Brandywine Realty Trust (BDN) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brandywine Realty Trust third quarter earnings call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time.

As a reminder, this conference call is being recorded. Prior to turning the call over to Mr. Gerry Sweeney, please let me read the following disclaimers on behalf of the Company. 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 on such forward-looking statements are based on reasonable assumptions, these statements are not guarantees of results and no reasonable assumptions and 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, terms, and uncertainties that could cause actual results to differ materially from those expected.

Among these risks are risks that have been identified in our annual report on form 10-K for the year ended December 31st, 2006, a copy which is in the 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, our tenants, and potential loss of bankruptcy and major tenants, interest rate levels, and ability to debt and equity financing, competition for real estate acquisitions and risks of acquisitions, dispositions and development, including the cost of construction, delays, and cost overruns, anticipated operating and capital costs, our ability to obtain adequate insurance, including coverage for terrorist attacks dependent upon certain geographic markets and general and local economic and real estate conditions, including the expected and duration of adverse changes that affect the industries in which our tenants compete.

For further information on factors that could impact us, please reference our additional filing with the SEC. We're subject to the reporting requirements for 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.

Judith, thank you. Good morning, everyone, and thank you for joining us for our third 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 Mainardi, our Corporate Controller, and Bob Wiberg and George Sowa, two of our Executive Vice Presidents and Senior Managing Directors.

The third quarter showed improving margins, strong retention, a continuation of positive same-store growth, and an improving tread line on both our mark to market and capital costs. Also, subsequent to the end of the quarter, we executed a well-priced term loan for $150 million. In addition, we anticipate making an announcement shortly on our joint venture efforts in our northern PA suburban portfolio. This co-investment transaction is consistent with our stated objective in improving our return on invested equity and creating future capacity.

We narrowed our 2007 guidance to $2.57 to $2.59, and Howard will discuss that in more detail. During the quarter, our core portfolio occupancy improved to 94.2% and 95.5% leased, respectively. This compares favorably to 91.3% and 93.2% from a year ago, so we had about a 290 basis point increase over where we were this time last year. The largest increases in occupancy gains occurred in our urban Austin and New Jersey divisions.

Year to date, our same-store NOI increased 3.7% on a cash basis, and 2.6% on a GAAP basis. We've also achieve year-to-date positive net absorption at over 300,000 square feet. Our quarterly retention rate is 74.2%, and year-to-date of almost 77% also reflect good core portfolio performance.

Capital costs decreased quarter over quarter and are down about 10% from year end 2006. With our occupancy approaching our 96% target, we hope to continue to reduce overall capital costs through a combination of high retention rates, lengthened lease terms, and selling high-capital-consuming properties.

From a capital standpoint, our costs are running about 12.5% of GAAP rents, which is a good benchmark for us. We also saw declining trend lines in capital costs per lease year in our New Jersey, urban, Richmond and mid-Atlantic operations. During the quarter, we saw increased capital costs in the PA suburban west portfolio, Southern California, and Richmond.

Our FFO (inaudible) radio for the quarter was 64.7%. Also, as we briefly discussed on last quarter's call, we have been undergoing continual reevaluation of our personnel infrastructure with the objective of improving operating efficiency, ensuring a continued keen focus on leasing activities, and to reflect the results of our capital recycling and investment program. Based on that review, we made several changes at the regional and corporate level, and as such, G&A for this quarter includes about $1.4 million of severance charges. And that's one of the reasons for our higher-than-normal G&A run rate.

Some overall comments on macro conditions. Market conditions are stable to improving. In most of our markets, there continues to be leasing activity levels comparable to last year's third quarter. For the third quarter, all of our markets experienced positive net absorption. In several markets, notably the PA suburbs, Center City, Philadelphia, Wilmington, Maryland, and Oakland, absorption during the third quarter was well ahead of last year's third quarter pace.

In general, market occupancy levels continue to improve. The most notable improvement year over year is about a 500-basis-point improvement in the PA suburbs, 250 basis points in Center City, Philadelphia, and about 200 basis points in Delaware, with the other markets remaining fairly static. New Jersey showed a slight vacancy increase year over year. The only market where we saw any real appreciable increase in vacancy rates was in our small operation in Southern California.

New development starts remained muted in all of our markets, and we actually think one of the corollary benefits of the recent credit volatility will be further constraints on new construction starts into 2008 and 2009. The overall economic picture as we see it remains a bit clouded. Job growth in all of our markets, however, remains positive. But I don't think we've seen the full impact of the recent market volatility. Tenant demand, however, seems to remain strong at this point.

Looking at valuations, while there's been much talk about increasing cap rates, our read is that there has not been a sufficient velocity of transactions to determine a definitive pattern. Clearly, properties are continuing to trade at strong pricing levels. The cap rates we've seen in the last 60 days or so are very close to what they would have traded at during the second quarter in the early part of the summer.

We are noticing, however, that bid lists are shorter. Buyers are investing more equity and closing schedules are returning to historical timeframes. In fact, our prognostication is that cap rates will remain fairly flat or possibly back up maybe 50 basis points in some markets, but really do believe that it's a bit too early to call.

We do think there are a lot of transactions being queued up for the first half of 2008. By that time, hopefully, the debt markets will have further stabilized and there will be higher clarity on cost of capital and debt costs. There's also a significant amount of private capital continuing to be raised to invest in commercial real estate. One of the benefits we do see happening, which I just touched on, is a return of normal due diligence in financing cycles, which we think will [inure] to the benefit of higher-quality buyers.

Couple things are for sure: land is not getting any cheaper, approvals are not getting easier or less expensive, and construction costs are not going down. So we do believe that the replacement cost benchmark will remain a valid part of the investment thesis.

Across our portfolio, we continue to project that rents will be flat to slightly up, with downward pressure only in Southern California, and we continue to see an upward-increasing pressure on tenant improvements and other leasing costs. Our five ground-up developments projects are physically proceeding on schedule. During the quarter, while we had an upswing in activity, we did not execute any leases of notable magnitude. We continue to have close to 60 deals in our pipeline, totally just shy of three million square feet. Activity remains strong, and we have about 350,000 square feet in advanced stages of negotiation. We also have about 1.1 million square feet under (inaudible) planning.

A disappointment during the quarter for us is that we had one major planned transaction of about 200,000 square feet in northern Virginia that fell out of (inaudible) in the last couple weeks. In the final analysis, that tenant not to pursue with the consolidation upgrade of their space, because they determined their existing square footage was more than ample to accommodate their space requirements.

From a yield standpoint, we still anticipate going in (inaudible) on new developments arranged between 7.7% to 9%, and 8% to 10% on our redevelopments. As we noted in the supplemental, we have moved the estimated stabilization dates on some of the properties back a few quarters, related to our ground-up developments.

The good news is that our outstanding lease proposals are at rental rates in excess of our original proformas, and we believe this increase over our original proforma rate is more than ample to compensate for any capital costs or concessions necessary to affect tenancies. Certainly, as we look to the latter part of this year and in early 2008, we're hopeful of posting more definitive leasing results on the ground-up development.

