Brandywine Realty Trust (BDN) 2007 Q4 法說會逐字稿

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

Prior to Mr. Sweeney's remarks, please let me read the following disclaimer on behalf of the company. The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words anticipate, believe, estimate, expect, intend, will, should, and similar expressions as they relate to us are intended to identify forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, these statements are not guarantees of results and no assurance can be given that the expected results will be delivered. Such forward-looking statements and all other statements that are made on this earnings conference call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected.

Among these risks are risks that we have identified in our annual report on Form 10-K for the year ended December 31, 2006, a copy of which is on file with the Securities and Exchange Commission, including our ability to lease vacant space and to renew or relet space, 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 financing, competition for real estate acquisition and risks of acquisitions, dispositions and developments, including the costs of construction delays and cost overruns, anticipated over-operating and capital costs, our ability to obtain adequate insurance, including coverage for terrorist acts, dependence upon certain geographic markets and general and local economic and real estate conditions, including the extent and duration of adverse changes that effect the industries in which our tenants compete. For further information on factors that could impact us, please refer to 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 subsequent information discussed on this conference call unless required by law.

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

Jackie, thank you very much. Good morning, everyone, and thank you for joining us for our fourth quarter 2007 earnings call. Participating on today's call, along with me on Howard Sipzner, our Executive Vice President and Chief Financial Officer, Bob Wiberg, Executive Vice President, George Sowa, Executive Vice President, Darryl Dunn, our Vice President and Chief Accounting Officer, and Gabe Mainardi, our Corporate Controller. Our year end results were in line with expectations. Of particular note in the quarter was the continued decline in capital costs, which has been a positive trend occurring throughout the year. 2007 also saw good leasing activity whereby we improved our core occupancy to 93.9% and had net positive absorption for the year of almost 300,000 square feet. We closed out the year with a tenant retention average of 72.8%. Our same-store numbers are moving in the right direction, exceeded our original 2007 plan, and built momentum for the portfolio going into 2008.

For the year, we had positive GAAP rents on both renewals and new leases, positive cash rent growth on renewals, but continued to have negative cash rent growth on new leases. Market conditions remained stable, but our outlook is cautious. Although we have not noticed a perceptible slowing in activity, assessing real tenant demand remains challenging. In fact, traffic that is showings through our core portfolio was 37% higher in the fourth quarter over the third quarter of 2007. The same held true for our development projects, which saw a doubling of traffic in the fourth quarter versus the third quarter. We did achieve some leasing in the development pipeline, most notably 30% at the Park in Austin, 10% at Metroplex, and 67% in our 100 Lennox Drive rehab. Pipeline activity is solid, but the timing of deals remains less certain.

Most of our markets continue to experience positive absorption in 2007, with several markets, most notably the Pennsylvania suburbs, Richmond, Philadelphia CBD, suburban Maryland and Oakland, all posting measurably increased absorption over 2006, while Northern Virginia and New Jersey posted lower year-over-year absorption levels. Vacancy rates continue to decline in several markets, specifically in the Pennsylvania suburbs, Philadelphia CBD, Wilmington and Richmond, but increased year-over-year in Northern Virginia, suburban Maryland, Northern California, and Austin.

On today's call, we would like you to focus on several key themes. Our 2008 business plan is based on conservative and very achievable assumptions. It excludes a lot of speculative income one-time items and incorporates a minimal level of sales activity with no programmed acquisitions or developments. We will also draw your attention to several other initiatives the company is pursuing. These efforts are designed to sharpen our capital deployment, create additional liquidity, and move the company to a more effective rightsizing, given our cost of capital. We also have a keen focus on our forward funding obligations, the largest of which is our IRS historic rehab build to suit in University City, Philadelphia. We are actively exploring strategies that I'll talk about in a few moments to create an attractive funding framework for that project.

It has been a little more than two years since we undertook the Prentiss transaction, and it's time for a candid assessment. Brandywine and Prentiss combined to broaden our operating platform into higher growth markets to generate better earnings growth. Thus far, as illustrated by the following points, all of these objectives have not been completely achieved. Overall portfolio performance and same-store growth results have been below original expectations. Our sales program has been successful, but the data is focused on selling slower growth assets, improving portfolio quality, and consisted primarily of higher cap rate sales that have resulted in some earnings dilution.

Further, during the two-year period, asset pricing and our cost of capital precluded expansion into some of the new markets. Also, due to the limited size of the asset base in several markets, we operate with higher deployment costs and minimal economies of scale, which impact our margins. The slower than anticipated lease-up of our development projects has temporarily created a capital consumer and event risk overhang. We made each of these development decisions based on then-market conditions and full confidence in our local teams. We remain convinced that these projects will be successful, but the reality that lease-up to date has not delivered to the targeted growth.

Finally, last year, we made several capital allocation decisions, most notably our share repurchase effort, that in retrospect utilized capacity less effectively than we would have hoped. Execution on these original objectives has created a situation where we have been underdelivering. Our 2008 business plan is designed to change that situation, eliminate any credibility gap, and enable us to deliver consistent, predictable returns. A few comments on the 2008 plan, we anticipate achieving both positive GAAP and cash same-store NOI growth rates. From an investment standpoint, while we have more activity under way, we have only programmed $160 million or so of sales activity. We currently anticipate that the taxable gain from these sales could be absorbed within our 2008 dividend so that no special distribution will be required. We have not programmed any acquisition activity in 2008, nor are we anticipating any further development activity unless accompanied by both significant preleasing and improved financial capacity.

Our capital uses for the year are anticipated to be about $175 million, deployed primarily into our development and redevelopment pipeline. An important point to note is that our total unfunded development balance at 2000 year end will be about $320 million, of which $290 million relates to the postal office building at Cira Centre South. Given the overall state of the economy and our cautious outlook, we are projecting an average year end occupancy in our five ground-up developments of just 35%, ranging from 0% at Southlakes to 75% at Metroplex.

Our 2008 projections incorporate less than $3 million of NOI from these properties, as well as incorporate the impact of expensing interest as capitalizable interest periods burn off. Going in yield projections on a cash basis, we expect a range between 7.0 to 8.75% and between 8% and 9.5% on a GAAP basis. While we certainly hope to exceed these leasing targets, until there is greater clarity on the timing of pending activity, we believe caution is the right approach. We do not have the need for any external financings during 2008. The business plan Howard will walk through is fully funded and also positioned to meet our forward funding requirements.

Our detailed projections show a good increase in our 2008 CAD number over 2007. We expect dividend funding shortfall to be about $15 million and that we will be at a breakeven CAD payout ratio by year end 2008. As a consequence, the Board has determined to maintain our current dividend payout of $1.76 per share for 2008. In making this determination, we have carefully reviewed all projected lease transactions and all related capital costs for the year and believe we have a clear path to full dividend coverage. Just as importantly, we analyzed all the data relative to 2009 that's available. We show a continuing improvement in our CAD payout ratio, certainly aided by portfolio stability and additional NOI from our development projects.

We anticipate achieving positive mark to market from a GAAP standpoint on both new leases and renewals in 2008. The numbers indicate good portfolio performance and improvement, but given the rolling impact of 2007 sales activity, 2008 projected sales activity, the exclusion of other than known items of other income, the more conservative lease-up on our development projects, we produced a guidance range that we outlined in our press release last evening. Howard will walk through the methodology in detail behind all these projections. Our objective this year is to set a very deliverable expectation based on predictable revenue sources that the portfolio will deliver based on known conditions. That approach, while delivering a range beneath consensus, creates a higher quality projection base from which we can grow.

At this point, Howard will review our fourth quarter results and our 2000 business and financing plan.

Thank you, Gerry. If any of you do not have a copy of our supplemental package, which was released yesterday evening, you may get one on our website at www.BrandywineRealty.com in the Investor Relations financial reports tab. For same-store calculation purposes for the 12-month period, we've once again adjusted the NOI and related numbers for any Prentiss assets for the four days we did not own those properties in 2006 to make a comparable period over period comparison. The reconciliation of 12-month same-store NOI on Page 13, or on Page 12, rather, goes into this in greater detail.

On December 19th, we closed the sale of 29 properties to a joint venture in which we maintain a continuing interest. As a result, the income of these sold properties remain above the line and not in discontinued operations. These properties have been excluded from the various same-store calculations and will be accounted for under the equity method from December 19th forward. And lastly, we have reclassed certain expense reimbursements and other related matters related to management activities to both a management income and expense line on the income statement. Previously, these were either included in other revenues or netted against property operating expenses. We believe this new treatment is more informative on a go-forward basis. Quick highlights from the income statement for the fourth quarter, we reported FFO of $53.5 million versus $59 million in the fourth quarter a year ago.

