Brandywine Realty Trust (BDN) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Brandywine Realty Trust Third Quarter Earnings Call. [OPERATOR INSTRUCTIONS]. As a reminder, this conference call is being recorded. Prior to turning the call over to Mr. Gerry Sweeney, please let me read the following disclaimer on behalf of the Company.

The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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 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 risk 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 lease vacant space and to renew or relet space under expired 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 debts 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 conditions, including the extent and duration of adverse changes that affect the industries in which our tenants compete.

For further information on factor that is could impact us, please reference our additional filings with the SEC. We are subject to the reporting requirements of Securities and Exchange Commission, and undertake no responsibility to update our supplement information discussed on this conference call unless required by law. Thank you. I would now like to introduce your host for today's conference, Mr Gerry Sweeney, President and CEO of Brandywine Realty Trust. Mr.Sweeney, you may begin.

Christian, thank you. Good morning, everyone, and thank you for joining us for our quarterly earnings call. Participating on today's call are Tim Martin, our Vice President of Finance, Scott Fordham, our Chief Accounting Officer, Gay Mornarity our corporate controller, Bob Wiberg, Executive Vice President and George Sowa, an Executive Vice President.

Third quarter was a good one for the Company. Progress continues to be made on the operating, integration and investment fronts. Some of the key operating highlights for the quarter are, while we exceeded the FFO forecast for the quarter, primarily as a result of the one-time items that we articulated last quarter and Tim will discuss in a few moments.

Our quarterly retention rate remained north of 70% and our year-to-date retention rate is 78%. Portfolio occupancy remained around 91% with the leasing percentage north of 93. We were expecting to have a slightly negative absorption during the quarter due to known tenant move-outs that affected both our retention rate and the net absorption across the portfolio.

We are, how far, genuinely pleased with the level of activity that we're seeing through the our portfolio, pushing rents clearly remains a challenge in most of our markets. But the activity levels remain strong. The amount of leases we executed during the third quarter was north of 1.1 million square feet. That velocity represents good traction and reflects 155 deals of which 32% were done on a direct basis with our in-house leasing staff.

Year-to-date, we've been averaging about a million square feet per quarter and have executed about 430 deals of which 27% were done through our in-house staff. From an overall standpoint and certainly is reflected in our projections for 07 for the same-store numbers, gaining an economic uplift in some of our markets still remains a bit allusive, but the generally strong deal flow should continue to benefit our goal of occupancy improvement.

With those opening observations, let me just spend a few moments adding some additional color and then George and Bob will spend a few minutes talking about what they're seeing in the northern Virginia and New Jersey marketplace. Several key metrics to focus on as you look at the quarter. During the quarter our rental growth on both renewals and new leases were very much in line with our expectations. From a GAAP standpoint, we were slightly positive on renewals and down about 4% on new lease transactions.

We have been negative on the GAAP new lease rates for several quarters, but believe that a general tighting remains under way. By way of example, when you dissect our leasing activity by tenant size, the results were a bit interesting. For example, our overall GAAP rental growth rate on new leases company-wide is down 3.7% that 4% I mentioned a moment ago.

However, when you look at rates on leases that are greater than 10,000 square feet in size, we actually had a 1.4% increase. That same trend holds true on GAAP rent growth for renewals greater than 10,000 square feet, which were 1.4% positive versus the company-wide average of 0.3% positive. From where we look at it, that's clear evidence of an increasing shortage of larger blocks of space in all of our markets and it also reinforces the success of the active marketing campaign we have to absorb some of our smaller spaces.

Our approach has clearly been to lease some of these spaces as quickly as possible, including some of those smaller spaces that may require a bit larger of a capital investment. Along those lines, we're convinced that once we get tenants in our buildings, we have a long track record of being able to retain them. So that approach is very good from an investment standpoint. While our capital cost this quarter a bit below than what we were experiencing earlier in the year, they do remain high by historical standards.

Our CAD ratio improved nicely this quarter but still remains above our targets. Again a portion of this is being driven by our aggressive practice in leasing up some of our longer-term vacancies. We continue to experience the highest capital cost per square foot per lease year in the Pennsylvania suburbs, New Jersey, our urban division in northern California, with below company average capital costs in Virginia, Metro D.C. and Austin.

We are clearly doing everything we can to control our capital costs and as a [inaudible] a fact of about $ 5.2 million or about 32% of the capital costs outlined in our supplemental package relate to discretionary expenditures on general building improvements versus those for specific tenants. [Folksie] on broad trend lines, all of our markets with the exception of northern Pennsylvania suburbs and Wilmington, CBD are projecting stable or increasing rental rates over the next year. And certainly while we have an excellent construction team in place, the combination of increasing labor costs and materials mean that we'll continue to see some upward pressure on tenant improvement costs.

Cira Centre remains on target with move in occurring on schedule. We are 100% leased and 90% occupied. The last move-ins for the restaurant, fitness center, conference center, and the remaining several tenants will occur by mid first quarter 2007. So that progress continues very much in line with what we talked about last quarter.

Radnor continues to make progress as the supplemental package indicates, at the end of the third quarter, we stood at 65% leased, which is already in line with what we project in our last quarter call as our year end target. We're ahead of our projections for the year. We are also experiencing fairly significant activity in Radnor, in fact. the pipelines the largest we had since we acquired the property and is approaching almost 1 million square feet of deals. This activity has given us the ability, we think, to increase our asking rents on select space within Radnor, while continuing to accelerated the pace of absorption. The project appears to be truly hitting its stride and we are now expecting the year-end leasing levels to approximate 73%.

Our construction and development projects remained on schedule during the quarter. While we certainly have leasing to do on our development deals and I'll talk about that when we talk about you're '07 guidance, we have good activity with fairly frequent showings. We're also making headway at 855 Springdale Road, which we anticipate will be 46% leased by the end of the year. And 500 Office Center Drive, which is currently showing 21% lease. We expect that to be 67% leased by the end of the year. But all of our development, redevelopment projects are progressing pretty much on schedule.

And we expect deliveries to occur as projected in the supplemental package. On a final note, our CFO Search continues. We have identified several finalists and are on target for an announcement later in the year. With that brought over, let me ask first Bob and then George to briefly chat about what they're seeing in their marketplaces.

Good morning, we thought it might be helpful if we spent a few minutes this morning covering the northern Virginia office market and the toll road corridor in particular. And overall, the northern Virginia market, office market includes about 158 million square feet and it continues to improve this year.

Over the past 12 months, we've seen vacancy drop from 9.2% to about 8.7% including sublet space and direct vacancy is now about 7.6% and it is a broader recovery with virtually all sub-markets below 10% vacancy on a direct basis. Rents have also increased about 2.5% year-to-date and we should see them hit 3 to 3.5% overall increase by year-end. And net absorption which typically runs about 4.1million square feet on average in northern Virginia has accelerated from a slow start this year and it's now about 2.2 million square feet year-to-date and should finish about 3 million square feet.

So, the market performance is generally been good in '06 and that has really triggered new construction starts in a number of sub markets. The current level of construction is about 7 million square feet of competitive leasable office space and it's distributed broadly in three categories. One, is inside the beltway, which is about a third of the office space being built. The second group is Route 28 near Dulles Airport and west and that's about 45% of the under construction office space. And then the toll road corridor, which extends from Tyson Corner to Dulles Airport is about 20% of new construction.

So let's zero in on the toll road corridor, where we have about 47% of our portfolio in the Washington area. As we mentioned, this market extends from Tyson's Corner to Dulles Airport and it includes a submarket of Tyson Corner, Reston and in Herndon and totals about 52 million square feet. Over the past 12 months, vacancy on the toll roads dropped from 11.4% including sublet to about 10.3% and is it's down to 9% vacancy on a direct basis.

