Brandywine Realty Trust (BDN) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Brandywine Realty Trust's fourth-quarter earnings call. [OPERATOR INSTRUCTIONS]

Prior to turning the call over to Mr. Gerry Sweeney, please let me read the disclaimer on behalf of the company. The information 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, estimates, 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 expectations, 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 10K for the year ended December 31, 2005, a copy of which on file with the Securities and Exchange Commission.

Including our able to lease vacant space and to renew or relet space under expiring leases at expected levels, competition with other real estate companies. For tenants, the potential loss or bankruptcy of major tenants, interest rate levels, the available of debt and equity financing, competition for real estate acquisitions, and risks of acquisitions, new positions, and developments, including the costs 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 furthering information on factors that could impact us, please reference our additional filings with the S.E.C.

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 unless required by law.

Thank you.

I would now like to introduce your host for the conference, Mr. Gerry Sweeney, President and the CEO of Brandywine Realty Trust. Mr. Sweeney, you may begin.

Thank you. Good morning, everyone. And thank you for joining us for our quarterly earnings call.

Participating on the call with me today are: Howard Sipzner, our Executive Vice President Chief Financial Officer, Darryl Dunn, our Vice President, Chief Accounting Officer, our Gabe [Minardi] our Corporate Controller, as well as Bob Wiberg and George Sowa, two Executive Vice Presidents.

2006 was a good year for the company. It started off with our merger with Prentiss Properties and continued with the strong execution of our business plan objectives. A good part of our activities during the year was spent on accomplishing these business calls and the success integration of both our employees and work processes.

As I'll walk through in a moment we achieved success on many fronts.

Our major disappointments during the year, however, revolved around rental rate growth, pressure on capital costs, and our general stock price performance.

Looking at the fourth quarter, it was a good one for the company. We posted financial results in line with our forecasts and ended the year within our guidance range.

During the quarter, we also saw strong tenant retention of 82%, our occupancy levels also improved over the previous quarter, and on a year-over-year basis.

FFO pay-out ratio remained in line with our 70% target, and during the quarter, we had net absorption of 177,000 square feet, resulting in total net object corporation for 2006 of 455,000 square feet. We also improved our office occupancy by 90 basis points over year-end 2005, and improved our leasing percentage by 120 basis points over year-end 2005 levels.

Looking back on the year, we had increasingly strong deal flow sequentially throughout the year, and we hope that will continue to benefit our overall goal of occupancy improvements.

Several key metrics to focus on as we look at the company's performance. During the quarter, our rental growth rates on both renewals and new leases were in line with our expectations and exhibit just a slight improvement year over year.

We still have a way to go, but certainly as we look at things, we'll discuss later the trend line appears to be a bit positive.

On trend lines, the same trend that we talked about last quarter held true again this quarter on GAAP rent growth on new leases greater than 10,000 square feet. Those -- that growth rate was actually 3% positive versus an overall 3.7% negative on GAAP growth rate. From our standpoint, that reinforces an increasing shortage of larger blocks of space and a little bit more pricing influence over the larger deals.

In addition to not looking just for rainbows, but it's important to note that about 1.6 million square feet of our current vacant 2.7 million square feet or about 60% of the company's vacancy is in suites greater than 10,000 square feet.

Our general approach has clearly been to lease as much space as possible, including you some of those smaller spaces that may have included a bit more capital investment. We believe our track record of keeping tenants in our portfolio, as evidenced by our long-time high retention rate, continues to make this a sound investment approach.

Speaking of capital account costs for the quarter were a bit higher than what we've experienced in the last quarter, and certainly remain high by historical standards. Again, a portion that's being driven by our continued aggressive practice in leasing up space.

During the quarter, we did experience the highest capital costs per square foot in the company per lease year in our Pennsylvania suburbs, New Jersey, and northern California operations, with below average capital costs in Richmond, metro DC, our urban division in Philadelphia, and in Austin, Texas.

Focusing on some broad trend lines, all of our markets are projecting stable or increasing rental rates over the next year.

Further, all of our markets with the exception of suburban Wilmington posted positive absorption with a corresponding decrease in vacancy rates and upward pressure on rental rates during 2006. Brandywine occupancy also outperformed market occupancy levels in all of our markets with the exception of suburban Maryland due to the Calverton project. In many cases that outperformance was dramatic, particularly in central New Jersey, urban, Richmond, northern California and Austin.

Cira Center is on target with move-ins, the last-ins occurring on schedule. We're essentially 100% leased and a bit over 90% occupancy. And the last move-ins will continue this quarter.

Radner continues to make progress as the supplemental package indicates. As of the end of the year we stood at 74% leased, which was slightly above our year-end target.

More importantly, momentum continues to build in our Radner complex. Pipeline is very strong. Larger blocks of space in the complex are being leased. We are increasing rents and are confident of hitting our 92% target at Radner Financial by the end of 2007.

Our construction and development projects remained on schedule during the quarter. We had good activity across the board with fairly frequent showings.

On our five development projects, all are on target and on budget with the exception of our project in Oakland, which slipped a bit during the quarter due to a delay in approval and site issues, and the cost numbers in Oakland have increased a bit due to additional design changes.

As it's parent, I have to apologize, there were some inaccuracies on the corn shell and the P&L dates on some of our development projects on page 23 in the last quarter supplemental. Current schedule is pretty much accurate and on point.

And we anticipate delivering these projects between April and October of this year with projected stabilized years in the range in which we had spoken before between 8% and 9.5%.

Several encouraging signs on the pipeline activity, as I mentioned, is picking up. We have a deal pipeline of slightly more than 3.5 million square feet. And in many cases, our current asking rents are a bit greater than our original pro formas. And if these trends continue, we should be in pretty good shape in our development projects.

Given the project's physical stages of delivery, we would not expect any actual lease executions until later this year. And as such you may recall that our 2007 guidance does not include any income from these deliveries in this year.

Briefly let me review several key barometers by which we measured our success during 2006. Our -- one of our primary goals was to execute the integration plan.

As we talked on previous calls, we made great progress, and I think all of us take great pride in the extraordinary success we had during 2006. My thanks to George Johnstone, Senior VP of Operations, really headed the effort for us. And to the many members of our employee base whose commitment really made this success possible.

Our next major goal was to commence $200 million in new developments. As we currently stand, and is indicated in the supplemental package, we have $260 million of new developments underway, as well as $43 million of rehabs for a total development pipeline of about $304 million, equal to about 5% of our total enterprise value.

So that objective we laid out early in 2006 was also accomplished.

The third major objective was to achieve success on the Dallas sales initiative. We had originally targeted $200 million total sales activity for 2006. We actually sold $290 million during the year out of Dallas, and we just closed another $108 million sale and had the city place project under agreement and in due diligence.

We also in addition to the Dallas activity sold another $72 million of properties in Philadelphia at an average cap rate of around 6%, as well as selling several parcels of land at a very strong profit during 2006. So with these recent closings back to Dallas, we will have sold over $500 million in Dallas within 500 quarters of closing the merger transaction with Prentiss. And during the year we made good use of these capital recycling activities by purchasing five office properties for an aggregate price of $227 million, and four land parcels to add to our development pipeline that had a total cost of $15.8 million.

From an efficiency standpoint, moving on to administrative operations, we had identified originally about a $4 million to $5 million efficiency through the Prentiss operation and we have reached that goal. Another primary objective was to improve occupancy. As I mentioned we ended the year up year over year.

