Brandywine Realty Trust (BDN) 2009 Q1 法說會逐字稿

(Operator Instructions) I would now like to turn the conference over to Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust. Sir, you may proceed, sir.

Beverly, thank you. Good morning and thank you all for joining us for our first quarter 2009 earnings call. Participating on today's call with me are Howard Sipzner, our Executive Vice-President and Chief Financial Officer; George Johnstone, our Senior Vice President of Operations; and Gabe Mainardi, our Vice President of Corporate Accounting.

Before we begin, I like to remind everyone that certain information discussed during our call may constitute forward looking statement within the meaning of the federal securities law. Although we believe the estimates 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.

With that said, during the quarter, our primary efforts remained focus on balance sheet management and maintaining stability on real estate operations. We are pleased to report progress on both fronts.

In addition to reviewing our operating results, the primary topic for the call is an update on our capital plan. As we had previous identified our capital program for 2009 consists of three primary components: first, secure debt financing; secondly, asset sales; and finally, a third-party financing program for our IRS historic renovation and garage construction project.

On the secured mortgage component, our 2009 capital plan contemplated $180 million of mortgage financing. On April 1st, we closed a $90 million financing on our Two Logan property. This property was already encumbered with $68.6 million mortgage with the face rate of 7.78%. The replacement rate on the new mortgage was 7.57% for seven-year term, three years interest-only and the loan was provided by a life insurance company.

In addition to that activity, we undersigned application for a mortgage on our One Logan property in Center City, Philadelphia. That project is currently unencumbered. We anticipate a mortgage funding level of around $60 million for a seven-year term that will close late second or early third quarter. These two financings put us at a $150 million mark. As previously stated, our objective is to enter the mortgage market later in the year with one or more smaller properties to fill the $30 million remaining gap in achieving our $180 million annual goal.

Our 2009 business plan also contemplated $180 million of sales with another $160 million programmed for 2010. Sales and joint ventures remain one of our most cost-effective sources of raising capital. We entered the market in the first quarter with a variety of assets that we had targeted for sale. As we suspected, the market is challenging but surprisingly active. As such, we are pleased to report that the first wave of our potential sales has been successful. In the first quarter, we closed on $10.1 million of sales.

We are under agreement or in advanced contract negotiations on $160 million of properties. Of that amount, $26.5 million closed yesterday. $85 million is under firm contract and $50 million in advanced contract negotiations or letter of intent negotiations.

The property closed yesterday was sold to a private buyer at a cap rate very much in line with our targets. On one of the deals under contract, there is a 50% loan to various financing contingency which while we feel very comfortable in having that thing achieved, there's still a potential variable on that transaction. The remaining $50 million that we have under contracts or letter of intent are all in or will shortly be entering the due diligence phase. We are expecting these transactions to close during the second and third quarter. We are also expecting additional offers on several other properties.

On the properties we have sold or have under contract or letter of intent thus far, we will have an average weighted cap rate in line with our target of 9.5%, but there is a high degree of variability within each specific transaction. Our bid list on each of these properties varied dependent on the property's location, growth prospects, etc. but represent a blend of institutional all-cash buyers mixed with private investment groups who are seeking traditional financing between 50% and 65%. One of the properties we do have under agreement will necessitate us taking back a purchase money mortgage equal to about 25% of the overall sale price.

Just as importantly, in addition to the sales efforts, we also have several joint venture discussions under way on larger pools of assets. And while we remain encouraged with the tone and pace of these discussions, the size and complexity of each of these transactions will result in potentially protracted closing time lines.

All in all, on the asset sale front, we're very pleased with our progress to date and increasingly confident of our ability to meet or exceed our 2009 target. The overall tone in the investment market seems to be improving but it is still a bit too early to tell. But we have seen that trend through the bidding process on a number of assets.

