Brandywine Realty Trust (BDN) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Brandywine Realty Trust fourth-quarter earnings 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 we discuss on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation and Reform Act of 1995. The words "anticipate," "believes," "estimate," "expect," "intend," "will," "should," and similar expressions as they relate to us are intended to identify forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, these statements are not guarantees of results, and no assurance can be given that the expected results will be delivered. Such forward-looking statements and all other statements that are made on this earnings conference call that are not historical facts are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those expected. Among these risks are the risks that we have identified in an exhibit to our current report on Form 8-K that we filed with the Securities and Exchange Commission on January 10th, 2006. We are subject 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. Good morning, everyone, and thank you for joining us for Brandywine's fourth-quarter earnings conference call. Today agenda will provide of our fourth-quarter results, as well as our year-end results, an overview of market conditions, our 2006 outlook and business plan.

Participating in today's call with me are Chris Marr, Chief Financial Officer; Tim Martin, our Vice President of Finance and Treasurer; Scott Fordham, our Chief Accounting Officer; and Gabe Minority, our Corporate Controller.

The fourth quarter was certainly a busy one for the Company. Efforts were primarily devoted to running our core business, but also very focused on accomplishing the steps necessary to consummate our transaction with Prentiss Properties. We received a tremendous amount of assistance for our employees, and my sincere thanks to everyone for their hard work. It's amazing the number of individuals in our Company that have been working in overdrive for a number of months to make sure that we both achieve the closing and also were in a position to accelerate our integration program. And I want to thank them for their outstanding efforts.

Moving on to results, operationally, the fourth quarter was a good one. Portfolio continues to perform in line with expectations. In particular, occupancy was up slightly to 90.9% from 90.2% in the third quarter. Leasing improved to 92.3%. These results were consistent with our original forecast.

Occupancy levels moved up from the end of last year to the end of this year in our urban and Virginia portfolios, remained flat in our western Pennsylvania operations, and had declines in New Jersey and our northern Philadelphia suburbs.

We also had a very good quarter in terms of tenant retention. The rate for the fourth quarter was 80.5%. More importantly, for the year, we wound up with an overall retention rate of 74.5%, which is very good in terms of our historical averages.

GAAP lease rents and renewals were down less than 1% for the year. We had positive gap renewal rates in the northern suburbs; urban, central New Jersey and Virginia; and were negative in western Pennsylvania and southern New Jersey. As we looked at the year, new lease rents were down about 8%, from a GAAP standpoint, all of our regions were off ranging from close to flat to down to 12% or so in our Philadelphia urban and western suburbs.

Capital trended fairly well for us during the year. We ended with a total cost per lease year of around $2 per square foot, which is pretty much in line with where we were in 2004, but down from where we were in 2003.

So all in all, we're pleased with the performance of the portfolio during the fourth quarter. The results were in line with external expectations. More importantly, as we looked at the performance of the portfolio over the last 12 months, we did perform pretty much in line with what we had originally projected.

Looking at our markets, our pre-merger core markets continue to show some positive momentum in terms of absorption. We have also seen a bit of compression in the amount of time it takes a deal to close.

It also appears as though we're seeing vacancy rates stabilize or come down over a number of our suburban sub-markets. For example, the Pennsylvania suburbs, it looks as though we'll post about 800,000 square feet of absorption during 2005, which is a good trend over last year. Expectations are that in 2006, that will be somewhere between 800,000 and 1 million square feet.

Just as importantly, we've seen a decline in sublease space in some key Philadelphia suburban markets. To give you an example, in King of Prussia, they started the year with about 4.1% of sublease space as a percentage of total inventory. That's down to less than 1% at the end of the year, so about 500,000 square feet of sublease space has been absorbed.

2005 was also a strong year for our Richmond operation. As well as the market leasing improved statistically over 2004, net absorption in the market was about 200,000 square feet, and stable vacancies prevailed. The overall suburban office vacancy rates -- slightly north of 10% for class A space. Our portfolio by contrast is less than 4% vacant.

Looking at New Jersey, in that market, the defense, health care, and mortgage sector continues to anchor the market. But as we're looking out over 2006, rental rates are predicted to decline slightly as some new product comes online. In addition, there are several large blocks of space available that we think will result in our downward rent pressure on the southern New Jersey marketplace.