Our operating margins continued to show some improvement during the course of the year and improvement over 2005 levels.

In looking at the portfolio for 2007, we anticipate good performance coming from the Pennsylvania suburbs, including being on plan in Radner, central New Jersey, Philadelphia urban, northern Virginia, Richmond, Oakland, Austin, and San Diego. Our 2007 rollover in these markets is manageable, and we feel as though we're in a good position to be very much on target.

The challenges we see in the portfolio are -- remain in Delaware, southern New Jersey, and suburban Maryland, where specific tenant rollover situations and uncertain regarding the depth and velocity of market activity remain a concern.

But our watch word for 2007 is as it's always been which is to lease space. Leasing remains the top priority throughout our organization and is clearly the most direct path to value creation.

From a disappointment standpoint looking at 2006, I touched on these briefly. We continue to experience a general rolldown in rents on both the cash and GAAP basis. On both new leases and renewals. We did post some positive same store in the same quarter.

Market conditions are clearly continuing to improve which makes us hopeful that later in 2007 we'll bring more positive rental rate trends. TI continues to experience pricing pressures.

During the fourth quarter we saw an increase in TI costs over previous quarters to bring our run rate for 2006 to about $2.70 per square foot. We anticipate continued pressure on capital, but all of the markets that we are in are approaching a point where we can begin to amortize excess improvement costs as part of the rental income stream and thereby delivering higher effective rents.

In addition with rents firming, one of our key leasing strategies for 2007 is to increase our average lease term, thereby diminishing our leasing costs per lease year.

So all in all, 2006 was a year characterized by successful integration. One where we met our core operating objectives, began to optimize potential operating efficiencies, commenced our development pipeline, and had significant success on recycling capital.

With that as a brief overview on 2006, I'm delighted to turn the floor over to Howard. Howard?

Gerry, thank you. It's a pleasure to be here on my first Brandywine call.

So before I give an accounting overview, let me offer a few general thoughts. When a new person starts in a senior position or any position, you'll often hear them talk about the first 100 days, about listening and learning, about taking time to understand the company, about getting to know the people and the culture, and about assessing strengths and weaknesses.

I subscribe to all these ideas, but if I accelerate my process as it's been only 25 days including weekends since I arrived, I'm not even on the direct deposit payroll system yet. So in just my 26th day with Brandywine Realty Trust, let me share a few observations with the understanding that I still have a great deal to learn.

The people of Brandywine are outstanding. Whether in the field or in our corporate office, our employees are conscientious, talented, and hard working. We clearly have the talent and teamwork to excel.

In particular, our regional managing directors together with their respective teams possess a wealth of contacts and local expertise with which to pursue and execute opportunities in their markets. Our systems and infrastructure are extremely sound and well designed. We have a strong internal control culture, reinforced by our internal audit function, our Board and audit committee oversight, and most of all the 61 professionals who perform our various accounting functions.

We have an excellent IT infrastructure, consisting of 11 professionals who service our information needs and assure the accuracy and safety of our data. Many of you have asked or written about the turnover in Brandywine's corporate division.

While challenging for the company, these openings and changes have given me the opportunity not only to join the company but to bring on board two key individuals, Darryl Dunn as our new Chief Accounting Officer, and Robert Juliano as our new Information Officer. Darryl and RJ bring experience in their respective fields and will help move Brandywine forward. I am very pleased with the rapport the three of us have developed over the past few weeks and look forward to the enhancements we hope to introduce at Brandywine.

My initiation would not have been as smooth as it has been without the prided efforts and immediate outreach of a group of people.

These include Brad Molotsky, our General Counsel, Greg Imhoff, our Chief Administrative Officer -- though he does far more than the title suggests, George Johnstone, head of operations, who was a big help in getting me acclimated, and Dan [Petoniac] our Director of Lease Administration.

Darryl and I have benefited tremendously on the accounting side from the work of Gabe Minardi, our Corporate Controller, as well as Chris [Sheffer], Construction Controller, Joe [Labonno] and Renee Hollaway, our Property Controller, Jim King, Director of Internal Audit and [inaudible], Director of Financial Reporting.

Both RJ and I identified the key contributions of several of our IT managers including Gary [Hess], Jeff [Craler], Chris [Whitcamp]. Their efforts and the rest of the IT staff on network infrastructure, systems management, and our reporting process create a solid base for future advancement.

In the short time I've been here I had the opportunity to work closely with Tom Wilkin, audit partner at POWC and his fine staff, as well as Mike Friedman, corporate counsel at Pepper Hamilton. They've been a big resource in my first few weeks. Sounds like the Academy Awards, but there's only one person left.

Lastly, let me thank Gerry Sweeney for giving me the opportunity to join such a fine company. Beyond being the founder of Brandywine and the day-to-day leader, Gerry is the heart and soul of this company, challenges us to reach our potential, and sets an excellent role model with his own passion and integrity.

As I told the senior managers at our recent off-site managers meeting, my job at Brandywine is to be the financial fiduciary of the company and stakeholders. So, whether you're an investor or a bondholder, a tenant or a lender, an employee or a vendor, I'll be protecting your interests as if they were my own. We'll be truthful, communicative, and as transparent as possible in our efforts to serve each of you.

Before we get to the numbers, let's cover a few accounting objects for our quarter and year-end reporting.

This quarter and all of 2006 for the most part reflects the full effect of the Prentiss merger which closed on January 5, 2006. Net of those Prentiss properties that we sold in 2006, as noted in the supplement on page 22.

The dramatic change in Brandywine from this merger makes quarter-over-quarter comparisons difficult for many of the figures. Where applicable we will highlight the sequential trends and, in fact, have done so in many sections of our supplement. If you do not have a copy, you may get one at our website at www.brandywinereality.com.

Second, please note our inoccurence of a $1.4 million noncash charge for the accelerated amortization of deferred financing costs in connection with our payoff on January 5, 2007, of our $300 million floating rate notes which had been due in 2009. To facilitate your understanding of our results, we have presented FFO both with and without this charge, in the process adjusting as well for a separate acceleration charge in Q4 2005, of $1.9 million in connection with the restructuring of our current facility, unrelated to the Prentiss merger.

Third, it has been the historical practice of the company to exclude gains on the sale of nondepreciated real estate, unlike many of our peers in the office and other REIT sectors. These amounts totaled $11.6 million for Q4 2006, and $14.2 million for all of 2006. This fact should be considered when reviewing metrics such as FFO, FFO per share, FFO payout ratio, and CAD payout ratio.

Fourth, the reporting periods reflect the classification of the Prentiss Park West assets in Dallas as held for sale at year end, along with one of our smaller properties. Both these sales closed as expected in January, 2007.

And lastly, all per-share figures that we'll discuss on this call are based on fully diluted shares.

A few highlights from the fourth quarter. Total rental revenue from continuing operations increased 79% to $174.7 million in Q4 from $97.7 million a year ago, and they were up 1% sequentially from Q3 '06.

Net income from continuing operations increased 11.2% to $8.7 million in Q4 from $7.8 million a year ago. And net income available to common shareholder after preferred dividends increased 330% to $21.9 million in Q4, from $6.6 million a year ago.

Of note on the income statement, recoveries were particularly strong in Q4 2006, at 37.6%. Resulting for the most part from a true-up of our full-year recovery process. We expect our recovery rate on expenses to run overall at a more typical 33% to 35%, depending on the pace of future leasing, as well as the impact of base year resets in connection with renewal and other leasing activities.

