Brandywine Realty Trust (BDN) 2008 Q4 法說會逐字稿

Good morning. My name is Crystal and I will be your conference operator today. At this time I would like to welcome everyone to the Brandywine Realty Trust fourth quarter earnings conference call. (Operator Instructions) Thank you, I with now like to turn the call over to Mr. Gerry Sweeney, President and CEO. Please go ahead, sir.

Crystal, thank you very much. Good morning, everyone. And thank you for joining us for our fourth quarter 2008 earnings conference call. Participating on today's call with me are Howard Sipzner our Executive Vice President and Chief Financial Officer, Bob Wiberg, Executive Vice President, George Johnstone, Senior Vice President of Operations and Gabe Mainardi, our Vice President of Accounting.

Before we began, I would 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 estimate reflected on 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. So with that said, moving into the call.

For the foreseeable future, our primary efforts remain focused on liquidity enhancement, continued deleveraging and stable real estate operations. In 2008, we leased $2.4 million square feet, ended the year with a 72.7% retention rate and a 93.1% occupancy. We sold $512 million of assets. We improved our debt to gross assets ratio from our high of almost 55% five quarters ago and as part that process, reduced our debt balance by over $500 million. And by resetting our dividend during the latter half of 2008, we have moved the company to a strong positive cash flow operating position.

To touch on the major punch line first, from a liquidity standpoint, our total capital needs for 2009 approximate $550 million. This consists of $152 million bond payoff in Q4, $69 million of a mortgage maturing at Two Logan in our center city operation, $160 million of anticipated spend on our post office and garage project, and $169 million of other capital expenditures including our development -- remaining development buildout, redevelopments and tenant improvements and leasing commissions. So total capital requirements of about $550 million. Our projected sources for 2009 consist of $180 million of projected sale proceeds. You may recall back in our November call we had projected about $100 million of sales due to all of our accelerated bond buyback activity during the latter half of the year. We've increased this target.

We're also anticipating $180 million of secured mortgage refinancings of which $90 million is in process and Howard will touch on where we stand with the balance of our program. Approximately $106 million of a line of credit withdrawal or a Sierra construction loan funding, $24 million of funding from our tax credit, and $60 million of excess cash flow after our dividend payments. So with only $174 million outstanding, on our $600 million line and most of that relating to our bond buyback program, we clearly have ample capacity to execute our plan and cover any delays or shortfalls in any of the above line items. So with 2009 recapped, our major focus is on 2010 and really the fourth quarter of 2010. Our total uses in 2010, we project to be about $522 million, including $265 million of bonds coming due in December of 2010, $57 million of mortgages, post office and garage funding of $110 million as well as other projected capital costs of about $90 million. So in looking at 2010, continued success in our sales, joint venture and secured financing front are important components of our 2010 plan. In 2010, we'll also have the benefit additional $34 million of tax credit funding, repayment of our $40 million purchase money mortgage from the Oakland sale and our post office project coming online during the third quarter of 2010.

In anticipation of the marketplace and to be well ahead of our liquidity requirements, we're proceeding down the following specific paths. First, our major forward capital commitment remains our 100% fully leased GSA project and university city Philadelphia. As we disclosed, we completed the historic tax and new market tax credit which raised a total gross source of permanent capital of $77 million or 22% of total project costs. With this equity raise completed, we're now in the process of obtaining another funding source for the balance of our project commitment. Our two key options include a multiple year construction loan as well as potently longer more permanent source of capital. Both avenues are being pursued. Achieving this objective, will, at a minimum, provide a non-credit facility source of capital for this project, there by assuring additional line capacity. This is our highest financing priority in the company and consistent with the time line we laid out on our last call we project a mid year 2009 execution.

The other path is continued pursuit of asset sales, joint ventures and secured mortgages. We had great success during 2008 and while the market remains very challenging, we believe our approach should result in 2009 and 2010 average sales execution targets of between $150 million and $200 million. Our 2009 business plan contemplates between $160 million and $180 million of sales with a similar amount program for the following year. While there is no real visibility to pricing, joint ventures in sales remain one of the more compelling sources of capital we can access. As evidenced by the success of our bond buyback program, we're able to sell assets at market cap rates accretively acquire bonds and accelerate our deleveraging plan. Based on this opportunity, individual asset pricing is somewhat less important than the overall theme of ensuring multiple year liquidity and intermediate term deleveraging. As such, we're test marketing for a sale of number of asset for different sizes, quality and location so we can see what present ours best combination of potential outcomes. Our first wave of properties is in the market and we should have more clarity on velocity and pricing over the next several months. Also, given the size of our unencumbered pool, we have the ability to execute a reasonable amount of secured mortgages while still maintaining very strong covenant compliance.

