Brandywine Realty Trust (BDN) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Brandywine Realty Trust first quarter earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. Prior to turning the call over to Mr. Jerry Sweeney, please let me read the following disclaimer on behalf of the Company.

The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words "anticipate," "believe," "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 assumption 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 our Annual Report on Form 10-K for the year ended December 31, 2005. A copy of which is on file with the Securities and Exchange Commission, including our ability to release vacant space and to renewal or relet space under expiring leases at expected levels; competition with other real estate companies for tenants; the potential loss of bankruptcy of major tenants; interest rate levels; the availability of debt and equity financing; competition for real estate acquisitions and risks of acquisitions, dispositions and developments, including the cost of construction delays and cost overruns; unanticipated operating and capital costs; our ability to obtain adequate insurance, including coverage for terrorist acts; dependence upon certain geographic markets; and general and local economic and real estate condition, including the extent and duration of adverse changes that effect the industry in which our tenants compete.

For further information on factors that could impact us, please reference our additional filings with the SEC. We are subject to the reporting requirements of the Securities and Exchange Commission and undertake no responsibility to update or supplement information discussed on this conference call. 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 first quarter earnings call. This is our first quarterly conference call since the closing of the Prentiss transaction. And we look forward to providing you with an overview of our first quarter results, updating you on our business plan, market conditions, and integration activities. Participating in today's call, with me are Chris Marr, Chief Financial Officer; Bob Wiberg, our Executive Vice President; George Johnstone, who's our Executive in charge of our Integration efforts; Tim Martin, Vice President of Finance; Scott Fordham, our Chief Accounting Officer; and Gabe Minority, our Corporate Controller. Prior to getting started let me just mention that we made some changes to the supplemental package. The objective was to begin to provide a tracking mechanism for an interim comparison between the legacy portfolios, identify some additional components of our growth model, and lay out some additional operational and financial disclosures. In addition, given our land inventory and development pipeline we also incorporate a schedule which captures our future development and earnings growth potential on a value creations schedule. We would anticipate that we would continue to make some additional enhancements to the package over the next several quarters.

The first quarter was a very productive one for the Company. Our integration program continues to proceed on schedule. At the same time, however, and probably more importantly, we continue to focus on running our core business and implementing a business plan that will generate significant results as we look forward to later 2006 and into 2007. From a financial and operational standpoint, the first quarter was a good one. The combined portfolio performed well and with our expectations. In particular, occupancy remained at 90%, leasing at 91.7. Occupancy levels that moved up from the end of the year are our Western Pennsylvania suburbs; Richmond, Virginia; Northern PA; and Metro D.C. portfolios. We studied a performance in Oakland, Boston, New Jersey, and our urban operations. We also had a very good quarter in terms of tenant retention. We [ended] the quarter at 78.3% and had a net absorption through the portfolio of over 100,000 sq. ft. The rental rates are identified in the supplemental package. And you can see that we wound up having a net increase in GAAP rents on renewals, but continued to experience negative growth on a cash and GAAP rate for new leases.

Generally though, leasing performance has improved quarter-over-quarter. Looking at some of the specific metrics, we posted positive GAAP rental rate growth on renewals of 0.6%, and that covered about 890,000 sq. ft. and was broken down to a negative 2.1% in legacy Brandywine and a positive 5.4% in legacy Prentiss. The markets with positive GAAP growth rates on renewals were New Jersey, Richmond, Mid Atlantic, and Northern California and the Southwest, and were slightly negative in the Northern and Western Pennsylvania suburbs and our urban operations. From a cash standpoint on renewals we continued to experience negative cash adjustments in segments of the legacy Brandywine portfolio, particularly in the Pennsylvania suburbs, but did experience a positive cash flow on rate growth in the legacy Prentiss portfolio of 3.1%, particularly in the Mid Atlantic and Northern California markets. During the quarter our leasing team did 116 total of deals across the entire portfolio, with about 25% of the square footage of those deals done on a direct basis, which really reinforces the strength of our leasing and tenant service teams. The breakdown of transactions was 38% of our square footage were renewals, 45% new leases, and 17% were expansions and relocations within our portfolio of our existing tenant base.

