Brandywine Realty Trust (BDN) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to Brandywine Realty Trust's first-quarter earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

Prior to turning the call over to 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 risks that we have identified in our annual report on Form 10-K or the year ended December 31, 2006, 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 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 ability of debt and equity financing; competition for real estate acquisitions and risks of acquisitions; dispositions and developments, including the cost of construction delays and cost overruns, unanticipated operating and capital costs; our ability to obtain adequate insurance, including coverage for terrorist acts; dependence upon certain geographic markets and general and local economic and realistic conditions, including the extent and duration of adverse changes that affect the industries in which our tenants compete. For further information on factors that could cause impact please refer to our additional filings with the SEC. We are subject to the reporting requirements of the Securities and Exchange Commission and undertake no responsibility to update or supplement information discussed on the 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.

Jackie, thank you. Good morning and thank you all for joining us today for our first-quarter 2007 earnings call. Participating on today's call with me are Howard Sipzner, our Executive Vice President and Chief Financial Officer; Darryl Dunn, our Vice President and Chief Accounting Officer; Gabe Minardi, our Corporate Controller; Bob Wiberg, Executive Vice President and George Sowa, Executive Vice President.

The first quarter grow was a solid one. We had good leasing activity, completed our Dallas exit, sold non-core assets in the Philadelphia suburbs, participated in the continuing market recovery and advanced our development and redevelopment pipeline. For the quarter, financial results were in line with our internal estimates and we're reconfirming our guidance for the year. As indicated in our fourth-quarter 2006 call, the run rate for the first several quarters of 2007 will be impacted by our asset sales program. As we saw in the first quarter, however, our leasing activity will help to counterbalance come of this effect.

Core portfolio occupancy improved to 93% and 94% leased, respectively, a significant improvement over where we were a year ago where we were 90% leased, so we had almost a 300-basis point occupancy improvement in the last 12 months. Most of our regions participated in this trend with the strongest occupancy gains in New Jersey, Northern Pennsylvania, urban and our Northern California regions. Our same-store NOI increased 4.9% on a cash basis and 2.7% on a GAAP basis. We also during the quarter had net absorption of approximately 145,000 square feet. It's a very good result for us, particularly in light of several known large rollouts that occurred during the quarter.

The challenges discussed on our last call persisted into the first quarter of this year, namely while we had strong rental rate growth on renewals from a GAAP standpoint, we continued to experience negative GAAP and cash growth on new leases. In addition, we continued to experience higher than normal capital costs to both absorb new space and/or retain tenants.

On the leasing statistics there are several points that are important to note. The reported universe that represents leases that actually commenced during the quarter. As a result, some of the leases that were signed as long as 12 months ago and reflect marketing initiatives at that point in time are incorporated into these quarterly numbers. In fact, several of the larger leases were signed as early as May of 2006. There has been an improvement in overall market conditions since a number of those leases were signed, so when we look at the trend line that's identified on page 24 of our supplemental package, the rental rate for both new and renewal leases have improved measurably year-over-year. For example, our cash renewal rate for the first quarter of '06 averaged $19.39, whereas our cash renewal rate for the first quarter of '07 was $23.26, or a 20% increase. This same trend is added on the cash rank for new leases were we had about a 17% increase over the recurring -- over the last four quarters.

While those numbers are clearly a function of mix of quarterly activity, it does reflect a good data point for market recovery and stability. The right numbers reflected on this schedule do include expense reimbursements and one of the major challenges we have had in moving rents to a full positive mark-to-market has been the resetting of base years during lease negotiations.

For the quarter, our FFO payout ratio was at 69.8% in line with our target range, our [CAD] ratio is too high and capital cost during the quarter continued to experience pressure. Again, a significant portion of this pressure was due to several large leases done some time ago, but we certainly continued to reduce our capital cost as a major priority in the Company. The recovering markets and our improved occupancy levels do present some intriguing opportunities on tenant negotiations. As we have talked on several calls about the increasing scarcity of large blocks of space, this trend continued during the quarter and we had been a bit aggressive in moving rents and reducing TI and concession packages on tenants requiring larger amounts of square footage. We will continue to selectively identify these situations where we believe we can exercise some leverage over our pending tenants.

Our lowest capital cost on a per-square foot basis occurred in Northern Pennsylvania, our urban division, Virginia and Southern California. We experienced higher than average capital costs in western Pa., southern New Jersey and our mid-Atlantic region. Certainly you can see that absorption improves our overall negotiating position and enables us to extend terms and amortize standard TIs in the related rental streams.

From a development standpoint, the pipeline is on schedule. You will note that Howard and the team made a number of excellent changes to our supplemental disclosure this quarter, all designed to increase the overall clarity of our presentation. One of those changes is (inaudible) on page 28 where we expanded our presentation to more accurately reflect the full universe of our value-added activities. As a consequence, we have broken down these activities into two primary categories -- developments and redevelopments. This schedule provides a much broader representation of the total value-add underlay in our entire development pipeline. As you can see, the total square footage under development or redevelopment is 2.75 million square feet with an aggregated total budget of about $440 million. Some of these projects included on the schedule are in the advanced planning and design stages, as such some of the presented budget numbers will change as designed progresses and estimates are finalized.

This schedule does however finally capture the broad scope of our development and redevelopment initiatives and reflect $145 million of future cash requirements. On our six ground-up development projects with in-service dates starting as early as April of 2008, we have 76 deals in our pipeline totaling 4.3 million square feet. The activity in this pipeline is very strong and the yields in our development projects remain in line with what we previously forecasted which range between 8% to almost 10%.

This development pipeline presents high-quality additions to each of our sub markets and is an outstanding complement to our existing inventory. We believe they will be effective economic contributors to our Company as we move forward in 2008. As I've noted on previous calls, it's important to note that our 2007 forecast does not reflect any income from this ground-up development.

So to summarize the quarter, our major successes were a continuation of good same-store growth, positive absorption and major leasing successes at (inaudible) suburban Maryland for both new leases and renewals, continued progression of increasing rental rates and a strong tenant retention rate of 72%. Remaining challenges are reducing rent rolldowns, reducing continued pressure on capital and executing leases on our ground-up development pipeline. From an overall standpoint, market conditions continue to improve. In every one of our sub markets we have seen vacancy rates come down over the last several quarters. Most markets are witnessing positive absorption as well as an increase in overall effect rental rates, and in most of our markets construction coming online is very moderate with the possible exception to the Dulles Toll Road corridor and central New Jersey.

At this point, let me turn the presentation over to Howard.

Good morning everyone, thank you Gerry. Before we discuss some of the top-line numbers, let me just cover a few accounting and related observations. As Gerry mentioned, we've spent a fair amount of time redesigning the supplemental package. Our expectation is that it provides the information in a clearer, more usable format. Many of your comments are reflected in here and we welcome additional feedback on this front. For the most part we have maintained a sequential format to our presentation as we believe sequential numbers, particularly when adjusted for discontinued operations, are and excellent indicator of the performance and growth of our operations. I you do not have a copy of the supplemental package, you may get one on our Web site at www.BrandywineRealty.com.

