Brandywine Realty Trust (BDN) 2008 Q2 法說會逐字稿

Good morning. My name is Else and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Brandywine Realty Trust second quarter earnings conference call.

(OPERATOR INSTRUCTIONS) Thank you.

It is now my pleasure to turn the floor over to your host, Mr. Gerry Sweeney, President and CEO. Sir, you may begin.

Else, thank you very much.

Good morning, everyone, and thank you for joining us for our second quarter 2008 earnings call. Participating on the call today are Howard Sipzner, our Executive VP and Chief Financial Officer, Bob Wiberg and George Sowa, two Executive Vice Presidents, George Johnstone, our Senior Vice President of Operations, and Gabe Mainardi, our Vice President of Corporate Accounting.

Before we begin I'd like to remind everyone that certain information discussed during the call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved.

For further information on facts that could impact our anticipated results, please reference our press release as well as our most recently filed annual and quarterly reports on file with the SEC.

On our last call we identified several key near-term priorities. Those priorities were continued operational improvement, advancing our development pipeline leasing, and executing our balance sheet program.

Let's start off, though, with a couple of overriding observations. First, we made significant progress in reducing tenant improvement capital costs. Our year-over-year CAD ratio has improved to 88% versus 124% last year at this time. Our year-to-date CAD is at $1 per share versus $0.71 per share in the first six months of 2007, so an increase of about 40%. We believe this trend line is driven by more tenants opting for shorter-term lease extensions with the attendant lower capital expenditure requirements, and I also think in general the entire competitive set has become much more focused on capital spending.

There's a clear recognition of not necessarily universal acceptance by tenants of a much more difficult environment for landlords to contribute excess capital unless accompanied by much longer lease terms and strong underlying economics. In addition, many private competitors face issues related to investing significant capital for lease transactions due to their financing constraints.

The levels we're able to put forth often fall short of covering all tenant move and relocation costs. The tenants don't have the desire to invest any additional capital, so in many situations they stay put or reengineer their plans. While the economic picture is far from certain, we don't really see events on the near-term horizon to change these drivers.

Secondly, while making progress we continue to battle headwinds to improve our same-store portfolio reporting metric. Several factors impacting this metric are we have traditionally had good occupancy levels dating back several years, ranging between 92% and 94%, so our same store has not really had the benefit of large occupancy gains.

Occupancy levels over the last couple quarters have been impacted by a slightly negative absorption, coupled with rental rate increases that in many cases only slightly exceeded our base year resets. Our strategy to improve this metric is to continue to absorb vacant space, keep our tenant retention levels high, and effectively manage our controllable expenses.

For the balance of the year we expect fairly flat occupancies so we'll expect to close out the year between 92% and 93%, falling a bit short of our stretch goal to improve occupancy by 100 basis points.

However, as we look at our portfolio, we remain well-positioned for continued economic pressure. Our tenant retention rate remains in the mid-70s and while I mentioned we did have some negative absorption during the quarter, the actual results were much better than we had originally planned.

And while it's early, our window into 2009 shows a continued bias by our tenants to renew. Further, our capital cost trend line has significantly improved. We've had good activity levels through our portfolio and our forward leasing statistic of 94.2% remains over 100 basis points in excess of our actual 92.9% occupancy which is a good data point for continued stability.

Finally, our rent spreads, while not quite where we'd like them to be, continue to show trend line improvement.

We'll spend time later talking about our investment strategy, but generally overall volume in the marketplace is down considerably. It's hard to make a firm read on where pricing is due to this low velocity, but the increasing availability of higher-yielding non-hard asset options for investors and debt market challenges has impacted pricing, particularly on larger size transactions.

We would expect this to continue until equity investors accelerate investments into lower levered acquisitions and stability returns to the debt market. Underwriting is clearly more cautious, and IRR targets are increasing. As I will discuss later, though, we're still seeing good velocity on smaller-sized transactions.

In looking at the general market, there is no question that economic uncertainty continues to impact leasing velocity. Market conditions remain stable, though, and with the exception of suburban Maryland, there is very little new construction coming online in any of our markets.