Contrary to southern New Jersey over central Jersey, up in Princeton, where we have a large operation, despite some buildings coming online, that leasing activity remains steady. We are projecting rental rates there to increase slightly over the near term. And by way of illustration, for deals done in 2005, central New Jersey had just north of a 5% increase in GAAP rents on new lease, and about the same for renewals, which compare very favorably to southern New Jersey, which had a 3% decrease on GAAP rents and flat for renewals. So all in all, the markets appear to be trending in the right direction, but clearly there are some challenges ahead which I'll talk about in a few moments.

Looking ahead and moving on to a more important topic, which is our 2006 forecast -- when we rolled out forecast for Brandywine standalone in October, we did project a range of 2.55 to 2.63. Between then and down, there have been some leasing slides in the Brandywine pre-merger core portfolio, as well as higher-than-anticipated movement in interest rates, which raise the cost of our pre-merger floating rate debt a bit, as well as, as Chris will talk about, the larger-size bond offering we did at the end of the year. So really, those two factors -- interest rates and some minor leasing slides, resulted in a downward revision to our pre-merger base.

With that as a background, we had announced that the Prentiss transaction would be about $0.05 accretive for 2006. That number is still proving to be the case. The major changes that we've seen thus far incorporate about an additional $0.01 on the refinancing of our acquisition term loan. But more importantly is a situation with the sale of the asset in Dallas. And certainly consistent with our strategy of recycling capital in that market, we had a wonderful opportunity very early in the year, and certainly earlier than we had anticipated, to sell Burnett Plaza for $172 million.

It's a great per-square foot number at $168 a foot. It was about a 7.2% cash cap rate. We also did a recharacterization of our ownership position in another small building in Dallas through a joint venture with a tenant. So we achieved close to the aggregate of $200 million of activity in the Dallas marketplace almost immediately following closing.

Consummating these transactions has put the revenue contribution from Dallas at less than 9.5% of our total revenues. And as we mentioned during our investor roundtable meetings during the proxy process, the $200 million target was for the first year. We certainly plan on redeploying those proceeds into our development pipeline that is coming online in early to mid 2007.

As we assessed it, the opportunity to accelerate that process was the right business decision for the Company, certainly consistent with the message we had articulated. But it does have the effect, as you've noticed in the press release, of being about $0.05 dilutive for 2006. And that was the primary and the large driver in earnings revision as we outlined.

We're also spending a significant amount of time an effort to ensure that we handle the integration correctly and efficiently. And those non-recurring costs account for about another $0.01 of the revision. Chris will walk through the numbers in a lot more detail. But I think the mathematical presentation we laid out in the press release is pretty clear.

I think the takeaway point is we had an excellent opportunity to sell Burnett Plaza at what I thought was really very attractive pricing -- clearly occurred at least three quarters in advance of our plan. We're going to be looking to reinvest those proceeds as we ramp up the acquisition pipeline during the course of the year.

Let me spend just a moment or two on our integration efforts, as that's clearly a key topic. The integration process is advancing quickly and very smoothly. Remember, it's only been about seven weeks since we closed the transaction, and tremendous progress has already been made on many fronts. We formed an integration steering committee which consists of both former Prentiss and legacy Brandywine executives, and dedicated a full team of executives to oversee that process.

The mission of the steering committee is to simply direct the efforts of the overall integration, and oversee a number of activities of the various task forces. Task forces have been formed for investment, development, legal, accounting, IT, human resources, and the regions. Each of these task forces are again comprised of legacy Brandywine and former Prentiss employees. Each task force has established 30-, 60-, 90- and 120-day goals. All of these task forces are making significant progress, and all of our 30-day goals have been achieved.

So all in all, we think the integration is progressing very nicely. It's clearly characterized by a "we" approach, not a one way versus the other. And we're really proceeding with -- as we've pointed here, a participatory discipline collaboration to achieve best practices and ensure that each component of our business is analyzed with scalability and efficiency in mind.

Give you a quick example -- our development task force was established. They completed the first range of their duties. Their mission was to develop processes to ensure that development standards, effective cost controls, and development submission procedures are in place across the Company. That task force reported its results. And we're in the process of implementing their recommendations.

We're also assessing our property management, asset management, leasing, engineering and capital budgeting processes. And again, on all these fronts, the process is moving very well.

Overall, I'm very pleased with the level of cooperation, dialogue, and frankly, the enthusiasm for creating a new company that I am convinced will generate significant value in years ahead.

So with that, let me turn the presentation over to Chris Marr to talk about our fourth-quarter results and to walk through our 2006 forecast.