Page 32 of the supplemental also reflects the inclusion of our 862,000-square-foot GSA lease in our development pipeline. The inclusion of this transaction brings our overall preleasing to about 49%. The Cira South development which we announced during the quarter consists of several pieces. I'll go through those quickly just to make sure there's clarity on how the pieces fit together.

The first component, Brandywine purchased the 862,000-square-foot 30th Street postal service building from the University of Pennsylvania. We paid $28 million, or $32 per square foot for this facility. Shortly after acquisition, we executed a 20-year, non-cancellable lease with the GSA on behalf of the Internal Revenue Service for all 862,000 square feet. Our costs to historically renovate this facility, including the purchase price, is about $265 million.

Prior to any tax credits, the yield is 8% with a 40- to 50-basis-point increase after we receive a tax credit. The anticipated delivery date is the third quarter of 2010.

We also entered into a 90-year lease with the University of Pennsylvania on the adjoining annex site. This 2.5-acre site can accommodate three separate parcels for development. The first part will be a 2,400-car parking facility, of which 50% will be leased for 20 years by the Internal Revenue Service. The total cost of this garage is $110 million, of which we allocated $55 million in computing our yield on the IRS deal, and which investment factored into our overall yield calculation.

The annex site can also accommodate two other development parcels. The northernmost parcel, fronting on Chestnut Street, is programmed to be a 250-unit residential tower. Brandywine is currently negotiating with several well-capitalized residential development companies to proceed with this project. The business deal would be for us to sublease our ground lease interest at a fixed return on cost with a percentage rent provision, as well as a residual profit position. Our investment in this tower will primarily relate to infrastructure and foundation support, which we anticipate to be less than $10 million.

The third development parcel is known as the Walnut Street tower. It's a mixed-used project that will be comprised of between 400,000 to 500,000 square feet of office space, 225-room high-end hotel, and potentially some condominium units. We are currently in negotiations with several hotel operators on entering into a long-term, financeable lease for the hotel and residential component of this tower. The University of Pennsylvania has also executed a 20-year lease for 100,000 square feet of office space in the tower.

As we indicated at our announcement, our ground lease gives us several years to start construction at both of these towers prior to having to relinquish control of any of these development sites.

From a cash investment standpoint, at the end of 2007, Brandywine will have about $60 million of invested capital in its overall project. By the end of 2008, this investment will only increase by about $44 million to an aggregate projected investment of slightly more than 100 million. The bulk of the construction costs will occur in 2009 and 2010.

This project provides us with a multitude of funding options. The GSA provides a 20-year bond-type fixed revenue stream with escalators for operating expenses. The spread versus today's rates is very attractive. As such, we're actively pursuing a financing strategy to lock in our long-term costs of funds. Additionally, we are also exploring potential joint venture partners for both the GSA transaction as well as the Walnut Street tower.

Finally, and to close the loop on our overall university-city investment landscape, we have engaged in investment (inaudible) to the market Cira Center I on a co-investment basis during the first quarter of 2008. Consistent with our commentary on previous calls, we were holding off on this effort until the next phase when it was announced.

With that announcement behind us and construction underway, we believe it's an appropriate time to explore a profit harvesting opportunity on this project to help us also create additional capacity.

So to summarize the quarter, we had a continuation of good same-store growth and core performance. This is our fifth quarter in a row of positive same-store growth. We continue to improve the leasing levels in our portfolio and show continued strength in tenant retention. Our capital costs trended down, and our negative mark to market narrowed by posting both positive GAAP rents for both renewals and new leases.

We also spent a significant amount of time advancing our development pipeline, both from a physical construction and leasing standpoint, consummated our Cira South development, and continued the ground work to execute our strategic planning co-investment strategy.

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

Gerry, thank you. Just a couple of highlights before we touch on some key numbers. If you do not have a copy of our supplemental package you may get one on our website at www.BrandywineRealty.com in the investor relations financial reports tab.

One other observation which we've made for the past few quarters; for same-store calculation purposes for the nine-month period, we've adjusted the properties from the Prentiss merger for the missing four days in 2006, attributable to our January 5th, 2006 closing date. Doing so enables us to include those Prentiss assets in the nine-month calculation on an equivalent basis, and the reconciliation of nine-month same-store NOI on page 13 of the supplement goes into this in greater detail.

Some highlights from the third quarter 2007 income statement are as follows. Our FFO totaled $62 million in Q3 of this year versus $63.7 million in the third quarter of 2006, reflecting the reduced share count both for buyback activities and the valuation of our contingent securities. FFO per diluted share in the quarter increased 1.5% to $0.68 a share versus $0.67 a year ago. And as Gerry mentioned, our FFO payout ratio on the $0.44 regular common share dividend equals 64.7%.

Let's highlight a few income statement items. Total rental income was up about $13 million or 8%. On a same-store basis, total revenues increase $2.6 million, and same-store NOI, on an overall GAAP basis, increased $2 million or 2.3%. Both positively impacted by gains and cash rents, termination fees, and real estate tax savings while offset by decreases in recoveries and slight increases in operating expenses.

Overall, termination revenue in the third quarter increased to $7.7 million versus $4.7 million in the period a year ago. And one termination transaction in particular stands out, whereby we realized $6.9 million on that transaction on a 60,000 square foot space and have already lined up a replacement tenant on attractive terms going forward, though that lease is not reflected in the 9/30 occupancy figures.

Straight-line rent contribution is down to 5.5 million from 6.4 million as we burn off free rent periods and move to a more cash-based rental platform, thereby helping to improve our CAD ratio. Of note, our G&A expenses for the quarter of 7.4 million includes approximately $1.3 million of one-time severance costs related to the restructuring of some of our internal personnel that Gerry touched on. Going forward, we expect G&A to be in the range of 6.25 to $6.5 million, reflecting those savings.

Looking at the rest of the income statement, interest income of 1.1 million declined from 2.5 million in the period a year ago, due to lower cash balances, and our 10-31 exchange funds have now been fully deployed in the July 2007 acquisition.

Interest expense was down markedly from $44.5 million a year ago to 40.9 million in the current period, reflecting higher capitalized interest attributable to higher development activities, and slightly lower rates on debt instruments notwithstanding overall higher debt levels.

Turning to other operating metrics, our EBITDA coverage ratios, which we provide in the supplement, were at their highest levels of the past seven quarters at 2.6 times interest, 2.4 times debt service, and 2.3 times fixed charges. Our 63.1% NOI margin is up over the period a year ago, and our 33.1% recovery margin is in line with prior 2007 quarters, but below last year's rate of 36.5%.

CAD ratio came in just about 100% at 102.3 at $0.43 per share, and that's up markedly from the prior periods, and it's attributable to, among other things, lower capital expenses on our revenue-maintaining leasing activities.

