Brandywine Realty Trust (BDN) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Brandywine Realty Trust 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. Jerry 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 give 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 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 ending December 31, 2003, and any subsequent filing, a copy of which are all on file with the Securities and Exchange Commission.

For further information on factors that could impact us, please reference our additional filings with the SEC. We are subject to the reporting requirements of the 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 press release. Thank you. I would now like to introduce your host for today's teleconference, Mr. Jerry Sweeney, President and CEO of Brandywine Realty Trust. Mr. Sweeney, you may begin.

[Elsa], thank you. Good morning, everyone, and thank you very much for joining us for Brandywine's first quarter earnings call. Today's agenda will provide a brief review of market conditions, a review of our first quarter 2005 results and our outlook for the balance of the year. Participating with me in today's call are Chris Marr, our Senior VIce President and Chief Financial Officer, Tim Martin, our Vice President and Chief Accounting Officer, and Jim Cebra, our Corporate Controller.. First quarter performance was consistent with our expectations and reflects a continued improvement in many of our operating metrics. Core portfolio results were solid, but remained reflective of continued competitive environment that we operate in.

One of -- one of the key highlights of the first quarter was the continuation of our leasing success at Cira Center, our 29-story building at 30th Street Station in University City, Philadelphia. As I mentioned on the year-end call, we expected to be 75% leased by the end of the first quarter. In actuality, we exceeded those expectations, Cira now stands with an office lease percentage of 87%, which translates to an 83% overall pre-leasing level, including the retail and the conference center space. During the quarter, we were successful in signing six leases for -- aggregating approximate 152,000 square feet.

Cira Center now stands with 10 and 15-year lease terms in place, with good rental growth rates throughout those terms and in very good position and ahead of our pro forma. This -- those leases, as well as ones we already have signed, will be staging in during 2006. Separate press releases on the individual tenants will be forthcoming over the next week or so, as we clear internal public relations departments in those specific tenants.

As we stand right now, Cira has created over 725 new jobs for the city of Philadelphia and bought approximately 500 new jobs into the commonwealth of Pennsylvania. Based upon a retained job number within the city of Philadelphia of 100 -- of 1150 jobs, Cira will have created a 63% increase in new versus retained jobs for the city of Philadelphia, a significant accomplishment in today's environment, and we could not be more delighted with the progress we have made on Cira's pre-leasing. From a construction and budgetary standpoint, all other items at Cira remain very much on target.

Looking at the general first quarter, our operating performance, several items warrant mention. For the first quarter, our retention rate was 69.3%. This number exceeded our internal expectations, but was below our five-year historical average of 75%. As I indicated in our last call, we expect that our quarterly retention rate will be in the 60 to 65% range for the second quarter, with a ramp-up toward the end of the year. That is all based upon known vacations and leasing activity within our existing tenant base. At the end of the quarter, our portfolio was 92.1% leased, and 91.3% occupied. Still very strong statistics in this type of market.

For the quarter, we renewed leases approximating 846,000 square feet and signed new leases for close to 300,000 square feet. We did, however, have leases expire or terminate for about 1.2 million square feet, so we had slight negative absorption throughout the portfolio. While the level of leasing activity we're saying is very encouraging, the negative absorption is symptomatic, we think, of a continuation in a very challenging operating environment. The quarterly rental data continues to reflect that emerging market. For the first quarter, we showed a decline on new lease rents on a straight-line basis of slightly less than 10%. This is a bit better than our forecast, represents an improvement over previous quarters, but is still indicative of very competitive market conditions.

Rental rate growth on renewals was slightly positive on a straight-line basis and finally, capital costs for the quarter were $2.21 per share foot, which is in line with last quarter's performance and down from a year ago, but still remains a bit above our historical averages.

I'd like to take a moment to discuss general market conditions. As I mentioned briefly, they continue to improve, but at a very slow pace. There remains a wide dispersion of activity and strength in many -- many of the submarkets in which we conduct business. We continue to see a slowly emerging trend towards equilibrium and positive absorption, but, all transactions remain competitive and in some submarkets, there is still continuing pressure on economic packages offered to tenants. With the overall market vacancy rates where they are, which range from the mid-teens to single digits on Class A inventory, this situation is clearly going to remain until absorption brings the Class A vacancy rates down further.

Given the quality of our portfolio, the thesis is fairly simple. General market activity will continue to increase our occupancy, but until there is consistent absorption throughout the regions in which we do business, there will not be any real significant increase in - in rental rates. Activities through our portfolio did continue to increase through the quarter. Our conversion rate continues to improve, which I think reflects our aggressive leasing stance and all-hands approach to leasing office space.

As I have also indicated on previous calls, buyers' psychology has clearly shifted. The general expectation is that rents will get stronger rather than weaker, and that's an important change from where we were just over a year ago. We continue to see a flight to quality, which is a harbinger of market recovery. We have seen good activity and higher leasing volumes in King of Prussia, Northern 202, [Concha-Hawkin] and Plymouth Meeting. These markets are typically viewed as being top-tier, but we have yet to see a recovery of baseline economics and we believe those levels will stay the same until there is more absorption throughout the market place.

Our outlook of several months ago remains on track. For the Philadelphia suburban market our perspective is that vacancy rates will continue to decline, average rental rates will remain flat, and there will be positive net absorption throughout the market that will vary between submarkets. And. also, there will be minimal new construction in the Pennsylvania suburbs. By way of illustration, in King of Prussia, for the first quarter, had positive absorption of 150,000 square feet and vacancy decrease of 70 basis points, to bring the overall market vacancy rate to about 15%. Our combined western suburban operation right now is about 90% leased, which is significantly outperforming the market. In addition, Plymouth Meeting, [Blue Bell], as well as several other smaller submarkets also saw vacancy rates decline during the quarter.

In Delaware, for the quarter, performed well. Average rates continued to increase and there was a slight decline in vacancy. For 2005, we continue to believe that vacancy rates should continue to come down with average rents moving up slightly, with the overall market highlighted by positive absorption.

Southern New Jersey should see a marginal increase in vacancy, flat rental rates, and break-even absorption. New Jersey, interestingly, is seeing a higher level of construction activity, primarily due to its stronger performance over the last several years. There will continue to be price competitiveness for smaller tenancies across the market until vacancy rates generally decline by about another 500 basis points.

