Brandywine Realty Trust (BDN) 2004 Q1 法說會逐字稿

Thank you for your patience and please remain on the line. Should you experience any audio difficulties, please press 0 and an operator will assist you. Please remain on the line. Thank you . Good day ladies and gentlemen, and welcome to to Brandywine Realty Trust first quarter earnings release conference call. At this time, all participants are in a mute mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. 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 the earnings conference call that are not historical facts are subject to certain risks, trends and uncertainties that could cause results to differ materially from those expected. Among these risks are the risks we have identified in our annual report on Form 10-K for the year ended December 31, 2003, and any subsequent filing, a copy of which are all on file with the Securities and Exchange Commission. 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 Securities and Exchange Commission, and undertake no responsibility to update or supplement information, discussed in 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 teleconference. Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust. Mr. Sweeney, you may begin.

Thank you very much, and thank you all for joining us for today's call. Today's agenda will provide a brief review of market conditions, financial review of our first quarter results, a look forward at the projected real estate market conditions as well as an update on our 2004 business plan. The company representatives participating in today's call are Chris Marr, our Chief Financial Officer, Tim Martin, our Vice President and Chief Accounting Officer and Dan Palazzo, our Corporate Controller. The first quarter was an extremely active one. I'm delighted to report that we've posted solid results on all fronts from a tenant retention operations and leasing activity level, we continued our track record of market out performance. The real estate market remains challenging and it continues to be very competitive. I'll talk more about that in a few moments. In addition to our operational activity, however, we also had during the first quarter, some significant successes on the financing capital market front.

To recap our quarterly performance, we reported FFO in line with estimates. In fact if you really look at year over year first quarter '03, first quarter '04, very much in line with the exception of us not having any significant lease termination revenues or other income during the quarter, but as consistent with previous quarters, our performance was very much in line with our expectations. On the capital market front, during the first quarter we successfully completed the final phase of our balance sheet repositioning program. Over the last year, we took advantage of strong capital markets to significantly improve our balance sheet, create additional capacity, and position the company for migrating to an unsecured debt model. In particular, we reduced our debt levels dramatically and all of our financial metrics have improved significantly year over year.

One of the first quarter's great successes was the ability to execute this final phase and evidence of that success was that we did receive a tripple B minus investment grade rating from both Standard and Poor's and Fitch. Several other highlights for the quarter, same store was essentially flat except for the other income and we wound up at 90% occupancy level. As we've seen in previous years, the first couple of quarters are typically our most challenging due to higher levels of expenses and generally lower levels of activity. For the first quarter, for example, we had leases expire for approximately 970,000 square feet. We renewed or signed new leases for approximately 863,000 square feet, which put us in a negative absorption for the quarter of 108,000 square feet. However, of that amount, 114,000 square feet, so more than our total negative absorption related to a tenant to fall up in the Lehigh Valley and that single tenant also accounts for a drop in our overall level of occupancy from year-end levels.

We did have continued success in our tenant retention, specifically retention for the quarter was 76.4%. Our rental rates on new leases during the quarter had negative GAAP growth of 3.5%, but we did, in fact, have GAAP rent increases of 1.6% on renewals. As Chris will touch on in more detail, we now are in the range for the year the 260 to 265. The reason is the increased visibility we have on time, we have some lease transactions, the challenge of the predicting the pace of our pipeline and as Chris will touch on the financial opportunities we have related to our investment grade process. The topic we always chat about on every call is our capital costs. For the -- capital costs for the first quarter trended down from the fourth quarter of last year.

And as we always mention, quarterly activity is clearly a function of specific lease transactions, but from what we're seeing there continues to be a downward albeit very slow trend towards lower capital costs. For example, during the first quarter we had overall leasing costs of $2.49 per lease year which was down nicely from $2.86 per lease year for the fourth quarter, but due to competitive pressures we're still above our historical averages. Operationally, the first quarter frankly saw a continuation of what we experienced through most of last year. Tenant retention, controlling capital costs, lease structures that provide for growth and mitigate short-term rental pressure have been our continuing priorities. Our leasing posture continues to be very aggressive and the clear emphasis through our entire organization is achieving our leasing and capital targets along with our net effective rent targets. Activities through the market is improving but recovery will be slow, and while there is an emerging bias toward rent stability, rental rate pressure, particularly in several submarkets continues.

There is very little construction activity in the market, while a number of projects remain on the drawing board we've seen very little actual construction starts, and what we have seen has tended to be more residential or retail in nature. The approval environment in our targeted markets remains very difficult. Infrastructure constraints, anti-growth movements and numerous open space initiatives have created a strong bias in township councils and zoning boards against additional development. We have also seen several townships effectively attempt to downsize existing approvals through implementing more stringent, impervious coverage and parking requirements. So from a development standpoint, while activities like that at a township level increase our frustration, I can assure you that from an owner's perspective it gives us incredibly strong comfort on the marketplace's long-term stability.