FFO per share came in at $0.59 versus $0.63 a year ago. If you adjust the $0.59 for a noncash charge of $3.7 million, or $0.04 per share, for settlement of an expired hedged transaction, our FFO would have been $0.63 and in line with consensus estimates. In lower share count from prior buyback activities and reduced impact from contingent securities also contributes to the FFO per share level. The payout ratio on our $0.044 regular common stock dividend equaled 74.6%.

In terms of a few income statement line items, on a same-store basis, rents increased $1.2 million, while recoveries decreased $3.3 million, resulting in an overall decrease in same-store NOI of $2.1 million, or 1.5% on a GAAP basis. The recovery decline reflects the outsized recoveries in the fourth quarter of 2006 as a result of some catchup in that activity with respect to the overall 2006 year. Please note that we have provided greater detail as well in the same-store and regular income statement for the various components of other income.

Our G&A expense came in at $6.5 million and that reflects the benefits of the reorganization we implemented this past summer and as a good run rate going forward, as we'll talk about a bit later. On the rest of the income statement, interest income continues to show moderate declines on a sequential basis. It came in at $590,000 versus $1.8 million a year ago and $1.1 million a quarter ago, and this reflects lower cash balances, reflected among other things, more efficient cash management. Interest expense was down significantly from $44.7 million a year ago to $40.6 million, reflecting higher capitalized interest of $4.7 million versus $2.3 million on our larger development activities, slightly lower debt balances due to asset sales, and debt repayments, along with declining floating rates.

Turning to other operating metrics, EBITDA coverage ratios of 2.4 on interest, 2.2 on debt service, and 2.1 fixed charges, all came in in line with historical results. I'll just emphasize in terms of margins, our 33.8, or roughly 34% recovery margin, reflects a very consistent level for this category for 2007, and what we would expect to see going forward and differs somewhat from the experience in 2006. On a CAD basis, we came in at $0.36 per share and despite 120% CAD payout ratio in 2007 overall, we are, as Gerry noted, experiencing declining trends in capital expenditures and also seeing year-over-year declines in straight line rent and FAS 141, leading to improvements in the CAD results.

On a full year basis, our FFO came in at $2.55, or $2.59 without hedge expense. That's at the top end of our prior range and $0.01 above consensus and reflects an FFO payout ratio of 69%. The CAD for the full year of $1.46 results in an aggregate 27 to $28 million dividend shortfall for the year, which was covered by financing activities, and Gerry touched on dividend coverage, and we'll talk about it a bit more when we discuss the 2008 guidance. Just quickly on account receivables, we really had no undue activity in terms of credit experience in the fourth quarter, and that's a very positive and encouraging trend. At year end, we had about $21.7 million of operating receivables and a reserve of 3.7, or 17%, and we counted on our books just under $90 million of straight line rent receivable with a reserve of $6.4 million. We did increase our reserves slightly in the fourth quarter to provide a greater cushion against future rental income write-offs. Without the nonrecurring hedge costs again, our FFO of $0.63 met Q4 consensus and our 2007 figure of $2.59 exceeded the full year consensus by $0.01.

Let's talk now about 2008 guidance, which we gave some detail about on the press release last night and we'll amplify a bit more on this call. We are providing 2008 guidance of $2.46 to $2.56. Let me underscore a couple of key assumptions. Firstly, no 2008 acquisition activity is included in our plan. We do have between 155 and $162 million of net sales activities on five specific properties, between a range of 7.5 to 8% blended cap rate. One is closed. One is expected to now close on February 29th. Two are in discussions with a variety of bidders, and one is speculative later in the year. As Gerry mentioned, we need to fund approximately $175 million of combined development, redevelopment and capital expenditures.

To break that down, we see about $75 million of expenditures in the development pipeline, about 25 in redevelopments, and another 75 of combined leasing commissions, tenant improvements, and various building capital. Of that last 75, between 45 and $50 million is expected to be revenue maintaining capital expenditures, and that compares favorably to the $61 million we incurred in 2007, and is one of the data points we're using to gain more comfort on the dividend coverage. In addition to the $175 million, we track about $10 million of internal construction leasing and development costs from capitalized overhead that gets prorated amongst these activities and is added into the total. For our five major ground-up developments, we expect to achieve about 15% average occupancy for the year and between 30 and 35% occupancy by year end to generate somewhere between 2.5 to $3 million of NOI contribution in 2008. Capitalized interest and expenses on any unleased, or non-income-producing construction in progress will be cut off between August and December 2008.

For our same-store properties, we expect GAAP same-store NOI growth in a range of 0.5 to 1%, and cash same-store NOI growth of between 2 and 2.5%, and I think the dynamic between those two illustrates the increase in the cash components of our income. We see same-store occupancy increasing up to 100 basis points by year end, but as we'll touch on in a moment, a significant portion of that is in fact back ended in the fourth quarter. As Gerry mentioned, we see GAAP mark to market increases on both new leases and on renewals in the 3 to 4.5 or 5% range. We see a decline of anywhere from 5 to $6 million in straight line rent, and a smaller 1 to $2 million decline in FAS 141 income. We're projecting a consistent recovery profile of between 34 and 35%, very much in line with the 34% we achieved in 2007. Our overall recovery profile continues to improve, as we move more and more tenants to a triple-net lease structure.

With respect to overall 2008 leasing activity, we have about $60 million of speculative leasing revenue for both new and renewals in our 2008 plan. To date, we've executed on 60% of the associated revenue, which is a relatively good number, as we see it, though we point out that the fourth quarter of 2008 represents about 40% of our 2008 speculative leasing and is only now about 40% executed at this time. In line with this bias, there is a similar upward trend in the expected fourth quarter FFO and CAD numbers. Let's talk about other income items. The 30 to $38 million range we outlined will incorporate several categories, including termination fees, management income now reflecting the expense reimbursements as we reclassed in Q4 and all prior periods, any other rental income items, interest income, JV income from our various JV activities, including the joint venture with DRA, and any other nonrecurring items. In 2007, to compare against this 30 to $38 million range, we had $47 million in these categories. I point out there was a typographical error in some of the early versions of the press release that stated it at 49. The correct figure for 2007 would be $47 million in these categories, so we're showing a marked decrease in our expectations on those numbers.

We need to repay about $135 million of maturing debt. We are targeting no 2008 financing activity, and we do not need any, though we will look at mortgages and stable properties where the terms make sense. G&A is expected to run at 6.5 to $6.75 million per quarter, reflecting cost savings and certain reclassification of costs to operating expenses, in line with Q4 '07. We have a reasonable cushion in our G&A line for the potential costs of a new Chief Operating Officer, whose search is currently under way. We expect leverage to remain flat to slightly down as a result of steady operations and the identified asset sales. And lastly, with respect to our CAD, we're currently projecting it to be in a range of $1.55 to $1.65 per share. And that would translate to anywhere from a 10 to $20 million GAAP on a dividend and neutral to slightly positive by the end of 2008. Our 2007 shortfall was about $28 million by comparison, and if we achieve the results in our plan, it sets us up for full coverage in 2009. As Gerry outlined, this all sums up to the expectation that we will maintain our $1.76 dividend, $0.44 per quarter, but as always, subject to Board approval.

We don't typically give out quarterly guidance, but I would like to share a few observations to make sure we get the year started right in many of the models that the analysts produce. Our FFO run rate in the fourth quarter would be $0.63, excluding the hedge expense. For Q1 2008, we should all consider the following adjustments. With respect to the DRA transaction, we see Q1 NOI dropping by about $0.04 a share. Net of management income and reflecting our share of the JV debt. We see Q1 interest expense dropping by $0.02 per share, due to debt repayment from the proceeds from the DRA JV.

Lastly, we do expect tenant reimbursements to drop about $0.01 a share because in the fourth quarter we still did have some one-time activity in 2007, and lastly, the other income categories as a whole would need to drop by anywhere from $0.01 to $0.02 to match our range. This results in a $0.59 run rate. We have received a large termination payment already in Q1 of $3 million, which adds about $0.02 per share versus the $760,000 we received in Q4. This leaves to a preliminary Q1 view of about $0.61 per share. We hope this sets the stage for both the quarterly and full year review of 2008.