With all the positive activity we're seeing, we are, however, a long way from having predictability of rental-rate levels or increases. We approach the market with the understanding that we can have in -- an influence on our occupancy levels, but certainly not on our -- on moving up average effective rents at this point.

As we look at the balance of 2005, there's several key themes for Brandywine. First, continuing our strong market out-performance. Second, continuing to invest significantly in the infrastructure of our buildings. This will certainly better position our existing inventory to take advantage of their tremendous locations, surrounding amenity packages, thereby leading to much stronger investment values and a stronger more diversified tenant base. Third, and clearly the most important, is to position our company for accelerated growth. We have solid growth built into our portfolio for 2006 and 2007 that will be achieved simply by bringing Cira Center online, the increased leasing activity we anticipate at Radnor, and strong market performance as the market recovers.

Our balance sheet capacity is excellent. Our reliance on short-term floating-rate debt is minimal, only 16%. Our market position has never really been stronger and our infrastructure is the deepest it's been in the history of our organization. From an earnings standpoint, we continue, as we have in previous quarters, to be driven by an overall cautionary approach. We remain in a climate of compressed rental rates and increased operating costs. As such, like many other companies, we continue to face a margin squeeze.

For 2005, you'll note from our press release that we have reaffirmed guidance between $2.48 and $2.55 a share. We are targeting an FFO of $0.58 to $0.59 per share, FFO, for the second quarter. And we would urge all of you to factor that into your models. Given disclosure requirements, this earnings call is truly our one opportunity to provide color-on guidance. As such, I would urge you to reflect on my market commentary and understand why we are strongly suggesting that you revise estimates to be at the lower end of our guidance. At this point, Chris will now discuss our first quarter results. Chris?

Thanks, Jerry. We're very pleased, obviously, with our first quarter results in line with our previously issued guidance and with first call consensus. Few highlights from within the quarter are as follows. First, and let's not forget, we passed Sarbanes-Oxley. And our Form 10-K filing, we reported that our internal controls were operating effectively. We had no material weaknesses. It does seem, at least to us internally, that it was an eternity ago when we filed that 10-K, but the reality is it was only about a month and a half ago. And since we spent so much time and incurred the costs, I wanted to make sure those efforts were permanently reflected in the transcript for this call.

Our balance sheet remains largely unchanged from year-end. If you look at the fluctuations between the fourth quarter of last year and the first quarter of this year, essentially we continue to draw on our credit facility to fund our investments in Cira Center and our other land and development projects.

P&L variances worthy of note. Our other income was up, reflective of the termination fee we had disclosed in our year-end earnings release and in our Form 10-K as a subsequent event. As you all will recall, we terminated a 50,000 square foot tenant in our western suburbs portfolio. As you all will recall, we terminated a 60,000 square foot tenant in our portfolio. We received a termination fee, wrote off the straight-line rent for a net of 3.7 million. We released 76% of the space with occupancy taking place in February and March. While it's tempting to take the 3.7 million and divide by the shares outstanding and arrive at an impact, that omits the fact that a rent-paying tenant left the space. So we do not have the benefit in our revenue stream in Q1 and for the balance of 2005 of the revenues from the terminated tenant.

The impact of timing on the occupancy of the two new tenants, the current rental rate on the new leases as compared to the previous tenant who terminated, along with lost recoveries will trickle through rents for the balance of '05, leaving us with a net $0.05 per share impact for full- year 2005, as we had previously articulated in our last press release. Operating expenses were up over Q4 driven primarily by snow removal costs. Rolling operating expenses from Q4 to Q1 most comparable given the [Rubenstein] transaction, snow was about 3.4 million over Q4 and the balance of the increase was normal seasonality. GNA on a run-rate basis for Q2 through Q4 of 2005 should average 4.1 to 4.3 million per quarter. GNA was at 4.7 in Q1 primarily due to timing of costs that we had budgeted for in our full year 2005 expectations.

We have on our to-do list, some process improvement opportunities in the areas of Sarbanes-Oxley and establishing a technology solution for our documentation, IT infrastructure upgrades, software enhancements, and other areas where we would incur some expenditures for professional and consulting fees. As you would expect, we expense such costs when incurred. These costs were in our full-year guidance, the timing of them made the first quarter GNA a bit lumpy. Same store results removing the effect of the termination payment, NOI was down 0.6%, consistent with our guidance of flat to 2% decline for full-year '05. Our operating metrics were also consistent with our guidance.

Retention at 69%, we expect that annual percentage to range from 60 to 65. New lease rates were down a bit less than our 10% expectations for the year. Renewals were a bit better than our expectations and capital was consistent with our Q1 thoughts. Ending occupancy was down slightly, a trend that will continue into Q2. As Jerry mentioned our 2005 full-year guidance remains unchanged at $2.48 to $2.55 per share. I'll reiterate again that we are comfortable at the low end, or $2.48.

After digesting our Q1 results and updating our thoughts on Q2 and activity for the balance of the year, we remain comfortable with this guidance. We are introducing Q2 guidance of $0.58 to $0.59, consistent with what we discussed on our last earnings call. In this guidance, there's a continuation of a previously articulated assumptions. Rents on renewals and new leases should continue the trend of the last few quarters. Average occupancy to be flat to a slight decline over Q1. Operating expenses will moderate over Q1 due to the lack of snow removal costs and reduced HVAC expense, driven by the weather, but offset by higher repair maintenance and landscaping charges, driven by the season. Same store NOI will be consistent with our full-year expectations. As I mentioned, GNA to run in that 4-1 to 4.3 million range and no material term fees or acquisitions activity.

As you look out for the second half of the year and, as always, we'll provide specific Q3 guidance and update our full-year expectations in our second quarter release, implied in our full-year guidance are stable expenses, rental rates consistent with forecast, and gradually improving occupancies which translate into sequentially higher FFO per share as you look out for the latter half of the year. At this point, having reviewed the -- the highlights of Q1, I would like to turn the call back over to Jerry.