One interesting change is on the property count. A number of you this morning have asked if we have lost a few properties. Of course the answer is no. Rather we've moved to a convention of treating multi-building assets as single properties whereas previously this was not always the case. For same-store calculation purposes, you will notice that we have included the Prentiss assets in the comparison of first quarter '07 to first quarter '06 and we have adjusted the Prentiss numbers in that calculation for the four days that we did not own those assets in 2006. Doing so enabled us to include them in the calculation and do it on an equivalent basis. The reconciliation of same-store NOI on page 11 of the supplement goes into this in greater detail, including the footnotes that explain how these adjustments were done. Note that the Prentiss assets brought onto our balance sheet a large intangible asset related to lease accounting and the amortization of those is reflected in our net income presentation and of course affects the bottom line net income figures. All real estate depreciation and amortization is added back for FFO purposes.

Lastly, or not lastly, also on the development section as Gerry mentioned, we've added more detail and broken out a number of assets. I will point out that there was a mistake in last night's schedule as the occupied and leased figures for the combined development and redevelopment program should be 33.5% and 45%, respectively.

We also continue to exclude gains on sale of non-depreciated real estate from our FFO calculation unlike many of our peers. We do add these gains back for CAD purposes. We did not have any such gains in the first quarter. We have also reviewed and refined our disclosure on recurring capital expenditures on the CAD calculation, page 14 of the supplement. Specifically we've analyzed our expenses in this area and now reflect those expenditures on both an asset and suite level that serve and identified those expenses that served to maintain existing level of income. This is different than our prior treatment which captured expenses solely on an asset level based on first or second generation cost. The new method gives a better sense of our recurring capital expenditures and is in line with how other REITs who provide a CAD calculation, and many do not, present their activities. Our per-share figures will be presented this morning on a fully-diluted basis. And lastly it's warming here up in Pennsylvania as spring arrives, so those who have stayed away due to the cold are welcome to come up or down for a tour.

First quarter income statement. Total rental revenue from continuing operations increased the 13.3% to $163.1 million in Q1 from $143.9 million a year ago and was essentially flat when compared to $164.1 million in Q4 2006. Operating income increased 12.1% to $32.6 million in Q1 from $29 million a year ago, but decreased 20.8% from $41.8 million in Q4 '06. The sequential decline is primarily attributable to a $6.8 million increase in depreciation and that in turn is attributable to accelerated amortization on certain lease intangibles as well as catch-up on recently completed TI projects. There was also a onetime reduction in recorded Q4 2006 depreciation which adds to that difference.

Property operating expenses and G&A were up slightly on a sequential basis though G&A was down significantly on a year-over-year basis as the period the year ago reflected onetime merger integration costs. G&A is running in line with our expectation of $7 million to $7.5 million per quarter.

Termination revenue at $1.3 million in Q1 2007 is incorporated in our other income line which also captures management fee income. The termination revenue is up slightly below the historical run rate of the last four quarters of about $1.9 million a quarter. Interest income shown a sequential decline of over $1 million attributable to the liquidation of our securities portfolio held in Q4 2006 related to a defeasance transaction. Interest income is also down due to more effective cash management techniques which have reduced unnecessary cash balances wherever possible. This practice has in turn contributed to part of the sequential reduction in interest expense which is also reduced by greater capitalized interest in the amount of $3.7 million versus an historical run rate of about $2.4 million. This increase tracks to our increased development activity.

To sum it all up, said FFO totaled $58.6 million in Q1, a 6.1% increase from a year ago, and on a per-share basis, $0.63 per share, a 6.8% increase. The greater increase on a per-share basis tracks the overall decrease in our shares attributable to various share buyback activities. Various coverage metrics on our debt side -- 2.6 on interest, 2.3 on debt service and 2.2 fixed charge -- are all in line with prior periods.

In terms of receivables, no unusual activity at 3/31/07 and we had just over $22.4 million of operating receivables with a reserve of approximately 220%. We also had and $77.4 million of straight-line rent assets or receivables on our balance sheet with a reserve of $4.4 million. These numbers are consistent and in line with prior activities. We have ceased accruing revenue on our one New Century lease. The total impact on a going-forward basis would be about $600,000 or a little bit less than $0.0066.

As Gerry mentioned, we're maintaining 2007 FFO guidance at $2.57 to $2.65 a share and Gerry pointed out as well that there will be some interruption of the trend line so to speak because of the sale that took place throughout the first quarter and into the fourth quarter. The contributors to the overall FFO increase will be clearly occupancy gains, harvesting from our development portfolio and overall increases in rent. While on a same-store basis versus the prior lease, we did show declines, we are quite pleased. On a sequential basis, rents continue to track up across our various markets and overall signaling ongoing recovery in our markets.

Key balance sheet items, again, everything pretty much consistent with prior quarters, 49% debt to total market cap and 52.5% debt to gross real estate. Our secured debt remains at relatively low levels, as does our floating-rate debt, particularly following the $300 million financing that we closed earlier this week, the 5.7% 10-year unsecured notes. Our future refinancing needs are quite moderate, just $20 million of scheduled maturities between 2000 and 2008, plus a $113 million note in 2008. As a result of this, we will continue to look through the portfolio for prepayment opportunities where we can do those economically.

And lastly, on the share repurchase program, we did purchase over 1.5 million shares year-to-date, then we have authorization for another 0.75 million shares under our existing program. And with that, I will turn it back to you, Gerry, for some follow-up.

Let me spend just a few minutes talking about our expectations for the balance of 2007 in terms of our business plan. Comments are really categorized in three categories, first operations and market activity, secondly development and redevelopment efforts, and third our investment activity and share repurchases.

On the first point, from an operating perspective as discussed and certainly as amplified in Howard's comments, we had good absorption, an increase in occupancy and encouraging same-store results. The velocity of our lease transaction in the last couple of quarters reinforces our belief that we're in a recovery mode in most of our markets. This premise is supported statistically and vacancy rates market-wide have generally experienced sequential decline since early 2006 and it has also been accompanied by an increase in rental rates across most of our submarkets in terms of general market data.

Give you an example of some of our additional leasing activity, year to date, we have had some very good leasing results. These leases have not yet commenced so they're not reflected in our quarterly statistics for the first quarter. But in particular we signed a -- Lincoln Financial Group signed a 180,000 square foot lease at our Radnor Financial Center which essentially pre-stabilizes that property in advance of our year-end '07 expectations, so we're very much on line there. We have executed a lease for another tenant for about 69,000 square feet in Newtown Square, Pennsylvania, executed a lease down on Dulles Corners with [Savitch] for about 48,000 square feet, a 47,000 square foot lease with MFT Insurance in Austin, and also wrapped up a 31,000 square feet or a Lake Brook Point project in Richmond with [road] access.