Generally, though, leasing activity and absorption levels are below that of last year. However, year-to-date absorption is better in the second quarter of '08 than in the second quarter of '07 in southern New Jersey, suburban Delaware, suburban Pennsylvania and in Austin, while year-on-year absorption levels are down in Richmond, northern Virginia and suburban Maryland.

Certainly, given the overall economic climate, this is not surprising. But also we've seen year-to-date reinforces the lack of clarity caused by this economic uncertainty.

Certain points to note. From a market statistic standpoint, most of our market saw slight increases in year-on-year vacancy rates. In the Pennsylvania suburbs, however, vacancy rates trended down about 200 basis points and in southern New Jersey they trended down about 100 basis points. This was also the case for Philadelphia CBD and Richmond, Virginia.

In our four major markets, we are out-performing market occupancy levels by between 310 to 900 basis points, which we think is a real tribute to both the quality of our portfolio and the skill and depth of our leasing and management teams.

From an activity standpoint, this quarter we had total leasing activity of 596,000 square feet. This compares to overall leasing activity of 1.2 million square feet in the first quarter and 976,000 square feet in the second quarter of 2007.

While this quarterly stat is clearly a function of specific deals, our actual activity this quarter is down from the prior two quarters. During the second quarter, however, tenant showings increased significantly over the first quarter of 2008.

During the second quarter we had 387 showings, which is a 17% improvement over our prior quarter, so tenant traction appears to be solid. However, our conversion rate is still challenging and the length of time proposals that are outstanding has increased.

So these three statistics -- overall market activity, Brandywine's actual leasing activity, and actual tenant showings in our portfolio -- all indicate and illustrate the market dilemma. A lot of tenants are looking but not a lot of decisions are being made and this uncertainty is being offset by the increased likelihood of tenants wanting to stay, and in most markets a big drop-off in supply.

From a forward income standpoint, as of the end of the second quarter we have already achieved about 92% of the spec revenue we have forecast for the year, with 95% of third quarter revenue and 89% of fourth quarter revenue already executed. In total, we only have about $2.9 million of speculative rents yet to be achieved for the balance of the year.

Lease rates are in line with expectations. Free rent and extraordinary concessions are increasingly a minor issue. In fact, for leases executed year to date only about 14% of our leases contain any elements of free rent.

Next topic is our development projects. Since our last call, several points of interest. Our prospect pipeline for development projects stands at 28 prospects with total square footage of 625,000 square feet. This compares to our leasing pipeline in the first quarter of '08 of 18 prospects and 501,000 square feet.

And in addition to a stronger prospect pipeline, we made significant actual progress since the last call. The pending sale of the 2100 Franklin project in Oakland as well as the recently announced 195,000 square foot lease of our South Lakes project in northern Virginia moves our overall development pipeline to about 75% leased. These two events reduced the amount of spec space in our ground-up developments by almost 400,000 square feet.

On page 30 of the supplemental package, for our development projects, with the exception of South Lakes, we have kept the cost and stabilization dates constant. Also, while we certainly hope to exceed as we did with the South Lakes development, we have used a fourth quarter 2009 construct as the stabilization date for all projects.

These dates were obviously subject to change based upon actual leasing activity as are costs based upon the particulars of actually executed leases.

Looking at South Lakes, upon full lease-up we have a stabilized GAAP return of 7.6% with an initial cash return of 6.6% and an average cash return over the lease term of 7.5%. Those numbers all exclude any of our management fee income.

The leases for a 10-year term commencing in August of 2009, our overall investment base will be about $313 per square foot, which compares favorably to our estimated replacement cost number of $350 per square foot. On our remaining development projects we were projecting initial development yields between 7.5% to 9% on a GAAP basis and 7% to 8.5% on a cash basis.

Continuing to look at page 30 for a moment, on the IRS transaction, which is identified as post office, we reduced our costs by $10 million to $255 million due to some value engineering and the finalization of our guaranteed maximum price.

Also, on the garage, the IRS has agreed to lease 367 more spaces and we've also made further design progress on both the actual number of spaces and the overall project design, and we'd expect to have those costs and designs finalized in the next couple quarters.

Another key event during the quarter which affects our Cira South project is not on the schedule but was the passage of legislation to extend the tax abatement period on the site for an additional seven years from its existing 2018 expiration date to 2025.

