Brandywine Realty Trust (BDN) 2008 Q3 法說會逐字稿

Good morning. My name is Amanda and I will be your conference operator today. At this time I would like to welcome everyone to the Brandywine Realty Trust third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator instructions).

I would now like to turn the call over to Gerry Sweeney. Please go ahead sir.

Amanda, thank you very much and good morning everyone and thank you for joining us for our third quarter 2008 earnings call. Participating on today's call with me are Howard Sipzner, our Executive Vice President and Chief Financial Officer; Bob Wiberg and George Sowa, two of our Executive Vice Presidents; George Johnstone, 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 our 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 assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports filed with the SEC.

There's no question the last 60 days have been unprecedented on a variety of fronts. These circumstances impacted every company, including ours, and have certainly been a factor as we formulated our 2009 and 2010 business and capital plans. Keep in mind that in this environment our primary focus remains balance sheet management, liquidity enhancement and the efficient operation of our portfolio.

Our third quarter results reflect solid performance in our core portfolio, the ongoing lease-up of our development projects and prudent balance sheet management. The results of these activities, together with the sale of a five-property office portfolio in Oakland, CA, and an office building sale in Richmond, VA, put us in a very strong liquidity position going into 2009. As a result, we've increased our full year FFO guidance for 2008 to be in the $2.39 to $2.43 per share range and provided 2009 guidance range of $2.17 to $2.27 per share. Howard will discuss the assumptions driving our guidance in more detail.

During the quarter, we made good progress on a number of our key near-term priorities as we've outlined in our last two earnings calls. Those priorities were continued operational improvement, advancing our development pipeline leasing and executing on our balance sheet program. From an operational standpoint, we continued to reduce tenant improvement costs. Our blended cost per square foot for the quarter also came in at a very good number at $1.14 per square foot. And our overall capital costs were less than 10% of GAAP rents, so well within our operating guidelines.

More importantly, our year-over-year CAD ratio has improved to 91% versus 120% in 2007 and our 2008 year-to-date CAD is $1.45 per share versus $1.10 per share in the first nine months of 2007, or an increase of about 30%.

During the quarter we showed better mark-to-market on renewal leases than we have in the previous eight quarters. Our GAAP renewal rents are up 10%, with cash renewal rents up almost 3%. GAAP rental rate growth on new leases was also up about 3.6% but slightly negative on a cash basis. We had fairly active leasing during the quarter of a total volume of about 670,000 square feet compared to 595,000 square feet in the second quarter. However reflecting continued tough market conditions, these numbers are down from our activity levels in the first quarter of 2008 and the third and fourth quarters of 2007.

Our leasing staff continues to ferret out direct deals and during the quarter we had 54 transactions representing 43% of rents and 37% of square footage done directly by our leasing staff. While these are all solid accomplishments, for the year our same-store number excluding termination fees was down 2% on a GAAP-basis but up 1% on a cash basis. As Howard will discuss, we continue to experience a sequential decline in non-cash items and are well-positioned for a steady improvement in the cash component of our revenue stream. During the quarter though on a disappointing note, we had 86,000 square feet of negative absorption, bringing our total year-to-date negative absorption to about 315,000 square feet, or about a 1% decline in our same-store occupancy targets. We do expect occupancies to remain flat for the balance of the year.

The economic crisis is having a significant impact on tenant demand, tenant psychology and continues to impact leasing velocity. Leasing activity and absorption levels are generally below those of last year, and our year-to-date leasing activity and absorption levels are down year-over-year in just about every one of our markets. Certainly not surprising, but there are a few additional points of note.

Most of our markets did see a slight increase in year-over-year vacancy rates. In the Pennsylvania suburbs, however, vacancy rates trended down 70 basis points from 15.4 to 14.7%, and in southern New Jersey trended down from 14.1 to 13.5%. That was also the case in the CBD in Philadelphia, where vacancy rates decreased 600 basis points from 10.7 to 10.1%. In our 4 major markets of Pennsylvania, New Jersey, Virginia and Austin, we're outperforming market occupancy levels by between 310 and 900 basis points.

During the third quarter from an activities standpoint, we had 264 showings. Tenant traction is still higher than it was 12 months ago, but is down from our run rate in the last two quarters. For the quarter, lease rates were in line with our expectations. Free rent and concessions remained a minor issue, and for leases executed year-to-date, only about 13% of those contained some element of free rent.

Next topic I'd like to spend a moment on is our development projects, and since our last call there have been several points of interest. We have 36 tenant prospects in our development project pipeline totaling just shy of 700,000 square feet. This compares to our second quarter pipeline of about 28 prospects and 625,000 square feet. So again a quarter-over-quarter pickup, but down from last year's volumes.

Along those lines, we did make strong progress since our last call. The sale of the 2100 Franklin project in Oakland, the recently announced 235,000 square-foot lease at our South Lakes project in northern Virginia and other activity has moved our ground up development pipeline to approximately 82%, or about 58% leased excluding our fully leased IRS project. South Lakes, upon full lease-up will have a stabilized GAAP return of 7.6% and an average cash return of about 7.5% excluding our management fees. Leasing activity on the remaining 30,000 square feet or so looks very promising.