We also signed during the year to date a 90,000 square foot plus lease with Hewlett-Packard in our Rockville, Maryland project and that at least partially absorbed one of the largest move-outs we had during the first quarter which was a series of tenants vacating our Rockledge Drive in Maryland.

So it was a good start on same-store performance. Continuing to absorb space will remain one of our key focus points. [Marking distance firming], expectation is that we will see a diminution in rental concessions and above standard TIs. We certainly plan on taking advantage of these conditions by increasing the length of our lease terms where possible and providing for continued stepped rent increases.

So we certainly have good hopes for same-store performance for the balance of the year. A lot of impact has not been yet felt in the first quarter numbers but we hope to see that happen as the year progresses. On the second category of development and redevelopment, touched on it earlier, but we do have a significant opportunity to generate future growth by executing on that pipeline as identified on page 20, as well as some other things that are in the queue. You may recall that on the ground-up FFO, that doesn't factor any revenue for 2007. However given the pipeline of transactions, we do anticipate demonstrating solid leasing activity over the next couple of quarters which will well position this part of our pipeline for growth in 2008.

Our redevelopment projects continue to move on schedule and we expect them to be FFO contributors as the year progresses. And while our overall development /redevelopment pipeline as Howard touched on shows a blending leasing percentage of 45%, we're very, very focused on absorbing space in our ground-up development projects. So from this business plan objective of development and redevelopment activity, the take-away is simple, which is to lease up our development projects and we plan on doing that going forward.

The last point I wanted to touch on really was investment activity. And as we look on that from a couple of different standpoints, dispositions, acquisitions and stock repurchases. First, for dispositions. From a sales standpoint, we really had a very active 12 months. In fact, from the first quarter of 2006 through the end of the first quarter of 2007, including City Place, we have sold about $750 million worth of properties. The bulk of these sales are $512 million worth in Dallas. The recent closing of our City Place project represented the sale of our last asset in that market. That sale provided $115 million in cash as well as provided for a $10 million additional contingent purchase price that will be paid upon the conversion of the upper bank of that tower to residential condominiums. If that occurs, we will certainly be in good shape. From the beginning, we viewed City Place as a risk and are pleased to have it behind us. Our whole TRA generated an IRR on that asset of just slightly below 9% without the contingent payment. If that contingent payment is received, that IRR will approach the mid-teens, which is a very good result for us.

But overall from a pricing standpoint, the Dallas exit program progressed in line with our expectations and we have accomplished this goal 21 months, almost two years, ahead of schedule. Chris [Sipps] and our team in the Southwest did a great job in helping us execute this strategy.

In addition, during the quarter we also sold our Reading and Harrisburg portfolio for $112 million which represented about a 7% cap rate, and that sale enabled us to exit those two sub markets entirely. That sale is also part of our program to exit nine core markets in the Greater Philadelphia region. We expect to continue this pace of activity and are confident of our ability to accomplish a minimum $200 million sale program in nine core Philadelphia assets by the end of the year.

As discussed previously, this disposition program creates a muting on our near-term earnings growth but does provide significant long-term value-added benefits as we recycle dollars into higher-yielding developments or assets with longer-term growth characteristics.

Acquisitions, let's chat about that for a moment. Continued tap rate compression has further moderated my views on additional acquisition opportunities. As a consequence, since the first quarter of '06, our acquisition volume has only been about $300 million, which was a fraction of the deals we reviewed. Those acquisitions occurred in northern Virginia, Richmond and California and were perfect complements to our existing end market inventory.

Acquisitions do remain a part of our investment landscape, but pricing levels frankly have put a number of direct on-balance sheet investments outside of our investment criteria. By way of illustration, during the first quarter of '07, we analyzed approximately $2.6 billion of acquisitions, aggregating about 11 million square feet. The only acquisition that fit our criteria was our purchase of the remaining 49% of our joint venture with ADP. ADP was a great partner but the 51/49 ownership structure was not optimal for us so we negotiated a transaction whereby we purchased their interest for $63.5 million or an imputed 6.5 cap rate on 2007 GAAP NOI. These assets were always part of a consolidated joint venture and they're located in our in-market positions within northern Virginia and northern and southern California. All of the other acquisitions we assessed did not fit our criteria for on-balance sheet investing so we remain increasingly selective and are confident that our improving same-store performance, additional leasing activity and our financing activities will help mitigate any dilution caused by our asset recycling plan. And it's really on that premise that we're assessing acquisition opportunities.

The sale of our Reading and Harrisburg portfolio did create a 1031 issue for us so we're actively pursuing a number of replacement acquisitions that would fulfill this requirement. The types of acquisitions we're pursuing consistent of properties that exhibit stronger growth characteristics than the recycled asset and provide for an entry point approximating replacement cost.

Last point I want to touch on is share repurchases. As indicated by Howard, we purchased 1.8 million shares out of our 2.5 authorization. That is in addition to the $60 million share buyback we did as part of our convertible note issuance back in the fourth quarter of '06. Repurchasing shares remain a key part of our investment strategy, so long as we trade where we are. We do view this repurchase program, however, as part of our broader objective to increase earnings, invest in assets that are additive to NAV and continually strengthen our balance sheet.

So in conclusion for the prepared comments, the first quarter was a solid one. Our property management and leasing teams again did a great job of keeping our retention rate north of 70% and a true bright spot was our ability to have positive absorption in a quarter where we knew we had some significant rollouts. So to recap, the major focus points for 2007 are continue absorbing space at ever-increasing rates, close the gap between new and expiring rents, and the trend lines seem to be there; diligently execute a campaign to control capital cost to deliver higher net effective rents; demonstrate the quality of our development pipeline by execution of leases over the next several quarters and continue the asset repositioning strategy while maintaining strict discipline in our acquisition undertakings.

We believe the Company's platform and management team are well positioned to execute these overriding objectives and we look forward to accomplishing our goals during the balance of the year. Jackie, at this point, that concludes our prepared comments, so we'd like to open up the floor for questions.

(OPERATOR INSTRUCTIONS). Michael Bilerman, Citigroup.

Howard, I was wondering if you can walk through the quarterly ramp to hit your guidance range. It looks like you probably need about $5 million to $12 million of additional FFO over the next three quarters over the run rate. Just talk about what are the components that will build you up to the low and the high end?

Michael, good question. There are a lot of different scenarios that could get us there, and while recognizing we're not going to comment on the quarters because they can be lumpy with respect particularly to some of the other income items -- lumpiness of termination fees and the like. As we look at the big picture on a year-over-year basis we probably need on the low end as you said $5 million to $6 million to maybe as high as $10 million. And I think the components of that could be viewed the following way. We are still are projecting GAAP NOI growth between 1% and 2%. We did do better than that in the first quarter, and to the extent that trend continues, we can revisit it. But we're holding to last quarter's projection or expectation on that.

