Brandywine Realty Trust (BDN) 2007 Q2 法說會逐字稿

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

Prior to turning the call over to Mr. Gerry Sweeney, please let me read the following disclaimer on behalf of the company. The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words anticipate, believe, estimate, expect, intend, will, should and similar expressions as they relate to us are intended to identify forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, these statements were not guaranties 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 different materially from those expected.

Among these risks are the risks that we have identified in our annual report on form 10-K for the year ended December 31st, 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 re-let 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 availability of debt and equity financings; 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 attacks; dependence upon certain geographic markets; and general and local economic and real estate conditions, including the extent and duration of adverse changes that affect the industries in which our tenants compete.

For further information on factors that could impact us, 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 this conference call unless required by law.

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

Thank you. Good morning, everyone, and thank you for joining us for our second quarter 2007 earnings call. As usual, participating on today's call with me are Howard Sipzner, our Executive VP and Chief Financial Officer; Darryl Dunn, our Vice President and Chief Accounting Officer; Gabe Mainardi, our Corporate Controller; and both Bob Wiberg and George Sowa, Executive Vice Presidents.

The second quarter was a good one. We had good leasing activity, strong net absorption, positive same-store growth and an improving trend line on our mark-to-market. We advanced our development and redevelopment pipeline. We also accomplished several financing transactions, which further strengthened our balance sheet and improved our debt profile.

For the quarter, as Howard will discuss, financial results were slightly ahead of First Call in line with our internal estimates. Core portfolio occupancy improved to 93.9% and 94.9% respectively. This compares favorably to our levels from a year ago. So we had about 200 basis point increased over this time last year. The biggest increases in occupancy gains occurred in our Midatlantic, Austin and New Jersey operations.

Our same-store NOI increased 2.5% on a cash basis and 2% on a GAAP basis. We had net absorption during the quarter of 182,000 square feet. Year-to-date, we have had positive net absorption of 327,000 square feet. And that statistic along with our quarterly retention rate of 85.5% reflects very strong core portfolio performance.

Capital cost quarter-over-quarter were down about 10% and with our occupancy approaching our 96% target and as market conditions continue to improve, we will be better able to manage our capital cost for a combination of high retention rates, lengthening lease terms and aggressively selling high capital consuming properties.

We are also delighted that we had 7.2% GAAP increase this quarter on new lease rates and 1.4% increase in our GAAP renewal rates. We saw particularly strong rental rate increases in our urban Virginia and Mid-Atlantic operations. On renewals, we had a strong performance by Austin, Virginia and again, our Urban division.

From the capital standpoint, declining trend lines in capital costs for a lease year occurred in Pennsylvania-West, New Jersey, Urban, Mid-Atlantic and our Northern California operations. Conversely, for the quarter, we saw increased capital costs in our Richmond and Pennsylvania North operation.

FFO payout ratio is below 68%. Looking at the market from an overall standpoint, market conditions remain stable and improving. Several points worthy of mention. In most of our markets, year-over-year leasing activity for the second quarter improved, particularly in New Jersey, Pennsylvania-West, Urban and Delaware. Leasing activity was below 2006 second quarter levels in both Northern Virginia and Maryland.

Most markets continue to have positive absorption in line or in excess of a year ago. In particular, the overall Pennsylvania suburbs, Urban, Wilmington and Maryland had good absorption numbers compared to this time last year.

Vacancy rates for the markets remain essentially static, with good performance in Pennsylvania-West, Urban, and Richmond. A large increase we had in vacancies occurred in our Carlsbad Southern California office, but our 2007 and 2008 rollover there of 3% and 9% respectively with a positive mark-to-market should insulate us from the increased vacancy rates in that sub-market.

Job growth remains positive in all of our markets with 1.5% or better employment gains posted in the western suburbs of Philadelphia, Northern Virginia, the East Bay and Austin markets. Furthermore, across our portfolio, we are projecting rents to continue to have an upward bias, particularly in Northern California, New Jersey, the Pennsylvania suburbs and our Urban division.

Construction activity in most of our markets appears to be flat or trending down. For Northern Virginia and the suburban Maryland, we're expecting construction activity to remain flat, particularly as the inventory currently under construction goes through this absorption cycle.

So all in all, solid projections, we look forward to the next several quarters.

From a construction standpoint, our development pipeline remains very much on schedule. On our six ground-up developments within service states starting in the second quarter of 2008, construction remains to progress according to the plan.

At the current time, we have 55 deals in our pipeline. Activity remains strong. And at this juncture, we have about 225,000 square feet of leases in very advanced stage of negotiations. Our hope is that we'll be able to report definitive results to you on our next quarter call.

I mean certainly as we look at it, the lobbies, the landscape and the amenities and parking lots in those new ground-up buildings are finished and it becomes truly ready for tenant showings and more importantly tenant decisions, we are very confident that we can move this pipeline through its normal leasing cycle and generate strong growth rates into 2008.

The supplemental also outlines a number of projects under active redevelopment. These projects show in-service states ranging out to September of 2008. In all cases, those buildings are undergoing significant redevelopment of base building systems, common areas. And that has been and will remain a very good value generator for us.

From a land standpoint, our overall inventory can deliver approximately 7 million square feet. Components of that land are in active planing and development stages. Those properties include the remaining build-out at Metroplex, Lenox Drive and our Dulles Corner property.

In addition, we have planing underway for several other projects, most certainly Bishop's Gate, a Southern New Jersey site that can accommodate up to 375,000 square feet of additional building, West Creek in Richmond, Virginia, that can do about 290,000 square feet, and our Rob Roy site in Austin that can do an additional 88,000 square feet.

Our desire to start these projects is a function of market conditions and our overall portfolio strategy. In the meantime, we believe that our expenditures on these activities create strong land value and certainly strong investment value for the company.

So to summarize the quarter, we had a continuation of good same-store growth. This is our fourth quarter in a row of strong same-store. We had positive absorption throughout the portfolio with significant leasing successes. We had a continuation of increasing rental rates, a very strong retention rate this quarter and made solid progress on both our capital and our investment program.