Capital costs for the quarter were $2.88 across the portfolio. A bit higher than our historical run rate. The breakdown numbers was a bit interesting. The legacy Brandywine portfolio actually encountered higher than normal CapEx costs primarily due to the execution of several long-term, fairly capital, intense of leases in our Pennsylvania North, Pennsylvania West, and urban operations. But the mix of activity also changed and that probably impacted the capital numbers the most. For example, in the quarter in our Northern PA and Western PA suburbs, there was a much higher percentage of new leases as a percentage of total activity, compared to our historical run rate. In the Northern Pennsylvania suburbs to illustrate that, we did 71% of our transactions were new leases versus a 2005 full year average of about 24%. And we also just about doubled that same ratio in our Pennsylvania Western suburbs. As you know, we typically experience higher costs on new leases and having a higher percentage of new leasing activity versus renewals this quarter skewed our bottom line capital costs. In addition, the duration of some of those leases, which were fairly long-term in nature, consisted of some higher leasing commission costs which also contributed to the higher-than-normal run rate. The good news, however, is that leasing activities is picking up. In the legacy Prentiss portfolio capital costs were actually below their historical averages, particularly in the Mid Atlantic and Northern California marketplaces.

From an overall standpoint we posted FFO of $0.59 per share, which was $0.02 ahead of First Call consensus. There were several contributing factors and Chris will talk about them in more detail. Also as we indicated in the press release we are reaffirming our 2006 FFO guidance. We do have some leasing activities to achieve but at this point we are comfortable with hitting those targets. Cira is ramping up with the occupancy schedule to occur on a fairly rigid basis. Radnor projected occupancy increases are on track and we continue to see more activity throughout all of our properties. Operationally, the portfolio performed in-line with our expectations. It's actually been a very encouraging quarter for us in that the run rate through this combined company was very consistent with what we had projected at the end of the year. We had below budget expenses, at this point remains to be seen, but that's a trend or an aberration. And also our G&A run rate, excluding the first quarter integration items, as Chris I'm sure will touch on, came in-line with our original forecast.

To spend a few moments on the market it's fair to say that we continue to see an increase in activity in all the markets in which we do business. From an overall leasing standpoint we, as I mentioned, we had positive absorption throughout the portfolio. But the portfolio itself was fairly active in terms of new leasing activity at 350,000 sq. ft. and about 890,000 sq. ft. on renewals on just our in-service assets. More importantly then the quarterly activity, we also estimate that the rental trend is up in Central New Jersey, the Pennsylvania suburbs, our urban operation, Richmond, Metro D.C., Northern California and Austin. We expect rental rates to be flat or slightly down in Southern New Jersey and suburban Wilmington. We continue to outperform market occupancy levels in all of our markets and all of the markets are experiencing a decline in vacancy rates, lower unemployment rates, strong job growth particularly in Metro D.C., Northern California and Austin. Also another encouraging sign is that in addition to these positive dynamics all of the markets say Wilmington had positive absorption during the first quarter.

The integration program is proceeding according to plan and is clearly a significant undertaking. As I briefly mentioned in our last call we have a dedicated team working on task forces led by George Johnstone. Some of the key highlights during the quarter are that we had 650 tasks identified and approximately 60% are complete. We have 14 task forces in full operation comprised of 99 employees or about 15% of our total employee basis touching different parts of the integration process. Those task forces are analyzing different parts of our business and are well into the process of identifying best practices that will create a much more efficient business platform for the Company. And all of the task forces at this point are on schedule with their own business plans. So all-in-all we have and continue to make critical decision points on a number of functions. The feedback of traction and cooperation through the entire organization has been wonderful and reflects the emergence of a strong culture that will continue the value-added traditions of both legacy companies. On those positive notes I'd like to turn the presentation over to Chris. Chris?

Thanks, Jerry. Well it was in fact a wonderfully productive quarter. From a financing perspective we completed our $850 million bond offering in late March. The components of that offering were a $300 million 2012 maturity at an effective yield of 5.77%. A $250 million 2016 maturity at 5.95. And a $300 million floating rate 2009 portion of the transaction callable at par in six months that was priced at a spread over LIBOR of 45 basis points. The spreads on the six-year deal were at 107 over and on the 10-year deal 134 over. So we believe we had wonderful execution. We tapped into the market at a very opportune time for the Company. The bonds have traded well, performed very well in at a secondary trading immediately following the offering tightening by about two basis points. We attracted a wonderful blend of new investors and core Brandywine account holders, and in effect turned out the bridge facility we had used to close the Prentiss transaction in early January of 750 million, as well as reducing our credit facility outstandings. So we have met our capital needs for the balance of the business plan for 2006. So at this point we have no need or plans to go back into the market for the balance of the year. Floating rate debt at the end of March at 16% of our total debt is a range of which we are comfortable with today. Our target is to maintain that ratio in the teens as we have over the past several quarters. Built into our forecast for the balance of the year and our reaffirmation of guidance are realistic increases in LIBOR for the balance of 2006.