As far as the market conditions go, there are higher levels of activity, particularly among major users. On the positive side, recent announcement by Cefelon, Shire pharmaceuticals, Lockheed Martin, ING, Triple A and Olympus America have created significant momentum through some of our submarkets. That has been somewhat upset by an announcement of Banc of America's acquisition of Fleet which will result in a loss of about 850 jobs at their Horsham facility and in addition, Dupont some time ago, announced worldwide layoffs and the impact of that action on the state of Delaware employment base at this point still remains unclear. We have also seen several instances where tenants have removed sublease space from the market and actually begun to backfill. The market that has proably been the most robust in terms of major tenant activity has been the western suburbs where recent movements by major corporations could create about 2,000 new jobs. There also have been a number of key renewals throughout the market which have taken large blocks of potential space out of the market inventory.

It still remains, however, a good news, bad news story. The good news is that, for example, in the western suburbs, approximately 1 million square feet of activity in the past six months has resulted in approximately 600,000 square feet of net absorption. The bad news is that the King of Prussia marketplace still remains close to 20% vacant. The dilemma we are facing in a number of submarkets is that large portions of vacancy are in smaller increments between 5 and 50,000 square feet. So tenants looking for space in those submarkets of less than 50,000 square feet have multiple space options. Our vacancy, for example, is composed primarily of small space, so while -- we continue to see increased pressure on both rental rates and capital costs. From a long-term perspective, inspection activity has clearly increased over this time last year, and over the latter part of 2003.

Our conversion rate remains strong, companies are beginning to make hiring commitments, a very good sign is that large blocks of space and sublease space are beginning to disappear and as history indicates, as users absorb these large blocks of space, the majority of smaller users will begin to follow suit. The market is clearly tightened not at a size level where the bulk of our inventory lies, but the signs are there for a longer term recovery. We are seeing typical tenant movements that are I think symptomatic of this stage of the market cycle. We're seeing a lot of B and C buildings seek out A quality product at B prices and large users in the marketplace are still able to get larger blocks of A space at B pricing levels. Looking ahead we expect relative rent stability in portions of the western suburbs, Allentown, Reading, lower Bucks County, Plymouth Meeting, central and southern New Jersey and in Richmond, Virginia.

We anticipate seeing continued rental rate pressure in King of Prussia, Horsham and Bala Cynwyd. Our leasing team continues to improve their conversion rate and their deal flow. However, given the uncertainty in the economy of the recovery on both mid and small sized tenants, continues to result in our very conservative bias on projecting both absorption patterns and revenue growth. We continue to operate our business on the premise that markets remain challenging and the focus remains maintaining and improving occupancy levels. Bottom line that's what we are all about and where a big portion of our company's infrastructure efforts are devoted. Slippage in this quarter, as I mentioned, really relate to that one tenant but we are determined to continue to improve our occupancy levels as well as controlling our operating and administrative costs.

We did a great job during 2003 hitting our expense reduction targets and we are focused on the same level of success during 2004. During the first quarter we also commenced construction of Cira Centre at 30th Street station in University City, Philadelphia. Upon commencement we announced that project was slightly more than 50% leased. During this quarter we signed at 75,000 square lease with FCA, where they will establish their north American headquarters in the building. That brings our Cira office component to slightly less than 65% preleased which puts us in line with our projected absorption pace through April of 2006. Construction is moving forward on schedule on original budget and our marketing pipeline remains strong. We successfully integrated the five problems we acquired late in the fourth quarter of 2003 into our portfolio. With good results.

All in all, the first quarter was a good, active one. Results were perfectly consistent with our expectations. The company is well positioned for external growth as the real estate market conditions improve. We plan on accelerating our growth by increased acquisition development and financing activities and it really was delightful to see our balance sheet strategy executed with such consistency on schedule while at the same time maintaining strong operating performance throughout the company. At this point let me turn the presentation over to Chris to walk through our capital activities first quarter results and provide more color to our financial picture.

Thanks, Gerry. Normally I open my remarks by touching on variances either within the balance sheet or P&L, variances from plan or variances from our prior trends but this was a very uneventful quarter from that perspective. We came within our FFO guidance range and our metrics were right in line with our business plan. The major highlights since our last call include the completion of the final two transactions in this stage of our balance sheet recharacterization strategy. Since our February earnings call, first we redeemed all of the outstanding series B convertible units, we completed the redemption of the 97.5 million of par value for 93 million in cash. We did then recognize a 4.5 million or 9 cents per share of FFO gain under EITFD 42 and that's reflected in our results, and in order to finance this redemption, we issued 51 million of common stock off of a closing price of $28.55 and 58 million of seven and three eights coupon perpetual preferred.

