Brandywine Realty Trust (BDN) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Brandywine Realty Trust Conference Call. [OPERATOR INSTRUCTIONS] 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 result and no assurance can be given that the expected results will be delivered. Such forward-looking statements and all other statements that are made on this earnings conference call, that are not historical facts, are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those expected. Among these risks, are the risks that we have identified in our annual report on Form 10-K for the year ended December 31, 2004. And any subsequent filing, a company 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. e 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 conference, Mr. Jerry Sweeney, President and CEO of Brandywine Realty Trust. Mr. Sweeney, you may begin.

Thank you very much. Good morning, everyone. And thank you for joining us for our Second Quarter Earnings Call. Today's agenda will be consistent with the format we've used previously, and will provide a brief review of market conditions, review of our second quarter results and our outlook for the balance of the year. Joining me in today's call are Chris Marr, our Senior Vice President - Chief Financial Officer and Tim Martin, Vice President and Chief Accounting Officer.

Second quarter performance was consistent with our expectations, and reflects a continued improvement in many of our operating metrics, core results were solid, but they also remained very much reflective of a continued competitive environment. By our standards, by Brandywine standards it was a fairly quiet quarterly, while in the year-to-date we've analyzed a significant number of pipeline acquisition deals, we've really only acquired one project for less than $17 million, I'll speak about in a few moments. While we continue to pursue numerous acquisition opportunities, with hope of getting several transactions announced or closed during the third quarter. Consistent with our practice, our financial projections do not factor in any of this investment activity.

But back to operations. In looking at the second quarter performance, several items warrant some mention. For the quarter, our tenant retention rate was 80.4%, this number exceeded our internal expectations, and was above our five year historical average of 77%. We expect our retention rate will be in the 70 to 75% range for the third quarter, and that is based upon the information we have at this point based upon existing tenant activity. At the end of the quarter, our portfolio was 92.9% leased, and 91.4% occupied. Highlights were the continued strong performance of our Richmond portfolio, and increased traction in our Industrial portfolio. For the quarter, we renewed leases for approximately 925,000 square feet, and signed leases for 213,000 feet. For the second quarter, we showed a decline on new lease rents on a straight line basis of around 5.3%, a bit better than our forecast, and represents an improvement over previous quarters, but still really indigative of -- of competitive conditions.

On renewals, rental growth rate on a straight line basis declined by less than 1%, capital costs for the quarter came in at $1.74 per square foot, which is down from last quarter's performance, and actually down from a year ago, but still remains a bit above our historical average. Our CAD payout ratio is a bit higher than I would like. But the good news is that we are leasing space and incurring reasonable capital levels to accomplish deals. In addition, as we've discussed on prior calls, we are making significant investments in our portfolio this year, so that about 25% of the $9.1 million shown in the supplemental package for building and TI dollars relates to base building improvements, not tenant specific activity. From a general standpoint, marketing additions continue to improve. There still remains a wide dispersion of activity and strength in our various sub markets. We continue to see a slowly emerging trend towards equilibrium and positive absorption, but as I mentioned on -- on so many other calls, all transactions remain competitive. In sub markets, there remains pressure on economic packages, and certainly, with market vacancy rates ranging from the high single digits to mid-teens in class A inventory, we would expect that situation to continue until additional absorption brings those class A vacancy rates down.

Activity through our portfolio continued to increase during the second quarter. Our conversion rate continues to improve, and as I've indicated in previous calls, buyer sh -- buyer psychology is really shifted. And our general expectation is rents will get stronger rather than weaker, over time, and that's an important shift from the last six quarters. Many sub markets continue to see good activity, and post positive net absorption. We've seen good activity in higher leasing volumes in King of Prussia, northern 202, Conshohocken, and Plymouth Meeting. Our outlook for the market is for the [Philadelphia] suburban market is at demand will continue to be spotty, but positive. Average rental rates will remain flat. We believe there will be positive net absorption throughout the market that will vary by pace, by sub market. And that there will be minimal new construction, and most of that occurring on a significantly pre-leased rate build to suit basis. But we also anticipate that competition for most deals, particularly larger deals, will remain intense.

For our western suburban portfolio in Philadelphia, we are 89% leased, which has significantly continued to out perform the market. Areas where we are experiencing positive absorption were Bala Cynwyd, Delaware county, Exton, Lower Bucks and the main line area. From a general standpoint, for the second quarter, Pennsylvania suburbs had 285,000 square feet of positive absorption, which puts that number at over half a million square feet of positive absorption year to date. And that is up dramatically from a year ago. By way of comparison, the second quarter of '04 had negative absorption of 360,000 square feet, and year to date had negative absorption of about a million square feet. So when you look at a time line over the last 12 months, there's been a fairly strong swing in absorption throughout the Pennsylvania suburban marketplace. Still a long way to go, but the trend line remains positive.

In Delaware, our market -- our portfolio performed very well. We foresee rental rates remaining flat, and competition remaining for deals. Major topic of conversation in that market in the last 30 days has been the recent acquisition of MBNA which is clearly one of the major employers and one economic forces in the state of Delaware. The true impact of this sale, I don't think, will be -- will take some time to sort out. Brandywine does not have any exposure to MBNA, and our major project in Wilmington is joint ventured with the folks at Macquarie Office Trust, and is long term leased to JP Morgan Chase. At a minimum though, I think the news on MBNA, and potential cutbacks they may have in the marketplace over the -- the short and immediate term may dampen some of the appetite for new construction that was programmed in the Wilmington market. But Brandywine's position in that market is very solid.

Rental rates in southern New Jersey, we think, will remain flat or possibly decline in some of the sub markets. In Lawrenceville, activity is remained steady with new companies and expansions, and rental rates steady to increasing slightly over the near term. Burlington and Camden Counties where we have the bulk of our portfolio in New Jersey had positive absorption during the second quarter. It respectfully 169,000 square feet in Burlington, and 250,000 square feet in Camden. Which offset the first quarter negative absorption, so now year to date, those counties are in net positive absorption position. Those 2005 numbers again compare favorably to 2004, which had this market at negative absorption of 350,000 square feet halfway through 2004.