The third component of our 2009 capital plan is the financing program for our IRS project. As we noted in our press release, we have a total remaining investment obligation on this project of $257 million. Our program for this project involves an interim financing solution through a construction mini-term loan and or a longer term bondable type of financing. Both paths are being actively pursued with excellent progress to date. And as we have consistently commented, we anticipate an announcement during the first half of this year. In the meantime, construction is moving forward and we've had additional value engineering savings on the garage and do at this point anticipate some construction cost savings on the main facility.

The historic and new market tax credit structures are set and those moneys will flow in on schedule. And again, we have a very high degree of confidence in executing a transaction that will eliminate our need to finance on an open-ended basis the additional investment from our line of credit, thereby preserving that capacity for upcoming maturities.

Last comment, our balance sheet, while much progress has been made over the last five quarters, our leverage thus remains higher than we would like. The capital plan I just outlined, and we've talked on that on previous calls, is designed to show a clear liquidity bridge for us through 2010 and in 2011. We do plan on remaining a strong investment grade credit with a high quality of well-diversified portfolio.

Along these lines, as Howard will touch on, we had continued to take advantage of the discount from the buying market as a potential de-leveraging tool we can use. And while the credit markets continue to tighten, there are still spot opportunities available. And along these lines, last night we did launch a tender to $100 million of our 2010 bonds at a stipulated price of 93%. Sources of capital fund that tender will be anticipated closings that we've already achieved or will have from sales in our mortgage financing.

So overall, our 2009 capital plan, as the first quarter closes out, we are very pleased with our progress and certainly look forward to making continued progress during subsequent quarters.

Turning our attention now to the real estate markets, we continue to see fairly predictable activity. The market is performing as we thought it would. Activity and absorption levels are down. Lead time and periods to get deals done are longer. And a higher percentage of deals are stalling at advanced stages of negotiations as tenants continue to remain reluctant to make the capital decisions necessitated by signing new leases.

Tenants remain primarily focused on finding bridge solutions to their real estate requirements. And while we're beginning to see some signs of that changing, most tenants are still pursuing shorter term solutions. Despite this, we had a fairly active quarter with some very good data points. For the quarter, we had 718,000 square feet of leasing activity, consisting of 118,000 square feet of new deals, 89,000 square feet of expansions by our existing tenants and 510,000 square feet of renewals. That total leasing activity level is in line with our fourth quarter '08 activity of 742,000 square feet, and actually greater than the activity we achieved in both the second and third quarters of 2008.

Our core portfolio occupancy, excluding the four developments and lease-up, was 91.2% and 92% lease, respectively. Including the developments, core occupancy was 89.3% and 91.6% lease. These numbers are down quarter over quarter but very much in line with our expectations and are primarily related to the 128,000 square foot lease rejection that arose out of Circuit City's bankruptcy.

On a cash basis, or seems to result to post an increase of 5.6% excluding termination fees. Our tenant retention rate for the quarter was a strong 78% excluding that bankruptcy and compares very favorably to our run rate of the last several quarters.

Capital costs as a percentage of GAAP rents remains in the single digits. While costs ticked up marginally during the previous quarter, the first quarter numbers did incorporate two 100,000 square foot renewals with slightly higher capital costs. Without those two large deals, our capital costs would have been close to the 5.5% of GAAP rents.

Activity level -- that is traffic to our portfolio -- rose 21% quarter over quarter with an increase in every one of our operations with the exception of New Jersey. Traffic activity increased in with our [strongs] in our Pennsylvania suburban operations, metro DC and in Austin, Texas. Activity levels I mentioned declined in New Jersey and we're down about 26% quarter over quarter.

While I've not seen any big upward pressure on concession packages particularly on the capital side. The percentage of deals we did during this first quarter that incorporated free rent rose quarter over quarter from 23% in the first quarter up from 14% in the fourth quarter of '08. We continue to make very good progress on our 2009 expirations. Of the original 3.5 million square feet that we had rolling, we have executed about 46.5% to date and continue to make good progress on that front.

Our GAAP increase on lease renewals during the quarter of 11.2% was our best in five quarters. Conversely, our GAAP rent on new leases had our first decrease in five quarters. So, another clear indication of the importance to all of us in keeping our existing tenant base in place.