Rents on the toll road have been among the best performers in the region, particularly in Tyson's Corner and in the better properties in Reston and Herndon where the top rents are exceeding $40 a square foot in '06. The issue really has been necessary absorption on the toll road corridor which typically averages about 1.6 million square feet per year. In 2005, we were very much on track with that total and we absorbed about 1.7 million square feet.

As I mentioned, 2006 started slowly and while it's improved, we've only absorbed about 500,000 square feet year-to-date. There's a number of deals in the works that should help push up the absorption totals by the end of the year but it will end the year probable significantly off of its typical lease year in northern Virginia.

Meanwhile, year-to-date deliveries of new space have been pretty minimal so far, about 240,000 square feet. And it's been largely preleased. Through the end of the year we think about 500,000 square feet will deliver on the toll road corridor and that should keep the vacancy rates from increasing, even considering the below average absorption.

Looking forward in 2007, we think about 750,000 to 1 million square feet of new space will deliver with current leasing between 10 and 15%. But with any recovery and absorption trending toward a typical year, the vacancy rate should remain fairly steady, this is a time frame that we'll deliver our South Lake project into the market. There are a number of starts now under way or planned which will add significantly to the 2008 deliveries.

If everyone who is now under construction or is moving dirt proceeds forward, deliveries on the toll road corridor could move up into 1.24 million square foot range in 2008 or potentially beyond. Based on historically absorption levels that should be manageable. But it could push the direct vacancy rate over 10% by the end of 2008. I think it's important to note that new office products always benefit from a flight to quality. And quality is really what we offer with our South Lake project both in terms of the building and I think especially in terms of the environment that we offer.

If you look at this quality and combine it with our 2007 delivery date, as strong and expanding in place tenant base in Dulles Corner which includes north of Brunet, Deltec and Pyro systems and our motivated and talented leasing team in northern Virginia, we think we should perform well within our marketplace going forward.

All right, thanks, Bob. George?

Thanks, Jerry. Good morning, everyone. The southern New Jersey office market continues to make positive strides with overall vacancy rates for the third quarter of 2006 declining 120 basis points and 12.5% for 13.7% at the end of calendar year 2005. This positive trend is affirm when considering the current overall vacancy rate represents a 240 basis point decline when compared to the vacancy rate at the end of calendar year 2004.

Brandywine southern New Jersey vacancy rate of 80% at the end of the third quarter 2006 continues to compare very favorably and 450 basis points better than the market rate. Year-to-date, the market has experienced positive absorption of 144,000 square feet from a broad cross-section of employers. Specifically the market has benefited in 2006 from continued strength in the advanced healthcare, law, engineering and construction sectors. The quality of life and desirability of the southern New Jersey market for companies requiring a skilled work force, including many engineers was a leading reason for Flor Daniels leasing nearly 50,000 square feet with us during this quarter.

This transaction is amplify the ability of our regional team to stay in close contact with our tenants as this deal was only made possible by partially recapturing space from one of our existing tenants and supplementing it with existing vacant space in the same building. The net result is that we assisted a tenant that was interested in downsizing while also allowing us to immediately backfill the space that would otherwise be vacated during 2007 upon the original tenant's expiration date.

While obtaining approvals in New Jersey has been and continues to be a very difficult process, there's currently approximately 389,000 square feet of new construction under way in Burlington county with approximately 90 square feet of that being preleased. While the significantly increased price of new construction requires relatively high rental rates to generate adequate returns, the addition of this new inventory will likely result in some moderation of the markets rental rate growth. As for Princeton, the overall vacancy rate has declined 70 basis points to 12.6% at the end of Q3 2006 from 13.3% at the end of calendar year 2005. This trend remains slightly positive as 12.6 rate of 20 basis point better than the end of calender year 2004 despite the addition of new office inventory during this same time.

Brandywine Princeton market office vacancy has consistently far exceeded the market rate and is currently at 5% at the end of the quarter number 3 in 2006, 760 basis points better than the market. Year-to-date absorption has been positive, 76,000 square feet from a cross section of companies where the finance and law sectors being the more active participants in this marketplace.

At the current time, our largest vacancy in Princeton Pike is only 7,000 square feet with several of our buildings at 100% occupancy. We're preceding with the construction of a 75,000 square foot office building as well as a renovation of our recently acquired 90,000 square foot former headquarters for Lennox china as well as a offensive and defensive strategy.

We needed to create inventory or we do run the risk of losing some of our existing tenant that have expressed an interest in expansion and we certainly hope to continue to attract new tenants to our location. The relative strength and desirability of the Princeton market combined with abundant investment capital of searching for property has resulted in several new office buildings being constructed on respective basis. These new competitive building total approximately 622,000 square feet and are located in the central and northern part of the Route 1 corridor. While these buildings will certainly be competition for Princeton Pike campus our location continues to be among the most desirable in the entire market through the quality of our assets, lack of traffic congestion and immediate access to interstate highway systems, passenger rail lines and regional airport.

The desirability of our Princeton Pike location is affirmed by the continues southern migration of companies along the Route 1 corridor, approximately 250,000 square feet of the existing tenants in our Princeton Pipe location have either relocated from the central and northern part of the Route 1 corridor and we absolutely expect this trend to continue. Gerry?

George, thank you. Tim, maybe spend a few minutes walking us through the quarterly activity and previewing the '07 guidance.

Sure will, thanks. The third quarter was very productive on several fronts and was positive from an earnings perspective. Our portfolio continued to perform in line with our expectations and our reported $0.67 of FFO per share for the quarter was slightly above consensus estimates and our own guidance range of %0.64 to $0.66 per share.

When comparing the results from the third quarter to the second quarter this year, let me highlight a few items. Property operating expenses were up a good bit quarter over quarter, primary drivers were notable increases in utilities expense and repairs and maintenance expense. The increase in utility was due to increased costs associated with a warmer than normal summer season, while the increase in repairs is largely a timing issue.

The sequential increase in property operating expense is in real estate taxes contributed to the increase in tenant reimbursement revenue quarter over quarter as much expense increase is passed onto our tenant base. Other drivers of earnings during the quarter were some items that are nonrecurring in nature. One of these was a lease termination with a tenant in our western Philadelphia suburbs where we immediately released the space. The impact of the quarter was approximately $0.03 per share when considered the termination fee and the associated write-off of the related straight line rent receivable balance.

I'd like to bring attention to that point. The face amount of the termination fee is only part of the story. When a lease is terminated we do recognize the termination fee, but we also write off the related straight-line rent balance. So it's not quite accurate to capture the entire face amount of the termination fee as the nonrecurring impact of the quarter.

Therefore, while we show termination fees totaling approximately 4.5 million for the quarter, we also did write off approximately 1.5 million in straight-line rent associated with those leases, bringing the net impact to around $0.03 per share for the quarter. Another item of note was the fee we received during did quarter related to the termination of a purchase contract that provided us another $0.03. The combined impact of those two nonrecurring items of approximately $0.06 per share was about $0.02 more than the amount we provided our guidance during the second quarter earnings call and is the primary driver for us being $0.02 higher than the midpoint of our guidance range of $0.64 to $0.66. We've talked each quarter this year about G&A synergies and we've continued to see G&A expense reductions through the 2006. The third quarter was no acception and came in at about 6.5 million as compared to 7.7 million for the second quarter.

Earlier this month, and subsequent to quarter end we completed the sale of 345 million of exchangeable guaranteed notes, and the simultaneous repurchase of about 60 million of our common shares. You can find all the details related to the notes in our press release and the related 8-k but in brief the exchangeable notes have a coupon of 3.875% and have an initial exchange price of $39.36 per share. Which represents a 20% premium to our share price the day of the pricing.