The net result of these two transactions along with our accomplishments in 2003 has been to reduce our annual fixed charges by approximately 8.4 million and reduce the total common share equivalents by 2.2 million shares. This improvement in fixed charge coverage, our reduction in overall leverage, reduction insecured debt and the increase in our equity capital base were all very significant contributing factors in Standard and Poor's assigning a triple B minus corporate credit rating and Fitch assigning a triple B minus issuer rating to Brandywine. At this point, there are three steps in the process that we are focusing on for the next few months. First, we continue to work with Moody's who as you know improve the outlook on our existing rating to positive in December, and we hope to take that to the next level and achieve investment grade from Moody's as well. We are also working very diligently to close on our new line of credit.

Our existing $500 million line matures at the end of June, and in the last few months we've launched a new $450 million line of credit and have received commitments totaling approximately $680 million and right now we're in the process of concluding the allocations to that line and finalizing documents. We would expect to close on a new line of credit during May. In addition then, the final item is to file a registration statement with the FCC, establishing our operating partnership as a registron so that we may be in a position to issue rated unsecured debt. One of the key factors in being in a position to file the registration statement is we need to have our operating partnership audited on a stand-alone bases for the past three years. These audits are currently in process and we would hope to be in a position to file a S 3 and a form 10 by mid May. Our current thinking would be to have our inaugural debt offering be a $250 million ten-year deal which would reduce our current floating rate exposure by 64%.

As it pertains to our earnings guidance, we have introduced our second quarter guidance of 62 to 63 cents per share, consistent with our expectations when we finalized our budget at the end of last year. We have and continue to forecast consistent occupancies from the first to second quarter with trends in rental rates and capital remaining unchanged. If you look at our same store growth for the first quarter and the fact that we had virtually no termination income in Q1 of '04 versus almost 1.3 million in Q1 of '03 if you were to pull the termination fees out of both quarters we had roughly 1.1%, same story on a wide growth quarter over quarter directly in line with our expectations. As we look to the last six months of the year, we are now able to include in our forecast with a higher degree of certainty a debt offering. Adding a $250 million 10-year bond offering, at current treasury rates and spreads to our guidance, along with the related audit and other costs reduces our expectations for the last half of the year by about 3 cents per share. We have also tweaked our liable rate assumptions up on our floating rate debt for the last half of the year.

Our pipeline of acquisitions opportunities remains full and we have pushed back by a couple of months our forecast of when we may actually close on an opportunity. These two factors reduce our expectations by about 2 cents per share. Last item of note from a financial perspective is that in accordance with the implementation guidance provided under FINN 46 R we can did consolidate in our balance sheet in the first quarter the assets and liabilities of 4 and 6 tower bridge, two joint ventures we are involved with in Conshohocken that were previously accounted for under the equity method. The impact of that from a balance sheet perspective is about $27 million of real estate assets being added to the balance sheet and about $15 million worth of mortgage debt. Within our supplemental package on the joint venture schedule, we have broken those two assets out as previously unconsolidated and now consolidated JV's so that you can actually see the percentage of that debt that is attributable to Brandywine. At this point, I'd like to turn the conversation back over to Gerry.

Thank you, Chris. Let me spend a few moments talking about our 2004 outlook, and key priorities as we look to execute our business plan for the balance of the year and into '05. Over you commented -- as Chris just mentioned and I chatted about earlier, I mean relative to our guidance, our financial outlook simply from a bottom line standpoint continues to be driven by an overabundance of caution. In a company of our size with our revenue base there is simply too much uncertainty anticipating the timing of absorption, rental rate recovery, and as such we can continue to be conservative in projecting our financial results. Looking at 2004 for the balance of the year we do see positive activity. For the remaining part of the year, we have about 9 1/2% of our total portfolio rolling. We are aggressively in front of all of these tenants. Our expectation is to experience the same level of success this year that we have over the last 7 years. We are confident that we will be able to deliver that consistent level of performance. From an external growth standpoint we're focused on two primary avenues, acquisitions and additional development services. From an acquisition standpoint, we do anticipate during the balance of 2004 being a net acquirer of properties. That will be the first time that's occurred in several years. Our deal pipeline as Chris touched on is strong. It is wide ranging, and it encompasses individual assets to mid and large size portfolios.

