Brandywine Realty Trust (BDN) 2004 Q2 法說會逐字稿

Welcome to the Brandywine Realty Trust 2004 second quarter earnings release conference call. At this time all participants are in a listen-only 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 this earnings conference call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual differ 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, 2003, and any subsequent filings, a copy of which are all on file with the Securities and Exchange Commission. For further information on factors that could impact us, please reference our additional filings with the SEC.

We are subject to the reporting requirements of the Securities and Exchange Commission and undertake no responsibility to update or supplement information discussed on this conference call. Also reference the disclaimer statement in our earnings press release. 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.

Elsa, thank you very much. Good morning, everyone, and thank you all for joining us for Brandywine's second quarter earnings call. Today's agenda will be similar to the past. We'll provide a brief review of market conditions, a financial review of our second quarter results and an update on our business plan. Participating in today's call with me today are Chris Marr, Senior Vice President and Chief Financial Officer; Tim Martin, Vice President Chief Accounting Officer; and Jim Seever, our Corporate Controller.

The second quarter was an extremely active one for our company. I'm delighted that we posted operating run results in line with our projections and exceeded our previous guidance, due to several positive nonrecurring events.

At an operating level, our operations continued on track with our budgeted expectations. During the quarter, we experienced continued competitive conditions throughout our marketplace. Nonetheless, our portfolio performed well.

Quarterly retention was above our 75% target. The portfolio remains north of 90 percent occupied and almost 91% leased. Quarterly rental rate growth on new leases was actually positive on a straight-line basis this quarter. But I caution you, while we're delighted with that result, it's difficult to predict whether that's the beginning of a trend or just purely a function of leases that were done in the quarter.

From a general standpoint, real estate markets remain challenging, but we are seeing increased activity and a more positive buy throughout the entire market. In addition to our operating successes during the quarter, we also closed our $450 million credit facility. And we also received our upgrade from Moody's, which completed our announced programs of obtaining an investment grade rating from three agencies.

On the asset sales front, during the quarter we sold one property in King of Prussia to a user and a parcel of land in Richmond. In addition, we continue to have very good success in our new business development program.

A couple quick highlights. Same store for the quarter was essentially flat. Tenant retention for the quarter was 77% again above our target. We have narrowed our range as indicated in our press release for the year to $2.57 to $2.62.

First call consensus currently $2.60. More visibility on the timing of acquisition transactions from now through year end is the driving force in this refinement. But also with our investment grade rating process completed, we are positioned to access the unsecured market. And as we've discussed on previous calls, particularly with the recent run in treasuries, this will have an incremental short-term cost. But from a strategic standpoint, it is a very valuable step for our company. It will reduce our reliance on our line as our primary financing vehicle, enhance portfolio flexibility and minimize our floating rate debt.

Also capital costs for the quarter trended down from the first quarter. For the second quarter we had overall leasing costs of $1.55 per square foot per lease year, which was down measurably from $2.49 per square foot per lease year for the first quarter. While we are still running above our historical averages, we are projecting a continued downward trend on capital costs, albeit at a slow pace.

Tenant retention, controlling capital costs, lease structures that provide rent thefts to mitigate short-term rental pressure, have been our top priorities. Our leasing posture continues to be aggressive, and our clear emphasis is on achieving our leasing, capital and effective rent targets. There remains minimal development throughout our region and an approval environment remains challenging, which, as I talked about on the last call, increasing pressure on townships to downsize by implementing more stringent impervious coverage and parking requirements.

Spend a few moments talking about the market. From a general overview, there's good activity, but in most of our sub markets, minimal or still negative net absorption. Long term, however, the general sentiment is that job growth is occurring on a fairly broad basis.

For example, in Montgomery County, the unemployment rate has dipped below 4%, and the State Department of Labor in Pennsylvania recently indicated over 8,000 jobs have been added thus far this year in Lehigh and Northampton counties. We continue to see the same trend in a number of other locations. The dilemma is that the jobs that are being created in categories that use office space are typically first-filling space that's currently under-utilized before committing to expansions or longer term leases. But we have had discussions with a number of major employers. They seem to be in a hiring mode and expect job growth in the 3% range, and that their expectations are that this growth will occur on a steady basis.

Interesting, but with good activity, but minimal net absorption, our focus remains on capturing a significant percentage of market share through aggressive leasing strategies. Complicating this endeavor a bit is that sublease space remains an issue in a few sub markets. While the terms of these sublease spaces are not necessarily directly competitive with existing inventories, they do obviously present downward pressure that affects effective rent levels.

On a positive front, though, we have seen several major companies remove sublease space from the market and actually begin to backfill. During the quarter, we saw good activity in Delaware, part of the Pennsylvania suburbs, New Jersey and the Virginia marketplace. No real pricing power yet, but certainly continued positive momentum.

From what we're seeing, and from all the discussions we're having, we believe we are at the bottom of the market with an upward bias, but no one is projecting a robust recovery. Common projections are that vacancies have peaked and will gradually decrease.

There will be continued downward effective rent pressure in the western suburbs, vacancy in class A buildings will decrease faster than class B and class C, and the negative absorption will be with us for at least several more quarters. But activity levels, we anticipate, will Continue to increase. Activity has picked up significantly as the year has progressed. For example, the New Jersey market continues to do well with an overall vacancy of just around 10%.

The defense sector continues to anchor that market with Lockheed continuing to expand. On a more cautious outlook over there, the mortgage finance sector is expected to slow due to the rise in interest rates. And in southern New Jersey, specifically, Cendant Corporation's announcement that they may sell their mortgage operation where they employ about 5,000 people could have an impact long term.

Interestingly, though, southern New Jersey's recent consensus figures that were re-leased in June indicated that southern New Jersey experienced a population growth more than twice that of the northern part of the state, which is the first time that has occurred. Major transactions throughout the region during the quarter have been with Lockheed, GMAC, the State of New Jersey, Tyco and AAA. And we recently delivered our Bishop's Gate building in southern New Jersey that is 69% leased in a 52,000 square foot building.

So it still remains very much of a good news, bad news story, but with a cautious upward bias. In the quarter, our portfolio had slight negative absorption, but inspection activity clearly increased. Our conversion rate remains strong. Companies are making hiring commitments and large blocks of space generally throughout the market are becoming increasingly scarce.

Looking ahead several quarters, we expect relative rent stability in portions of the western suburbs, in Allentown, Reading, Lower Bucks County, Plymouth Meeting, central southern New Jersey and Richmond, Virginia. We will continue to see, we believe, rental rate pressure in Horsham, King of Prussia and Bala Cynwyd. Our leasing team continues to improve our conversion rates, but it does remain increasingly difficult to project the specific absorption patterns and timing of transactions.