An important feature of the notes is that they contain a net share settlement feature, which essentially mean that is the $345 million par value of the notes will ultimately be settled in cash, not shares. Shares will only be issued for the portion if any of the value of the notes that exceeds 345 million.

As part of the transaction we repurchased $60 million of our shares at a price per share of $32.80. The balance of the proceeds will be used to repay our 2009 floating rate notes on January 2, of 2007, which is the earliest available prepayment date. In the interim, the proceeds were used to reduce borrowings on our revolver for working capital and some investment in short-term paper.

Key benefits of the transaction are reduction in our floating rate interest exposure from approximately 20% of total debt down to about 10% of total debt. Had an immediate impact on our fixed charge coverage, and also of note it fits perfectly into our debt maturity schedule.

Now, let's take a look at guidance, we've introduced fourth quarter 2006 FFO guidance of $0.64 to $0.66 per share. To get to the midpoint of that range, lets start with the third quarter FFO of $0. 67 per share. Take away $0.05 of the $0.06 of termination and nonrecurring stuff, and another penny for the delusion associated with net dispositions, that brings us to $0.61. Add about a penny for the accretion for the exchangeable notes, add another penny for sequential NOI improvements in the same store and Price Portfolio and about $0.02 of impact from the developments, redevelopment and lease up assets.

That brings the running total up to the midpoint of the guidance range of $0.65. We've also introduced 2007 guidance providing an FFO per share range of $2.55 to $2.65. As outlined in our earnings release, our 2007 outlook is predicated on a number of key assumptions. We've base the low end of our guidance on the premise that our same-store Legacy Brandywine portfolio will see a year-over-year decrease in net operating income ranging from down 2% to down 1% based on slightly improving occupancy, roughly flat mark-to-market renewals, slightly negative mark-to-market on new leases and operating expense increases of 5 to 5.5%.

We expect the remainder of the acquired Prentiss Portfolio to achieve a .5% to 1.5% NOI increase year-over-year based on occupancy gaines of .5% to 1.5%. Positive mark-to-market on both renewals and new leases, but offset somewhat by operating increases 6.5 to 7.5%. Real estate taxes are the big driver of the anticipated rise in operating costs. Our guidance includes 150 to 200 million of acquisitions per quarter with yields ranging from 6% to 8.5%. Dispositions will have an impact as well. Included is the full-year impact of 385 million of year-to-date 2006 disposition, the full year impact of the 125 to 175 million of anticipated fourth quarter 2006 disposition and the full-year impact of an additional 125 to 175 million in dispositions.

So at the midpoint, we're assuming around $700 million of acquisitions in the full-year impact of around 685 million or so of dispositions. I've noticed that our guidance anticipates the dispositions to impact all of 2007 while the speculative acquisitions are forecast radically throughout the the year. And finally, our guidance assumes the completion of all development projects as outlined on page 24 of our supplemental package, including the continual lease up if the Radnor asset consistent with our original three-year plan. We expect additional leasing to stage in throughout the the year, flattening out at around 92 to 93% in the four quarter of 2007. Thanks for taking the time to listen do today's call, at this point, Gerry, I'll turn it back to you.

Great, Tim. Thank you very much. Let me just spend a few moments talking about our 2007 forecast and several key themes. And then we'll open up the mic up to questions. As Tim touched on, certainly the same-store numbers, particularly coming out of Legacy Brandywine portfolio, is fairly tepid and certainly frustrating to some degree.

I think the changes we look at where we are today versus a year ago, is that the velocity of deal flow through the the portfolio certainly seems to be a lot higher. And at this point in the year, as Tim had touched on, we're projecting fairly modest occupancy gains. But we're certainly focused very much on trying to improve our overall level of economic occupancy through the portfolio.

Expenses continue to be a challenge and primarily only in areas that are hard to control, particularly utilities and real estate taxes. And as you saw on the press release, one of the major increases on the Prentiss portfolio, some of the real estates tax increase are forecasted, particularly in the California of marketplace. When you also look at 2007, you really do need to factor in that we had a fairly active capital recycling year. October 3 marked the one-year anniversary of the announcement of Prentiss deal we closed that January 5 in '06. If you look at this additions for five quarters following the Prentiss transaction, that volume will be as Tim touched on, in excess of $700 million due to Dulles program acceleration and the selling of some noncore Philadelphia assets.

Our business plan for '07 is predicated on investing those dollars in our target markets. I'll touch on those in a second. But clearly, that level of recycling creates some timing issue that we talked about in the last several calls and we factor that into our guidance.

So I think we're certainly focused on what we can do to improve our same-store growth rates as we look at 2007.

And that will be a key area of focus of management over the next couple quarters. We are, however, as we look at our guidance for '07, pleased when we look at the midrange when you factor in the level of disposition activity we've had through the Company, that we are looking forward to a growth momentum over the 2006 estimates.

And with our market showing signs of continued recovery, we do believe that our operating platform is in the best position for growing than it has been in the last several years. So, bottom line, we expect 2007 is a year of us jumping back into a growth mode, albeit as a slower pace than we would like, particularly on the Legacy Brandywine same store, but we are going to be in a position to take advantage of a much more diversified platform and move ahead with executing our investment and operating strategy. On the investment front, we certainly anticipate 150 to 200 million occurring over each quarter of 2007.

We have indicated in the press release cap rates ranging between 6 and 8%. I will tell you, certainly given the markets where we're pushing to acquire, we do expect efficacy cap rates to be much closer to the 6 to 7% range, but certainly with much stronger growth characteristics than we're seeing in some of the Legacy Brandywine markets. Converse to the cap rates in our dispositions have ranged between just shy of 6% to as high as 9%. But a very good representative sample of what we're seeing in the investment market.

Let me chat for a moment about our Dulles sales efforts. You may recall our game plan for the first year was to sell about 200 million. Year-to-date we've closed 270 million. In addition, at the current time we have an additional 140 million under agreement.

Of those, approximately 127 million is hard with their deposits and closing scheduled for later in the fourth quarter. The remaining $12 million remains in due diligence with an expiration in late November and a closing by year-end. We certainly remain fairly confident about getting these transactions across the table.

Pricing has been very much in line with our expectations and if those transactions progress, we'll have accomplished a sales program in Dulles of 410 million within the first year of closing. These moneys along with the sales some of core Philadelphia assets will be recycled consistent with the goals they outlined on the last quarterly call, namely to strategically shift the revenue contribution within our portfolio.

Our 3 to 5 year goal is to increase our overall capitalization and through that growth, move towards equalizing the percentage of revenues coming in from Philadelphia and the metropolitan D.C. regions and to increase the revenues coming in from California and Austin. In today it's climate, we anticipate that growth will be fueled by executing co-investment vehicles along with some direct investments and our development pipeline.

You may also recall that our expectation is that we plan on maintaining the development pipeline between 5 and 10% of our overall asset base.

As we look at some key upside and downside scenarios for '07, Tim touched on a very important point where we've done a fine job of reducing some downside exposure where we've brought our floating rate debt down to just about 10% of our overall base. On the operating expense front, I can guarantee you, we're doing everything we can to control the pressure on operating costs. We have a number of initiatives under way in the Company as we started the approach to 2007, we're certainly going to spend some more time showing folks how we can reduce our operating expense run rate through the portfolio.

On occupancy, again the forecast right now projects some fairly modest occupancy gains across the entire company. Occupancy is clearly an important variable in our earnings forecast. For every 1% gain in occupancy, we can improve our FFO by about $0.05 a share or 2% increase.