Chris, thank you. Let me take a few moments to review our 2005 business plan. For the balance of the year, without any qualification whatsoever, our primary attention is focused on the leasing and operating side of our business. We're clearly determined to continue our aggressive leasing program, focus on controllable expenses, and invest capital in our portfolio to ensure long-term, high-tenant retention rates and very high levels of tenant satisfaction.

Our portfolio rollover for the balance of the year is very manageable. t's about 11% and it's fairly evenly dispersed through all five of our regions but certainly evenly dispersed in our three major reasons. We're in active discussions, obviously, with all tenants, many are in the process of renewing. We have some known move-outs, as you might expect. And consistent with first quarter results, and as indicated in our year end call, we are projecting, as Chris touched on, about a 10% decline in market- to-market rates and at tenant retention as Chris just articulated. Our objectives on Radnor remain very much on track. We are pleased with the success thus far, pipeline continues to grow, we have excellent activity. You may recall that upon acquisition we had programmed a back-ended or a lumpy three-year lease-up. And activity levels continue to increase each -- each almost each week and the pipeline remains strong.

From an acquisition investment standpoint, again, as we've indicated in our guidance, we don't really have any significant acquisitions programmed for the year. We do, however, have a very strong pipeline of transactions. We're being very cautious. And as a consequence, really haven't factored even anything for the balance of the year. The dilemma we're seeing generally is that we're not seeing risks being appro -- appropriately priced in a number of acquisition opportunities. And as I've certainly indicated before, we haven't, and certainly don't anticipate, acquiring properties where we do not see the risk equation being balanced, or where we expect significant rolldown unless there's a corresponding offset in price. Very much akin to what we were able to achieve with a couple of transactions last year.

Given the acquisition environment and the drive of capital into our business, we -- we are analyzing some investment strategy that will provide a cost -- that could provide a cost-effective. high-yielding way for us to grow the organization. We continue to explore property-specific joint ventures. The launching of a fund that would enable us to fund a co-investment vehicle, as well as other similar investment strategies. All of these avenues are being actively pursued and evaluated in the context of our current financial capacity, our desire to maintain balance sheet simplicity, and the risk-adjusted return on any dollars that we invest.

As I mentioned before, we do see some selective markets being primed for more development. Our existing land inventory can accommodate approximately 3.5 million square feet. We've had very good success in the last several quarters, moving through the -- the approval process and perfecting approvals on the piece of land that had not yet achieved that state. So we are in a position to move, as we view market conditions dictate, into some new development. And, as I've indicated on the previous two calls, if market conditions continue to improve, we believe that there is a good layering-in of new development into our existing submarket inventory, we would expect to start some new developments later this year in the third and fourth quarter.

Given the strength in the investment market, we will continue to evaluate selective asset sales. These sales are being evaluated in the context of whether we're maximizing value and whether we can improve our competitive position by re-deploying those funds in some other submarkets. Our portfolio is in excellent shape, and we carefully review all pending transactions.

The first quarter was really a good one for us. Unspectacular, someone said, but a good one. Solid portfolio performance, very much in line with our expectations, which gives us increasing comfort that we're very much in tune with the pulse of the market. We continue to work on strategies to more effectively position our company going forward. And we -- we have never wavered from taking a very aggressive stance on making all lease transactions and ensuring that we have the highest quality inventory to present to the marketplace.

As I mention in every call, we'd like to do better, but in the context of a difficult operating environment during the first quarter we maintained well above market operating performance. We continue to effectively manage our land inventory and advance approvals. We kept our balance sheet in great shape. We continued to reduce our reliance on debt -- on floating-rate short-term debt. We further consolidated our market position and positioned the company very well for growth. Certainly the first quarter leasing activity at Cira puts that project in wonderful position to contribute more than we were thinking to earnings in 2006, and the activity at Radnor, as I mentioned, continues to be strong.

In summary, we're very well-positioned to grow the company, operate it effectively through an improving operating climate, and use our financial capacity, and the depth of our management and infrastructure, to take advantage of all market opportunities. I'd like to thank you for taking the time to listen to our prepared comments, and [Elsa], at this point I'd be happy to answer any questions.

Thank you. The floor is now open for questions.

OPERATOR INSTRUCTIONS

Our first question is coming from David Fick with Legg-Mason.

Good morning. I'm here with John [Guiney]. I'll have a couple and John, I think, will have a couple. Chris, can -- can you talk a little bit about the GNA spike? You indicated $4.1 to $4.3 million run-rate. And I assume that that forward run-rate incorporates the fact that you've got some of these front-loaded items and the first quarter is what it is, but then we go forward from there?

That's correct. We just had some costs that we had budgeted to incur in '05. And we were able to execute on some of our internal strategies, incurred the costs in Q1, and they should be nonrepeating as we go forward.

Okay. Jerry, the fund that you referred to is something that you might explore. Is there any more sort of -- you're talking about doing a commingled institutional fund as opposed to sort of the JV strategy that you explored in your Wilmington assets. What would the nature of that be?

Actually, it could go either way. I mean, we continue to explore both alternatives. I think we're very happy with the structure of the Wilmington assets as well as with -- with our relationship with [Mcquarry]. As we mentioned, when that deal was announced, there's a formulaic approach in place for to us continue to grow that venture if it meets the objectives of both parties. We are also looking at specific joint ventures that -- to -- on new acquisitions with other institutions that would -- could both be fully identified, or a specific property or portfolio joint venture, or forming a co-investment vehicle with one or several of those institutions to form a pool for us to acquire other properties.

So it could be both existing assets and acquisition assets. Would that include Cira Center?

Well, I think that, Dave, I mean, as we outlined from the start, we -- we kept the option-out in a financing strategy for Cira open. Certainly with the progress that we've made on the leasing front, as well as the physical construction progress, the building will be delivered in October, we've had an increasing number of inquiries from institutions on a venture structure. I think what we'll do, is we're going to evaluate those from a pricing overall return standpoint before we make any decision on what to do with that project. Right now, frankly, the major objective for Cira was to continue to get the leasing. We still have a little bit more to go, but I think we're -- we're very optimistic that we're continue to have the same level of success.