This legislation was passed by the state legislature and city council, and is operative if we bring 500 new jobs into the city. This is a significant positive for our development efforts and creates a very strong marketing platform for us to continue establishing University City as a preferred business destination along the Northeast Corridor.

So all in all, the second quarter was a good one. We're particularly pleased with the capital cost numbers, tenant showings throughout our portfolio, and the progress on our development pipeline.

At this point I'll turn the conversation over to Howard.

Thank you, Gerry.

Good to be here on our second quarter call. Couple of accounting-level observations. As most of you know, last year on December 19th we closed the sale of 29 properties to a joint venture in which we maintain a continuing 20% interest. For periods through December 31st, 2007, in our supplemental package and other disclosures, the income of these properties is included in operations and not in discontinued operations.

These properties, however, are excluded from the current three and six-month, same-store calculations and are accounted for under the equity method from December 19th forward.

Secondly, on June 30th, 2008, we announced the pending sale of five properties in Oakland, California, and now account for them as held for sale. These properties have been removed from all the associated metrics and disclosures in the supplemental package with the exception of certain leasing statistics on pages 25 to 26.

And lastly, during the second quarter review, we identified the need to revise prior period financial statements by immaterial amounts due to the form of tax withholding and settlement in connection with prior restricted stock grants. As such, you will notice that the prior five periods in the supplemental package for the income statement, FFO and other schedules have slightly different amounts than you may have seen in prior periods.

We apologize for any confusion but on the basis of our review have concluded, with our accounting firm, that this is the appropriate course of action.

And now some of the quarter highlights. In the second quarter, as Gerry mentioned, FFO totaled $59 million, excluding the $6.85 million impairment charge, versus a similar $59 million in the second quarter of 2007. And FFO per diluted share was $0.65 in both periods.

A few observations on the components of our second quarter performance. We had stable property results on a sequential basis with respect to revenues and expenses, notwithstanding a slight downtick in occupancy. We had reasonably light termination fees of $892,000 and other income of $815,000. We had a little bit over $1.66 million of JV income -- higher than anticipated due to our zero basis in the DRA joint venture investment, allowing full income recognition of any cash receipts.

We had a $1 million gain on the previously disclosed extinguishment of an additional $7 million of our exchangeable notes. Our G&A ran slightly below our expected run rate of 6.25 to $6.5 million and our interest expense was in line with our expectations and benefited from low floating rates.

Our FFO payout ratio, excluding the impairment charge, is 67.7% on a $0.44 dividend -- below our 70% target.

Let's highlight a few other income statement line items. On a same-store basis, cash rents increased $1.5 million while non-cash rent items decreased by roughly the same, extending our shift to a more favorable cash rental income construct. Recoveries increased $1.5 million, substantially matching the $1.7 million increase in expenses.

Termination and other revenue decreased by $0.6 million, resulting in an increase in same-store NOI of over $680,000 or 0.9% on a cash basis. All of these metrics were in line with our expectations.

In terms of our second quarter FFO results, it's necessary to break down the results versus consensus into two buckets, as eight of our analysts who report FFO did so without impairment, and in that case we beat their $0.61 consensus by $0.04 per share. For five analysts who reported FFO net of impairment, we beat their $0.52 consensus by $0.05 per share. And the different treatment by the analysts might possibly be causing some confusion.

In terms of other operating metrics, EBITDA coverage ratios were 2.7 for interest, 2.5 for debt service, and 2.4 for fixed charges -- all at or above our recent high levels and indicative of our desire to maintain a strong investment-grade rating.

Similarly, our NOI margin, recovery margin and EBITDA margin were all at high or near-high levels.

Our 36.7 recovery margin in the second quarter is a bit above recent results, though our year-to-date figure of 35% is closer to our 34% full year expectation.

And as Gerry mentioned, our CAD figures, our cash available for distribution, came in quite strong at $0.48 per share. Where available, we have updated historical CAD figures to reflect more recent information, particularly as received from unconsolidated joint ventures, and we're pleased to report a 91.7% CAD payout ratio for the quarter.

The $9.3 million of revenue-maintaining capital costs in the quarter is the clear driver of this strong dividend coverage performance, along with significantly lower non-cash straight line rental income. Year-to-date our CAD totals $1 per share, resulting in an 88% CAD payout ratio for the $0.88 in dividends paid.