At this point, Howard will walk us through the quarter results and make some observations on our financial picture.

Thank you, Gerry. If you do not have a copy of our supplemental package, you may get one on your website, www.brandywinerealty.com, in the Investor Relations Financial Reports tap.

Once again, for same-store NOI calculations in the supplement, we have adjusted the Prentiss assets that are included in the six-month calculation for the missing four days in 2006 attributable to our January 5th, 2006, closing date. Doing so enabled us to include Prentiss assets in the six-month calculation on equivalent basis. And the reconciliation of the six-month same-store NOI on page 13 goes into this in greater detail.

And as Gerry mentioned, we have expanded the development section to give better clarity to our various projects and also reintroduce some more detail on our land holdings on page 33 where you can get a sense of some of the longer-terms projects.

Now, let's turn to some of the financial results. FFO in the second quarter totaled $59 million, up 3.6% from $57 million in the second quarter of 2006. On a per share basis, FFO per diluted share increased 8.3% to $0.65 versus $0.60 a year ago, and that larger per share growth is, of course, attributable to our share buyback activities over the past year or so in total. The payout ratio on a $0.44 common share dividend equaled 67.7%.

Now, let's highlight a few line items in the income statement. Total rental revenue was up $5 million or 3.7% on a same-store basis with a bulk of that attributable to higher tenant recoveries in the current period. The balance of our growth in revenues is from revenues attributable to acquired and completed properties. Overall termination revenue declined from $1.3 million to $500,000 for the quarter. For the same-store portfolio, both operating expenses and real estate taxes were up on a quarter-over-quarter basis, outpacing the revenue gains and resulting in a same-store NOI gain of 2% on a GAAP basis.

Straight line rent contribution is down to $6.1 million from $8.2 million as we burn off free rent periods and move to a more cash-based rental platform, which will of course improve our CAD ratio.

Our G&A expense came in as expected at about $7 million and was down from $7.7 million a year ago, reflecting the continued synergies in the combined Brandywine Prentiss platform.

Looking at the rest of the income statements, interest income declined from the period a year ago, but at $1.6 million, exceeded the prior quarter's figure in the first quarter due to temporary cash balances or waiting reinvestments under 1031 exchanges. These have now been fully deployed, and thus, this figure should drop back to last quarter's run rate of about $700,000.

Interest expense was down slightly from $41.6 million to $40.8 million, reflecting higher capitalized interest of $4.4 million versus $2.4 million in the quarter a year ago. And lastly, the equity and income of unconsolidated entities includes a $3.8 million promote on the dissolution of the INVESCO joint venture. This is included in our calculation of FFO.

Turning to a few other operating metrics, our EBITDA coverage ratios remain steady at 2.5 times on interest, 2.3 times on debt service and 2.2 on fixed charge and support our commitment to an investment grade rating on our unsecured debt. Same-store NOI increased 2% on a GAAP basis and 2.5 on a cash basis and reflects 256 properties that were 93.6% leased at the current quarter-end versus 93% a year ago.

Our NOI margin came in at a 62% and our recovery margin on expenses at 33.7%. Most importantly, the recovery margin was in line with the Q1 figure of 34%, but well above the last year's rate of 27.7.

On accounts receivables, we had about $20 million of operating receivables and we are well reserved at about $3 million and we also had on our balance sheet at quarter end the $82 million of straight line rent with an associated reserve of $4.5 million.

Turning to our 2007 FFO guidance, we are maintaining our guidance at $2.57 to $2.65 per diluted share. Looking at the $1.28 we have done a year-to-date this translates to a $1.29 to a $1.37 range for the last six months of the year. And if we assume we are for calculation purposes a $91.5 million fully diluted share basis, it means we'll need about $118 million to high of $125 million and that compares to a $117.6 million we have done year-to-date, and $122.7 million we did in the second half of 2006.

The key assumptions to achieving this FFO performance will be overall GAAP NOI growth rate in 2007 of between 1% and 2%. We are at 2.4% year-to-date, but we expect the rate to moderate somewhat as we run up against higher Q3 and Q4 recovery from last year. Overall, we expect same-store occupancy to reach or exceed 94% and core occupancy reflecting additional recently completed or purchased properties to be at or above with 94.5%.

We anticipate between $6 and perhaps as high as $10 million of total lease termination revenue with only $1.8 million realized year-to-date but this range for the full year will compare favorably or comparably to $7.8 million in 2006. And lastly, we expect all other miscellaneous income to contribute approximately $12 million to $14 million, with about $7 million realized year-to-date and this primarily involves our third-party management and other activities.

And as I mentioned earlier, well, while I'm not specific as to where it would occur in the year, the $3.8 million we realized in this quarter from the dissolution of the partnership was part of our original guidance and is presented on the equity and income of JV line items.

Interest savings will total approximately $10 million year-over-year, as we continue to reset the balance sheet and identify ways to improve our interest cost. This will be offset by a reduction interest income of as much as $5 million as we carry lower cash balances. And lastly, we'll have a reduce share count for the year due to share buybacks.

Year-to-date, we bought $168.5 million of assets and sold $349 million; comparably in 2006 we sold approximately $500 million and brought $243 million. Our guidance for the balance of the year reflects projects bought to date but does not reflect any meaningful accretion or dilution from further acquisition or disposition activities. We are marketing certain portfolios of assets, but we'll not know for certain how that sale will impact 2007 and 2008 ultimately until later in the year.

On the debt side, we maintained consistent 53% debt-to-total market cap and 53% debt-to-gross real estate cost leverage metrics and continue to reduce both our secured-debt and its floating rate debt in the quarter via certain refinancing and long-term insurance.

With that I will turn it back to Gerry for some further comments.

Howard, thank you. To wrap up with some overall observations. First to refresh everyone's perspective, our base strategy as a company remains driven by 4 predicates, and I'll just walk through them.

First is really accelerated dispositions to take advantage of both the strong investment and private capital market as well as to reduce the overall revenue contribution from the Philadelphia suburbs. I will chat about that in just a few moments.