From an overall leverage standpoint, we made very good progress during 2008. Coming into the year, our debt to gross book was just short of 55%. We ended the year with over $500 million reduction in our overall debt balances from our 2007 peak levels. Our overriding objective remains bringing our overall debt to gross asset ratio to between 45% and 50% over the next several years. Moving towards these overall leverage targets may create some downward pressure on FFO, however, as we're anticipating it, assuming relatively stable core portfolio performance, increasing cash contributions from our development projects, including the post office project coming online, a negative arbitrage and our debt rollover exposure and the positive impact of our historic tax credit are multiple year projections insure that we can achieve our overall leverage target by year-end 2011 and do that in a fairly non-dilutive manner to our current earnings forecast.

Moving onto the real estate market, our concerns remain the velocity of new leasing transactions, existing tenant stability and tenant credit. To address these concerns, we are first proactively reacting to market conditions This involves meeting the market on rental rates, even more active leasing campaigns and establishing clear guidance more leasing achievement that meet the market, manage our capital investment, and preserve asset value. Along these lines, we had a very good year in 2008 and while 2009 will be a challenge, we have a very good operating plan in place.

On the stability of our existing tenant base, we have aggressively sought out early renewals. At the beginning of this year, we had 3.5 million square feet or 13.2% of our portfolio rolling. Year-to-date we have already locked away 1.1 million square feet so our net remaining 2009 rollover is about 8.7%. In looking at 2010, we have about 14% of our portfolio rolling so our two-year average is about 11% and we expect to make significant progress on these numbers as the year progresses.

Finally, in this environment, tenant credit remains a top concern. We have been fortunate that over a very long period of time, our tenant defaults have been very low. That is due to strong upfront credit [equalfication] and active ongoing monitoring. In this environment, even though strong practices will be strengthened. Additionally, as Howard will touch on, we have increased our account receives reserves and tightened our credit standards as part of our year-end review process. So as those and a overriding frame of reference and looking at the fourth quarter, we did have fairly strong core portfolio performance. We continue to have very good success in reduction tenant improvement costs. Our blended cost per square foot of capital came in at about $1.50 per square foot and our overall capital costs were less than 7% of GAAP rents which was well within our guide lines.

We also showed better mark-to-market on renewals we have in the previous eight quarters. Our GAAP renewal rents are up 6.7% with cash rents up 2%. GAAP rental rate growth on new leases was up 11% but still slightly negative on a cash basis. We also had a fairly active leasing quarter with a total volume of 742,000 square feet. That compares favorably to our 670,000 square feet in the third quarter of 2008, but reflecting tough market conditions, both of these third and first quarter numbers are down from our activity levels in the first quarter of 2008.

In this challenging market, our leasing staff continues to fair out direct yields. And during the fourth quarter we had 47 transactions representing 48% of the total deal volume and 37% of square feet done on a direct basis. For the year, we did 206 direct deals representing 45% of total deal number and 41% of executed square feet.

In looking at the broader market, year-to-date leasing activity and absorption levels are down in just about every one of our key markets. Certainly given the overall economic climate, that is not surprising. In most of our markets, we did see a slight increase in year-over-year vacancy. In our four major markets though, Pennsylvania, New Jersey, Virginia and Austin, we're outperforming market occupancy levels by between 150 to 1600 basis points. More importantly if you go back and look at the last difficult operating climate between 2001 and 2004, our portfolio has with very few exceptions out performed the competitive marketplace by a wide margin. For example, our Pennsylvania operations where we have our largest square footage outperformed market averages by between 600 and 1100 basis points in the time frame between 2001 and 2004, which were the last years of peak vacancy in this marketplace. We have the same historical trend line in CBD Philadelphia, New Jersey and in Richmond. So in this time of increasingly challenged fundamentals, we are confident that history will repeat itself, and our submarket position in asset quality will deliver relative out-performance.

Just a couple of thoughts in our development projects, since our last call our major tenant has taken substantially all of the remaining space in our West Lakes building. At our Austin project, we made some progress during the quarter and are still in very advanced stages of negotiation with several tenants aggregating approximately 100,000 square feet. So in this price we're hopeful of executing at least a portion of those transactions and continue to see some good activity despite some very tough local market conditions.

As for the existing ground-up development which you will note are now into our operating portfolio, our game plan is to achieve stabilized occupancy by year-end. Our 2009 plan incorporates an average 49% occupancy versus 15% at year-end 2008. Approximately $4.3 million of NOI contribution and a year-end occupancy level of about 80%.

As a construction update, on the main post office IRS transaction, the project is progressing on schedule. The major changes this project since the last quarter is that reduced the number of parking space we've plan to construct to 1,662 by basically building two less parking levels and that generated a cost reduction of about $15 million and that's so noted in our supplemental package.

As we note in our press release, we have adjusted our 2009 guidance based on examining several key factors. It is clear that capital capacity and economic conditions are not conducive to additional new developments. So as part of our standard year-end review, we spent a significant amount of time assessing our plan for each project, it's current value and it's future profitability. This process had two conclusions. One affecting 2008 results, and one affecting our 2009 guidance. As you in the in our financial disclosures, we are taking a non-cash charge of $10.8 million in the fourth quarter of 2008. This charge was recorded as the carrying amount of these partials exceeded their current fair value based on what we think net realizable value is in today's environment.