Termination revenue at $1.2 million was typical in Q4 2006, the drop in depreciation is due to certain timing differences between Q3 and Q4 2006, as well as certain accelerations in Q3.

Our G&A at $7.2 million for the quarter represented 4.1% of total rental revenue for the quarter. G&A is declining generally, though this and other quarters have included some one-time integration and transition costs.

We expect our run rate for 2007 to be in the $7 million range, up slightly from our prior indications.

To put that in perspective, and I thank one of our analysts for pointing this out, if we look back at 2005 at the Prentiss run rate numbers, excluding merger charges, which we calculate at about $21 million, and Brandywine's 2005 G&A costs of $18 million for a total combined company on a pro forma basis of $39 million, you can see we've achieved significant savings on the G&A side, via the merger.

FFO totaled $59 million in Q4, up almost 73% from a year ago. And excluding the debt charge would have come in at $60.4 million, versus $36 million with the prior figure adjusted, as well. On a per diluted share FFO went up -- increased 8.6% to $0.63 in Q4 versus $0.58 a year ago.

Excluding the debt charge, FFO per diluted share would have been $0.65. That would have met both our consensus estimates from the analysts as well as the mid point of our own quarterly guidance.

And on the payout ratio, about 70% on the unadjusted FFO and 67.7% excluding the debt charge.

With the other metrics, our interest coverage ratio at 2.5 times very comfortable, 2.3 times debt service and 2.2 fixed charge. Very comfortable in terms of our coverage, vis-a-vis our ratings and other expectations.

Gerry mentioned the same-store NOI increase of 5.5% for GAAP and 8.2% for cash. Those numbers do include term fees which were not terribly different in the two periods. Besides occupancy and rental gains driving these numbers, we saw increased recovery percentages and forward growth in the expenses in the quarter.

A few quick highlights on the 12-month income statement. FFO per share at $249 versus $244, if we adjust both of those figures for the aforementioned debt charges, $251 versus $247, the $251 both met our consensus as well as the quarterly guidance, as well as the full-year guidance.

In terms of development yields, we broke this out on the press release. In 2006, we completed and leased just over $215 million of development activity, primarily Cira Center, regarding an annualized yield of 7.7% and a GAAP yield of 9.1%.

On the accounts receivable side, certainly one of the things we look at on a regular quarterly and year hyphen basis, at 12-31-06 we had $20 million of operating receivables and net reserve of $4.5 million, and about $71.6 million of straight-line rent met with a reserve with $4.8 million. In the aggregate, no unusual credit activity in light of the fourth quarter 2006, and our reserves remain in line with prior periods.

Let's talk for a moment about 2007 guidance. As noted in the press release and as Gerry mentioned, we're raising the bottom end of our guidance to $2.50 from the $2.55 in recognition of the Q4 charge of a $1.4 million debt extinguishment charge. We're keeping the top of the range at $2.65 and our $2.57 to the $2.65 range brackets the analysts' consensus of $2.61.

Let's take a quick look at how these numbers both come about and what some of the challenges or opportunities are in 2007.

We look at Q4 without the debt repayment charge it's at a $0.65 run rate. If we back out $0.01 per share from delusion to one of the sales, the large Park West sale that closed earlier in January, that would take us to about $0.64. And deduct, as well, $0.01 which was some street line rent catch up on the Cira Center project in conjunction with it coming on line, that brings us to $0.63.

Deduct another $0.01 from the early excess recoveries in Q4 offset by other miscellaneous benefits, that brings our normalized run rate to about $0.63, plus or minus, or about $2.52 annualized. So both hit the mid point of our guidance or the consensus of $2.61, we had about $0.09 or roughly $8 million.

And as we take a look at our forecasts and budgets, we wanted to give you a sense of how we see ourselves achieving that. If we achieve GAAP NOI growth in 2007 between the range of 1% to 2%, and that's a little bit higher than the previous numbers we've communicated, we take the mid point of that at about 1.5%, that's worth about $6 million. So we'd be about 75% of the way there.

Really, I think the primary driver for both us as well as you to focus on is going to be the occupancy. There will be no single greater action we can take than increasing occupancy.

If we move our occupancy up 1% in 2007 on a mid-year convention to 92.5% at year end, that could be worth as much as half of that $6 million growth, about $3 million. Then the rest of the income to make that up, and obviously hit the $8 million number, will come from other realizations on renting, better control on renewals versus base rent, the hope for and certainly desirable expectation of slow ultimately no rent rolldowns on renewals and new leases.

We do expect to have some lease termination, probably in the $3.5 million to $4.5 million range.

Those terminations will of course need to be overcome in the context of our year-end occupancy. But that would be below the $7.5 million we had in 2006.

We're not projecting any meaningful accretion from acquisition or disposition activities, but it could be as much as $500 million on either side of that. Quite potentially involving JV activity on the purchase side.

In 2006 to put it in perspective we sold close to $500 million and bought $243 million.

Land acquisition for development and monetization of older land parcels will also be top priorities.

And as Gerry mentioned, no contribution from the ongoing development activities.

A few quick balance sheet metrics, and then I'll turn it back to Gerry. Very conservative debt profile.

Been very pleased what I've observed in terms of the history of the company as well as the goals going forward. 49.7% debt to total market cap. 52.1% debt to gross real estate costs.

In very small concentrations of secured debt. Just 14% of total market cap and floating rate debt 6.9%. Our $600 million line reflecting the pay off of the $300 million note in January is now $305 million drawn.

So we'll continue to monitor the credit market for opportunities to term out, particularly in the 6 to 10-year timeframe, where we have some openings. We also continue to look aggressively for debt paydowns, but do not anticipate any further prepayment charges in 2007. Lastly, our share repurchase program remains open.

We have the authorization to purchase another $2.3 million shares, and that's something we can continue to do or suspend under Board authority.

With that I'll turn it back to Gerry.

Howard, that's great. Thank you very much for those comments.

Prior to opening up the call to Q&A, let me make a couple of observations if I might relative to 2007. The -- I certainly communicate it in every conversation I have with our shareholder base and the analysts. We certainly remain disappointed with the performance of our stock.

We recognize there's been a lot of noise relating to integration risk, the slower recovery in our markets, the delusion overhang related to the Dallas sales and our portfolio realignment activities.

But as we look at certainly our stock remains undervalued by any metric, but particularly when compared to replacement cost and historical occupancy and NOI levels throughout the combined portfolio. And as we enter 2007, we're certainly encouraged by the leasing traction that we saw through the portfolio. The consistent outlook for continued rent stability and potentially some growth. The general recovery state of our markets, and our value creation strategy.

So I mean, real straight forward, the key element of our 2007 business plan, we're going to keep it simple again this year. And the first one it's simply growth-releasing performance.

As Howard touched on, as we've talked on other calls, we all operate every day on the premise that the most direct avenue we can go down to improve the overall financial and operating performance of our company is by simply leasing space.

Key objective as part of this obviously is performing financially within our earnings target ranges and move toward accelerated FFO growth, certainly a positive CAD ratio remains a priority for the company. And we think we can get there by increasing occupancy levels as well as effectively managing our capital costs.

Again, we're seeing very clear signs of a market recovery, albeit spotty across some of our markets. But generally and fanatically speaking we think the markets are at a point where we can start to move from a defensive approach to one that's more offensive and focused and really start to drive the rental equations across the board. Talked about our existing pipeline. Obviously we have work to do there in terms of leasing activity.