We are actively pursuing a number of transactions that will improve our competitive position. A good example of that is we did right at the end of the year early in January on acquirer the one building that we did not control at Princeton Pipe Corporate Center. The guidance at this point does incorporate just an additional $50 million of acquisitions and it cap rates in from the low to the mid 9's. The overall acquisition market remains competitive. The region did see a fairly healthy pace, about $175 million of transactions in the suburban counties at overall cap rates ranging between 9 and 9 1/2. There was one transaction actually in the Plymouth Meeting Marketplace that sold for a 8% cap or $275 per foot, primarily due to one long-term lease where the tenant was a financial institution. The other transactions were properties that traded between nine and 10% cap rates. So we continue to see a fair amount of potential transactions, and acquisition investment team is actively pursuing a number of specific transactions. Dispositions, we sold two buildings for an average of 9.3 cap rate. As previously indicated, we will continue to cull out properties that do not present any locational or operation advantage to our organization.

Another factor in our external growth is our development services program. As shown in the supplemental package, we have approximately 1.1 million square feet under development and redevelopment that's roughly 54% preleased. That obviously includes Cira Centre. Included in that list are three projects, or about 300,000 square feet under redevelopment. As we've talked on previous calls, these projects are an excellent opportunity for us to reposition assets. In addition, we're analyzing several additional projects that would commence renovation during 2004. That program will reposition well located assets into new facilities where we can achieve higher rental rates. One change in cost on the schedule quarter over quarter has been our costs on 501 Office Center Drive where the costs are up approximately $1.1 million.

We had expanded the scope of that project to include additional HVAC work, a complete tenant amenity program, including a conference center, tenant storage, incorporation of a -- of a -- of a -- an eating facility and some additional TI work. So our pots have increased and yield tap compressed slightly. Still a very good economic return for us in that our basis in the building before the renovation program commenced was about $65. So even with the additional investment we wind up at a market rate investment level with a new well located aset. On the broader development front we're pursuing numerous build to suit opportunities. And if those conditions justify, we do anticipate moving forward with additional development during the latter half of 2004.

In addition to our development and redevelopment activities that we currently have underway, we are pursuing some larger scale opportunities and expanding our program to provide assistance to corporations and municipalities as they think through master planning situations. On the land front, we're beginning to see a number of land parcels that could present great opportunities for the company going forward, but we will continue to be governed by our program of being self funding on that effort. So as we look at the remainder of 2004 into 2005, the outlook is well steeped in financial conservatism. We do, however, expect the markets to continue their recovery and while this is a positive development in and of itself, we're even more excited about our position. Our balance sheet program having been completely executed, has put us in an extraordinarily strong position. In addition, we have continued to increase our internal infrastructure due to the addition of several seasoned executives who will assist us in guiding the company to the next phase.

These additions, along with the strength of our existing management personnel, combined with the new financial strength, truly positions us for accelerated growth as we look into 2004 and '05. Our market position, excellent deal flow and control of tenancies will continue to create value and our entire team continues to do an outstanding job. Our regional strategy has clearly resulted insignificant out-performance, marketplace psychology is beginning to turn positive. This combination positions us extremely well to continue generating significant value through our growth program. Thank you very much for taking the time to listen. Holly, at this point we'd be happy to open the floor for any questions.

Thank you, sir. The floor is now open for questions. If you do have a question, please press star 1 on your touch tone phone. If at any point your question has been answered you may review yourself from the cue by pressing the pound key. We do ask that while you pose your question that you please pick up the hand set to provide optimum sound quality. Once again, ladies and gentlemen, that is star 1 on your touch tone phone to ask a question. Our first question is coming from Chris Haley of Wachovia securities.

Good morning, this is Greg with Chris. I just wanted to touch real quickly. You guys mentioned something was going on at 501 Office Center and the development costs going up and yields compressing a little bit. Could you also talk about what happened at 690 Snow Drift, the building A? It looks like costs went up a little under 2 million there?

Actually if you take a look at the revised supplemental package that was posted earlier this morning you'll see that those costs are precisely in line with what was shown last quarter. There was a duplicate addition done on a tenant, so there has been no change in those costs.

Okay. Now, moving on to the Cira Centre, the version that I have says costs are 177.6 million.

Right.

Is that consistent with the new -- I don't have a copy of the revised.

Yes, there has been no change in the Cira Centre numbers at all. If you would like to take a look at what we talked about on the last conference call, we had projected an overall cost per square foot somewhere between 250 and $260 a square foot and the actual numbers we're showing right now are right at the low end of that range when you break out the retail versus the office space. So there has been no change in the Cira budget whatsoever.

I see, and now Chris and I had had a previous discussion with you guys and seemed to have a feeling of a number more in the 160 million.

The only thing I can tell you on that, not having any detail on those conversations, is that you might have even thought about a shell cost number or a cost number at a certain point in the development process, but our budget has been consistent for almost over a year now and our owner's budget through the GNP has validated that.