On our remaining development projects, Metroplex, Lenox Drive and Barton Creek, as we did last quarter we continued to project initial development yields between 7 and 9% on a GAAP-basis and 7 and 8.5 % on a cash basis. Metroplex is located in the Plymouth Meeting submarket in our Pennsylvania suburbs, where Brandywine owns 15 buildings totaling approximately 1 million square feet. Year-to-date in that submarket we have executed 163,000 square feet of transactions. Of those, 115,000 square feet were new leases, of which 43,000 square feet went into Metroplex. Our Plymouth Meeting portfolio is 95 --is about 96% leased excluding Metroplex and 90% leased including Metroplex.

At Metroplex we recently signed three leases totaling -- it brought us to a total lease square footage to 45% of the building, which is up from 24% last quarter. We're also in the late stage of negotiations with two additional prospects totaling an additional 42,000 square feet. Assuming these two additional transactions get signed, we will have leased about 80% of the project.

In Austin, we have approximately 100,000 square feet of leases either out for signature or operating in negotiations under a letter of intent. So on this project we've seen a big pick up in activity since the last quarterly call.

1200 Lenox in our central New Jersey market is currently 49.3% leased, which is up from 30% last quarter and is now about 37% occupied. So overall, pretty good progress on the development projects since our last quarterly call.

Howard will discuss our balance sheet in much more detail, but to touch on initiatives relating to our University City projects, on the IRS transaction, we are working on our historic tax credit for this facility, which we anticipate will provide a $50 million source of capital over the next two years. Upon closing of this structure, we will revisit the joint venture market and plan to move forward with a construction loan on this project. Our funding schedule for the IRS and the garage complex is that by year-end 2008 we will have $82 million invested with $155 million projected spend in 2009 and $134 million projected in 2010.

As we all know, the investment markets stopped on a dime and as such we're delighted with our 2008 sales activity. Including Northern California, we've had over $500 million of sales activity at a blended cap rate of 7.7%, with cap rates ranging from 6.2% to 8.3%. We also have about $60 million under contract or in advanced negotiation. However given the significant disruption over the last 60 days, we won't consider these deals done until they are in fact closed. But regardless, we're running very much ahead of our 2008 business plan projections.

I'd like to spend a moment on our dividend announcement. Our current annualized dividend rate is $1.76 per share. We expect our 2009 dividend to be $1.20 per share or $0.30 per quarter, which equates to our current projected 2009 taxable income. The reality of this current economic and financing climate necessitate a re-evaluation of our dividend payout. A clearly likely intermediate-term outcome of this environment will be a more expensive cost of capital for our entire industry. As such, it became increasingly clear that retaining earnings is the most cost-effective and correct financial decision. As sacrosanct as we viewed our existing dividend, given both forward financing uncertainty and the cost of replacement capital, the Board did not view this as an appropriate time to either subsidize or grow into our dividend.

As our 2008 numbers show, we made far more significant progress in our CAD payout ratio than many projected. We expect our 2008 CAD to be at $1.90 per share, or about a 90% payout ratio on our current dividend. Fairly remarkable improvement driven obviously by the burn-off of straight line rents, strict capital controls and a tenant bias toward shorter-term lower capital consuming leases. However, looking at our 2000 financial plan, we did increase our capital run rate over 2008 assuming a further deterioration of market conditions. This assumption and projected leasing activity puts our CAD projection between $1.49 and $1.59 per share.

Another component of the dividend decision is the composition of our 2008 dividend payments. During the year we had about $50 million of projected taxable gains from sales, or about $0.55 per share. As such, approximately 30% of our current dividend really represents special distributions to our shareholders. As we look at it, our new $1.20 dividend run rate, our FFO payout ratio will be between 53% and 55% with a CAD payout of 75% to 80%, very strong and very secure payout levels. To the extent that we generate gains from either additional sales, we'll handle those through either a special dividend distribution or other tax planning techniques. When this current pricing dislocation ends, as it most certainly will, we plan to be among those companies who possess a strong financial and operational platform to grow our dividend as we did for many years in pace with our earnings growth.

Let me spend a few moments on our 2009 business plan before I turn the floor over to Howard. As we look at 2009, based on our view of real estate market and financing conditions, our plan does contemplate a continued challenging environment. The key elements of our 2009 plan are as follows. First, for our existing portfolio we are targeting same store occupancy range between being down 150 basis points and flat, with 2009 year end occupancy levels being between 91% and 93%. We will also be targeting during the year even more stringent cost controls over both our operating expenses and capital costs.

As we build our 2009 projections, we were very focused on our 2009 renewal profile. During 2009 we have 3.2 million square foot or 13% of our portfolio expiring. To date we have already renewed 876,000 or 27%, leaving a remaining 2009 rollover number of 2.3 million square feet or 8.8% of our portfolio. Of this amount, 347,000 square feet, or about 15%, is out for signature or in advanced negotiations, leaving a net 7.5% of remaining 2009 rollover as of today.

In terms of large exposure, our top 15 leases that are expiring during 2009 account for approximately 30% of our original rollover. 51% of this square footage has already been renewed, with another 36% in advanced negotiations. So overall, as we looked at our plan, very good progress on proactively addressing our next year rollover exposure.