Two is actively manage our land (inaudible) with very strong inter value opportunity in our land holdings. As I mentioned, we can build close to 7 million square feet when the growth and the risk profile equation makes sense. Our current land inventory is just slightly north of 2% of our asset base. We will look to marginally raise that percentage by both actively selling out of several slower growth markets where we have land, and certainly by increasing our land position in higher growth markets, such as Austin, Metropolitan DC and Northern California.

Increasing our development pipeline, and risk adjustment returns do provide a strong solid platform for growth. The existing pipeline is progressing according to plan. I mean frankly as we have talked on other calls we are hoping to have a bit more pre-leasing but the project really are now just starting to come online and given the leasing negotiations we have underway our pipeline of deals we remain very confident they will perform as expected.

As such we can continue to actively plan other high quality pipeline targets, which starts later this year and into 2008 so they can be growth contributors the latter part of next year and into '09. We certainly would continue to proceed with an investment strategy by very select acquisitions, enhancing returns on any dollars we actually invest, maintaining a strong balance sheet as Howard mentioned with good reserve future capacity. And certainly continue to take advantage of the dislocation between our stock price and our real estate values.

Let me warp up this speech, with just some additionally observations. From an operations and market activity standpoint as we discussed, we had good absorption, increased stock occupancy and encouraging same-store results. Our expectations that market conditions will be stable to improving, and we anticipate a continuation of this trend.

And certainly we are pleased that our portfolio is closing at a 96% occupancy target as that will certainly put us in a very good position to continue generating positive same-store results. And that trend presents a great opportunity for us to generate future growth simply by executing up to our historical standards in our own core portfolio.

From the development or redevelopment standpoint as indicated in the supplemental, our overall pipeline of both ground up and redevelopment shows about 2.4 million square feet, with the blended leasing percentage of about 45%. We certainly remain very focused on absorbing the remaining space and continue to create additional value through our development pipeline.

From investment activity standpoint, let me spend a few moments on both dispositions and acquisitions. We continue to focus on reducing our core portfolio revenue contributions from the Philadelphia suburbs which we view encompassing PA North, PA West and New Jersey to a lower percentage than where it is today which is north of 40%.

Along these lines we are in the market and are expecting bids in the next several weeks in the portfolio of 1.9 million square feet of assets located in Bensalem, (inaudible) Fort Washington and Lehigh Valley, Pennsylvania. That portfolio consists of a blend of product types about 450,000 square feet of one store flex space, a little more than 100,000 square feet of office space -- I'm sorry -- warehouse space, and the balance in 2 to 4 story mid-rise buildings. We have received good investor demand and our expectation is to report to results on that transaction during next quarter's call.

From an acquisition standpoint, identifying acquisitions that meet our yield quality and locational criteria remain the challenge; our efforts remain focused on our targeted growth markets of metro DC, Austin and Northern California. While many of these acquisition opportunities that we have looked at year-to-date from intriguing from a locational and quality standpoint, they were either at or above replacement cost, generated minimal near or intermediate term returns or had IRRs well below our investment criteria. By way of illustration, during the second quarter alone, we analyzed north of $2 billion of transactions encompassing over 7.5 million square feet. And precious few of those hit our criteria.

Certainly there is the expectation that cap rates may back up and that some of the more thinly capitalized leverage buyers will reduce their promise on the bid list. We have not seen any sign of that in any of our markets and I will touch on that just in a moment. The only transactions from an acquisitions standpoint that we proceeded on was the acquisition of the Lake Merrit Tower in Oakland, as well as the Boulders acquisition in Richmond of Virginia.

As we outlined on last quarter's call and as touched on by Howard, we did have a 1031 requirement that was an important consideration in evaluating these transactions. Lake Merrit Tower is a property in Oakland; we acquired it from Prudential who frankly acquired it as part of the overall transaction with Prentice. The property is next door neighbor to our Ordway center and we acquired the property for cash cap rate close to 6% and a GAAP rate higher than that, as we believe to be about 85% of replacement cost. The transaction had a large impending tenant rollover situation, created some leverage with tenancy in the marketplace for us. And the deal simply works from both an economic and a product complementing competitive standpoint.

Boulders, which we closed after quarter end, consists of five class A mid rise buildings that are directly competitive to our Arboretum project in the Southwest part of Richmond. We are able to require these properties for a mid-6 cash cap rate, better returns on GAAP basis. But more importantly, we are able assimilate those properties into our Richmond operation thereby decreasing our marginal cost of running that over operation and purchase those properties slightly below replacement cost. Those two transactions fully acquitted ourselves of our 1031 requirement.

Speaking on cap rates, there is certainly a lot of speculation about liquidity in the marketplace and where cap rates are going. And while we certainly keep the sensitivity at the forefront of our thinking, we do continue to beat the bushes for opportunistic acquisitions. And as I mentioned, we really have not seen any sign of cap rates banking up or frankly at this point any major change to the bid list composition.

Relative to cap rates, just spending a few moments going around the Brandywine horn, the market in Northern Virginia and suburban Maryland remains very active. Recent sales in suburban Maryland have been in the 5% cap rate range with one property actually trading in the mid 4s. On the Northern Virginian front, we are typically seeing high quality Class A property trading from the low 5% to 6% cap rate range with B quality properties typically trading closer to 6%.

Speed to marketing quick execution remains the order of the day, and there continues to be from underwriting no shortage of buyers for top quality product in those markets. There has also been a fair amount of investment activity year-to-date in Austin. And total volume has been north of $1.6 billion, which obviously included the Blackstone portfolio.

Southwest market, we've had our operations at a couple of good trades. The pending sale by a private developer of about 1.7 million square feet of portfolios is imminent. That is reportedly down to a few institutional buyers with going in cap rates rumored to be below 5%. Across the Austin major submarkets, cap rates have generally been in the low 5% range. And again, at this point, we're not seeing any signs that the marketing cap rates will do anything other than remain unchanged.

Moving on to Northern California where we spend a significant amount of time looking at acquisitions, cap rates in that market continue to remain at the low end in the 3s and high ends on stabilized assets to low-to-mid 5s with very strong bid-list comprised of both institutional and operator sponsored of capital funds.