As mentioned, I am going to spend some time discussing our 2005 results, particularly as compared to our expectations when we first introduced guidance in early November of 2004. I will also update you on our fourth-quarter financing transactions and our outlook for financing activity in 2006, as well as to further discuss our 2006 financial outlook.

We met our guidance for FFO per share in each of the four quarters of 2005, including the quarter that just ended. When we first introduced 2005 guidance way back in the fall of '04, we based that guidance on several specific items that we detailed in our release at that time.

The first was our expectation that in 2005, our same-store occupancy would range from 50 basis points positive to 50 basis points negative as compared to our '04 results. As detailed in our supplemental package, our actual results were an average occupancy gain of 50 basis points.

The second item was that our GAAP rents and reimbursements, not including any termination fees, would decline versus our '04 same-store results in a range of 50 to 150 basis points. We were a bit better, at a decline of roughly 13 basis points.

The third item was that we expected same-store expense growth of 0.5% to 1.5%. This one we missed, as our same-store expenses grew 4%. We undershot on both taxes and, more particularly, on utility costs.

The fourth item was an expectation that same-store NOI -- again, absent any term fees -- would be flat to down 2%. Our actual result was a decline of 2.9%, driven by the higher-than-expected expenses.

At the date of that release, our FFO per share expectation for 2005 was $2.45 to $2.55, and our actual results are within that original range.

We had previously issued guidance of $0.61 to $0.62 of FFO per share for the fourth quarter, and our actual results were $0.62 per share. As Jerry mentioned, the quarter was a very straightforward one for the Company. Our positive absorption of 309,000 square feet and our retention of 85.5% were at the high end of our expectations. Capital of $2.16 per square foot per lease year was up from the past two quarters' trend. But as we've often said before, it is difficult to evaluate that figure quarter by quarter.

Our full-year figure of $1.99 compared to a 2004 amount of $1.95. Our CAD ratio at 107% for both the quarter and the year is in line with our expectations.

Our operating expenses in the fourth quarter were a bit higher than we expected, related primarily to snow removal in December, but also related to higher HVAC repair and maintenance cost than we had been previously experiencing. Snow removal, the majority of which we're reimbursed by our tenants, was 1.2 million in the fourth quarter.

As a note, the previously forecast and disclosed 1.9 million non-cash write-off of deferred financing fees in connection with the termination of our old credit facility is included in interest expense for the quarter.

We have had three financing transactions since the third-quarter earnings call. On December 20th, our operating partnership sold 300 million of our 5.625% five-year notes. When factoring in the hedges we had in place, the effective yield on the notes is 5.61. We use the proceeds to reduce our borrowings under our credit facility, and that's reflected in the $90 million balance outstanding at year-end.

On December 22nd, we closed on our $600 million four-year revolving credit facility. At our current rating, the facility is priced at 80 basis points over LIBOR with a facilities fee of 20 basis points.

On January 5, in connection with the Prentiss transaction, we closed on a $750 million, 364-day term loan agreement priced at LIBOR plus 100 basis points, the proceeds of which, along with approximately 195 million of borrowings under our new credit facility, funded a portion of the cash consideration of the transaction. Currently, we have outstanding approximately $223 million on our credit facility. These transactions are reflected on pages 13 and 14 of our supplemental, where we illustrate the pro forma effect on our debt profile of the acquisition.

Our plan is to refinance the acquisition bridge facility utilizing unsecured notes in one or a series of transactions. We have been exploring maturities and investor demand across the yield curve. We would expect the refinancings to take place over the next few months.

At year end, our credit ratios remained in line with our forecast -- leverage levels of 48% and interest coverage for the year at 2.7 times and fixed charge coverage at 2.2 times. Our fixed charge coverage, which includes capitalized interest for the fourth quarter at 2.1 times does reflect as one would expect full interest costs on Cira Centre, with the NOI from Cira in the fourth quarter being very modest, with only the first tenant in the building.

REIT spreads have tightened since the end of last year. However, LIBOR and treasury yields have widened out since we last issued guidance. Five-year treasuries are up almost 50 basis points, and ten-year treasuries are up 25 basis points from their mid-October levels. LIBOR is up roughly 40 basis points from three months ago. While our models factored in a level of rising rates, and we have hedged a portion of our future debt issuances, rates, particularly on the short end of the curve, have moved much higher and more rapidly than our prior forecast anticipated.