And our primary objective is to absorb that vacant space by about 3 million square feet in the Company or recognizing operating expenses on that space, so a clear initiative in the organization as we go into into '07 is to exercise every possible remedy and be as aggressive as we can to move our occupancy levels across the portfolio. And certainly with the market stabilization and recovery under way, accelerating that absorption and eliminating any earnings drag on our vacant space will create some additional forward momentum to our growth model.

From a development and redevelopment standpoint, we have 10 projects aggregating $308 million under way. These projects are 19% pre-leased. Our earnings forecast at this point does not project much of an impact to our 2007 revenue model from our new development projects.

Certainly, with delivery dates starting as early as May, 2007, our hope is that we can achieve a level of preleasing that will generate an earnings contribution during 2007 so that would be a clear upside to our earnings forecast. We also have been in a mode in the last few years of stable level of lease termination and nonrecurring items. We certainly think that trend will continue as we look at 2007. To wrap it up, all in all, I think the third quarter was a good one for us. We're going to wind up where we thought we would be for 2006. And it did represent I think continued evidence of a recovery under way in our marketplace.

Our 2007 forecast, I think reflects the diversity of our operating platform, positioned the Company well for accelerated growth. Our leasing property management and construction teams continue to do an excellent job of attracting, retaining and getting tenants in the spaces. We're doing our best to manage capital and operating expenses. And the integration program is well into the implementation phase. We have high expectations of that phase being wrapped up with the same degree of excellence as our planning was.

And so as we look forward to '07, we want to insure we're in a good position to take advantage of the total diversity we have with both our operating investment and development platforms. Christian, at this point, we'd be happy to open up the floor for questions.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question comes from Michael Bilerman of Citigroup. Please go ahead.

Good morning, Jonathan Litt is on the phone with me as well. Gerry, if you talked a little bit about maybe programs that you may put in place or and try to contain expenses. When you think about the potential impact of those programs relative to the guidance, I mean, how much could you trim those expenses that you forecasted?

Well, we operate in a mode where about 36% or so of our total expenses are recoverable as part of our tenant reimbursements. So we approach controlling operating expense from a couple different standpoints, one is, we always want to make sure we're in a better competitive position than our local competition on being able to deliver first-quality office space at a lower operating cost. Secondly, to the extent that we can reduce expenses, some of that benefit will accrue back to us, both in terms of top-line rent growth, as well as a lower resetting of dasher when we do new leases. Frankly, the impact of us reducing expenses on our bottom, the impact of that on our bottom line, pales next to the impact of improving our occupancy levels. But I think the game plan from a operating expense standpoint is to clearly be aggressive as we can in bidding all of our contracts. We've had some great savings on shares, we've had some good savings on some of our service-providing contracts. It's really frankly the areas as I mentioned we don't have much control over, relative to utilities and real estate taxes that are creating the bigger pressure point on expenses.

And I would just add to that, Michael, that one of the drivers of the expense increase 2006 versus 2007, is that 2006, the winter months in the first quarter of 2006, we experienced lower than normal levels of snow removal costs, a little bit milder winter so utilities were a little bit lower in the beginning part of the year. Now, of course, a lot of those expense savings inured to our tenants' benefit. But when you focus on the expense line items themselves, part of the year-over-year growth is a bit distorted given the nature of the winter 2006 versus our anticipation of a more normal winter in 2007.

And then, yes. Would you characterize that 5.5 to 6.5% total expense increase as being a baseline where if you were successful here, you may be able to knock off 100, 200 basis points off of the expense growth?

I think that might be a little bit aggressive. But I think you can make some movement on it. As Jerry alluded to there are things outside of our control that can could have bring it down 100 or 200 basis points if we had consistent levels of snow removal, if we have consistent levels of R&M year-over-year that would bring down the trend because our forecast include more normalized level over many years and isn't sometimes the best comparison directly to 2006 levels.

Can you just review just the average yields and sort of the timing on the dispositions, both with scheduled for the fourth quarter, what you've budgeted into 2007, and what you've put as an average yield for the acquisitions as well?

Sure. Let me address that to the extent I hit all your points. We've been averaging, I mentioned the cap rate range on our sales has literally been below six. To as high as nine on some of the smaller assets. In addition, we've sold a couple buildings that were substantially vacant. So the cap rates really on those are not that relevant. So I think on the cap rates on the sales, we're basically been bouncing mid six through mid sevens. When we look at, and we look at the Dulles sales, for example, we've been very much in line with what we originally thought they would be. So we're pretty pleased with that result. On the acquisition front, again I think we're focused on cap rates, given where we plan on targeting the investment of those dollars, we're certainly focused on cap rates toward the lower end of the range and as I mentioned in my comments, the factor into our overall guidance.

The pipeline on investment activity is actually very, very strong. And I think that was clearly one of the driving predicates of giving one of the two companies together that we certainly have a good opportunity with seasoned teams in place and markets to deploy capital judiciously and expeditiously and get good quality assets to improve our market positions in those new markets.

But also create a much better, longer-term growth platform, so the pipeline that we're evaluating through our investment committee process is very strong, it's very diverse and certainly given all the transaction we've underwritten over the last couple quarters, I feel pretty confident that that range of cap rates is certainly going to be achievable and that the volume of transactions that we based our guidance on is going to be clearly executable on a ratable basis during the course of the year.

And when you step back from that, you really have to take, keep in mind that the level of our disposition activity over the last few quarters, where when you compare our disposition activity to projecting on the acquisition front, we're really a net acquirer of just slightly north of 100 million of assets.

So we certainly see the recycling as an opportunity to exit those properties that we've talked about before, deploy capital in markets that we think have great management teams, great long-term fundamentals and higher growth characteristics and at the same time, manage the dilutive impact of that by executing that on a fairly planned basis.

That's helpful. Just you're comment on lease term phase and other income going into '07, I guess you're grossing about 10 million this year, is that a fair assumption to whats you have that going down or out?

The $0.10 will be on the high end of what will be included in our range. Somewhere in the $0.07 to $0.10 range, depending if you're at the high end or the low end of the range.

Okay, thank you.

Thanks.

Your next question comes from Anthony Paolone with JP Morgan. Please go ahead.

Thank you. Can you go through your role, your lease expirations in metropolitan D.C. and Dulles for '07, since that seems to be where there's a lot of the exposure and also given that you're teeing up some Dulles assets for sale, does that change that exposure much?

Well, I'll take the Dulles, Bob you want to take D.C.? Okay, good. Let me just make a couple comments on Dulles. I mean, certainly the largest role that we are, that is going to occur in 2007 relates to the 7-eleven lease at City Place center at the end of the first quarter. That is a property that we are actively engaged in sale negotiations. So certainly to the extent that we move forward with the existing properties under agreements, as well as Citiplace, that is essentially eliminates the exposure of the company to Dulles during 2007. the exposure of the Company to Dulles during 2007. To the extent that we're not successful with the Citiplace that would remain a role exposure for the company in 2007.

Then excuse me, for the Washington, D.C. market, our largest expiration in '07 was Group Aspen Lockheed-Martin and we renewed them earlier this year so that has been taken off the table. The next largest is a tenant HMShost, which is a pretty much the full building in our 6600 Rockledge building. And they are going to evacuate the building in the first quarter of 2007. We're currently renovating that property and it's in a great location. So we anticipate a good release scenario there. Beyond that, the expirations are a bit smaller. We have a tenant actually a couple tenants rolling out of our properties in the Fair Oaks Market. The lease is coming for renewal -- doing well there. We have Chevy chase bank up in Bethesda, expiring on 60,000 feet, they have sublet the entire premise and there will be 20,000 square feet of that that actually expires the rest of the sub tenants will stay in the building -- exposure by far our biggest piece to handle will be that HMShost vacancy in Maryland.

So, when I look at the 800 some odd thousand square feet in the supplemental, some of that has been, like what amount of that has been already addressed?