IRRs on these deals generally are below the low 7% range and to achieve this IRRs requiring some aggressive run away growth assumptions and low reversionary cap rates. The overriding metric remains discount to replacement cost, but we are even seeing that gap narrowing and putting more pressure on both entry cap rates and overall IRRs.

In the Philadelphia market, for the first quarter had about 1.9 billion of total transactions, the average cap rate for all office both one story mid rise and high rise averaged around 7% with quality property. The quality A property cap rates in the low to mid 6's. Buyer demand was broad based and institutionally dominated.

From an investment standpoint, we look at this as being the order of the day and certainly why as I mentioned there is specter of maybe a change in that environment, for all the properties currently in the marketplace that we were working on now we have seen no sign of any cap rate payment. And from an investing standpoint we continue to operate in markets that have shown depth of liquidity and strong investment value and that is certainly evidenced by no shortage of private institutional capital looking for a home.

Another final comment on the investment side, we had been getting and awful lot of in-bound calls regarding our take on the republic transaction. And I suspect many of you are interest in having us comment on the recently announced deal.

Based on the information that has been published in various reports and our long standing intimate knowledge of operating in those markets, and given the relative quality, age and rollover characteristics of the republic assets, we're extremely pleased to see the announced pricing for the transaction.

The pricing being paid for republic assets strongly reinforces the value we believe we have and continue to create in our own Northern Virginia portfolio. Given the status of the transaction we really can't take any questions on the deal. But we'd be happy to address market base questions regarding our own portfolio.

So, in conclusion, our second quarter was a solid one. Our property management leasing teams again did a great job; retention rate of 85% was a true bright spot along with along with our ability to have continued same-store growth and positive absorption. Major focal points for the balance for the year are to continue absorbing space and increasing rates.

We set up our development pipeline, while seeking new opportunities to create value through our development skills, continue our asset repositioning strategy while maintaining strict discipline in our acquisition undertakings.

Our markets are now in better shape than they've been in years. The investment market remains strong, and we're convinced the diversity of our company's platform and the strength of our team leads us well positioned to execute all of the objectives that we've spoken about, and to continue generating increasing growth.

Ilsa, at this point that concludes our prepared remarks, and we can open the floor for questions.

(OPERATOR INSTRUCTIONS) Our first question is coming from Ian Wiseman with Merrill Lynch. Please go ahead.

Yes. Good morning. Two questions, first Gerry I was wondering if you could talk a little bit more about stock buybacks here, and you did about 1.8 million so far this year at $33 and the stock is at $26. I think you have only got $0.5 million left in your program. What do you expect for the balance of the year, and could you and will the Board consider reinitiating a new plan?

Certainly, the board has -- to answer the latter part first, Ian. The Board has always expressed a strong appetite for recognizing value, and one of the things we've done over a number of years is to pursue a stock repurchase plans.

Certainly with the dislocation in the marketplace, that value proposition becomes even more potent and to the fore-- so, I mean, we certainly have been buying, we have bought in the past, we have continued to buy, and certainly we view that as I mentioned in my comments a very key part of our overall investment landscape for the near term, and Howard, if you want to add anything to that.

Yeah. The only point, I'll add, Ian, is we have got to some degree to link the purchases of shares to certain sale transactions, because it is not necessarily a goal to change the balance sheet's structure, so those sales that have been free of tax consequences have enabled share repurchases and that was more true earlier in the year.

The more recent sales particularly Reading and Harrisburg had tax characteristics. And we escrowed those funds and ended up spending somewhat above that amount of escrowed money on acquisitions. So always there is a mix between share repurchase, acquisition activities both strategic as well as protective, and of course development pipeline, redevelopments and developments.

Now what type of cap rates are you are looking in your market, I mean your stock trades an implied, I don't know, [7, 4] are my numbers, I mean, I know that you've talked about challenges in your markets about buying, but you said if you sold assets that you would look to buy more real estate, why not just buyback more stock?

No. I think that's what we are saying that's certainly a very key part of our landscape. But when we sold the Reading and Harrisburg portfolios, as we mentioned on the previous calls that was in we had a large 1031 requirement there.

We will not have that requirement on some of the pending sales coming up, which will generate some additional liquidity. But certainly, when we look at the trading price per pound, the implied cap rate, knowledge of the inventory, et cetera, certainly accelerating the stock repurchase plan is the key part of Howard and my thinking.

Okay. And it just doesn't -- I know you've been active here, just given where the average trade was, but I assume you'll reconsider that. The second question Jerry, you talked about, you know, getting closer to your ceiling occupancy, let's say, 96% and I understand that you guys have been very aggressive on the leasing fund but, you know, your markets still, you know, are well below that in terms of, you know, the vacancy is mid-teens in many of your markets, I just wanted to get your medium-term view of rent growth in your markets.

And, you know if you don't get there in terms being able to have leverage with pushing rents, can we expect internal growth to slow as you get closer to your ceiling occupancy?

Well, I think in terms of the -- yeah sometimes the broad markets statistics pick up Class C, Class B and Class A properties and what it particularly is, is a fairly broad range of occupancy levels among those classes of inventories.

We clearly operate -- a vast majority of our portfolio is in the very, very high A category. Both in terms of location, maintenance efficiencies, et cetera. So where were competing for example, on a Radnor or a Plymouth Meeting, you know we look at the competitive inventory to those locations as being well below the published vacancies statistics you might be looking at from a CBRE, or one of the other major brokerage houses.

And that trend line remains pretty much the same, as we look at our -- the level of our inventory, and the location of our inventory throughout our company. I think one of the interesting things we have the ability to do is, as our occupancy reaches the 96% target and some of them might even go beyond that as we had in the past, is we start to -- the leverage dynamic with our tenants tends to change. Where if you take look at our, you know, seven our eight year track record now having retention rates north of 70%, we really operate, we're giving tenants very little reason to leave. We are price competitive. Our buildings are efficient. So we think we're able to get tenants to stay with increasing the rental rates, and hopefully lower capital costs.

And George do you have any observations on New Jersey marketplace?