Finally, on Sears Center, our project in University City, that project is progressing extremely well. Steel is rising, both cranes are operational. Topping out is on schedule for November 2004 and on track for a fourth quarter 2005 occupancy.

The project is on budget, on construction schedule and we continue to have very good leasing activity. We are currently running ahead of our leasing pro forma in terms of absorption and in complete line with our economic assumptions. The property right now stands at 63% overall leasing, but 66% of our office space leased with a very healthy pipeline.

At this time Chris will walk us through our second quarter results and provide more color to our financial picture. Chris?

Thanks, Gerry. I will spend a few moments first looking at some of the financial highlights of the second quarter. On the balance sheet side, the only real material change is in construction and progress, and that approximately $34 million increase from the balance at the end of the year reflects our progress at Cira Center, about $29 million of that, and the balance being the finishing costs for Bishop's Gate.

On the income statement, other income is up over the prior quarter's run rates for really two specific reasons. First, in our SEC filings over the last five or six years, we've disclosed that we were a defendant in a case alleging that we had breached our obligation to purchase a portfolio of properties. When the case began in the late 90s, we established a reserve against a security deposit we had made, and during the quarter, the parties agreed to settle the case, and as a result, we received our security deposit back and we relieved the $1 million reserve that we had established at the time the case began. So that $1 million is reflected in other income.

The second item, we had an opportunity to assist a tenant who desired an early termination of a lease by negotiating a termination fee, and then immediately releasing the space to a high-quality credit tenant. Also included in other income is approximately $780,000 of termination income. So if you were to take the $1 million and the $780,000, which is included in other income on a run rate basis, then $0.63 would have been our run rate FFO per share.

Moving on to other items in the income statement. In accordance with Fin. 46, we consolidated our joint ventures at Four and Six Tower Bridge into our income statement for the first time during the second quarter. So, under the implementation guidance, you don't go back and restate prior periods, so some of the comparisons to prior periods are a little difficult to make, because the revenue and expenses from Four and Six Tower Bridge are now properly reflected for the first time in accordance with the implementation guidance in our second quarter results.

Property operating expenses, if you exclude the consolidation of 4 and 6 Tower Bridge, they are up around $600,000 from last year. That's driven primarily by higher utility costs and to a lesser extent, just the timing of repair and maintenance expenditures. When you get into the second quarter, you clearly start to have the issues related to the HVAC systems and the cooling, and the timing of that is often difficult to predict.

General administrative expenses were impacted in the second quarter by approximately $400,000 of professional fees that were incurred in relation to our filing on June 2third of our Form 10 for Brandywine Operating Partnership with the SEC. In that filing we needed to include audited financial statements of Brandywine Operating Partnership for 2001, 2002 and 2003. The costs of that process were about $400,000 and are reflected in G&A in the second quarter. Equity and income reflects the inclusion of our Christina joint venture with Mcquarry in the second quarter of this year, it was not in the second quarter of the prior year.

Other highlights from the quarter. Our credit profile continues to show improvement with debt-to-gross assets at 38 percent. Interest coverage of 3.6 times up from below three a year ago. Fixed charge coverage at 2.7 times up from just north of 2 times a year ago. As Jerry mentioned, Moody's did assign an prospective below A3 investment grade rating to the operating partnership in early July. Completing that -- the investment grade process we discussed earlier in the year, we now have prospective grade ratings from Finch, S&P and Moody's.

We did close, as Gerry mentioned, during the quarter on a new line of credit. We're pleased to have 22 participating banks. We brought the spread in to 90 basis points over LIBOR, and a covenant package that meets our business objectives. And we have an accordion feature within the line that allows us to increase the size to a maximum of $600 million. So with that, renewal -- three-year renewal, that leaves us with the only near-term maturity of any significance being the $100 million term loan that matures in 2005.

From a guidance perspective, our 2004 guidance from its first introduction in October of '03, has consistently been based on our assumption we would realize FFO per share in the range of $1.25 for the first six months of this year. So, to be clear, our third quarter and annual guidance are based off our actual results for the first six months of $1.25 per share.

We did introduce third quarter FFO per share guidance of 66 to 68. This reflects our lowered cost of debt capital, as we will experience a full quarter benefit of the lower spreads on our new line. We also have lowered spreads on our term loan, as a result of achieving three investment grade ratings and held pricing off of the credit grid instead of leverage, and it reflects the June 29th maturity of our 4.2% LIBOR hedges on %175 million of our line borrowing.

This guidance continues to reflect our assumptions of slightly positive same-store NOI growth and slightly positive same-store occupancy growth. We also fine-tuned our full-year guidance, as Gerry mentioned, and introduced a range of $2.57 to $2.62, reflecting our continuing belief that we will be a net acquirer for the year, but recognizing that the timing on closing on acquisition opportunities is more likely later in the year than we had previously modeled.

At this point, having touched on those highlights, I'd like to turn the call back over to Gerry.

Chris, thanks. I'd like to spend a few minutes talking about our 2004 outlook and-- for the balance of the year, that is, and our key priorities.

Real simply, as you heard us talk about on previous calls, while market conditions are improving, the timing of absorption, the decision making time line for tenants, still remains difficult to predict. And as such, we continue to be cautious, particularly as we integrate our market expectations into our financial models. There simply remains too much uncertainty, and while the fundamentals that I mentioned are improving, I think it still hard to indicate the visibility when things turn around.

For the remaining part of the year, we have a little more than 6.5 percent of our portfolio rolling. I can assure you, we're in front of all these tenants and we certainly plan to have the same level of success that we've had in the last seven years with those tenancies and are confident of our ability to deliver those results. We would expect rent levels and capital to reflect our recent experience over the last few quarters.

From an external growth standpoint, we're focused on two primary avenues. The acquisition market remains very competitive. During the second quarter, the region saw very few transactions. But I will tell you, the pipeline of pending transactions from both public and private companies is very active.

As I mentioned at the onset, and Chris amplified, you know, we are a bit disappointed. We haven't gotten that many transaction across the finish line thus far this year. But I can assure you, we're working on a number of potential deals that will get increased visibility during the next quarter.

We're also pursuing a number of transactions that will improve, on an asset basis, our competitive position. For example, next week we're acquiring a 170,000 square foot four-story building for about $21.7 million. That project is in southern New Jersey. As we view it, it's clearly under-leased, being about 58% leased. And it's being acquired at a price well below replacement cost.

Our all-in investment base upon stabilization of this project will be less than $150 per square foot. Again, below replacement costs and will achieve north of a 10% return. That acquisition will provide us with additional inventory in a marketplace where we're very strong, where we have an overall 93% occupancy rate and further improve our market penetration.