During the quarter we sold seven assets in Chicago that were unincumbent, Burnett Plaza in Dallas, as well as doing a call center JV in Dallas with IBM, and we used the proceeds from those transactions to repay our credit facility, the balance of which is $100 million at March 31. As a reminder, that facility has a capacity of 100 million and matures in December of 2009. The $114 million mortgage on Burnett, that went to the buyer of that property. Leverage at March 31, and this is a conservative way to look at leverage because it includes all of the debt from the consolidated joint venture assets, is at 51% of gross assets. And coverages for the quarter, interest coverage at 2.25 and fully loaded fixed charges at two times, both of which include our share of the joint venture interest expense, are in-line with our forecasts. As a note, and for those of you who follow us intently on the fixed income side know those coverages include the interest related to Cira and our other development projects, as well as our lease up assets. So they're at the low point in the cycle where we have projects like Cira almost fully funded but do not have the stabilized NOI yet. Our forecast at fully loaded fixed charge coverage in Q4 is more in-line with the 2.15, 2.0 two times.

From a P&L standpoint, I guess I'll call them interesting facts about the quarter -- I hope they're interesting. Four days of results for legacy Prentiss are obviously not included as we closed on the transaction on January 5. So for the second quarter will be the first time we'll actually have a full quarter of legacy Prentiss included in our results. The discontinued operations reflects the Chicago assets sold during the quarter, Burnett Plaza until it was sold during the quarter, and a full quarter of operations for the remaining ABP joint venture asset held for sale in Chicago, which is referred to in the supplemental as 220 [Cabot] Drive. The other ABP JV assets besides Chicago in which we own a 51% interest are consolidated on our books and their results are reflected at 100% with the minority interest reflecting our joint venture partner's 49%. The call center with JV with IBM which is a 50/50 deal is consolidated on to our books, the legacy Prentiss Broadmoor joint venture is shown on the equity basis and all of these accounting treatments are consistent with the methodology that was used for Prentiss financial reporting.

G&A a good way to look at that run rate in G&A is as follows: The actual first quarter of G&A of 8 million 490 includes the approximately 1 million of integration, consulting and other expenses that we discussed in our fourth quarter call. That will be nonrecurring, so we can subtract that out. In addition, for the legacy Prentiss employees who stayed with us for a portion of Q1 as transition assistants, their comp and benefits that will not repeat in the future as they have transitioned out by March 31 was an additional approximately $300,000. So our run rate into Q2 is the 8 million 490, less 1 million for nonrecurring integration costs, less the 300,000 for transition employees are roughly 7.2 million which gets you to our underwritten run rate net of synergies of roughly 28.5 million. As we move through the year we continue to expect to realize additional synergies, but they are difficult to forecast out at the moment into Q3 and Q4 at this time. Other income, we do continue to believe that the third-party fee income expectations that we previously articulated continued to be accurate and reflected in our results. So the other income run rate going forward should continue in that 6.5 to $7 million per quarter range. Our underlying operating assumptions regarding the property results for the remaining quarters of 2006 remain consistent with prior statements and we continue to be very positive about our leasing opportunities for the balance of the year.

In terms of the first quarter exceeding expectations, as Jerry mentioned it was a host of small items that contributed to the positive results. The core property results were in-line with our expectations. We did have some positive GAAP contributions from the final purchase price allocations. Weather, it was warmer in this winter than it had been in the past, so we did have some lower snow removal expense then we would have budgeted. Chicago, the ultimate timing of the dispositions ended being a small positive to our forecast in Q1. The bond offering, the timing of the offering, it essentially closed right at the end of March, our interest costs were lower during the quarter than we would have forecasted originally as a result of that timing. Our 2006 guidance is unchanged except it now reflects the expectation that we'll be a net seller of 150 to $200 million of assets. Effectively, the $2.50 floor is in fact a floor as we look at our complete business plan for the remainder of the year. Q2 at a range of $0.58 to $0.60 of FFO per share, it reflects the negative impact on the full quarter, or the run rate from the first quarter of the bond offering, the sale of Burnett, the sale of the Chicago assets, and the positive impacts of our lower G&A, and the core property leasing activity. So at this point, I'm sure there's many, many questions that folks will have when we get to that portion of the call on our first quarter reported results as a combined company, but I'll turn it back over to Jerry to wrap-up from here.