As you can imagine there's a tremendous amount of work yet to be done on the construction and tenant-finish side. We're spending an awful lot of time making sure that logistically we can do whatever we can to accelerate some occupancies of the tenants that are -- are staging in 2 -- through 2006. We've preloaded lot of the floors, a lot of the materials in the building, making sure the vertical transportation systems can accommodate both tenants occupying the buildings in rapid pace of tenant-finish work. So I think, on Cira, with all that said, we will continue to have financing structuring discussions with institutions and evaluate their propose in the context of how we think Cira fits into our overall growth strategy.

Great, your land portfolio is now about $61 million. Is there any thought about maybe, particularly in the western burbs, where the higher and better use might be residential, doing some diversion there, and what percentage might be able to be converted to residential?

Well, we actually have several parcels that are under agreement to residential builders right now. And there are two parcels of ground in -- actually one's in Chester County, one's over in New Jersey. Actually two -- two small sites in New Jersey. So we continue the process of always looking at what's the highest and best use for the site. And have a pretty active dialogue with the number of the residential companies that are local here in both national and scope, about always analyzing each piece of ground. That being said, I do think that we have some prime pieces of real estate that are --are very, very good office sites.

And we'll continue to move in that direction unless we get something more substantive and more profitable out of some of the discussions with the residential companies. But that's clearly -- clearly something we've looked at. We've sold one site for hotel use, sold a couple small pieces for retail use over the last couple years. So we're -- we're not -- we're agnostic in terms of product type on our land inventory. Depends what the profitability is.

Any idea that you'd care to share in terms of what the fair market value is on your overall land holdings?

We think -- look at each of the pieces of ground on a regular basis and I don't have the number right in front of me, but the overall FAR cost per square foot on our land, we believe, is well below market. And then when you factor in some of the infrastructure costs that we've put into our projects, in terms of the both physical and approval infrastructure, we feel as though we're sitting in -- in a position where we're well below market. I don't have a number to give you on that.

Okay, John has a couple questions, I think.

Hey, Jerry. Nice job on Cira Center.

Thank you, John.

What's the -- any anticipated change in the total box project budget on Cira Center?

Not really, John. Not of any consequence. I mean, I think -- we -- we were fortunate that we bought out a lot of the heavy items early on. Tenant improvement costs are staying pretty much in line with our budgets as we've revised them going forward. So, I think we're going to come in pretty much where we thought.

Hey, on -- on Radnor financial, first, as a clarification, what's the total occupancy, including Radnor Financial, in the portfolio?

86.7%.

Okay. And if you take out your TI and leasing commission budget on Radnor, what's your redevelopment budget, approximately, in terms of parking, base buildings, retail heth -- health club, other amenities?

Yeah, I mean, we looked at putting in an average of about 30 bucks a foot in TI. So, we've really -- I mean, I think on some of our calls before we actually talked about a 30 million number. I think layering on top of that, you have probably -- and included in that, John, would be some of the costs for -- for the health facility, for the restaurant conversions. There was also a $5 million or so budget in place as part of our acquisition. I mean, I think it was higher than that, in terms of some base-building renovations.

One of the things we are looking at doing at Radnor, as you touched on, is building a -- one and possibly two structured-parking decks, to move the over all parking ratio up from little bit north of 3 per thousand to the mid-4 per thousand. We're going through the zoning on that. That will actually commence sometime in the next several weeks. Get the approvals in place for that. And then really being in a position that if we come across a tenant with a higher parking demand, we can go ahead and build the garage as part of an overall lease proposal.

Any -- any chance of trying to control some of the other contiguous kind of [Class C] buildings?

We actually, during the quarter, did acquire the parcel that sits out front called 200 Radnor Chester Road, which is a -- a land use that will most likely go retail.

Gotcha. And one last one. What's your fixed charge coverage?

Our fully loaded fixed charge cover, so if you're looking at preferred dividends as well as interest plus capitalized interest plus our principal payments, so we describe it kind of as a rating agency, fully loaded number, is 2.34 times on the first quarter. If you look at it with kind of a more traditional approach of just taking interest plus cap interest plus our JV interest share and --and our perpetual preferred dividends, that number is 2.6 times.

Thanks a lot.

Great, thanks, guys.

Thank you.

Thank you. Our next question is coming from [John Stewart ] with Smith -- Smith Barney.

This is John Stewart here with [John Litt]. Chris, could you spend a couple minutes on the lea -- the 50,000 square foot lease termination. What was the rent rolldown on that?

You know, I don't have the exact roll down in front of me here, but the leases that we signed, they are between, the two tenants, were at average in kind of that $21 a foot lease rate, and I don't have in front of me what the previous tenant's gap rent was on that expiration. But I think it was fairly consistent with what you would see in our portfolio in terms of the rolldown on new leases versus expired.

Okay. And then when will you begin recognizing rent on -- on those new leases?

When they took occupancy. So there was a small -- one of the smaller tenants took occupancy in -- in February at some point, and the other took occupancy at some point in March.

So I -- can you -- I wasn't quite clear what you meant by the $0.05 impact?

Well, in essence, if you were to have expected to get rent from the prior tenant for the entire calendar year 2005. So in our budget, we had rent streams coming in from -- from the terminated tenant. So that rent's gone, and any recoveries that would have happened through them is gone. And then that's replaced in effect for 37,000, 38,000 square feet of the 50, with the two new tenants taking occupancy at various points during the first quarter. So the net of that is -- is a detriment, so to speak to the balance of 2005. So, I mean, that's the thing that everybody needs to focus in on termination fees. It's -- you get the fee but the reality is the tenant left, so you don't have the revenue for the balance. That's rarely why we find ourselves in this position, other than being able to release the space.

Okay, it's $0.05 dilutive excluding the lease termination fee?

No, no.

So if you take the lease termination fee and then you deduct from that dollar amount the net lost rents and recoveries, the impact for fiscal year 2005 is $0.05. Positive.

Positive, it's not diluted.

I guess if -- if ; those new leases took occupancy in the first quarter, what exactly explains the -- the drop from the first quarter to the second? And then obviously even at the low end of your range you're going have to go up to $0.63, $0.64 a quarter.