We have revised our 2006 financial outlook to reflect the impact actual interest rates have on our previous forecast, clarity on the accounting treatment for certain G&A costs, fine-tuning of the Brandywine standalone forecast, closing of the Prentiss transaction, and the sale of Burnett Plaza.

We thought it would be most clear and helpful for those of you listening to the call if we provided our update under the same construct as we introduced guidance on November 1, 2005. As Jerry mentioned, at that time, we had expected the standalone Brandywine to earn FFO per share of 2.55 to 2.63 in '06. We have modified our operating expectations by $0.01 downward to reflect the net impact of the positive and negative changes to our budget that occurred when we did our internal first-quarter leasing forecast.

We've increased our expected G&A expense by $0.01 a share to reflect the expensing of certain consulting and other integration-related costs that in our original forecast we had not anticipated would hit the P&L. We have increased our expected interest expense by $0.02 per share to fully reflect the offering we did in late December and our revised expectations on short-term interest rates.

Our expected contribution from the Prentiss transaction at that time was $0.04 to $0.06 accretion. Given the uptick in treasuries, we have adjusted our expected permanent financing costs and our long-term plan for the $750 million of term debt, and we now expect an additional $0.01 of interest expense versus prior forecasts. So at the low end of our guidance, we currently expect a $0.04 net contribution from the Prentiss transaction.

As Jerry has also mentioned, we have previously discussed our strategy of reducing our Dallas investment by about 200 million over the course of '06. We have been publicly stating that any FFO impact from that Dallas capital recycling strategy was not factored into the November 1 guidance.

With the sale of Burnett Plaza, we had wonderful pricing and excellent execution much earlier in the year. And the FFO dilution with that transaction is about $0.05. This reflects the removal from our expectations the GAAP NOI for Burnett and the reduction in interest cost reflecting the payoff of the 5% mortgage on that asset and the remaining proceeds paying down floating-rate short-term debt.

Adding up all those pieces, as we put in the table and press release, we are introducing FFO guidance of $2.50 to $2.58 per share for 2006. Risks to that range are primarily related to our leasing assumptions, principally our occupancy expectations remaining in line with current forecasts and our ability to execute our permanent financing strategy in accordance with our plan. Investment opportunities and increased leasing velocity, and certainly any uptick in market rents, would represent opportunities above the low-end of the range. At this point in the year, and having operated as a combined company for approximately 50 days, we are articulating that we're much more comfortable at the lower end of our guidance.

I will now turn the call back over to Jerry.

Looking at our plan for '06, now that Chris has outlined with a high degree of clarity what the quantitative benchmarks are, our business plan objectives are very straightforward, and I think consistent with what we previously articulated.

First priority is to execute the integration process and really make it a tremendous internal momentum builder. It's clearly a key driver in our future success. We're investing a significant amount of time and energy to get it right -- that is, create a framework for best practices that will be scalable, efficient, reflect the impact of new technology, and provide clear, concise directions to all of our employees. As I touched on earlier, that process, I think, is going very well. And I really do appreciate all the effort and the double duty that an awful lot of people in the Company are putting forth to make this project a tremendous success.

Secondly, as Chris touched on, certainly a risk as we look at the business plan for '06 is our leasing velocity. And we are focused on very much meeting our leasing objectives. We remain optimistic, and there is momentum building and positive dynamics in many of our submarkets.

However, the markets generally remain challenging. Conversion of prospects to sign leases, getting through local approval processes, is challenging, and in some cases just plain difficult.

So a major priority for our Company is to continue our long-standing track record of outperforming the markets in which we do business, being very proactive in addressing weaknesses, and taking corrective action to ensure that we are always operating ahead of the curve. When we look at 2006, we have about 10% of our portfolio rolling, and some significant vacancy to absorb.

In the assessing that portfolio and the performance, we do anticipate good performance coming from the Pennsylvania suburbs, including being on plan in Radnor, central New Jersey, the urban operation in Philadelphia County, Northern Virginia, Richmond, Oakland, Boston, and San Diego. Our 2006 rollover in these markets is manageable, and we feel as though we are in a good position to approach our targets.

The challenges or the storm clouds we see are in two of our historically strong markets, Delaware and southern New Jersey, where specific tenant rollover situations and an air of uncertainty regarding some of our tenants' plans are causing some concern regarding retention and absorption. We're also fully evaluating the pipeline of activity and challenges coming from the suburban Maryland operation, and several properties in Dallas. We will continue to work on that and be in a position to discuss at the end of the first quarter during our call.