So as we look at the market, the numbers clearly support our premise that the market is improving. Our deal flow is up. Not to be confused with lack of competition per deals, but the general trend line is up for deal flow. Markets statistics are showing a positive traction on the absorption level, and leasing activity level. As I mentioned, tenants psychology has clearly changed and we are clearly seeing more requests for proposals from large tenants.

As we look at the balance of 2005, several key themes for our organization. First, we will absolutely continue our long track record of strong market out performance. Second, we will continue to invest in the infrastructure of our inventory on the belief that that will better position those buildings to take advantage of their tremendous locations leading to stronger investment bags and higher occupancy levels as market conditions strengthen. Third, and clearly, the most important, given the stability of our portfolio is to position our Company for accelerated growth. We have solid growth built into our portfolio for '06 and '07 that will be achieved simply by Cira Centre coming on line, increased leasing at Radnor, and strong general performance as the market recovers. Our balance sheet capacity is excellent. Our market position has never been stronger, infrastructure is the strongest it's been in the history of our organization. And really, that's just one of the great challenges we face is how to effectively expand our operating platform to provide even stronger growth opportunities in the years ahead.

From an earnings standpoint, we continue to be driven by an overall cautionary approach. We do remain in a climate of compressed rental rates and increased operating costs that create additional margin pressure. For 2005, as Chris will touch on, you will know we reaffirm guidance if 248 and 255 in FFO. We are tar getting a FFO of $0.60 to $0.61 per share for the third quarter. And I'd urge you again, as I do in every quarter, to factor that into your models. And I would also ask you to reflect on our market commentary, and understand why we are strongly suggesting that estimates be in line with management forecasts.

At this point, let me turn the call over to Chris to review or second quarter results.

Thanks, Jerry. As Jerry mentioned, second quarter was a very positive one for the company, core portfolio performed very much in line with our forecast and we continue to improve our internal systems and processes. Actual FFO for the quarter was $0.61, or $0.02 per share higher than our guidance. Primary driver of this was better than expected -- of this better than expected performance reside in the other income line. As you all know, we do not include non-recurring items in our guidance. And during the quarter, we received a bit more than $800,000 of termination fees that were not included in our forecast. Absent these payments, we were right at our $0.59 per share guidance.

Our G&A and operating expenses were in line with the run rates we articulated during our prepared remarks and in response to questions on our first quarter call. Same store results for the six months ended June 30, '05 ended in line with our guidance. If you remove termination fees from both periods, revenue was slightly up at .4%. And NLI is down at 2% both in line with the underlying assumptions we provided in our guidance. Same store results have a tendency to kind of move up and down, so as we look at the six month period, we think that's a pretty accurate reflection of -- of where we thought we were going to be, and as I said, in line with our -- our previously issued guidance.

Looking forward, we have introduced guidance for the third quarter of $0.60 to $0.61 per share of FFO. The assumptions underline this guidance are detailed in our release and remain consistent with our expectations articulated earlier in the year. We will have consistent average occupancies. GAAP rents down 50 to 150 basis points. Other income in G&A run rates of 1.5 million and 4.3 million respectfully. And we will bring into service in the third quarter 244,000 square feet of development and redevelopment assets. Our full year 2005 FFO guidance of 248 to 255 remains unchanged. Given our actual performance for the first half of the year and guidance for the third quarter, we are clearly more comfortable at the lower half of that range. From a financing perspective, we remain in great shape with our existing sources and uses matching up nicely. We continue to use the credit facility to fund Cira with the expectation we will term out a portion of the borrowing by the ends of the year or in early 2006.

I'm going to take advantage of having a quarter that performed as planned. Stop my comments here and turn the call back over to Jerry to wrap up.

Great. Thanks, Chris. Let me spend just a few moments before we handle questions on our 2005 business plan. For the balance of the year, primary attention is clearly going to be focused on leasing and operating side, and also continuing to -- to [vet] the investment market. On the operating side, we're determined to continue our agressive leasing program, focus on all controllable expenses and continue the program of investing capital in our portfolio to ensure that we do keep our tenant retention rates as high as they've been over the long term and to increase our levels of tenant satisfaction.

Roll over for the balance of the year as we look at our risk profile is very manageable. It's just about 7.5%, and is fairly evenly dispersed between our major regional operations. We are in active discussions with every tenant. We have some that are going to renew, some that are known move outs, some that even at this late date aren't sure of their plans, but we continue to stay in very close contact with them, and have full expectation we will be able to perform as we have in the past. We are continuing to project, you know, a declination in mark-to-market on a cash basis as well as on a GAAP -- GAAP base, although it's slightly lower than cash. Just given where the state of the market is right now.

Our objectives in Radnor remain very much on track. We are pleased with our success thus far. We have excellent activity. You know, upon acquisition as we've repeatedly mentioned, we programmed at three year lease-up. Activity levels continue to increase. Our pipeline remains strong. Certainly, consistent with the original plans when we prop -- we bought the properties. We are commencing on a -- on a significant renovation of the 555 Lancaster Avenue Building. That renovation will significantly upgrade the property in line with our expectations. We will be installing a new curtain wall, completely new mechanical systems, re-configuring the entrances and upgrading all the common areas. That process is underway and will be completed on schedule during the first quarter of 2006. I mean as we look at Radnor, we have owned those properties for nine months. Those projects completely have been re-introduced to the marketplace. We have generated great deal flow. We've bought the occupancy level up to 26%, which is pretty much on track with our -- our -- our -- our projected absorption pace. But also more importantly, in line with our projected rental rates and TI's. We certainly continue to track several larger deals that are having a longer incubation process than we would like to reach a decision point. But we certainly, as we have in previous quarters, continue to have a very high level of confidence that we can meet our objectives on Radnor and make that a very successful investment for the Company.