A general observation on our recovery profile, and I think it speaks to some of the changes and accomplishments that have taken place here. Year to date, our recovery ratio is running at 34.1% versus 31.4% a year ago on the same-store portfolio for the nine months. This has produced $6.7 million of incremental revenue. Even though this gap or surplus will moderate in Q4, as we experience the comparison to 2006's fourth quarter true-up, the fact remains that our migration to more triple (inaudible) leases is improving our revenue profile and making up for a modest roll-down, in some cases, on rent levels.

There has been a pronounced transition there, and the occupancy gains in the same-store portfolio help as well. We think this trend, overall, bodes well for future revenue profile.

Accounts receivable at 9/30 were about 20.7 million of operating receivables, with a reserve of 3.1 million. We also had about 86.5 million of straight-line rent receivable with a corresponding reserve of $5 million. In the few instances of challenging tenants, and we don't yet include Wall Street banks in that category, we have increased our reserve percentages.

Let's talk for a minute about our 2007 FFO guidance. On the press release, we did narrow our guidance from the prior range of 257 to 265, bringing the top end down to 259 and leaving the lower range at the 257. There are essentially two reasons for this change in the upper end. The first is the delays in development leasing, as Gerry touched on, take away the possibility of hitting those higher ranges.

And while our plan did not anticipate leasing that space for the most part in 2007, it would have been necessary to achieve leasing in the developments in order to hit the higher ranges. And the other thing is, and we'll talk about it in a moment, we're coming in roughly on plan with the other income line items, including management fee and termination income, but we clearly would have needed to exceed those levels by some degree, and we left open that possibility to hit the higher end of the range. And that does not appear likely, at this point.

Looking ahead, we did about $1.96 per share, and we need $0.61 to $0.63 to sort of frame the range in terms of the remaining guidance. And assuming 91 million fully diluted shares, it translates to about 55 to 57 million in Q4. And this is comparable to the $59 million we did in Q4 2006. We believe this run rate is achievable, and with more reasonable levels or more typical levels of termination revenue and other income will really reflect our going forward run rate.

Overall, we expect GAAP NOI growth in 2007 to settle at around 2%. This anticipates a moderation in the Q4 NOI growth rate as we catch up with last year's high recoveries and still wait for some of the deferred leasing to kick in.

We still expect to achieve core occupancy of 94.5% by year end versus the 94.2 we had at the end of Q3, and you should note that we have 95.5% leasing in our core portfolio on a forward basis, which does speak very favorably to the forward-leasing momentum.

In terms of termination revenue, we're not anticipating significant termination in Q4, and should end the year somewhere around or just above the 9 million we had previously guided as the upper end of the range, given that we've recorded already $9.5 million year-to-date.

Bear in mind that we recorded over 7 million of termination revenue in 2006, so our current number, in an historical sense, is not that far above what we've experienced previously, and we do believe going forward that termination revenue will be a component of our income stream.

For all other income, we realized $11.5 million year-to-date, versus 10.3 million a year ago. We're running at about $4 million to $4.5 million a quarter here, primarily management fees, and these have ticked up a bit as our recent sales have included some degree of third-party management. So we expect our fourth quarter number to be at or slightly above that level, and therefore be at or slightly above our $14 million target for the full year.

With most other assumptions holding roughly constant, we would need about $100 million of core NOI to achieve our expected guidance, and that compares favorably to 98.8 million, 97.2, and 97.5 in the last three, going back in the three quarters of 2007. So we're fairly comfortable at this point with our revised guidance.

We're not projecting any further sales or acquisition activity within calendar year 2007. If the northern PA transaction does close, it is likely to be just at or around year-end and will be taken into account when we issue 2008 guidance on or before our fourth quarter call. We're waiting to see the status of that transaction, as well as one or two other items, before we come out with that guidance figure, and also finalizing our budgets for next year.

Lastly, we have a $3.7 million charge currently booked in (inaudible) comprehensive income, which we are deferring till we determine whether or not we will move forward with an unsecured bond offering. We had planned to do so in August or September of this year, but the conditions mitigated against that and instead we executed and closed the term loan financing to provide liquidity. The outside date for a determination of this event would be March 31st, 2008.

A few balance sheet metrics. Our debt-to-gross real estate cost stood at 54% at quarter end. We've continued to bring down our secured debt levels with targeted refinancings, and that number now stands at 2.7% of total market cap, and just 18.6% of total debt. Our floating rate debt at quarter end ticked up a bit to 16% of total debt, but we did execute certain hedge transactions in October to control against the risks of floating rates, recognizing that floating rates, excuse me, have in fact been coming down.

Currently, our $600 million line is $345 million drawn, and that reflects the funding of the term loan. We intend to maintain adequate availability on our line to finance our various capital needs and to manage the balance on the line through a combination of longer-term financings and/or capital recycling, such as the one pending in northern Pennsylvania.

Now I'll turn it back to Gerry for some conclusion comments, and then we'll take questions.

Great, Howard, thank you. Let me just touch on a couple points quickly and then we'll go right to the Q&A. Our business plan remains very focused on what our current challenges are as well as positioning us for future growth. Just to walk through what we view as our major challenges and opportunities. The number one challenge we have in the Company, and I also think one of our great opportunities, is leasing our development projects.

Overall, factoring in our development and redevelopment portfolio, leasing status of 56%, we're overall about 90% leased when we look at our steady state inventory. The core component, approaching the 95% mark, I think we really do have a great opportunity to drive our growth rates into 2008 and 2009 through leasing up to development and redevelopment projects.

As I mentioned, activity does remain encouraging. While I'm disappointed at not being able to report definitive results, I am, as is our entire management team, confident of our ability to hit our target of returns. For those who have not seen these projects, I assure you they're the highest-quality additions in their respective markets. They are just reaching physical completion at this point, in terms of landscaping and presentation, and very much like we experienced with a lot of our development projects in the past, really leasing activity translates to leases once you really present the finished product.

But in all situations, marketing conditions have continued to remain positively biased, and we really are confident of our ability to translate some of that advanced activity into executed leases and harvest this growth opportunity as we move into 2008.

The next significant challenge that actually Howard touched on pieces of it is really to improve our operating metrics. I mean, we've had great success in improving our same-store growth rate, but most of that growth has really come through occupancy improvements. As the market conditions continue to firm, please remember my comment earlier about the big basis point reduction vacancy in the PA suburbs.

We really do believe we have the ability to continue to push top-line rents, look at our lease structures, lengthen lease terms, all with the overall objective of improving our operating margins and improving our net effective rents.

The next opportunity and challenge we face as a Company is to continue to create capacity through the sale or joint ventures, and in the process create a higher growth revenue profile and strengthen our balance sheet. Certainly one of the key objectives is to continue to create significant capacity on our line, to fully fund our development, value-added and future acquisition activity, and we believe we are well on track to do that.

But as we look ahead, the objective remains to continue reducing our exposure to slower gross submarkets where we have B-quality assets, focus on utilizing co-investment strategies for expanding the inventory base, and devote our core balance sheet capacity to development and direct value-added opportunities.

So to wrap things up, the third quarter was a good one. Our property management leasing teams, again, did a great job. And the ability to have continued same-store growth and improving the metrics from a trend line base was a bright spot. Focus continues leasing space, leasing our development portfolio. We know our shareholders are looking for tangible results. As we have in the past, we're determined to produce them, and for us, it's a top priority in the Company. And also to continue our asset repositioning strategy.