We also sold one property in King of Prussia during the quarter to a user. It was a good return, it was net absorption for the marketplace. And more importantly, from our standpoint, we took a large block of space off the market and did not turn it over to a potential sublease situation.

Our development program continues to progress, and we're confident we'll generate significant growth over the next several years. Right now, we have about $227 million dollars under development, that clearly includes Cirrus. It's 1.2 million square feet, and we're already 58% pre-leased on average. Development yields are in the 10 to 11% range.

We had recently announced a new build--to-suit transaction. It is a 15-year lease with AAA in southern New Jersey that will be 75,000 square feet on our existing land holdings at Mount Laurel Corporate Center. That project will generate a net overall development yield just shy of 11%, and will be delivered in the first half of next year.

In addition to that, we are actively pursuing a number of build-to-suit activities that will generate significant growth. Our redevelopment program continues to move forward on schedule and we are aggressively repositioning other assets within our portfolio to accelerate leasing activity on those buildings.

As we look at the remainder of 2004 in '05, we expect the markets to continue their recovery. We're convinced this will present a wonderful opportunity for us to move up our occupancy levels while stabilizing effective rental rates. In addition, our land bank and development program continue to generate increasing numbers of very viable opportunities.

On the acquisitions front, as I indicated, I wish we had done a little more thus far this year, and that's clearly a big part of our revised forecast. But -- and it's a big but -- the pipeline is very strong, and I'm confident we can get a number of these transactions accomplished before the end of the year. Our market position, excellent deal flow, control of tenants, will continue to generate significant value.

While we are spending a significant amount of time focused on leasing activity, with market dynamics changing, we're also spending increasing effort on our growth strategy. How can Brandywine use our market platform to significantly accelerate our growth rate? Along these lines are development program acquisition, financial programs are key drivers, and we're convinced that, given the levels of activity we're seeing, this company will be positioned for significant growth and be in an outstanding position over the next several years. All in all, the second quarter was a good active one for us.

Results were perfectly consistent with our expectations, as a result of our significant market out performance, marketplace psychology turning positive, our operating platform is the best shape it's ever been in. This platform positions us extremely well to continue generating portfolio growth, as well as accelerating our external growth program.

Thanks very much for taking the time to listen. Elsa, at this point we would be happy to open the floor up to any questions.

Thank you. The floor is now open for questions, if you do have a question, please press star 1 on your telephone keypad at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question, that you utilize your handset to provide optimum sound quality. Once again, that is star one on your telephone keypad for any questions at this time. Our first question is coming from John Litt of Smith Barney, please go ahead.

Good morning, guys. John Stewart (phonetic) here with John Litt and Andrew (inaudible) as well. Gerry, first question, what is your forecast for acquisitions for the balance of the year?

Well, we had projected, John, to be a net acquire of $50 million and we're holding to that in terms of what we are confident we can deliver by the end of year?

Just a question of timing?

Right. Okay. What is your forecast for accretion from acquisitions in your current guidance versus previous forecast? About two cents.

Two cents. Okay. Just drilling down into the guidance a bit, Chris. I apologize if the confusion is on my part, but you talked to -- you mentioned that your guidance was predicated on actual results of $1.25 for the first half?

That would be correct.

Does that mean you're basically excluding the $0.04-one-time items in this quarter.

No. The redemption charge, or I guess, gain, that we incurred in the first quarter when we redeemed out the convertible preferred. We are not factoring that in. But our actual six-month FFO per share, if you pull out the $4.5 million that we got as a gain on the series B preferred unit redemption was $1.25. So we're looking at $1.25 and then rolling that forward.

I see. I guess the last question along those lines, was the settlement during the quarter, the one-time items, were those incorporated in your guidance?

Again, we have a first-six-month number that, if you go back to October and then again our guidance on a per quarter basis, we had always been looking at something along the lines of $1.24 to $1.26 for the first six months of the year. So $1.25 is right in line with our expectations. You know, various things obviously have moved in and out of that number, but where we landed is where we thought we were going to be.

The guidance for the third quarter effectively is based on the run rate, as I said, of a 63-cent kind of stabilized second quarter and then you know, from there on out, the only real tweak to the high end and the low end of the guidance was more driven by the timing of closing on any external opportunities.

It's John Litt. The question is, if you beat by $0.04 cents for these one-time items, and you're lowering the guidance by $0.03, and that $0.04 wasn't in your guidance, then you're really lowering by $0.07 Given your expectations for NOI growth, acquisitions, et cetera, we're trying to figure out why the numbers are coming down by $0.07. If you had factored that four cents in, in the first half, and that was-- you kind of were confident that was going to come. But it seemed like that was kind of stuff you couldn't have forecast last October.

Well, John, when we did our initial forecast back in October we had given a range with base level of $2.60. When we progressed through the first quarter and wound up having the four-cent issue on the preferred dividends and reaffirmed the $2.60 low end at that point, you may remember that was a fairly active discussion. We did reaffirm the lower end of that range.

So if your question -- I'm trying to understand the question. The question is, did we know about this -- these one-time charges in the second quarter when we reaffirmed guidance? At the end of the first quarter, the answer is, yes. Does that clarify it?

Yes, that's helpful. Okay. Gerry, you gave the gap rent spreads on leasing on the quarter, what were those on a cash basis?

On a cash basis?

The cash basis numbers are shown in the -- in the supplemental. And on the new leases, we were on a cash basis quarter over quarter.

I can dig that out, Chris. I guess more importantly, what is your forecast for the mark to market for the balance of the year and for next year?

As I mentioned in my comments, we expect for the balance of the year that we're very much in these same lines. and we -- just to amplify, John, we really do focus more on GAAP because of our -- the uniqueness of our lease structures. I mean, well over 90-plus percent of our leases have contractual rental rate increases.

So, as opposed to looking at the high point of the rent cycle rolling down into these tougher market conditions, we tend to look at what our GAAP rental rate levels are, as well as our capital costs per square foot. So certainly for the latter part of this year, we're expecting to be in the same range we've been for the first and second quarter. And as we look out over at 2005, what we're looking at on transactions we've gotten across the finish line for early '05 renewals, we're running in the -- you know, negative cash range of about 3.5 percent to a positive GAAP range of about 4%.

Okay. I think Andrew Caldewitt (phonetic) has a couple questions as well.

Yeah, just one final question, Gerry, regarding the McQuarry Office Fund down in Australia. They recently made a-- were in discussions to bid for the Principal America Office Trust, and I think they announced that you guys would be one of their partners in that acquisition, is that correct?