Credit does remain a concern. As Howard will touch on, we did increase our reserve amounts. On the last call, we identified the potential for future reserve issues impacting our 2009 guidance. This quarter, our FFO reflects an increase in our reserves of additional $2.9 million. And Howard will touch on those, the rationale for that in a few moments.

Our leasing staff continues to ferret out direct deals. And during the quarter, we had 104 transactions which represented 47% of the deals and 24% of the square feet done directly by our leasing staff.

Another interesting window into tenant psychology is that, of the deals that we tracked, fully 50% of the tenants changed their minds about relocating once they entered the market looking for space. That's clearly another indication of the dilemma tenants' face in balancing their own capital commitments and making a longer term real estate solution.

So overall, the economic climate, while becoming more possibly biased in the last 60 days, has still created a bit of an overhang issue in the minds of our tenants. And frankly, they are confused about what to do. That makes our job that much harder. But our objective is to keep them focused on staying where they are and signing effectively priced renewal transactions. We will, of course, continue to be very price competitive in order to keep our tenants, but more importantly, to attract new tenants to our various properties.

In looking at the broader market place, year-to-date leasing activity and absorption levels are down in just about every one of our key markets. We do however continue to outperform market occupancy levels by between 150 to 1500 basis points. Maintaining this level of positive market out-performance will certainly be a challenge, but one that we were able to achieve during the last market downturn. As we alluded to on the last call, the last difficult operating climate between 2001 and 2004, our portfolio, with very few exceptions, outperformed the competitive marketplace by a wide margin.

So with that overview on the market and on our capital plan, Howard will now review our first quarter financial results. Howard--

Thank you, Gerry. We had a very productive first quarter on both operations and financial activities and continued our efforts to maintain liquidity, strengthen our balance sheet and reduce leverage. As you will see in our press release and supplemental package, both available on our web-site, our reported results include a retroactive application of several new accounting pronouncements covering convertible debt, treatment of minority interest and the calculation of FFO.

Please follow-up with us directly if you have any questions on any of these.

In the first quarter of 2009, funds from operations or FFO available to common shares and units, total of $50.5 million or $54.2 million without the $3.7 million impairment. FFO for diluted share in the first quarter was $0.55 or $0.60 without the impairment. The impairment was related to an expected sale that in fact closed just yesterday but did not qualify under the accounting rules for either held for sale or discontinued operations treatment. Excluding the $0.04 impairment, we beat the $0.57 analyst consensus by $0.03 and beat consensus by a full $0.06 if you also back out the $0.03 or $2.9 million non-cash credit reserve. Our FFO payout ratio came in at a very strong 54.5% on the $0.30 dividend paid or 50% without the impairment.

Few observations on the key components of our first quarter performance -- Rental revenue was flat with a continued shift towards increasing cash rent. Straight line rent was down $4.5 million versus a year ago and down $700,000 sequentially. Recovery income was down sequentially, reflecting a $450,000 downward CAM adjustment in the first quarter versus a $4 million 2008 fourth quarter true-up increase to CAM revenue, but was up versus year ago reflecting a $2.3 million downward adjustment in Q1 2008. These adjustments take place to match the expenses incurred with the revenues recognized. We're very comfortable with the 37% recovery rate as a good figure going forward subject again to fluctuations and expense timing.

Term fees, other income, interest income, gross and net management income were all in line with expectations and recent results. JV income was impacted by a $570,000 one-time write off of the abandoned investment in the Seven Tower Bridge land project.

Our operating expenses were negatively impacted by the occurrence of a $2.9 million non-cash reserve in the first quarter for additional bad debt allowance. Interest expense declined sequentially and year over year despite lower capitalized interest to the lower debt balances from our debt reduction program. Interest expense includes an extra $1 million of cost related to the adoption of APB 14.1 on the convertible notes.