Judith, with that, that wraps up our prepared comments and we're happy to open the floor up for any questions.

Thank you. (Operator instructions.)

Your first question is coming from Michael Bilerman of Citi.

Good morning, guys. John is on the phone with me as well. I want to come back to your explanation on the guidance reduction on the top end, and lowering the midpoint. It looks like your other income is going to come in probably now 15.5 million, relative to the high end of your prior guidance of 14. Lease term fees are going to be around 9.5, 10 million which is at the high end of where you put out guidance. Are you effectively saying that the high end of your prior guidance had another $0.06 or $6 million of this stuff in it?

No, the high end of our prior guidance would have needed out-performance on those two metrics, certain other activities, and certainly a contribution from development activity. In addition, we're absorbing, net, between the gains in the fourth quarter, about $1 million of one-time costs on the severance, and that does pull back a little bit over $0.01 a share. So when you construct these guidances throughout the year and leave them unchanged, you're still hoping that you'll have some of those other events, some one-time, some more permanent, and our revenue mix is a combination of all of those. I would emphasize that even the one-time events, though unpredictable and lumpy, do tend to run somewhat thematically year to year in rough ranges.

Understood, but you gave pretty specific high and low ends on those items. The developments, even if you got some leasing, really wouldn't add much to the bottom line -- maybe $0.01. And so you've reduced the top end by $0.06, there has to be a lot of other things that were factored in that are not coming out.

No, I mean, it's very simple. It's the fact that the numbers we put out did not speak to the high end of the range, but really spoke to the middle of the range.

Okay. And as you think about going into next year, I assume the run rate today, relative to where the street is at, likely would have to come down. Is that a fair comment?

We don't comment on street numbers or really true to true up to them or figure them out. I mean, we are finishing our budgeting process. We have a couple of transactions that are moving through the pipeline. And once those combination of activities are behind us, we'll put out our numbers. I mean, people could certainly look constructively at the Q3 numbers with the various exceptions or one-time items we talked about, at the expected numbers for Q4, and build their own cases.

We don't plan on doing aggressive acquisitions. We do plan on leasing up the developments as quickly as possible. That would be one swing factor, though we have pushed those dates back in the aggregate, and that will certainly have an impact on 2008.

Gerry, can you talk a little bit about the northern PA sale and sort of the process you went down to decide to either sell it in totality and now going down the road of doing a JV, and in that JV, what sort of interest would you have and just help us just understand a little bit more about the whole process.

Sure, I'd be happy to, Michael. As we announced I think on the last call, you know, we embarked on a process through an investment adviser to do a fairly broad marketing effort on the northern PA portfolio that was in the, you know, 1.5 million to 2 million square foot range and had a mix of product type in there, and a mix of markets.

Going into that process, our expectation was that due to the diversity of the product type, the number of tenants involved in the portfolio, the different submarket positions, we'd be in a position to make that a very attractive vehicle to bring in a co-investment partner. And we thought that would optimize our pricing metric. That turned out to be the case. We anticipate that we'll be retaining about a 20% stake in the portfolio, and our expectation is that that transaction will be in a position of where we can announce it in the next week or so.

We're talking like a cap rate of probably 7, 7.5%?

Well, we'd mentioned -- I had mentioned again on previous calls that we had about 10% of our portfolio that I viewed at the high end of the cap rate, which I assigned about an 8% target to, so our expectation is this transaction will come in south of that target.

Okay, thank you.

You're welcome.

Thank you. Your next question is coming from Jordan Sadler of KeyBanc Capital Market.

Thank you, good morning. Gerry, could you help us out a little bit on the development pipeline? You said you have 350,000 square feet or so under negotiation, and in which markets specifically are you seeing the most activity today?

We're actually seeing some pretty good activity in all of our markets. There was clearly a slow-down a little bit during the summer months, and Bob and George are here to address their specific projects. I mean, I think, you know, coming west to east, you know, the property in Oakland is really just -- it hasn't even really received its CO yet, and the lobby finish is just being put in.

So the activity we're seeing out there is pretty good, and certainly looking to maybe attract someone from outside of Oakland and the East Bay markets into Oakland itself.

Austin, activity there has picked up measurably in the last 60 days. So Chris and Ralph are doing a good job of [powering] through that. The Metroplex project in Plymouth Meeting, Pennsylvania, we've actually executed a small lease post-quarter closing. Have a couple of other ones queued up, and we're actually seeing an increase in activity there.

And Bob, maybe you and George can jump in on your respective projects.

Sure. With regard to South Lake, as Gerry mentioned, we had a great disappointment a few weeks ago. After having spent about six months working with Northrop Grumman, one of our principal tenants, on a very large transaction for most of that building, they decided really at the finish line not to consolidate the groups and totally set us back.

So our position that we were left in is being out of the market for much of that six months, as other tenants moved other projects. So at this point, we're really getting back in the market. We've got a lot of work so far in trying to, you know, rev up the engine immediately. We've got a great team working on it, both in-house and with some of the top brokers at CB in that market. And we've had a lot of tours simply because I think we're the best product available in that market today.

So everyone will look at it, but the pace to get a deal signed is going to be a little bit lengthy just because we're really just restarting that engine. So at this point, we've done about nine tours since we terminated the transaction with Northrop several weeks ago. There's really about six real prospects in that group, about 450,000 feet of potential deals. I'd say maybe half of that is really viable for our project, given some of the locations, timing, and cost considerations.

Bob, is it more important to get aggressive on rate at this point, given sort of the competitive supply out there and sort of I guess the fact that Northrop spit the hook, and I guess there's a little more sense of urgency to get it leased out. Are you --

I don't think it's really a rate-driven decision for most of these groups. It's really more where they want to be, [the side of the deal.] And a couple of them probably are more rate-sensitive than the others, but we clearly profile out to the higher-end tenant, so I don't think we want to nose dive to take a cheap deal, because we will make better deals, certainly, on that property.

And what's the asking rate now at South Lake?

It's about $36, $37, and that's right where we were with Northrop.

Okay.

And Jordan, the other thing that's happened, because again, when you get disappointing news like this, which it was, you look for the silver lining. During that negotiation period that Bob and his team had underway with the tenant, there were a couple of other good leasing benchmarks in the marketplace. One of our directly competitive projects up on the toll road, (inaudible) toll road signs was fully leased by Volkswagen and took that space off the market. And Reston Town Center continued to absorb space, and Bob, there's not much space available there?

Correct. Yes, so I think with those two gone, it really puts us in the number one spot, certainly as far as quality and environment go. As Gerry mentioned, I think it's worth noting the good news in that market, and a bleak quarter for us personally was Volkswagen decided to relocate from Detroit to Herndon because they could have gone anywhere and they really chose that market, given the attributes that it offers in terms of the economy, the demographics, work force, infrastructure, and the lifestyle considerations that Herndon has to offer.