We don't have rea;;u any comment on that at all.

The fact that they were talking about acquiring that at a 35% premium to net tangible asset? No-- any comment on what price you'd be willing to pay for assets like that?

No, I just really have no comments. We really haven't been directly approached on that transaction by anyone, so I really can't even comment on the report of the news story.

Okay. Thanks.

Our next question is coming from Ross Nussbaum of Banc of America Securities, please go ahead.

Hi, good morning. It's John Kim (phonetic) with Ross. Quickly, I just wanted to clarify, the decrease in your 2004 FFO per share guidance was mainly due to the restatement of your first quarter numbers and not due to any expectation changes?

No, no. If you think about it, I'll try this one more time. When we releasd at the end of April the $0.59 per share, first quarter numbers, and we reaffirmed guidance for the year at a low level of $2.60, contemplated in that $2.60 was the potential impact of this litigation settlement and the terminations fee.

So the change from $2.60 down three cents is purely reflective of timing on any external opportunities, and the fact that we have recognized that closing on any acquisitions is realistically going to be later in the year than we had previously assumed.

Okay. Thanks. Jerry, last month, Philadelphia Mayor Street discussed the possibility of rescinding the tax breaks for some of your law firm tenants at Cira Center. City council ultimately did not pass this proposal. At this point, do you believe this issue is completely behind you?

I think the issue for us is completely behind us, yes, I do.

Okay. On this topic, do you have a feeling of what the outcome may be for Liberty's Comcast development?

John, that would be pure speculation on my part and subject to a lot of political vagaries which I really can't comment on.

Okay. Have you seen any increase in Cira Center recently in the last few weeks?

Well, we've seen a tremendous increase in the interest of cirrus center. I'm hopeful that's not due to any political issues. I think it's more determined by, or more driven by the fact that steel is now visible. So when you're coming down the Schuylkill Expressway, or coming to 30th Street Station, you actually see the steel erection under way and you see, obviously, the two large cranes.

So as you typically see on a development project, once there is certainty of delivery, a number of tenants, you know, raise their hands and express an interest. I think what we're real happy with is the leasing activity we've seen. The largest contiguous block of space we have is less than 85,000 square feet. So we've now really entered the market for the small and mid-sized tenants where we've programmed multi-tenanting in a number of floors, but still continue to pursue a number of 50,000-75,000 square foot users. So, my guess is the -- all the publicity surrounding the political situation here in Philadelphia and in the Commonwealth certainly heightened interest in some of these projects, for good or for bad. But I think the -- at a marketing level, the reason we're seeing an increase in activity is because of the physical progression of the project.

Okay. And Jerry, you mentioned companies currently increasing their space utilization as they hire. Do you have a sense of what shadow space is in your portfolio currently?

We think it's around 3%. That number's held fairly constant throughout the portfolio. It seems to be a bit higher in a couple of the pockets in the western suburbs, and much lower in some other areas, but I think in general, it's around that 2 1/2 to 3% range.

Okay. Thanks a lot.

You're welcome.

Our next question is coming from David Fick of Legg Mason. Please go ahead.

Good morning. Can you talk a little bit about your pipeline potential, the land holdings that you have as this market starts to gain some (inaudible) here?

Absolutely. We have, we think, a couple very good land holdings. Working my way kind of around the geography, in Bucks County we have a parcel ground that is under option that we control and will close on by the end of this year. Once approvals are perfected, they can do 400,000 square feet of mid-rise office product up in the Newtown Bucks County Marketplace, which is one of the tighter submarkets in the region. And it's really become, David, an extension of the Route 1 Princeton corridor. So we have a lot of very high expectations for that parcel of ground.

In addition to that, we -- moving further down the Turnpike, we have our Metroplex site which can do about 500,000 square feet. Now, we have put in an adjoining parcel of ground under agreement that we will close on early next year that will enable us to increase that density, add another building of about 75,000 square feet and provide improved access out to one of the major highways. So Metroplex will wind up close to a 600,000 square foot development for us. Potentially more, but in that range. And that site is going through the reapproval process due to that third building addition, but we anticipate being through that the very early part of next year.

Up in Iron Run in Lehigh valley, we have the ability to do several hundred thousand square feet of office space on land that's fully approved and perfect it, which we think will create an opportunity for us. Where we made some very nice headway also is over in the Princeton corridor, where we've acquired-- that We can do two buildings in our Princeton Pike development, to that 240,000 square feet.

But in addition to that, you may recall we acquired a building on Lennox Drive last year. Along with that building acquisition came nine acres that can do about another 100,000 square feet. And we're going through the replanning process. That site base is adjacent tonight Princeton Pike. So we have an ability to potentially increase our density or change the design plan there.

We have several other parcels over in New Jersey that can do anywhere from 100,000 square feet to 50,000 square foot building up in Highlands. And then we have development land down in Richmond that can do about another 300,000 square feet. None of those include land that we don't have approvals in place for. We have a number of larger parcels. Green Hills land, for example, in Berks County, that is not included in any of our development capacity and we may wind up selling that for residential use.

Within the City of Philadelphia, as you know, we own four piers on the Delaware River that are in the process of going through the development planning cycle now, as a potential pad lease or a sale for mixed use development. In addition, I think we have one other parcel -- that I think I'm missing is 7000 Atlantic Drive over in southern New Jersey, which sits in Laurel Corporate Center, where we own a number of buildings, and that can do 110,000 square foot project. So I think as we look at it, I think we have got the ability to do roughly, including some of those grounds under option, about 3.2, 3.3 million square feet of space. And I think what we're spending a lot of time on now is revisiting some existing approvals to make sure that we can create some additional density or reconfigure parking. We do that, and really position those parcels for quick entry into a marketplace that's clearly going to have a need for larger blocks of space in the not too distant future.

Thank you for the comprehensive answer. How are you thinking about these forward projects in terms of costs? What has been happening to your cost per square foot for your typical building? And then how would you look at your existing portfolio in terms of its value on a replacement-cost basis?

In terms of what we're seeing from a cost standpoint, it's -- as I say, it ain't going down. So we've seen clearly steel, sheetrock, obviously the unit costs of labor, increase. But we've also started to see that come back down.

I think steel prices have peaked and we're seeing in some cases, you know, 20- 25% bid increases, they're now starting to migrate back down. Glass seems to be fairly constant in its costs. Precast and brick are holding fairly constant, although there still seems to be delivery issues on good quality precast. So, as we look at these costs, We essentially take what we know our building costs are.