But the watchword is, as it always has been for our Company, to lease space. And leasing remains a key priority. We have a great team of leasing professionals and business executives who are focused on making sure that we accomplish all of our goals.

In terms of investment and financing activities, I think we're on track on several very, very positive fronts. First of all, our goal is to execute our development pipeline. It's a very important objective, and we have some exciting and very profitable developments under way.

As you know, we're delivering Cira Centre this year, and that has been a success all the way through. The supplemental disclosure lays out that staging in some more clarity to help you with your thought process. The redevelopment of 555 Lancaster Avenue, 500 Office Center Drive, and Springdale Road remain on track and on target.

In looking at our development pipeline, the one that will be fully reflected in our first quarter supplemental package, we have I think some very good momentum building. We have under way Center 21 in Oakland. We're proceeding with Park at Barton Creek in Austin. We have recently announced the commencement of the start at Metroplex I in Plymouth Meeting. 3 Paragon in Richmond is underway. And we will also be commencing a building on our Lenox Drive Park -- 72,000 square feet in central New Jersey. That's a total development pipeline of close to $166 million, or 693,000 square feet.

As we stand here today, those projects are all in a pre-leasing mode. The only property with signed leases at this point is 3 Paragon, which is 35% lease. As we assess the market conditions, both in terms of submarket peculiarities, our own inventory and our projected demand, I think we feel very confident that we will be able to meet all of our leasing expectations on these projects.

We expect delivery dates on these projects ranging from 3 Paragon in June of this year with Lenox Drive, Metroplex, [Ferris Park] and Center 21 rolling in during the second, third, and fourth quarters of next year. We expect initial development yields on these projects to range between 8.25% to 9% on a cash basis, and between 8.6 and 9.5% on a GAAP basis, with the weighted average initial return slightly north of 8.5% going in.

All in all, having an extraordinarily good value creator for the Company and very consistent with our growth plans. A great deal of attention this year will be focused on assuring that we execute and lease this development pipeline.

From an investment standpoint, we also plan on deploying capital into new acquisitions during the year as we identify good opportunities. Our pipeline right now is fairly significant, well over $700 million. And the priorities are simple. Investment allocations that we will make during the year will continue to solidify our submarket presence in both legacy and new market areas. As I mentioned earlier, we had tremendous success in the accelerated achievement of our $200 million Dallas recycling target. That notwithstanding, given the strength of the investment market, we are currently test marketing for sale a number of assets in Pennsylvania, New Jersey, Delaware and Dallas to ensure that we can provide ongoing internal liquidity to fund other growth opportunities and effectively cull properties where we think we have maximized value.

Chris touched on the $750 million unsecured note financing we plan on doing in the first half of the year. So from an investment and financing perspective, it's going to be a very active year for us in terms of executing the development pipeline, recycling and redeploying capital, and doing bond financings. The upper end of our guidance does in fact factor in the results of some partial impact of investment activity.

So to wrap things up, as we sit here seven weeks after the closing of the transaction, I'm delighted with the progress we're making on the integration, truly establishing a common culture. The level of communication between our management team and various functions is outstanding. And I really do remain very impressed with the quality of people throughout the entire organization. And I think that will be a key driver of success for us, and bodes extremely well for the Company's future.

We've also made significant progress on executing a business plan in terms of leasing, capital budgeting, commencing development starts, as well as forming a strong acquisition pipeline to identify redevelopment opportunities.

Our 2006 forecast, as Chris mentioned, has a high level of clarity to how those numbers were developed. Certainly the slippage due to interest rates, some modest leasing slides, while they're clearly an expected part of our business is still disappointing, and we're working hard to make up lost ground. I do believe that the decision to sell Burnett Plaza earlier rather than later was the right decision for the Company, even though it had a short-term dilutive effect. It was the correct real estate call, and I think sends a very positive message that we're serious about undertaking recycling capital and positioning the Company for stronger, longer-term internally funded growth.

So with that, I appreciate your taking the time to listen to the call. And we would be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS). Jordan Sadler, Citigroup.

I'm here with Jon Litt. My first question just relates to what's implicit in the guidance from the $0.04 contribution you're now anticipating from Prentiss, in terms of let's say leasing and occupancies, as well as maybe expense growth?