But as we look at 2007, we're currently focused on potentially starting a new building in Richmond. The new building in New Town Square, Pennsylvania, as well as commencing several rehabs during the year. Certainly we would expect to be able to provide better clarity on those projects during our first-quarter call.

From the land inventory standpoint, the supplemental indicates we currently are carrying just shy of 500 acres of ground that can accommodate 8.2 million square feet of value creation.

One of our objectives for 2007 is to continue to add to our land positions in the northern Virginia marketplace, Austin and California, and to continue to actively manage and in some cases we did this past year, trade out of some of our land positions in the Philadelphia suburbs.

Operationally and administratively, we'll continue to implement our top priority best practices that came out of the integration with the goal of further streamlining our operating efficiencies and rationalizing our G&A and regional deployment costs. We would certainly expect in 2007 to continue our long-standing track record of achieving a tenant retention target north of 70%.

From an investment outlook, we're looking at several objectives. One is that we would expect to sell outright or joint venture an additional $200 million from the Philadelphia region. As you all know and certainly as evidenced by some recent events, the liquidity in the marketplace is amazing.

And we certainly anticipate taking advantage of this by trading out of noncore assets and continuing our program of dramatically improving overall portfolio quality.

From an acquisition standpoint, pricing is clearly very dear, but our pipeline remains strong. We will continue to look at acquisitions in strategic in-fill locations where we can add to our market positions.

Look for situations with vacancies where the pricing -- the growth is not already based into the pricing, and as such where we think we can create value and expand our marketing and operating platforms. Based on existing market conditions, as Howard touched on, the emphasis on acquisitions is going to be a bit muted versus where it was in our previous call.

Certainly continued cap rate compression, stronger core portfolio performance, continued stock buy backs, and anticipating forming co-investment vehicles we think provide a more clear and definable path toward growth.

All in all, 2007 business plan is straight forward. We clearly understand we have been a laggard in terms of increasing our FFO growth. With the integration accomplished, our market's recovering, our development's underway. We believe we are well positioned to again start to deliver positive same-store results, improve our operating margins, return to a better control in our capital costs, an ever-expanding value-added pipeline. We certainly appreciate you participating in our call in our today, and look forward to answering any questions. At this time we can open up the mic for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is coming from Ross Nussbaum with Banc of America Securities. Please go ahead.

Good morning, everyone. Couple of questions. Not sure who to -- who's going to field this one.

If I look at your lease expiration schedule for 2007, looks like the expiring rents are lower than what you had in 2006. What are you expecting the rent spreads to be?

It's a good question, Ross. And in that layout I did for the FFO growth, I think we were cautiously optimistic hoping to hit GAAP numbers around $22 or so. So on a going in cash basis, we may be neutral. On the GAAP side, we could have positive opportunities.

We're going to be very focused in 2007 on much more defined rent bumps, particularly if some of those rollovers, unfortunately, involve step ups in the base year on the expense side. But all of that rolls up into an expectation of 1% to 2% overall NOI growth.

Okay. And then Gerry, can you remind me, I don't know if you disclosed this. What was the cap rate on the $108 million you sold in Dallas this past month?

The overall cap rate, Ross, I did not mention it. Thank you. On our total sales in Dallas was right around 8% on a weighted basis.

And that ranged from cap rates on certain properties as low as 3% where there's a leasing situation, 6%, and over 10% on two small properties. But on a blended basis, we were just north of 8% cap rate.

Okay. And which --

And frankly, very much in line with our original criteria.

Yep. Which assets in Philly were sold at a fixed cap? That was a little lower than I would have expected.

Yes. We actually sold -- the major property that drove that in the Philadelphia area was a building that we sold in [Bala Kenwood] earlier in the year, and that was below a 6% cap rate on NOI.

Then we sold properties, one of which -- actually two of which were responsible for in New Jersey which had very good cap rates on current income. Some leasing exposed. So clearly in that case the new buyer, the buyer was hoping to get some growth from those properties versus what was currently in place.

Thank you. Our next question is coming from Ian Weissman with Merrill Lynch. Please go ahead.

Yes, just a follow up to Ross's question.

Gerry, could you just talk a little bit -- give a little more detail on the cap rate compression in your markets. You talked about carrying back your acquisition assumptions, I think it was $600 million to $800 million. My guess you'll do some fraction of that. What type of deals are you looking at in your markets right now?

Well, the primary area of focus in terms of looking at acquisitions are in some of the markets outside of the core Philadelphia area.

That being said, there's a continual and ongoing pipeline of activity in these key -- in the Philadelphia marketplaces. I think what we're looking at in terms of criteria for proceeding with an investment, and if you look at the three buildings we bought in northern Virginia during 2006 are a good example of it.

Is properties that really do have an in-fill strategic opportunity for us, where there's either a tenant connection, an opportunity to expand our concentration in the submarket, and where we think the economic metrics make sense. Either the price per square foot we're paying versus replacement costs in that market. Or a going in return where we think we can actually get some marginal growth out of the acquisition.

What we're generally seeing, however, in a lot of the deals we look at is that the future growth is already priced into the point of sale -- point of entry pricing. In those cases I think we've not proceeded with any of those transactions. I don't think really we'd anticipate that we would. So we're really keyed in on properties that can really add to our existing market positions, take advantage of the infrastructure we have in those areas of operation.

And get some definable growth that will replace the overall intermediate term returns that we think we can get out of our development pipeline, our share repurchase program, we're deploying capital back into our own core inventory.

Let me ask the question another way then. If you were to look at your footprint, we've had enormous cap rate compression certainly post Blackstone, EOP transaction. Where are you seeing deals -- where are deals in your markets and have you seen as much cap rate compression in your core markets?

In the currents market being the Philadelphia --

In your current footprint. Look across your top three or four markets, have weather have cap rates trended in the last couple of months since the EOP and Blackstone transaction?

It's very direct, I think, cap rates continue to be compressed. We're seeing cap rates moving down, I don't want to put a number on it, whether it's 50 or 75 basis points. But there's no [dirth] of buyers out there. High-quality properties are being actively bid through an auction process.

And we're looking at cap rates on a cash basis that range between generally 5% and 6%, possibly a little bit north of 6%, and on a GAAP basis between 6% -- excuse me, 6% and 7%, depending upon where the existing leases in place are.

If you had to put a cap rate on your portfolio would it be between 5% and 6%, or 6% and 7%?

I always believe it's between 5% and 6%.

Okay. And the other piece of that Dallas sale, the 7-Eleven building, did you disclose a cap rate on that?

We did not. That's right in that 8% range also. Although that's an interesting dilemma because that property really is having a major rollout at the end of the -- actually early in the second quarter with the 7-Eleven vacancy.

So that property is being purchased more on a per square-foot basis and a retenanting prospect.

Okay. And finally one last question. What are you forecasting for capitalized interest for '07 and what projects are you currently capitalizing?

Ian, it's Howard. I don't have a list of the projects in front of me, but our capitalized interest has been very consistent. It was $2.3 million in Q4.

Going back sequentially to Q3, Q4, Q5, Q7, the higher historical numbers are being at the time when some of the older projects were still under construction. Cira has come off and is now in the operating side. We've harvested virtually all of that, but it will be replaced by some of the current projects as they ramp up. As well as potentially new starts. So don't expect that number to change dramatically one way or the other.