Thank you, Chris. Let me spend a few moments if I may speaking about our business plan for the balance of 2006 and into 2007. First of all, all the key opportunities we identified as part of the Prentiss transaction are in the process of being harvested or implemented. Several key points highlight our business plan and position the Company for, we think, some significant growth. First of all, we've achieved all of our stated objectives regarding embarking on our development pipeline. At this point we have 960,000 sq. ft. under development at a total capital -- projected capital cost of about $250 million. These developments will be high-quality, value-driven additions to our existing portfolio. We are projecting an average initial development yield in these projects between 8 and 9%, with overall development yields between 9 and 10%. Far superior than those you would find in the average marketplace today and given their projects quality, their in-fill market positions compared to the rest of our portfolio, we believe these positions come -- we believe developments position the Company for some significant growth.

The rehab program is moving on track. At the current time we have three properties in the rehab aggregating 400,000 sq. ft., but with projected returns between 8 and 10% and a total capital cost of $43 million. So between our development and rehab projects we have a $300 million development pipeline or about 5% of our asset base under development. From an overall standpoint it's important to note that this development pipeline along with Radnor lease-up assets, Cira and our land inventory we have about 15% of our portfolio either under development, redevelopment, lease-up asset, i.e., in the value creation phase of their life cycle. Certainly any development -- any undertaking on development in a time of rising labor and construction costs creates some exposure. To mitigate this all of our development projects are proceeding under fixed price construction contracts or guaranteed maximum price contracts. So our exposure to photo construction cost fluctuations have been significantly mitigated. We made note in the supplemental package two of the projects construction costs have gone up. Those increases are primarily related to above budget TIs that will be annualizing in the rental rates from the employees -- or from the tenants.

As Chris touched on, we completed our balance sheet program as far as the Prentiss transaction and sit here today with minimal exposure of floating rate debt. Our goal is to keep the floating rate debt less than 20% of our total debt. And for 2006, just to amplify one of Chris' points, LIBOR would have to raise above 5.55% prior to having any impact on our earnings model for this year. And at that point, every 20 basis points of an increase above that level would cost about $0.01, and that could fall on an annual basis. So we have a good margin built into our floating rate debt assumptions for the year. We have good financial capacity under our line, as well as having an active investment program. And on our investment program, we've been actively recycling capital. As you well know, we're ahead of our sale projections. We met first year projections that first quarter by the Dallas activity, which Chris talked about, in addition to that, we are currently under a letter of intent advance negotiations for about $70 million of additional properties in Dallas. We would expect that if those transactions progress they would close late in the second, early third quarter. So our Dallas recycling program continues ahead of pace and we remain comfortable that the pricing achieved is in-line with our original expectations. Dallas is currently about 9% of our revenue base and if these sales close that percentage will be further reduced to be less than 7%.

From a broader standpoint though, the investment pipeline remains very strong. We are actively evaluating over $600 million of transactions with a steady flow behind that. Our acquisition priorities remain active to in-fill our market positions and that strong growth characteristics. Targeted both is our Metropolitan D.C., Northern California, Austin, as well as continued consolidation in our core Philadelphia regional markets. The challenges that pricing pressures and the lower cap rates and aggressive underwriting are really conspiring to present acceptable deals from surfacing. We will continue to ferret out acquisitions that fit our objectives, but are not driven to meet any volume target. In addition to accelerating our program in Dallas we are also undertaking a program of calling out nonstrategic assets in our other core markets. In particular, we have expected to dispose about $50 million in assets in our core legacy Brandywine markets during the second early third quarter, as well as test market approximately another $50 million of properties. As Chris touched on, our guidance incorporates between $0.015 to $0.02 per share of potential dilution relating today the net seller of properties ranging between 150 to $200 million. From a leasing standpoint we will continue to take advantage of what we see to be improving market conditions by having aggressive leasing programs. Our leasing teams are fully aware of our objectives of accelerating absorption and remain focussed, knowledgeable about our competition and market conditions, and are driven to execute all of our leasing programs.