So I think it's a great endorsement for the market. We wish it was in our building, but it takes out some of the competition and again, it speaks to the long-term position of that submarket.

That's helpful. Maybe if you guys could frame -- you talked about a couple of joint venture transactions that are maybe in the mix or in the offing for early next year to late next year. What kind of order of magnitude and structure are we talking about here for both the northern PA assets as well as the Cira Center (inaudible)? And would Cira Center One be combined with the new Cira South, and --

Jordan, that's going to be a question determined by the market. We will be going to the investment marketplace with a joint venture on Cira Center I. The property is stable, generating very, very good cash flow, a good mix of tenants, long-term in nature. Very high profile. I think the announcement of Cira South really validated that neighborhood as being a high-growth corridor within the -- along the northeast.

So the target there is primarily to look primarily at Cira I, but we will certainly be having and continuing to have some discussions with folks on the other two component pieces.

Northern PA, that transaction, as Howard touched on, we would hope to close that by the end of the year or shortly thereafter, and I think that reflects a strategy of trying to position ourselves with strong financial partners to both create a future growth opportunity for us, expand our management base, and provide some additional liquidity to the Company.

And northern PA is a $300 million portfolio, plus or minus?

No, it was never that -- it's in the 240, 250 range.

Okay, and you'll sell 80%?

Correct.

Roughly. And Cira, just in terms of its asset value today, roughly?

Yes, I think we're going to let the market determine that. I think we feel pretty good about it, but I don't want to be giving you a number that's either one way or the other too high or too low.

A 7 cap or better would probably be expected for an asset like that, I would imagine?

We think it's going to be -- we think it'll have premiere pricing, and it'll be well received, given its quality, rent profile, and location in the northeast corridor.

Okay, then lastly, Howard, maybe you could just help me out with this. The fourth quarter number is -- I think you're guiding to the midpoint of $0.62, which seems pretty clean. And I'm just thinking about the northern PA JV, which, you know, (inaudible) a couple hundred million dollars at a 7.5 out of -- you know, nothing accretive necessarily coming out of that. Is the $0.62 a bit of a decent run rate to think about the portfolio for the next few quarters?

I mean, I would agree with your math that it's the midpoint of the gap. We've not yet baked in the northern PA transaction, nor have we provided any indications on 2008 guidance (inaudible) --

Now, am I missing anything, though, like, plus or minus on the leasing? I mean, you said that occupancy will be 94.5 at quarter end. Is that late commencements that are driving that, and so will the run rate kind of tick up towards the latter half of the quarter?

Look, I think all of those things amount to somewhat unpredictable events, and that's why there's a range, effectively, of 61 to 63. People tend to use the midpoints because they're easy and obvious, but we realize there are some uncertain timing items and also uncertain events that could influence still the fourth quarter, even though it's already November 1st.

Thanks, guys.

Thank you. Your next question is coming from Ian Wiseman of Merrill Lynch.

Ah, yes, good morning. You guys talked in your comments -- I guess you expressed the most concern about your Southern California portfolio, and you definitely have a need to clean up some capacity on your balance sheet. Are there any plans to dispose of the San Diego portfolio, say, in '08?

Ian, we're taking a look at a number of positions in the Company. Aren't prepared to announce anything one way or the other, but as we're looking at the Company's platform going forward, where we maintain platforms, what our competitive advantages are in those marketplaces is a key part of management and the board's thought process.

Well, has pricing deteriorated in San Diego in light of the pick-up in supply and sort of the deterioration fundamentals?

I mean, from what we've been able to discern thus far, there's really not been any significant back-up in pricing levels. I mean, the market shows very good long-term demographics, there seems to be a dislocation right now, primarily due to the fallout out from particularly the homebuilding and the mortgage business.

But again, as we look at and I touched on earlier, land prices are not breaking, approvals are not getting easier -- in fact, they're getting more protracted and more challenging. Sites are fewer and far between. So, you know, the long-term view, I think, of investors in that market is it has a lot of vitality and viability on a long-term basis.

Thank you. And finally, Gerry, you talked about challenges in leasing up your development pipeline. Outside of the Northrop Grumman deal, maybe you could just give a little more color on what some of those challenges are. Are space showings down, are tenants pushing back on rents, and is there a particular sector of the economy or business sector that is really pulling back its plans on growth?

Yes, good question. Actually, we're not really getting much push back on rents, and we're having a fairly high degree of showings. I mean, there's a good velocity of traffic through the projects. And look, I want results right away, our team wants results right away, but the reality is there's a gestation period on these projects. I mean, they range from a low of 75,000 square feet up to 200,000 square feet.

It takes time. It's very analogous to what we experienced on Cira Center, for example, where I remember getting a lot of questions from our shareholders on hey, the property's been at 50% lease for a number of quarters now, is anything happening? And the reality was on that building, as all the other buildings we've done in the past, until the finishes are ready, people can walk into the restrooms, walk into the lobby, ride the elevators, there tends to be a lack of urgency in making a key decision.

So we're actually pretty encouraged with the activity we had. We are a bit disappointed that we haven't gotten more people across the finish line, but look, our leasing teams led by our managing directors are savvy. They understand the local market dynamics, they understand deal flow, they understand what's behind the prospect. So we have certainly never taken a position where we've not been responsive to the market in terms of effective economic terms, so.

Okay.

Pricing's not being an issue now in any of our projects.

Okay, thank you very much.

You're welcome.

Thank you. Your next question is coming from Mitchell Germain of Bank of America Securities.

Mitch?

Sorry about that, guys, hey. Given the fact that you guys shifted the stabilization two to three quarters, is there any correlation with what you're seeing in your leasing and your core portfolio? Are decisions taking longer, are certain type of companies out of the mix right now?

Not really. Actually, I think the data points are actually completely divergent. I mean, we're seeing good traction through our core portfolio, and again, that tends to be a lot of existing tenants, a lot of smaller tenants, tenants with very specific, shorter-term time horizons, and we continue to see good traction there.

I think on the development projects, they tend to be a bit larger in scale, there tend to be more people involved from the client standpoint in those decisions, and they tend to be vetted more thoroughly internally as a tenant. I think the situation Bob alluded to is perfectly on point, when you start dealing with the tenancy in the 200,000-square-foot range. There's a lot of owners of that process in an organization.

I mean, certainly, the volatility in the capital markets and the uncertain economic picture will certainly play into the psychology that's internal at some of those larger tenant users. That is an outlier from what we've seen thus far in our traction throughout the rest of our portfolio, but it's clearly an overlay, it's certainly something we talked about at our management meeting, in terms of making sure that we're always reacting and being proactive to the marketplace.

But any time that there's volatility in the market, whether it's capital debt or business climate, that will clearly have an impact on the decision timelines of some of these larger tenancies.

And just final question, can you just go over some of your corporate overhead changes that you made on the quarter?

I'll be happy to, yes. We actually took a look, because of our asset recycling program, where we sold a number of assets, we took a look at how we wanted to run our previous three operations in the PA suburbs. We've consolidated those into one central operation and realized some savings there. We took a look at some of our corporate functions to key in on which we thought were adding significant value to the organization and made some adjustments there.