The second conclusion of this process, is that while we will continue to perfect approvals and build value, we do not realistically see significant development activity this year. The reality is that it's hard to make a rational case that land values are going up or that development yield requirements are going down. Until we get better clarity on true land value and future yield requirements ,it does not make sense for us to continue to increase our investment base in these land holdings. As a result, we will no longer capitalize interest, real estate taxes and other carrying costs into land basis on any projects during 2009. Rather all of the previously capitalized charges will hit our 2009 income statement and that primarily accounts for the reduction in the up rent of our range from $2.27 down to $2.21. And in looking at the low end of our guidance as Howard will elaborate on, our previous low end was $2.17 when you adjust that with this land carry issue as well as several sense of potential income loss to unknown tenant credit situations and just simply a more caution outlook on the back end 2009 leasing rental ramp due to continued challenging market conditions, that brings our the bottom of our new range down to $2.04. So our new range is $2.04 to $2.21. And at this point Howard will now review our year end financial results and provide some additional color on our guidance and capital plan.

Thanks Gerry. We had a very productive fourth quarter on both operations and financial activities. And entered 2009 with some of the strongest financial metrics and balance sheet characteristics that Brandywine has delivered in the past few years. These include liquidity, leverage covenant compliance and financial flexibility to execute our plan. Yet we are fully aware of the challenges ahead and are taking all possible steps to further strengthen our liquidity and capital availability. In looking at the fourth quarter, FFO funds from operations totalled $57.8 million in the fourth quarter or $68.7 million without the imperilment charge versus $53.8 million in the fourth quarter of 2007. FFO per diluted share in Q4 in 2008 was $0.64 or $0.75 without the imperilment charge versus $0.59 a year ago. Adjusting for (inaudible) purchase gains and the non-cash land imperilment as many of you do, are $0.58 adjusted FFO beat the Q4 consensus FFO of $0.54 by $0.04 a share. A testament for the stong performance of our core portfolio. Our FFO pay out ration is a very strong 68.8% on the $0.44 dividend paid in October or 58.7% without imperilment. Few observations on some of the components on the Q4 performance. Rental revenue was up slightly on a sequential basis with a continued positive shift towards increasing cash rent versus a year ago. Recovery income was boosted by a little over $4 million of fourth quarter cam true-ups. Term fees and other income were at the low end of recent results. Our gross management income was $5.2 million or $2.6 million net of associated costs in line with Q3 and recent results. We booked $4.6 million of JV income. This was boosted by a $3.2 million sale related distribution on Five Tower Bridge which we exclude from funds from operations.

Our operating expenses of $44.5 million are up from recent levels due to our incurring an extra $2.5 million of non-cash reserves in the fourth quarter for potential bad debt. Our G&A of $5.1 million was a bit lower than our typical run rate due to true-ups year-end bonus accruals offset by severance charge for certain headcount reductions. Interest income includes imputed income on the mortgage loan from the Oakland sale in October 2008, interest on other notes receivable and interest on temporary cash balances. Interest expense of $35.9 million was a bit higher than recent periods despite lower debt balances due to lower capitalized interest in the fourth quarter. As of January 1, 2009, we'll be capitalizing interest on a reduced construction and process balance. Deferred financing fees are higher than recent trends due to accelerated write-offs on account of the debt repurchases.

We realize $16.3 million of gains on these purchases which aggregated $134.2 million of face debt amounts. And lastly, we booked the $10.8 million non-cash impairment charge related to review of our land inventory. On a same-store basis, cash rents increased $3 million while non-cash rent items decreased by $4.2 million amplifying our shift to more favorable cash rental income. Recoveries increased by $5.4 million where as expenses a same-store basis decreased $1.7 million. For the quarter, same-store NOI increased 3% on a GAAP basis and 8.8% on a cash basis, both excluding termination fees and other income items. FFO for the full year totaled $249 per diluted share or $2.68 with the $0.19 of total impairments added back in. Our full year FFO payout ratio equals 70.7% or a very strong 65.7% with the impairment added back. CAD remained robust at 59% per share versus 46%, 48%, and 52% in the prior three quarters. We are continuing our run of low cap-ex, declining non-cash items and good dividend coverage. And we're pleased to report a 74.6% CAD payout ratio for the fourth quarter. The $11.4 million of revenue maintaining capital costs in the quarter are the driver of this result along with significantly lower non- cash straight line rental income. Year-to-date or for full year 2008 our CAD per share folded $2.04 per, resulting in a 86.3% CAD pay out ratio for the $1.76 of common share dividends paid. We expect even better CAD and FFO coverage ratios with our new $1.20 dividend guidance.