Sure. In New Jersey and also suburban Pennsylvania, I think it's important to charge now where -- you know New Jersey actually has been absolute -- in relative terms actually performing, you know, pretty confident. Which is the good thing because they never really saw the highs or lows of some of the other markets.

But, you know, you look in suburban Pennsylvania market, we actually track nine different sub regions within that market. You know, of those regions, we've got a market presence of 1 million square feet or more, it's more in the sub regions, and you look at year-to-date occupancy gains, we had experienced 3 or 4 of those markets actually increasing anywhere from 40 basis points to 1,230 basis points to increase in occupancy. And as you look, all four regions experienced strong occupancy gains. If you go back to January 1st of '06, the last year and a half, they went from 140 basis points up to 1,810 basis points, specifically in Radnor.

So you know Brandywine has consistently outperformed the market particularly with the class of property that we've had. But it's also very encouraging to see the rest of market come back to where we are. You know, so again that gap between where some of the other competitors are, where we are, and where are they continue to close the gap it's a very good thing for all of us to be able to keep moving the rental rates upward.

So what's your medium-term outlook for rent growth then?

I think we are bullish on where rent growth is going. Again with the vacancy continuing to decline, we're seeing good strong demand across really all the properties that we have in all the markets that we have at this point. So I think we are bullish where we are right now, in the recovery cycle.

Bullish to the tune of, I mean, what should we expect in terms of, you know, year-over-year rent growth?

It will really vary by sell market, and you know, we are starting to absolutely see the deals driven by some of the gains within certain markets. And again, if you look at deal-to-deal, we've been relatively flat on some of the growth but very encouraging when you start to dig into those details. Because you're starting to see a number of deals and again on a weighted average basis it's still been relatively flat 1% to 2% type of thing. But when you dig into the details and certain transactions, you are absolutely starting to see some nice gains on rental growth.

Okay. Thank you so much.

Thank you. Our next question is coming from John Guinee with Stifel. Please go ahead. John Guinee of Stifel your line is live, please proceed with your question.

Thank you. Well, nice quarter, guys. A couple of questions. First, Howard you've got a lot of '08 and '09 that rollover below market. Any -- have you gotten to address that issue yet?

Well, we will continue to get a benefit from the exchangeable notes that we're done at the end of 2006 at a low rate. We favorably refinanced the debt in the ABP Brandywine office investor's portfolio, which leveled off in the sixes. And we financed in the long term market at late April at 5.7. And we set up and have now repaid of the Grande loans, at a 7.48% rate, and we'll look for opportunities to turn that out as well.

So we're actually very pleased with what we have done with the overall level of debt, which has remained constant. If you look back a year ago, roughly in line. And certainly, the interest costs, even after taking into account the capitalized interest, are down dramatically.

And in fact, year-over-year we are looking for a $10 million decrease. So whether that continues at the same rate next year, is unclear. But we've taken steps all along the way to lock in rates, reduce floating rate exposure. We're at probably the lowest floating rate point since post Prentice merger for this company and what we seek to stay there. Because on a relative basis, the long-term rates are as attractive, or more attractive than the floating rates.

Okay, second question, what else do you have in the market besides the North Philadelphia portfolio?

John, we have a couple of other small properties in Delaware and the Pennsylvania suburbs that are being marketed.

Okay. And then -- third question obviously, you guys paid a lot of attention to this -- FAD dividend ratio has just been struggling. Is it getting -- getting it to 100%, is that on '08, '09 or 2010 event?

We've always expected it to happen in '08. It will be a combination of remixing on the non-cash components, and we saw nice improvement in straight line rent. To some degree that continued improvement depends on new lease structures. Secondly, the gains in occupancy are probably the most meaningful metric.

We have now got our recoveries running on a very steady state basis, so we won't see that jump around as it has a little bit in the past. And lastly, and the most important, is going to be the capital. And while it's remained stubbornly high, it's our expectation that we can get that capital to work for us better as our buildings tighten up.

We don't necessarily see costs coming down, because it just costs more, to do the same or even less work they we've done in the past. But the goal will be to get the longer lease terms to spread that, to get better terms on the back end of the leases where their terminations will get paid for un-amortized components of TI.

And those are things, we feel we can do better, and in fact, have done better in this quarter as our markets tighten up. You know, to some degree there is a little bit of a timing disconnect between what you see reported on the FAD page, which are the GL entries for the quarter, and really reflect deals of 3, 6, and even longer months longer ago.

And the leasing statistics page, which shows dramatic improvement on the capital costs and really are more of eye towards the future. So I think taking those two in the combination allows you to look back and what was done previously, or what was agreed to you previously, what might be a better expectation going forward.

Great. Thanks a lot.

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

Hey guys (inaudible) is on with me as well. Howard, can you just run through the other income in the lease terms, the guidance. I just want to make sure that I have the numbers down correctly?

Yes, I will do that, because we did touch on that earlier. Let's just first setup where last year was, and I think that can helpful starting point. Last year we did on the other income line, about $22.4 million in total. That included about $7.8 million of lease termination.

We also, at another spot on the income statement booked a $3.1 million gain on the termination of a purchase contract. So on the aggregate, about $25 to $26 million are what I'll call non-rental revenue, non-lease related revenue. Year to-date, we have about $9 million on the other income line, and the $3.8 million that was booked on the JV line.

So we are running very much in line. The mix and the components have been a little different. In that year to-date our termination revenue is actually quite low. And we have some transactions kicking around. We have just lot of activity in the portfolio. So we still expect to see that on average around the same figure as last year, you know, we're holding a range right now of $6 to $10 in our various modeling.

And similarly, on all the other items, you know, mostly management income, but a few other things that come in there as well, to be in the $12 to $14. So in the aggregate, looking at $17 to $23 as a range of other revenue you know, pull a mid-point of say $20, and then of course the JV income of $3, puts us very much in line with last year.

The challenge with these numbers -- we've gotten some questions on the quarter and on the year, is just very little visibility on when some of the larger one will happen, particularly when there are third parties involved, such as the partnership, or the lease terminations.

For a portfolio of our size, given our revenue base, seems capable of producing in that combination of activities, somewhere in the plus or minus $20 million range. And I think, since we don't expect 2007 to be terribly different from 2006.