We also went back and looked at some of our regional operations through the company, and just as we do every year, we took a hard look at what we need to do to improve our efficiency, how we can best effectively manage our properties, and as a consequence of all of those changes, we reduced headcount by about 25 people or so, and those numbers were reflected in the severance charge.

Thanks.

Thank you. Your next question is coming from John Guinee of Stifel.

Hello there.

Hello.

A couple quick questions for you. Gerry, you stated that you've really got a strong development focus, not much focus on acquisitions. You've got a couple of large JVs -- northern PA, Cira Center, which I'm assuming -- and correct me if I'm wrong -- are going to be taxable JVs. Is the end result a special dividend, given all the asset sales or JVs, or can you do a tax-efficient manner?

John, it's Howard. With respect to a transaction involving the northern PA assets, and occurring in 2007 at this point, we've done sufficient planning that we in all likelihood do not have to pay a special dividend. You know, there's always a final determination on that, but the combination of absorption existing in the dividend and in the earnings stream, some reverse exchanges, among other things, from the Boulders transaction.

Some of those assets were placed with an intermediary in advance of this transaction, and a few other steps controlled that, because to your point, the goal of a lot of these transactions is to create capital for future use. Future transactions would have to be evaluated on a one-by-one basis, and certainly if there were several in one year, it would bring on a greater likelihood of special distributions which we think are fine because they do return profits, in effect, to the shareholders.

Okay. Second question. When you're shifting your core assets into redevelopment, are there any accounting things we should be aware of? For example, are you capitalizing interest on these assets, even though they're really in service and 50 or 60% occupied? What should we be aware of in that regard?

On the redevelopments, there really are two categories of accounting treatment. One is really just a prospective expense process where we don't do anything with historical basis, and we simply look at the expenses incurred. And until those, in fact, begin producing revenue, they are booked in construction and progress, and there is capitalized interest.

On a number of limited cases, and you can pick those up in the supplement, we do, in effect, treat anywhere from all to a large part of the asset as effectively land value because the nature of the work is so great that it really does obviate all the former improvements. A good example of that, ultimately, will be the post office building where for the moment, only a portion of that is in service.

Of course, there are some carry-over leases, but ultimately, once those vacate and we begin full-scale work, that entire asset will be treated as construction in progress and along with the prospective expenses will generate capitalized interest.

Great, thank you.

Thank you, John.

Thank you. Your next question is coming from Ken Avalos of Raymond James.

Thanks. Hey, Howard, I mean, can you help me out with the NOI margin? If I rip out the other income, it's down pretty significantly from Q1. And I understand there's some seasonality in Q3, but are you really just not getting the rent growth off the leverage expense to coincide with obviously the expense increases? And if so, can you help me understand when you expect that margin to grow?

Well, we look at the margin with all of the components, because the terminations, while I know you folks don't like them and tend to back them out, they can be very productive, as we touched on with back-filling of leasing. But they also do drop out revenue for the period, so you'd be hurting yourself twice to not include them in the run, and again, our experience does suggest that there'll always be some amount.

It can be lumpy from quarter to quarter. In this particular case, that may be so. This was a particularly large quarter, it was influenced by one transaction. I would tend to look at these things more on a longer period of time than focus on any one quarter. We saw that transaction coming for some time now; didn't know when it would hit. And it's got some other aspects to it, but these are a part of our business.

So Q2 and Q4 that don't have a huge term fee, I guess I'm just trying to get to the -- and I understand your point about FFO and the lease termination fees, but I'm really just trying to get a sense for what point the gap closes, either on rents or you start getting some rent leverage, (inaudible) term fees and showing some better strength in the core NOI margin.

Well (inaudible) --

(Inaudible) on this quarter.

I definitely think it's a mixed bag right now. We are treading a little bit of water with the rents. Generally, a little bit stronger than they were, but certainly not where we want them. We do believe that the tightening of our properties in the markets will work in our favor. We'll be doing more renewals and less primary leasing.

Another point that you have to mix into this is the expense recoveries. We have changed the characteristics of our leases, in some cases to triple net, in others to a more bifurcated expense stop. All of that is leading, along with occupancy gains, to better protection for the Company on expense recovery. So it's fine to look at any one line on this, and to put it in or pull it out, but it is a total package.

Yes, and I'll just add on to that the expenses this quarter were a bit higher because of the seasonal -- in Q3, because of the utilities, which always tend to run higher in the third quarter, and it clearly has an impact on the margins, particularly given the level of (inaudible) we tried to incorporate, relative to the expense reimbursements.

The other dynamic that we certainly take a look at is the trend line has been a narrowing of that negative (inaudible) to market. And we do expect that to continue. There continues to be some pretty big occupancy gains in these different markets. Not to say the markets aren't going to be competitive, but the dynamic in our Company has changed a little bit from the standpoint that a year ago at this time, we were looking at a portfolio that was in the high 80 to 90% leased range, and there was a major emphasis in the Company on kind of leasing up the core as well as bringing the developments online.

Throughout the Company, there's been a very effective job done in improving occupancy. In our portfolio, our track record is typically retained (inaudible) to 70% of our tenancies. We tend to have the better effect of rent growth on the renewal tenancies versus the new tenants. So I think we're continuing to plan that that spread will continue to narrow, you know, barring any major economic dislocation.

As we move out some of the smaller assets we did this past year and look to do in 2008, we'll be getting out of the weaker submarkets that have traditionally been very low rent growth and high capital consumers for us.

Thanks, that's helpful, and yes, I mean, I think with the high occupancy and same-store performance, I guess that's what surprises us a little bit. So it sounds like maybe Gerry you're thinking the back half of '08, you could see some expansion at that line?

We hope so.

Thanks, appreciate it.

Thank you. Your next question is coming from Rich Anderson of BMO Capital Markets.

Thanks. Good morning, still. Just one question. Gerry, did you say that you're generally seeing a trend upward in rents, but also a trend upward in CapEx spending?

Well, I said that we expect upward pressure on generally construction costs, which are part of the TI cost. What we're hoping to do is, and we've seen it in a number of different situations where we have rent growth beginning to occur at a faster rate than the capital costs. And I mean one of the things we do is if you take a look at our capital costs as a percentage of gap rents, one of the things we've got, that percentages in the last couple of quarters has been around 12.5% of capital costs relative to gap rents for a particular tenancy.

That has (inaudible) as high as 15% or more, and our objective is to try and keep that in that below-15% target range, which if we continue to manage the expenses Howard touched on and get better traction and top-line rent, our hope is that the margins will continue to grow, both from an operating standpoint, but also from a net effective standpoint after capital.

Okay, so capital costs are ranging from 12 to 15% of total rents, is that right?

Total rents, correct.

Okay. What do you think the same-store growth potential is with Brandywine? You did 2.5 or whatever it was, and you're looking at 2 for the full year -- NOI growth, that is. What's the potential for this portfolio, do you think?