Our ratios for both NOI, recovery and EBITDA margin were strong with the recovery margin boosted by the fourth quarter cam true-ups. And it's reflective overall of a movement to more triple net lease structures.

In terms of 2009 guidance, Gerry gave a lot of highlights. And I'll few in pieces. As he mentioned, we're revising 2009 FFO guidance from $217 million $227 million to now be in a range of $204 million to $221 million. This revision is attributable to suspension of capitalized interest and expenses on land, which we estimate in total at about $0.05 per share. Uncertainty on year-end 2009 leasing targets and potential credit losses which in the aggregate could be as much as $0.6. Key 2009 assumptions include for the same-store properties negative 3.5% to negative 2.5% GAAP same-store NOI growth or declines rather excluding termination and other revenue while on a cash basis it will be flat to down 1%. We still expect good performance on our rental rates with GAAP mark-to-market of 2% to 4% up and a cash mark-to-market of flat to down 2%. Year-end occupancy reflecting the third and fourth quarter ramp in activity is projected to be up 100 basis points to 93.4%. We're still seeing $25 million to $35 million of gross all other income items and $15 million to $25 million on a net basis. And our G&A should be in the $20 million to $22 million level overall or between $5 million and $5.5 million per quarter. We have no acquisitions programmed for 2009. Gerry already touched on the investment activity and the financing needs as well as the sources for those.

Jumping down, the interest expense should be similar due to lower capitalized interest, despite lower balances. Our guidance also includes about $4 million of incremental interest for convertible revaluation under APB14-1 at a 4.5% rate. We will add back this non-cash interest expense in our CAD calculation.

In terms of dividend guidance, we're still holding to the $1.20 we laid out last quarter as being reflective of our 2009 taxable income and this should conserve $40 million to $50 million of additional capital for our liquidity needs. Still expecting to pay an all cash quarterly dividend though our board will continue to evaluate it at its regular quarterly dividend set dates.

In terms of accounts receivable at 12/31/08, we had $3 million of fairly predictable third party receivables and $13.6 million of operating receivables with a reserve of about $4.9 million or about 36%. We also had straight-line rent receivables on a gross basis of about $97 million and a reserve of $10.6 million or about 11%. In the aggregate, we boosted our reserves by an extra $2.5 million in the fourth quarter.

On the balance sheet, we're very pleased with the movement in our debt to gross real estate cost coming in at 50.9% as we move to push this below the 50% level.

Our $600 million line was $153 million drawn on 12/31/08 and reflecting activity over the past six week is now about $174 million drawn. As a result of sales, financing activities, including debt repurchase and operations, our covenant compliance on both of our credit facilities and unsecured senior debt is generally at its strongest levels in over two years. We are proud of this result and hope to build on in the coming quarters. A strong balance sheet is our top priority.

Great, thank you very much. Howard. There's no question as glad as we all were to have 2008 end. 2009 will no doubt westbound a tough year for both the economy and our industry. The economic environment has wide ranging, still evolving implication and the office business will certainly feel the effects of job layoffs, dislocated capital pricing, and global deleveraging. While the implication in this turmoil may be pervasive, at an operating level our team and portfolio have seen difficult times before and we know the ingredients to successfully navigate a downturn in real estate fundamentals.

One thing that is clear is that in this type of climate, definitive actions need to be taken to ensure a successful outcome. All of our objectives that I've touched on and Howard touched on saw with the recognition that holding our breath and simply waiting for recovery is not an acceptable strategy. A clear path with well understood expectations is the appropriate course. We believe we have outlined a defined path with reasonable targets and milestones to address our maturities and development commitments over the next several years. We have a very well-positioned asset base with a strong operating team, a strong pipeline of leasing activity, free cash flow and a very strong competitive position. The portfolio has been cycle tested and historically performed well. So as challenging as we expect 2009 and possibly 2010 to be, we are well positioned to outperform our competitive set. Our tenant service teams in every one of our regional offices has done a great job of building strong tenant relationships that really do make a difference in times like this. There is little doubt that the collapse of the investment grade in CMBS market has injected risk into everyone's capital structure. Where as we spent a great deal of time in the past layering out a very managed stage debt maturity schedule, the current financing climate has made that strategy mute and creates pressure for us to ensure ample liquidity as we look into 2010 through 2012.

With our midterm debt trading at north of 18%, yield of maturity, our stock trading at a 12% implied cap rate, the market is clearly focusing on our ability to access capital. In this climate, we understand that skepticism and can only allay your concerns through continued execution. We had a very good last five quarters in terms of sale and joint venture activity by raising approximately $750 million of liquidity. While a portion of that went to our development and redevelopment pipeline, over $500 million as we've touched on, went to reduce debt and create capacity through 2010. Like most companies, we still have work to do and are determined to get it done. While pricing in the sales, joint venture and secured financing markets are not as favorable as any of us would like, we still expect to meet the targets we've outlined earlier. Given our stock trading range, debt pricing dislocation, we have a good opportunity to continue to enhance liquidity, delever and do that with a marginal level of dilution. And we plan to take advantage of what opportunity that window presents. Given the total overlay of uncertainty, any plan has execution risk. Ours does as well. Given than immutable however are targetswe've believe are very reasonable, manageable and create a very effective plan to bridge us through to a time of more financial market stability. Aside from planning for our debt maturities, our largest capital exposure is our 20 year fully leased government project in university city, Philadelphia. There's clearly a financing market for this transaction. Again, pricing may not be what we originally hoped for, but we're confident that meeting our objective of finding an off credit facility funding source for this project will in and of itself create an excellent source of capital at a corporate level for us to address future maturities.