Very quickly, on the balance sheet, we continue to monitor our debt profile and saw a slight improvement on the debt to gross real estate costs at 53.6%. Our secured debt remains quite low at 10.4% of total assets and our floating rate debt, though that's a good thing to have right now, is only 4.2% of total assets. Our $600 million credit facility was $120 million drawn on 12-31- 07, and this significant reduction outstanding reflects the $150 million term loan we funded on October 19, and the roughly $230 million of proceeds from the DRA joint venture. We had aggregate availability under our lines of over $475 million at 12-31-07 and have no need to do any financings in 2008 regardless of the success of our indicated sales initiatives.

Lastly, I want to note that we completed reviews of our plan with the three rating agencies in January 2008 and received generally positive feedback from all three. We appreciate their support and remain committed to a strong investment grade rating. Now I'll turn it back to Gerry for some additional comments.

Howard, thank you. Looking ahead after carefully assessing the real estate markets, our operating history over the last two years and factoring in near-term capacity considerations, we plan to operate and deploy capital only in those markets where we have a clear competitive advantage, accompanied by quality asset base and a strong management infrastructure. This execution will ultimately right size our portfolio, further streamline our cost structure, and better position us to deliver a higher return on invested capital. Achieving this objective requires capital execution relating to several parts of our portfolio. The primary hurdle to this execution is the current state of the investment market, which is, as you well know, still fraught with extensive price discovery. As such, the pace and timing of this investment activity is uncertain and the process will take some time. With that in mind, as both Howard and I have touched on, our 2008 plan only incorporates the $160 million of tactical sales activity. It does not reflect some of the investment strategies that I'll go into in a few moments.

By way of background, the last two years, we have actively sold the higher cap rate assets I alluded to earlier in the discussion. For example, we sold approximately $800 million of properties, which represented higher cap rate exits from Dallas, Redding, Harrisburg, and our Northern Pennsylvania suburbs. In 2007 alone, we sold over $600 million of properties, of which $400 million were assets in Philadelphia. These sales have been dilutive and that cumulative impact is clearly reflected in our upcoming plan, so we've been fairly active on the sales side. We could have sold less, which was have created a higher FFO, but we believe all of these sales transaction improved both our market position and our portfolio quality. To invest significant capital only in those markets where we have a competitive advantage will certainly necessitate the recapitalization or exit from some of the several -- from several of the smaller markets in which we currently do business. Prior to addressing those, let me spend a moment talking about our University City and Philadelphia region-based initiatives.

As announced in our last call, the marketing process for a joint venture on Cira Center is under way. We have 35 investors who have expressed interest in the project. Property tours are under way and we expect five to ten quality offers. Our rational for this transaction is to reduce our Philadelphia exposure, provide additional liquidity and harvest profit. These numbers -- any of the impact of any joint venture from Cira is not reflected in our 2008 plan. On the fully leased post office building and related garage structure, we have clearly created value. Our primary objective is to capture this through a financial structure and mitigate our forward funding obligation. We are currently in active discussions with several potential joint venture partners who would take a majority equity stake in this project.

While there are still a number of moving pieces, even in today's climate, we are very pleased with the level of response received due to the long-term nature of the government lease, the quality of that income stream, and its near-term delivery. As I mentioned earlier, 90% of our post 2008 development funding commitments, that's $290 million out of 320, relate solely to this property. The rationale for proceeding with this effort is to create an overall coinvestment vehicle to mitigate our funding obligation, harvest potential profit, and create a high quality going-forward revenue stream. This effort will be non-dilutive. It will better position our balance sheet, and it is our top priority.

Howard outlined a transaction we consummated with the DRA Advisor Group on our Northern Pennsylvania suburban portfolio. This is a very effective capital strategy for us. During 2008, we will continue our asset calling efforts and we'll certainly be looking to replicate that capital structure on other portions of our suburban Philadelphia-based asset pool. Now, moving on to the broader picture, in looking at other parts of the company, we have a small portfolio in Southern California. That portfolio consists of 437,000 square feet, or about 2% of our overall portfolio.

To gain asset level control, we unencumbered those assets from secured financings from a joint venture late last year. As we originally anticipated, we have concluded that we do not have a competitive advantage in this marketplace. Our expectation as such is that we will sell this portfolio by the end of 2008. The total estimated dollar amount, we anticipate to be slightly north of $100 million, and as such, we expect dilution, if any, to be immaterial. That market is truly in a state of flux, so the timing of this effort is subject to some projected lease-up activity and the health of the investment market.

The next market I would like to spend a moment on is Northern California. That asset base represents about 9.5% of our net operating income. We have a strong market position in Oakland, but have been unable to expand into the East Bay markets as we originally anticipated. We have evaluated several billion dollars of transactions, but have not been able to acquire any properties on any acceptable economic terms. As such, our choices for this market are to simply stay as we are or to look for a creative way to recapitalize. The approach we're exploring right now is to recapitalize all or portions of this portfolio with a joint venture partner who will reduce our invested capital to generate liquidity and rationalize our investment program for this market. Again, given the state of the investment market, the timing of the undertaking is uncertain, but it is a direction in which we are moving. In the interim, we have a strong management team, good market position and good leasing activity under way.

The remaining smaller operation is Austin Texas. We have not yet made a conclusive determination on the ultimate outcome of this market position. We continue to like both the dynamics and the demographics of this market. We enjoy a strong competitive position, with a high quality asset base, good land holdings, and an excellent management team. The overall market size, unlike the very large markets of Northern and Southern California, is also one where we can deploy limited capital and continue to improve our competitive position. That market, however has experienced some head winds due to lower than normal absorption and construction deliveries, so our plan is to continue to carefully monitor that market for deployment and/or project level recapitalization strategies.

The objective of all these efforts is to recognize the realities of both the market and our capital capacity regarding growing these operations, establishing the economy of scale, creating the competitive advantage we want, and deploying capital on terms that make sense. We also recognize that the timing and execution of this strategy is subject to overall investment market conditions. We are in a type of market where frankly everything is for sale and nothing is for sale. Pricing and velocity is very uncertain and as such, our business plan reflects only what we are convinced we can on all fronts including this investment arena. We are also in a market where stability, certainty and predictability matter. Looking back over the last two years, we were probably at times overactive, and I view 2008 as a year to strictly focus on operational execution, balance sheet strengthening, and our leasing activities.

On a personal note, the dramatic pullback in the pricing of REIT securities and more to the point, Brandywine stock, has created a high level of disappointment. Our stock underperformed in 2005, after we announced the merger with Prentiss, performed generally in line with our peer group in 2006 and then underperformed our peer group in 2007. The objective in laying out the 2008 business plan is to establish a realistic and achievable benchmark from which you can measure us. We also laid out some strategic objectives relative to the capital allocation and portfolio rebalancing. The execution of which will improve liquidity, sharpen our execution, and return Brandywine to having a competitive advantage in every one of the markets in which we operate to achieve our paramount goal of generating better growth rates.

One last, but very important comment, a key driver in the Prentiss transaction was the strength of the relationship that I had with both Mike Prentiss and Tom August. Those relationships remain very strong and as such, I very much regret this recent turn of events. By way of background, given the volatility in the capital marketplace and more importantly the challenging operating climate, we made the determination to expand the management team and add another seasoned executive in the role of Chief Operating Officer. From my standpoint, this is a very welcome addition. At the time of the merger, to build a consensual management approach and culture, we did not expand our top ranks.

Neither Prentiss nor Brandywine had a Chief Operating Officer and we felt having a very good creative interchange while we built the culture of the company after the merger between all the managing directors was very important. Based on the market and operating challenges we encountered in 2007, but really more importantly looking ahead into 2008 and 2009, it was clearly time to change that approach. The board, that's including Mike, Tom, and myself, felt this was a necessary objective. Given the press of Tom's other opportunity, the Board and Tom began an accelerated process in trying to structure a way in which Tom could fulfill the role of Chief Operating Officer. For a variety of reasons, these negotiations were not successful and Tom decided it was in his best interest to pursue the very attractive opportunity in Dallas, which was announced the other day.

I think simply put, we all care very much about the success of the company and sometimes that creates emotional reactions. I can assure you that there were none and there are no significant policy or strategic disagreements at the Board or senior management level. Just a lot of anxiety over how to get the stock pricing moving again. One of the unfortunate outcomes of the process we went through is that an internal e-mail that Tom used to communicate to the Board was required by SEC rules to be filed as part of his resignation. Tom regrets, I regret, we all regret this had to be included, as it portrayed a different picture than the process that was truly underway. I really do wish Mike and Tom the best, thank them both for their contributions for their two years on the board.