As a final point you may have noticed on our press release that we increased our share repurchase program to 3.5 million shares. That action recognizes the underperformance of our shares, their significant discount to [NEB] and the relative yield comparison to our peers. This share repurchase program will dovetail with our development acquisition program and provide us a full range of viable capital deployment options. The share repurchase program will be executed in the context of our long-term focus on continuing to improve our credit profile, but first things stock at the current trading levels is a economic equivalent of buying assets at close to a 9% cap rate. So we would expect to implement this program in the very near future. Looking ahead for the next several quarters, we anticipate the continuation of the on track progress of our integration efforts, improving fundamentals through our markets, on budget, on time progression of our development projects, and an active asset sales and capital recycling program. All-in-all, we're very pleased with the first quarter results, the progression of our business plan, and the outlook for the balance of the year into 2007. Thank you for joining us on this call. And Alice at this point we will open the mike up for questions.

[OPERATOR INSTRUCTIONS]. Our first question is coming from Jordan Sadler with Citigroup. Please go ahead.

Hi, I'm here with Jon Litt. The first question regarding the guidance, and maybe you can maybe point me in the direction. It looks like beyond 1Q and 2Q at this point, or at least the guidance you're providing for 2Q, the ramp in the second half would have to be pretty significant to get to the mid point. You would have to go from the $0.59 you would expect, you did in 1Q and your expecting for Q2 to something like $0.68 a quarter in 3Q and 4Q. Can you just walk me through some of the things that would get you there?

Sure, Jordan. It's Chris Marr. It's a very good question. As you look into the third and fourth quarter, also call it $1.19 kind of first two quarter number, you can have a couple of things occuring. One, you're going to have the contribution in Q3 and Q4 from the Cira Centre, as well as from Radnor Financial lease-ups. So you will have very positive contributions in both of those quarters from those two large projects. You're also going to have the positive absorption in Q1 and Q2 from the legacy Brandywine portfolio and also from the legacy Prentiss portfolio where we do see a ramp-up in occupancies in the latter part of Q2 and particularly into Q3, which certainly helps feed into the fourth quarter. G&A, as I talked about, you're at a high point in Q1. You'll see that come down in Q2 and we do expect that we'll be able to articulate more savings in Q3 and Q4.

And I think lastly -- so if you look at all of those things and then the last piece would be as we articulated back when we originally provided the guidance, our expectation on things like termination fees and nonrecurring that they would have been in-line with what the legacy Brandywine portfolio would have had. And if you think about last year that number legacy Brandywine let's call it $5 million or so. So translating that on the new share count it's in that kind of $0.05 range. So somewhere between $0.05 and $0.07 of those kind of items we've yet to realize any of that. I think in our forecast we continued to have visibility to that kind of a number. So when you add all those together I think you're kind of up above the 250 mark into the 252 to 253 kind of range and then we bake in the fact that we do expect to have these dispositions that get you to the lower end. To get up into the higher end, essentially we're going to have to see much better than our conservative expectation on synergies, as well as more accelerated leasing.

Okay. In terms -- what's the contribution? Can you quantify from Cira and Radnor in FFO?

Well, I think if you go to the page in the supplemental that has the leasing ramp-up, we've talked about ramp levels there in kind of mid 30s --.

Sure. But I just mean in terms of FFO contribution in the second half of the year, you think that's a couple of pennies?

Oh, sure. I mean, you've got tenants that are just coming in in the first and second quarter. So most of that occupancy occurs in the latter half of the year. If you think about Radnor you're really -- you're booking all the expenses plus the carry-on Radnor, nothing is being capitalized, so all that leasing is a positive impact directly to FFO.

Okay. And then if you put the sales into the guidance at 150 to 200 and you're expecting, I guess, some dilution potential. What were the offset that kept it --?

I mean the offset was essentially the two [said] beat in the first quarter.

Which was driven by what?

Whole host of factors, lower-than-expected expenses, Chicago being in there for a little bit, Burnett timing on that sale, the bond offering, et cetera. So on an annual basis we're starting off $0.02 ahead of where we thought we were going to be. Essentially we can absorb that through the disposition.

Okay. And then in terms of buybacks, maybe you can give us some color how you would weigh buybacks versus additional acquisitions or debt repayment?