In addition to addressing liquidity and having stable operations, an additional objective is to manage our G&A and administrative expenses. We have implemented a variety of tactics ranging from base salary freezes, vendor renegotiation programs, aggressive real estate tax appeals, staffing level reassessment, and discontinuing of some non-core functions, all to ensure that we operate as effectively as possible.

On a final note, and to amplify Howard's commentary, there's been much discussion regarding substituting stock for cash dividends. This initiative led by [Navery] gives all companies an opportunity to evaluate this option as the year unfolds. We're clearly living in unprecedented times and preserving optionality is key part on any business strategy. That being said, our board has made no determination on our future dividend composition. We believe we have an excellent road map top raise sufficient capital to the programs discussed on this call. Our board while certainly recognizing the need for continual assessment is a very strong advocate of the REIT model and that a cash dividend is a key component of that structure. As such, I would never rule out an action that might be in our best long-term interest. Our strong preference is to maintain our dividend at its current readily supportable level and continue to pay it 100% in cash. I would like to thank you for listening to the call. At this time, Crystal, we will open the floor up to questions and would ask that in the interest of time you limit yourself to one question and a follow-up. Thank you.

(Operator Instructions) Your first question is from Michael Bilerman with Citi.

Good morning, Howard, you talked about your same-store cash going flat to down one. Obviously last quarter you were up 2% to 3% so about a 3% change about $10 million or so and you've talks about this credit loss of tenants you haven't targeted yet but banking in some and then maybe some leasing targets. Can you kind of walk throughout some of the specifics of it. What actually changed between the November forecast and today in terms of the 300 basis points move and your thinking so we can understand it a little bit better?

I think our new plan as we've laid it out builds in a much higher degree of caution and conservatism both around the prospects for the upper end of that leasing range as well as well for what unexpected credit events that may happen this year. We don't break it out specifically by quarter as to how it might happen, but on an overall basis we felt that bringing it to those new levels was more realistic and reflective of the risks in front of us.

How much credit reserve was there in the previous same-store versus today? I'm just trying to isolate the two things. If it's really a change in occupancy targets to the end of the year or how much is due to this unexpected credit loss and the change here is about $10 million on NOI, just the 3%. And so I'm just trying to isolate that a little bit more and really understanding how your thinking changed?

We see about $0.06 related to the combination of uncertainty on leasing as well as the potential credit loss.

So that translates to more like $5.5 million to $6 million. I'm not sure where your $10 million number is coming from.

I'm just doing the 3% on $30 million or so of same-store NOI in terms of the change in previous guidance.

I don't have an answer to your question as you phrased it. Irwin had a follow-up as well.

Gerry, you mentioned in your prepared remarks sort of the deleveraging plan and ways in which you were planning on mitigating FFO dilution. I'm just wondering if you can give us more specifics bridging the gap. I'm having trouble getting to a number that isn't very diluted because of the very low rate on the debt that's maturing over the next couple of years somewhere between 4% and 6% versus the refinance options that are out there either secured debt or asset sales and yields that were well higher.

Irwin it's Howard. I think the control factor in all of that or the wild card is how much debt repurchase we can do as we lay in those sales. Because the rates that we'll be retiring that debt potentially far exceed the rates at which we'll be selling properties so we'll both protect the dilution as well as amplify deleveraging in that process And you saw a lot of that in in Q4.

I think that, Irwin, coupled with these development projects in which we're carrying pretty much the full value today coming online over the next couple of years will also be a contributing factor to that. But certainly one of the opportunities of the marketplace presents with its dislocation on the debt pricing side is -- it gives a company like ourselves an opportunity to be more aggressive on generating sales and joint venture proceeds and applying those dollars into a buyback of some of our midterm debt maturities.

Your next question comes from the line of Jordan Sadler with KeyBanc markets.

Good morning. I just wanted to follow-up on two things. The financing. Can you just maybe walk us through where you stand. I know in your opening remarks, Gerry, you mentioned the sources for 2009, $160 million in mortgage financings. Refinancings, and $90 million in process. I don't know if I missed the punch line there. I didn't hear the rest of where that stands. And then secondly, just on Sierra, where we are in that process and what expectations pretty broadly you have for that.

Howard, why don't you take the first part.