Besides providing a number within our 85% to 90% target for common dividend coverage, it also results in a very easy to calculate CAD ratio.

Accounts receivables. At June 30th, we had $14.2 million of operating receivables and a reserve or allowance of $4.6 million. This 32% level represents a slight increase from prior periods and provides a greater cushion against potential rental income write-offs. We feel very comfortable at this point in time about our tenant credit profile.

We are maintaining our 2008 FFO per-share guidance of $2.40 to $2.50, excluding the recently announced impairment charge, or $2.32 to $2.42 after impairment, and are leaving most of our assumptions from our last discussion unchanged. This is consistent with the guidance we put forth when we announced our Oakland sale, and assumes that the sale closes on or about August 31st, 2008.

To recap, we are assuming no 2008 acquisitions, continuing to look for about $150 million of individual sales activity at a 7.5% to 8% blended GAAP cap rate. Three of those have closed, providing about $55 million of proceeds at a 7.2% trailing GAAP cap rate. We have several one-off sales in the market which we would look to in reaching the $150 million target.

We expect to fund, between development and redevelopment activity, revenue-maintaining CapEx, and those expenditures related to new primary leasing of just under $100 million between now and year end, keeping our 2008 total below the $200 million target we outlined earlier this year.

On the income side, we are becoming a little bit more cautious on our developments and redevelopments and expecting little incremental income from either of those categories for the balance of 2008. Achieving such income would be one of the drivers in hitting the higher levels of our guidance range.

On the same-store front, we continue to expect between 0% and 1% GAAP same-store NOI growth, having done 0.7% year-to-date and cash same-store NOI growth in a range of 2% to 2.5%, with 3.4% year-to-date.

We are moderating our occupancy expectations and believe it will be in the 92% level compared to 92.9% at 6-30-08, recognizing some of the challenges in the primary leasing market.

We continue to expect additional declines and straight-line rent, and in FAS 141 income, creating a better cash construct in our same-store results.

We see all other income continuing to be in the $30 million to $38 million range, incorporating termination fees, gross management income, including expense reimbursements, other rental items, interest income, JV income and any other non-recurring items, such as the gain on the convertible buy-back.

Year-to-date, we have done $24 million amongst these categories, though only $17 million, excluding the $4.3 million convertible gain and the $3 million large individual term fee we recognized in Q1.

We continue to see G&A running at 6.25 to $6.5 million, and for the full year expect we will now cover our dividend with about $1.75 of CAD, reflecting a very strong first half of the year.

We're not prepared to comment on 2009 guidance at this time but expect to do so on our third quarter call.

In terms of balance sheet, we're very pleased that we continue to reduce our debt-to-gross real estate cost, bringing it in at 52.4% for this current period, in line with our goal to move it to 50% or lower. It's down from its peak of 54.3% and represents a 245 absolute reduction in debt over the past few quarters.

We continue to maintain very low levels of floating rate debt and secured debt, strengthening our credit profile.

Lastly, our $600 million line was $163 million drawn on June 30th, 2008, giving us aggregate availability of over $440 million from this facility and resulting in no need to do any financing in 2008 and well into 2009, regardless of the success of our incremental sales activities.

And now I'll turn it back to Gerry.

Thanks, Howard.

We are operating our business plan around three key themes. Those themes -- and we chatted about this on the last call -- are one, improved operational performance; two was balance sheet strengthening, and thirdly, portfolio alignment.

On the first theme, operational execution, we continue to focus on meeting our leasing projections, reemphasizing strong cost controls, and maintaining strict discipline on our capital allocation decisions.

The objectives are covering our dividend, which we have done successfully, as Howard pointed out, for the last two quarters, retaining high stable occupancies, and continuing to improve our margins.

In this type of climate, that's clearly very challenging to do, but it's a key priority and we remain very focused on our portfolio alignment strategy to better position and improve our long-term sustainable growth rates.

Our expense control programs are also yielding some good results. An example of that is a recent janitorial re-bid saved about $0.08 a square foot throughout large portions of our portfolio, and so we are aggressively going back to all of our vendors and using our market position to negotiate better terms on all of our major contracts. George can certainly outline those in more detail during the Q&A session.