Did you guys forward purchase any steel?

And we -- we did and we locked into pricing.

All right. Looking at the operating expenses for the quarter, they are up sequentially year over year but reimbursements were down both sequentially and year over year. What's going on there and is there going to be any catch up?

I think when you look at operating expenses, quarter over quarter, you need to factor in both the discontinued operations operating expenses as well as the, you know, the continuing operations on the face of the P&L, so if you look at, you know, if you look at both operating expenses are up from the first quarter of '03, about 1.6%, you know, a component of that is just inflation and another component of that would be just the timing of repair and maintenance. If you look at property operating expenses on the same store level up about 2.7%, that timing on just repair and maintenance items comes into play there. I think we had about $700,000 of expense in the first quarter of last year R and M and I think this quarter it was about 1.1, 1.2 million. So that's just a timing issue, and as you would expect, you know, we do have some seasonality to the expenses so I think you'll see as we would have predicted, you know, kind of inflationary type increases in cost as we go from year over year. On the re-- reimbursements, you know, same issue, you've got obviously a different pool of properties, you know, overall, quarter one of '04 versus quarter one of '03, One and Three Christina joint venture properties being one of the bigger changes as long as -- you know, as well as the Bay Colony being acquired, Princeton Pipe being acquired at the end of the year. On a same store bases expenses are up 2.7, reimbursements are up 10.4. I think that's probably a little bit, you know, more consistent if you look at quarter over quarter.

All right. And just real quickly, what was the share county at quarter end?

At the end of the -- at the end of the quarter, total common shares outstanding were 45 million 664 thousand.

And diluted?

If you look at kind of what would you use for a denominateor in Q2 and going forward, if you took common shares OP units, et cetera, 48,740,000 would be a good number going forward.

Great. Thanks a lot. I'll let someone else ask some questions.

Thank you. Our next question is coming from John Kim of UBS.

Hi, good morning. It's John with Keith mills. I had a question on your 2004 earnings per share guidance. It was lowered more than your FFO guidance range. Was this due to any changes that primarily affect EPS such as the lower advert sales assumption?

The change in that guidance pretty much revolves around the, you know, the trading of the recapitalization of the convertible preferred shares into being replaced essentially, you know, roughly half and half with common shares and perpetual preferred shares so there are a lot more common shares outstanding that are included in the EPS denominateor than there used to be. And this wasn't contemplated in previous EPS guidance because those transactions had not been completed.

O okay. Is there any interest in acquiring any of equity offices, Philadelphia office portfolio? It looks like some of the suburban assets may be a good fit for your portfolio?

Well I think it's -- John, we look at all transactions in the market and as if and when those properties get presented to the marketplace I think we would certainly take a look at them as would I'm sure a number of other local players and make, you know, come to a conclusion whether they are a good fit from both an age quality tenant mix roll over profile and make that investment decision.

So you would look at their Center city portfolio as well?

I think our focus would primarily be on the suburban property.

Gerry you also mentioned TI's were down as compared to last quarter. Where do you see the rest of 2004 compared to this quarter?

I think trending somewhere between first quarter and year-end fourth quarter. Again, it's very hard to project with any degree of certainty a significant decrease, and it's very much a function of, you know, what individual lease transactions come across the table. I think what we're seeing is, you know, the capital in our renewals are kind of holding steady and I think we're pretty happy with the being able to achieve, you know, a minor cash mark to market down, but more importantly, you know, well over 90% of our leases have staffed rents. It was very encouraging to see a positive GAAP rental rate growth on renewals. But I really do think we are going to see capital costs pretty much in the same range that we've seen in the last two quarters.

Okay. Fair enough. Thanks a lot.

Once again, ladies and gentlemen, to ask a question, please press star 1 on your touch tone phone. Our next question is coming from Frank Greywit of Key McDonald.

Hi guys, I some have questions about Cira Centre. Have you thought any further about the joint venture of that project?

The joint venture remains along the continuum of financing option o for his that property.

What would you say is, I mean, can you give me even a percentage of what's most likely or --

at this point, no.

Okay. What about McQuarry in general, how is that relationship going and are you working on anything in addition? Do you think they will be part of your acquisitions in '04?

We hope that they will be part of our acquisition program either in '04 or '05. -- dialogue remains active. Our team it remains engaged with theirs as we start to assess different opportunities.

As far as if there was a cost overrun at Cira Centre, who's on the hook for that? Is this the general contractor or you guys?

If it is a cost overrun related to the approved scope that's part of the GMT it would be the contractor. If it relates to a scope change then that would be an owner responsibility, or if it's a TI overrun it would be the tenant responsibility so it depends on what type of overrun there is.