You know, Rich, that's a number that's going to be available when we complete our budget work. We're pretty happy with this year's numbers holding in the twos; probably settle somewhere in the 2 to 2.5% range, maybe a little better, if leasing kicks in sooner in the fourth quarter.

And we're going to shift a little bit. We're going to move from more occupancy-driven gains to more absolute rent gains. And if we can achieve those, I think we can possibly do better. But that's a big if. You know, 2% is a good number for us, it's better than where we saw this portfolio this time a year ago. It's not necessarily our end point; I would say it's definitively not. But we would be satisfied; we hope to get better growth out of the portfolio, because again, the growth of our FFO is going to be driven really by two components going forward.

It'll be internal growth from these factors, and the development program. We just don't see much acquisition activity going forward.

Okay. And the last question is more sort of conceptual. I had a chance to visit with the Philadelphia strategy a little while ago, and I thought it was very good, particularly Cira Center and some of the relationships that you have that have driven that strategy there, made it from a risk to I think a very good opportunity for you.

But how do you sort of extrapolate that advantage that you seem to have in Philadelphia into other markets? I mean, it just seems to me that it really is alive and well there, but how do -- I mean, is it a little bit more cookie cutter in East Bay and Austin and Washington, D.C.? Explain to me why it's not -- shouldn't be viewed that way?

Good question, Rich. And first of all, thank you for the compliment on the Philadelphia team. I think we've got great people there, and they're doing a magnificent job for us. Look, we only want to be in markets where we think we have a competitive advantage, and define that as the ability to outperform the market. And I think as we assess that, it really revolves around, you know, a couple of real key attributes. One would be the real strength of our local team and the depth of the organization in that market.

Next would be deal flow and the ability to execute, so brokering governmental relationships. I guess the next would be kind of overall submarket positioning, the quality of our asset base, the reputation we have with our tenants and our ability to retain tenants in those markets, and grow with those tenants in those markets through some of our land holdings.

So I think when we asset kind of the non-Philadelphia positioning -- D.C., Austin, and the other markets -- our position is that we're very well-based in those areas when you start to benchmark it against that criteria. We have strong local teams; I mean, people well steeped in the market, people with great brokerage relationships, very good local relationships with both tenants and political leadership.

We have extraordinarily strong submarket positioning. Take a look at what Bob runs in Reston and Herndon, what we have in southwest Austin or Lake Merritt in Oakland. So we have sizeable positions in those submarkets with great teams, with strong tenant relationships. And in each of those markets, some component of land inventory to assist in their growth.

So at an operating standpoint and the capacity to grow and improve our market positioning, we're very confident of our capabilities and our teams. That's been juxtaposed, in the last -- particularly the last 12 months or so, that based upon relative pricing that we've seen for acquisitions and what we thought was a higher rate of investment or return on our development portfolio, we've not expanded our asset base in those markets to the extent that we would have hoped for this time a year ago or two years ago.

But we have focused our efforts on solidifying the positions, getting increasing control over our tenants. We've looked at a lot of deals that were clearly in the deal flow and moving towards very high quality developments. So I think when I assess the qualities that position Brandywine to be a differentiator and a top performer in those different markets, I think we do have the right positions, the right criteria.

What we're lacking in a couple of cases is a larger investment platform, which certainly as the development comes online we look and explore some of these co-investment strategies, those two factors will create a very viable avenue of growth in those markets for us.

Okay. Thank you very much.

You're welcome.

Thank you. Your next question is coming from Chris Haley of Wachovia.

Morning.

Hey, Chris.

Bob, I'd appreciate your thoughts on what Northrop Grumman was thinking a month or two ago, and now what they're thinking. Are they -- they have some space (inaudible) staying put, they downsizing in their existing spaces?

Sure. Northrop Grumman has lots of different divisions, and they don't always -- or they never actually sort of have a unified real estate approach. So I think what one group does is really independent of the next. But the group -- we were dealing with a particular user group; that group had three different locations and wanted to consolidate them into one. It was clearly their vision to do that throughout the entire process, all the way through negotiating a lease and up to the signature moment.

I think what happened, really, is that the corporation looked at what they had in real estate just beyond that one group and said we've got some opportunities in our holdings, not to consolidate, but to put particular groups. And they said rather than consolidate, we're just going to leave these groups apart, fill some holes in our real estate platform, and just approach it that way. So it wasn't, I don't think, a broad statement about the Company, it was just at that particular moment, they had that opportunity and decided to go in that direction.

How many options -- so it sounds like they will stay put, or at least consolidate with an existing space versus take up some of the existing space that's being provided in the marketplace, and recognizing that Tishman's success with Volkswagen was a big win out in that area, as well. Could you refresh us in terms of how many options a full-floor user would have in that marketplace, and (inaudible)?

The only thing -- I could probably tell you better what the new development opportunities are, because I'm not sure of the inventory of full floors in buildings. But year to date, there's been about 780,000 feet of new product that's delivered in '07, it's been about 45% pre-leased. So that did pretty well just due to the VW deal and a couple of other ones. The wave that's still coming, really, and there's about 2 million feet that are going to deliver between now and the end of '08, and that's about 15% leased. And so that's where the real fight will be among those different products.

And this is all outer Beltway?

Right. That's really Reston-Herndon. The 28 South is a different market, really, but this is in the Reston-Herndon area.

Okay. If I could maybe move to Philadelphia, ask a question about Cira II, Gerry, when I look at your development page, the second tower -- how do you -- will that come onto your development page at some point in the future?

I'm sorry, Chris, which second tower?

My recollection was with the south -- probably the south project, there's obviously the government deal in the garage, but is there a tower, additional commercial space that will be developed?

Yes, I'm sorry, I thought I'd try and explain that in my comments, but --

Sorry.

That's okay. There's Walnut Street and a Chestnut Street tower.

Right.

And if we were to proceed with those, they would, in fact, come on. At this juncture, we're in active negotiations on the Chestnut Street tower, which is residential in use, with several very high quality residential developers who would essentially develop that, and we would enter into a sublease of our ground lease and take a profits interest. That would not be something we would develop on our own balance sheet.

The Walnut Street tower is a mixed-use tower with hotel and office component. To the extent we were to proceed with that, whether that would be a joint venture or an on-balance-sheet development I think is still to be determined, based upon how we make out with some of our negotiation with hotel operators and discussion with potential financial partners.

So the only thing we're showing right now, Chris, is what we actually have committed to start, which is the post office historic rehab and the garage, which is the postal service building is fully leased to the Internal Revenue Service, and the garage is 50% pre-leased to the Internal Revenue Service.

Thanks, Gerry. Does the Walnut Street tower carry the (inaudible) IZ benefits to prospective tenants?

Good question, Chris. The entire site is within the (inaudible) opportunity zone.

Okay. And does the post office/garage offer -- is there a sale right that you've negotiated as part of this, or do you have to maintain an interest (inaudible)?

(Inaudible)

If you were to attempt to monetize the asset, would you have to -- could you sell it entirely, or do they have refusal rights or a right to review the sale contract or joint venture contract?