And on a run rate, once you factor out some of these dispositions, that's probably in the neighborhood -- at the midpoint -- about $6 million of incremental NOI, so that's obviously a key contributor. We don't expect our total other income line item within that to be the same as last year. It will probably be down a couple of million dollars because we did have some larger termination revenue and other income items in there. We are expecting some interest savings this year, anywhere from $4 million to $5 million. That will be a combination of refinancings, some higher capitalized interest, and lastly just more effective cash management and line management usage. There will be a slightly reduced share count that needs to be looked at on a year-over-year basis. Again, not really looking at any meaningful accretion from this point on from acquisition activities,. though we do have some in the pipeline and we do expect in particular to reinvest the escrowed cash from the Reading and Harrisburg sale. So nominally, we will do better on that than the interest that that escrow is earning for sure and probably up to $2 million of other miscellaneous savings.

As I parse through those, I kind of get to somewhere in the midpoint of that range. Clearly as Gerry pointed out, any faster pace on leasing up the developments would be a positive contributor, and that is probably the most significant unknown at this point in the year and that would be the thing that would move us to the higher end of the range.

Howard, what was that $6 million -- you talked about $6 million of NOI from the --?

If you look at it at an aggregate NOI figure of about $380 million, so 1.5% of that is about $6 million on an annualized basis. We've done a fair amount of that already in the first quarter. So we could outperform that. But again, we'll have to watch that sequential NOI growth rate to see if the good performance in Q1 carries forward. In part, some of that was some reduction in some of the expenses. Sometimes those pick up in later quarters in the year as those things are not perfectly level throughout the 12 months.

Just thinking about the acquisitions and dispositions, I guess in the first quarter and then following the City Place early in the second, if you're a seven cap on the Reading and Penn assets and City Place was probably sold at least at what was remaining on the lease in 1Q results at north of a 10 cap, wouldn't that be dilutive even if those proceeds were recycled into acquisitions or the stock?

It most certainly would, and we expect -- some of that was acquisition activity, some of that has been offset with share buybacks, perhaps to continue on that front. And lastly, the leasing and occupancy gains in some contributing to NOI gains. Some interest savings and -- this is somewhat of an art over a science and there are ranges here and that's why there are ranges. And to the extent there is a dip as you pointed out with some of those effectively first four-month activities in Q2, that does potentially impact that second-quarter run rate. It could be offset by some onetime items as well that move into the second quarter over other quarters. So there are definitely some moving pieces here. It's May 1 or May 2, plenty of time left to both have a strong second quarter as well as set ourselves up for the rest of the year.

You don't have any gains at all from land or development in your guidance, right?

We don't include land sales, gains in guidance. To the extent we have fee-related income, other promotes, that would be part of the other income bucket, as it has been in the past.

Okay. The last question just on cap interest. Was there any change I guess in the thinking about moving a lot of I guess about $50 million of land into the planning phase? Just walk through the decision to embark on that planning and start capping more interest.

I think both of us will touch on that. Just purely from a financial perspective, when we went through at a meeting earlier in the year and we went through the different land assets and laid out the plans for each, it became clear that somewhere near term and work was already underway, and others were really just being held for way down the road development, and hence the two buckets. And the ones that are near term are broken out. And I suspect Gerry could probably touch on one or two of those and kind of highlight why we have chosen to elevate those above the others, if he wants to.

I would be happy to, thank you. Actually, Michael, on the capitalized interest on page 28, which identifies a number of land holdings, this quarter does not really represent that much of a departure from what we have done in the past. The presentation is a bit different. We used to include all of these land projects on our value-added pipeline without really adding in any commentary on all of the development work that is underway on those properties. So as we try and achieve better clarity on the full scope of all of our activities, we have a very robust redevelopment and land planning process underway through the Company' we simply categorize these differently. We had been capping some of the interest on some of those properties in previous quarters. This process that we went through in the last few months really added a level of clarity in how we want to present those. We worked up business plans for each one of those assets with definable time lines and really did, as Howard touched on, segregate our land holdings into near-term, intermediate-term real development viable opportunities for us versus more land planning and master planning opportunities.

Right. And then when you look at this, the projects that you added on page 28, so thereabouts $50 million of lands [in] development, what sort of gross development dollars could that support? And as you think about adding those projects, what is going to be the timing of those deliveries to come online?

That is a very good question, and at this point I'm not really prepared to give you specific starting dates for every one of the projects. But they are all going to be a function of, number one, how we do on the existing roundup development pipeline because one of the things we really do from an overall standpoint is look at the risk of our development pipeline coming on board. So key focus is on leasing up the existing ground-up developments. As we have success with those, I think that opens up a number of opportunities for us both in central and southern New Jersey, as well as the Pennsylvania suburbs and potentially some of the other markets. So there are market calls. Our objective, Michael, particularly given the challenging zoning and approval process we face on a lot of our projects, is to literally get almost all of our key land holdings up to the point where we're ready to complete the design and development process, perfect all of our approvals and entitlements and really then be in a position to go through our build-to-suit or marketing campaigns and actually start the project based on market conditions.

In terms of total development cost, and I think as you see with our existing development pipeline, you really do see a range of cost per square foot from the low 200s to very high 200s to close to $300 a square foot. So you can certainly extrapolate from some of these land holdings what you think the overall development pipeline might be as we look out at the intermediate-term.

And I certainly appreciate the added disclosure. If there's any way to get back that land held for development page quarter the developable square footage, that would be helpful.

We can (MULTIPLE SPEAKERS) good point.

Ross Nussbaum, Banc of America Securities.

Good morning, guys, it's Mitch Germaine here with Ross. Just to clarify, your full-year disposition target was?

I think we had said up to $500 million of dispositions, and year to date we have done somewhere in the mid to high 300s, I believe, though I don't have an exact number in front of me.

Okay, thank you. And you had discussed in your prepared comments market conditions were stronger than kind of -- that what is being illustrated in your supplemental. Where is your full-year expectation for cash and cap rents.

I think you have to look at our numbers in sort of two different constructs, and if you look at the leasing pages in the supplement, while it does demonstrate that there has been a roll-down in the combined effect of rents and expense stops, when you compare an existing -- a new lease, or even a renewal lease to the prior rent in that space, our bigger takeaway is really to literally run across the new rate line for each of those categories and really focus on how much those rates are going up in the aggregate. Recognize, for these five periods, this is a combined company post the Prentiss merger, so you're looking at a full data set here and we're seeing some very significant effectively year-over-year increases in rates. While we are still dealing with two phenomena, number one, some prior rents in those spaces that were inordinately high, perhaps coming off a period two or three years ago when those spaces were formerly leased, and also the phenomena of expenses escalating and dealing with that feature. So two issues we have to continue to focus on. The absolute level of rents I think really does support a strengthening market theory and we hope to continue to take advantage of it and I think there are -- one is to continue to push the rents higher, get better terms on expense stops which we have begun to do. And lastly and I think most importantly, make the capital work a little better for us by getting back down below that number that has gone over $3.00 per square foot per year. And we're very focused internally in getting that back down into the mid-2's, if not less, where our CAD ratios will improve, the cost of financing those leases will improve, and that just runs right through the whole business. And that is the biggest challenge and opportunity right now to the extent we execute on it.