Jordan, I'll jump in. When the mortgage refinancing. As you know we have about a $70 million principal mortgage maturing in July. We've got a refinancing lined up that will actually slightly increase the proceeds reflective of a reasonable loan to value and we hope to close that sometime in the second quarter. That would leave us with about $90 million of additional mortgage financing in our plan. We're going to market with a particular situation we think could raise as much as $50 million and that would leave as yet unspecified $40 million in one to two other situations. And we may exceed that but that's what we've built in right now. In terms of the Sierra financing, we are in the market right now to a group of banks who are evaluating materials and information for the potential construction loan. Still too early to tell how that's going to shake out but we do have a lot of interest in what is clearly a very unique and high-quality project. Out of the those efforts and really out of our own desire, some longer term permanent solutions are also being pursued with a number of intermediaries and potential long-term lenders.

Follow-up on Sierra. Gerry, do you have the ability to cease development there if the financing you're able to a-- if you're not able to achieve financing that would make that deal economic given the rest of --

Do you say do we have ability to stop developing the post office project?

Right, you have $275 million left to spend. If you can't raise $150 million or $200 million of cash to fund it, you've got a tougher struggle ahead of you in the forward-looking two years and so do you have at ability to stop it to preserve liquidity to save the entity.

No, we're under a lease with the the federal government on the project, definitive delivery date. You never preclude the impossible. All of our focus now is centered on maximizing the financing structure there. One thing that has gotten a little bit lost in the shuffle. We raised a permanent source of capital in the company. Gross proceeds of $77 million or 22% of that project's costs, but while the accounting flow through is a bit different that does provide a good frame of capital for us to address at the construction there. And certainly to add on to Howard's commentary, given the breadth of the discussion we've had with both interim construction lenders and several I think very high quality longer term sources, I think given the strength in the bondable nature of that government lease, we feel very confident that we're going to be able to meet our financing objectives on the project.

Okay, that's helpful, thank you.

Your next question comes from the Jamie Feldman with UBS.

Thank you very much. Can you talk about your change and assumptions in credit reserves or credit concerns? Where these tenants are? What industries they're in and what's changed in your view since the first time you gave guidance?

For the adjustment we made in the fourth quarter, Jamie, we went industry by industry, category by category and looked at the historical ranges we've used for reserves and in many or even all instances moved up the dial a little bit within those ranges. It is not necessarily reflective of any particular bad debt experience to date. So it is exactly what we said it was. It's a non-cash reserve. But we do believe there will be surprises out there. We just don't yet know what they are, have clear signals as to who they are. For 2009, we built in the same potential expectation of the possibility or even probability that we'll have to add at some point during the year in a similar construct. And that was a component of the guidance revision but at this point it's non specific.

And Jamie, we have always operated on the premise that we're at it's course-- a great degree secondary business and as this climate has changed, we've got people in our field offices doing additional space walk throughs, reconciling security card cancellations to layoffs, having a lot more conversations with regional managers and decision makings that are tenant-based. I just think we're focused on marrying up what we view the quantitative side of what we see in the financial settlements with what we're seeing in an operating level to ensure that we do everything we can to stay ahead of the curve on any potential credit issues. Part that is addressed by taking upfront reserves and increasing our waiting as Howard and Gabe did at the end of the year. The others as the operational reviews in the third is what we've done in our 2009 guidance which is factor in a level of caution relative to tenant fall outs.

Which markets do you say are causing you the most concern or the most incremental concern?

I'm sorry, Jamie, you cut up on the.

Which geographical market would you say your view has changed the most of the downside.

From a credit standpoint?

Yes

I think it's across the board. We go through a pretty thoughtful process based on SIC classifications. We assign waitings to all of those different SIC codes. Every tenant is categorized in that framework and it's really more of an industry versus a geographic computation place and we actively review that to make sure we are generally well reserved and certainly to the extent we think we have any credit exposure. We talk about those as part of our ongoing business reviews with all of our managing director. Every managing director brings in their list of their credit concerns they have that might be driven by lower utilization of the space, overall pen and credit situations or just rumblings they are hearing on the street. So we have a real-time discussion flow through the company that's really geared to identifying where we might have some potential hurdles.

And then on the fourth quarter sales, I see there's some seller financing. Do you think that's something we should expect to see going forward? And how would you characterize your process in dispositions right now?

I'm not sure it's something we want to do in any event but sometimes to bridge it. In this case was a fairly small one year piece of paper that was simply designed to bridge out the timing of equity contributions with the debt level provided by the local bank.

I think it amplifies the fact that in this kind of climate you just need to be flexible on pricing and also flexible on terms. But as we are in the market for either a sale or a joint venture, we're looking at to raise as much cash as we can to the extent that there's a fairly good pricing tradeoff behind bridging -- behind the first mortgage with sufficient equity and cash flow behind it. That's actually not a bad business for us right now in order to meet our longer-term objectives.

Your next question comes from the line of John Guinee with Stifel Nicolaus.