Okay. Terrific. Thank you so much.

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

John Guinee here. Hi, Gerry, did you ever hire a CFO?

I have. Yes.

Okay.

Thank you for following our company so closely.

Alright. A couple of questions. First, one, if you throw cap rates aside for a moment and just focus on price per pound, is there any place where you think you can buy at a decent price per pound or a decent discount replacement cost? Because I know how you think and you usually think price per pound first. Or is every place you're looking a situation where the depression in cap rates has caused the corresponding increase in price per square foot to get just too high?

I think, John, generally what we're seeing is that pricing on the bid is pretty close to replacement cost. We are seeing some situations where that's not the case. But they tend to be situations where there truly are leasing anomalies that create a little bit of an opportunity. They're the ones I think we key in on.

Certainly one of the things that I think has been a clear and consistent message over the last 12 months is that we've looked at a lot of deals is that pricing really is approaching replacement cost. Now to counter that is replacement cost has also been escalating at a fairly rapid rate, too. Particularly, a lot of our markets and some, which we have good concentrations, the approval process is continuing to get harder.

There's significant pricing pressure from the public agencies on infrastructure and entitlement costs. Costs which are rolling into the entitlement costs which are rolling into the cost to build and just general construction cost increases.

So I mean certainly as we look at our own portfolio and use that as a framework to evaluate acquisitions, I mean our current mid-rise inventory pipeline today is north of $270 a square foot to build.

That's a pretty significant increase over some of the projects that -- some of the pricing we would have had just four or five quarters ago, when you have a metroplex that's $265 a foot to build. Lenox Drive, which there is a high quality, but fairly standard three-story mid-rise building north of $230, you've had some pretty dramatic increases in replacement costs.

One of the things we're trying to do with recessed properties is what is replacement cost for that location within that political framework, and approval framework, and then where do we actually think the benchmark or rent will be today versus a year or two years from now.

Right. Alright. Thank you.

You're welcome.

Thank you. Our next question is coming from Cedrik Lachance with Green Street Advisors. Please go ahead.

Thank you. Gerry, on the Philly sale at a 6% GAAP rate, what was the occupancy rate in these buildings?

A ballot point was pretty much occupied. I don't have that in front of me. George, what was your recollection on Cherry Hill?

Approximately 80% on Cherry Hill properties.

Could you hear that, Cedrik?

Yep. What do you think of the IRR expectation on the part of the buyer or buyers?

I don't really know. They used a fairly high degree of leverage. I will tell you what we're typically is seeing is IRR's, certainly George and Bob and Howard, weigh in. But we're seeing IRR's for five-year hold in the high single digits.

Yes.

8% to 9%.

Yes. A lot of function of these leverages, as Gerry mentioned. But the private buyers are definitely using leverage to their advantage right now. But I'd agree with that, that's a good assessment.

What do you think would be the IRR on a levered basis?

Going into the six? It really is a function of how aggressive you get on that exit cap rate.

But if you hold it constant and you've got a substantially occupied building, not a whole lot better than six. Someone buys at a six, there's not a lot of positive leverage per se, if they can get in in the mid sixes and can finance the 80%, 90%, as we've seen some folks do, then it gets a little more interesting.

Then the motivations are different. They're not necessarily as IRR driven as deals as perhaps fee and just small spread driven. I really don't have any capital in the first place.

Okay. Looking to rent growth in the next year, can you give us a broad overview across your markets what you think will market rents -- by how much you think market rents will increase in your various markets?

I think Howard talked about that in terms of factoring into our forecast today. We're certainly seeing in every one of the markets as part of our quarterly review rents, worst case remaining flat and in most cases moving up.

Yes, and markets where you see them being flat in some markets, where you see them going up.

Yes. I mean, certainly I think where we see rents being certainly flat right now is in the -- I'll turn this question over to Bob and to George. But just looking at our quarterly review sheet, we certainly, as I mentioned in my comments, continue to see I think pressure in suburban Wilmington, and a couple of other submarkets. But Bob, what's your -- what are your thoughts?

Yes. I think in northern Virginia last year, we saw rents go up 3.5% to 4% on average. And in Maryland, I think we saw about 2% last year.

And I think what's going to happen in '07 and '08, they'll change a little bit because as new supply comes on line, it will make some of the properties less competitive, in particular the B properties. So I think through '07, the A properties will still do well, and they'll actually increase their rent probably in the 2% to 3% range, maybe more.

I think when you get to the end of '07 and into 2008 for the B properties, the commodity stuff, that's where it's going to be flat. There will be a lot of pressure from the newer, better properties.

In the Philadelphia area, I think you need to bifurcate the rent growth with the expense growth, as well.

And in looking from the pure margin side, but with the increase in rents, we have been seeing it in the marketplace, no doubt. And particularly when you look at some of the new product coming on. If you look at the direct asking rents for the new product, they continue to go up. And part of it is a function of the market.

Part of it is the function of the returns needed because of the increase in construction costs as Gerry had mentioned. But we do continue to see the increase in the market. And just to put southern New Jersey in context, I know Gerry said some challenges there potentially.

But it's really driven due to a couple of thing. It's absolute and will relative terms in that marketplace specifically.

And the reason for some of the potential weakness there is really it's been finance related sector, and in particular in southern New Jersey, driving that for the last few years. And with the increase or stabilization and interest rates here, that sector has actually fallen off a bit. Real good with health care and defense and construction and the rate recently.

So hopefully that trend continues. But it is some cause for concern.

Right. I mean, in another piece of data which is certainty important as we look at where the portfolio stands is the break -- is the composition of our vacant space.

And as I touched on -- we have about a 1.6 million vacant space in the company that is in blocks of space greater than 10,000 square feet. I mean, for the last several quarters, there's been a good divergence between rents that we've been able to achieve on the larger spaces versus the smaller spaces, which is a pretty -- in our minds, a harbinger of certainly a market in the recovery phase. And I think this quarter the spread was widest it's been. Which was we had 3% increase in rents on spaces over 10,000 square feet.

And a negative number on spaces less than 10,000 square feet. So clearly with vacancies coming in just about every submarket, so long as there's good absorption which all of our data points to indicate there will be there's going to continue I think to be some better pressure on rents. And we're clearly focused in 2007 on trying to get those -- I think it's 74 individual spaces greater than 10,000 square feet put away to the extent we can.

Okay. And just one last question. Gerry, you mentioned that your GAAP rate or your estimate of GAAP rate on the portfolio between 5% and 6%. That would probably suggest that you believe your stock's dramatically underpriced. Why not buy every share you can find instead of investing in acquisitions?

I think that's one of the things we touched on, Cedrik. That's a good point. We've certainly had this share program underway.

We continue to expect to keep that in place. We did purchase -- I don't know the exact number, about $70 million, $80 million of stock -- $60 million in stock as part of the exchangeable notes.

$94 million total.

$94 million total? Thank you. So we bought almost $100 million of stock back last year.

We would certainly look to do that. Which is why when we make that investment decision we look at the best ways to deploy that capital. Is it into the TI dollars to get a tenant lease in place, direct share buyback, buying land.

I certainly think with the process getting incredibly complicated and I think getting more so as we look out over the next few years. Land is going to be a great value driver for this company. And as the company scale's gotten larger, it certainly gives us the ability to look at land as a key part of our business program.