Next, for our existing ground up developments for 2009, our game plan is to achieve stabilized occupancy levels by year end on Metroplex, South Lakes, 1200 Lenox, 100 Lenox and The Park at Barton Creek. Our 2009 plan numbers incorporate an average 47% occupancy or about $4.1 million of NOI off of these projects. We will also during the year continue our on time, on budget completion of the IRS facility and the garage.

From an investment standpoint, our 2009 business plan does not contemplate any direct acquisitions. We've also programmed a $100 million of dispositions and an 8.5% cap rate occurring in the second half of the year. Targeted dispositions for the next several years are properties that are located in either non-core markets or are properties that fall under the bottom 25% of projected performance based on our NOI and CAD growth rates. In addition during the year we will continue to actively explore additional sale and joint venture opportunities. From a development standpoint, we have not programmed any additional development starts in 2009.

Using that investment posture as a takeoff point, our 2009 capital strategy will be to continue to improve our balance sheet, create capacity for our 2010 maturities, and position the company well for long-term growth. Potential sources of funds are the asset sales I mentioned, pursuit of joint ventures. We have -- less than 3% of our asset base is currently in joint ventures, so we certainly would expect -- recognize that the direct assets sale market is challenging. We'll push on achieving some additional joint venture activity during 2009.

Less than 10% of our debt is secured, which creates a good potential source of capital. While our clear focus will be on the quality and the size of our unencumbered pool, we will certainly explore spot opportunities to utilize secured leverage, particularly in a couple of properties that have secured loans maturing in the next two years.

Our 2009 business plan does contemplate that we obtain construction financing on our 100% GSA-leased facility. As Howard will articulate, we're in discussions with several key lenders and our target is to finalize construction funding arrangements in the first half of 2009. While this construction loan approach will be a bit more expensive than our line of credit, it will be in line with the carrying costs incorporated into our construction budget. Our primary objective is to use this construction loan in conjunction with other sourcing activities to reserve line capacity.

And finally, we will generate additional cash flow from our dividend policy revision, the potential historic investment tax credit to put us in a good position as we look at our 2010 capital plan.

At this point, Howard will walk us through our 2008 and 2009 financial plan. Howard?

Gerry, thank you. Before we begin, I just want to point out that we're all quite proud to be reporting this earnings call from the home of the world champion Philadelphia Phillies. If all goes according to plan, they'll have some company shortly from one or more of our professional sports teams. Now on to the highlights.

FFO in the third quarter totaled $53.6 million versus $62 million in the third quarter of 2007. On a per share diluted basis, we realized $0.59 per share versus $0.68 a year ago and at $0.59 exceeded analysts' consensus by $0.01 per share. Notably, the quarter a year ago had $7.6 million of termination revenue versus just $300,000 in the current quarter, representing virtually all of the difference in performance. On our $0.44 dividend, the FFO payout ratio for the third quarter was 74.6%.

A few key components of the Q3 income statement are minor declines in our key revenue items on a sequential basis due to a down tick in sequential occupancy offset by gains in rental rates. We also realized $338,000 of termination fees and other income of $784,000. Our gross management income was $4.4 million or $2.6 million on a net basis, and we realized $1.1 million of unconsolidated joint venture income. On expenses, property operating and real-estate taxes were in line with prior periods. G & A of $6.9 million was a bit higher than prior quarters due to certain severance accruals in the third quarter. And interest expense was in line with our expectations. On a same-store basis, our cash rents increased $1.7 million while our non-cash rent items decreased by $3.5 million, amplifying our shift to a more favorable cash rental income profile.

Recoveries decreased $400,000, whereas expenses on a same-store basis increased by $700,000. Overall, our recovery ratio declined a bit in the third quarter to 33.4%, but remains in line with our expectations on a full-year basis. Overall, our same-store NOI on a cash basis excluding termination and other revenues increased $600,000 or 0.8%. All of these metrics were in line with our expectations.

FFO for the nine months totaled $1.85 per share, or $1.93 with the $0.08 impairment added back in from the second quarter. Our FFO payout ratio on the historical $0.44 dividend run rate equaled 71.4% or 68.4% with the impairment added back in.

CAD remained robust at $0.46 per share, in line with $0.48 and $0.52 in the prior two quarters. We are continuing our run of low capital expenditures, declining non-cash items and good dividend coverage. And we're pleased to report a 95.7% CAD payout ratio for the quarter on the $0.44 dividend. The $8.9 million of revenue maintaining capital costs in the quarter are the key driver of these results, along with significantly lower non-cash straight line rental income. Year-to-date, our CAD per share totaled $1.45, resulting in a 91% CAD payout ratio for the $1.32 of common share dividends paid. Obviously both our CAD and FFO coverage ratios are going to improve dramatically with our new dividend guidance.

Looking briefly at account receivables at September 30, we had $14.3 million of operating receivables on our books and a reserve of $4.9 million, or about 34%. In Q3 2008 we nominally increased our operating receivable reserves to provide a greater cushion against potential rental income write-offs. We've had no write-offs year-to-date and feel comfortable about our tenant credit profile, though we will continue to monitor.