And so effectively you have $20 million between lease terms and the other income, and then another $4 million from the gain that you booked in the quarter.

If you took some mid-points and blended some of the numbers -- that's at this point is good an estimate as anybody else can put out there. That's why there's still a range in our guidance, because some of these are certain at this point.

And there is no other one time or any other gains, other than the one that was booked this quarter in guidance? There is no other extraordinary income or anything else going on?

Well, to a degree, and I wouldn't call it extraordinary. There's always a component of that other income item that is, so to speak, unspecified.

Right, but you're capturing it in that, you know, when you're talking about $6 to $10 million of lease terms, and another call it a guess, $12 million or so of other income, and the $4 million gain -- you're capturing it in that sort of guidance that you're giving?

That would correct and then I'm --

Maybe you can walk through I guess, if you, you reported $0.65 this quarter, if you put the $4 million gain aside for a second, that takes it down to $0.61, which includes $0.6 of other income in lease terms, excluding the gain. How do you get from the $0.61 to a $0.65 to $0.69 run rate, which appears, based on the guidance numbers here to have equal amounts of other income? It's just -- I'm having a hard time bridging that gap.

Well, I think we will do a little better on the other income item versus what we've done year to-date. We're at $9 million on that line item and we think we'll be in the $12 to $14 million range for the balance of the year. And secondly, you have to also factor in the sales activity for the quarter is for the most part front loaded, with those funds being invested in cash accounts.

We bought the one property in mid May, and really bought the second property into July. So to apply simplistically a $0.61 run rate, I think under sells the portfolio and the run rate, it also doesn't pickup the leasing that occurred throughout the quarter. So I think we certainly come out of Q2 at a higher run rate, and when you factor that together with these other income items -- which, again, I want to emphasize those are not necessarily viewed as unexpected or extraordinary. I think the range of them, particularly, a base amount, which is management income and other third party activity relate is fairly contractual and expected at this point. It puts us well within achieving, what I see right now, as a range of a $1.29 to a $1.37 for the bulk of the year.

Okay. Thank you.

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

Hi, it's actually Craig Nelmen here for Jordan. Can you just address your leverage and maybe few of the sources and uses of cash going forward to see where we might shake out on leverage?

Well, leverage has been fairly consistent on a gross book basis in the low 50's. It has picked up on a market cap basis and you know unfortunately, that's a calculation that takes the stock pricing, you know it probably looks even worse today then it did on June 30th. And to some degree, we have to look through that.

We also run the business looking at the coverage's -- those have been fairly consistent. In a general sense, we have no particular desire to move leverage dramatically from this point. So funding of future growth activities for the most part will be asset sales, and remixing those proceeds into developments, as well as stock buybacks where that's attractive.

We'll look to use third party financing arrangements on some of our newer and older assets to monetize some of those positions. So we'll be considering more joint venture activity, to the extent that makes sense. And lastly, we're very expectant that sometime in 2008 the CAD ratio will climb below 100%, and we'll begin to retain capital there as well.

Okay. Then can you just kind of go through the -- or give some background on the rise in the property taxes, I think, it was up in the same store portfolio 9.9% year-over-year?

From a general sense, and then, I'll ask Bob and George to jump in. As we've talked on previous calls the -- you know one of the challenges in running an office building is an element of your costs are somewhat uncontrollable. What we've seen happen a lot in municipalities in which we do business, is there's been a decrease in both federal and state funding, a slow down in new home sales or the resale of homes.

So there tends to be a real push by a lot of these municipalities to hit their point of least resistance which is going back and reassessing our commercial rateables. And we continue to see that across the board. I will tell you we have a very active program of appealing and striking combinations with the lot of local taxing authorities.

One of the other challenges that you see sometimes in real estate taxes, certainly in some municipalities where there is a transition sale, you'll see some reassessments take place based upon the value of the transition. So I think dramatically the continued push by municipalities to -- they get higher real estate taxes is there. I think it'll continue to be there.

We're addressing that by setting separate real estate tax base stops in a lot of our new leases going forward. Or to a great degree, where we can achieve it in the market, structuring our leases as pure triple net. So we create a pure inflation hedge on things like that. But there's a transition period on that, until we achieve that through out -- as a general rule throughout our entire portfolio.

Now, George, Bob, any observations on real estate taxes?

I'd say, you know, the DC area -- the municipality as Gerry said, have been very aggressive on trying to step up the assessments. And it's become as major source of their funding. And they can really do it based on the high transactions prices paid for the building.

So we've seen a consistent growth in it. As, Gerry, also mentioned, we always appeal these to see if there is any way to get them back down, keep them in line. But beyond just a pure tax basis, the other pressure we're seeing is trying to find infrastructure. And what we've been seeing, again in Metro DC, is that they're trying to push more transportation improvements that area needs on to property tax.

And there have been some restrains due to the way you have to assess commercial and residential taxes. But be it a surcharge, or other ways, they're trying to get around that and put more of the burden on commercial properties.

In the district we also see that to supplement municipal services, they're forming businesses improvement districts, which are again a supplemental tax. They've got a new tax for the baseball stadium. Things like that, that really are trying to shift more of the burden from the government to the commercial property owners.

Okay.

If there is any good news, and I do mean I'm stretching here -- the only good news with a variance, is it's typically a variance that every landlord is undergoing. So it tends to be a general elevation of real estate taxes on a pure square foot basis throughout every market in which we do business. So it's not a competitive disadvantage typically, as we can compete in sub market locations.

So in that $16-4 that you guys had in the second quarter pretty good run-rate or do you think its going to edge up higher in the end of the year, for the second half?

I mean it seems like -- you take a look at the last four quarters, I mean, we've been running in that as $16 to $17 million range. I mean, I don't have any anecdotal stuff -- it was indicated be spiking beyond that.

Yes.

A lot of our municipalities bill on quarterly basis. So that would reflect, I think the line share of our real estate taxes.

All right just one more quick question. I know you guys addressed the $2 million square foot portfolio over the market, and said that they're coming I think next week or soon. Do you have any early indications on where pricing might come in, or expectations?