Lastly, any markets surprising on the plus side with rents based on your expectations?

I think the markets -- the answer to that is no. I think we have been expecting to have a steady recovery in a number of these markets. I think the market that has certainly in the last quarter has shown some surprising strength, is CBD Philadelphia where there has been a significant tightening of the vacancy. Really very, very few large blocks of space available whatsoever. Some good tenant movement, some good absorption in the marketplace. So I think where when we chat with the folks in our urban division, I think they feel very good about some significant upward pressure on rents in that market. When we look around the rest of the Company, I think we're just very pleased with I think the strength of the firming we have seen and the ability to move rents closer to our targets. Nothing truly dramatic just quarter-over-quarter, but just a very nice progression of what we've seen in the last few quarters.

If you just go back to your first question, year-to-date when you factor in City Place, we have done about $350 million of dispositions this year, which is really the two major properties in Dallas -- Park West and City Place, then the Norton Office Center and then the (inaudible) which is an Philadelphia, Newark, and then the sale of Reading and Harrisburg. So when you look at a target for the year for us for dispositions, then we did talk in that $400 million to $500 million range, a key piece of that was at least $200 million in Philadelphia. So we would certainly expect disposition targets conservatively for the balance of the year between $100 million to $150 million.

Thank you for a much.

Jordan Sadler, KeyBanc Capital Markets.

Could we just drill down into the cap rates on the sales a little bit? I know you put the disclosure, Howard, of discontinued ops, and that was real helpful on page 10, but I'm just trying to see if I'm reading this correctly. The held for sale column purely relates to City Place?

That's correct.

Which would imply something close to a 12% cap rate on trailing numbers. I recognize 7-11 was rolling out, but is that about the right way to look at that?

Yes, I mean very simplistically, for the quarter, [6 million 480] of revenues less the [3 million 1] of operating expense would be my way of looking at it, and there's really -- and depreciation, there's really nothing happening within that asset. There's no G&A, there were no direct financing costs. Obviously the money nominally goes to pay down the line, so you look at that as the initial replacement. And then ultimately an acquisition or lastly perhaps a development. But yes, that is the gap on a full quarter basis. We had some of that in April. I think the lease terminated actually at the end of April, so we had that full effect. But beginning May 1, that's the roll-off.

And then on the sold assets, it looks like almost, if you balance the assets that were sold between January and March, almost like mid-quarter sort of convention would be appropriate?

You had Park West in the middle of January, one small asset in January and then you had the big Reading-Harrisburg package at the end of March. The big Reading-Harrisburg package was a mid-7s cap rate, and that was a full quarter effect and you really don't have much income in here at all, two weeks maybe from the others. So you can really do the math on that basis. I don't know if mid-quarter is exactly right, but those are the components.

Most of it's coming off of Reading and Harrisburg.

Yes, I would say. If you look at average NOI from that.

You're not too far off though, Howard, (MULTIPLE SPEAKERS).

It's about $3 million in aggregate, about -- roughly 70% of it is probably Reading-Harrisburg.

Park West in total was about $106 million or so. That was mid-January so we had to wrap up the quarter at the 112. So you throw Norton in there, you're not too far off.

We'll grant you your mid-quarter. We're probably pretty close.

You might be off by a couple of dollars.

Maybe a day or two.

So that's also roughly going to shake out on a blended basis to be something like a 10 cap, just as far as trailing numbers go, so you're going to have to replace $35 million of NOI to sort of get back up to sort of the same pace in terms of NOI. I know you talked about sort of increasing or growing GAAP -- growing same-store NOI above sort of your target levels, originally targeted levels. But what is the replacement NOI on incremental acquisitions? And I know you don't have a ton targeted here, but I guess whatever you redeploy Reading-Harrisburg into, what is that going to look like?

A couple of observations. One is, you have to recall, when we prepared our forecast for '07, we certainly anticipated that City Place -- or we were hoping the City Place roll off and actually the -- originally at the end of the first quarter, we picked up an additional month of that. So that number that we were getting for the first quarter when we looked at the second quarter, that did drop off based on our core projection. So when we looked at the full year 2007 as we were doing our original projections, we anticipated that rolling off. So I'm not sure you can look at it from the standpoint that that $3 million plus per quarter is factored into our numbers. So we're hoping for a whole bunch of -- the impact of a range of other data points that Howard touched on a few minutes ago would try and compensate for that. ' But to answer to your question directly, I certainly think that we're doing our best and we're looking at a lot of deals, we're trying to target average cap rates north of 6%-6.5% on a GAAP basis. We may find some that might be a little bit higher. We won't go too much lower, but there's clearly, as I mentioned in my comments and Howard shouted about and certainly is part of our numerical thought process, there is clearly going to be a little bit of a muting of earnings growth effect by selling out of these -- whether it was a Dallas, which was really a no-growth market for us or a Reading-Harrisburg where there was stability but no growth as we look at repositioning the portfolio. But I think our expectation is that continued firming of the markets, some of the activities that Howard had touched on, hopefully some good success on the development front as well as additional absorption will really ease that path to a higher quality portfolio. And I think we're, as we sit here in May, we are fairly encouraged by both the performance of the same-store portfolio, our ability to execute some I think very good sales transactions that are clearly consistent with our overall Company's objectives and that we will wind up through a combination of developments coming online and some of these disposition efforts with a much more growth-oriented portfolio as we roll into 2008. And that's the objective of everything we've been doing over the last 1.5 years.

What are you targeting? I assume you have to redeploy $112 million plus, to 1031 Reading-Harrisburg, right?

We would need to do that, correct.

And should we assume that's going to be in northern Virginia?

We're looking at a range of options right now. It will not be in suburban Philadelphia.

Just to clarify on Brandywine Office Investors, ADP's 49% interest. The 6.1 cash cap rate is on the gross value, right, the $137 million?

It's on the $279 million asset valuation that the two parties agreed upon for that transaction. That's the indicative cap rate off that.

The share. Lastly, what is your flexibility, Howard, to continue to do share buybacks under your existing line of credit facility? What is the most restrictive covenant?