Okay. You indicated that some of -- you're beginning to see -- am I correct that you're beginning to see some possible development type opportunities?

Absolutely I think we're, you know, we're pursuing a number of build to suit transactions where we would either be a fee developer or an owner of a property that would be either fully or substantially leased on a long-term basis by a tenant so I think as ah, as I tried to touch on, I think that type of activity really is reflective of where we are in the inflection point of the market turning. We're seeing more large users beginning to be a bit more thoughtful about planning their space requirements. One of the early warnings or one of the early signs of that happening is when they are looking for -- looking for more space and willing to make a longer term space commitment.

Okay. As far as your planned unsecured offering have the -- has the blip in interest rates affected you guys in any way? Are you looking to put a yield lock on the transaction?

Certainly the back up in treasuries had an impact. Now that we have two investment grade ratings, I think as we said the certainty of execution has increased dramatically, and we are exploring a variety of hedging strategies in anticipation of getting the market.

Okay. Can you touch a bit on the Lehigh Valley tenant as well that vacated?

The Lehigh valley tenant was -- occupied a full building, and had been at one point fairly heavily capitalized and became increasingly thin as the years progressed and they were more of a specially manufacturing company that wound up not being able to sustain their business so they are exploring a number of reorganization possibilities. We are tracking it very carefully. But they are no longer in a position where they are paying rent, so we did the right thing which was to recognize that as a reduction in our occupancy levels and a reduction in our projections for income.

Are you expecting to redevelop this space or is it something that can be backfilled?

I think it is something that can be backfilled fairly readily. The issue for us really is more of one of timing and whatever costs there might be required to do that based upon whoever the user is.

And my last question: You've quantified before the conversion rate and the increase in inspections. Can you do that in the first quarter?

I can but I'm going to need just one second.

Okay .

I'm flipping, I'm flipping here. Yes, I mean for the first quarter I'm looking at one of our major operations, we wound up looking at a conversion rate that's moved from about 40% in the fourth quarter to about 50% in the first quarter. The percentage of direct deals has stayed about the same. So I think we're we're -- you know, the objective is to get as many tenants as we can through our space and once we get them through to make sure we sign leases with them.

Okay. Great. Thank you.

You're welcome.

Once again, ladies and gentlemen, that is star 1 to ask a question. Our next question is coming from Jonathan Litt from Smith Barney.

Good morning. Good morning, it's Gary Boston here withJohn. Gerry I just wanted to talk about the acquisition activity with pipeline. You indicated the pipeline was pretty full but only $50 million, I think you said was in your guidance. I just wanted to get a sense on, you know, timing on when you thought that some of that money might be put to work and you'd also had indicated it was fairly far reaching and I wanted to see if that might include any geographical expansion to new markets.

On the first, I mean the pipeline is fairly strong right now, and we do have the $50 million in our projections. The deal flow in our core market is quite significant and I think one of the things that we're looking at is you know, given some of the capital pressures in terms of what's created on pricing. We've certainly been in the hunt for a number of transactions, but fundamentally on some of the deals it just did not make sense for us to proceed. I mean, I would have hoped that we would have been able to get a couple more deals closed thus far this year but with some of the private money that's been actively chasing, particularly some of these mid sized deals, we really have seen a pretty good compression of yields. Hopefully some of the -- the volatility in the bond market might move some of those guys to be a bit more conservative but we also have a good mix of mid and larger size portfolios in our pipeline that we're actively spending a lot of time on. You know, in central New Jersey, for example, it is very active.

We're looking at a number of transactions up there, but we have seen some yield compression in that market, also. You know, in terms of expanding the footprint I think as we assess the long-term prospects for the company, you know, we have always and continue to remain open to looking at the right type of transaction that can increase the overall operating strength of the company. Not top of the radar screen right now, but our continuing our search process much looking for larger portfolios that could expand our operating platform.

Jerry, it is John LITT. On the yield expectation you said you are looking in the low 9's for the acquisitions. What types of yield are you seeing transactions trade at that you are not competitive on?

One of the things that we saw as I mentioned, John, there were a couple of buildings, one in particular that traded close to a 8% cap rate, which in and of itself wasn't that much of a concern but it was off of a rental stream that was done a couple of years ago so you had the price per square foot on a suburban office building at $275. You know, for better, for worse, I think the way we assess our real estate investment strategy, if that 8% had some decent growth in it it might have been a more attractive entry point in terms of yield, but it was hard for us to justify a $275 square foot price when, in fact, we know from our own development pipeline in the suburban counties were delivering brand new product with structure parking in some cases a lot lower than that.