Well, it's a bit early to have a full look at 2009. We are very much focused on our 2009 renewal profile. During 2009 we have 3.1 million square feet or 11.5% of our portfolio rolling. That number is already net of the 270,000 square feet of 2009 expirations that we have already renewed. So using that 3.1 million square feet as the base, at the current time we have about 1.4 million or 46% that is pending or we deem to be highly likely renewals, with about 1.2 million square feet or 38% simply being too early to call.

We have about 15% or 469,000 square feet of tenants who have indicated that they will most likely be leaving, so overall while certainly not definitive, this provides a good perspective on current thinking within our tenant base.

The second theme is balance sheet strengthening. Howard touched on some key statistics there, and as we've indicated on previous calls we continue to have strong coverages, good capacity, but our current level of leverage is above our targeted historic run rate, and generating more capacity is our clear priority.

The northern California transaction will generate over $400 million of both cash and debt relief, and our objective, even with this sale, is to continue to reduce debt levels and improve our investment grade metrics.

Tactics to achieve this are very disciplined forward capital deployment executing on our asset sales as both a strategic and as a financial seller, and executing on co-investment opportunities.

Two of our balance sheet initiatives relate to our University City projects. On the first, the main post office and IRS transaction, our objective remains creating a co-investment structure.

Primary goals there are to capture value, reduce University City exposure, and offset part of our forward funding obligations. We're in the process of working through tax and legal structuring issues with our targeted potential partner, who is taking a majority stake in the project.

This event would be non-dilutive, and our hope is to get this transaction consummated prior to the end of the year. You may recall that most of the funding for this project occurs in 2009 and in 2010.

We are also in the market for construction financing and would expect to finance this project via third party construction vehicle versus using our line of credit.

Our joint venture efforts on the existing Cira project have clearly been buffeted by debt market conditions. After a full marketing effort we selected a partner and we're underway with significant due diligence. Pricing was very much in line with our expectations, and we consider it to be very attractive.

Making this venture work requires debt financing on the level of $175 million to $200 million. Given the disruption in both the availability and the pricing of secured financing, particularly at these dollar levels, this effort has been moving at a much slower pace.

Ultimately, our ability to proceed on this front will be a function of achieving the right debt structure, but in the interim, the property continues to be a solid and increasing cash flow contributor to the Company's bottom line.

As a counterpoint, though, we're seeing very good traction at the single small asset pricing level and have a number of such assets under contract or letter of intent.

As Howard touched on, our original business plan contemplated about $155 million of sale transactions. We have closed on $55 million of those year-to-date at an average GAAP cap rate of 7.2%, and a cash cap rate of 6.75%.

Beyond that, we currently have $59 million under contract and $54 million under letter of intent, cap rates ranging from 6.2% to 8.1%. We also have approximately another $100 million of properties in the market.

Given this market dynamic and the increasingly attractive alternative to the near-term larger asset ventures is a continuation of our aggressive program to sell slower growth, older capital-consuming assets that will generate both additional capacity but more importantly improve our longer-term growth profile.

And that leads to our third key theme, which is portfolio alignment. The objective is clearly to deploy capital consistent with the objective of generating better growth long term.

Implicit in this objective is an asset sales program that is both growth and geographically centric. It also entails deploying capital at the highest possible rates of return, and in those markets where we believe we can generate better than core levels of return on investment.

Executing on this theme will also create capacity, improve our portfolio quality and increase our going-forward same-store performance.

Several weeks ago we announced the $412 million sale of our Oakland portfolio. From our standpoint the pricing was acceptable. The sale is expected to close, as Howard mentioned, in the next 30 to 45 days, and achieving this sale was a key component of our 2008 investment strategy.

The execution of each of these initiatives will result in a stronger balance sheet and a more competitive inventory. While these transactions are clearly subject to the uncertainty in the investment market, we do remain encouraged with the level of interest and look forward to announcing definitive results in the near future.

So in conclusion, the second quarter was solid. We've taken an aggressive approach to our existing portfolio by getting way ahead of our speculative revenue, and as discussed have about 92% of that already committed. And as you view the company over the next couple quarters, the following factors are what we're continually focused on.

Operational additional leasing is key. On the capital front we've had two very strong quarters. Year-to-date retention number is good at 75% and the trend line looks positive, and we hope to continue to meet headwinds in balancing forward leasing activity and improving same-store revenue, but as Howard touched on the core is solid and positioned for good stability.