John Guinee here. Thank you. Nice job on the sources and uses. First, Howard, on page 16, your CAD analysis. Any reason you didn't deduct your debt extinguishment gain out of that?

We just don't do it. We didn't do it in the first quarter, the second quarter or the fourth quarter when we had those gains. We do believe they reflect a cash event because in fact we won't have to repay that cash. Exactly where and how you apply that could be up for debate. But our practice is to book it and leave it in and in the second quarter it's realized.

OK. Second, can you discuss your unencumbered asset pool in terms of number of assets and amount of NOI and your ability to borrow against this asset pool until you hit up against some sort of covenants?

Generally just about 80% of our assets are unencumbered. I don't have exact counts in front of me. That's about $4 billion of gross value real estate. It fully supports a tremendous amount of mortgage debt capacity. We're going to monitor covenants a go-forward basis. Certainly the plan we've laid out for 2009 and well into 2010 works on all fronts, but we'll continue to watch NOI levels at the respective properties. The costs of the debt, all of those are inputs into those calculations, and we'll continue to maintain a very healthy margin on all of those calculations and recognizing that the fourth quarter was really one of our strongest yet.

Okay, so to try to get a little specific you've got unsecured debt now of about say $480 million. How high can that number get until you've maxed out against your unsecured debt covenants?

We have not necessarily calculated nor provide that number. What we can say with certainty is that $180 million in the plan, the amounts we've contemplated for 2010 and beyond are all accommodated by our covenant calculations.

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

Hey, Gerry, Howard, good morning,.

Hi, Dave.

Wanted to ask a little more on the packages for disposition that you either have in the market now or maybe contemplating and less on pricing but more of the characteristics that got you to those assets. Maybe what type of LTV and a rough range you have and ultimately what you hope to get out of the those sales.

I'll address parts of that and the rest of the team can certainly jump in. As as I mentioned on the last call we went through a fairly extensive process on an annual basis. We updated that towards the end of last year. We analyzed every property in our portfolio based upon its NOI growth rate. It's capital to NOI ratio as well as what we view to the value accretion possibilities over the next five years through a fairly detailed financial model for each project. That was a key point in screening what assets we want to put on the market. Was coupled with recommendations by our managing directors who obviously know the local market specifics better than we do relative to what they thought would be an executable transaction in this kind of marketplace. As we look at the first wave of assets we're marketing, Dave, it's north about $300 million. It is in five different states. The asset size range as low as $3 million to $4 million to a high of $60 million. Some assets are stand alone. Some are small parts. And I think as I've talked before I think one of the thing we're going to see for the next few quarters is probably a higher level of traction on some of these smaller sales. And I think that what we've layered out there in terms of projects we're marketing down in the Metro D.C. area and Richmond and Pennsylvania, Delaware and New Jersey. All factor into the criteria that we think based upon our own financial analysis and what feedback we've gotten from the brokers that we've hired to market the properties, it should be in good shape in in terms of getting projects across the finish line.

What about debt on these assets? Is there any characteristic with respect to debt across the board.

Very good question. Most of the seats we have on the market today are unencumbered. We're certainly, in some of our joint venture discussions and some of the portfolio discussions we're having with specific parties, there's a combination of assets that not included in this pool I just mentioned that have some level of secured debt. So we're not adverse at all to the idea of looking at some of the our debt pools and marrying those up with a potential equity source for either a sale or joint venture undertaking.

Do you say in your initial comments $160 million to $180 million of asset sales was what was contemplated this year and again next year.

I did. Between $150 million and $200 million each for the next two years. Our target for 2009 is between $160 million with the upper end of $180 million. When I walked through the source we used the $180 million number.

Your next question comes from Richard Anderson with BMO Capital Markets.

Thanks and good morning.

Good morning.

I just wanted to touch more on the disposition topic again. First of all, what did it offset from the previous guidance? Why did it go up and what shortcoming did you have that required you to up your disposition target?

I think one of the key issues and I'll defer to Howard for the detailed answer. We accelerated our bond buyback activity in latter part of 2008 and continued that distribution into the early part of 2009. That's an important consideration for us because if you remember from our call in November, one of the things we really want to try to do is keep our line of credit as unused as possible. Look, that line of credit with its maturity extension goes out to 2012. It's a $600 million line. It is an arguable point. Today whether that line would be renewed at its current level, even at a different pricing metric. So I think one of the thing we're trying to do is we factor in, as we develop our capital plan for the next several years is to rely as little as we need to on the line of credit as our primary financing. That does put additional pressure on us to meet our asset sales targets and to more aggressively look at joint ventures as Howard articulated layer in some very achievable financings. But I think the driver, Rich was really the acceleration of our debt buyback program. Remember, most of our line of credit outstanding balances is because we're buying back debt.

Right.

But the reality is that the driving predator is that we want to keep that line of credit subject to the discipline of pursuing other capital. So with higher dispositions in an ever-changing and tougher marketplace, higher cap rates, yet no impact on guidance, so that means then, of course you're offsetting that dilutive impact of higher dispositions by a higher level of debt repurchases.