From an acquisition standpoint, we have a very strong active pipeline of deals. As I mentioned earlier, year-to-date we've evaluated over $2 billion of transactions. While some are still active, many have traded out at pricing levels that we just did not feel comfortable with. For example, an office park in northern Delaware, three buildings about 300,000 square feet, sold for a sub seven cap rate, with market roll over and above market rents, and that wasn't an expectation we want for our investments. We remain cautious, and as a consequence, as we talked on previous calls, really, haven't factored any acquisitions into our projections. We still are seeing a dilemma in many situations where risk is not being appropriately priced into pricing expectations. We have not and won't acquire properties where we don't see the risk equation being balanced, or where we expect significant roll-downs along with a lot of deferred cap on some old -- older stock unless there is a corresponding offset in price per square foot.

We did acquire, during the quarter a 380,000 square footwear house building that was significantly vacant. It was truly one of those unique one off value added transactions. We have a number of leases that are close to being executed. And our plans for that property are simply to use that to [seed] a joint venture, or to simply trade out of it at a significant profit . Given the acquisition environment, and the drive to cap into our business, we continue to analyze several investment strategies to provide a -- a better, higher cost effective way for us to invest dollars, and continue to pursue all of those various avenues.

We do see some of our selective markets being primed for some development, we have an existing land in -- inventory that can accommodate approximately 4.8 million square feet of space. We recently acquired 20 acres in Plymouth Meeting that can accommodate up to 570,000 square feet or about $20 per FAR purchase price. We also went under agreement on a site in New Jersey that can do about another 300,000 square feet. All of that square footage is either approved or in the final stages of approval.

Our expectation is that if market conditions continue to improve, we will start several new developments in the third and fourth quarter. In particular, 110,000 square foot building in southern New Jersey, and a 75,000 square foot building in Central Jersey. In addition to that, we are considering three other potential starts based upon where we see market demand and the rest of the competitive set.

Given the overall strength of the investment market, we continue to evaluate selective assets sales. We are test marketing about $90 million of assets for sale, and will have the better read on that in the next 30 days. Those sales are certainly being evaluated in the context of -- of whether now is the optimal time to sell those, and whether we can improve our competitive position by re-deploying some of those funds into our core markets. The portfolio is generally in excellent shape, and we carefully review all pending sale transactions.

To wrap up, the second quarter was a good one for us. Solid portfolio performance, very, very much in line with our expectations. We continue to work on strategies to more effectively position or company for growth. The leasing stance remains very aggressive. Our buys towards having a strong -- strongest, highest quality inventory in our competitive set is unquestioned. And while we always like to do better, as we look at the past quarter, you know, we were able to maintain well above market operating performance. We continued to advance approvals across the board in our land inventory. We kept the balance sheet in good shape. We aggressively pursued numerous acquisition opportunities, but displayed continued discipline in our underwriting approach. And also continued to capitalize on what we view as significant internal growth opportunities in our portfolio, namely the continued lease up at Cira Centre. Aggressively all deal leads at Radnor Financial. And in general, improving traction throughout our portfolio. We are very well positioned to continue to grow the Company, operate it effectively through an improving operating climate, and use both our financial capacity and the depth of our infr -- infrastructure to optimize all market opportunities. At this point I'd like to thank you for taking time to listen to our prepared comments and we'll be happy to answer any questions you may have.

[OPERATOR INSTRUCTIONS] John Litt, Smith Barney.

Hi guys. It's John Stewart here with John Litt. Jerry can you give us a bit of a sense for who the tenants are that you are referring to in terms of the larger deals that you are looking at at Radnor Financial Center?

I certainly can't name the tenants, no, I can't.

Well in terms of the types of tenants?

Pharmaceutical, finance services, would be the two primary categories.

And how many square feet are you -- are you talking about here?

Well I mean are you talking about specifically at Radnor, John?

Yes.

Our pipeline of deals there remains in the half a million square foot range.

And given your comments about the intense competition for the larger deals, do you think you'd see pressure on the rents if you were to consummate one of these larger deals, or do you think they would come in line with Pro Forma?

It's possible. I mean, we're certainly -- we're advanced in the number of those discussions, we think we are close to Pro Forma. I mean, certainly, one of the advantages we think our properties in Radnor have over some of the competitive set is the -- the -- the 100% nature of the location. And the amount of capital that's been put into the buildings and we are putting into the buildings. So I think as we look at it, we are presenting clearly one of the top class physical locations in the marketplace and doing that on terms of a very competitive, what we think the higher end competition is. So while it's hard -- hard to read exactly where the deals shake out, I think, you know, the marketplace is savvy enough now to kind of get to the least common denominator on overall economics. And some of these discussions are advanced to the point where we kind of know where they might come in. And we think that is going to be closely approximating our -- our assumptions.

You talked about a three year lease term -- lease-up time period at Radnor. What's your expectation for the increased leasing activity in '06 at Radnor?

Make sure I understand. We projected a three year lease-up, and the bulk of that was back ended towards the third year. So right now, we stand around 26%, I mean, we would certainly look to be just shy of 50% for, toward the ends of '06.

Okay. That's what I was looking for. And then the acquisition pipeline, you talked about a couple of deals that you might potentially announce in the third quarter, can you give us a sense for the potential magnitude?

The potential magnitude is -- is about -- about -- depending on how the deal shakes out, $80 and $100 million.

What sort of yields are you looking at there?

I think the yields we're looking at there are in the 7.5% to 8.5% cap -- GAAP yield range. It's hard to say.

Okay. Thank you.

You're welcome.

John Kim, Banc of America Securities.

Thank you it's John Kim, with Ros. Jerry, last quarter you discussed property joint ventures, and co-investment joint ventures as well. Can you provide an update on your thoughts going forward?