Well, I think in terms of the buyback program itself, I mean I think given where the pricing level of the stock is, as I mentioned in my commentary, it's a pretty good bargain right now with no execution risk. I think in terms of how we evaluate that relative to specific acquisition opportunities it's really going to depend, Jordan, on the characteristics of that opportunity; whether it's -- we think it has high growth potential; whether we think we can move up ranks in the joining properties like we did with the one Paragon acquisition earlier this year; whether it creates a better net management efficiency for us. And we'll take a look at all the different component parts of that acquisition opportunity not just to going in return and compare that to what we think we can get from buying back the stock.

Do you think that will be done in a positive spread relative to your dispositions?

We do.

Neutral to slightly positive. [multiple speakers].

With the cap rate on dispositions?

I mean I think GAAP cap rates are in the mid 7s.

Yes, I mean if you took a look at what we've put forth this year between the Dallas recycling and the success we've had on some of the legacy Brandywine we're in the mid 7% cap rate range.

Okay I'll turn it over. Thanks.

Thank you. Our next question is coming from Ross Nussbaum with Banc of America Securities. Please go ahead.

Thank you. It's John Kim with Ross. Just a follow-up question on the share repurchase program. It sounds like if you're going to be buying back shares and then apply a 9% cap rate that that should be accretive to your earnings. So my question is how does it effect your guidance at all? If you decide to get that earlier?

I think if we decided to do that -- I mean that's, again, encompassed within the range. So as you move up from the low end of the range additive to that would be the positive FFO impact of the buyback.

And you plan to fund that with the line of credit or is that just dependant on asset sales?

Yes, I mean ultimately asset sales, the timing, obviously dollars are fundable and it could be a near-term use of the credit facility and then the facility is paid back from the sale of assets.

Okay. Regarding your new development in Herndon, can you talk about the tenants that you're focusing for leasing of that asset and as far as what industry they're in and where they're coming from?

Sure. Bob, why don't you take that.

That market is still dominated really by the defense contractors for the technology firms and I think that's still the base that we're going to see. If you look over the past couple of quarters, we've seen a more diversified demand not only from the government contractors but also broad business expansion. So I think there's two dimensions to it.

But I think one of the real factors for us in our location is that we've got a unique business environment where we are where we've had tenants that have stayed with us for a long time and they've continued to expand. And the largest tenants that we've got in there are Northrup Grumman, Deltek and Perot Systems who are all expansion-oriented tenants currently. So we'd like to serve them primarily. There's certainly a broad demand in the market, in general. So I think we should be in good shape there.

Where do you think we should see preleasing let's say by the end of the year?

By the end of this year?

Yes.

I don't think we'll have any leases signed by the end of this year. We'll deliver in September of next year. And I think, really this is a market where you're going vertical before you tend to get a lot of action on it. I mean we could do something sooner, but I would think the end of this year unlikely we would have a lease signed.

Turning to your property inventory summary which is on page 9 of your supplemental. It appears that the majority of your underleased assets are in markets that you labeled Pennsylvania North. And I think, Jerry, you also mentioned this is where a lot of your high TIs are coming from. So can you just remind us what markets those are in and do you see the opportunity there really to lease that space or do you plan on selling some of those assets?

Well, I think a combination of the two as is frequently the case. We're going to be selling some of the assets in the PA North. And that was mentioned as part of that $50 million number. But our northern suburbs really encompasses the very strong market of Plymouth Meeting going into -- heading further East towards New Jersey, Blue Bell, Fort Washington, Horsham, moving down in the Bala Cynwyd, then really up into the Lehigh Valley where we continue to have fairly small absorption on some of our office space. So I think we look at the Pennsylvania where we're seeing the higher level of low performance, if that's the right way to phrase it, is really up in the Lehigh Valley in the office space.

So I think we feel comfortable with the economics of the deals that we've done. Those larger deals primarily were in the turnpike markets of Fort Washington, Blue Bell, and Horsham. And I think as we've assessed the risk on absorbing space in that market for the balance of the year we're feeling pretty good with the projections as they stand right now.

Okay. And final question on Cira Centre, how does the joint venture sale of Comcast Centre -- I think they were saying -- Liberty was saying it was at 400,000 sq. ft. in the high six cap rate. How does that change your expectation as far as a potential joint venture sale of Cira Centre?

Well, that's a good question, John. I think we were pleased to see the high price per square foot paid for new construction in the City of Philadelphia. And to have that type of cap rate on a presale basis, we thought was also very encouraging relative to the, we think, the increasing attractiveness of CBD Philadelphia. So that has all been factored into the mix. As you can imagine, we've talked to some of the same people and that's certainly a process that we're reflecting on right now in terms of what exactly to do with Cira Centre from a financing standpoint.