I think at this point, from a practical matter, we're down to about 400,000 feet in Maryland that we have to deal with.

Okay. Jerry, what do you anticipate as development starts for 2007?

I'm sorry, Tony.

Development starts in 2007?

Well, certainly as I mentioned our target is to be around that 5%-plus range. But as I mentioned on the last couple calls, that's really conditioned upon how we do with our existing pipeline. We certainly have a number of properties queued up to go justified by market conditions. They would be the next building at metroplex, another building at Princeton Pike, a major rehab redevelopment opportunity in Chester County. Possibly a building in southern New Jersey. In our Bishops Gate complex, as well as the potential for doing the Westlakes building down in Dulles corner.

Okay. And then just one final accounting question. When you mentioned there were, you wrote off some straight-line rents related to lease termination is that net against the lease term income that you report? Is that show up somewhere else in the income statement?

It shows up under straightline rent. I wish I could have netted southern income because it would make the point I was trying to make in my prepared comments a also bit clearer and it would be helpful if I could present it that way. Unfortunately, GAAP requires me to present those straight-line rents through the straight-line rent item, but thanks for raising that. I mean, it is a little bit misleading to think about the nonrecurring termination fee to be as high as what it may appear to be.

Okay. So, and I know you show the straight-line rent number in the supplemental separately. But like on the GAAP income statement, that's usually embedded up in the revenues, so would it be up there?

It is. You can see the breakout of the straight-line rent on page 15, I believe. I'm sorry, page 11.

Okay.

Page 11 when we break out into the various buckets between same-store and the Prentiss Portfolio is so on and so forth quarter break out the revenue number into its components there.

Okay, great. Thank you.

You're welcome.

Your next question comes from Mr.Ian Weissman of Merrill lynch. Please go ahead.

Yes, good morning. Jerry, I was wondering if you could touch on your acquisitions for a second and maybe talk a little bit about the markets in which you're targeting. Should we be expecting new markets or looking to expand in Austin or Oakland, two markets that you seem to be more bullish on?

Yes, no. Number one, we certainly do not anticipate any new markets. When we talk about the target markets, maybe I should be clear, we're so used to talking about it internally. They are the Legacy Prentiss markets that have come over. As I've certainly talked about before, you know, we view metro D.C., particularly the Virginia Marketplace, Austin and Oakland east bay area of northern California, to be the primary target markets for new acquisitions.

Which of those four markets, let's call it, I think the upper end of your guidance was 8.5% cap rate. What type of product in which markets are you seeing 8.5% cap rate?

I don't think we too much 8.5% cap rates in those markets as well. I was clear on my commentary that as we're looking at the target market acquisition program, we're, our guidance is really predicated on the much lower end of that range.

And looking just clarity for a second here on the press release you talk about a full-year impact of 125 to 175 million of disposition. Should we make the assumption that those close early January?

You should.

Okay. Okay. And finally, if you hit the upper end of your acquisition guidance of let's say 800 million on on the of the call it 350 million of potential dispositions, how do you anticipate funding the balance?

I'm sorry.

Well, if you do 800 million of acquisition, let's say, and you talked about for the year, 125 to 175 million of dispositions, but you're also going to close on another call it 150, 175 million towards the fourth quarter, or year-end of '05, let's just say that's 350 million of dispositions on top of call it 800 million of acquisitions. Is the balance going to be funded off the line, I assume?

Off the line, but as you look at the through-put we're talking about, we've got roughly about 700 million of dispositions that we'll kind of carry us through to the first quarter of '07, then we're going to be funding in some acquisitions, through the end of '07. So the net cash requirements can be north of 100 million. We would certainly expect we'd be drawing down from the line to fund those.

Okay. Thanks so much.

Okay.

Your next question comes from Mr.Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

Good morning. Jerry, just on leasing expectations, your leased versus occupied space spread is about the widest we've seen it in the few quarters. You've got some speculative development if the pipeline and more seemingly being teet up. Yet you're guidance for next year is seems relatively conservative on occupancy, at least relative to what you're signalling here. Can you sort of bridge the gap for me? Is there anything out there in terms of leasing exposure or anything rolling? Is there anything out there in terms of leasing exposure or anything rolling, which is you don't expect will get filled next year that you currently know about? Or maybe you can just give us a also bit more color.

I will. And clearly it's not an exact science. In terms of actually getting leases across the table, or getting prospects across the table to sign the lease, getting the permits in place within a 30 or 45-day to get the tenants in place. A lot of it, particularly this early in the year, we spend a lot of time internally deliberating on thousand best project our leasing activity. A couple observations, a few of which I touched on. One is we really have not projected any real leasing updraft from our development projects. The ones that are coming online now and under way.

We have also, when you take a look at the leasing versus the occupancy spread, that's really coming out of a, being driven out of Radmore and a few our properties in that preleasing redevelopment mode that creates that kind of spread. For the most part, our stabilized inventory has a pretty close connection point between what's leased and what's occupied. What we have a number of initiatives under way in the Company to try and absorb some of our vacant space. And in fact have identified targets for every space within the entire inventory.

Actually getting those leases or those spaces leased again at this time the time of year is fairly hard to predict. I think the tact we've taken this year is consistent with what we've done in some of the previous years, where we're fairly cautious on what we expect to be able to lease during the year. We track all of the activity through the pipeline. We have incentive programs been in place for all of our stove make sure we get leases done.

And as I touched on, one of the key distinctions between previous years and this year, and I think we really are generally pleased with the level of activity through the the entire portfolio. And while that may not create a real upward pressure on rents, it will be able I think, give us a good shot to improve our overall occupancy levels versus where we've been the last couple of quarters.

That's helpful. Another way of looking at it also, from an occupancy standpoint, let's say the end of the first quarter, 90% occupied, you're 91.3% occupied overall today. Want to take a shot on what the total portfolio might be occupied by the end of next year?

By the end of next year?

Including Cira and Radnor?

I think while our projections right now that we put forth indicate that it's going to be 150 basis points north of that.

And then just touching on speculative development a letter bit, I noticed and you may have touched on the Metroplex completion date and 1200 Lennox Drive, got pushed back a little bit. I was curious what the source of that was and what the prospects look like for leasing on?

Right, typically at this stage in each a development charges, there might have been some difficulty getting some final approvals where they'd -- George if you want to talk about the Jersey property.

That's right, Gerry. We had actually the building design and then by the time we had everything mobilized we had a bit of a wet spring that caused a little bit of a delay, but really what happens when you go quarter to quarter sometimes it's a bit misleading because a month could become the next quarter.

So it really wasn't anything of extreme consequences that relates to the 1200 Lennox Building, as relates to activity, though, we have had good activity through the building and a lot being driven by our own tenants within the park as I touched on in prepared comments so again the activity itself has actually been quite strong for the building. And to have the 100 Lennox building, the 90,000 square foot Rehab right along side of it. ACtually gives people alternatives for the space with in it. So it's actually the activity has been quite nice on the buildings.

George, you're not worried about the 600 plus thousand square feet of competition in Princeton right now?

I worry about a lot of things. But the fact of the matter, it is in a different part of the location within the market. And again, we've seen this continued migration further south. So am I concerned? Sure. It absolutely is competition. But as strange as it may seem the market is really bifurcated in a pretty extreme way. When you look at it from the context of how bad the traffic has been on Route 1, where to go, literally five to eight miles in the morning can cost you 15, 20 minutes. You multiply that by the number of employees, by the number of trips per day and I lived there for 20 years in the marketplace. You just avoid the road if you can. We're really at the intersection of two major interstate highways. It is a great location for us and I think people are getting fed up with it.

In terms of magnitude, how big is the overall Princeton market?