We are moving forward, as Howard mentioned for the formal search for a Chief Operating Officer and those costs are built into our projections. Additionally and more importantly, the board has begun the process of evaluating additional board candidates, with the objective of bringing on to our board very well respected individuals from our industry. And to close, our entire team is resolved to continue working together to make sure that we do realize the value that we can glean out of this market and that we anticipate as part of the merger transaction. Jackie, at this point, we would like to open up the floor for questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question is from Anthony Paolone from JPMorgan.

Thanks, good morning. Gerry, can you walk through, as you look out the next couple of years, in your core markets, what would need to happen so that rents and core NOI growth would actually start to move a little bit higher than the sort of like 0.5%, 1% you're kind of trending at?

Sure. I'll start on that, Tony, and then turn it over to both Bob and George to talk about what they are seeing in the different marketplaces they are involved in. Clearly we need a steady state economy, that will not be subject to any significant job backs or corporate relocations. Most of our markets have had that steady state for the last year. In addition to that, one of the benefits of the economic disruption we're going through is that there will really be our expectation over the near term, the near term being the next couple of years, any significant increase to any construction activity. I think the lending environment is different, developers, be they public or private are much more cautious on job creation and assessing the timing of tenant demand.

So I think there's going to be continued downward pressure generally in most of our markets on existing vacancy rates. It will be a combination of hopefully steady state and lower construction volumes. Another positive that we would hope to see happen over the next couple years is we have been very fortunate to have a pretty good tenant retention rate through almost every operation in the company. One of the positives, if you can call it that, from a slower economic time, is that really only very happy people move. You see that in the residential marketplace and certainly from an office standpoint. Tenants tend to focus more on near-term business objectives as to deploying significant capital with leases in the near term when they are going through this type of process. Well, that certainly we've seen the impact of that on some of our development projects. Our hope is that we will see that continue to be reflected in our existing core portfolio, which will generate as you see statistically, pretty good returns on rents, but more importantly, much lower capital costs across the board. Bob, why don't you talk about some of the things you're seeing in your market.

Sure. I think for growth in the DC portfolio, there's a few drivers that will affect us, the big one is leasing our new building in Southlake, and we're obviously very actively trying to get that accomplished. We also have our redevelopment project, 6600 Rockledge, which gives us opportunity to increase our performance. I think a couple other factors to note, one is, in the past couple of years, one of the big negatives has really been the operating cost growth that we've seen. That's been through property tax increases and utility increases, a lot of the property tax was driven by the increasing valuation to buildings. That will clearly slow down.

Whether there's an offset from in the military, we don't know, but I think that growth will slow. Also utility wise, our big exposure was because of the deregulation of utilities in Maryland. That's pretty much played through, so while there will be expense increase due to fuel costs and things, I think that hyper growth we saw is behind us. As Gerry mentioned, I think retention's a positive, because it is expensive to move. We've seen retention rates go up across the board in the D.C. area, and we'll continue to see that. And I think the final one I'd like to note is when we look at our growth rate, one of the challenges we have in the DC area is the historic high rents we achieved in the 1999 and 2000 timeframe, and when we're burning off those leases and going to new ones, there are cases certainly where we have rent rolldowns. Those have pretty much played through the system at this point and I think as a result we'll be seeing more growth generally lease to lease and in our portfolio going forward.

And Tony, on the Pennsylvania, the Philadelphia area, I think we've seen a couple of things, too, and where to grow income really could be a couple of ways. One is certainly increase the rents. The other, it can be done a number of ways, but also maybe more importantly in some cases is improve our margins, and to that end, we've actually utilized the triple-net lease structure in probably two-thirds if not more of our leases done within the last two years or three years at this point. And so, again, we're improving our margins overall through the utilization of that triple net lease structure and also have better control on our capital costs. If you look at trend lines on the capital, TI or the number of deals that we do directly with our excellent leasing staff that we have throughout the region, I think you'll see that trend as well.

Again, if we look at the suburban market specifically right now, there's 29,000 new farm jobs created just since July of 2006 in the area. I think you're seeing that kind of play out through overall vacancies, a little more than 15%, about 13.6% on a direct basis, but more importantly, it's about 1100-basis point improvement from the high back in 2003. So I think you're seeing some of that play through and, the one thing, too, if the economy continues to have some uncertainty, if you look back to the times we went through several years ago, what ended up happening, we continued to have very high tenant retention rates. The terms generally were a bit shorter, but we also didn't have to spend as much capital. People were in an indecisive mode, but certainly not in contraction mode, nor necessarily in expansion mode, but the same time they stayed put, which is from a landlord perspective isn't necessarily a bad thing, we didn't spend much capital as a result, and when things turned around again, they continued to expand.

All right. And I guess, and maybe this is an accounting question, your FAS 141, taking into account what you're talking about in your markets and maybe where you're going, your FAS 141 is like $3 million a quarter and I guess that was set because at the time you purchased Prentiss, the idea was that market rents were higher than were in place rents are. It's been a couple years now and it seems like your cash rents that you're signing are really right at about the level of expiration. So I'm wondering, when does that 141 really burn off, is there, from an accounting point of view, does there still exist a gap there, or can that potentially be written down, written off, or how does that work?

Yes, I mean, Tony, it's Howard. Lot of questions embedded in there. It is primarily from the Prentiss transaction. The assumptions tracking back to the end of 2005 were predicated on achieving higher rents than those that were in place, to some degree, that's not presented itself. There's no write-off to the extent that's not realized, it was an appropriate presumption presumably at the time. There is an expected decrease from what was a peak in 2007. I mentioned that at about 1 to $2 million, and that will contribute to better CAD, but fundamentally, your question's right on target, that the expectation is that that combination of cash and 141 income does migrate to a pure cash equal or greater amount over time and we've had mixed results on that front.

All right, and last question, Gerry, with respect to Cira, talking about doing something with the IRS site and bringing in a partner there to help fund those costs and then selling some other suburban assets maybe into a JV and whatnot, why, why still feel the need to sell an interest in an asset like Cira if it seems like maybe you can achieve some of your funding goals with some of these other transactions?

Well, Tony, it's a good question. I think what I try to do is outline a range of different paths that we're exploring, all of which, again, were focused on putting us in a much better competitive position at a real estate level and generating additional liquidity for the company, and that liquidity, you can look at it in one of two ways, one is a short-term liquidity aspects of further strengthening the balance sheet. The other corollary to that is obviating the need to fund in future dollars. I think our approach right now, given really the lack of clarity in the investment market generally is to pursue a number of different avenues, see how those processes work their way through, and then make what we think will be the best decision predicated upon the options that we have in place. I mean at this point in time, we've gotten good interest on Cira Center, but we don't know as of yet and won't know for probably another 20 or 30 days on what the pricing will be. Or it could be even longer than that based upon how the bid process works.

And if some of those transactions, like if Cira happens, Southern California, maybe joint venture in Northern California, if some of those things do hit this year, what would that do to, say, your dividend guidance or your earnings guidance, for that matter?

Tony, I'll jump in and then we'll probably turn it back for other questions. Our plan does not contemplate these additional transactions. To the extent there are any one or more larger sales or JV activities that would either dilute earnings and/or create the need for a special dividend, that would in all likelihood be a code by a full review of the dividend at the time. But that's not in the plan, nor contemplated at this time.

Okay, thanks.

Thank you. Your next question is from Jordan Sadler with KeyBanc Capital Markets.

Good morning.

Good morning.

Just wanted to sort of circle up on some of these proposed transactions. I'm trying to I guess understand exactly what you guys are looking at. Following I guess the merger with Prentiss, you gained access to an exposure to Northern California, Austin, and Northern Virginia, which was not mentioned in your sales plans. And it sounds like you're potentially thinking about retreating from these markets. At the time when you merged, I thought that you identified these markets as superior growth markets, and that was sort of one of the reasons behind the -- one of the reasons behind the merger. And so could you maybe explain what the thought process might be on maybe getting out of these markets now and maybe how that thought process may have changed?

Oh, sure. It's a good question. The -- we had mentioned from the beginning that we always thought that we would go into a two-year period of evaluating Southern California, and I think from the beginning, we indicated we did not think that would be a long-term market for us, unless we were able to expand that market position significantly.

That, I remember.

I'm sorry, that's Southern California.

Yeah, I remember that.