The term -- I mean if you want to look at it on a sequential basis, take the $0.63 and the net impact of the termination fee, net of the -- of the rents, as I discussed in Q1, is somewhere between five and a half and six cents, and then , as I said, as you go through the course of the year that number ends up being at a nickel. So if you roll down from the 63 to 57, 57.5, then as you move into Q2 you have, as I said, a decline in average occupancy, you have the impact of all of the deals that we've been doing over the last few quarters at rents on new leases below expiring, an on renewals, flat to slightly below.

So you in essence have a slight decline in your revenue stream offset by an improvement in your operating expenses, just given seasonality. And that gets you into that, pretty simply, into that $0.58 to $0.59 range. As you move into the latter half of the year, you have the implicit occupancy moving in a positive absorption direction with rents staying in the -- in the same kind of range as we've seen the last few quarters.

Jerry, could you just spend a minute on the retail space at Cira Center and the prospects and where you see the rents coming in relative to pro forma.

On the latter point, we actually seeing the rents coming in right in line with pro forma, let me put it that way. I mean, the retail components, you have to understand, of Cira is not -- not all that great. We have a bank that's been programmed to move in there. That an 8 or 9,000 square foot health club. We are in discussions, the largest retail bank is about a 7,000 square foot restaurant. We have five or six very active, very high-qualified prospects for that.

We - John, we had actually made a decision early on not to lease the retail space until we had proven to the marketplace that there were going to be close to 2,000 people working in the building. And the early retail deals you looked at just didn't have the economics we wanted. As we've certainly leased up the office component of Cira we are in very good shape. And understanding about 10 to 12,000 square feet is also a conference center. The vacancy is a conference center that will be, again, has several strong companies looking to run a conference center operation for us for the tenants in that building and open up to some other Brandywine buildings. So we're pretty confident on the -- on the retail and conference center/health club space.

Okay. Thank you.

Thank you. Our next question is coming from Anthony Paolone with J.P. Morgan. Please proceed with your question.

Thanks, good morning. On Cira Center you mentioned a couple times coming in ahead of pro forma. Can you put some numbers around what the yield might look like relative to the -- historically, talking about ten-ish or so?

Yeah, I mean,I think when we're saying we're ahead in numbers, we are well ahead from a pre-leasing standpoint of where we thought we'd be. I mean, we literally weren't expecting -- our pro forma was slightly less than 65% when the building was opened. And actually a few quarters after that. So from a leasing standpoint, we're well ahead of where we thought we'd be. From a cost standpoint we're in line. And I think we've always talked about a stabilized return, when the tenants weren't paying rent, of around 10%. And those numbers have not changed.

Alright. Thinking about it from an FFO point of view, come October and looking out to '06 when the tenants start taking possession of the space, will you bring that into service proportionally so that it -- it'll be accretive every time a piece of it comes into service , or how will that work?

Yeah, this is Chris, Tony. We will -- we will bring the building kind of in service proportionally as the tenants occupy. As we look out at '06, and the impact that the pre-leasing has, obviously, the sensitivity to--to a forecast is all related to when they actually take occupancy and begin paying rent. So, we are -- a lot of these leases, as you're aware, were signed in the last week or two, and the tenants have the desire to get into the space as soon as possible. So, at this point, we're still working through a lot of the details on occupancy by suite.

And I think as we get to the next earnings call, we'll have better visibility and be able to talk a little more specifically about how we would -- how we would suggest you model occupancy as it comes in throughout 2006, and the related FFO impact. At this point, it's so sensitive to who -- who gets in at what date, that it's just a little bit premature for to us get too specific.

Okay, looking at the expirations for the balance of the year, 1.9 million square feet, are there any pockets or anything that you think would drive cap x that would go north of the 12 bucks that you ran in last couple quarters? Or what -- what are some numbers we should look for there?

I mean, I don't think there's -- there's really nothing from an expiration perspective. And really nothing from a leasing guidance when you look at what the marketplace is telling us that would cause us to think at this point that the $12 range is going to change dramatically as we go through the year.

Okay. Any chance of it being much lower?

I would think that would be hard for us to project out at this point. I mean, I think we're still seeing, as I mentioned, very -- strong competition for deals. One of the benefits that we have is a lot of our -- a lot of our space and our average tenant size is fairly small, around 10,000 square feet, so you're typically not incurring a lot of heavy TI costs. A lot of our base building systems are in very good shape. So we're, in many cases, not doing a lot of above-ceiling work as part of a tenancy. But I think for modeling purposes and certainly for projection purposes we're looking at a fairly stable capital investment environment.

And I think from that perspective, it's also the balance of -- of renewals as a proportion of new leases in any given quarter. And then to the extent that we see, obviously, positive activity on the new lease front and begin to see absorption, you would expect that those costs would be, up in those quarters where you have a lot of new deals.

At Radnor Financial Center can you talk about the nature of the tenants or perspective tenants you're seeing there, like average size and just kind of -- traffic?

I don't think there's any change in the average size that we talked about on the last call just a few months ago. I mean, you have a couple major tenants we're pursuing. Major tenants being north of 100,000 square feet. Then we have a whole laundry list of tenants in the -- ranging down as low as 1,000 square feet up to 25 or 30,000 square feet. So, I think we're -- where we're very pleased with Radnor, we would certainly be pleased if we had leases signed, but what we're very pleased with Radnor right now is -- the objective for us was, for the first couple quarters, to make sure that those buildings were fully introduced with the new management team to the marketplace, and we were in a position to generate a lot of activity. And able to get some good data -- point connections between tenants who were looking in King of Prussia, [Concha-Hawkin], Plymouth Meeting, into the Radnor circle. And that's been very successfully executed by our leasing team.

So, you know, we certainly -- it's not like we're making doughnuts so we can project exactly when a lease will be signed, but we've got some very positive discussions underway. The buildings continue to present themselves well. We've posted a number of -- of tenant broker events. Have done an awful lot of additional broker presentations to make sure that people understand that we are aggressively marketing that space. So the pipeline numbers are slightly above where they were a few months ago, which is good. Now the job and mission is to make sure we execute on some of those leases and achieve the same level of success at Radnor that we achieved at Cira Center.

Yes. Thank you.

Thank you. Our next question is coming from Christopher Haley with Wachovia. Please go ahead.