Not just acquiring land and getting it through the entitlement process, but certainly looking into becoming a master developer and creating pad sites to spin out and mixed use developments.

So that clearly is I think a valuable long-term creation investment for us. And on the acquisition side again, I think the facts and circumstances on each individual deal. We want to certainly improve our long-term competitive position each marketplace.

I think as 2006 showed we were fairly judicious on when we did buy. I think there were compelling reasons for those properties that dramatically improved our presence along the Toll Road. Improved our market position out in Herndon.

And really added to the quality of the space we had in the marketplace, and we're able to realize some operating efficiencies and some marketing efficiencies by acquiring those properties. That's where I think, Cedrik, the key focus is going to be on acquisitions, on a direct basis.

Okay. Thank you.

Thank you. Our next question is coming from Michael Bilerman with Citigroup. Please go ahead.

Hi, John's on the phone as well. Gerry, just on that land piece, I guess your land on the books is about $110 million. You sold the land in the quarter the noncore at two times book. What is your estimate of where you think that land is at market today and how much would you consider noncore?

I don't have the exact number, Michael, on what the mark to market is. But out of this plan we've bought -- we're underactive development. To give you an example, certainly the price per FAR foot in some of the suburban Philadelphia markets has gone from $25 to almost $60 in FAR foot. Bob, I think you are seeing some of the same things with some of the land prices.

Certainly, escalated in the cases. I think the further out you go, you're in the $30s. More in town you're in the $50 to $90.

And downtown you're in maybe $200 in FAR foot. But there's been very rapid escalation over the past 12 to 24 months.

I think -- I'm flipping to the page for you, Michael. I mean certainly I think looking at -- I'm referencing page 24.

Yep.

Certainly we think there's some good development opportunities for us on the sites we own in northern California and northern Virginia.

I think we're comfortable with our investment basis there. In terms of being a positive -- being below market.

In New Jersey, certainly Lenox Drive, 7000 Atlantic in our Bishops Gate development, are key intermediate development opportunities for us. Main Street, as well as Highlands are properties we certainly have potential in, but certainly we would consider to be noncore.

When we look at PA north and west, clearly have as we look at Metroplex and Plymouth Meeting land, they're extraordinarily good development opportunities for us. And we take a look at Lehigh Valley land, Horsham and also Allentown there's certainly thoughts we have there on what to do with those in terms of churning those.

And New Town Square and Southpoint are obviously core markets for us. Philadelphia urban, again, I think wonderful opportunities we have. Two Christina is a site that sits next to our one and Three Christina building in Wilmington, Delaware. That's the headquarters for JPMorgan Chase. Great site we have at a land basis that's just a fraction of what current market is.

Byberry is a site we have under option for five years through the Philadelphia industrial development corporation. So our investment basis there is minimum. We have a fixed price option contract that is in the $15 to $16-foot range. I forget the exact number.

Philadelphia Marine Center is our operation on the Delaware riverfront, which has tremendous future development capacity, which we have really no basis in at all. Look -- excuse me.

Looking at Richmond, certainly very excited about the prospects that West Creek land presents. Of course, that was an acquisition we undertook this year. And we hope to build on that land during 2007. Gateway land is adjacent to our Arboretum development. Great quality product. And certainly something we'd view as a capacity for growth.

And [Dabney land] is land that we will look for opportunities to parcel out pieces of that. And just the thing about this, the $8.2 million, outside of that Philadelphia site, all this is owned -- wholly owned, 100%?

All this is owned 100%. And on the Philadelphia site, which we have listed here as Byberry, that is under a long-term option.

And so when you think about the $110 million of balance sheet value and throwing out numbers that were $30, $40, $50, and upwards of $60 FAR, it would appear as though this stuff could not only be worth two times, but maybe three or four times.

Again, I don't have that number. But certainly I think that --

Individual cases for sure. Not everyone. Certainly some of them.

I think we have a very good business. It was actually interesting to get Howard's perspective. Given his experience in the retail sector where land is looked at a bit differently. We have had over the years a very good land development business where we've sold parcels at very nice profits. Because that really hasn't been an FFO consideration for us under historical standards, we haven't really talked about had story that much.

Certainly when we look at land at $110 million or so book value, two things. Someone we clearly think that we are in the money on the land inventory. Two, I think as a company with our total enterprise value where it is, we are underlanded as a company, particularly given the challenging entitlement environments in which we have our core operations.

Gerry, maybe you can talk a little bit about the development projects. I think that you put out some scenarios where you're going to look at lease up and it sounded like some of the rent levels are coming in higher than pro forma.

When you sort of look at the five of the key projects under development, $250 million, basically most of them got pushed back one or two quarters. They all remain 0% leased. Can you give us some comfort as to how those are going to shake out in terms of yield and the leasing progress that you're seeing?

Sure, Mike, I'll be happy to. And I did mention in my overview comments, and I apologize if I wasn't clear on it.

But the only project that had an actual slide in projected and service date was our Center Point One project in Oakland. Which slid several months due to really site issues and also significant approval issues relative to getting our final permits in place.

All of the other projects have remained on schedule. Unfortunately, and this was something I missed last quarter, the projected and service dates that we had in there for several projects were not accurate.

Okay.

So the only one where there hasn't been a slide was on Oakland. But let me turn it over to Bob to you and to George to talk about South Lakes and Lenox.

Yes.

With regard to South Lake near Dulles Airport, the project's coming along great. It looks really good. It will deliver on schedule by September of this year. And so in the physical side it's terrific.

The challenge we face out there really has been and will be the significant amount of new construction that is occurring in that market. When we started that project, there was with us included, there was about a year supply of space based on typical absorption. After we started a significant number of additional projects came on line or went under construction and boosted development to about 3 million feet.

Now in 2007, there will be about 1 million feet delivering which is when we will deliver. And historically the market absorbs about 950,000 feet a year, which should be good.

However in 2006, absorption was significantly off of the historical pace. And that was in large part to a lack of big requirements. We had lots of small and medium-sized tenants out there but the number of big requirements was really dramatically off from 2005.

So as we look forward to our project delivering, I think there's a few things that we'll focus on in terms of strategy.

And I think first is that we want to compete on quality because that's what we offer out there. We have, a terrific part that it's in, in terms of infrastructure and good product.

And today we've actually got rent that's are higher than our pro forma on our existing product next door. So we're optimistic about the rates that we're getting, second highest rates to Reston Town Center.

Second, I think we've got to take advantage of our early delivery in the cycle and try to grab tenants before they get into the 2008 cycle where there are more deliveries. And then breaking the building down to one or two-floor deals.

I think that's a smart move if we can do it. Then we also need to draw significantly on our existing tenant base there which has been very expansive over the years, based with north of [Grumman], [Deltech], [Bro] and a few other people. And I think importantly with that project, you've got to keep a long-term view of the dynamic nature of that market, the rapid expansion to the west with population, the airport, the 28 core, CIA and FBI putting new facilities in.

So no doubt in the long term, it's a winner. But I think in the short term, '07, '08, we've got to compete heavily to keep ahead of the curve.

And over in Princeton Pike, the 1200 Lenox building is on schedule to be completed this coming April. And I've talked in the past -- that was really an offensive and defensive move at the same time. There is a lot of construction going on in the marketplace right now.

It really occurs at different places in the market where we're in a submarket that's literally where the southern part of the corridor where the traffic is, I guess as the case may be.