So I think what we've talked about here on that market is very consistent with what, with what we talked about originally. Relative to Northern California, that's a marketplace where, again, I tried to lead a balanced approach where we like it. We have a good team there, a good position in Oakland, but I think what's really happened is the, it's become clear that where pricing levels are in that marketplace, our cost of capital is going to be hard for us to grow our operation and create a real competitive advantage outside of the pod we have right now in Oakland, fully utilizing our own balance sheet. Just not going to happen from that standpoint.

So what we're looking at doing in that market is recapitalizing the joint venture, our operations, so we can reengage on -- actually get some money back, again, increase the liquidity in the company, but certainly create a different, hopefully a different investment landscape for that marketplace. That's more of a recapitalization versus simply indicating that that market may not work for us. And I think Austin is in the same situation relative to our long-term price in terms of what the right capital plan is. Certainly we do have a significant competitive advantage in Northern Virginia and the DC area and suburban Maryland and our hope would be as it was in the beginning to continue to grow those operations and to generate better long-term average growth rates.

Would you be able to maybe give us a sense of what the IRRs have been on Prentiss assets sold and going forward, will you be able to maybe provide that for us so we can measure how you guys did relative to the buy?

Jordan, I don't have specific IRRs, but what I will say is with respect to all the sales activity, we sold at or above gross cost, and obviously realized good NOI and income along the way, and at the point of those sales included in the basis any unamortized TI or capital. So I would say the sales premise and the pricing premise all held up, but the growth premise has not held up.

Okay, and then just could you just give us some more color on the 153 to $160 million of assets that are in, asset sales that are in guidance. Where are those?

We identified two thus far. I can't identify the other three because they are all in various stages of discussion, where one is not yet in the market per se. The two that sold, one was a small industrial building that originally had been part of the Northern PA Asset group. Because it was industrial, it fell away. We put it back on the market and sold it at a nice profit, as will be disclosed in Q1 and in line with pricing expectations, a small transaction and the second that was closing was supposed to be today is now moving to the last day of the month, but it's still under a hard contract, is a single tenant building in New Jersey on which we didn't see much upside because it's single-tenant long-term lease and found a motivated buyer for that. The other two are other assets that have various characteristics in the portfolio and have both been identified as good candidates for sale. Generally those other two assets have full occupancy, stable to flat income, and, and are really the proto typical assets that seem to sell best in this uncertain market, and we've received good expressions of interest. We assume those latter two sales occur into and through the second quarter and the last speculative sale is a late third quarter event, but no real color on that.

And so once sort of the capital is raised from these, it's not clear whether or not these are, how leveraged these assets are that you're bearing, I'm assuming there will be some--

No leverage on any of them.

Okay. So the capital's coming in. Have you some excess liquidity. The purpose of that excess liquidity will be for what uses?

It will fund our development activities and capital expenditures in the long-run. We outlined about $175 million of those for the year. We have debt repayments going on through the year, the largest of which is at year end, and all with an eye to maintaining maximum availability on our line of credit. I mean we really have subscribed and do subscribe to the notion that the capital market conditions are of uncertain length and we're going to make sure that we're in a comfortable position beyond anybody's reasonable expectation of how long that's going to last. It may turn around in three or six months. It may not turn around in 2009, and we're thinking 2009, 2010 and beyond in terms of making sure we don't have to do any kind of financial transaction we wouldn't otherwise want to.

We shouldn't necessarily expect a big buyback program.

We have no buybacks programmed into the plan for 2008. We do believe they would be attractive, but our first priority to address the first current capital market conditions and make sure we're comfortable with respect to them.

Thanks.

Thank you. Your next question is from Ian Weissman from Merrill Lynch.

Yes, good morning. In your guidance, you have, I assume, a fairly bullish view of internal growth. I mean you're looking at 100-basis point in occupancy, call it 3 to 5% rollups. Can you talk specifically about what the slowing economy has meant in your markets and why you are somewhat bullish on the outlook for '08?

Yeah, Howard and perhaps some of the others will jump in. I mean firstly that pickup in occupancy is to some degree back ended. It does contemplate some periods during the year when there will be interim vacancy and that really speaks to why the NOI growth is a little bit muted with respect to the rental growth. The economy is cutting both ways and also not necessarily visible. Our leasing activity remains reasonable. We've had good renewal activity out of that, particularly on some larger tenants already in the first quarter. I mean I think probably the statistic that underscores how we're doing in this economy is that 60% of our speculative revenue as we sit here on February 20 is already executed. So we obviously have exposure, but it really sits with only 40% of our overall plan for the year, a portion of that obviously is renewals, which have a much higher probability, and the rest is some speculative leasing primarily towards the end of the year. So those are the risks on the upside in the plan.

Yeah, I mean just to add on to Howard's comment, I mean for the first quarter we've got over 90% of those rents already executed, about 80% for the second quarter, and then about 60%-some for the third quarter for an overall average for the year of about 60, 61%. So we spent a lot of time scrubbing through all the individual assumptions that were developed by the managing directors relative to what they thought they could realistically achieve in every component of the portfolio.

The dropoff in retention ratio for the quarter, how much of that's related to tenants moving to new developments?

Actually, actually none. One of the big drops in the fourth quarter was that we had a tenant rollout in a building that we were planning on selling to DRA that got pulled from that transaction and that was I think about a 70,000-square foot, so that was a big piece of the negative roll. We had a couple longer-term tenants that were on sublease that rolled and that counted towards the lower retention rate.

You spent a lot of time adamantly defending the dividend, just given your '08 business plan, do you care to sort of paint a scenario where the board would consider a dividend cut?

The board's spent a lot of time evaluating the detail of the plan. Management has spent a lot of time reviewing the detail of the plan. There would have to be a pretty adverse change in unforeseen circumstances, because right now as I mentioned, we do believe we have a clear path towards coverage. Certainly if you, if you assume some of the things we're chatting about a moment ago relative to good retention rates, we've created better room on that coverage ratio, so I think the only circumstance that we create a relook at the dividend, if something unexpected happens within our portfolio, or there was one of these larger portfolio transactions, that we concluded we had no good deployment opportunities, and that it was better for us to make a special distribution to meet the tax requirement. I think at that point, I think the company would spend a lot of time thinking about what we would do to that payout ratio going forward.

Can you define what a coverage ratio you're uncomfortable maintaining is?

The only thing I'll say is historically in the company ran at about a 70% FFO payout ratio, which we're at or even better than, but also an 85 to 90% CAD ratio, which we're clearly above. But we do get positive under this plan in the mid to high 90s in the fourth quarter of 2007. Again, assuming all the assumptions are hit, and then I think set up very nicely for 2009, which it's obviously premature to talk about. But we've set out a set of very clear, detailed assumptions of what we need to do, fully communicated internally, and we do believe that if we, for the most part, most of those assumptions, we can maintain the dividend.

Okay, thank you very much.

Thanks, Ian.

Thank you. Your next question is from Jamie Feldman with UBS.

Great, thank you. Thank you for the detail on laying out the coverage. Can you talk a little bit about what you're seeing in terms of tenant behavior in terms of TIs, free rents, where tenants are by market and what they want, and then what your base assumption is for TIs and leasing commissions for the '08 guidance?

Yes, I mean Jamie, I'll jump in on the last question. We outlined about $75 million of total capital, about $45 million of that is with respect to what we call revenue maintaining space that we're either rolling or that was recently leased, so the other 25 to 30 or so would be for previously vacant space. In terms of rates, the cost to tenant, the newer renewal space is actually quite low, and it kind of runs to your earlier question. We are seeing some short-term decisions. We're -- a tenant will say let me just ride this out for 12, 18 months, then I'll let the other folks jump in, and those are typically low or no cost. They do tend to bring the averages down.

But clearly in our plan, the more renewal activity we have, and we've been reasonably consistent on the assumptions there, probably somewhere around 55 to 60%, even a bit above our historical -- below our historical averages, but more renewals will obviously bring our costs down dramatically. There's almost a 3 or 4 to 1 relationship, whether you look at per square foot or percent of revenue or whatever the metric between renewals and new leases obviously. I mean the only place where we really want to spend new lease dollars are in our developments, and, we've given a fair amount of leeway to the field to get those deals done at the market.

I guess how would your leasing teams characterize what they have to do to get deals done in their market today versus maybe a year ago, free rent versus TIs?