About 15 million square feet in total. So it's nowhere near what Bob's markets is. But it's very concise market. But Route 1 being the major artery throughout the the marketplace.

Okay. Perfect. Thank you.

You're welcome.

Your next question comes from Mr. [Cedric] Lahans of Green Street Advisors. Please go ahead.

Thank you. Gerry, in the past couple quarters you've repurchased shares. Now, it seems that you're focusing your attention in terms of capital deployment -- acquiring assets. Can you discuss a little bit your thought process as to how you decide to allocate capital to new acquisitions versus repurchases your shares?

That's a good point. We didn't touch on it. We still have remaining capacity to I think it's 2.3 million shares under our guidance. Because when we did the exchangeable note issuance, we repurchased 60 million as part of that, Cedric, but treated that separate and apart from our previously announced share repurchase program. So, we still consider not really factored it in but certainly view -- continued execution of that program as a viable strategy for, for 2007.

As we looked at it, we typically always focus on what we think the competitive advantage we can create the both the near-term and the longer-term growth prospects for acquiring a piece of real state, or building a piece of real estate versus our share program. And I think over the years we've had a pretty good track record of balancing those. And not really to the exclusion, the mutual exclusion of one versus the other, if I said that correctly.

So, we did not talk about the share repurchase program so I appreciate you bringing it up. That certainly remains in our landscape as we look forward for the balance of the year and particularly as we start evaluate new acquisition that is might below certain price point that is we would find acceptable. We certainly would view that as a viable investment alternative.

Okay. There's been a fair amount of rent growth I think some some of your markets, Austin, Oakland, northern Virginia. And how much of that rent growth is baked into the expected yield you have on the development in these same markets and how much of it might explain higher potential yield you might get from these developments?

Well, you're right. We have seen, we take a look at our portfolio, we've certainly had higher rent growth -- I think the development yields that we've targeted on all of these properties under development is zeroing in on the 8 to 9% range. That is predicated upon achieving rental rates in line with current asking rents. And we typically pro forma an anchor deal with 2% to 3% escalations. And then certainly layer in additional tenancies based on what we see in the market at that particular point of time, so the original pro forma's that we do on this buildings are typically predicated upon existing rents in the market or certainly what folks who sit in George and Bob chair think they that have they can deliver when we expect that project to be completed.

Okay. When you acquired Prentiss last year, in some of the presentations you major investor suggested that the same property NOI growth you were expecting from the Prentiss Portfolio would be about 4% on a compounded annualized basis between '05 and '08. And given your targets for the Prentiss Portfolio for '07, where do you think your at versus is the predictions you made last year on the Prentiss Portfolio?

Well, we did look at that in particular as a couple-year average. I think when we look at the rent growth numbers that we're anticipating out of Legacy Prentiss, that 3 to 4% range is certainly what we were looking at to do in '07. I think frankly, where we're, I was not anticipating this to be quite candid, we'd be looking at expense increases of up to 7.5%. That's a certainly above what we were expecting when we went through the pro forma exercise. But I do think to go again to the core of your question, certainly as we look at the Austin and East Bay Market, as well as with Bob articulated relative to Virginia, we certainly see that there should be an ability to continue to accelerate growth.

And the other thing you have to keep in mind is that we certainly have changed the mix of the portfolio by accelerating the sales program in Dulles. I mean, that's probably one of the key variables that versus our pro forma. We had projected as I touched on earlier, only selling about 200 million in Dulles the first year. And then liquidating that portfolio over a several year period. The acceleration of that program I think is the right thing to do from an investment standpoint, has clearly altered some of the original projections we laid out.

You were expecting higher same-property growth in Dulles than the other markets at the time?

Cedric, would I hesitate to say, I don't have those numbers in front of me. But certainly Dulles is generating a tremendous amount of jobs. There's pretty good growth in that market. But I just, I can't give you an answer of what the mix was as we looked at it October year-ago.

Okay. Final question, can you just give me a also bit more detail ons what you see in the Philadelphia market right now in terms of rent -- in terms of demand and you lose the fact that you might be getting a little better ramps on larger blocks of space? Can you also discuss what you have in terms of large blocks of space still available in the Philadelphia sub-market?

I'll be happy to. What we're basically saying in the Philadelphia marketplace, give you just a synopsis of it, we're seeing better activity but minimal rent growth. I alluded to as the tepid and frustrating comment. So, I think were seeing a higher probability of absorbing space. Rental rate movements have not been that significant. I think we're as we have certainly gone through our portfolio to it fairly well, we're pretty comfortable that we have a stabilized rent environment.

If I could go back to some of the commentary made on the last call, it's really proven true in our budgeted forecast, which is that we were projecting essentially a slight negative mark-to-market on the Legacy Brandywine portfolio and a more positive mark-to-market on the Legacy Prentiss Portfolio and that's exactly what we're seeing. When we take a look at our portfolio, our total vacant space as I mentioned is about 3 million square feet. Which we think creates a great internal growth opportunity for our company if we can absorb a good piece of that. As that's broken down by size, we have 35 blocks of space in the company that are greater than 10,000 square feet. And I think that's clearly reflective of what you see in the marketplace.

There's a clearly an increasing dearth of larger blocks of space which I think does create the opportunity that Bob touched on, larger tenants looking for better quality, larger space availability and then, a willingness to pay high rents in new development properties to achieve that.

So we certainly expect to be able to continue to hold the line on rents and do well in absorbing those larger blocks of space. Conversely, of the 570 vacant suites we have through the the entire company, you essentially have almost half of that is 2500 square feet and down. So like I said, it would be smaller than 2500 square feet. That's where a key area that we are focusing on and trying to absorb that space and get that inventory cleared.

Okay. Thank you.

Did you want to say something?

Just to expand on that point a bit more, too, if you were to look at the space, especially, we have a proprietary software system where we actually track inspections and proposals and everywhere along the yield curve, if you will. When you look at our space inspections for the first nine months of '06 as compared to the first nine months of '05, the inspections are actually up 17% year-over-year for comparable period. And the actual proposals that are issued are on a comparable basis. So again, if you look at the pipeline in activity, it's certainly up rather dramatically year-over-year. And the one thing that I think we've seen in the marketplace as well is, in the the last few years, tenants really had hesitated to commit longer term in some cases and we've seen that hesitation is going away in some cases and they are actually committing to longer-term leases, where before the-- what was happening in the economy and it seems like things have stabilized enough where people are actually willing to step up and commit on a longer-term basis, rather than just bind the time [inaudible]-- at a time.

Your next question comes from Srikanth Nagarajan of RBC Capital Markets. Please go ahead.

Thank you. Just one question on G&A expense assumptions for '07 and what kind of potential synergies you could see in '07 going forward.

We outlined the third quarter got down to the of $6.5 million range, and at this point our '07 guidance is based on that kind of being what we would anticipate seeing in a typical quarter, clearly,there is going to be things that in any individual quarter that can make it go a little higher a little bit lower but at a $6.5 million run rate for G&A, it is really good news from the stand point of view. And in this particular area, we outlined if memory serves me, 4 to 6 million worth of G&A synergies. At a 6.5 million run rate, clearly the synergies have added up to be slightly more than what we would have talked about a year ago.

Excellent. Thanks.

Thank you.

Your next question comes from Mr. Chris Haley of Wachovia Securities, please go ahead.

Good afternoon, thanks for staying so long.

Our pleasure, Chris, we were waiting for your call.