Sure. You know, we continue to look at a number of different options for us to form co-investment vehicles. As -- as most of you who follow the Company, know we have one existing co-investment vehicle in place with Macquarie Office Trust. And as -- as we went into that transaction, we certainly anticipated and still do expect that that will wind up being a renewable source of capital for us. And that formula and governance and protocols are all clearly delineated in our existing structure, so that continues to be a viable source of co-investment for the Company. In addition to that, we're also talking to a number of -- of advisory firms, money sources on forming an co-investment vehicle with us to look at -- at the larger scale transactions that increase the execution probability of us being able to bid on larger portfolios.

And what would be timing of this? Would this be '05 or kind of "06 time frame?

Our hope would be to get something accomplished by the end of this year. But I think we are very mindful of balancing our -- our -- our own cost of capital, with the blended cost of capital that come into place through a co-investment vehicle, with balance sheet simplicity, and making sure we stay very much in line with our benchmark center of -- of having a very strong balance sheet with a lot of debt capacity on an unsecured basis.

Given the acquisition landscape, what are your thoughts regarding using sale and joint venture proceeds for buying back your own stock?

Well that's always on the landscape. We certainly have -- have done that in the past, and as we look at each dollar coming into the Company, we look at the best way to deploy that, and buying back stock is always an option.

Regarding acquisitions, you've alre -- you've discussed acquisitions for the rest of the year. You already have a leading position in many of your sub markets, can you discuss where you are focusing on acquisitions and if there will be any new sub markets that you're looking at?

Two questions, let me answer each one individually. One is we continue to always look to improve our marginal competitive position in every sub market we are currently in. So I do think that as we look at a number of our core markets, while we are significant owner, there are some profits that we always keep in our list of -- of properties that if we could, we would like to own them, and we continue to pursue them. So as we look at our comp -- at the overall environments we operate, we do think there is a number of either institutionally or privately owned properties that present -- would present good additions to our inventory in our core markets. So hopefully that answers that first question. The second question is we -- we -- we have and we continue to look for ways to expand our geographic platform in a way that makes sense. So as we look at our position in central New Jersey, it's -- it continues to grow. We think there's a lot of additional room for growth in that market. We think Delaware is a market we would like to continue to expand our operations in. And then we always maintain a very optimistic viewpoint on -- on engaging in dialogues with other private companies to see how we can effectively structure transactions that could accomplish our goal of increasing shareholder value, making a smart acquisition, and expanding the infrastructure and the inventory base of the company.

What's your appetite for further enhancing your position in Virginia and potentially answering the DC market?

Well we -- we -- we were -- we had a very nice operation in northern Virginia. Like that market, we did swap out of that with the folks at Prentice Properties a number of years ago in order to swap out their properties in Pennsylvania for our properties in north Virginia. We continue to track that market, we have a good management team in Richmond, it has a great operating presence in the marketplace. So we continue to look for additional opportunities in Virginia and up through the -- up through the northern Virginia corridor.

Okay. And final question, now that Cira Centre is almost fully leased are there any more development opportunities near 30th Street Station?.

There are, and we continue to -- to see if we can make sense of any of them.

Okay. Thank you.

Anthony Paolone, J. P. Morgan Securities.

Hi. Good morning. Jerry mentioned in the CapEx, the $9 million, about a quarter was for base building. About how much is left in -- in this program, or how long do you think it will be sort of above average?

Well we had actually, last quarter, Tony, I mentioned that we were looking to spend around $7 or $8 million for the year. And that's kind of being incurred [radibley] throughout, so you can assume we have another $4 million or so. And that could vari, because we are -- we continue to go through a pretty aggressive program in the Company with our operating heads and our development team to identify errors where we can significantly enhance some of our existing stock by making an investment. In fact one things that was in the -- in the -- in the package this quarter was the addition of the 500 Office Center Drive Building to a rehab. That started us looking at that as a project to -- to essentially kind of pretty it up. And as we got into it, we realized we could create some significant value as we did across the street at 501, by undertaking a more significant renovation. So it's an ongoing program, you know, when you are talking about suburban office properties that are, you know, between 10 and 20 years old. There's going to be a lot of opportunities, I think to improve value, assuming that the core super structure and location issues are effectively addressed. And I think a benefits we have is that as we look at our Suburban Office Portfolio, we have properties in just tremendous locations whether it's here in Plymouth Meeting or King of Prussia, venture interest in Conshohocken, or Mount Laurel, New Jersey, there are literally ground 0 locations that are very attractive. And as our stock gets aging, we think that presents a great opportunity for us to invest marginal dollars and deliver -- and get a much higher cost -- or much higher return on a cost adjusted basis, once we achieve new tenancies.

Okay. At -- at Cira Centre, Chris, can you talk maybe what the roll-out looks like of leases there? Just from a financial statement point of view.

Sure. The first tenant will -- Deckert, will take a portion of their space in the fourth quarter of this year and then the balance of the -- the existing 93% come in fairly evenly over the first half of 2006.

To about what's the percentage in 4Q?

In 4Q of this year?

Yes.

I think the first tenancy in the fourth quarter year is about 100,000 square feet that will move in, and then balance is in -- in 2006.

Okay. And then I know you don't put lease term fees in guidance, but is there anything you -- you see that's just visible in the back half of the year here that you know about?

At the moment, there's nothing in the back half of the year that we know about.

Okay, and straight line rents, any guidance for what that number looks like? It seems to have popped up the last couple of quarters, is that where it's going to [inaudible]?

Yes, it popped up in the first quarter, and then came down a little bit here, and I think as we talked about on the first quarter call, a lot of that, are deals that -- that the Rubenstein Company had done that took effect when we acquired them. You know, all other things being equal, that number starts to come down then over -- because there were some free rent deals they did over the balance of this year. It's just such a tough number to predict because it is really dependent upon then, other transactions. You know if we did a long term deal with bumps, that obviously impacts the number going the other direction. So I think we don't -- we don't -- right now, I would have to say the number is -- is destined to start to trickle down, all things being equal.