I think there's a couple of things. The free rent was never that prevalent in the Philadelphia area, when you come down to it. With few exceptions, and the TI side, depending on the type of space, where your construction costs have clearly gone up in some cases, the TI has tracked the real cost of what the construction actually is, from a concession, they are not shy about asking, but again, depending on who it is and where it is and the type of leverage respective parties have, you certainly don't have to meet. Where we've found tenants have been contributing their own dollars in some cases and I guess most importantly, if you look at the trend line quarter over quarter in over last year, every one of the subregions in the Philadelphia area with very few exceptions, we've actually had positive trend line on the capital we've committed, anywhere from 11% reductions to maybe 40% reductions quarter over quarter. So it's one that we set some good trend lines on the capital side.

And I think, down in the metro DC area, what we've seen certainly for new space in particular, everyone's trying to hold the space rate as much as they can. The TIs are clearly expensive these days. We've been pretty successful in extending term, so when we put out more money, we expect more term. We've got up to 15 years in some cases to amortize that out, but I do think free rent is coming back into the market down in metro DC. I think that's where the concession is made to complete a deal and I think that will be, continue to be a factor certainly through the wave of construction we're seeing in '08 and to some degree in '09.

And then back to the JV question, I think when you were answering Jordan's, or actually I think it was Tony's final question, I'm wondering, I think I heard you say that any JV would be dilutive in the near term, or did I hear that wrong?

JVs would be dilutive in the near term, to the extent the funds were used to pay down a line of credit costs, with floating rates where we are, I'm not sure we see ourselves doing subfour cap rates on our JVs, though we would certainly welcome them. I think more globally, the purpose of the JVs are part of balancing our holdings in certain markets, dealing with markets where we don't have competitive advantage, and also dealing with some longer-term funding obligations. And some of those will be positive to FFO and some will be negative. But we'll blend those combined issues in making decisions.

Referencing the credit line. And then finally, can you characterize a little bit about the types of partners that are out there now and maybe how that universe has changed over the last year or so?

Yeah, I would say with respect to the initiatives we have, it's too early to tell. I mean it would be, not fair to the process. We'll wait until we have something definitive on any of the transactions till a later date.

I think it's pretty traditional institutions, pretty broad based, certainly the joint venture that we went through on the PA north properties attracts a different partner than Cira Center or some of these other ones. But it's pretty broad based. I think one of the real unsettled aspects is kind of waiting to see where debt settles in, which I think is one of the reasons why people are taking longer to kind of underwrite the real estate because it's hard to draw a definitive conclusion on what your return on equity's going to be until you lock into your debt. So I think there's still -- what we've seen is certainly reflects what you read in the periodicals. There's a lot of capital out there looking for a home. Some of that capital wants to try and get in earlier in 2007 because they think things will tighten up significantly in terms of deal velocity later in the year and there's a pricing advantage today. Other folks are just looking at deals and taking their time on the bidding process, but haven't really noticed a dramatic change in the composition of, of some of the institutions that have raised their hands on some of our initiatives.

And what about a change in their IRR with respect to returns?

I think it's too early to tell, to be honest with you.

All right. Thank you very much.

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

Hey, thanks. Good morning, or good afternoon. Just a quick softball first, the other income, when you say JV income, are you talking about management income off of the joint venture? What is JV income to you?

No, JV income is what we book on the income statement as our equity--

Okay.

in unconsolidated entity.

Okay, got you. Then for lease termination fees, you've done $3 million already. What is your expectation for '08 versus '07 on that line item?

Yes, I mean we were specifically not breaking out individual categories, but really encapsulated that with the other four or five categories in one larger number. All of these individual items save management fees and perhaps the JV income tend to be very unpredictable and therefore we're not going to venture any kind of number on what individual ones will be.

Okay. On the sort of broader picture, the development activity that you've undertaken, it's interesting to me that you've got no development starts for 2008. I assume that has to do with some of these strategic decisions that you're making. Have you any pursuit cost issues with that plan, a change of strategy?

No. I mean really development activity on a go-forward basis will be predicated on at least two things. Number one, getting leasing done in our existing ground-up developments and to a lesser degree, the redevelopments, which are further along, and more generally, just the state of the economy. I mean, you know, it's a tricky time right now because while it's obviously not the time to start right now, it might very well be the time to deliver two or three years forward. So with that in mind, you will notice that on pages 32 and 33 of our supplement, we have both our active development description, as well as our land bank, where nothing's really happening for the moment, and within those two categories, some things do move back and forth, and on I think about 10 projects, we are doing some active planning to keep approvals in place, to have schematics available, and even doing some light marketing on some build to suits, but it is all low level supportive activity as opposed to hard starts.

Okay, and then even bigger picture, I guess, not to be a cynic, but as I think you know, when we came out of the box after the Prentiss merger, our general thesis was that you would ultimately sell East Bay and Austin, Southern California, and focus back to Washington, DC, that was sort of our thinking right from the get-go. And it just feels like that might have been always on the back of your mind, that you really wanted DC to sort of close the loop between Richmond and Philadelphia. How much of that is really, was really right?

Well, look, we made no secret from the very beginning that the primary driver of our thoughts on the merger was the expansion of the asset base into the metro DC market. That was almost 30% of Prentiss' EBITDA. Great diversity of product in that market in a lot of different submarkets, so clearly review that as a very important component of the deal. But we also wanted to give the other markets a very good run. Again, good teams, good quality asset base, and I think as I touched on at the beginning, you know, one of the material things that changed was when we started to try and expand our operation in Dan Cushing operation, which is Northern California, you saw cap rates drop into, the 3, 4, 5% range. Our cost of capital would never get us into that position, number one. Number two, the growth assumptions that were driving some of those deals was simply too dear for us to appreciate as real estate people as opposed to financing people. And we just weren't able to grow.

If you're not able to grow an operation, you need to explore alternative ways to generate profitability and as we look at Northern California, we're hopeful that a partnership structure out there will enable us to harvest some profit, rationalize that platform and create expectations for growth going forward. If that in fact doesn't prove to be the case and that an exit there is more optimal from a pricing standpoint, we'll certainly look at that too. That is to be determined. We have good people, good assets in those markets, but our cost of capital, our capacity to deploy capital for the foreseeable future, we just have to be realistic and recognize that we don't have that ability to grow and increase, increase our competitive advantage in those marketplaces. That's why we talked early on about the need to really be competitive in every single market in which we do business, from every point in the real estate cycle. Part of that is having control over tenants, broader brokerage relationships, land holdings, quality asset bases, and in some of those markets, it may be hard for us to do on our own balance sheet.

Understood. And, you know, I mean just an observation I think hunkering down into what makes you guys interesting, sort of a Mid-Atlantic type of portfolio or Philadelphia to DC portfolio, that would be well received. It's just a matter of getting there. That would be my guess, but anyway, good call. Thank you.

Thank you.

Thank you. Your next question is from John Guinee with Stifel.

Hi, gentlemen, nice job. Quick question on page 32. What you said was that your four or five different spec office buildings all shift from capitalizing to expensing interest sometime toward the latter part of this year. Can you walk through your accounting policies for the planning and design stage land, as well as land held for future development as well as your redevelopments?

John, it's Howard, there's a clear break with respect to our land bank, which includes properties or land parcels on page 32 and those on page 33, and therefore explain some of the movement that took place. And just conceptually, the land that is on page 32, the $51 million aggregate value for which we are capitalizing interest and expenses, that land and those projects have active work going on with them. We have people from our development team working on various projects, laying out designs. We are incurring third party costs, and we are getting ready, so to speak, to do something. Emphasis on getting ready.

The projects on page 33 represent a longer-term land bank for which there is no discernible or meaningful current activity, and they are simply longer-term core holdings in DC, Jersey, Pennsylvania, Richmond, et cetera, all the various markets where we do see development opportunity in the future and therefore land banking is appropriate. But nothing in the near term is indicated. In certain cases, we have sold land parcels out of both buckets, primarily the nonactive bucket, just because we've found better opportunities to monetize than to proceed.

So on the $70 million of land held for future development, are you capitalizing our expensing your carry there?

We are expensing it.

And then how are you handling your redevelopments?

On redevelopments, we, we allocate some internal overhead where it's appropriate on those projects, and the $28.2 million of construction and progress related to those projects, and the bulk of it is the full scale redevelopment of Lennox Drive, as you see. We do track capitalized interest on those amounts as well.

But you're expensing your interest on the 241, $241 million?

We are expensing our interest on the 167.6, so that that's in service. The 241 represents the total project costs.

Is it also safe to say that when you cut through all this, that the ability to cover the dividend in 2009 is largely dependent on getting up to a stabilized level of occupancy on the five spec buildings?