The development pipeline, we made good progress in the last 30 days but we still have more to do. We have strong prospects on both Metroplex, South Lakes, and 1200 Lenox, and are working every avenue to get these transactions executed and those properties stabilized at the earliest opportunity.

On the balance sheet front we've made excellent progress in the last two months on accelerating our initiatives and we expect that trend to continue with the consummation of some of the pending transactions.

So when we look at the third quarter our hope is to have continued operational improvement, maintain our occupancies and deliver a good CAD ratio, to make further progress in our development and redevelopment pipeline, and to continue execution on our balance sheet program.

We are making significant progress on a different topic on our board search. We have completed an overall market search for high quality candidates and the board has interviewed a short list of candidates. Bringing on a high-quality addition to our Company's board remains a priority of the board, and we'd expect to have an announcement in the near future.

That concludes our remarks, so at this time we will open the floor to questions. We would ask that in the interest of time and to give everyone a chance to get their questions asked you limit yourself to one question and a follow-up.

Thank you very much.

Thank you.

The floor is now open for questions. (Operator instructions.)

Our first question is coming from Anthony Paolone with J.P. Morgan. Please go ahead.

Hi, this is Sarah King here for Tony. I just had a quick question for you guys.

Gerry, can you give us your thoughts on BlackRock's reported interest in moving to Philly, and how Brandywine positions for something like that?

I'm sorry, the last part of your question cut out -- I'm sorry.

Oh, I'm sorry. It's regarding BlackRock's reported interest in moving to Philly, and how Brandywine positions for something like that.

Sure, I'd be happy to. Look, there's clearly been reports in the press that BlackRock is looking for a new location to house between 1,000 and 1,500 employees, which would translate to between 500,000 to 600,000 square feet.

They are clearly involved in a multi-state evaluation. That process is progressing pretty quickly from their standpoint. BlackRock, who is a current tenant at Cira One, identified Cira as a short-listed location. The tax incentive program I referred to earlier, including the recent extension of the KOIZ benefits through 2025 put Philadelphia and Pennsylvania in a very competitive position.

We are in discussions with BlackRock, but this is clearly the type of climate that both parties are mindful the need for solid economics in the deal, a clearly identified financial structure and flexibility against any future near-term cost fluctuations.

So all of these issues are really front and center in our discussions with BlackRock. In the meantime, I think BlackRock continues to fully vet through their different locational alternatives, and I do think that situation will clarify in the next quarter or two.

Okay, thank you very much.

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

Good morning, this is David Schamus here with Michael. Regarding the Richmond market, it looks like you have about 27% of that rolling next year. Can you just provide a little bit of color on any plans to renew or release that space?

Sure, be happy to. George, would you like to cover that?

Sure. In Richmond we've got I guess at this point 13% of the rolling square footage already executed. In that likely to renew category we've got 20%. In the kind of too early to call category is where the bulk of it sits right now at 62%, and only 4% of the rolling square footage has actually indicated that they're likely to leave.

Okay, thank you.

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

Thanks, good morning.

Good morning.

Could you guys address the dividend and just sort of what the plan is on it at this point? I know on previous calls you've said the plan is to maintain it, and from a CAD perspective it appears once again this quarter you are able to pay it out from free cash flow.

But on a prospective basis, given sort of the upcoming transaction in Oakland, which is likely -- seems to be dilutive, based on what you've reported so far, and your prospects for occupancy and the role for next year, it seems like we've got a challenging environment ahead of us and it doesn't seem like in the near term you guys are going to be able to grow into the current dividend on a recurring basis.

So can you maybe just talk about what the thought process is on sort of addressing it over the longer term?

Sure, I'd be happy to. Look, there's no question that 2008's off to a very good start relative to cash flow and its impact on our dividend coverage. You may recall from our call earlier this year we were projecting to be in a position of being -- hopefully covering the dividend by the end of 2008. So we're clearly pleased with the capital trends we're seeing. But I guess looking forward, our dividend policy will be determined by really several key factors.

I mean, first there's going to be the pace and success of our sales activity and its resultant impact on both FFO and CAD. So you're right in the northern California transaction has a level of FFO dilution. The level of CAD dilution relating to that sale is much less.