The questions I have on this presentation from last year on the Prentiss Portfolio are the assumptions on the core growth rates, recognizing that it's from '05 to '08. Even if you adjust for marginally significantly higher expense growth, just the margin calculations, there had to be some other adjustments made to maybe same-store revenue or mark-to-market to account for the variance between, even the 1 to 1.5% from the Brandywine Core Portfolio and I'm doing the pro forma after the sales of Dulles. And the Prentiss Pro forma core numbers are 4.5 to 5. It would appear to me there have to be some adjustments made on same-store revenue as well in addition to the increases to same-store expenses. Would you characterize the adjustments, maybe you've been more conservative on rental revenue changes or in terms of you giving your '07 guidance?

Well, I think not having those schedules in front of me, Chris, I'll try to remember to the best I can. I mean, we certainly as I mentioned a couple times, I think, are really focused on, being realistic yet conservative on what we think we can absorb. I certainly think one of the issues where I talk about a call or two ago was where we saw a variance versus our underwriting was in the Maryland market of the acquired Prentiss Portfolio. We certainly assumed that we're going to do better there from a rental rate and absorption standpoint than we've done over the last year. So when I look back in terms of when I say okay, where do we, where were our assumptions off base a little bit? When I take a look at most of our core portfolio that we brought over from Prentiss, particularly southern California, the ADP Venture, Oakland, the Concord product, certainly looking at Austin, the major variance within the acquisition really related primarily to the performance of the Maryland portfolio. So I would have to take a look and see how that fit into. But certainly I think that's, that's probably where I was off base when we did the original --

Were these numbers, Gerry, the Brandywine core, were they your numbers or were they some extrapolated numbers from like a PPR or a RIF and the same thing with Prentiss were these Prentiss numbers or were these you numbers of Prentiss?

Not knowing which numbers you're looking at, I'm not sure. But I know what we did is we took a look at our projections on the performance of the Prentiss Portfolio, given the assumptions we had and extrapolated some growth rates from that. We certainly benchmarked that against, I can remember some of the presentation we talked about growth rates effective rent growth rates, et cetera, through . And we certainly looked at what we were seeing at argus real estate level and comparing that to the projections for economic growth in that market.

You know, on the Brandywine side, I think we certainly took a look at what our experience was with the portfolio. Focused on where we thought the same-store growth would be, and again as I think I've talked about on this call, we, I'm, I remain a bit frustrated we can't get a also more same-store growth out of the Brandywine portfolio.

But if there's any takeaway the Prentiss transaction is additive without the PP Portfolio, you be at the lower end of the range?

Look -- I mean I think if you look at fanatically , Chris, which I know you love to do, when we look at the performance of the relative portfolios, certainly from an operating standpoint, same-store standpoint, occupancy gain standpoint, diversity of investment alternatives, future development pipeline, there's no question in our mind it was the right decision to do what we did. The frustrating aspect is we really want to make sure we work in '07 as this market stabilizes to dramatically improve our same-store portfolio and get it back to the level that it was in the early 2000s.

And that's helpful. When does the Prentiss Portfolio go into same-store? I forget the exact closing of the deal.

The closing was January 5, So we have this odd four-day period.

So this won't go in the same-store until '08?

Technically, that would be correct. The first quarter that it would be in the same-store would be technically be the second quarter of 2007, would be the first quarter that you could compare quarter over prior-year quarter of a full 90 days.

When did Cira go into same-store?

Cira wouldn't go into same-store until 2008.

As well. And same thing with the Radnor portfolio?

That's correct.

Okay. On your cap rates, pardon me, yields on sales in the fourth quarter, obviously you got one of the big buildings in there which I would assume, could you give us a sense as to what the in-place rate of return is on the yield on the sales are? For the fourth quarter?

I don't have that.

What would you say your, I apologize if I missed this, the rate of return yield on the sales year-to-date?

Well, I think as we're looking at, I have a general schedule here in terms of the range of cap rates on the sales have been south of 6. To as high as 9. But we also had a couple sales in there of significant under-leased buildings.

I think had you mentioned that before, do you have any kind of a number, weighted average?

I don't have the weighted average here, no.

Okay, all right. And when you look at the development additions in 2007, at least on your schedule, you mentioned 8 to 9% development yields?

Right.

Those are cash or GAAP?

They are GAAP

They are GAAP, okay. And I'm assuming you're getting some reasonable bumps on that so we can make an adjustment for cash?

Right.

Okay. On the mark-to-market, if I look specifically at Dulles, the earlier question was asking about the 7-eleven lease. In your '07 guidance, are you assuming that the asset is sold and you do not have to deal with that expiration?

We are.

Okay. And if you did not sell the asset, what would be the mark-to-market in Dulles?

Actually, the, I think in there it's a positive mark-to-market. He's asking if we end up holding onto Citiplace.

Oh. I just don't have that schedule. Mark-to-market would not be meaningful. -- mark that lease to market anyway.

How about, where would you say your overall portfolio is, the Brandywine portfolio and the Prentiss portfolio is in terms of mark-to-market?

Well, I think it's consistent with what the information we put out at some of the investor meetings, which showed a negative mark-to-market in Brandywine but it was, we had some sub markets that were positive and some were negative, but generally, I just don't have the schedule in front of me, it was 1 to 2% or something negative mark-to-market I think in the legacy Prentiss portfolio, it was up 3 or 4%. So I think blended wise, we thought we were pretty close to mark-to-market as a company.

Sheets current number or last quarter?

Last quarter. Well, actually, perspective based upon asking rents in '07.

Okay. Okay, and then also with regard to this just want to go back and look at the changes, in strategy. Thematically you're looking at acquiring approximately a quarter billion on a full-year basis with Prentiss being brought in. That number obviously has gotten more aggressive to 600 to 800 million. Is part of that hire volume a function of to eliminate the dilutive of a slightly higher sales pace? Or do you really believe your rate of return on those deals, which you had originally estimated at 7.5% cap rates, which I would assume have to come down, is there something unique about the proposition for 6 -- worth of acquisitions about the proposition for 6 -- worth of acquisitions for next year?

Well, fortunately the cap rate on acquisitions -- has come down, too, from our original target. So I think it's worked out well for both of us. I'm trying to follow your question relative to the 250 million because again the way we look at it is that certainly we've dramatically accelerated the liquidation pace of some of these assets. So I'm very pleased with that. I think it's the right investment decision to make. -- broadening our acquisition pool. That being said, we have not done and certainly don't expect to do a transaction that doesn't make sense from an investment standpoint. We certainly have made the decision what we're looking at is net 130 million acquirer, '06 and '07 in the aggregate, based upon the pipeline and the quality of the deals we're seeing from all the different markets.

From right here, from where we stand today, you have no acquisitions assumed in the fourth quarter, you've got sales of approximately 150 million then another, I've got another 150 so 300 million of forward sales, and 700 million of purchases?

Yes, looking at that, sure.

Okay, all right. So in terms of balance sheet changes, there will be a modest as you fund out the rest of the development plus net investment activity, I would see somewhere in the neighborhood of 400 million increase to my leverage?

Yes, you could see that level assuming that there's no other joint ventures or other sales activity, correct.

Okay, great. Thanks much.

Your next question comes from Mr.Richard Anderson of BMO Capital Markets. Please go ahead.

Thanks, were you anxiously waiting my call, too? I was, actually. I had you, I have your picture with me right here. You know there's a danger in Friday conference calls and this hour and a half conference call is maybe one of those dangers. But thanks for sticking around with us. I'll try to be quick. First of all, on the exchangeable notes, those can be exchanged right now, right? Assuming they get down-- five-year wait time?

The holders of those notes cannot put them to the company until the fifth anniversary.

The fifth anniversary? I couldn't read that anywhere, I apologize.

Actually, not only on the first five-year anniversary, but four different five-year anniversaries, unless the exception to that is obviously upon a change of control scenario, that accelerates.