I'm sorry, you mean the garage or the post office building with the IRS?

Post office.

The post office building we own in fee, and there's no obligation from the IRS to purchase that building, so we could market that for sale if we chose to.

Okay. And then on Cira Center I, I seem to recall during the lease (inaudible) time period that you actually had looked at potentially venturing the asset? And I'm interested in your thoughts today, why you would do that if -- given that you had not pulled the trigger beforehand?

Well, we looked at -- you're going back a number of years, my friend. We had looked at joint venturing Cira before we actually broke ground on Cira. Because one of our objectives was to get a 50% pre-lease and a 50% partner. It became clear that the financial marketplace did not value that location as much as we did, so we decided to move forward with Cira as an on-balance-sheet development.

Now that Cira is leased, I think viewed to be a pretty good success, but more important, now that that neighborhood is beginning to really take shape with the riverfront development, the residential development, the Penn Drexel Children's Hospital expansion, it has a level of vitality and therefore a level of energy that it didn't have a few years ago. So I think certainly, it's incumbent upon us, now that we've created a very high quality, stable asset, to explore the investment market and see what that pricing will bear.

Okay.

So I'm not sure they're completely comparable in terms of where we were five years ago and where the project sits today.

Right. That's helpful. On the Brandywine Philadelphia portfolio that's being marketed currently, I can't recall -- is there a leverage on that portfolio?

The properties are owned free and clear on Brandywine's balance sheet at this point.

Okay, so when I look at your future development commitments, which I guess even if I exclude the post office transaction of 220 million, I still have about 190, 200 million to go. The suburban portfolio sale can help me fund that, and I still have some additional capacity on my line of credit. Is that a fair statement?

That would be the objective.

Sounds like an answer, not a question.

Well, just want to make sure I capture everything, because right now, obviously, your leverage is -- depending upon how you define leverage, whether it be coverage or debt-to-assets, debt-to-market-cap -- obviously it's moved up. So when you're adding development to your future capital commitments, how do you fund that? So okay, that's it, thanks.

Thank you, Chris.

Thank you. Your next question is coming from Cedrik Lachance of Green Street Advisors.

Thanks. Just going to limit it to one question. You purchased some stock back in the spring at about $33 a share, and now that you trade in the mid-twenties, you haven't been purchasing any shares. Can you help me understand why that's the case?

The purchase we did earlier this year was really a use of capital at the time, and not necessarily a predictor, which it turned out to be a bad predictor of stock price. But when we completed some sales activity without reinvestment requirements, that was the best use of capital at the time. Clearly, the market has proven otherwise.

But present, you -- what would you prefer to do with capital, given the option at present? Buying your shares, development, or acquisitions?

I think the major objective as we generate capital right now is just to continue to improve the balance sheet metrics, and make sure that we maintain what we've always had, which is great optionality on assessing different deployment opportunities, whether that's stock, development, or a co-investment strategy with acquisitions.

All right, thanks.

Welcome.

Thank you. Once again, as a reminder, if you would like to pose a question please press star, then the number one, on your telephone keypad. You have a follow-up question coming from Michael Bilerman of Citi.

Hi, this is [Irwin Guzman] here with Michael Bilerman. Can you disclose the cash NOI --

We can't hear you.

I'm sorry, we can't hear you.

Sorry, is that better?

That's much better, thank you.

Can you disclose the cash NOI on the existing Cira Center asset?

We've not provided that individually.

Right, I'm just -- without you giving a valuation. I'm just trying to get a sense, so that I could estimate my own value for that asset that you'll be contributing.

Yes, but we just haven't provided that individually at this time.

Okay, my other question has to do with the 60,000 square feet that were terminated in the quarter. Can you provide the terminated rent and the spread to the new rent, and when does it commence?

I'm sorry, the 60,000 --

Yes, I don't have the returns in front of me. The new lease has not yet commenced.

But can you give any sense of the spread between the old lease and the new lease?

I don't have that data in front of me, and there'd be a lot of different ways to look at it, including unamortized TI, concessions in the new deal. I mean, I think the take-away for us is we got a large payment, clearly cash, we'll re-lease the space satisfactorily, the exact comparison between the two leases, I don't have and is not yet reflected in the statistics, because it's not yet active.

Okay, thank you.

Thank you. You have a follow-up question coming from Chris Haley of Wachovia.

Gerry, on the development pipeline stabilization date extensions, how much is that driven by fundamentals that you see in your markets, versus your capital position? And wanting to extend out capital?

I'm not sure I understand the question.

How much of it is based upon market activity or at least interest in your assets is not as robust as you'd like it to be versus your wanting to be more careful in terms of putting dollars into the asset, given your balance sheet?

Oh, I understand now, sorry, Chris. Kind of a quasi-senior moment there. (Inaudible) the market just in terms of what we expect the absorption pace to be. I mean, once you start a project (inaudible) we're in great position to do that, just as we assess the timing of the pipeline of activity, and the delivery dates of these buildings, in terms of physical presentation. We thought that these were more accurate targets.

So if I go back to prior notes, I think a couple of these projects had already been extended, in terms of some of their dates. Maybe not to the degree that all the projects have been extended from the second quarter to the third quarter.

I think the only one we had extended was Oakland, and that was just to reflect the core and shell completion date due to being a little slower to start that project because of some approvals.

Thank you for that. And you're still holding to a 7.75 to 9% rate of return?

That's what the numbers are showing at this point, based upon what the properties are being marketed for, plus what the budgets are, so yes.

So to adjust for longer or higher carry costs, the assumption would be higher rental rates?

Well, I mean, actually, in every case we've got rental rates in excess of proforma, but yes, that's all in the mix.

But as of yet, we don't have any rental rates that have been signed.

Well, that's true.

But you're still targeting 7.75 and 9, even though there's no data points that suggest that those are the numbers that you will achieve.

Well, until the lease is signed, you're right, the number's not in black and white. But based upon the lease proposal we have out, the input from our managing directors running those projects, the input from the leasing agents, when we take a look at what our fully-loaded cost position is in these buildings versus the rents that we're looking to achieve on a stabilized, first-year, cash basis, what's what the targeted rents are. Or targeted returns are.

If you had to put your -- get your best guess in terms of how this might phase in, what might be a target lease-up rate on the existing assets that were under construction a quarter or two ago to today, over the next couple quarters, still kind of excluding the downtown Philadelphia deals or west Philly deals. Should we expect to see the leasing rates of these things to be back-end loaded, or should we expect terrorist see maybe 10% next quarter, 20% the following quarter, and so on and so forth? Just trying to --

Yes, Chris, it's Howard, and that's exactly part of the budget process that we're finalizing as we speak and would be part of the guidance. We would give some additional color from the timing of the projects, as well as the overall portfolio.

Okay, thank you.

Thank you. There appears to be no further questions. At this time, I would like to turn the call back over to Mr. Gerry Sweeney for any closing remarks.

Great, thank you all for joining us for the call, and we look forward to providing future updates. Thank you very much.

Thank you, this concludes today's Brandywine Realty Trust third quarter earnings call. You --