Our dividend guidance for 2009 is $0.30 per quarter or $1.20 for the year versus $0.44 per quarter or $1.76 for the 2008 year. This sets our 2009 dividend to roughly match our expected taxable income and will conserve about $50 million in annual cash flow for our ongoing needs. As Gerry noted, we are increasing our 2008 FFO guidance to $2.39 to $2.43 from $2.32 to $2.42, and that latter figure, or both numbers reflect the Q2 impairment. And that represents about $0.04 at the midpoint for those who look at that kind of calculation. This increase reflects the six-week delay in the closing of the Oakland sales transaction along with better than expected performance in various other income items. With $1.85 of FFO per share already achieved year-to-date, fourth quarter FFO guidance affectively works out to be in a range of $0.54 to $0.58 per diluted share.

Couple of notes about the fourth quarter. We continue to assume no acquisitions. We are programming up to another $45 million of sales activity, though we will not count that until they're actually closed. We expect to fund about $45 million of investments in the fourth quarter, representing commitments to our ongoing development/redevelopment projects, revenue maintaining capital expenditures and certain expenditures related to new leasing activity. Overall we expect our 2008 plan to come in with about $187 million of total capital expenditures below our 2008 expectations -- below our $200 million expectation at the beginning of the year.

We have no incremental income in the fourth quarter for our four ground-up developments, but recognize that capitalized interest and expenses on all four of these projects, including Metroplex, which has already happened, will end by December 2008, at which point they'll be reclassified as operating properties with their full results included in the core portfolio. This will decrease our core occupancy by 200 to 250 basis points from that point forward. We obviously expect we will recover from that as lease up continues throughout 2009.

We see all other income items for 2008 coming in as high as $40 million gross, or $31 million net after management expenses, versus our prior range of 30 to $38 million on a gross basis. Remember that this bucket includes termination fees, gross management income, other rental income, interest income, JV income and any other nonrecurring items including items such as the debt extinguishment gains we recognized earlier in the year.

We expect our G&A to run at about 6.25 to $6.5 million in the fourth quarter, and therefore with an expectation of about $1.90 of CAD and a full-year dividend of $1.76 under the prior rate, we should do about 90% coverage for the year.

Now turning to our 2009 guidance, which we have introduced in a range of $2.17 to $2.27 per diluted share. Notably this will result in FFO coverage on a payout basis of 53% to 55%% on an assumed $1.20 dividend. Key assumptions for 2009 include no acquisitions, up to $300 million of aggregate investment activity. This incorporates about $155 million for the post office and garage projects, $55 million of revenue maintaining capital expenditures, and you'll note, as Gerry pointed out, that's much higher than we experienced in 2008 and about $60 million of new leasing CapEx. And this last category includes about $40 million for the substantial completion of the four developments that will be in the core portfolio as of year-end 2008.

We hope to raise in the aggregate, about $400 million of total capital in 2009. We see $30 million of that coming from free cash flow after the new dividend, up to $100 million of asset sales, up to $120 million of mortgage financings, and up to $150 million of construction financings. Clearly any one of these can go higher or lower and be offset by increases in the others, but our goal remains to source about $400 million of incremental capital during 2009 and therefore place our credit facility at a similar low balance to the way we'll end 2008.

For our same store properties in 2009, we expect flat GAAP growth, or no growth, but expect to grow to see our cash same store NOI grow by 2 to 3%. For that same other income bucket of items, we're projecting 25 to $35 million of gross income, or 15 to $25 million on a net basis, versus the $40 million gross or $31 million net we now expect for 2008. We see 2009 G&A of between 22 and $24 million. We expect a slight decline in interest expense during 2009 due to lower debt balance and you'll note that our interest expense projections for 2009 include between 4 and $4.5 million of incremental interest for the convertible re-valuation under APV 14-1 at a 5.5% rate. We will add back this non-cash interest expense in our presentation of CAD. We expect a 5 to $10 million improvement in the non-cash components of FFO over 2008 and that provides a preliminary guidance range for CAD of $1.49 to $1.59, representing at least $30 million of free cash flow and coverage on a CAD basis with an assumed $1.20 dividend of 75 to 80%.

Our debt to gross real estate costs looking at the balance sheet came in at 9/30/08 at 52.5%. We will see meaningful improvements in all of our leverage metrics by the end of the year, reflecting the transactions we closed earlier in October. And once again, our secured debt remains quite low at 8.5% of total assets and our floating rate debt very manageable at 9.5% of total debt. Our $600 million line was $175 million drawn on September 30, 2008. As we pointed out in the press release, following the closing of the October sales and other activity early in October we had no balance on our line and $145 million of cash on hand to meet future needs. We've since used a portion of this cash to fund various expenditures.

And now I'll turn it back to Gerry for some additional comments.

Great. Thank you Howard.

To close on our prepared comments, as you look at the fourth quarter, our priorities remain continued operational improvement, the objective is to maintain our occupancies and deliver the numbers that Howard referenced, continue to make progress on our development and redevelopment pipeline, and continue with the execution on components of our balance sheet program, particularly the Cira South tax credit and advancing the discussions on the construction financing.

As we close, there's no question 2009 could be rough sledding for the economy and for our industry. We are prepared for it and our projections reflect as much. Looking at the situation through a slightly different lens, a shift in tenant psychology or a firming of the economic climate could create some operational traction for us at the margin.