They are allowed -- certainly, there's a big difference between funding money on the line or otherwise and reinvesting in our assets. Those assets go into various denominators, share buybacks do not. So that is an activity you can do less of than all of the other growth you can do using leverage so we have to watch that. And we have a lot of overlapping objectives, and certainly one is to maintain if not increase or improve our credit rating. The other is to maintain maximum flexibility when something else comes along. And, clearly, if you overdo buying shares, you have less flexibility later on. So in a variety of ways, we have to beef up our equity capital and there are lot of ways to do that besides issuing of equity which is certainly not indicated today given the conditions and that includes monetizing some of the development assets as conditions permit. And certainly running a better, a more efficient process on the operations side from a capital perspective. Currently, we are not retaining enough or perhaps any cash after the dividend and that's something we just have to improve and get to a more cash-positive posture.

Thank you.

Ian Weissman, Merrill Lynch.

Gerry I just want to clarify something. I think last quarter, you said that you were going to do about $400 million of acquisitions this year. You say that lower cap rates in your markets have actually changed that assumption. Should we assume that you're going to do no acquisitions for the balance of the year?

I don't think that would be good assumption, Ian.

Let me ask you this question. How much have cap rates dropped in your markets from last quarter which gives you greater reserve for paring back your acquisition assumptions?

I think in a couple of the markets, particularly when I look at an Austin or a northern California, I think there has been a continued diminution of cap rates. Certainly Bob and I have looked at a number of things down in northern Virginia in the district and they continue to be a fairly long list of buys. So for real classification, I think it really would be a function of -- there seems to be continued downward pressure on cap rates, first of all. Two, there continues to be a very active list of bidders for almost every property. And three, certainly everyone seems to be lowering their IRR thresholds down from 8% to close to 7%. I think when you get into that range for us, we want to be increasingly selective because we know we can generate better value for our development pipeline. So I was very careful in at least how I tried to phrase my presentation in terms of -- the acquisition expectations are muted. I think that's a combination of those cap rate issues I just spoke of. Also, some of the performance we've had a year to date from our same-store portfolio. But, again, I think I don't want to preempt any possibilities, I just think the washboard for us on the acquisition front is going to be very focused, very selective, very disciplined. We do have some redeployments we need to do through Reading and Harrisburg and we have a development pipeline that we need to fund and we want to make sure that we do that very effectively.

Lastly, just talking a little bit about fundamentals in your core markets. Clearly, you have had year-over-year improvements in occupancy across all of your markets, but if I look at page 22 of your supplemental and I look at the nine markets that you highlight, you have actually had sequential drops in occupancy across all of your markets with the exception of New Jersey. Maybe if you could just comment on the sequential trends.

Let me just put there -- so we're all on the same page, as they say. I think in terms of taking the ones that show the biggest declines, and I again tried to touch on those in my commentary, was year-over-year, we have had a decrease in our portfolio, primarily in Austin which is down from 93.8 but certainly up from 91.8. So point-to-point it's up. Where we have had a downward trend in the last couple of quarters is in Richmond, but that's specifically tied to one large attendant rollout that we had projected as part of our 2007 financial plan. And in fact, those folks have already identified a tenant for one of those larger spaces. Southern California again is up in trend line over where it was last year as is the urban division, northern California, Pennsylvania North, which had probably had the most dramatic growth from 88% to about 95%. New Jersey while it dipped down has come back fairly nicely to the almost 96%-plus occupied. Metro DC has remained fairly flat, a little bit of an upward bias. And in Pennsylvania West is where we have had the challenge from an occupancy standpoint but we've been able to maintain that level close to 90%. So one of the challenges when you present any of these different points of data, they are moments in time. But I think as we look at the trend line when you compare ever-increasing rental rates over the last four or five quarters with an improving occupancy level, it seems to work out very, very nicely.

I guess my only point was, I just want whether -- clearly, we have recoveries in your markets year-over-year. I just wonder, it just seemed odd that across all of your markets, you are getting the sequential drop in occupancy. I just wanted to know whether or not it was a trend across suburban markets that we might have hit an inflection point in terms of change in operating fundamentals, maybe for the worse, but you're saying (MULTIPLE SPEAKERS).

I understand that question. I certainly would not infer that from those graphs at all.

Thank you.

John Guinee, Stifel.

Well you guys have certainly been busy. Question on the acquisition side first. Is there anyplace in the country where you can buy at a GAAP cap rate of greater than 6% below replacement cost and actually have underlying rental rate growth?

I think there are a few opportunities. I'm sorry -- did you say a cap rate of 6%?

Yes. What you had said earlier was I want to buy at a GAAP cap rate of north of 6 below replacement cost and in some markets where there is underlying rental rate growth. And the question is -- is there anywhere in the country where that actually exists?

I think there are pockets of that, yes, John. Certainly we have seen that in Richmond when we bought properties this year which is a market that we have a great team in place and it has a good operating platform. And again, I think that there's pocket opportunities even in the higher-priced markets where there may be a different risk profile to the asset where there's a near-term lease rollover, whatever it might be. But it's certainly harder to do which is why I said the acquisition expectation was muted quarter over quarter. And it is (technical difficulty) something that meets all of those three criteria.

The second question, a minor one. Do you anticipate being able to unwind any more JVs?

At this point, we don't have -- they are in our landscape right now. Our major joint venture is with the McQuarrie on two assets in Wilmington, Delaware, which are long-term lease to a credit tenant. They continue to like that asset, as do we, and they actually like that structure quite a bit. So we have a 20% interest along with a nice promote and a good credit tenant with a high-quality asset. So that structure, John, that partner and that asset works well for that program. The other joint ventures we have as identified on page 29 are most mostly with local developers and landowners where we structure that financial transaction provides a very high -- a comparatively high rate of return on our invested dollars. So we don't really anticipate unwinding those during the course of the year.

Great. And last question is, in your development pipeline, the bad news is just leasing is slow, but the good news is, I think have in all of these assets at a very low price per pound. Do you have any sense -- for example, you are in Dulles at $292 a square foot, you're in Austin, Texas at what to $214 a foot, you're in the Metroplex Plymouth [meeting] at $264 a foot. Do you have any sense for what it cost to build similar product today?

Yes, John. I think generally I would say, the difference between when we started and today is two components. One is land, the other obviously construction cost and I would say it's up probably $50 a foot perhaps from when we started a project a year ago. And I think to your question, there's a couple of interesting sales down in Virginia currently that people underwrote against current construction costs and there's a project near us in Herndon called the Monument III that just sold very recently for about $286 a foot. And I would say that's about a $50 gain over what the developer had and the building was only 27% leased. So it was really an opportunity buyer coming in. And similarly, [Carlyle] has under contract or maybe just closed a project Westfield for about $256 a foot, a lower rise building, and they probably have about 200 into it with zero leasing. So I think people are paying up on these, but I think the way that they look at it is that that is about replacement cost today.

Right, thank you.

Cedric Lachance, Greenstreet Advisers.

Is City Place the only asset that's in your property held for sale?

Yes, that was it.

Okay. So if the condo development doesn't happen there, you will recognize an impairment charge, correct?