Good morning, guys. I have a question about the interplay between the Cira Center and the [Rubenstein] assets. Looking at -- now that Cira is -- you just have a couple single floors left, is it -- is there -- has there been and do you think there will be ability to steer tenants to the blocks that you have available at Radnor?

I want to make sure I understand your question. So prospects that we had for Cira, could we now steer to Radnor?

Yeah, I mean, or was the primary motivation with Cira tax incentive-oriented versus space-oriented? What is the availability -- what is the potential to move potential big users now back out to Radnor? If there ever was.

Yeah. Chris, I have to tell you, as we approach every prospect, whether it was for Syra, [One or Two] Logan, Radnor. any other building in our portfolio, we have a pretty good program in place. We show them everything. Locational decisions tend to be very tenant-specific. I mean, tenants kind of know where they want to go. They know generally what they want to pay. They know where their employees are coming from. So when -- even with the prospects we were talking to with Cira, they certainly, as part of our marketing program with them get to be very much aware of literally every single square foot we have available anywhere in our entire portfolio. So what happens, though, is usually very -- a very quick culling process where they say it's wonderful you have space in Radnor, you have space here, but we want to focus on this building or this submarket.

And I think that's one of the real strengths we bring to bear with the tenancies, we're able to show them literally tremendous asset bases in the five counties in Pennsylvania, southern central New Jersey and Delaware as well as center city, Philadelphia, to make their lives, in terms of selecting office space, much easier. I think Syra was, we had a very long prospect list for many months. And as the building got closer to completion, I think that was a tremendous catalyst for tenants to make decisions on the space alternatives.

We're bringing -- the tenant-specific press releases will show, the next week or so, we're bringing an operation of the company in from New York. We're bringing a company over from New Jersey. We're bringing a company up from Delaware. I mean, certainly those companies, I think, were driven by the elimination of the hurdle rate in the -- the entry price of doing business and the cost of Philadelphia. But, it was also the location at work for them. And, I mean, I think the access to the northeast corridor and the transportation system in the region was very, very viable for them.

We're going to turn -- we never detracted any of our attention from Radnor. We entered the year with the focus on two of our higher profile exposures were Cira and Radnor. We've got one in very good shape. And we're as determined on Radnor as we were on Cira to make it very successful.

Regarding Radnor in relation to King of Prussia, [Concha-Hawkin], and the Tower Bridge submarket, where do you think your asking rents and economic terms are on what you're asking at the Radnor assets versus those submarkets?

Yeah. I think in terms of -- we're priced above King of Prussia, which is what you would expect. We are priced comparable and in some cases above [Concha-Hawkin] and we're priced below Plymouth Meeting. So, it's -- It's a very, very good price point for us. And certainly with the investment base we have in the financial center at Radnor, we have some very good flexibility in terms of being aggressive on our leasing proposals if we need to be.

Okay. Just two final questions. First, Jerry, you mentioned the development starts again, possibly in the second half of this year. Are we still talking about the same three or four projects you mentioned last quarter?

We are, Chris.

Okay. And, Chris, your line is now $200 million out of the $450, I think you had indicated earlier. What is your -- what is the prospects of bringing that $200 million downward and keeping a higher fixed-rate component of your debt for the rest of the year?

I think as we had talked about at the end of last year, as we had completed the -- the various bond offerings, the line usage in '05 is primarily directed to our investments in Cira Center. And as we look at -- as we look at life for the balance of the year, we've got a couple different opportunities. Obviously one is to go back and tap the unsecured bond market for a -- for a slightly smaller slug than what we had done in our debut offering and term that out. That's one thing we are evaluating.

And then, a couple other alternatives that we have to end the year with that line balance being at or below where it is right now. So little premature to get too specific. But, as always, and as Jerry said, our desire is to continue to improve the quality of the balance sheet and our credit position, and to do that in a cost-effective way.

Great. Thank you.

Thank you. Our next question is coming from Paul Puryear with Raymond James. Please proceed with your question.

Good morning, guys. It's still morning. Just a couple maintenance items here, on the Cap X run rate for the year, we hear the $12 per foot. Could you just talk about maintenance CapEx, is that in that 6.6 million that's in the supplemental package?

Repair and maintenance cost for the portfolio, Paul?

Yes, Exactly.

I mean, anything that's defined as a -- as a repair and maintenance, meaning there's no life to it, there's no depreciable life is expensed and run through property operating expenses. When you look at building and TI costs in the CAD calculation of $6.6 million or so, in that would also include the recurring kind of capitalized items at our properties. So, a new roof, for example, or something like that.

And -- and what do you use for that run rate?

Well, that's a real tough one to tell because, again, it's so correlated to the timing of when the leases take place on the TI side. I think what we talked about on the last call, from a capital perspective, is that we were clearly focused on the buildings and on looking at an efficient way to make some improvements. I think historically we been in that kind of $0.25 to $0.40 per square foot, on an annual basis, for what you refer to as maintenance CapEx.

Yeah, okay. Straight line rent in the quarter. The big jump, was that related to the lease term or is that all [Rubenstein]? Could you just comment on that?

Yeah, it's the -- it's the latter. When we -- when we inherited the portfolio they had done some leases that took effect in either really December of '04 or the first quarter of '05 that had a period of straight -- I'm sorry of free rent that we inherited. So, I would say roughly 60% of that difference is inherited leases and the balance was a couple leases that we had done where there were an extension to the term in exchange for a period of free rent in the first half of '05.

So, looking out for the rest of the year, what sort of run rate should we use there?

Yeah, that's almost impossible for us to try and forecast with any degree of accuracy.

Well, is it going to be something lower than the 3.8?

Yeah, because of the fact that the [Rubenstein] ones that we inherited effectively burn off in the first and second quarter.

Okay. I guess one more question. I think you've commented on this before. But just to refresh our memory, the 10% that you keep talking about on Cira Center is that GAAP or cash?

That's GAAP.

That's GAAP. Do you have a sense for the cash number?

Yeah, probably about a percentage point lower. I mean, the -- the GAAP is little bit higher than ten, so, call it mid-tens, mid-nines.

Okay. Very good. Thank you.

Thank you. Our next question is coming from Rich Anderson with Maxcor Financial. Please go ahead.