First, our primary markets are historically fairly stable, and we have minimal exposure during the next 12 months. Second, our portfolio quality is at the upper end of our competitive set and in many of the submarkets in which we do business, we have an extremely strong market share. Third, we have strong leasing and property management teams that keep us very much in the deal flow, and look at the percentage of direct deals we do as evidence of the depth of our local relationships. And finely, while every company must navigate in this capital constrained environment, many of our local competitors are much more leverage constrained, with much less room for flexibility, thereby providing us with a distinct competitive advantage in the ongoing battle for additional tenants. We thank you for listening to our call. At this time we open the floor for questions. We would ask that in the interest of time, you limit yourself to one question. Thank you very much.

(Operator instructions). Your first question comes from Michael Bilerman with Citi.

Good morning everyone. Justin's on the phone with me as well. I assume we both get one question each if we're both on the line? Just some humor in the morning. Talk about the joint venture in Cira Center. I mean, how did--I know you had started going down the road in that process. Where did it sort of go and sort of how do you think about that wrapped up with the Cira Center South project and the IRS leases going on?

Michael, I'll take the first part of that and ask Howard to chime in on some of the technicalities. On the IRS facility we had identified a joint venture partner that we were quite pleased with both the partner and the structure. The challenge is that they were a tax-exempt entity and there are a number of various complications involved in receiving an historic tax credit with a tax exempt entity.

So what we have opted to do is to proceed with the negotiations to achieve an historic tax credit. Once that structure is finalized we would then revisit the joint venture market. That market would be somewhat limited to taxable entities. And then also move forward the construction financing program.

On the Cira Center One project we did enter the marketplace for a joint venture. We again had identified a joint venture partner and the disruption in the debt markets going back to the middle part of the summer changed some of those fundamental underwriting criteria. So we made the decision that given the success we were having on some of our other sales activities, most notably the sale of the Oakland, CA portfolio, that we would keep Cira Center right now as a large, unencumbered asset and then revisit the joint venture market when there was more clarity on the secured debt market.

Okay that's helpful. We'll re-queue up.

Your next question comes from Jordan Sadler with Keybanc.

Thank you and good morning. Could you just give us a little bit more color on the asset sales that are currently teed up and what pricing looks like?

Sure I'd be happy to --

The ones that are under contract as well as the ones for next year that you might shed?

We have, of the dollar amount that I mentioned, we have about $11 million of that is under agreement and scheduled for closing, with the balance under contract negotiations. They are properties in the metropolitan Philadelphia region, and the cap rates range from mid seven's to low eight's.

In terms of the projection for 2009, Jordan, the $100 million, we had programmed those for the latter part of the year. We actually view the investment market to continue to be fairly slow, certainly through the end of this year and into the early part of next year. When we look at laying in our capital plan, we layered in those sales to be occurring ratably in the second of the year, recognizing that the more challenging investment market we have moved up our sale cap rate assumptions on those assets to about 8.5%, which is well above the 7.7% average cap rate we experienced thus far in 2008.

So, I'm sorry, have those been identified or its--?

They have not. No, they're part of a pool of assets we'll be going to test the market with.

Thank you.

Your next question comes from Jamie Feldman with UBS.

Thanks. I was hoping you could shed a little bit more light on some of your development progress, particularly South Lake. I guess what I'm trying to figure out is what changed and did you guys maybe give more TI's than the market had expected or than tenants wanted? More free rent? What got things flowing on the development pipeline?

Bob, why don't you take that?

Sure. For our South Lake project, really what happened in this quarter was an expansion of the existing Time-Warner Cable lease. They had initially committed to 195,000 feet knowing that was probably a minimum. And as they worked through their space plan, they really expanded out to the 235,000 feet we currently have leased. And it was taken on the same terms as the original deal. We still have a floor left in the building. We've got a number of prospects, and we don't discount also the possibility that Time-Warner Cable will take that as well.

And then I guess just a quick follow-up. How're you guys approaching this market? Are you willing to put more TI's in? Are you pushing more for free rents? And then what are your competitors doing?

In the Reston-Herndon market we don't have any free rent in our deal. The concessions are significant in terms of TI's, because that's really what it takes to build space today. But we've seen a variety of different deal structures. I think there's also a couple of transactions occurring now where there's significant free rent included but the base rate is pushed up to account for that. So I think there's a range in the market down there of maybe $30 to $35 of face rate, but again much of that driven by free rent.

And then what about across other markets? That's my last follow up.

I'm pleased to report, the deal that we did up in Princeton recently was with a company that we did a deal with 10 years ago, and he changed companies and wanted to stay with Brandywine in another location. So that actually worked out extremely favorably and -- actually at our pro forma rent, so -- and TI for that matter. So it was a right-on deal for us and we happened to be in the right location at the right time. But generically speaking on the market though, it has -- to Bob's point, I think he's absolutely on-target with regards to the TI. This space has cost more to fit out and tenants generally are looking for the landlords that fund that. We'll try to recover it through increased amortization of those costs where we can, but a lot will come down to alternatives for the tenant.

And I think Jamie, in general and as we look at the market, and it's clearly with slower activity, one of the key attributes we have, which I think is reflected certainly in the numbers we're looking at for 2009, is with the quality of our leasing and property management teams we're well ahead of the curve in approaching our tenants for renewals. Now the realities in today's marketplace looking for new office space, for a lot of our tenants, is not a number one priority. So through servicing them effectively over the term of their lease, giving them really no reasons to leave, I think we've been very aggressive in getting out there and talking to every one of our existing tenants, which is why we've had such good success in reducing our '09 exposure significantly even though we're only in the fourth quarter of '08.