I guess I misread that, I apologize. On the acquisitions, you mentioned equalizing Philly and D.C. When you say equalizing Philly, is the basis Philly include southern New Jersey and Wilmington?

When we look at that,Rich, we have about a little bit north of 50, 55% of our revenue contribution coming in from the Philadelphia region, which we design as central southern New Jersey, the Pennsylvania suburbs, Delaware and the City of Philadelphia.

That's a big jump in D.C. over time, I guess, right

We're talking over 3 to 5 years. And again we're looking at that, that growth, the company growing during that period of time. So I think we have, you know, certainly some work to do. We think the program is on point.

And last question is, I guess sort of big picture for you, Gerry. A lot of these calls over the past couple of years have been, we're seeing increased activity, starting to look good, but still no rent growth. And that's sort of been the seam for you guys for a while. My view, you guys are probably the best you can, it's just market conditions, have you ever stepped back and said maybe we should be buying back all the shares? If that makes any sense.

Well, look. I think, you have to recognize these markets run in cycles. And we certainly didn't have the legacy Brandywine markets the level of rent -- that we're experiencing a number of other markets. That was one of the attributes of of being here that was kind of stable and steady. So when I look back on the company's performance, in the early 2000s, you know, our occupancy levels were higher. We were generating better same-store growth. And there was a decent flow of transactions. I look at, compare that to today, I think we have as George touched on a very high level of transactions through the company. Rental rates have not moved at the pace that expenses have moved. And our hope subpoena that that's a transitional disconnect.

We literally have again, rental rate mark-to-market is increasingly narrowing over the last couple of years within the legacy Brandywine Portfolio, which I why I think we're talking about in terms of stabilized rents when we do our canvassing of all of our managing directors, certainly we're all anticipating rents to rise. The challenge first in this market is the pace of growth up until now has not outweighed the expense growth. Which creates a, a very tepid and negative same-store growth, NOI situation. So, our expectation is that with there continuing to be decline in vacancy in the market, they continue to be fewer larger blocks of space, our marketing pipeline being stronger than its ever been, is that we will ultimately -- occupancy gains and hopefully we will ultimately -- occupancy gains and hopefully being able to push represents in some of our key markets, move back to a same-store scenario. So as frustrating as it's been for us, it's certainly, a part of the business and we recognize that and recognize that's one of the attributes of this marketplace. Over that same period of time it has become tougher to build. And our expectations that we'll be able to be a good driver of growth over the next few years from our development pipeline in this area.

Okay. Thanks very much.

Your next question comes from Mr.Ross Nussbaum of Bank of America Securities.. Please go ahead.

Hi, Jerry, good. I'll be quick. Question regarding what's going on out in Dulles in terms of new construction. I know you touched on it before. Do you have any fish on the hook in terms of your development in terms of getting any preleasing down there?

Is as this point, we're just in the proposal stage and there are a number of tenants in that market, but it hasn't really gone beyond the proposal.

Do you think there's going to be pressure on rents over the next two years as 4 million square feet guess absorbed out there? We don't really think there will be downward pressure on -- online. One of the real factors, a couple.

One is that the market's getting tighter. But also there have been so many investment sales that are at very high prices that are underwriting increased rents across the board, the landlords have substantially increased their asking rents for property in that whole corridor. And I think it's kind of dragging the market up. So we don't really think there will be rent reduction at all. And we think the property is really well positioned, given how we performed it, to, to perform over time.

-- 250 million estimated total costs under development, you're 5% preleased on that, where do you think that number would be? Are you on target or a little behind where you thought you'd be there? Ross, generally for the whole, the development portfolio? Uh-huh.

Oh, we're, we would never have expected to be that, to have any significant leasing activity today. I mean, you look -- take a look at these building sizes, the 10 to 14-month delivery timeframe, the tendencies in the marketplace, rare is the situation where you have the heavy prelease in the suburban lots --

Raw space are you building out any suites?

No, I mean right now, the focus is on core and shelf completion and our expectation is that the marketing efforts really begin to ratchet up significantly kind of once the steel is topped out, the curtain wall, facades going up, we got some of the lobby elements, the next one would be a lot of traction.

Thanks, guys.

Your next questions come from Mr.Michael Hutchens of Stifel Nicolaus, please go a head.

You've answered most of my questions. I have one, and forgive me if I haven't, if this has been addressed. I got a little late. I'm here with John -- as well by the way. The question we have, is there a story behind the gain on termination of purchase contract? Not much -- it's not all that dissimilar to a frankly to a termination fee of a lease contract. We had rights under an agreement that dated back to 1998. And in return for 3.1 million payment, we agreed to tear up our rights under an agreement.

Okay. That's it. Thank you.

Great. You're welcome. Thank you.

And we have a follow-up question from Mr.Chris Haley of Wachovia securities. Please go ahead.

You're getting starving, Gerry, aren't you?

I'm what?

Starving.

I never eat lunch.

Gerry, I'm looking at this expense growth, and I'm comparing it to some of the other data point that is we received from some of your peer public companies. And they seem high and I'm wondering where your variance might be and we're trying to relate this to the other companies. Are a greater percentage of your leases gross and your recovery ratios below 90% or 80%? Just trying to understand what, more color about, on an inflation number, 2 to 3 times inflation number on expense growth.

Well, let's look, let's behavior indicate the expenses.

Sure, sure.

I mean, one of the key drivers when we look at the Prentiss Portfolio of the expense growth is coming out of real estate taxes. That's a huge driver, particularly in the California markets. Across the board, I think we were showing, I don't know if you guys have the schedule, an 8% utility cost increase. In that range? So again, utility cost and real estate taxes tend to be large components of the expenses involved in running an office building. The expenses we control, the repair and map happenings, internal costs, management fees, are all progressing I think at fairly reasonable rate. What we typically see is a higher level of r and m budgeted this early in the year and we typically don't extend the budget amounts of money -- where we are right now in the beginning of the fourth quarter, of '07, looking at '07, we also take a cautious approach to make sure we budgeted enough expenses at the property level.

But the ability to pass those through in terms of reimbursed, just trying to understand, I understand the percentage increases and many of your peers are also using or assuming mid to high single-digit tax and utility increases. Is there an inability to be recover that? Are you assuming a lower ratio of recovery this year versus last year?

No, I think our overall recovery rate, projecting 36% or so, which is up slightly. As you know, it really boils down to a lease by lease calculation. Tenants base year is reset, don't recover anything that particular year. As it relates to utilities specifically, utilities generally are recovered at a much higher level than any of the other expense items because many of our leases are structured that you you know that the utilities cost largely are passed through entirely to the tenant. Whereas-- may be just baked into a base year or maybe into a pool of other expenses in a particular lease and that increase may be offset by a decrease in another line item. Other things are some, some of the of more of our expenses at the property level are billable to tenants, but there are several line items that aren't billable to the tenants at all under a lot of our lease structures. So it's really a mixed bag property by property, lease by lease. Up fortunately, there's no quick and dirty, easy answer.

If you look at operating expenses this year, nine months, were up 3%. And my, roughly approximate with my reimbursement level, reimbursement increases --

Correct.

I'm just trying to reconcile why '07, is it because of the lag of lag of taxes?

Again, I mean I think it's back to the individual line items I mean I think it's back to the individual line items within that property operating expense numbers that are up and/or down and a combination of the leases as base year is reset, the level of recovery is going to decrease sequentially, you know, year-over-year.

Okay. Well, thank you.

You're welcome.

At this time, there are appears to be no further questions. Once again I will turn the floor over to Mr. Gerry Sweeney for any closing remarks.

Well, thank you all very much for participating in the call. And we look forward to continuing our discussions and updating you on our activities after the end of the year. Thank you.

This concludes today's Brandywine Realty Trust conference call. You may now disconnect.