And lastly, we realized $6.6 million of gain on $75.2 million of aggregate debt repurchases -- $40.3 million on the 2009 tender and $34.9 million in open market purchases.

On a same-store basis, cash rents increased $3.3 million while non-cash items decreased by $4.1 million, continuing our shift to more favorable cash rental income.

Recoveries increased by $3.4 million and the associated expenses increased on the same-store basis by $2.3 million.

For the quarter, same-store NOI increased 0.3% on a GAAP basis and a very strong 5.6% on a cash basis, both excluding termination fees and other income items and notwithstanding a decline in same-store occupancy. Our CAD remained robust, cash available for distribution, at $0.48 per share and we're pleased to report a 62.5% CAD pay-out ratio for the first quarter.

The $8.5 million of revenue maintaining capital costs of a driver of this performance and reflect a continuing trend to lower CapEx expenditures. Reflecting all of these results, our EBITDA and coverage ratios were solid and in line with expectations at 2.6 interest, 2.3 debt service, 2.2 fixed charges and reflect our continuing commitment to the investment grade rating.

On the guidance side, we are maintaining our FFO guidance for 2009 to be in the range of $2.04 to $2.21 excluding the impairments or $2 to $2.17 if the impairment is included, as we've seen many analysts do in the past.

Key 2009 assumptions include a negative 3.5 to negative 2.5 GAAP same-store NOI performance, excluding termination of other revenue and minus 1 to flat on the cash side, GAAP mark-to-market of 2% to 4% up and cash mark-to-market of flat to down 2%. And that's on a blended basis between renewals and new leases, and we're now projecting year-end core occupancy of 91% to 92%.

We continue to see about $35 million of gross other income items as I discussed earlier, and year-to-date, our figure is above $13 million in that category. So we ran a little bit high in the first quarter attributable to the repurchase gains.

Our G&A is coming in as expected at around $5 million a quarter. And again, we're not contemplating any new acquisition activity in our numbers in 2009.

Our capital needs for the balance of the year totalled $525 million. And I'm starting that on April 1st to pick up with the quarter-end figures. We see $250 million of aggregate investment activity including $140 million to be spent on the post office for the IRS and the related garage, $20 million to finish redevelopment lease-ups, $35 million to finish ground-up lease-up, $30 million of remaining revenue, maintaining CapEx and up to $25 million of new leasing CapEx. And picking up on March 31st, $275 million of debt repayment, $68 million in change for the Two Logan loan which, of course, has now been refinanced, $152 million for the 2009 note and $55 million for aggregate buyback activity reflecting the tender we announced last evening.

To raise this $525 million, we're projecting approximately $60 million of free and clear cash flow after payment of the dividend, but before the revenue maintaining CapEx. We have about $24 million of programmed historic tax credit proceeds. We see $170 million of additional asset sales. Recognizing, we closed $26 million of that yesterday. We had $85 million committed and $50 million in the near term pipeline. A $180 million of mortgage financing again reflecting $90 million that closed on April 1st, $60 million committed and another $30 million still to be put into the market. And that leaves us with a balance of $90-$91 million to be funded either off our credit facility or off Sierra Construction financing that we hope to announce in the coming month or two.

We see similar interest expense reflecting lower capitalized interest as we moved away from many of our development activities, lower debt levels, but higher interest expense on account of the convertible bond accounting treatment. And that should translate to full-year figures of $1.40 to $1.50 CAD or anywhere from $20 million to $25 million of free cash flow after the dividend.

In terms of the account receivables, we have mentioned a couple of times that we increase reserves by $2.9 million in the quarter. This broke down to about $1.8 million attributable to straight line rent, about $0.8 million in the general receivable pool and $0.3 million related to legal pursuits. Where that left us at 03/31, was with $5.6 million of reserves, an operating receivables of $15.7 million, a reserve level of about 36% and $12.4 million of straight line reserves against a $97.4 million balance, a 13% level.

We're comfortable with these levels. We feel they reflect the credit quality of our portfolio but in this market and economy, we'll continue to monitor that on a month-to-month and a quarter-to-quarter basis.