In terms of general marketing approach, again we have great people. Their mission is to go out there and actively identify prospects or for the local brokerage community be involved in the community itself, identify prospects. And we track every one of these deals through our entire system and focus on our conversion rate and the watch words really are to get people through the door. That's why we measure showings as much as we do. Once we get them through the door, identify exactly what we need to do to make that deal work, make sure that that relationship we have with the tenant or the broker is good enough that we are able to leverage those relationships as part of the lease negotiations and then position the managing directors and Howard and George Johnstone to really make a quantitative and qualitative evaluation on whether the terms of that specific lease create value, cover some costs or bridge a gap for us and if they meet that criteria we go forward and do the lease. I think that's one of the reasons why we've always been pretty aggressive in both good and bad markets in terms of getting square footage signed on.

Okay. Thank you very much.

Your next question comes from David Rodgers with RBC Capital Markets.

Hey Gerry, thanks for laying out your capital spending needs with respect to your existing developments as well as the IRS and garage facilities. On that Cira South campus development beyond the IRS facility and the garage, can you remind me what your either constraints are or what your mandates are in terms of starting additional projects, funding those and if you have any flexibility with respect to extending any types of additional commitments due to financing or other types of criteria in the market?

Yes Dave, our perspective right now, as you may recall, that Cira South development has three component parts to it. The garage, which we are starting as part of our capital plan and then two towers that could range from 300,000 to 700,000 square feet. At the current time we don't have any plans to start either one of those towers and don't have the obligation to do so at this point. It's been mentioned in the press and on previous calls that there's a couple of larger tenants that are looking at a larger block of space in one of those towers, but certainly in this type of environment our desire to proceed with any of those alternatives is going to be a function of what the capital plan is, and make sure the lease economics dovetail nicely with the capital plan for that project. So as we are viewing Cira South today, it is the completion of the IRS facility and the completion of the garage.

So your land agreements don't require you to start at any particular time given any type of completion date on the garage or any other components?

We have provisions on the land lease that have -- that provide timeframes that if we do not meet those time frames in the future we could lose control of those respective paths.

Do those impact you in either 2009 to or 2010 where you have to make a decision over the next 24 months?

We don't believe so, no.

Okay. Thank you.

Your next question comes from Chris Haley with Wachovia.

Very good to hear in reference to the facilities. Howard, have you moved south yet?

I am firmly entrenched.

That was actually one of the unprecedented items that happened in the last 60 days, which is Howard becoming a Phillies fan, and the Phillies actually winning the World Series.

Which is bigger?

Well, congratulations on the dividend cut. Tough pill to swallow, but I wanted to expand a little bit on sources and uses. I want to make sure I have these numbers correct. And I would agree that you use the term hope to raise $400 million of total capital. The asset sales of $100 million, $120 million of mortgage financing and $150 million of construction financing. The use of $400 million, can you round that out for me? On top of participatory, on top of development funding as well as, as you mentioned, your leasing CapEx?

For 2009, Chris, it actually is larger than that. That's sort of on a net basis. Just to look at it on a gross basis, we've got 100, and I'm really running it through the fourth quarter of this year because everyone's got the 9/30 numbers in front of them.

Okay, so your $400 million of expected sources is a 15-month number?

Effectively it is, in broad terms, so let me map out what the next 15 months looks like, or 14 months. We've got the $113 million note coming due at the end of this year. We've got the $275 million note in November of next year. We've got a $68 million mortgage coming due in July. And net of $55 million of revenue maintaining CapEx that's really built into the CAD and the cash flow, we've got $245 million of incremental investments. That's about $700 million.

So it's $190 million of non-leasing CapEx?

I'm going to ignore your comment and try to finish the overall story.

Sorry.

So $700 million of total uses over the next 14 months. As we look at that, we see $30 million at least of extra cash flow after the dividend and after revenue maintaining CapEx. That's built in there. We think the historic tax credit will provide funding if it closes of up to $40 million during the next 14 months. We had cash on hand after the closing of the sale transactions of $145 million, and that requires us to use about $480 million from the revolver to complete the sources of $700 million.

Now we clearly don't want to end 2009 with $480 million or more drawn on the revolver. So the design of the $400 million capital plan is affectively to reset that revolver down to a very low balance, as close to zero as possible over the course of, and certainty by the end of, next year when we then confront the 2010 needs. And those roughly are about $530 million -- finishing the Cira project, notes and mortgages and again some incremental revenue creating CapEx.

And if we get that credit facility down to that level with the 2009 capital plan, we'll be able to make the same statement at the end of next year that we can make right now. Namely we can get well into early 2010 with doing absolutely nothing. And obviously we won't do that. We'll look at mortgages, sales, perhaps JVs, other transactions, those in the aggregate, and most importantly, not having as many eggs in one basket will balance us out for 2009 and set us up for a very successful 2010.

Okay, thank you for that. And just, you mentioned $245 million of project spend. Did you, was $55 million included in that, from your revenue maintaining CapEx, so therefore--?