For example, the building we're doing over in New Jersey for AAA is running about $180 a foot. Now, that had some -- that has a data center piece of it that's included as part of that cost basis. But the range we're looking at for standard 2-3 story building construction is-- you know, Bishop's Gate was delivered delivered about $160 a foot. AAA will be about $180 a foot. When we look at a project like a metroplex, which are six to twelve story buildings, the costs there are running $220, $225 a foot. And that includes some structured parking components. .

It's hard to project what will happen on construction costs. I think a lot of it is going to be driven by just demand for some of the major component pieces, like steel, curtain wall, glass. As I mentioned, steel looks like it's peaked. And glass seems fairly stable. We'll see what happens with the other pieces.

In terms of a replacement cost perspective on our portfolio, I'm not -- when I look at some of these NAB (phonetic) estimates, there certainly seems to be a disconnect between capitalization rates that we're seeing as we're bidding for properties, versus what some of the analysts are putting forth as value for our portfolio. But I think when we're looking at a market that has increasing difficulty of approvals, and that will not get any easier, that will get much harder, a strong bias against additional greenfield development. And ever increasing requirement on the part of our users for scale buildings, in other words, larger versus smaller buildings, I look at our inventory and say that we've created a very valuable asset.

When I look at our King of Prussia Business Park components or 401, or our inventory in southern New Jersey or Richmond, we have, you know, true class-A mid-rise product with good parking, good column, good window lines, we're looking at the high 100 level pricing on a replacement cost standpoint. And certainly, to the extent we're delivering good leases and good rollover and good retention, we certainly think it's north of that.

With all of that in mind what are you doing in terms of instructing your leasing folks going forward on the prospective buildings? How much have rents moved over the last year as costs and assumed forward costs go up?

Yeah, I mean, I wish I could tell that you rents have moved to where we wanted them to. I mean, it's --

I'm sorry. For former rents is really what I'm driving at. What is your hurdle rate for doing a building?

We have great Excel spreadsheets we can do anything with. I think-- a good example, I think, not to go back to a previous illustration, but it's that AAA deal. That AAA deal is going to come in just shy of 11% on a development yield basis.

I mean, that's down, you remember -- I mean, a couple years ago, we were doing development deals at 13%. But 11%, certainly a very acceptable rate of return on a full-building lease, and that steps up over time from the mid-nines up to close to 13%.

Part of that is an art of structuring the deal with the right rent structure that meets the tenant's requirements. So what we're typically seeing right now is clearly there, even though there's more activity in the market, tenants still have this perception that the real estate markets are back on their heels and they're negotiating very, very aggressively. So we're at that weird inflection point in the market where we actually see ourselves, in a number of cases, having stronger pricing pressure -- or stronger pricing abilities with larger tenants versus smaller tenants.

So if you're a 5,000 square foot tenant in King of Prussia that has just around a 20% vacancy rate, you have a plethora of choices to select as an office location, where if you're a very large user you don't have that many. So when we look at some of these development deals, and we have obviously have been very cautious on how we start them, and you can see from the schedule and the supplemental, we've been very good at getting good tenancies in place, that we do think that there's going to be increasing pricing capability for us to exercise over these larger users as they start looking for bigger blocks of space.

So, whereas we've bought down our pro forma rents from a maybe a couple of years ago, like when we started looking at Metroplex, we were probably in the very high 20s. We've migrated that back down to the $26-$27 dollar range. Right now that rent may not be there, but for the right user, that's clearly there, as we've seen in a couple of other situations.

Thanks a lot.

You're welcome.

Thank you. Our next question is coming from Frank Greywit of Key McDonald. Please go ahead.

Hi, guys. I was just wondering if you could go through the $1 million of other income. Was that basically just a security deposit that you paid to acquire a building that was then given back?

No. Frank, when the plaintiff alleged that we were in breach of our obligation to purchase the properties back in the late '90s, we essentially established -- we had to post a security deposit as part of the litigation process. During the process, our position continuously was victorious in court, but then there was a continuous appeal process. As part of establishing that security deposit, we also took a litigation reserve of $1 million. But when the case was ultimately settled, obviously, we no longer had a need for the reserve. We simply unwound the reserve and the $1 million flowed through other income.

Okay. Now, looking forward in the third and fourth quarters and how you're getting to your guidance, what are you assuming for other income then, kind of on a go-forward basis? Is that the formal $2.5 million range.

Yes. Other income on a go-forward basis, we would assume is consistent with where we had -- have previously been on a run rate basis.

That's about 2.5, right? About?

Yeah, it ebbs and flows, but that's in the ballpark.

Okay, and then as far as-- you indicated you'd be terming out your line of credit with the unsecured notes. What do you expect at that-- Is it going to be-- is it floating for the whole third quarter? Will you be floating on that balance?

Yeah, that is not our expectation, although the timing there is certainly subject to a variety of things, including the fact that at this point we don't have an effective shelf registration statement yet. So the process will evolve. Obviously, our hope is to be able to get to market as soon as we can and as market conditions warrant.

Okay. What do you think that spread is between the -- I guess what your cost-to-debt was in the second quarter, what it will likely be in the third quarter, assuming a full quarter of having the debt flow, and then moving to the fourth quarter, assuming you've -- that you term out that debt.

Boy, that's a tough question to answer, because number one it's really a subject to what's the timing on any potential debt issuance. Number two, it's a question of whether that issuance is of a five-year tenor versus a five-year tenor, how we ultimately come down to the size. Okay. I think the bigger thing to look at is the fact that $175 million of the line was hedged with a LIBOR floor of 4.3 through the end of June. That hedge is burned off.

So at this point if you look in the supplemental, you can see the floating rate and the rate at which it -- floating, you could make your own LIBOR assumption, and essentially calculate pretty close to what it would be on a hypothetical, if it's floated for the full quarter.

Sure. How big again are you expecting the issuance to be, the unsecured issuance?

That's, again, subject to what makes sense in the market.

Okay.

I think, historically, we have talked about something in the approximate range of $250 million.

Okay. Now, you indicated, I believe, that your margins were a little compressed, due to higher expenses in the second quarter, is that correct?

Well, I was just trying to look at a quarter over quarter of June '03 to June of '04.

Okay. Typically, it appears that you experienced a little compression in margins between the second and third quarter. What are you assuming in your guidance? Are you assuming that same, that -- what usually -- are you assuming that same phenomena, and additionally, third quarter over fourth quarter?

I think as you go -- as you go forward, clearly the first quarter you're impacted, obviously, by the weather.

Yeah.

Then in the second quarter you have got some additional costs related to landscaping, as you're doing a lot of your outside work. The third quarter, historically, then you've gotten neither the weather nor a significant amount of landscaping, and then the issue kind of starts all over again in the fourth. So, the cycle, if you look at past years in terms of margins, we would expect the 2004 would be no different than prior years.