Well, you know, our expectation is going to be in line with what we went out to the marketplace with. The question -- I think a couple of calls ago where we valued our portfolio overall. And I think, you know, at that point we talked about an overall portfolio valuation around between a 5% and a 6% cap rate.

But we also indicated that probably 10% to 15% of our portfolio fell north of that. Certainly, this portfolio that is being marketed is in some market locations that would generate a cap rate probably closer in the 7% range -- between 7% to 7.5% versus the lower end of the scale.

Great. Thank you.

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

Congratulations, on a reasonable quarter. Gerry, on your same store expectations that you set for the 2007 year. You had a same store expense growth rate of 6.5% to 7.5%. Year-to-date, you are in the 6% range on the same store expense basis. Do you see any material deviation in the second half from those same store expense levels at two times inflation?

Chris, it's Howard. At this point, there's no predicting that or expectation of that.

Okay.

Now -- the one thing we do know with some certainty, is that the recoveries for the balance of the year, should be at a lower rate than they were at the end of 2006. Just the nature of how those were processed through on a tenant billing basis in 2006 versus a more level process in 2007.

On the assets that you've targeted to sell in Philadelphia, what's the leverage on those assets that you currently carry?

They are free and clear. I mean they're financed on an unsecured basis.

Okay. Lastly, on your development page, at the bottom of the page you provide your forward capital commitments related to leasing. Those numbers increased quarterly, which I guess would be in response to heavier leasing activity and pending commitments. Which based upon statistics at June 30th, indicates that that is predominantly second-generation space, rather than development space commitments. Is that a fair -- is that correct?

Chris, I think you are looking at the $55 million balance, and that's what you're basing you're question on. Yeah, that's not a commitment, that's an amount that's on the books for projects that are in process.

Okay. So if I compare that to the last quarter for example which was up a $5 or $10 million. What does that tell me?

Probably, not much other then they were projects underway I mean it just generally reflects the increased leasing activity. There's always going to be work associated with that leasing activity. Until that work is finished, and those leases are in place, that remains booked in construction and progress. I think you see that same phenomenon when you look at the spread on the portfolio between occupied and leased. And it's at a fairly healthy level.

Right.

And really that forward occupancy really goes hand-in-hand with some of the work that's underway.

And the other corollary to that Chris it's just the -- that also would also pick up our capital program for some base building costs. Whether it's roofs, parking lots, lobbies, and things like that would be in process. Particularly more in the second and third quarter of the year where we do a lot of that work just from a weather standpoint.

So, if I look at a forward run-rate of post this sale of the Suburban Pennsylvania stuff and maybe disposition of the remaining 10% to 15% of the portfolio that is -- has a lower valuation component to it. It may have a higher CapEx component to it. What should I view as an ongoing differential between your GAAP FFO and your cash CAD?

Well, I think we touched on that a little bit earlier. I think it was around a $17 million number. It's still high and it is still eating into the CAD ratio. I mean the one -- the one point we took away that was fairly positive for the quarter -- and you can see that captured in the supplement on page 26, is we saw nice improvement in capital per square foot, per year. You know, and that goes hand-in-hand with the rental rate increases, which we saw in both renewals and on new leases. That tells us, at least for this quarter, that a lot of our efforts are beginning to bear some fruit.

Now, one quarter, you know, doesn't necessarily make a long-term trend, but it's a good step in the right direction towards resetting the landlord/tenant relationships so to speak.

So that $17 million is a number that you would use on the quarterly basis, like, just help me out?

That's a number we'd like to see come down. That number is still high and you know, to get the CAD ratio below 100% we'll include both month productivity on the net income line, obviously, all the related costs of running the business, financing in G&A, and lastly, getting that capital down to a lower level.

Whether that means it has to go to 15, 12 or 8, I don't have a specific number in mind. Because all the other components can -- probably have more weight in the ultimate bottom-line number. But that capital is important and its one we put a lot of attention on.

From a public company shareholder perspective, what is the -- what level of cushion do you think you need to have before you start increasing the dividend?

We don't have a comment on that today.

Okay. Last question has to do with the INVESCO partnership dissolution. Could you give a little more color on this?

Yeah. This was a partnership that goes back, I think, to the late 1990's, if memory serves me correctly. And it's a partnership, which by virtual of prior transactions, we had no economic interest per se in that partnership. But we do have a carried interest that would be realized upon a dissolution of the partnership, depending on how that went in the particular transaction. That took place in May of this year, resulting in the calculation of a $3.8 million distribution to Brandywine.

And that was -- at the time you provided your guidance in the latter part of 2006, there was a termination date to this partnership that gave you confidence to include in your results -- to include it in your guidance at that time?

All I can say from my perspective, is when I got here in January, there was already active discussion about it, including discussions on how would be booked and it was clear that the nature of the transaction would be FFO eligible. That, coupled with the expectation that something would happen in 2007, led it to be part of the range we put out and in fact, realized this past quarter.

Chris, the other point of your question -- it was determined last year that this portfolio was going to put up for sale. There was a high level of certainty from our standpoint in terms of the execution of that. The timing was uncertain, but certainly in the waterfall calculation, given the profit load had been returned to the -- to INVESCO. We knew that it would be a profit position for us upon the successful execution of the sale.

Great. Thank you very much.

Thank you our next question is coming from Richard Anderson of BMO Capital Markets. Please go ahead.

Thanks. And just one, or one and a half questions, I guess. In the first quarter you had $0.63 of FFO, and at the time you said you expected to see a temporary trend down from that number. And this quarter you did $0.65. So, that didn't happen. So, I guess -- I am just wondering, was it the timing of the $3.8 million that drove the -- so the out performance relative to first quarter, or it was another factors?

Were some of these elements of your gross picture, namely the new leases going up 7.2%, the retention rate -- all that sort of stuff. How did that play a role in your, you know, beating what you implied would be sort of a $0.61 type number just a few months ago?

Yeah. We were not a position to have visibility, nor to disclose that particular transaction when we had the last earnings call. So we were -- at that point in time, expecting a dip based on the sales that took place, both at the end of Q1 and into early Q2. But at the same time, this transaction was expected in the full year results. The fact that hit in Q2 is really to some degree, happenstance, as is the nature with these larger transactions.