Okay. And remind us once again Cira Centre is on a ground lease or do you own the land?

No, Cira Centre is on a leasehold interest with Amtrak.

Okay. Thank you.

You're welcome.

Thank you. Our next question is coming from John Guinee with Stifel. Please go ahead.

Galant. Nice call. I'm sitting in Oakland, California, right now. So can you give me a sense for how the Oakland submarket plays within the overall San Francisco Bay marketplace?

Well, I mean, our assets in Oakland are primarily concentrated in the Lake Merritt section with two buildings up in the center of town. Do you want this from a geographic standpoint, John, or just in terms of --?

[multiple speakers] -- tenant, no I know the market. I used to live here. Which [multiple speakers] price points versus Fremont, San Francisco Bay, Contra Costa County, et cetera?

Yes, I think the attractiveness that we see in Oakland, number one is the significant market share we have in the stability of that asset base. But in terms of it as we assess the risk profile in starting center 21, which is the price that we have under development, we really viewed the quality of that asset, its location within the Lake Merritt submarket of Oakland, as it's creating a very attractive price point to bring businesses back into Oakland, particularly a fair positively price point compared to San Francisco and some of the other East Bay markets.

Oakland has done some amazing things in the last 10 years. And I think as we look at the growth of the residential market, but the residential population, the residential projects under construction, a number of which are in very close proximity to our buildings, we think that there's some of the same attributes in terms of success that we saw at Cira Centre within the Lake Merritt section of Oakland. So I think we have high hopes that when that project, the steel starts going up we'll see some additional activity. There's clearly a couple of large tenants in the market with Kaiser, and their related companies, as well as World Savings Bank and a number of the professional service firms. But I think, given the in-fill and the regeneration of parts of Oakland, Oakland really for the first time in the generation is poised to begin attracting tenants from the further East Bay markets, particularly those companies that have a high percentage of their employees commuting into San Francisco proper.

Okay. Thank you. One other question, how far will you push your debt to total market cap until you get uncomfortable?

I think we've always targeted and predicated all of our conversations on around 55%.

Great. Okay, thanks.

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

Jerry, Chris, and Bob, nice quarter and congratulations on the closing.

Thank you, Chris.

Couple of questions related to tenant inducements. You mentioned mix. Could you give us a sense as to what regional run rate fair budgeting number might be for the rest of the year regarding per foot numbers?

I think, Chris, the Brandywine number on the run rate basis would be lower than where we are in the first quarter. And there's no reason to think it wouldn't be any different than kind of where we have been historically. On the acquired legacy Prentiss, I think the first quarter number might in fact have been a little bit in-line or a little bit light then what you would have expected as the activity ramps up for the balance of the year.

Will you continue to show, Chris, -- will you continue to show through the year the legacy PDN, legacy Prentiss occupancy leased and CapEx stats or are you going to consolidate them at some point in time?

I think the intention is somewhat after the full year of 2006 would be to move forward with a more consolidated presentation. But for the balance of the year continue to allow folks to see the performance of how things play out.

Okay. I would agree it's very helpful to have the information. Could you give us a sense -- to go back to the balance sheet, regarding your development commitments and your acquisition commitments, before any buybacks, where would your leverage be based upon your guidance at year end?

At year end, we would expect leverage without any buybacks would be in that kind of 53% level.

That's a debt-to-market cap versus gross assets?

No, that's gross assets.

That's gross assets, okay. Great. And does that include sales?

That would include no sales.

No sales, okay.

Or net no sales, however you want to look at it.

Well, I'm not sure if I follow that.

Meaning, it would include no sales to the extent that we sold and acquired for a match number it would get you to the same point.

Okay. Thanks.

You're welcome. Thank you.

Our next question is coming from Dan Sullivan with Wachovia Securities. Please go ahead.

Good morning, guys. How are you?

Hi, Dan.

Question for you -- is probably for Chris. When I'm looking at the balance sheet, it looks like there was some debt that was the defeasance during the quarter and it looks like there is a new line item with a very long acronym on the debt schedule. Could you just work through [multiple speakers] something like that? Could you just work through what's going on? It looks like there's also an extra 190 million or so marketable securities on the balance sheet.

That's correct. In the fourth quarter legacy Prentiss, I guess in substance had a defeasance that for accounting purposes continues to be showing gross on the balance sheet until the underlying debt is paid off in November of 2006. So we have, on the asset side, the investment and marketable securities. Essentially that number represents treasury notes in the majority of that number.