Okay. I guess, finally, as far as capacity. How much-- I mean, now that you have a credit rating, how much capacity do you really have before you have to tap the equity markets again?

I think in terms of capacity to run the business, barring any external factors, you can look at the size of the line. The accordion feature where the balance is today, and the development commitments that we have plus positive cash flow. So, from that perspective, for the next few years, we have got capacity to run the business barring any external opportunities. Now to the extent that the acquisition volume changes or the development pace changes, then we have to revisit that issue.

I guess, today, if you had an acquisition opportunity, how many acquisitions could you acquire before you had to go back to the equity markets?

You look at the line balance is $270 million. We've got a current $450 million capacity that can go up to $600 million. Certainly, as we've modeled out the line, we have the ability to fully draw on it without having any covenant issues.

Okay. And the -- as far as your ratings with the credit agencies, would they be -- would that be -- on a go-forward basis, you'd be able to keep that amount of debt out?

It's a complicated question, because the other issue really comes down to the balance of secured and non-secured indebtedness. So, in the hypothetical, it would really have to be if we had an unlimited amount of unencumbered properties that we could buy at the-- at attractive cap rates, you know, you've got the ability to totally utilize the line.

If you're talking about properties that have mortgages on them, that starts to change the whole equation. So, it's actually not-- Unfortunately, it's not a -- kind of a simple answer to give.

Okay. Thanks.

Thank you. Our next question is coming from Keith Mills of UBS. Please go ahead.

Hi, good morning, gentlemen. How are you? Gerry, I guess the first question is-- the first couple questions are for you. Just going back to the second quarter basis results on the FFO basis, in fact, taking that a little bit further. I think you made the statement earlier that you anticipated the $0.04 related to the lease termination as well as this other revenue to be included in your second quarter result. Is that correct?

No. I think-- let me try to take it. I think if you look at the end of April when we released earnings and had the preferred stock question answered with the $0.59 per share, at that time we reaffirmed $2.60 to $2.65. At that point on April 28th, I guess it was, we felt as if the direction in which the litigation had been moving over the last several years and the conversations we were having with the particular tenants on that space, that at some point in our guidance, we were comfortable contemplating $0.04 a share of FFO.

Whether that was the second quarter, third quarter, fourth quarter, we didn't know. But the $2.60 contemplated that amount. So we had provided guidance of $0.62 to $0.63 for the second quarter and that is where we were comfortable. But you've got to focus in on the annual number.

Sure. Okay. That helps, I was just trying to understand if there was better performance in your quarter business than you expected. I wanted to try to get a sense of where that was.

No, I mean, if you look at it, that's exactly what I was saying earlier, that we were right in line with our run rate expectations at sixty three. Sixty three, so--

Okay. Next question for you, Gerry, is related to a press release you had out about two weeks I guess it was, where you announced the appointment and hiring of Jim Cuarato, is that correct pronunciation of his last name? He's going to be responsible for researching, evaluating, managing new development initiatives. Can you talk to us about his kind of priorities will be over the next six to twelve months?

Certainly. Jim joined us, Jim has extensive experience in major mixed use development, working with government funding sources, working through the approval process in both urban and semi-urban environments. And as we looked at our development pipeline going forward, which is it not just our -- the land inventory and the existing deals we announced. But we have a very active development services program that is comprised of Jim, Tony Rimikis and several other individuals in the Company whose major job it is to go out and source new opportunities for us.

And they could range from the consulting arm that we have with one of the major townships here in the suburban counties, to working with a couple corporations on reconfiguring their existing office buildings and doing some of their surplus land, to responding to public RFPs for future development opportunities, which we've done in a number of cases during the last quarter. So Jim's role is to come in and be an effective contributor to that team and really do whatever needs to be done to move transactions forward.

For example, we were talking earlier about our metroplex development that's going through a re-approval process. Jim is taking the lead with us on that. He's also taking the lead on a number of other transactions that are similar in scope. I hope that answers your question.

Yes, it does. I was just looking at his experience, particularly with being with the City of Philadelphia. I wasn't sure if maybe his projects would be more focused in kind of the downtown Philadelphia area rather than in the suburbs. Would that be true, or--? No, I think we continue to, as we have, look at a number of things within the County of Philadelphia, just as we do in every county in the suburban counties, but also take a look at Wilmington, Delaware, which is an urban environment that has interesting dynamics to it, in terms of development opportunities.

So it's not more urban versus suburban. It's just basically wherever we think we have an opportunity to convert and make money.

Okay.

Next question for you is related to the equity office suburban Philadelphia properties. Can you tell us where you may be in kind of the due diligence process associated with those properties?

Well, the equity office suburban portfolio has not been put on the market yet officially. The equity office urban portfolio, which is two buildings in downtown Philadelphia, is on the market and is being actively marketed right now.

And I think you had said previously that you would not be interested in those, but you might be interested in their suburban properties?

That is correct.

Okay. I guess the next question, my final question relates -- is for Chris, it relates to the refinancing of the 481 Creamery Way property. The debt and the interest rate seems to be higher on that now than it did in your first quarter release. Could you comment on that?

Well, we may have to look that one up on this one because we didn't do anything there.

We didn't do anything there.

Oh, okay. I guess we'll follow up with you.

Our next question is coming from Rich Anderson of Maxcor Financial. Please go ahead.

Thanks. Sorry to beat a dead horse on guidance, but did you -- you talked about the four cents, but did you also contemplate the full vote of the series C & D deferred dividends, which adds another 1.5or 2 cents -- or take as way 1.5 to 2 cents from FFO, did that -- Could you talk about the four cents, but you're not talking about the full vote of the preferred dividend.

The preferrred dividend in the guidance, back in April as well as now, was always contemplated completely.

Okay. The anticipated unsecured offering of $250 million, correct me if I'm wrong, but didn't you say at the time of the second common share offering, that would take the place of a debt raise? Isn't that what you were telling people?

No, we had always said that the reason we were obviously going through the rating agency process was to try and position ourselves so that we would be able to issue unsecured debt. That continues to be the strategy, and the use of the proceeds is, in effect, to take out the short-term variable rate debt.

Okay. My last question is, with regard to the capital costs that dropped versus the first quarter, isn't it really a tradeoff of that versus rental rates? I mean, you had a 15% roll down on a cash basis, and that is a lot worse than you had in the first quarter, so it's sort of a -- is it or is it not a tradeoff between capital costs and lower rents?

At times, it can be. In all cases, it's not. In other words, I mean, that was the first thing we looked at, too, so that's a good observation in terms of, well, geez, maybe that rate is down because of the lower capital costs. Honest to goodness, it's really a lease-by-lease specific.