Okay. Thank you.

David Fick, Legg Mason.

Hi. I'm actually here for John Guinee who is traveling today. I'm still wrestling with the CapEx numbers, perhaps, Chris, you can help us. You've answered a bunch of questions on this, but what is a decent run right now for the next two quarters? Looks like some of the capital committed in the fourth quarter of '04 actually hit in a second quarter, as well as some capital committed in the first quarter of '05. Is that -- A is that right, and B, just where should we be now for the next two quarters?

I think -- I think your analysis is correct, because as we looked at capital on deals that were done within the quarter being in the $12 range for the fourth quarter and first quarter, those dollars are going out the door now in the second. And you are starting to see impacts of that as we predicted. I think on a relative basis, if you look at it from a CAD perspective between TI and -- and building improvements, something in that kind of $9 million number going forward per quarter is a -- is a reasonable assumption.

Okay. Jerry, going back to Radnor for a minute, the redevelopment program, have you guys assessed, now, where you think you are going to have to go in terms of redeveloping those buildings, in terms of structured parking, how much retail makes sense, in the one building that was going to accommodate retail? That -- that's question one, and then related to that, the economics, the yield economics of development and the projects you talked about getting started on here shortly. Why would you start development when -- when the market is still relatively weak, and what are you looking for in terms of yields?

Thanks. Okay, Dave. Let me see if I can answer the -- . On Radnor, yes, the plan we had contemplated as part of our acquisition has remained very much in place. So during our underwriting on Radnor, we identified what capital costs or capital investment was required on an ongoing basis for those buildings. And then we had assumed a major redevelopment of 555 Lancaster Avenue, which is the building that sits at kind of the gateway of the project right along the -- the main transportation corridor, the road, the major road. Transportation corridor.

The -- so that plan is very much in place. What we've done in the last couple of months is really bid it through, value engineered it, relooked at it again, and have looked at a final budget for that and that was finalized a bit ago and work is currently underway. That work as we knew contemplated a whole new chiller system, upgrades to the vertical transportation, a whole new curtain wall system, a reconfiguration of the lower level so it work adaptable to retail use, which is what it's programmed for and are having good success there. And essentially repositioning the -- the entrance way into that building so it marries better with the existing buildings and parks.

So I think everything that we knew that we would have to do there we are doing. And I'm delighted with the progress we are making on the physical redevelopment front as we will be in a position to have that completed by early next year, which puts us in a position to be really be re-introducing 555 to the marketplace. One of the look behind the numbers issues is that we looked at Radnor essentially 555 Lancaster has been not primed for tenancies because of our renovation program. Once we complete that, it will be certainly very much part of our -- of our -- of our inventory of offerings. So I hope that -- does that answer your question on -- on Radnor?

Yes. Thanks.

Okay. From an overall development front, it's a great question, we sit and think about it all the time, in terms of, if the market has not really matured to the point the complete stability, why would you contemplate new development? We look at if from a couple of different standpoints. One, in the sub markets in which we are contemplating development, our existing asset base is 93% to 95% leased. So we have very little availability within or existing buildings to accommodate tenant expansions. We certainly don't want to be in a position of -- of losing tenants out of our portfolio because we don't have the space to accommodate them. That's one consideration.

Second consideration is as we look at the acquisition climate, and as I mentioned, we've looked at a fair amount of deals and can't quite make sense of most of them. One of the reasons for that is, contrary to -- to maybe the way some folks on this call look at it, we look at kind of an after capital cap rate. And as you look at buying exists properties that are in the, again, 10 to 20 years age bracket, and you are buying that at a 7.5% cap rate today, and with the roll-over, exposure and roll-down exposure, etcetera, when you factor, also into that the amount of capital that's required to sustain those tenancies, it really winds up being a cap rate that could be at lower than the nominal cap right by 200 basis points. So when we look at relative places to deploy capital, in a lot of these sub markets we see buildings trading out for these kind of numbers. We would rather be in a position to do new development, we have full confidence in the -- in the [inaudible] of our marking staff to identify new tenants, to bring in to those buildings. And we would do that for development yield that are in the 8.5 to 9 -- 9.5% range going in, maybe higher on a GAAP basis. And we then have a brand new piece of inventory, no capitol for a number of years other than the cost to bring the tenants into the buildings. So from a relative deployment standpoint, I think that's been one of the driving forces behind accelerating the development. Where we are looking at doing the development in Jersey, southern New Jersey, and Central Jersey, we feel pretty confident with the existing deal pipeline that we will have great success on leasing those buildings quickly.

Okay so you wouldn't contemplate development in your [inaudible] western Philadelphia suburbs at this point although you are starting to accumulate more land there? And I guess the reason I link the two questions, while you're dealing with a three year program at Radnor, you know, you are accumulating land, are you anticipating that -- that these sub markets are just so discrete you are not going to compete?

Well I -- let me answer that a couple different ways. One is I'm a firm believer that everyone competes, I mean everyone's competing across the number of the sub markets. There are tenants that won't move out of certain sub markets, but believe me when they are negotiating with us as a landlord, if they would never ever contemplate in their wildest dreams relocating to Lansdale, Pennsylvania, if they are looking for office space, you can bet that them or their advisor is going to be saying well geez, we can move to Lansdale for this amount of money. So I think we are not naive enough to think that there's -- that the universe of our competitive set will broaden based upon what leverage that tenant thinks they can get over us as a landlord in terms of driving an effective rate.