Thanks, I'll try to be quick here. For the Radnor lease, which one, just to remind me, are the Radnor Corporate Center, which one's Radnor Financial Center?

In terms of where they're geographically located?

No. When you look at those five, which -- which are which?

All five of the assets that we segregate on page 19 of our supplemental, are all Radnor Financial Center. That is all of Radnor Financial Center.

Okay. That's what I thought.

Radnor Corporate Center is included in all the other numbers. That's -- that's a stabilized corporate part.

So the Radnor Corporate Center is sort of in the -- in the operating assets and hitting FFO, Radnor Financial is not. Is that correct?

No. Radnor Financial is --

Radnor Financial is also negatively hitting FFO given that it's only 23 -- or only 19% occupied. We separate out those assets so you don't get a distorted view on occupancy.

Okay. And in terms of the -- of the five Radnor financial centers, three are 0 -- 0% occupied. Is that a number that you expect to see, zero for awhile? I mean, you're making progress in two of the five [inaudible -]

Yeah, I mean 555 Lancaster, we have some very good prospects. but that's currently 0% lease. We're actually going through the plan for chiller renovation, parking lot rehab, as well as some lobby renovation. So, we would expect that that leasing percentage would pick up in the third and fourth quarter. We really, frankly, look at 130, 150 and 170 as the three-building complex, that they're all connected. So they're all being marketed for sale. Our leasing priority of those three was the focus on 150, since both 130 and 170 present a great opportunity for larger size tenant who's in the 50 or 60,000 square foot range to take those buildings in totality.

So I think the idea is, given the mix of tenants we're seeing, that we would continue to put emphasis on 150 and then 201 King of Prussia Road is being actively marketed. They're fairly good floor-plate buildings. So, again, we're looking for a mix of tenants to occupy that. So, like I was referring to, or alluding to in my comment earlier with Chris Haley, we market everything as really driven by tenant preference. Right now, 555 is undergoing some significant work which we knew we had to put into the building. So that's really not being -- that's not available to be leased right today. I think that would be a third or fourth quarter movement.

Okay. When you spoke of new development potentially taking some -- having some starts second half of the year. What would be your pre-leasing requirements in those suburban developments, if any?

Well, no clear threshold. We always like to start with a target of 50% pre-leased. But, and it's an important but, it's going to be really a function of which buildings we start with, what size they are, and what we're seeing as late in demand from our existing tenant base and what we think is the state of the market is. For example, in central New Jersey we have a number of buildings we could expense construction on. Two are 75,000 square foot buildings, three are -- two are 120,000 square foot buildings.

As we're going through our market recon right now, we'll make a decision on which of those size building we want to start. Bucks County, again, we could do 65,000 or 100,000. Depending upon what we view the market being. So, the size of the building and the strength of our existing inventory in that submarket is going to be a driver of what the pre-leasing requirements going to be.

If we see a spec building, we shouldn't be surprised?

You should not be surprised.

Okay, last question, just for modeling, in terms of the other revenue line item, what should we be sort of thinking about, stripping out lease termination fees, I assume, in -- in the forward quarters of the year?

Yeah. We look at a run rate there. And, again, hard to be within a plus or minus couple percent. But a one point -- 1.3 to 1.5 million run rate a quarter is in line with what you should be using.

Okay. Thank you.

Thank you. Our next question is coming from Ross Nussbaum with Bank of America.

Thank you. It's John Kim with Ross. Jerry, you mentioned potential asset sales. How much could this be in '05 and when -- do you think you'll be a net seller this year?

Our goal would be that we would balance sales and acquisitions.

Okay.

That's -- I think the bottom line answer. We're test marketing a number of properties. But at this point, frankly, John, I can give you what a number is.

Are you targeting joint venture sales or entire asset dispositions at this time?

I think right now we're looking at primarily fee conveyances to independent buyers.

Okay. You also talked about the challenging leasing conditions that you're facing. When do you first see having pricing power with tenants on both rents and lower concessions?

I guess that's a question for Alan Greenspan, not for me. But I think it's going to vary by submarket. Here in the core market of Plymouth Meeting, I think we're seeing some very good dynamics. You move further -- one stop west along the turnpike to the King of Prussia market, it is going to be -- vacancy rates in that market is still around 15%. And I think it's going to be, depending on the level of absorption, it could be a year or six quarters, even further out. Hard to project. I know it's frustrating when you're trying to pull together financial models. But the reality is that these submarket dynamics are so variable that it's hard to identify when we will be able to get an upward movement of rents.

Delaware looks like it's going to be pretty good. Some of the submarkets were in New Jersey look like they'll be pretty strong depending on how some of these larger companies do in terms of the absorbing more space. But I think for our internal purposes and certainly as we go through our re-forecast on a quarterly basis, we are continuing to operate on a premise that it is -- while the buyer -- while the psychology's changed to be more of a buyer, we're still very much in the mode of reacting to a very competitive climate.

Okay. Thank you.

thank you. Our next question is coming from Chris Chapman with Key Bank Capital. Please go ahead with your question.

Hi, guys. My first question is, I guess, just a refresher about Cira Center. If I'm correct, on your last conference call you mentioned being in discussions with those six new tenants. And that those six would help you get to 75% leased by the end of the quarter. Obviously if they took 152,000 square feet that got you well beyond that. I was just wondering what happened. If during negotiation did they end up taking more space than you had anticipated? Or were you just being conservative with your target at the time?

I think a bit of this is timing because, you know, it's the same six tenants. What we were looking at is -- I think the difference is when leases would be signed.

Okay, alright. Getting back to the margin, the operating margin compression that you mentioned at the beginning of this call, I was wondering if --if any of that is due to now having some of the [Rubenstein] assets in your stabilized portfolio? Costs that might stick around on an on going basis versus general issues like snow removal or energy costs or whatever, things that might go away on a seasonal or macro basis.

There's a modest amount given the map of the 900,000 square feet or so vacant at Radnor financial, to the extent that, obviously, all the expenses for that complex are running through operating expenses and there's a minimal amount of revenue. So that is certainly a contributor that will go away as the space is leased. The balance of it is really what I talked about in terms of the seasonal-type items.