I mean, and when I say that, that's not just the individual lease we're negotiating, but it's the timing of when those leases occur in conjunction with the other leases in the quarter. So, for example, the reason we had the larger decrease in the first quarter -- I'm sorry, in the second quarter, from a cash standpoint, was really related to two specific leases. One of those leases really didn't have much capital, and the other one did.

So it's really not a direct linear relationship between rental rate and capital. We wish it was that quantifiable in all cases, but in many cases it's not.

Okay. Thanks.

Thank you, our next question is coming from Timothy Goble of REEF. Please go ahead.

Hi, Gerry.

Hi, Tim, how are you doing?

Question for you. On the portfolios out there for -- being marketed, EOP is not the only one out there. Are you also looking at the other large portfolios and maybe you can give us some color or help us quantify what sort of pricing they could go out at?

Sure. I'll say what I can. The -- I mean, we're -- there are very few things, I guess, it's an overview count, to me. There are very few coarse transactions, whether they're large portfolio, couple building portfolios or individual transactions that we do not look at to one degree or another when they come to market. In fact, a lot of our transactions we see before they come to the market.

So the pipeline is very -- I don't want to give you a number on that, because that just tends to create a lot hubris that I'm not sure is really productive. But the pipeline is very strong, and it is a very strong mix of transactions that are individual assets to large portfolios. Clearly, the larger portfolios take a lot more time to look at.

I mean, we're continuing our focus on looking at good quality, well-located assets that improve our competitive position. And I have to tell you, as we've talked about on the previous calls, under the right circumstances, not adverse to taking on additional leasing risks. I do think the market's going to continue to improve over the next several years. And if we can get the type of transaction pulled together like we did with the building over in New Jersey, where we're buying that building at clearly a good 20% below replacement costs and we'll lined up all-in after investing capital and-- you know, capital TMI leasing commission below replacement costs, we'll buy that leasing risk today.

So we're always trying to balance that, how you can create that upside in an acquisition versus what's a justifiable rate to pay today. Now, there's clearly been a very active investment market, and projects have traded for pricing levels that were above what we thought was reasonable. Which, frankly, is one of the reasons we're in this dilemma that we really haven't closed that much this year.

As we look at a number of the specific opportunities in our pipeline, though, I'm confident that a number of those are beginning to fit our criteria relative to a -- you know, that great point between price per square foot, going in return, and then all-in return on investment. All-in return on investment after the the building's stabilized.

So, in terms of the 50 that you're assuming for the rest of the year, what sort of going-in returns are you looking at there?

I think we're -- I don't think it's changed that much from what we talked about before, just somewhere in that 9% range.

Including the 58% occupied deal you have --

No, the 58% occupied deal, that's a good question. The going-in return, that obviously is south of the nine percent, because there's a large percentage of vacancy.

Right.

But as we look at the absorption pattern on that building, once we stabilize that, take our original investment base, plus all the costs to get it to stabilization, we're going to be right at around a 10% return.

Great. Okay. Chris, a question for you on the-- your comment about consolidating the 4 and 6 Tower, yet your expenses are going down sequentially. I can see why revenues and reimbursements might go up a little bit. But can can you help us understand what the dynamic is, what's going on there and whether there's going to be claw-back?

Sure, Tim. If you look at the first quarter, obviously heavily impacted by snow and snow removal costs. So, if you were to back out the snow removal in the first quarter, you know, you come down to, as I said, you take out 4 and 6 and the snow removal costs, and we're a couple of hundred thousand dollars higher quarter-over-quarter in expenses than we were, quarter over quarter, a couple of-- $600,000 higher, and that basically reflects 50% of that is utility costs and the other half is timing on repair and maintenance.

Okay. So what happens, then, to tenant reimbursements going-forward? Is that a good number, or--?

You always look at TI every quarter and balance that again, Tim, because we're billing the tenants based on a budget. So we've got to balance that against the performance of our other costs, as in snow removal.

I mean, to the extent that we ended up matching perfectly the periodic billings to our actual expenses, there would be no true-up to the extent that we went one direction or the other. There's a true-up that takes place at the end of the year.

Okay. So that, the tenant reimbursement line, is a good run-rate number?

Yes.

Okay. Great. Thank you.

Thank you.

Our next question is coming from Chris Haley of Wachovia. Please go ahead.

Hi, Jerry.

Hi, Chris.

Which of the portfolios in the marketplace look like yours or closest?

I'm sorry, Chris, was that an observation by one of your junior analysts there?

Yeah. He thinks they're all cool. But I know that-- I'm familiar with the portfolios that are out there. Which ones do you think are most like yours that would be good fill-ins?

I think the -- a couple pieces of the EOP portfolio fit in nicely, as do a couple pieces of a private company that's being marketed right now.

Are you saying-- are you really looking at some stuff, some big vacancy in Radnor?

As I mentioned, I think, Chris, we are open to looking at taking on additional leasing if we can get the right structure in place. As I mentioned, that's a real tradeoff between going-in price and what our expectation is on the underlying strength of that market.

So I think there's a number of portfolios out there. The pieces of it fit, what we're kind of looking for, so that's going to be an interesting procession to see how it all plays out. Hello? Are you there, Chris.

His line has disconnected.

Okay. Let the record show that that was him disconnecting.

Our next question is coming from Frank Greywit of Key McDonalds. Please go ahead.

Thanks. Just one last question, trying to reconcile back to your third quarter guidance. You're at $0.63, moving to $0.66 to $0.68. I can understand maybe a couple pennies from interest expense savings, but where do you expect to see the rest?

I think if you look at kind of the interest line, you're going to get from a run rate of, you know, a solid $0.63. You're a couple pennies, whether that be two or three, gets us to the bottom end, and then to get up to the top end is the assumption that we see some same-store results that are in line with the guidance we've previously reported.

Okay. And then the next -- then looking to the fourth quarter with pinching -- with operating margins falling a bit and likely terming out of the interest expense, I mean, did that -- I mean, I'm just trying to make sure that the fourth quarter number would jibe as well.

Yeah, that, you would cease to lose the quarter over quarter run rate on the interest expense savings. to the extent we were successful in getting to market with a fixed rate deal, that would obviously squeeze your interest expense a bit.

And, you know, then, the other item there, obviously is, as we talked about it, is the spec acquisitions, which would be a positive addition, depending upon the time.

Okay, and then just one last thing. In the fourth quarter, if you make some assumptions to the debt offering, do you expect that your overall interest expense will be more or less than in the second quarter?

Definitely more.

Okay.