So I think the composition of our sales activity and its impact on how we project our forward FFO and CAD will be a driver.

I think secondarily, the level of capacity we generate from these sales and other financing activities, as well as our overall balance sheet strengthening program, will be a factor.

I think third as we go forward into the 2009 budget process the projected capital run rate that comes out of that process, as well as what we view as the continued burn-off of those straight-line rents and FAS 141 adjustments will be a contributing factor. And the lease-up pace and I think the FFO contributions coming from our development and redevelopment projects in '09 and '10 will also be a factor.

And then I think finally, as we look at the level of success we have in the overall financing strategy for Cira South and the IRS project will also be a factor into the overall balance sheet positioning.

As we've clearly discussed, our goal is to stabilize our FFO payout ratio around 70%, which we've been doing, and to be able to demonstrate a steady path to about an 85% CAD payout ratio.

So I think all of these items will achieve a much higher level of clarity in the next couple of quarters, at which point the board can evaluate our '09 policy. In the meantime, I think we're pleased with the capital trend lines we've seen, but with some of the moving pieces we have in place from an investment perspective, we're going to have to see how those pieces fall into place over the next few months to get a more clear picture on both '09 and '10.

And as a follow up, you've clearly taken a small impairment on the Oakland portfolio, but any estimate on the expected gains to be realized in total from the assets that are under contract, or LOI? As well as anything else that might be sold this year?

Yes, we don't comment on specific future transactions. The sales that will allow us to reach our target for the year, Jordan, come from a bucket of different transactions. So until we see which ones actually progress we wouldn't know what that would be.

But the ones that are under contract, are they in the black?

Yes, yes. I think the issue as we look at where we are from an investment perspective, if you really go back a couple of years, go back to 2006, excluding the volume of sales we have related to the Dallas portfolio, they were essentially recorded equal to their basis.

We've sold about $408 million of properties and generated an aggregate gain of about $83 million. So a pretty good return on the assets we've sold. Additionally, when you take a look at the sales we've consummated this year so far, including this recent sale of a property in Bucks County, we had a $28 million sale that generated a gain of $13.4 million with $56 million of year-to-date sales that have generated gains of $21.4 million.

So as we look at it, we have a pretty good track record of selling property that gains. Certainly Oakland, after that transaction closes we can certainly share some additional thoughts on why we though the pricing levels we achieved there were the right decision for the Company.

That's helpful. Hey, Howard, on a housekeeping item, the cash you get from the Oakland sale, what are you baking into the guidance in terms of reinvestment? Are you assuming that's on the balance sheet, or do you pay off the unsecured that comes due in December? What's sort of happening?

A combination of both, Jordan. Assuming it closes late August, early September, we'll pay the line down to a zero balance. We'll have an amount of cash on the books and that will go substantially towards the $113 million note coming due in December, leaving us with a small expected line balance at year end.

Thank you.

Thank you. Our next question is coming from Dave Rodgers with RBC Capital Markets. Please go ahead.

Hey, good morning, guys. Gerry, could you give us a little detail on the tenant profiles that you reflected in your comments regarding showings being up so strong second quarter over first? Was there a particular geography or tenant base that would be standing out in those numbers?

George?

Yes, I think the composition of that pipeline is pretty evenly dispersed. We've got approximately 90,000 square feet of prospects in the Metroplex building that really kind of run the gamut of types of companies looking at space. I think when you look at a 1200 Lenox, we've got about 220,000 square feet of prospects there. Several are kind of in the financial arena. At South Lake we've got just a few smaller prospects looking at the balance of the space that Time Warner has not taken, and then down at the Park in Austin we've got 290,000 square feet and again, really kind of a mixed bag of prospects.

So not one industry kind of dominating the pipeline profile.

Okay, thank you. Now on the asset builds that you detailed, more qualitatively, can you talk about maybe generally the asset locations, the types of maybe assumed financing, who the buyers are, those types of details around those transactions?

Yes, Dave, this is Howard. Generally, the assets year-to-date that have sold well have been single tenant or well leased, very visible income streams, easy ability to finance, generally smaller size. So that's been thematically true of the ones we've sold.