It really isn't. I mean if you think about it, the way our plan is built with the sales, with the core activity, we will cover in the fourth quarter rather with really just 30% year end occupancy. I wouldn't necessarily call it a high or a low target. I think it's a realistic target. You got to recognize that's economic occupancy at which point we'll begin realizing revenue. In all cases, the space we are leasing has to be designed and built out. All we have done right now is core and shell. So I think the answer to your question is to the extent we exceed that level and start to realize more income into 2009, it gets that much better.

Great, thank you.

Thank you, John.

Thank you. Your next question is from Michael Bilerman with Citi.

Thanks very much. Gerry, you talked about the COO role and making the decision at the time of the merger not to put someone into that role given your company and Prentiss didn't have one and that given Tom's other job opportunities, it sort of came to a head and it sounds like you've now employed a search firm and you're going to go out and get someone. Would you envision this person doing and sort of what roles and responsibilities would they fill other than what's being filled today and just walk me through what changes would occur?

Sure, I would be happy to. The -- I think at a core level, we're looking for someone to really take active engagement with all the field heads from leasing, operation, construction and reporting manner, and to really take the lead on it company-wide asset management programs and monitor all those different activities. Certainly someone who would chair our internal management committee, which is comprised of our senior executives that meets on a regular basis to kind of do the company to-do list so to speak, and then actively participate along with Howard and myself and the board, our capital allocation decisions really on the premise of additional brain power is good today, but I mean our focus really with the COO is to improve and accelerate the operational throughput we have, not necessarily that there was anything broken at this point, but from our standpoint, we've had some good support functions.

We had a great individual. George Johnson heads up, our Senior VP of Operations, heads up a number of different functions. The COO would be a much broader role in the company, really work as a partner with Howard and myself and the other senior executives in really assessing all the different components of the business. And our hope is that we'll be able to assess some very good candidates, look for some fresh ideas. I mean, our company's changed significantly in the last couple years, as has the marketplace. Howard came in a little bit more than a year ago, brought a fresh perspective and became a very effective contributor to the company. And I think we can all learn from the search process to see what talent is out there and see what additional value they can create for our management team and for our shareholder base.

What sort of timing are you looking at?

Well, the search is under way. So my guess is it's a three to six-month process and we'll see how well that plays out.

I was just trying to reconcile that. I think Howard, you made the comment that it wouldn't affect your G&A guidance. I think you made mention that your current run rate, 6.5 to 7. That would imply about 26 to $27 million of G&A -- I'm sort of just wondering if you bring in a senior executive at the most executive ranks of the company, why that, wouldn't that push that number closer to, the 30s?

Well, I think what we expect to see is a little bit lighter in the first half of the year, and creating an effect, a little bit of a cushion later on. We didn't get at that micro quarter by quarter what it's going to be and we'll probably end up having somewhere to half or less of the cost of this person in 2008, and plus or minus we may be off by $0.25 million to $0.5 million in the aggregate and I think we can absorb that.

Gerry, just a bigger picture question, when you lay out all the potential JVs or asset sales that are potentially on the plate, it totals almost 25% over $1 billion of assets from your portfolio. Very meaningful in size. How many of these are mutually exclusive from each other or if you're able to obtain the pricing that you go, the company would be much, much smaller. How do you sort of think about, if you were going to execute on these, where you put the capital, how much of it's just going to be debt paydown and reduced leverage from the low 50s down to low 40s, just sort of step back from it and how you're evaluating it.

Good question. I think, you know, the driving predicate behind some of these discussions, or initiatives is really to explore as many different options as we can, given where the marketplace is today. Now, there's certain things that we know for sure, that are priorities. We clearly, as I mentioned, have set it as a priority creating a venture structure to help mitigate the funding on the Cira South project, and that's an active, ongoing dialogue that again, has no real current dilution effect, and in fact, we think may have a very positive effect on our forward balance sheet commitments and creates a very good framework for us in what is -- which is -- in a price which is clearly our largest capital commitment. We clearly have concluded that we do not have a competitive position in Southern California and as a consequence of holding those assets leaves us even more susceptible to things we can't control. So that would be a clearer priority.

When we look at Northern California initiative, you know, that is us trying to be forward thinking in how we could effectively create a better return on our invested capital in that marketplace, through either a joint venture structure, a partial sale of some of our interests, but more trying to look ahead on how we create the right economic framework to have a very viable, positive, profitable enterprise in the marketplace that, while arguably has higher growth characteristics in some of the Mid-Atlantic marketplace is also one that from a pricing standpoint is very dear. And we'll have to see how that works through this entire process. Cira Center, again, I think we'll see what the pricing comes in on that, but that's clearly a very viable opportunity for us to generate some immediate liquidity, and either recharge the balance sheet or use that capital to look to expand our operation, to the extend we find good employment opportunities down in the metro DC area.

What do you do with the capital in the interim? Do you -- is there a certain debt that can be repaid, or are you just going to sit on the cash?

Michael, it's Howard. We really have minimal debt rolling in 2008. We had about $120 million outstanding on the lines, so we could move those dollars around. We will be spending money on the capital side through the year, the timing of the sales offset some of that. I mean even with the sales program and all the related initiatives, I don't see us as having excess cash and depending on size, we can certainly absorb a lot of any one of these if it generates cash. The related question to what degree a special dividend would be required depending on timing and everything else going on, and then looking ahead, to what we're doing all the time, 2009 begins to bring both some mortgage and debt maturities that we certainly would not be adverse to laying in some cash in advance of those, in case the markets were not there in a satisfactory fashion.

Right. The -- it was helpful on the breakout you gave on all the other income pieces. What's embedded in the other in the revenue section, the $6.1 million that you had in 2007, 5.5 in '06?

Nothing individually of any note that really jumps out as this needs to be handled separately or that merits any kind of explanation. So I mean individual transactions with tenants selling up some obligations, it's a whole variety of odd items. I don't think there was any one that was larger than a couple hundred thousand dollars, and that's why those tend to come. They are unpredictable, they happen with the portfolio of a couple hundred buildings, 2000 tenants and everything else we're doing, but it really is -- it would be inappropriate to point to any one and suggest it was -- in the following year.

But that's a pretty -- just looking at the quarterly breakdown, it's pretty recurring in that 1 to $2 million range. There should be no reason why that $6 million goes away, right?

The one that I will point to that is of note is we converted one building from I guess it was an operating lease to an owned property by virtue of actually determination transaction that we did in 2007, and that was the south point building. That will not be the same store, but different treatment. That lease structure was booked on that one line. That was about $1.1 million of the 5.5, so that clearly goes away. That goes into NOI, although not same store, and from there on down, there's really nothing of any size that jumps out.

I know you haven't provided the details, but if you just take the $3 million of lease terms you booked, you take the $5 million of this other income, $20 million of management fees, which is flat with last year, and that should be going up because of where you are with the JV at DRA and then maybe $2 million of interest income cutting it in half given lower rates, and some modest increase in JV income to get to $35 million. So I'm just trying to reconcile what would take you to the bottom end of that $30 million, but also given the fact that lease terms are $3 million of them are already booked, sounds like you'll probably get to the $38 million potentially.

I don't think we go below the 30 and I won't dispute the mathematical accuracy as to whether those items materialize that way. Our view going into 2008 is to paint a picture that's much more certain for investors and analysts and our board and internally and I think taking the straight and narrow path on many of these items is just the right way to go. To the extent we exceed them, that's great. We'll have that much more FFO, that much more income. Most of those items would of course be cash. It would provide that much better coverage. It certainly fits within the range, the $0.10 range we laid out. I can't tell you sitting here in February whether we're more likely to be at 30 or 38 or even above 38, which is certainly possible, but I don't think we'll be below 30.

And that's what's embedded in the high and low end of your guidance?

Not that individually, but any combination of all of these ranges, again, I don't think we're going to hit the high end of every one of the categories, low on costs, high on revenues, to push us through, so there's sort of a bell curve that arises out of all the different scenarios.

Right.

And produces this range.

My final question, Howard, is you talked about the fourth quarter being higher than the rest and you talked about $0.61 for the first quarter being boosted up by that $3 million lease term fee. You also talked about the interest capitalization stopping between August and December, where most of that, the developments are going to be 30% occupied by the end of the year. I would have thought that would have had some negative impact to the fourth quarter FFO as you have to take in the full capitalization of those assets, but earning an economic low yield, although that wouldn't have been very dilutive to fourth quarter and -- in the fourth quarter probably really doesn't start to impact fourth quarter as much as it would impact 2009, so I'm just trying to put all these things together and really understand it.