So you know, as I hear that, and it sounds like maybe 8's is the market, I'm trying to figure out how you get your acquisition program done in the low 9's and what type of risk profile is associated with those assets.

And that's a very good question. I think as I also mentioned there were a number of transactions in the marketplace that did trade at, you know, 9 to 9 1/2%, so I think as we look at the 9 to 9 1/2, that's kind of the gap straight-line adjusted financial reporting cap rate. Certainly based on the lease structures we see in individual buildings, that gives us the ability to be more aggressive on the entry cash cap rate.

So a 9, 9 1/2 gap, so you're saying that there is a lot of straight line rent that's in those. Which now I guess I am questioning the risk profile on the locations more terciary or the rent above market or the growth lower, why is there this call it a percentage point spread between the deals you are missing and the deals you could buy?

I think, again, it is deal specific. In some cases we didn't like that submarket location of the building. It didn't really add anything to our portfolio, it didn't add anything to our tenant roster, didn't really improve our operate k platform, so we chose to pass on it even though from a yield perspective this transaction would have certainly given us the ability to fill that, you know a piece of that $50 million projected block. But I do -- I do think as you'll see in most markets around the country, you know, acquisitions are more challenging today, because of the generally lower cost of capital and the general expectation of the markets are recovering, but I am very pleased with the depth of the pipeline we're seeing in terms of the number of transactions, the type of transactions that we're kind of ferreting out in the marketplace.

Well that's why I ask, I mean most rates are not active on the acquisitions front which is why I'm curious to see how you guys are finding the opportunities. But changing gears to your guidance, you think that the conversion of the balance sheet from secured to unsecured and the -- might cost you in this $250 million bond deal, in the second half, might cost you 3 cents a share, I guess what's going to happen is between the equity deals and the bond deal, you are going to have some excess capacity to put money to work. Would your expectation be that that you'll get it to work in the second half and that the dilutive impact in the second half will go away in '05 or do you think there will be a lingering dilutive impact in '05?

No, I think our expectations were, you know, we will get through the bond offering. Second half of the year we're certainly anticipating being able to deploy additional capacity and that we will have a balance sheet where we want it, the operating platform where we want it. Looking at a recovering market in 2005.

But just strictly the economics of the or the mathematics of the delusion, the 3 cents delusion, do you think you will make that up as redeploying the capital?

I think basically what you're doing is moving from a fairly large reliance on floating rate debt and reducing that exposure, you know, down into the low teens so there is a cost of doing that, you know, whether that be at the longer end of the treasury spectrum with a 10-year deal or something obviously shorter.

The three cents is really a float to 6 as opposed to because you guys have done a lot of capital raising this year.

The 3 cents is merely addressing kind of the last issue for us, which is a heavy reliance on floating rate debt.

On your balance sheet you have land held for development of about 58 million. Could you walk me through some of the assets in there and the timing and if that value is close to market value?

Yes, I would be happy to. I mean, the largest land after we hold is right here at Plymouth Meeting which is called Metroplex, and that's about close to 9 million of the 50 I guess, in that range. We're actually, we're approved right now for about 400,000 square feet which comes down to a FAR value well below market. We have also optioned an adjoining piece which we will close on early next year. The acquisition of that piece will enable us to increase the density by about 100,000 square feet as well as incorporate a structured parking facility and a restaurant pad, so I think as we certainly look at the market again getting better, that opportunity right at the convergence of the Pennsylvania turnpike, the blue route, the northeast extension with its great access will be a very, very valuable asset. Number of other parcels we have over in southern New Jersey, as well as in the northern suburbs that we are working through on a number of transactions, the recent one we did was actually an acquisition of some adjoining land at our Princeton Pipe corporate center where we had, you may recall we had two parcels of ground there that could accommodate about 240,000 square feet. We bought the building next door that had additional acreage so we're going to the master planning process to increase our density there by another couple hundred thousand square feet. What we're seeing in the market was that typically tends to be driven by very large users and even the 250,000 square feet capacity we had was not really put into play for some of the larger deals. So I think we go through a thoughtful process every quarter in looking at the value of the land, both on a current and projected carrying basis. And remember a lot of -- a good portion of our acreage is held without basis and we've been successful in the last couple of years spinning that off for everything ranging from residential to a hotel use where we're selling that land to third parties. We have a couple of parcels of ground right now that we are going through the reapproval process to convert some of it to residential and put that out to residential development. So our land inventory is very actively managed, and I think we have great parcels of ground that will create some very, very good growth opportunities for us over the next year or so.

That's good. Those are my questions. I don't know if Gary had another one.

Nope, that'll work.

Thank you. Our next is from Rich Anderson of Maxcor Financial.

Thanks. My first question, why is the redemption gain not a hit?