Know, what you need to do, Cedric, is you need to combine the asset held for sale and the liabilities held for sale, and in conjunction with the sale, the liabilities were eliminated as they were intangible liabilities. And therefore on a net-net basis, I think we had about a $113 million basis, which once you factor in transaction costs and the like, will effectively be neutral. And we will not record any income or any such matter for that contingent profit until it's realized.

Going back to your development schedule, I know you're not very comfortable giving us the time line in terms of those land parcels that you have added to the development schedule, but when you look at Philadelphia right now there seems to be or to greater Philadelphia there seems to be a fair amount of development. What do you think is the probability that the various projects that are listed on page 28 will actually see the light day in the next two to three years?

I think in the next two to three-year time horizon, Cedric, I think the chances are fairly good. When I look at the schedule, our Metroplex site consists of three different projects. The first one is under development now. Again, we have I think some good leasing activity on that. So Metroplex II and III, they're in advanced stages of the approval process as well as the design and development undertaking. And our expectation, one building is about 100,000 square foot, one is a larger building and I think they are purely a function of market conditions. But I think based upon what we've seen in our Plymouth Meeting inventory between the executive campus, meeting house business center and 401, so our existing stock at Plymouth Meeting, that sub market has been incredibly tight with good firming of rents. So to the extent we can achieve our objectives on Metroplex I, I would certainly expect that II and then potentially three would follow sequentially. Certainly the other -- that is really the only one if I'm looking at it really in suburban Philadelphia. George, maybe you can chat a little bit about the perspective on the land holdings in New Jersey.

On the New Jersey land, one of the projects down in southern New Jersey we acquired, we're actually going through the architectural and engineering as we speak and it's the Bishop's Gate South project. In total, that would be about 375,000 square feet. But one of the things that appealing too, it's a five-building complex, so the first building is fully approved. We're just finalizing the architecture now. And, again, it's a 60,000 square foot building, very manageable for that market and immediately adjacent to what one could easily argue is the best park in all of southern New Jersey at that point -- a lot of corporate users in the park and essentially 100% occupied. We have one building that we put up a few years ago. That building is 100% leased now, and again the fault was to the extent we can stabilize some of the other properties, we will start that building as well. But again, it's a small manageable size for that marketplace.

Could you also provide us an update on the current market conditions in the Dulles corridor, given the number of developments that are going on there?

The Dulles corridor has been a bit of a paradox I think, some good and some bad news. I think the good news side, there is no new construction planned to start here in the next 12 months, so I think we know what we have as far as a delivery schedule. Interestingly, the absorption in northern Virginia was actually the highest in Reston-Herndon this past with, about 420,000 square feet and at the same time, the asking rents continue to increase. I think when Beacon got into Reston Town Center, they pushed up their rents to $48 a foot, which is easily the highest ever asked out in that corridor. We're doing about $34 at Dulles Corner, which is the highest ever achieved at that location as well. And in our own portfolio, we leased about 180,000 feet in Reston and Herndon in the first quarter, so it was a pretty active quarter. I think on the bad news side of the projects delivering the balance of '07 and for the most in '08, there really has still not been substantial leasing, and that is largely due to the fact that the large defense contractors who have been a big part of the market are not out there right now. So I think we'll see -- we're going to see the 800,000 square feet roughly delivering -- in 2007, it's currently about 15% pre-leased and there's about 1.8 million feet delivering in '08, also about 15% pore-leased. So the implication is clearly vacancy rates will go up. And I don't think we'll see absorption to match that. We have a current vacancy rate of about 10.7% in Reston-Herndon, it will probably go up to about 11.3% by the end of this year. And then depending on what happens next year, it could get potentially as high as 14%. I think after that, really there is no construction as I mentioned, so we think it will pull back down in '09 to about the 12% to 13% range.

In terms of rents, as I said, they are still going up. I think we will see that flatten out a bit in the second half of this year. I think clearly the B buildings will have more pressure because people consistently will pay up for new construction and I think the race for all of the new buildings are in the $35 to $37 range. As I mentioned, there have been some good sales out there, whether they're leased or not, so I think there's value in every one of these projects despite the leasing market. But our focus is really to lease our building, not to sell it and we're really trying to pursue tenants with expirations in '07 and early '08 where there's less competition out there. We're really pushing the quality and I think that has worked well with the people we've talked to so far because it is at the high end of the market out there today. And as we've talked about before, we're really trying to draw up our existing tenant base, which has some really great tenants right there at Dulles Corner who have historically been very much on the retention side of things. So far us at that location, we have about 600,000 feet of prospects, we're really in meaningful discussions with a couple of those. And in terms of the types of tenants, about 200,000 feet are software, about another couple hundred thousand are government and the balance are defense contractors, but not really the large ones at the moment. So we have decent activity and I think we will outperform certainly the other buildings we compete against.

Okay, maybe one final question. Gerry, you made some comments about cap rates continuing to decline in some of your markets. How do I compare that what the 6.1% cap rate you paid on ADP joint venture? It seems to be perhaps even higher than the cap rates you discussed in the previous call when you mentioned 5% to 6%, [5.0 to 6.0] was realistic in your markets.

I think we were happy with the outcome from the ADP venture in terms of the cap rates. There's some work to be done in a couple of the properties with some near-term leasing exposure where we feel confident we can execute on it. So we thought that was fairly reflective, Cedric, of where those properties would have traded at.

Okay, thank you.

Rich Anderson, BMO Capital Markets.

So when I'm talking about or looking at the buyback program, I guess I see an implied cap rate by our estimation of about 7.2%. So is that roughly what you see you're creating by buying your stock if I'm in the right range as opposed to buying a property which is a sub 6 -- is that the sort of spread you're thinking about when you go through your buyback program?

Yes, without commenting on an exact number, I think that's an excellent way to look at it. I think the other point and we've spent a lot of on it today is we've got a growing development process here, and in some construct the way we view the cycle is the asset sales in some of the noncore markets, whether they're in the 7s or even creeping to an 8, ideally the best use of those proceeds is to fund a development program that's at an 8, 9, 10 plus. Certainly some of the smaller projects on the margin have a lot of operating leverage in them.

But it takes time to get there.

It takes time to get there, but one thing we want to find ourselves in obviously is taking advantage of a price point this year and buying back stock and then waking up next year and realizing the Company continues to grow net-net and wouldn't it be nice if we had some more stock out there. You just need longer-term planning than that. So while certainly it made sense to the degree we did it primarily in the first quarter, no guarantee that it will grow at the same pace or higher pace, lower pace. There are lots of opportunities here to spend money over a one-, two-, even three-year period; it will just be more productive in the long run.

I have a couple of more questions, I know it's long but I will be quick. Gerry, one of the things that has always occurred to me with you guys is it always seems like your same store is about to pop and get really nice, but then something just sort of tips the scales and it's never as exciting as I or I'm sure you want it to be. So with that in mind, what do you think the growth potential -- internal growth potential of the Company will be once you get through these acquisitions, looking into 2008 as you call yourself a more growth-oriented portfolio?