I mean, not only do you have to assume a debt offering, but I mean, I think we all have to assume that the Fed will continue to increase year-term rates -- (inaudible).

Yeah, sure. Okay. All right. Thanks a lot.

Yes.

Thank you.

Our next question is coming from Keith Mills of UBS. Please go ahead.

Hi, guys. Two follow-up questions. I just wanted to clarify a point I made earlier, and that was not-- we were asking, or asked, initially about the Creamery property. It's actually about 41 John Young Way. I can still follow up with you after that.

Yeah, the Creamery-- 429 Creamery Way, 481 John Young Way and 440 and 442 Creamery Way, unfortunately, it looks like the current rates just got reshuffled on those three properties in the second quarter supplemental. We've done no financing activities on any mortgage debt.

I think those three rates just got shuffled in the supplemental as they're applied to each individual property. But the analysis should be consistent with the first quarter. We've changed nothing.

Okay. Great. Thanks for the clarification.

Two questions for you. First, could you just comment on the delay in the acquisitions that you're experiencing this year? Is there an actual delay, or is it just relative to what you were expecting nine months ago when you set your expectations for the FFO guidance for this year?

No, I mean, I think -- I'll tell what you it is, you can apply the word to it. We had assumed that we were going to have about $50 million in acquisitions around mid-year. We're past mid-year. And essentially with the acquisition in southern New Jersey versus the sale of the project in King of Prussia, we're essentially around a net zero. So, as I look at the landscape, we're looking at, you know, another couple months.

Maybe sooner, maybe a little bit later before we get something across the transom. So, when we did our original financial projections, Keith, we had assumed that $50 million was contributing in our as-of July first.

Okay. In terms of timing of the $50 million, is it safe to say it's safe to say it sounds like it's more fourth quarter than third quarter?

Yeah, it would. We're looking at a fourth quarter, potentially a very late third quarter.

Okay. And my final question for you, Gerry, is related to the conversion rate. You referenced in your prepared remarks that it was quite strong. Can you be more specific about it in terms of what it was in the second quarter, maybe how that compares to the first quarter and then how that compares to the historical average, peaks and troughs, kind of where you are in the cycle?

Yeah, I mean, I think-- when you look back a couple years ago, we were down in that 13% range and it migrated up to the mid-teens and then it was kind of plateauing around 20%. We're north of that right now, so what we're seeing is actually a pretty good dynamic, which is an increase in the amount of square feet coming through our door. A correllary increase in the amount of square feet we convert to leases. So that percentage being north of 20% when you take a look at the activity through the portfolio, we're really pretty pleased with it.

So, I think what that tells us is, we're seeing all the deals, our leasing agents are doing a good job once those prospects come through of following up with them and tracking their requirements, so we get them across the finish line. And third, I think, and most importantly, is that the product we're showing them is good quality.

So we track that by agent just to take a real good look and see how much do you -- how many deals we're getting through, how that compares to leasing activity in the marketplace, what is their conversion rate on a trend-line basis, how does their conversion rate compare to the other agents in the Company, and what type of conclusions can we draw relative to the specifics of the buildings that they're showing.

This 20%, Jerry, how is that calculated? Is that number of deals, is that square footage?

It's basically square footage.

Square footage? Okay. And I guess one could assume that over time, the 20% would move back to the mid teens, the thirteens? Maybe as the market strengthens overall, is that fair to say or--?

I would hope that we'd continue to move up.

I would think so, right.

But it did -- I mean, I think, you know, right now, as I mentioned in my comments, we're in the -- in that point in the cycle where the name of the game is to capture more market share.

Okay.

You're not really seeing net absorption, you're seeing good activity, minimal or negative absorption, so the real dynamic is to be aggressive, maintain worst case, but hopefully improve your market share.

As marketing initiatives improve, I think we would still want to maintain our market share, and then hopefully have the marketing and leasing strategies in place to actually outperform.

Right. Okay. And then I guess just my final, final, final question, and that is related to the leasing costs and how they dipped down to $1.55 per square foot per year from in the two-something range.

$2.55, right.

Do you expect that to increase now as you move to the second half of the year? And if so, what range do you think it would be at?

I mean, our thoughts for the balance of the year is that that's going to probably going to migrate back up towards the $2 level.

Okay.

So, I mean, still good compared to the first quarter, a little bit off from where we were in the second quarter, a little above our historical averages, but certainly, we're starting to get a sense that there's more stability to the capital side of lease transactions.

Okay. Thank you very much, appreciate it.

You're welcome.

Thank you. Our next question is coming from Jamie Feldman of Prudential Equity Group, please go ahead.

My questions have actually been answered, thank you.

Our next question is a follow-up coming from Timothy Goble. Please go ahead.

Hey, guys, another question on the acquisitions. Say you do end up being successful with one of the large portfolios or a couple large transactions, how are you going to finance that?

Well, I think as we mentioned on one of the questions, we have plenty of capacity within the -- within our existing balance sheet. You know, one of the things that we're clearly looking at for acquisitions is the ability to buy properties unencumbered, which, frankly, is a challenge when you're looking at buying properties from private development companies. They typically have long-term secured, fixed rate, difficult or expensive pre-paid debt.

So we've actually been very cognizant of maintaining and actually enhancing that secured/unsecured debt ratio. So again, what we're looking at on our portfolio right now, the vast lion's share that is easily handled on a transactional basis within our existing debt capacity.

So purely debt. Ultimately, is there an equity raise in there?

Well, I think it's-- I mean, certainly depending on the volume of transactions we see over the next couple years, and the -- and the status of the equity markets, we certainly would not preclude that. Current plan is, given how much progress we've made on strength in the balance sheet over the last couple years, that we have enough capacity built into our program to meet our -- you know, our funding requirements.

That's not a black and white answer, because I-- unless I'm looking at a specific transaction that we're going to be moving forward and it's hard to identify the exact capital structure.

So how much back-tracking could you do on the -- you know, debt-to-total capital?

38%.

I mean, I think you'd look at debt plus preferred to book capital. Our target range, you know, over the next few years is to stay in that 50 to 53, 52% range and keep our fixed charge coverages and our interest coverages in line with the ratings. So, I mean, another way to answer the question is, we would have to, A, find a transaction that made sense. B, it would have to be a capital structure that worked for the acquisition. And then, C, we would have to look at that in reference to all the hard work we've done to get to the rating and to make sure that our ratings profile stays in line with BBB minus B, AA-3 company.

Great. Thank you.

Thank you.

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

Great. Elsa, thank you very much, and thank you all for your active participation in the call today. We certainly appreciate your interest in the Company and look forward to updating you on our further activities during the third quarter call. Thank you very much.

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