I assume that's how the math works. Is that right?

Yes, I mean potentially it's not a precise science. It also depends the timing of some of these sales but we do believe if we can execute our sales earlier, where they would be more dilutive to the year, we can offset that and perhaps even overcome it in a positive way with accelerated bond buybacks.

How much bond buyback activity is in your '09 guidance?

We have not spiked that out. What we will tell you is that bond buyback gains are part of the $25 million to $35 million of other income items that we expect to achieve for the year.

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

Thank you. Howard, you alluded a couple of times to covenants being in a better position than they were two years ago. Would you be able to quantify where you were at two years ago and where you were at today?

No, I can't more have we because we've not been a discloser of our covenant calculations in the past but we're very pleased with how the results came in this quarter.

Seems to me that now would be the time to be a discloser.

It's something we continue to evaluate.

And in regard to the construction loan for the IRS building, can you help me understand why that's not closed yet, given the type of lease you have in?

I think the prime reason for the delay, Cedric as we talked about on the last two calls, is the -- proceeding with both of the historic tax credit and the new markets tax credit created a fairly complicated structuring challenge for us to ensure that we had from a finance reporting and from a tax standpoint all the cards lined up. So we needed to really see how that worked its way through the process and to some degree those structuring details were determined by the buyer of the tax credits and until that closed we actually couldn't provide a clear road map to a construction or a more permanent lender on exactly how the government lease would play with the master lease with the tax credits. That's why we're happy to get that done by the end of the year. Get all of the structuring documentation pulled together and as Howard touched on, pulled that together in a cogent presentation for lending (inaudible).

Okay. And maybe one final question. In regards to the asset dispositions you have planned, can you give us a sense of the type of buyers that are in market right now for those types of asset?

Sure. We've had a range of buyers. For example the small sale that we closed a little bit ago was a local investment group that frankly accessed a regional bank for about 60% to 65% of financing. On some of the the larger transactions, the parties that have executed confidentiality agreements range from again some of those smaller investment groups to some of the call it traditional -- traditional acquirers of be it pension fund advisers, or be they direct pension fund to buyers (Operator Instructions) Your next question comes from the line of Michael O'dell with Met Life.

Thank you. Just trying to reconcile Gerry's comments on the balance sheet liquidity being the priority with -- the fact that there's execution risk around any liquidity plan. With a plan to continue to pay your dividend in cash. That seem like a viable option. To raise cash.

Look, I was very clear on my comments as was Howard on the fact that this stock dividend option does provide something for our board to evaluate based upon how they see the success of our capital plan progressing during the balance of 2009. The philosophical bias of the board of the management team is that we reset our dividend towards the end of last year. Set it to as Howard articulated, a very reasonable support levels based on cash flow. We do believe that if we can meet the provisions of our capital plan, that is a preferred way for us to raise capital as opposed to providing our shareholders with a percentage of stock as part of the overall cash dividend.

Okay. Then just on the secured financings, what is the average size you're targeting there and who are the lenders?

We will probably do the two larger ones. One in excess of $70 million. And the other one probably as much as $50 million. But, generally I suspect they will be smaller because that seems to be the deepest part of the market, whether it be life company or some of the smaller banks. So probably in -- hopefully $20 million would be the minimum just for efficiency standpoint and probably up to $50 million seems to be the biggest spot in the market right now.

Great, thanks.

Your next question comes from Chris Haley with Wachovia.

Good morning. If I can ask a couple questions. I hope that's okay. I want to clarify the changes to the guidance range if I may. If I understand this correctly, Howard, you are including the year-to-date buyback gains of 2009 in the new guidance?

That's correct.

Okay and so the two at low end. The $2.17 prior guidance moving to $2.04 includes a positive impact of approximately what amount?

No positive impact because buyback gains were certainly contemplated in the prior guidance for other income.

Okay. Thank you. On the land capitalization that's roughly $0.05, $5 million. What is the base, the denominator or the dollar amount for land capital that you're then capitalizing?

The only thing we're going to capitalize is what is on page 31 of our supplement. It's primarily the two Sierra projects, a very small amount of construction and progress related to redevelopments and other projects but it's primarily Sierra at this point.

Thank you, what amount -- dollar amount will you no longer be capitalizing?

We pulled out at quarter end about $55 million specifically and then remember by the end of the fourth quarter all of our other projects similarly migrated off of the capitalized interest as a matter of course.

-- Chris, just so we're clear we're not capitalizing interest on any of our land holdings in 2009. I'm sorry, go ahead.

There are no further questions at this time. Presenters, there are there any closing remarks?

Thank you all very much for participating in the call, and we look forward to providing you with an update of our business plan on our first quarter call in a few months. Thank you.

Thank you for participating in today's Brandywine Realty Trust fourth quarter earnings conference call. You may now disconnect.