And those comments for some of the tours, you'll see at rush hour the difference between our location and some of the northern parts of the market, where the buildings are going up right now. It can literally be a difference of about 15 minutes, but it feels like a day and a half.

And so to that end, the Park is 96% leased. And our fear was that if we didn't build an inventory our existing tenants have no options other than to go elsewhere. So again, from the defensive end and offensive side, seems like it's going to be well received.

We have some good interest from existing tenants in our park. Hopefully we'll be able to validate that.

And we do have some other people looking from outside the park at the building, as well. And simply the 100 Lenox building, the former Lenox China headquarters building, that was an opportunity just to complete the assemblage of the Park. Now we've assembled the entire 137-acre Park, right at the intersection of Route 95 and Route 1, a core part of the market place for us there.

So it was a great opportunity for us, and we'll be redeveloping that building, as well.

That's helpful. Gerry, can you clarify on the sales volumes for this year what really is expected? I heard $200 million of noncore from Philly, $108 million for the Dallas that closed earlier this year. City Place, which you're speaking to some sense of value.

And then is there anything else planned just so that we can group it all together?

I think you have the three essential ingredients right now, Michael, which were the final -- the sale of Park West in Dallas, the potential sale in City Place, as I mentioned. That's still in due diligence, but under contract. And then about $200 million in some of the Philadelphia suburban markets.

If the City Place sale doesn't go through, how would that affect our guidance once the lease rolls and 7-Eleven at the end of the quarter?

Actually, we had factored it into the guidance that they're leaving. So we'll actually get the benefit of some of the rental stream -- not some of it, we'll get the benefit of the rental stream while we hold the building. And we don't have any income associated with City Place after the first quarter.

And what's the dollars for -- that's being lost? I guess if you get the cash you'll be able to reinvest so that would be the upside.

It's about $120 million in round numbers.

And how much is the rent that's going to roll off in terms of the NOI coming off at the end of the first quarter?

It will be a big difference in rent between pre the 7-Eleven space and after -- I don't have the exact number in front of me. But there is a difference. But that's been included in the assumptions.

Right. I'm just trying to get a sense of if you do go ahead and sell this, you'll get $120 million of cash. Then you won't have the downside of the rent going away. I'm just trying to understand the magnitude of it.

Michael, we'll get back to you with that specific information.

Okay. Great. Thank you.

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

Good afternoon, and congratulations on the move, Howard.

Thank you, Chris.

Mentioned earlier in your press release that your development yields on projects delivered in 2006 had a GAAP yield in the high single digits and a cash yield in the mid single digits for the 2006 deliveries. Could you expand upon that a little bit whether that's just a lower leased level or what would be the stabilized cash yield?

Significantly higher and much closer to the GAAP yield. There is just a timing anomaly in 2006. Again, we're annualizing partial year numbers for one in not getting the benefit yet of the cash, but getting the benefit on the GAAP side.

Okay. And on the developments to just simply ask the question, what are your development yield expectations on your projects under development today?

I think as we mentioned, it's -- we're expecting yields between 8% and 9.5%.

And Gerry, those are cash?

They are cash.

Okay. And then so the development -- the in-service dates that you had outlined in your third-quarter supplemental were incorrect for four of the five. And the only change that has happened this quarter is just the one.

That's correct. What's -- to rephrase, what's on page 23 in that column that you're looking at are correct.

That's what I was -- I would dwell on what is correct as opposed to what was incorrect.

That's fine. I'm trying to understand. So the primary reason for delaying them last quarter but not -- whether you reported them or not but the primary rational for moving those back three to six months would be what?

Chris, I think we're missing the point here. There was a mistake on the in-service date timelines on page 23 of our supplemental last quarter. The project's schedules haven't changed with the except for the one property in Oakland which I mentioned.

Okay. Are you including any land sale gains in your guidance at this point and time?

No. We have never included land sale gains in the FFOs far back as I could track.

Okay. Great.

It may, however, be land sales gains. We'll highlight those as they occur. But the guidance is not predicated on it.

Okay. Great. On leasing expenditures, could you give us a sense as to what type of aggregate expenditure or cost figures we might use to calculate a cash flow number or an FAD number for 2007?

Chris, we rounded about $3 million on the revenue maintaining and the other components as outlined on the FFO page. One of the things I'm taking a look at, as I get deeper into the numbers here is some of the methodology used in categorizing that. And I just want to make sure we're consistent with the way the peer group does that.

I'll probably be reaching out to many of you to check that, because I want to make sure we're not presenting that in a way that unfavorably casts us against the competition. But those were the numbers under our current methodology for 2006.

For 2007, the same building improvement would run about $3 million in total?

I don't have a budgeted CAD number in front of me. And as I said, I'm going to take a full look at how we do that before I hang my hat on a number.

It struck me on first glance that we were being overly inclusive in some of those characterizations, which is not a good or bad thing. Just a fact that need to be understood.

Okay. With regard to those, is it -- Gerry, is if your view or the costs per foot whether they be measured and Adam per Adam, or aggregate dollars. Were the increases during 2006 a function of market weakness, or a decision on Brandywine's part to be a little bit more aggressive and be willing to offer a little bit more of a concession, and then how does that flow into 2007?

I'm following you now, Chris. I'm sorry, Howard.

Chris, I think one of the objectives that's been laid out for 2007 leasing is just very generally getting paid for that capital. And there are many different ways to get paid for it. The most -- the easiest is just to lengthen the lease term.

So instead of doing it on a five-year lease or six-year lease, try it on an eight, nine, or 10-year lease and make the capital work for you a little longer.

The second is to be more aggressive on the rent schedule so that the GAAP recovery at least is more appropriate. And lastly, to be very -- to draw as hard a line as possible on those base-year resets. Because those can hurt us, as well. So there's no one magic bullet.

I think the feeling here is, and I've only been here three weeks, but it is a little more window in 2007 to be more offensive and aggressive on all of those points, and we'll just have to see how it goes quarter after quarter. But clearly, we'll need to improve the bottom line. And it's those steps that will help do it.

Chris, and this is George. One thing -- I like to be at the top some list. Being at the top of the capital list isn't where I'd like to be. And I think it is a bit of anomaly in New Jersey.

Walk you through a couple of situations where we had tenants that were expanding. We had to relocate some tenants. In some cases the relocated tenant went for extended term. That was a great situation. Some cases they even expanded.

In other cases we had the ability to relocate them, and the tenant opted not to extend their lease. We had to incur costs in unusual circumstance related to several relocations to that accommodated larger tenants who was expanding and taking more space.

And so again, if you start to drill down into the details, it isn't a run rate but is more an anomaly related to a couple of situations that either relocation or in one case we actually built out from shell conditions space that was broken down to the grid, basically.

You care to hazard an estimate as to when you might cover the dividend?

Well, if you look at the gains on the land sale for the year, we were right about there. And it's really our own -- not including clear cash flow item in our calculation which many of our peers do that highlights that GAAP.

Clearly the second ingredient is the occupancy gains which are starting to show the right trends. And the last and also important is to get that capital down. It's around this quarter it's $0.60 some-odd per foot. Coming from the retail space, his to blink once or twice when I saw that. But it's important -- you got to spend the money.

It's just important you get paid for it. You do it properly, between the large and the small spaces. As the overall occupancy tightens up to be a little more creative with the small spaces which are generally inefficient to lease. And just to be more careful.

And there's a lot of strategies that now that we're little bit stronger in many if not all of the markets, can be tested, and in some cases rolled out more fully. So there will be some experimentation to see what works better than what's worked in the past.