I -- I think you just answered the question. We are recognizing that increased cost on the interest side -- remembered that if 30% on average is leased, that only means we're going to have the interest expense hit us on the other 70. It does outweigh the income on the front piece, but there's a certain matching up there that takes place. And most importantly, the rest of our plan has a big ramp in the fourth quarter, combination of new leases, he replacements of some expirations and it all just combines. There's nothing unusual going on in the fourth quarter that will make it any different, other than those factors we outlined.

Okay. Thank you for your time.

Thank you.

Thank you. Your next question is from Chris Haley with Wachovia.

Good afternoon. Howard, you mentioned the planned expenditures for 2008 of $175 million, $75 million toward development, $25 million for redevelopment and then $75 million for leasing costs and building CapEx. Is that correct?

That's correct.

Okay, and within this $75 million of leasing CapEx, building CapEx, there's 40 to $50 million of maintenance CapEx, or revenue maintaining CapEx.

That's correct.

I look at your 2007 actual numbers for maintenance CapEx, that number was approximately 60.

$61 million, I think that's right.

So what are you attributing the decline to?

We, we're looking at a 94% lease portfolio. We have a reasonable assumption on renewals, first of all, which as we outlined incurred much lower costs -- effective at controlling capital otherwise. I mean we're just very heartened both by the trends from the second through the fourth quarters, so if you pick up from the fourth quarter, we did $4 million better roughly than in the second quarter. And if we just maintain the fourth quarter level, which I think we can do a little better than, that would translate to about 53, 54 and it's a little bit above our target and we certainly don't want to end up there, so I think our target of 45 to 50 based on what we see, based again on the leasing that's been executed year-to-date and the carryover from the fourth quarter, we're reasonably comfortable that we can bring that capital back down off the 2007 peak. That chips away about half of the dividend shortfall.

The amount of leasing that you're assuming would be my existing square footage plus 100 basis points of occupancy growth, not making any other adjustments, so in this 2008 year, you have approximately $2.9 million rolling on the consolidated portfolio so I would layer on a little bit more than that, maybe another I guess about -- so a little over 3, 3.25 million to lease plus the unconsolidated portfolio, so if I just make those calculations, I'm having a tough time getting to this 40 to $50 million maintenance number. Are you making any differences between first generation and second generation, or revenue maintaining and not revenue maintaining?

No, we're maintaining all of our practices and disclosure consistent with what we adopt at the beginning of the second quarter of this year. There's no change. Every lease transaction has been analyzed on a forward-looking basis for how it would be booked and that's the basis for these calculations. I'll be happy to give you better detail offline, but we should probably move on from--

All right. That's helpful. I would like to follow up. I have some thoughts on the credibility gap note mentioned, Gerry, early in the call. I do also think there's a performance gap issue and some of the things you noted early on are certainly opinions, and they're influenced by the departures of certain executives, but after covering your company for almost a dozen years, it's hard to see board members leave like this. It's certainly hard to see the turnover that has occurred with some of the executive partners you've had, and I look at the guidance that's being offered this year relative to past years and I look at 2008 performance in an FFO per share basis, actually being flat with where it was eight years ago. In fact, your cash flow per share, as we calculate it, is approximately 20 to 30% below where it was 8 to 9 years ago. And we look at this Prentiss transaction, which we're looking backwards and I'm glad to hear you're admitting there were some challenges and things that weren't executed, but this was supposed to be additive, provide growth, it wasn't.

I don't know whether Brandywine was sold a bill of goods by the Prentiss guys, who knows, but you guys made the underwriting. That certainly makes me question Brandywine's underwriting, but more clearly, we were sold a bill of goods and the facts remain from 1989 to 1999 through 2007, 2008, your compound average growth of cash flow per share is negative 3, and your company has actually grown the fastest of almost all the suburban office companies, so not only have you more than doubled the size of your asset base, you haven't even grown per share cash flow. And I go to Cira Center, a good deal, no growth in per share. Rubenstein, the portfolio, Radner, no growth in per share expected. Three quarters in a row of development deliveries being pushed out, and the balance sheet's now levered almost 60%.

And the decisions in the short-term on buying back stock at a time when the development dollars are going up certainly makes me want to question the decisions on the short-term, on the part of the management team and the board. So in view of these short-term decisions and long-term strategy questions, I ask, I can't help but inquire who is leading and guiding and watching this performance? This even excludes the fact or any reference to the stock and the performance, this is the only office company where today's price is below that of 10 years ago, 10 years ago. So what to do?

These two board -- my, my initial take is these two board seats are critical, that are now open and it's unfortunate to see those guys go earlier than they were scheduled to go, or even earlier than we would like to have seen them go. These two board seats are very critical and I think the board and management needs to take a serious look about who they should bring in. Regarding this capital plan in the short-term, I know you're providing only 2008 guidance, but I think you need to provide a more realistic two to three-year plan, which is clearly indicating that more capital needs be raised through dispositions and as you mentioned, moving out of some of the markets two years ago that you thought you were going to expand upon and now you're turning around and saying, well, those are not working out as what we had planned, so now we have a company that's much higher levered. We have an asset base that's $5 billion or 200% greater than where it was, zero growth over the last 10 years.

That's all I have to say. Thank you.

Thank you, Chris. We certainly recognize there's some challenges we have ahead of us. The Board, as I mentioned, is very focused on looking for some additional candidates and our objective in looking at, in laying out the 2008 plan is to, is to set that new path going forward. And I understand your observations and recognize where they are coming from.

Thank you. Your next question is from Mitch Germain from Banc of America Securities.

Good morning. That's a tough act to follow. Gerry, touching a demand a little, are you seeing it coming from, you know, from CBD to suburban, is there a certain tenant type that's been driving that demand that you spoke about in the fourth quarter?

That's actually been pretty much across the board. Certainly not a big movement between CBD and the suburban markets. There's been some movements, obviously, we were able to capture Lincoln Financial Group earlier in 2006, but there's been some movements of other tenants downtown in Philadelphia, as well as movements of tenants within the suburbs. And certainly, Bob, and George, I don't know if you guys can comment on what you've seen in your markets?

I think as it relates to your question specifically, CBD Philadelphia actually had a very good run. They've got 2 million square feet of net absorption here, just in the last year, most vacancies since 2001, so on a concurrent path, suburban markets in Philadelphia as well, actually, I've got 1.5 million square feet of positive absorption, so it's not one leaking to the other. In this case, both are doing quite well, especially historically. And particularly, the thirteen straight quarters of positive absorption in the suburban markets. So I think, overall, you're seeing, as Gerry mentioned, fairly stable job growth, and it's across the spectrum. It's education, health services professionals, business services, government in some cases, so it really has been a fairly wide spectrum of growth.

I think in Metro DC, we have actually seen people coming in from the CBD and going to Virginia in particular, lately. It hasn't really affected our portfolio so much, but I think it has the Crystal City market, and what's happened in Washington D.C. is the rents are very high and the operating costs are extremely high, especially property tax, and a lot of the associations in particular that don't have to be there are seeing a lot of savings moving across the river, but still being on a Metro stop. But we have actually had pretty good success filling spaces here, and as George said, a lot of it's from diverse industries, it really hasn't been driven by some of the factors that play historically in the DC market, like defense procurement, so I think we have been able to get some broad-based support.

Great, and just a quick bookkeeping question for Howard. Your management fees are not getting net against the expenses in coming up with your guidance, correct? Other income guidance?

No, no, we're looking at that category on a gross basis now, the 30 to 38, which includes management fees, on a gross basis, which ran about $20 million in 2007. To address an earlier question, we will see increased management fees from the DRA joint venture, clearly, but we also have, offsetting that, at least two medium-sized contracts that were expiring, in line with expectations, so there is a mix, and that might explain why you're not seeing as much of a jump overall as you might have expected. There is a little bit of a remixing going on.

All right. Thanks guys.

Thank you. (OPERATOR INSTRUCTIONS). Your next question is from Jordan Sadler with KeyBanc Capital Markets.

Sorry, guys, my question was answered, thanks.

Thank you. There are no further questions. I would like to hand the floor to management for any closing remarks.

Great. Jackie, thank you very much. Thank you all for participating in the call, and we look forward to our next quarterly update. Thank you.

Thank you. This does conclude today's Brandywine Realty Trust fourth quarter earnings conference call. You may now disconnect.