The other thing we're coming off to Howard, to add on to your comments was, with the sale particularly of Citiplace, which we knew had a -- was a big contributor for the full first quarter. We knew there would be a deployment lag on that, and we were able to actually achieve the acquisition in Northern California a little bit faster then we initially thought. So that, in combination with some of the better mark-to-mark on the variance, was certainly contributing factor.

Okay. And so, just so I understand, when I look at -- just to use one of the good numbers that you reported at this quarter, new leases up 7.2% on a GAAP basis, the history, the trend, has been pretty much negative over the past several quarters.

So how much of that and how much of the retention rate being 85% versus your sort of 70'ish type of run-rate. How much of all this is a blip in the screen, and how much if it do you think could stand the test of time for the next you know, year or so?

Well, it's always challenging to take one quarter, and zero in on numbers. So when we typically look at our retention rate, we do look at and anticipate performing somewhere around our multiple year average in the mid-70s. Certainly this quarter, we were above that -- my recollection is that last quarter we were slightly below our long term average.

So I would love to be able to say that we're going to always continue our portfolio in a close to 90% retention rate. But sometimes that doesn't work out. We have a good track record of keeping that in that 70% to 75% range. You know, in terms of the -- of where the rates are, look -- again I'm not sure if 7% the right number, I'm not sure a negative percentage is a right number either. But what we are saying at this point, through every one of our market is a tightening of, number one our inventory base, two, a stronger desire on the part of our tenants to stay with us, three, either stable or decreasing vacancy rates sub-market wide.

And again, when you -- roll over the A, B, and inventory, there's clearly a tightening in most of the marks at the upper end of the quality scale. That will translate, we think, to improving metrics on our mark-to-market.

Okay. I mean I just noticed a lot of good figures that were reported in the second quarter. And I just wanted to get a sense of if we're on flexion point or if we're you know, sort of just had a good quarter and it might go back to reversion to the mean. But I guess we'll just wait and see. Thank you very much, guys.

Thank you. Our next question is coming from [Steven Saswick], of Private Investors. Please go ahead.

Yes, can you tell if any of these tax protection arrangements can be modified or waived, due to uncertainties in the capital gains rate changes? And then, also how many square feet are subject to these tax protected arrangements, particularly in your non-core locations?

Well, I would [inaudible] can always choose to not enforce that agreement. It really tends to be a one fee directional agreement, in connection within earlier purchase by us of a property. That's one aspect. But I think earlier the cash characteristics we spoke of -- really were more because of the low depreciated tax basis.

And really a choice for the Company as it relates to recognizing and passing through that gain, who are not doing so, and reinvesting the money. Now our decision takes into account a lot of things, but probably the first aspect of that is where we are overall on the dividend in terms of taxability and the possibility or likelihood that passing through some or all of those gains might require special distributions.

It's not currently our strategy to be making special distributions on sales. So wherever that aspect arises, we'll typically use 1031's. Often times, some of those same properties have specific requirements with the sellers that we have that we cannot recognize tax, because of the characteristics of their contribution. There we have no choice at all.

Okay. So than some of this is Brandywine's choosing, and your dividend is possibly getting bumped by taking these gains into account?

It's definitely something we monitor on the taxable side. That's correct.

Okay. And do you have any kind of trends in replacement cost growth in land prices lately?

A good question. George -- Bob, why don't you make some observations on that.

It seems that certain segments of construction prices continue to escalate. Blasting one. We're talking to some of the contractors as we speak about a project. And certainly, a lot of the others have gone up dramatically in the past. It seems like it has been stabilizing a bit more than we had, because you -- for a while, it seems like things are just going absolutely crazy.

But it seems like it's kind of -- a little bit more of a normalized state. Normalized still not being flat by any means, but certainly not out of control. The exception, just again, glass I think right now. But as far as cost increases, you know, the cost of replicating buildings just continue to go higher and higher. And then, we touched earlier on some of the operating expenses. And I guess from that perspective, when there is new product in the marketplace, it has to generate higher rents, just to support the new increase in the costs that are out there these days.

And I think, in Metro DC, we are seeing very much the same thing. I think we're continuing to see significant escalations in construction costs, both base building and carriers. But you also mentioned land, and that's another one that hasn't come off in price it all.

I think in very urban areas like the Metro DC proper, land is very expensive, about $200 a buildable foot. And in the suburban areas, it's hard to come by in any urbanized part of it where you really want to buy. If you buy, further out, you get a better price, but you have to carry it until you can actually enter into production.

And what are the yields on the developments been kind of running?

Yields on our development pipeline are between 7.5% to 9.5%.

Okay. Thank you.

You're welcome.

Thank you. Our next question is coming from Mitch Germain of Banc of America. Please go ahead.

Hey guys. Most of my questions have been answered. Gerry, did I hear you mention potential land sales with regards to the marketing of the Northern Pennsylvania portfolio?

Mitch, I did mention land sales, but not really in connection with the market of the Northern PA portfolio. We do have some parcels of land that we're seeking markets bids on, but we don't view there is a near-term growth opportunity.

Just as we have done, and last year we booked a number of gains from land sales, not FFO, but from capital gains, and we'd expect to do the same thing going forward. So we constantly go through our land inventory. And if we don't think that there is near-term value-added opportunity for us or that the market may have shifted, and that land may have a higher and better use, we're very, very aggressive in culling that out.

We plan on continuing to do that. In addition to that, you know, we certainly have an active program underway to try and identify additional parcels of ground -- just like we did with Rob Roy down in Austin earlier this year, where we think that there is a significant supply constraint. There is an upward bias on future land pricing, there's infrastructure limitations where you know, buying a good piece of land that we can create significant value, add through the approval process, it's a good business strategy for us.

Great. Thank you.

Thank you. There appears to be no further questions. I'll turn the floor back over to you for any further or closing remarks.

Elsa, Thank you, and thank you all for your participation on the call and we look forward to updating on our business plan on the third quarter conference call. Thank you.

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