The ones we have under contract exhibit many of the same characteristics. In certain instances, users are also looking at buying buildings, sometimes with quite a bit of space available to satisfy their occupancy needs.

So it's very focused investment strategy, it's got a high degree of predictability to the buyer. When we evaluate those kinds of properties for sale, we're looking at regional considerations, operational costs, and we're also making our own assessment as to the future building and tenant capital we ultimately might spend as we try to move the portfolio to a more cash-like structure.

With activity up, would you assume accelerating more maybe into early 2009? Is there a larger number of assets in that bucket that you could move?

We are continually evaluating every asset in the portfolio for possible sale. We will continue to use an active sales program to accomplish some of the objectives Gerry laid out, and many of the efforts that are underway in 2008 will in fact carry over into 2009.

And I think, Dave, to add on to Howard's commentary, certainly one of the viable avenues that we're looking at here are either the reinvigoration or creation of co-investment vehicles, similar to what we have with several institutions where we do a partial sale of the assets, mitigate our gross investment base, generate a fee income stream and also reduce the capital obligation we have on that portfolio going forward.

So as we go through a very quantitative and qualitative exercises on each of the assets, we really are focused on where we think NOI growth's going to be out of that asset over the next five years, what type of value we're going to be creating through each dollar of additional capital we invest in that property, what its relative CAD contribution is going to be over the next five years in terms of is that going to be growing at a pace that we like or is that going to have a level of either tenant-specific situations or a rollover profile that will never quite be getting head of the curve?

So one of the great opportunities I think we have in our portfolio is to continue to mine those in-house opportunities with the objective of generating better CAD growth through our portfolio, frankly selling off some property that may not have the growth characteristics we're looking for but that may provide a current buyer with a level of stability or upside that they might be able to more effectively mine than us.

But overall the objective with every single asset decision is evaluating how that piece of property fits into both our regional landscape in terms of customer retention and attracting prospects, but also what it does to our growth profile for that region with or without that asset.

Thank you.

Thank you. Our next question is coming from Jamie Feldman with UBS. Please go ahead.

Can you talk a little bit about how tenants are behaving this quarter compared to last quarter (inaudible).

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

I'm sorry, I'm on. Can you talk a little bit about how tenants are behaving this quarter versus last quarter, in terms of wanting lower rent, wanting higher GIs, wanting more free rents? Just kind of what the leasing environment feels like?

George, you want to take care of that?

Sure. I think in the DC metro area we're seeing analytically somewhat the same scenario we've seen over the past six months in terms of actual deals being completed. I think there's more pressure certainly on the TI side. I think the buildings that are new are going to be generating higher TI amounts and tenants who are looking at those are expecting that.

But we haven't really seen a notable decline in the effective rates to date on the transactions we've completed this year.

I think Gerry touched on the bias toward trying to go shorter-term, more flexibility, but that's a perfect environment for us the way we're structured because we don't have a lot of secured debt on our properties. And so there is a bias towards staying put but maintaining flexibility, so it actually does play well into the marketing, how we market our properties.

And to just touch a little bit on some of that tenant demand question, too, we are seeing some demand being generated by the medical sector, and particularly some of the engineering firms now, be it either defense, energy, or infrastructure. So it seems like they've actually been on the growth mode right now.

Okay. And then just in terms of the mood of tenants, in terms of how they're feeling about the economy and their growth prospects, do they feel like it's getting worse, getting better, stable?

Well, I think the mood is cautious, Jamie. One of the things we see in a lot of spaces when we walk them is spaces are full. Tenants are probably using them a bit more intensively than they used to. That ultimately is a good sign, because when we come out of this period there'll be a desire to do some expansions.

We'll have to retain our tenants but also capture some of that activity. We don't see an uptick in sublease space. That's a good early indicator of tenant difficulty. It just hasn't been there. We don't see an uptick in any receivable activity, other than the odd individual tenant situation, there's nothing unusual about the credit profile right now.

So it feels to us like the noise out there, the tone you read about, is much worse than the actual events on the ground. And if the events on the ground continue as they are, relatively stable, we'll be fine.

All right, thank you.

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

Great, Else, thank you very much.

I thank all of you for joining us for this call. We look forward to giving you a further update on the Company's activity in the next quarter. Thank you very much.

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