No. To keep things clear, we look at that as embedded into the CAD calculation, which it is. We look at the cash available after the payment of the new dividend. We think at least $30 million, and we look at the net capital after that.

Okay, so the net would be $245 million, is that right?

Approximately, that's right.

And that's the amount of money that you would expect to spend on remaining -- spend on redevelopment and development projects not yet funded?

That's correct. The bulk of that clearly is going to go for Cira and the garage.

Okay. With regard to the, how much of the mortgage financings have you built into your 2009 guidance and approximately at what rate?

Actually built into our 2009 guidance is the assumption that we use the line. And really the plan calls for offsetting the use of the line at various points in the year by these various techniques. I think the strongest element of our plan is that we can get through 2009 with these either not coming in at all or coming in quite late. Clearly don't intend to let that happen, but in designing the plan, laying out the sources, uses, the impact on the income statement we have enough capacity on the line and with the cash we entered the fourth quarter to meet all of our obligations. That is a very important point.

We agree with that, and I appreciate your reemphasizing that. When you offer 2009 guidance in the low 220s versus the Q4 run rate, which has a little bit of the Oakland stuff in there, if I use a low to mid 50's number I can get to that 220 range just by annualizing the fourth quarter. Obviously there are offsets when you look on an annualized basis from the fourth quarter run rate so you're expecting positive same-store, are you expecting dilution from the development deliveries, are you expecting dilution from the mortgage financings? I'm just trying to understand the give and take to get to your current guidance for 2009 and how conservative or aggressive it is?

Well I think you hit on the key element. Once we get to January 2009 we'll be fully absorbing all of the associated interest costs and uncovered expenses on those four projects, until they get to an occupied status. And South Lake is interesting because it's fully leased but it won't begin to generate income until sometime in the third quarter. The others still have some leasing to go. But that will lead to not only the dip in occupancy that I pointed out, but a corresponding dip in income as we move through the -- certainly the first and probably a good part of the second quarter. And then we'll pick that up with the coming on line of leases we already know we have, and ideally other incremental leasing. We do not provide quarterly guidance typically but that does set up a reasonable look at how 2009 will play out.

I appreciate that. It'll be very helpful either in your fourth quarter or upcoming meetings or either a presentation to -- I would suggest you guys provide something like that on your Web so your investors can see regarding this business plan recognizing that the financial side, the balance sheet side is very critical today. And anything you can offer to mitigate some of these risks and concerns I think will be helpful. Thank you.

Great Chris. Thank you.

Your next question comes from Stephen Mead with Anchor Capital Advisors.

You have me?

I don't think we heard the name actually. Was it Mean? Steve Mean?

Hi Steve.

Am I on? Is it me?

You're on.

Now, can you talk about this, your bankers and the line, some of the terms of the line and just how you manage that going through this period in terms of the availability of the revolver?

Okay. We used to have an 18- or even 19-bank bank group, but with completed and impending bank transactions we'll be down to 15 banks and one or two have new names. We've not lost any bank from our bank group. And we've really taken no steps with respect to our credit facility to -- I mean, for example we've seen some other companies in the real estate and other space do a full draw. We've considered that, we've certainly thought about it, but we've not done that. So we really have very little, if anything outstanding on our line today and clearly in the business plan expect it to be fully available.

Now from our side of the table, we're absolutely meeting every covenant we need to with room to spare to be able to do so, so on our side we're in a comfortable position. We've monitored the banks in the bank group, nothing untoward has happened and we're satisfied with the current situation. And that facility runs to June 2011 and has a one-year extension option solely at our option to June 2012.

And the pricing?

Is based on our current investment grade rating, LIBOR plus 72.5.

And then if you lose, what LIBOR are you talking about?

Any LIBOR we choose when we typically borrow on one month.

Okay. And then in terms of if you lose the investment grade rating, what does the pricing do?

I don't have that in front of me, but the pricing would increase.

Right. But I mean in terms availability, does it affect the timing or the maturity or the availability on any of the lines?

No. There is no relationship between use of the line and our credit rating other than the pricing.

Okay. Thanks.

Your next question comes from Cedrik Lachance with Green Street Advisors.

Thanks. Just continue a little bit along the same lines. In regard to secured debt covenant you may have on your lines or on your own secured bonds, how much more can you borrow for mortgages or on a secured basis versus where you're at right now?

I don't have an exact number in front of me, but certainly quite a bit more than we're contemplating doing over the next couple of years. We recognize that over the last two years we've seen a dramatic reduction in our secured debt, several hundred million dollars, and that has improved all of the credit matrix -- metrics associated with that particular calculation.

Okay. So when you look at refinancing the unsecured obligations that are coming due annually from now on, do you feel that you're going to have to use primarily mortgages, or do you think there will be other sources?

I mean we hope we will be able to return to the unsecured market. It's certainly the most efficient way for a company of our size. That market's not currently available in any way we can tell, so we're contemplating other mechanisms.

I think in particular this IRS transaction with a 20 year bondable government credit lease presents a lot of interesting financing opportunities that we expect to explore through the balance of this year and into next year. It could be a very good source of almost permanent debt capital. We have other properties. We have over $4 billion of gross unencumbered real estate. We have a very pristine portfolio with lots of flexibility. We will use mortgage debt in certain instances but it would be limited not because of ability to do so but because of the desire that when things come back to normal we'll want to still be an unsecured borrower, take advantage of that market.