So with that said, when we look at land acquisitions like here in the Plymouth Meeting market, that we just did this past quarter, that can accommodate potentially 575,000 square feet of development. You would say, okay, you already have the Metroplex site there, which can do around the same amount of space, does that make sentence to buy today? Here is what we look at. One is we would always want to preserve maximum optionality and flexibility by controlling more in inventory rather than less in our core markets. I happen to believe that Plymouth Meeting is one of the best sub markets today, and certainly looking out over the next 20 years in the entire Philadelphia region. The road system is unparalleled, housing demographics have changed dramatically in the last decade, and I think Plymouth Meeting is a great location for us to continue to expand our land inventory. We also bought that lands from $20 an AFR foot, which gives us the ability to master plan it, get whatever additional [tangent] approvals are required, and really position it as a very good option in our Plymouth Meeting marketplace. It's complimentary to Metroplex as opposed to [necessarily] competitive. So in a marketplace where it's as hard as it is, to -- to get approvals, we will always look at buying more land. I think that that would give us the ability to create better inventory, be more competitive, offer our existing tenant base more options, get into the competitive deal flow with more product offerings, and we don't see the price of land going down. Actually see it continuing to go up. Surprisingly even though the office market may not be as robust as we -- as we hoped it might be from a construction standpoint.

Is the anticipated increase in valuing sufficient to offset cost of carry such that you are agnostic about when you might get to use the land?

I think so. And that's what we look at. We actually - that's a good question, David. We -- I mean we look at something like that acquisition. We clearly think that may be a situation where we will undertake a lot of development activity on it in terms of planning, approvals, infrastructure, investment, but actual vertical development could be a number of years away. So we actually factor in the carrying -- a range of carrying periods into our economic models to see if the deal makes sense.

Okay great. One detail question, what is your total occupancy including Radnor?

Total occupancy including Radnor is 87.8%.

Thanks, guys.

Thanks, David.

Chris Haley, Wachovia Securities .

Good morning.

Hi, Chris.

Congratulations on Cira.

Thank you.

Stick with Cira, when are you going to start recognizing GAAP income and cash income?

We would start on both of those in the late fourth quarter of, or in the fourth quarter of 2005.

Okay. Any sense of kind of a straight line versus cash rent difference? Best guess?

Not even a great guess at this point. I think in general as we look out more into '06, and again the tenants are going to layer in throughout the course of '06. It's -- it's -- my gut reaction would be there's not a large difference between the two.

Okay. On the acquisition side, is it fair to say, Jerry that the -- the -- the investment yields you're looking at in relation to what you are trying to sell, So [inaudible] dollars or roughly approximate but the yield spread, what you are going to be selling out of probably wind up being higher than what you'll be buying in?

We think so, pretty close though, at least in the properties we are test marketing now, Chris.

And if you can build today for 160 to 180 a foot, depending on your land numbers, we'll get there in a minute, and deals are being done, even B space is being bought at, you know those numbers or higher, what -- I'm trying -- I'm having a tough time understanding why you would be trying to buy today?

Trying to buy land or buy existing assets?

Existing assets.

Well, every -- every deal is somewhat idiosyncratic, you want to look at every deal. Some deals will work, some deals won't. That's -- that's a part of the business to be looking at -- at underwriting and potentially acquiring assets. I think the answer to your question really is what we've done thus far this year, is we haven't bought much. We do think on the properties that I -- I alluded to in my commentary that there are some very valid reasons for wanting to move forward with those asset acquisitions. Is that vague enough for you?

That's vague enough for me, Jerry. Thank you. I appreciate that. Okay so let's go into the development side. In -- first let's go to Fort Washington, what do you own those buildings for today in dollar amounts per foot, and what -- it looks like you are putting $110 a foot into them. So what is your basis going to be per foot in Fort Washington?

Yes, our basis there -- look it's like 80 $80 a foot is -- is what those buildings gross basis was when we bought them.

You put the money -- you put some money into them, and then you are putting another $100 in them?

Right.

So we are going to be around $200 number.

About 180 or so.

Okay and what do you think you can do for -- those are -- so you are not doing new buildings, taking an old building, and you're trying to make it work. And what do you think -- what are triple net rents in that market? If it were a net equivalent? In Fort Washington for a space that's been upgraded?

Yes, I mean 17 to 19.

Okay. And then what are you expecting in terms of say looking at that project, is there a difference between 500 and 501 in terms of what the return expectations would be?

I would actually expect the return expectations for 500 to be slightly higher. Because our investment, there will be significantly less than -- or right around the same, but it will can staged in from a TI standpoint differently. So not too far off but I would exhibit 500 to be a little bit higher.

Okay.

Because, Chris, of course you understand when that mar -- when that building is delivered, the market will be much stronger.

Well, we're hearing -- we're hearing numbers a little bit lower than your net numbers, but I guess -- I guess the feeling is that that -- it sounds to be more like defensive capital being spent than offensive capitol.

That's actually a fairway to look at it.

On the offensive side of the development, in terms of Plymouth Meeting, the land you just purchased -- I'm looking at the number, you said $20 in FAR foot?

Yes.

Can you bring -- in Plymouth Meeting, could you work me up from land to hard cost to soft cost to NTI, and where you think you'll be if you were to start today on that project? If you had half of it leased?

Well I think, I'm not going to give you too much detail on it to tell you the truth. But the -- what I will tell you we are looking for development yields on those properties very much in line with what I've answered to David, which is 8.5 to 9.5% range. That will vary obviously based upon the size of the building they are building, whether that building involves structured parking,which is fairly expensive, but certainly, in some cases, necessary. And the peculiarities of each individual deal.

Okay, but without structured park, what would -- what would a mid quality, new quality building be -- cost, at Plymouth Meeting versus say Fort Washington?

Well I think the construction costs will be about the same.

Right.

So then it's just a question of land value or fully absorbed investment base. I'm not sure I understand the question.

So then if you're in -- if you're in at -- if you're in at Fort Washington, 190 - 200, to get out to $200 a foot off of a $20 land base at Plymouth Meeting, that has to be a pretty nice build-out I would assume. [Inaudible] structured parking.