It's hard to put an exact number on it because of the volatility. Certainly one of the symptoms of being in the real estate business in there tends to be a level of cyclicality to it.

But in your mind, is it 200 basis points greater? Just long-term, I'm not saying in 2008 necessarily, but just generally speaking, do you think you can get 100, 200 basis points more like if you at just the quality of the market that you'll have?

Again, I'm not sure what the exact number would be. I think what we look at.

Come on, give me the exact number.

Down to the basis point -- give me the time frame. Rich, it's a great question and it's certainly something that's always in our landscape in terms of exactly what we can expect as a long-term growth rate for the organization. I think as we look at the composition of our portfolio today, we've had a nice uptick in occupancy. But I will tell you as I've said on other calls, we want to run this Company with a structural vacancy of less than 4%. So we still have some ways to go, and historically we're able to do that up until a few years ago. We're also looking and executing on changing our lease structures. One of the major challenges we've had in the last couple of years in our same-store growth is that the pace of expenses, expense increases has been pretty dramatic, and what happens at the point of sale, the point of the renewal or the point of the new tenancy is where we may have gotten reimbursements for the expense increased during the term of their lease, we're resetting new base years. So while we're getting good revenue growth notionally, we're actually eroding our margins because of the expense increases. What we're trying to in addition to managing our properties more effectively is to really key in on our lease structures by (inaudible) option of separate stops, moving a lot of leases to triple net. The ability to recover is still a function of the overall market and that's where we're always nervous but we're feeling a little more sanguine and comfortable about it from the standpoint of -- approvals are getting a lot harder with the exception of a few sub market conditions. There clearly is not a lot of inventory planned in the near-term and intermediate-term. So we really do think that our market position is very, very good. We continue to execute the plan of selling out of the really non-growth generating sub markets and the far out suburban markets around Philadelphia will add to the growth rate because actually the core growth rates in some of our town center markets like a Plymouth Meeting, a Conshohocken and Radnor certainly have been doing very well and we would expect that going forward. So I know that's a long-winded way of not giving you an answer, but it's hard to project.

Thank you, sort of. Last question. Are you going to grow -- I had this conversation with Howard briefly last week -- are you to grow in southern California?

I think when we went into southern California, we have a good management team out there with both executive and property and leasing level professionals. We have the management agreements in place with Prudential that go out for another year or so. The opportunity to do the ADP financially made sense for the balance sheet and from a real estate standpoint made sense. We have a core base of operation out there. What is fascinating about the real estate business is sometimes those small bases do grow into something very valid and very profitable. So right now it's too early to tell just because of the pricing pressure in some of the southern California markets, but I think we're comfortable with the team which is a key driver for me. We're comfortable with asset quality in the sub market positioning. So again a long-winded, total nonanswer for you on the fact that we're glad we made the right decisions, we have the right ingredients there to either maximize value through an ultimate sale or by continuing to grow that portfolio intrinsically.

Okay, thank you very much.

Srikanth Nagarajan, RBC Capital Markets.

Thank you. My questions have been answered actually. Thanks a lot.

Chris Haley, Wachovia Securities.

Holy cow. I'm very impressed. You guys continue to take a lot of time, which is great. Congratulations on good quarter. Two questions. I seem to recall like the third or fourth quarter last year you guys talked about the concern on the operating expenses side, same-store numbers speaking, same-store operating expenses. Could you give us your outlook for the rest of the year on the expense side? We're seeing relatively high expense numbers elsewhere, not just in your markets, but what might be influencing?

I think what the current same-store portfolio shows is just under a 6% operating expense increase which is quite high. It absorbs almost all of the -- certainly the cash rent increase and then some. I think point made today is that the 2.7 on a GAAP basis for the first quarter is running ahead of our expectations, number one. I think it was influenced by a large pickup in tenant reimbursement, which for the most part runs in line with where we are on a historical basis but runs higher than where we were a year ago in the same quarter. If you look back, I think it's on one of the first pages of the supplement, we broke out the recovery ratios and on average basis we're right in that 33% to 35% range where we think we will be, but year-over-year we did much better so that explains some of the pickup which is why I think for the most part we're still a little bit cautious on changing the overall guidance for the year. But certainly we can continue to hit our range 1% to 2% and absorb a 5% to 6% expense increase. If it gets more out of whack than that, we'll need a corresponding pickup either in occupancy, which was a big contributor in this particular quarter, or in the underlying rent rates which has been a good trend overall when you isolate those. So nothing in these numbers really surprises us. We are in fact at the margin (inaudible) some real estate tax roll down surprisingly enough. We have a couple of buildings in one or two markets where we've had some good news. So maybe that trend over the past couple of years is abating and we can convert some of that decreased expense ultimately to increased rent.

Chris, a couple of point on operating expenses. If you really bifurcate them into categories, a 10% increase on a $0.10 item, it's consequential but it's not as consequential as a 10% increase in real estate taxes at $4.00 or something for example. To Howard's point, we have been actively appealing real estate taxes when appropriate [as] bigger items such as electricity -- we're looking at ways to mitigate that. So on the bigger items, we're certainly doing a lot of work on how to minimize that. And in conjunction, we've gone to triple-net leases. For example, New Jersey we're about two-thirds of our leases are going triple-net now, so again we're passing that expense exposure off on the tenant side. So in conjunction with trying to minimize the expense, we're also laying off part of that risk to the tenant base.

Thank you. Last question would be on the additional disclosure which is helpful. Can you give us the sense, Gerry, what is needed for someone to build [Sears] Center II?

A lot of determination, Chris. You mean in terms of ranks?

However you want to define it. Is this project -- is this a real project, or is this something that -- you've mentioned the CBD Philadelphia market being surprisingly healthy given some of the ownership turnover that has occurred on the west side of the Schuylkill and your success there. I wanted to get your color on what would have to happen.

As we have talked on calls when the question comes up, I still do view the University City section of Philadelphia as an area that's right for continued regentrification and for creating significant investment value. With that as a driving predicate, we continue to work on a number of situations in University City area that could lead to a future development opportunity. Certainly construction costs, while they continue to go up, that rate of growth is moderating a bit in some markets. The rental rate picture in Philadelphia is looking a bit brighter than it was a few months ago. So the economic climate is correct, the numbers make sense and there's opportunities we can harvest. I think you would certainly see us move in that direction.

Is there an option held by anybody? Do you have an option?

I'm sorry?

Is there an option that you hold, or does someone hold an option -- is the site available?

Chris, we have not disclosed anything specifically on what we're working on in University City at this point.

All right, thank you.

At this time, there appear to be no further questions. I would like to turn the floor back over to Gerry Sweeney for any closing comments.

Great, Jackie, thank you very much. Thank you all for participating on the call. We appreciate your continued interest in the Company and look forward to next quarter's calls. Thank you very much.

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