One last question. Referring to the missed pricing of risk that you mentioned earlier in the acquisition market. I was just wondering if, I guess, if you look at the spread between yields-on-acquisitions versus developments, I guess as the low end or the acquisition yields come down, are you -- are you seeing a widening of that spread or is the spread staying relatively constant with development yields coming down, too?

I don't think it's coming down as quickly as what we've seen on some of -- on some of the on some of the acquisitions. And again on an acquisition, I think that you can look at it at a different couple ways. We do look at it from both vantage points. One is, you know what the going-in cap rate is, which tends to be the most widely-bandied about number that people get either excited or distressed about. The other issue that's more important to us is what our after-capital effective return will be. So, what you wind up seeing happening on some of these 20-year plus old buildings is you may be able to buy in for an 8% cap rate. But when you take a look and go through due diligence and focus on building systems, the superstructure of the building, whatever it may be, and then the refitting cost, for normal rollover, you may wind up essentially taking that 8 down 100 to 200 basis points. That's really your effective base to grow from.

So, I think as we mentioned on the last call, someone else had asked the question what our development yield threshold has been, we were historically able to achieve development yields in the -- close to 11% range. We are certainly now looking at development yields in the 9 to 10% range on the premise that that's a true 9 to 10% return. In that -- in that return is the initial -- initial fit-up costs for bringing the initial tenants in. All new building systems, state-of-the-art energy-management systems, great column spacing, good window lines, all that stuff that makes the building a Class A asset. It's is a submarket decision for us. But certainly as the cost to buy from a nominal cap rate standpoint has continued to be compressed resulting in values that are above replacement costs on a per square foot basis and an effective yield that's somewhat below the nominal cap rate, that's had a direct effect on the development yields. The spread hasn't changed dramatically between the nominal cap rate and the development yield requirement.

Great. Thank you very much.

Thank you. Our next question is coming from David Fick with Legg Mason. Please go ahead.

Just a real quick follow-up. On the land sales that you both have tee'd up and that you might do, is that in the guidance?

That is not. We actually don't really, Dave, include the FFO, I'm sorry, include land sales in FFO.

That's at your option and because they're not really recurring you don't do it?

That's correct. I mean, I know some companies do it. But I think we've adopted a protocol. We don't really do that on a going-forward basis.

Okay great. Thanks.

You're welcome.

thank you. Our next question is coming from Christopher Haley with Wachovia. Please go ahead.

Yes, now good afternoon. Your same store in the first quarter on a reported basis was very high because of the lease termination fee. Your zero to negative 2% same store guidance for the 2005 year, I would assume excludes the termination fee, is that correct?

That's correct.

Okay. Secondly just as of clarification similar to the last call, you have -- you have indicated that you previously indicated that your stabilized cash yield on the Cira Center would be 10 to 10 1/2. Is that the same today?

We'd indicate the return on Cira was going to be around 10%. That's moved up a little bit on a GAAP basis. And moved down slightly on a cash basis. So I think that's the 9 1/2 to 10 1/2% range that we're looking at.

Okay. And primary reason the cash was because of incentives?

It wasn't a that big of a movement. I'd have to go back and take a look at it. There weren't really -- weren't really a lot of concessions given there, Chris.

Okay. And could you remind me what the tax period is, the KOIZ period is. When it expires?

It expires in 2018.

2018. And is that the -- was that the extended date, Jerry, or are you -- still trying to extend that?

No. We actually didn't -- did not extend it before that That was the third iteration of the Commonwealth's plan on going from KOZ to KOIZ to KOEZ. One of those.

Okay. So 2018?

Is the termination date for the tax benefits, correct.

If you were to mortgage-finance this, how would a mortgagor look at that, if at all? Say if I'm in 2000, and I'm going finance this in 2006. Obviously, I'm assuming you wouldn't probably want to go longer than that, so you might go a ten-year mortgage or something like that. If you were to secure it.

I would actually, from the -- since you're touching on another point. I would view secured debt here as the least attractive alternative for us. So I can honestly say I haven't talked to a mortgagor about this particular situation. I think what you're going to wind up doing is taking a look at the credit, the income stream, the steps in it, the controllable operating expenses. Take a look at the mortgage on a per square foot basis compared to comparable sales. And then obviously take a look at what they project the real estate market in Philadelphia to be in the year 2018. If their model is good, I will listen to them.

Okay. Great. Thanks.

All right, you're welcome.

thank you. Our next question is coming from Robert [Beltser] with Prudential Equity Group. Please go ahead.

Hi. Just one question today on the Radnor Financial lease-up assets. You're showing an occupancy increase of over 70,000 feet , sequentially. Is that amount fully reflected in first quarter results?

I'm sorry. Let me just let me get to the right page.

We went from occupied square feet at the end of December at Radnor of 110 to 182 that's occupied at the end of March. That's the question?

That's correct.

Okay. Yeah. I mean, the lease up and the occupancy that -- that those tenants took throughout the first quarter would be reflected in the first quarter results.

So there's not going to be anything coming through into the second quarter?

I don't -- on a right in front of me basis I don't have the weighed occupancy date during the quarter. Some of these tenants took occupancy in February and March so you're not going to have the full quarter effect. So you'll get a little bit of a delta in the second quarter and then as you move into the third and quarter, assuming no other activity, then your -- your comment would be correct.

And just one other question. Was -- were these tenants -- was that what drove the straight-line rent higher in the quarter, these tenants coming in?

As we said, I think in response to a previous question, the straight-line rent in the quarter, the bulk of that was transactions that had been done by the [Rubenstein], entity where those tenants took occupancy in December and January. And had a period of free rent. I don't know how many of them were particularly at Radnor Financial versus Radnor Corporate, the assets in Delaware or downtown.

Okay, great. That's it for me. Thanks.

Okay. Thanks.

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

[Elsa], thank you very much. And I certainly thank all of you for participating in this call. Just as a final point of clarification to Chris Haley's last question on the -- on the tax period, just so I have my alphabet right, at the 0Z was 2010, the KOEZ was 2013 and the KOIZ is 2018. So, you can put that in your -- in your mix. But thank you all very much. We look forward to chatting with you on our next earnings conference call.

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