Okay, and so you alluded to the room you have under your covenant. Can you quantify that for us in terms of the leverage you can have given you still have to invest a fair amount of money in so few developments? Where is that going to bring you versus your covenants on the lines and the bonds?

We do not currently provide that in any kind of disclosed fashion. But what we will say rather than give a number is that we can satisfy all of the obligations we've outlined completing all these projects with room to spare in all those covenants.

All right. Thank you.

Your next question comes from Ian Weissman of Merrill Lynch.

Yes, good afternoon. I was wondering if you could just reconcile your comments about positive same-store NOI growth when you're projecting that occupancy could be potentially down 150 basis points? And at best, I think rents are flat to possibly down in your markets. Can you just walk me through that?

Yes. I mean Ian I think the distinction -- it's Howard -- on that comment is on the cash side. We are expecting an improvement in the relative mix of our base rental income from one that had a reasonable amount of non-cash income to when there'll be more cash. So when we talk about same-store growth we've limited that to the cash calculation and I think I mentioned that on the GAAP side we expect it to be flat. We are programming leasing in the 2009 plan and we expect that to have a positive impact as the year progresses.

The drop in occupancy, is that expected across the portfolio or just maybe you can address which markets you're seeing the most weakness?

Well, first of all, the biggest drop in occupancy is going to be sort of structural from an accounting standpoint as we migrate the four as yet non-fully leased to a non-fully occupied development projects into the core. On a same-store basis, any effect will be more muted, recognizing that we have had a decline nonetheless in the same store occupancy that's presented in our financial statements and in the press release and elsewhere. But notwithstanding that same-store decline, we've still been able to achieve a both a year-to-date and on a GAAP and a cash increase. And that's because of both the mix and the overall level of rents. I think one of the points that Gerry made was that, and I think it bears emphasizing, our rent performance has held up very, very well in a tough economic climate. We've seen increasingly better mark-to-markets on our rents on both the cash and the GAAP side and that's offset some of the occupancy decline.

Okay. Thank you very much.

Your next question comes from John Guinee with Stifel.

John Guinee here, but you did a great job and answered all our questions. Thanks.

Thank you:

Your next question comes from Jordan Sadler with Keybanc.

I just wanted to follow-up on the tax credit. What are the hurdles left to secure that?

We are fine-tuning the discussions with the prospective investor. We are well along in documentation. It is a complicated transaction with a lot of attorney and tax review, and on that basis we're being very cautious in predicting whether it will, and when it will happen, though we have reasonable expectation that it will.

Just to clarify, this is an investor who could utilize the tax credit as sort of an intermediary and then you would separately joint venture the property?

It is a direct investor who will work with us to form a partnership and that investor will receive -- will be designated the tax credits and other certain taxable aspects of the transaction.

Okay. Thank you.

Your next question comes from [Steven Sedgwick], private investor.

Yes. The January dividend payment can either be considered a tax payment for 2008 or 2009. What year does that look like it will be in today?

We've not yet made that determination. It's a good question. The declaration of that dividend will be done in all likelihood in mid December and at that point we'll have better clarity on the final constitution of our 2008 taxable income. And historically, or at least in the last year that was pushed to the following year, so that would make it a 2009 dividend for our purposes and for investor purposes, but we've not yet made that final determination.

Okay, thank you.

We do have a follow-up question from Chris Haley with Wachovia.

Two items. Again, the $100 million of assets sales would that lead me to believe that Cira North is off market?

Chris, I'm sorry. You really cut in and out there.

The $100 million expected sales proceeds in 2009 would lead me to believe that the Cira One, or North, project is off the market now? Or is not expected to be sold next year?

Well I think we view that $100 million as a pool of money and as a target to be achieved via a variety of sources. That could come either through a joint venture of some of our existing assets of which certainly Cira North might be one of those, or through the direct sale of some of the targeted assets that we've identified for sale.

Okay. On the mortgages, mortgage financings today when you look to permanently finance some of these projects, what would be a conservative assumption in terms of all in costs Howard?

Well, we would expect to be subject to debt service coverage. That could range from I've heard of 1.3, 1.4 to as high as 1.6. That would change the pricing. We would expect our costs to be in the low to mid sixes all in. That would be a reasonable expectation based on our preliminary conversations with some lenders and what we've seen some other folks do and what we've seen some of the buyers of our real estate tell us they can achieve. So we've got a fairly good view into the market but we don't have anything yet to report definitively.

The only qualifier to that -- it's not really a qualifier -- just to express the obvious which is that the market is incredibly fluid. And rate quotes today may not be there tomorrow. And if they are there tomorrow, they may be worse or better, based upon what's happening. So I think one of the things we've seen is we've looked at a number of these alternatives is the tremendous volatility in both the number of sources available and their pricing.

Thank you.

At this time there are no further questions. I would now like to turn the conference back over to Gerry Sweeney for closing remarks.

Great. Thank you all for participating in the call and we look forward to providing you an update at the -- subsequent to the end of the year. Thank you.

This concludes today's Brandywine Realty Trust third quarter conference call. You may now disconnect.