Thanks for the question. As we outlined in the release, the implicit expectations on the assets being acquired from the Prentiss merger is property level -- average occupancy growth from year end '05 levels in the 2.5 to 3% range; cash rents to decline in the 3 to 7% range from their previous levels; and operating expense margins on that portfolio to remain fairly consistent with the levels they would have achieved, or did achieve when they were managed and operated by Prentiss.

You don't think there's going to be greater expense pressure, for instance, on the operating side, either for utilities or the things you're starting -- or leasing costs, for that matter, like you're seeing in the Brandywine portfolio?

I think -- let me try to restate what I just said. When we looked at the operating expenses, the margins staying relatively in line with where historic Prentiss would have been, and certainly factoring in some level of expense growth for utility costs, primarily.

During your commentary you talked about test marketing some of the Pennsylvania, New Jersey, and Dallas assets for sale to continue to fund some of your internal cash flow needs. Could you talk about maybe what kind of volume we might anticipate in timing and maybe pricing?

What I think we're looking at right now is a range of around $150 million. As we look at everything that we're test marketing right now. And they range from a couple properties in the Philadelphia suburbs that we just don't see we're getting any synergies from, and we are in a good position on it from a leasing standpoint. A couple buildings over in southern New Jersey, which again have, I think, maxed out in terms of value for us, and two buildings down in the Delaware marketplace.

And I think pricing we're looking at is actually somewhere in the -- call it 7 to 8% range. We're still in the process of testing the market, as they say, on those. But my expectation is that they would be -- if we do get optimal pricings, things would happen later in the second, third quarter type of activity.

Have you included those assumptions in the guidance as well, or should we expect additional dilution if you do close the full 150 million?

We have not factored in any dilutive effect from any of those sales. And I think they're -- as we look at them, frankly, they're certainly smaller bites than we experienced at Burnett. And we're pretty confident that as those smaller sales would occur, that, given the pipeline of transactions we have right now, which I mentioned is about 700 million, that we will be able to effectively swap assets and improve quality and long-term income strength.

I might have missed this, because I was on another call. How quickly do you think you can get the Dallas proceeds reinvested?

We're looking at trying to do a portion of it sometime midyear, probably rolling into the third quarter. And as I did mention, Jon, one of the opportunities we saw with the sale, as we talked about on some of our investor presentations, was that recycling the Dallas assets was going to create some additional future capacity for us to fund out the 165, $166 million development pipeline that starts to phase in later this year and into early '07.

So are you assuming downtime and some sort of a negative spread?

We did. I think that's factored into our guidance.

And what's the negative spread?

Factored into the guidance was basically the full $0.05 of simply taking the Burnett NOI out of the assumption and using the proceeds to pay down the mortgage on that property, which was at 5%. And the balance of about 58 million was used to just reduce short-term borrowing.

Okay, so then when you reinvest it, in theory, there will be a little bit of a pop the other way.

The cap rate from a cash standpoint on Burnett was just north of 7%. From a GAAP standpoint, it was a little bit north of 8%

What's the balance you have in Dallas -- value?

The value we have down in Dallas right now is about 9.5% of our revenue stream. The total value, I think, is about $350 million or so.

Do you think you will be out of that by year end?

Well, I think we're going be test marketing properties, as we are with some of the other markets. But I think what we've said, John, and the direction we're moving in is that our first-year target was the $200 million. We've done that three quarters in advance, and I think we're going to -- [this would do] our number by the markets, test market some of those assets for sale or recapitalization.

I think it's the 7-Eleven asset or something that might be the most difficult given the occupancy there?

I think there's a big roll coming up in the first quarter of '07. And frankly, as we look at it, it's very, very high quality. The investment base is very attractive. There's some very good leasing activity on some of that space that's churning. So even with that role, and given our investment base and the future profitability coming from that building, we think that may actually be a good asset to either look at a partial sale or recapitalization over the next twelve months.

On the additional 150 in sales you expect to do, is that going to be at a wash in terms of cap rate, in terms of the investment, or is there a negative spread there?

I think our expectations on those is that we'd be close to a wash.

And any further thoughts on exiting California?

No further thoughts on that.

Ross Nussbaum, Bank of America.

It's John Kim with Ross. Just to follow-up on the last question, is Cityplace Center in your $200 million asset sale guidance in Dallas for the year?

It is not.

And Jerry, can you provide some more color on the leasing slides that you foresee? I think you said Delaware and southern New Jersey -- these were stronger markets for you historically. Why are these markets potentially turning around and being disappointing for you?