Well construction costs have gone up fairly significantly, too. So we would anticipate that new construction would be greater than our investment base at Fort Washington.

What did you build -- what did you build 401 for?

401 was built for about $213 a foot.

213.

And -- but that was three years ago? I forget. Yes, three years ago.

Could you give us a sense of why -- what was the rationale behind the sweet [inaudible] acquisition of the industrial asset?

As I mentioned, it was not very convoluted logic. We saw an opportunity to buy a building that would [inaudible] less then replacement cost. That was vacancy, or I guess, occupancy challenged. And I think part of that was due to the -- to the marketing stance -- stance of the prior owner. We -- we initially thought from a baseline standpoint that we bought the building at the price we did, that we would have an opportunity to lease the building up at a stabilized yield that was well above what the market is for investment guides for industrial properties, and we could make a -- make a nice return on just leasing up the building. On the other end of this -- of the continuum, we thought it might be a good seed property for a venture structure. That we could utilize our existing management infrastructure in New Jersey to manage and lease that property for us. And that it might be the beginning of something bigger in that sub market on the industrial front.

Okay. On the land investments, you already have Metroplex, you're -- one way -- maybe you are doubling down in Plymouth Meeting. Why, just interested why you would buy land there now and how long you'd be interested in holding the land before you want to utilize it? You are not the only company that's looking to buy land for development opportunities, so I'll be interested to say how quickly you would like to put land to work on an incremental basis, even though you already have land in that sub market.

I mean, look, we buy all land for development, which means we want to develop it as soon as market conditions will -- will -- will permit. Typically it takes us depending upon where the approval stage is on the land, it could take from six -- six months to eighteen months to perfect, or perfect the approvals, complete the schematic design program, get sight plan approval, and be in a position ready to go. As you know in these markets, it's not -- the approval process in and of itself is cumbersome, and time consuming. So as we buy something like the land in Plymouth Meeting, we are already underway on master planning that site, basically taking the conceptual development that we looked at in the underwriting, taking that to the next level. And then we will be in a position to start, sometime later this year, early next year working our way through the detailed approval process to make sure we are ready to build. But the timing of when to build is a function of what our perception of of the market, as well as what we think the -- the specific tenant demand might be. Something like that property in Plymouth Meeting, you know, will very quickly go into our menu of sights that we will present to our -- to tenant prospects. Many of the larger tenants who are looking to build to suit opportunities are looking for occupancies, anywhere from 12-24 months out. We would certainly think that piece of land could fall into the category of fitting within that time frame in terms of build-out.

Alright last question has to do with Radnor. Original cost was somewhere and $160 million for the whole package, is that right?

I don't remember.

So that -- in that number, my recollection was that included expected expenditures, and you are talking about doing a little bit more work on 555?

Right.

This -- and it will be done over the next six months, let's call it. Six to nine months.

Right.

Are we talking a reasonable amount of money or is this a change in that this building needs more work than prior -- prior -- prior thought?

I think the changes wasn't really necessarily the, just the scope enhancements, but it's also been the cost of construction materials. So I think as we looked at making a the investment we planned in 555, the -- the costs are up a little bit. But what we what we looked at was what the end of the day investment would be in that property. And what I -- but what I can share with you is that our end of the day investment base in that property fully loaded for TI cost in line with what we are seeing in the market. For leasing commission costs for its common area renovations and its -- and the currant wall and structure work will put us at an all in number below replacement cost of a -- of a -- of a new office building.

Thank you, Jerry.

You're welcome.

Rich Anderson, Maxcor Financial.

I have just 15 questions. So just bear with me here. Just to clarify, Chris, you mentioned 800 K and lease termination fees that wasn't in your guidance, does that mean, and this is small, does that mean you effectively are lowering guidance because it wasn't there previously?

No the thing is we look at, 248 to 255 range. We left the range unchanged, acknowledging the $0.02 that came in in the second quarter, and essentially still remaining comfortable within the lower half of that range, not implicitly lowering any guidance at all.

Okay. And I guess Jerry, maybe a question for you. You mentioned dispositions that you are marketing, and you even went so far as to add dispositions into your commentary and press release. What has happened strategically for you to start considering dispositions now? I mean this is not new that you can get top dollar for -- for assets. Is there anything about your business that has changed to make you start considering disposition in a more realistic way?

No, I din't think so Rich. I this as we looked at our market position -- you know, our entire portfolio then -- then and went market-by-market, there -- we identified a number of -- excuse me -- a number of assets that, you know, we thought were worthwhile, testing the market to see what the values would be. That's perfectly consistent with what we've always done. So no change there whatsoever.

Okay and then last question is, you know, you started the year assuming a retention rate of 60 to 65%, and you did 80 this quarter, and you beat that range last quarter, and you are looking for a 70 plus number next quarter. So obviously, you are going to beat your previous range. Would you have any sense about how much money you are saving from a TI leasing commission perspective by sort of beating your -- your expected -- expected retention rate range from the beginning of the year?

I don't, I'll make a couple comments, and Chris and Tim can look for a number. But it really depends, because in the renewals, there are also renewals and expansions so our typical renewals are significantly less expensive than new tenancies as a general rule.

What happens though, depending upon sub market, what the tenant is looking to achieve, sometimes there will be renewals and expansions. So you basically wind up in a situation where you have very little dollars spend or their existing space, but then it's actually a new fit-up on the expansion space. Blended you wind up lower than what you might have to spend for a new tenant, but that really is going to vari based on the percentage of expansion versus existing space. And then quite candidly, you have, in -- in some cases, you need to completely retrofit the space in order for the tenants to sign a longer term lease. So I mean our -- historically, you know, we've seen capital costs, I guess less than half on renewals.

A little bit less than half.