We redeemed a par value of 7 1/2 million for cash of 93, so we actually bought it at a discount.

Okay, thank you. What are moody's issues and why have they not, you know, jumped ship to invest in grade with you guys and why might there not be another step that you'd have to take, capital raising wise to satisfy whatever their criterias are?

If you look at the press release that moody's issued when they upgraded the outlook to positive, they really pointed to us doing a few things in order for them to really revisit the rating. They were primarily the addressing of the convertible preferreds, which we have done, and then the balance of them were somewhat mechanical. They wanted to be able to review our 10-K. They wanted to see how our first quarter results came in, and they wanted to see the registration of the operating partnerships, so their -- their trigger, really, for commencing another review of the company for potential upgrade is the filing of the F 3 and the form 10 which we would low pressure to do by mid May.

I guess longer term does investment grade mean lower growth for Brandywine?

No, I think it gives us a wonderful access to another capital source, so it gives us access as we've always had to the equity capital markets when that access is available, we have the McCarry relationship in terms of a joint venture pool of capital. We have other joint ventures that we've done where we have access to capital. You always have the secured debt market to the extent that that makes sense and now we will have also access to the unsecured rated markets, so I think while it is, you know, mathematically true that the cost of unsecured debt capital over the long-term is always going to be marginally higher than secured debt capital, we believe the flexibility that it provides offsets that slight cost increase.

Okay. Does the $50 million in acquisition, is that a net number and if not what are you thinking about disposition-wise?

It is a net number. We're not really looking at any significant dispositions for the balance of the year either than to a bow tie purchase.

For Cira Centre, you kept it on your books entirely because you weren't happy with some of the financial terms of the joint venture prior to the preleasing that you have been able to achieve. Now with the property at 65% preleased, are you noticing that the conversations are more to your liking from a JV standpoint?

Absolutely. I think the decision points for us are, you know, concluding after a full bedding of the different financial options for Cira, what's the best thing for our shareholders long-term. As we get through the joint venture discussions, there has been a C change of attitude difference between early on and where we are today, so I think we made exactly the right decision by starting the building, capturing the initial tenants, converting a portion of our pipeline now. We have high expectations that progress will continue, and certainly as that building reaches more stabilization we think that the joint venture marker will find it increasingly attractive.

The last question is, considering the success that you've had thus far there and from a preleasing standpoint, are you considering any other CBD type development opportunities? Is there any land available for you to, you know, give it another shot in another project?

I mean, there is certainly opportunities in the immediate environment. At this point, we are not looking and do not plan on looking at any land acquisitions in CBT Philadelphia.

Okay. Thank you.

You're welcome.

Thank you. Our next question is coming from Paul Puryear of Raymond James.

Hey, thanks. Hey, guys.

Hey, Paul.

Just one question. Gerry, as you look out to '05 and the leases that you've got rolling, if those leases rolled today, would the GAAP rents be rolling up o or down o or have you looked at that?

We have looked at it and where he are in the process with a lot of our proposals right now going out to the tenants for '05, you know, I think it is hard right now, Paul, to project with any certainty - significant increases. I mean, because again our roll over schedule is pretty much across the board in terms of what the average rents in place are. So I can't give you a definitive answer on what we are projecting the numbers to be for '05, but if you look at it we have about 17% of the portfolio rolling. The average rents on that are not too far off what we see -- what we've seen in '04, so our expectation is that, you know, if we get an upward rental bias in some of these submarkets hopefully we will be able to narrow the gap that we have seen in the last few years but that's a hypothetical exercise so would not and are not in a position to say we expect X percent rental growth rate in '05 either in a carbon GAAP basis.

Do those rents approximate the rates that are rolling currently; is that accurate? Those rates in '05 that are rolling -- rolling off, approximate rates that are rolling in '04 or are they higher?

For example, in '04 we've got an average rate roll of about $18.60. That's about $19.00 plus in 2005, but, again, wouts going through -- without going through the individual lease transactions, it is hard to say whether there is upward bias there or just simply being flat. For example, you know, half of the, you know, we have 350,000 square feet rolling for the balance year in New Jersey, southern New Jersey which is one of our more stable markets. We have almost 900,000 square feet rolling next year. We've had very good success in maintaining rental rate levels in New Jersey. With a higher percentage of our roll over next year coming out of Jersey, does that say something good for us? Well, again, hypothetically it does, but we really need to drill down and get feedback from the tenants on the proposals or go and ask them to really understand how that's all going to bet through.

Yeah, okay. Thanks.

There are no further questions. I would like to turn the floor back over to Mr. Sweeney for any closing comments.

Great, Holly. Thank you, thank you all for taking the time to participate in the call and we look forward to our second quarter earnings release.