Well, "disappointing" may be too strong of a word. But I think we have -- what we're looking at for '06 in both Delaware and southern New Jersey, we had a couple larger rolls coming up. And the feedback we're getting from some of those larger tenants in some cases precludes they don't plan on staying. And in a couple other cases, they're equivocating on -- their previous guidance was that they would stay.

So I think as we look at Delaware, I think it's a very good long-term market. We simply happen to have -- a couple tenants who are individually 50 to 80,000 square feet that looks as though they may not be staying with us. So clearly, we're scrambling to make sure that we can, number one, resolve whether it's a go, no-go for them, and then to clearly focus on what we can do to backfill that space.

Heretofore, certainly for the last three or four years, Delaware has been an extremely stable market for us. It was anchored by JPMorgan Chase in about 600,000 square feet; Computer Sciences Corporation in over 100,000 square feet. So we really had very little variability to our income stream in that market.

This is really the first year, 2006, where a couple larger tenants again have expiration dates at various points in the year. And there's not a high level of clarity on what they plan on doing. With some, there is. They have indicated they plan on moving out, and that's it.

I think over in southern New Jersey, there's been a slowdown in job growth in the last year or so. There's been a couple of new projects that have come online. There's been some retraction by some existing tenants -- I say existing tenants in the marketplace, not necessarily ours. And I think that's going to create for the first time in a couple years some downward pressure on rents in that market.

We, again, unfortunately have a number of tenants who are rolling in New Jersey during '06. So I think at this point, we're being fairly cautious on what our level of success there will be.

When you say Delaware, do you mean downtown Wilmington or suburban Delaware markets?

Actually, the bulk of our concern -- it's actually pretty much equally split. We have Delaware Corporate Center with a couple of larger tenants. We have a building in downtown Delaware, 300 Delaware Avenue, which has some rollover coming up, and a couple other suburban properties there that have the same dynamic as Delaware Corporate Center.

Your tenant improvement costs have historically been lower than Prentiss's portfolio. And some of this may be due to the markets, but some of it may also be due to your higher retention rate that you have historically had. How comfortable are you with maintaining or bringing up the retention rates in the Prentiss portfolio that you've acquired?

I think at this point, we're feeling pretty comfortable with the assumptions that are in the financial model. And I think there will be a transition period where we will see how far we can move that percentage up. I think the Prentiss number was 58% for the fourth quarter. As Chris mentioned, we were 85%.

So I don't think that's going to happen overnight. But I think through a combination of completing the integration process, getting to know each other, certainly adopting a common philosophy on how we approach certain tenancies, our expectation from the beginning and remains that today, was that we will be able to migrate that up over time.

Can you also provide an update on the joint venture potential at Cira Centre?

Nothing specific to report. We, as I mentioned on the last call, were looking at end of the first quarter, beginning of the second quarter as the timeline for us to begin to assess the right long-term financing strategy for that property. I think we're on track with that, but don't have anything specific to report. I think we'll -- certainly in the next month, rolling out into midyear, be talking to a number of institutions have approached us, but we really haven't pursued it too diligently -- about what their thoughts are in terms of that project. We also continue to look at some other things in University City which may fit into that framework also.

Final question for Chris -- this is an accounting question, I guess. But in your discontinued operations this quarter, the assets they are classified as discontinued operations. Is that just the Chicago asset that you've acquired from Prentiss, or are there other assets in there?

For the quarter, we actually don't have anything, I hope, listed as discontinued operations. We had some things during the year of 2005. So for the quarter, we had nothing. For the year, we had some things that were in that bucket and in that page in the supplemental. The Chicago assets didn't become ours until January (multiple speakers)

David Fick, Stifel Nicolaus.

John Guinee here. A couple real quick questions, which would then necessitate quick answers. Burnett Plaza -- you obviously underwrote that deal pre-merger. Your proceeds -- how does that compare with what you thought it was worth when you bought the Prentiss portfolio?

A pleasant surprise.

Great. Second, you went to great lengths as to -- this is $0.04 FFO accretive. What do you guys think it is on a CAD or a FAD basis, the merger, for the first year -- accretive or dilutive?

The straight line rent reset in that portfolio, as we articulated back on October 3rd, is $9 million. So kind of take that on the math.

How about TIs and leasing commissions?