And in our page in the supplemental that lists out the specific pieces of debt, you have a matching piece of debt that we call [PPREV] for about $185 million that is included in our liabilities. When that debt is able to be paid off in November, essentially the treasurers will be liquidated, the proceeds will be used to pay off the debt and both of those items will be off our balance sheet by the end of the year. It's a gross-up on the balance sheet and, in fact, a gross-up on the income statement where the interest on the treasury notes is coming through our interest income line and the interest expense on the underlying debt is coming through interest expense. For accounting purposes they're both mark-to-market, so the net impact on the P&L is zero.

The assets that secured these, these are all now unincumbered and on Brandywine's balance sheet?

That's correct.

Okay. That's all I needed to know. Thank you very much.

You're welcome.

Thank you. Our next question is coming from Anthony Paolone with JPMorgan. Please go ahead.

Thanks. Good morning. What do you estimate the mark-to-market of the combined Company to be now, in terms of your rents?

Well, I think in terms just to -- we can look at it a couple different ways. One is, we've had essentially every quarter we see what the mark-to-market is, so it tends to be revolving -- I mean an evolving number. So I'm not sure that we're really prepared to give you a number that would show what our mark-to-market is versus -- the range in the portfolio versus what we're signing at. I think --.

I think on the rent growth line where you look at the change in renewals, GAAP expiring to new, essentially we're running basically flat on the Brandywine portfolio, the Prentiss portfolio, legacy Prentiss in the first quarter was about a 5% uptick. So I think from that perspective it gives you a good data point. I think certainly things are going to get interesting going forward only from a GAAP perspective as the Prentiss portfolio and the effect repurchase accounting has already been mark-to-market. So I mean I think you're going to look at the renewals on both companies as we break it out on page 14 of the supplemental and will continue to do so going forward, has a pretty good benchmark for what the market is going at.

And to add to that, Tony, I mean one of the things that we do is every quarter take a look, basically input from our leasing agents and our leasing heads what we expect the trend line rents to be going forward. And as I think I mentioned in my comments would be most of our markets were projecting rents to continue to move up which will create a better data point as we evolve. But I think we're reluctant to say that we're a specified percentage of mark-to-market. Even though we are getting data points that show this from a GAAP standpoint, we're pretty close to breakeven. And even in some markets we're running ahead of the curve. Because it really does tend to be very anecdotal to specific roll-overs.

Okay. And I guess it just leaves me to the next question about -- you mentioned rental trends being up in most of your markets except for Southern New Jersey and suburban Wilmington. Can you maybe just give a little bit more detail on where on maybe the magnitude of some of the market rent movements in your various submarkets? With those major markets, for that matter?

Yes, sure. We have it right here at our fingertips. Actually we have a number of schedules. I think we look at the Pennsylvania North -- we continue to have declines in cash rent of around 10 to 12%, which is pretty much consistent with what we saw last year. The GAAP adjustment is significantly lower than that in terms of it's close to breakeven. Rolling that into -- and we're seeing the same trend line in the Pennsylvania suburbs. So the Pennsylvania suburbs I would still characterize as being in a period where we're hopefully breaking even on GAAP rental rates for renewals, but continuing to experience some decline on mark-to-market for new leasing activity.

New Jersey -- because, again, we look at New Jersey between Central and Southern New Jersey, the Central New Jersey is actually doing very well and there were getting positive cash and GAAP rents on new leases and renewals. But when you combine the operations between Southern and Central you're still looking at a decline of around 3% on leases in New Jersey. Urban we actually didn't have any real new activity. It was all renewals. And as I mentioned in my comments they were negative by about 7%.

Virginia, which is really Richmond at this point, when I say Virginia. The rate point there is that we've been positive on cash and on GAAP rents for the last couple of quarters. Mid Atlantic marketplace, and Bob you can certainly speak up for the numbers for the quarter, were positive cash and GAAP on renewals, a negative on a mark-to-market for new leases, and seeing the same trend line in the Southwest region. And in the -- in Northern California, again, the leasing activity out there this quarter was all renewals and they were positive on a cash basis about 7%, on a GAAP basis about 8%.

Thank you.

You're welcome.

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

Well, thank you very much for listening to the call. We appreciate your participation and we look forward to executing the business plan into our next quarterly conference call. Thank you.

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