But I actually don't know exactly where -- where it is right now. We always do offer it from the premise that it's better to renew a tenants than not to. And we certainly have a lots of control over how they want to reconfigure their space and typically the leasing commission is lower on a renewal, and in many cases, as you know from our supplemental, we did 39% of our deals on a direct basis, the vast majority of that was on renewal side. Because we are way ahead of our existing tenant base. So capital tends to be about half for TI, and leasing commissions could be greater than 50% differential based upon whether it was a district deal with our people, or whether there was a broker involved.

Well I think it's a great element of your Company, consistently doing a great job in the retention base, for what it's worth. Thank you very much.

Thank you.

Robert Belzer, Prudential Equity Group.

Good afternoon. Just a couple quick questions for you. Your expected development yields range is down quite a bit. Is that simply a function of higher construction costs?

Well I think -- I think it's a function of a couple of things. Actually, I wish it was only a function of -- of increased construction costs. It's also a function of, you know, rental levels being a bit lower than where they were a few years ago. But also, incre -- increased operating expenses. So we look at the compression of development yields, there's three pieces. One is operating expenses today are higher than they were a couple of years ago, for things like real estate taxes, insurance, janitorial costs, paper supplies, etcetera. And we work real hard to get economies of scale on those, but there's couple of things I just mentioned, like insur -- like real state taxes, there's no scale you can get, so you are kind of a supplicant of what happens in the marketplace. Rental rate levels that even though nominally may be at levels they were a couple years ago, and you factor in the additional expenses, the dollars dropping to the bottom line are down a bit. On the construction cost side, we have seen cost increases ranging from so 10 to 25% on some of the component parts. Sheetrock just went up another 15%, steel is up, although it's moderated, curtain wall is up, specialty steel items -- items remain expensive, so it's really those three pieces, if that answers your question on how we kind of seen our yield compression on the development deals go from what used to be a targeted 11% return to now called a 9 to 9.5% return.

Yes, just one follow up question on this. Just in terms of say -- if you could give me an idea of year-over-year increase. What would you think it would be in terms of overall construction costs?

Again it's going to depend on the -- on the building you are building, whether it's curtain wall, precast, granite, but I 'd say a general rule we are looking at are construction costs are up across the board probably 15%.

Okay. Great, that's all I have for you today. Thanks.

You're welcome.

Chris Haley, Wachovia Securities.

Jerry, on the Radnor space, what are -- what are the blocks that you have north of 25,000 square feet available? How many of them?

How many of them? Well, we have all -- we have all -- all of 555, that's 240,000 square feet.

Yes.

So they are all blocks. All of 170, 8000 square feet, at 150, there's available about 200,000 square feet which could be in that building could be broken off almost any way you want to.

All right.

There's about 40, 50,000 square feet at 130, which would be smaller blocks and then you've got 180,000, 170,000 square feet at 201. Again, I think you know, you have a lot of different options there as to how you would want to -- or how you could allocate that space.

You mentioned that there were several markets including Conshohocken and King of Prussia which are, say, two large [nodes] in the area. What would you say the number of blocks today, competitive blocks are available in relation to Radnor's availability for medium to large size blocks?

Well, Conshohocken, you have Eight Tower Bridge which is, which has probably five or six floors still available, that are full. Maybe more. Couple of the other buildings in Conshohocken have probably 15 to 20,000 foot blocks available. Again, not a -- not a great number.

Yes.

King of Prussia, there's a couple larger blocks of sub-lease space still available. I don't know the exact number for that, Chris.

Okay. In relation to your comments were you're seeing market improvement , maybe steady, not robust, and you still have plenty, obviously you have three year lease up at Radnor. The backlog number of maybe 500,000, at least in my notes suggest, that a backlog can be defined a varieties of ways. Doesn't appear to be a major change, maybe down versus where you were before, versus my notes. In a market that is steadily getting better, and the number of competitive blocks is going down, what is that -- what does that tell us about, you know, as an outsider, what should that tell us about Radnor space and the potential over the next year to two years?

I think what it should tell you is we -- it should reinforce the fact we have high level of confidence of meeting our projections. I mean again, there's -- there's locational differences. There's quality differences between a lot of those different blocks of space. So I think when we -- when we inventory like we were talking earlier about at Fort Washington where you -- there's -- there's different quality space in that market, and we certainly track what the competitive available inventory is, and make a point of knowing that set pretty well. So I think as we look at the marketplace, we think Radnor is in a good position. As long as the pipeline of deals is out, that's out there is -- is at a healthy clip, as it has been at Radnor for the last three quarters. I think we are feeling good about it, what you are look for is a chance to make a deal. If the -- if the transaction is not in your pipeline, you are not in active dialogue with the tenant, you have no chance to make the deal. So as we roll, you know, and again you have to under that's a rolling number so tenants that are on that list two quarters ago, you know, may not be on that list today. Because they may have -- may have made a decision to stay where they are or relocate elsewhere. And I think what we are really happy with, is whether -- you actually mentioned three markets, King of Prussia, Radnor, and Conshohocken, where we have a significant ownership stake. So one of the beauties that we see about our company is I can assure you that a tenant who is on a Radnor pipeline list, is on a pipeline list for our buildings in King of Prussia, and is on our pipeline list for our buildings in Conshohocken. So, and you can bet we are throwing up in front of them what we have available in Plymouth Meeting, Fort Washington, or Newtown Square. So information flow is important for us. So we do make a practice of putting as many alternatives in front of our tenants as possible -- or prospects as possible. So I think it -- it speaks well of where we think the markets will go in the next couple of years.

Where do you think your office portfolio occupancy will be by year end?

I think where we think it's going to be is pretty much where it is right now.

Okay. Great, thanks.

You're welcome.

Thank you. There are no further questions at this time. I would like to turn the floor back over to you for any further closing remarks.

Great. Thank you all very much for participating in this -- in this call. We -- we appreciate your interest and enjoyed answering your questions. And look forward to talking to you next quarter.

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