I think to some degree, that's going to be a function of what happens with the number of tenants that are renewing. When we take a look at some of the submarkets in the former Prentiss portfolio, their renewal capital costs aren't too far off what we've experienced. I think the variability, John, frankly in those markets, just as it is in our markets -- the legacy markets is on the newer deals, the new leases, you tend to have a lot more money in capital.

So we've been blessed with having this very high retention rates, which have on a weighted average basis kept our capital costs very low. I think as we start to look at the framework in the different markets, our expectations -- hopefully those two will converge sooner rather than later. But there's no question as we look at it and underwrote it, the capital costs on a per square foot, per lease year for new leases was higher in the Prentiss portfolio.

Okay, last question. For the new co, who is on the investment committee, what level deals are going to your investment committee, and how often are you meeting?

The investment committee -- the driver of that was the pipeline process, which is underway and in process. We will have meetings/calls on a weekly basis to review the assessments. There are in addition to Tom August, Bob Wiberg, and myself, there are three other executives from the Company on that committee.

Chris Haley, Wachovia Securities.

It's [Brendan Marunna] with Chris. I was wondering -- I may have missed this, but wondering about your same-store NOI expectations for '06, and if you could provide some color on the Brandywine same-store expectations versus the Prentiss same-store expectations?

As we look at the Brandywine same-store portfolio, as we articulated in the release, essentially seeing a slight decline in net operating income, and average occupancies unchanged to as much as a 1% increase. So call it right down the middle -- about a 50 basis point expectation there, and from a GAAP perspective, that topline rents and reimbursements actually being up around 1.25% over the '04 results. Clearly, the decline in net operating income reflects higher operating expenses as we guided the latter part of '05, and we expect to continue into '06.

On the Prentiss portfolio, to us, the entire portfolio is how we looked at it, not trying to bifurcate between their historic same-store and what we've blended into Brandywine in early January. I think on that portfolio as a whole, we articulated occupancy growth on average in that 2.5 to 3% range, and their cash rents on that portfolio to decline, in that 3 to as much as 7% range.

So would you be able to characterize the leasing environment for the Brandywine portfolio versus the Prentiss portfolio, or are they about equal?

Clearly, as we went through the various PowerPoint presentations in our travels back in the fall, and as we have articulated the guidance, the occupancy expectation and the growth, particularly in the northern Virginia area, is at a faster clip than what we would expect to get out of the core historic Brandywine portfolio.

Looking on page 15 of the supplemental, the leasing activity -- it looks like the rent growth in the most recent quarter was a bit below where it had been for the previous three quarters of '05. And I'm just wondering if there was anything unusual in the quarter.

The Brandywine -- again, this is -- as we said, it's awful difficult to look at some of these statistics on a quarter-by-quarter basis because it relates to the specific deals, and then just the general overall volume of activity that takes place within that quarter. Our GAAP rent growth on renewables had essentially been in that kind of flat to 1% down range as we had looked at how we saw the year coming together. And for the year, it was on a GAAP basis down 0.8%. On a new lease deals, we had all always been in that -- call it down 5 to 10% range. And for the year, we came in at down right around 8%. So I'm not sure I would look at that and try to derive anything on a quarterly basis. I think as we came in for the year, it was right in line with where we thought it would be back in October.

[Eduardo Abresh], Millennium Partners.

Just a quick question. In terms of your guidance and the tenancy we're seeing in -- I think it was South Jersey that you're not sure if they're staying or not, are you being conservative with those leases? Are you thinking they might leave, or that they might stay? What is in guidance?

I think our guidance is very reflective of the most recent information we have. So if our information from the tenant is that they will be moving out, then it clearly indicates that they will be moving out. Then really the dilemma was how long it will take to lease up the space they leave behind.

If we're frankly getting mixed signals from the tenants, then that really is a very tenant-specific situation. We know some tenants will have a higher probability of staying in the space, even though they may be expressing some equivocation now, where we believe that some other tenants, whether there is a corporate push on to do a consolidation, relocate out of the market, their demographic of their commuting base or their employees has changed -- where we thought that the tenant had a higher probability of moving out, our numbers do in fact reflect that moveout at this point.

Last, I think you said rent -- marked-to-market on leases coming due in '06 -- could you just repeat what that was on a GAAP or [cash]?

Continuing the expectation we had in '05. So on renewals, flat to down 1 to 2%, and on new leases, down -- call it in that 5 to 8% range.

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

Thank you, and thanks to all of you for participating on the call. And we look forward to our first-quarter call in April. Have a great day.

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