Chris, to wrap up the discussion on this point, and that's the, I think, the fanatic point, I mean, the markets have really been in -- is still in a competitive or nascent stages of a recovery. Certainly looking at 2005 and then 2006. And our strategy has always been to meet the market.

And because of were the markets were the last couple years, the strategy was really articulated internally as lease and don't repent. Which is basically you know your markets, you know your deals. You know your tenant. Know the brokers, know the product, and cut the best deal you can. And continue to absorb space.

The mantra looking at '07 and beyond is really a refinement of that, which is lease and reflect.

So there's some market anomalies that will create, I think, pocket opportunities for us to be incredibly aggressive in pushing rents and getting amortization and getting longer lease terms, mindful of overall marking conditions. The managing directors who make those decisions will really be looking at some market conditions to find out where they can push, where we need to just cut deals, and generally though I think the theme is that we feel comfortable, to move the NOI string forward based upon where the markets are.

Alright. I appreciate all the color. That's very helpful.

Last question is on the balance sheet, your prior expectations for the calendar year 2007 included approximately [$63 million] worth of acquisitions, about $125 million, $175 million of dispositions. And your press release last night indicated there is no major changes to that, yet the commentary on the call suggests that there will be more sales than what you had previously contemplated.

So I'm wondering if you could give us a sense as to the buy and sell numbers that you're using for your guidance, and what the leverage position might look like in the company at year end '07.

Yes. I think what I tried to communicate, Chris, was that we don't expect to achieve either accretion or delusion out of those.

Gerry identified a couple of specific sales. One closing, one under contract, and a couple of initiatives in the PA suburbs that could get you up into the 400's right there.

Other sales will be more opportunistic on the very profitable land sale last year. The situation there was we were working diligently for a couple of years on development plans, and were approach I think by a residential developer who just put a number on the table that we had no choice but to take.

So those things do come along and could surprise positively in that case.

As for acquisitions, again, we -- I would be very surprised if we don't buy and buy quite a bit in 2007. The nature of the cap rate certainly on a cash and nominally on a GAAP versus what will probably for the most part be debt costs, because I think we still have some capacity on the debt side.

And as we refinance can bring some of the interest rate down. So keep our coverage in the right range. So maybe a little bit of accretion there.

Given when you lay these out on paper, the timing, plus or minus, it's just not material or not as material as the company may have expected back in the fall of last year. Part of that is cap rate compression, and part of that is the realization we can work as hard and lease 10,000 square feet of space and make as much money as putting out a couple hundred million dollars of capital.

Where does it make more sense to put the efforts? It's clearly on the internal side, especially as the markets begin to turn. And there are a lot of indicators of that, notwithstanding that on a same-store basis we're still seeing rent. That's phenomenally perhaps the same-store growth in the fourth quarter NOI.

But a rent rolldown scenario, and it's really the mix of components including expense growth, leasing, the occupancy was up in the same-store set. So I think the theme at least it's clear internally and we maybe do a better job communicating it, is that the growth in 2007 to the extent comes will come from internal efforts.

Just to wrap up this question. Again on terms of the balance sheet, would you expect to have a big, excluding development, a bigger balance sheet at year-end '07 with more leverage?

Look, surprises in transactions come along of the the most important thing is to do them with your own capital sources and external capital sources. I don't want to have this call a year from now saying you didn't tell us you were going to do X or Y, because we might do X or Y. The plan to deliver the FFO growth we're trying to deliver does not require a large growth in the balance sheet. It would in fact not be a contributing factor.

Might it happen for the right reasons? Of course it might. Might there be timing differences between buys and sells? Yes. But in and of itself that is not going to be the growth driver in 2007. Therefore, it's been pushed down the list in terms of priorities.

Great. Thank you very much.

Thank you. Our next question is coming from Srikanth Nagarajan with RBC Capital Markets.

Thanks for taking my question. One quick question. Gerry, I think you stressed in your remarks twice in terms of the bifurcation and rental growth in your markets, specifically leases over 10,000 square feet. I was wondering if you could give us color on, in terms of excluding the expiring leases excluding Dallas, how much of your -- what percentage of your leases would be over 10,000 square feet?

We have to on the vacancy.

The vacancy schedule -- $1.6 million of the vacancy. I don't have that with me. We'll get back to you on that.

Okay. Great. Thanks.

Remember on the expiration since our retention history is pretty high, I think we need to focus more on where we do the leasing and the vacancy. That's going to be the bigger driver of the growth and to the extent the larger spaces continue to tighten more and we resolved some of the cost issues in dealing with the smaller spaces that could be quite productive.

Okay. Great. Thanks a lot.

Thank you.

Thank you. Our next question is coming from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Hi, guys. Just two quick ones. I guess on City Place, the expected price per pound is going to be similar, or did you suggest it would be around $120 million total value?

I did suggest that.

Okay. So under $100 a foot. Roughly.

Jordan, just to jump in on that, very much in line with where we valued it in the context of the Prentiss merger. No surprises there. We saw that lease rolling out, at least the company did. I didn't see it because I wasn't here.

But I think everybody knew about it.

But as I read back through the transcripts, it seems to be a well-known phenomena going back several quarters now.

Again, when we did the merger, we clearly understood that there was -- a key objective of ours was to exit Dallas.

And pleased with the way it came out. And pleased with the way we actually priced things originally versus how we came out. I think that's the sum total of the observation on that. Which is we're just delighted that a lot of other people see good upside in Dallas.

What of the expected IRR and look back relative to your allocated value to Dallas?

I mean actually pretty high in term of being able to buy and sell at effectively the same price. There was no gains are recognized nor any losses on account of the purchased accounting.

You got in what you got out. And we realized good yields along the way. So actually pretty productive for that period of time. But clearly now rolling off the portfolio and factored into the numbers.

Okay. And then just on sales, Gerry, wasn't sure if the $200 million -- it sounded like that was from more suburban. Any thoughts on a JV for Cira yet?

Two answers. The $200 million for -- I mentioned in Philadelphia, was all suburban. So it does not contemplate anything on any of our urban properties at this point, whether it was Cira or One or Two Logan. That being said that remains on the -- or near the top of the investment to-do list. I think I mentioned on prior calls, there are a number I think interesting developments.

I say development in the sense of things happening in the university area of Philadelphia. And I think year we have been. Waiting to see how some of those things lay out and then factor in a long-term investment strategy for Cira in the context of that broader development opportunity.

So we have some wonderful things happening on the residential front. But certainly with the master plan that University of Pennsylvania has rolled out, the conveyance of lands owned by the United States Postal Service, Drexel and Lincoln Universities, the program to expand both academic and residential bases. As soon as there's a better clarity on the timing of those things, I think that will solidify our timing on a capital event for Cira Center.

So sometime in '07 we'll have better clarity on those events?

And I would certainly expect sometime in '07, yes.

Okay. Thank you.

You're welcome.

Thank you. Our next question is coming from Ian Weissman with Merrill Lynch. Please go ahead.

Hello?

Mr. Weissman, your line is live.

I'm all set. Thank you very much, sorry about that.

Thanks, Ian.

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

Alright. Great. Thank all of you for participating in this call. We appreciate your continued interest in the company. And we look forward to our next conference call. Thank you very much.

Thank you. That does conclude today's teleconference. You may disconnect. Have a wonderful day.