Our debt profile remains conservative and moving in the right direction. We brought debt to gross real state cost down to 50.6%. We've repaid well over $500 million of debt over the past year and a half. And we have relatively low secured debt and floating rate debt giving us a lot of flexibility as we move our capital plans forward.

And lastly, we have approximately $4 billion of gross unencumbered assets to facilitate our secured borrowing and to address any of our sales activities. With that, I'll turn it back over to Gerry.

Howard, thank you very much. Okay, to wrap up a couple last comments.

We're clearly focused on executing our capital plan and insuring the portfolio performs in line with our expectations. While still somewhat early in the year, the quantifiable success we've had on the mortgage financing front we think reflects a good pool of traditional lending sources being available for high quality properties with good sponsorship. While underwriting standards have certainly changed, the strength of that large unencumbered pool that Howard just alluded to should put us in a very good position to meet our objectives on this capital plan component for the next several years.

From a sales standpoint, we're again very pleased that we've had such good success thus far. Pricing is where we expected it to be, and given the overall theme of balance sheet strengthening and generating liquidity, these undertakings will put us in a very strong position going forward. Finally, as we mentioned, we are very confident of our ability to announce a third party financing program for the IRS project by mid-year 2009.

Just a real quick note on a couple of our recently completed development projects. The target occupancy for the tenant at our 99% leased South Lakes in northern Virginia remains August 1st, and that work is progressing very much on schedule. Also during the quarter, we had excellent success on our Austin project, the Park at Barton Creek. We signed 79,000 square feet of leases, bringing the project to 78% leased, and in fact as of early this morning, we signed another lease that gets that project to 88% leased. And with some intermediate term activity behind that, we should bring that project to over 90% leased in the next 30 days.

So with overview, Beverly will open the floor -- open up to comments.

Thank you. (Operator Instructions). Your first question comes from line of Jordan Sadler with KeyBanc Capital Market.

Thanks. Gerry, just wanted to follow up, maybe for Howard, just where we are in terms of the IRS financing. You sound like you have a high degree of confidence but you've given maybe a little bit more color on some of the other capital raising activities and you're several months deep -- I'm just, you know, has a number of banks already put their commitments for this or is the mini-term done and you're looking to do a long term or where are we?

Jordan, Howard here. Good question. We have spent the last 6 to 8 weeks working with a handful of existing bank relationships. We've gotten good indications from them and we are working through the mechanics of putting that together into a cohesive group either financing just the post office or potentially encompassing both.

At the same time, based on the discussions with the banks in our own view of the market, ultimately the critical piece of financing for this project will be the long term financing into the extent we can produce some type of forward commitment on that, it both alleviates the late 2010 into 2011 needs and also potentially sets up the banks to have a bake then take out for their relatively short term loan.

So our activity right now and over the next couple of weeks is to play out those two paths, to figure out the right sequencing and either to bring them together at the same time or in a short period of time, one after the other. But activity has been strong, interests has been strong and we are definitely seeing a decent tone in the market and decent interest for this project.

Can you remind us of the expected yield on the project, given that the cost has changed a little bit and the amount of leasing done by IRS has changed a little bit?

Well, if you look at the yields on the gross basis, they're in the 7.5% to 8%. Then once you back out all the capital, we raised on the historic tax credit, they rapidly go up to 8.5% to 9%. That historic tax credit capital will come through the company in an income construct over the in service period and it will not affect our basis and that's proper GAAP accounting for those transactions.

So you just amortize those amounts over the course of the -- over the life of the lease?

That is correct. You know, we would essentially look at the net receipts. It's a little more complicated than that but just to simplify, we look at the net capital raised and once the projects are completed and delivered, we'll begin a recognition period of those -- on the expectation that the partner will exit the transaction at the end of a five year period of time because it becomes economical for them to do so.

And then Gerry, he touched on this a little bit but can you maybe talk a little bit more about the asset sales, the ones that are completed and the ones that are teed up, more specifically? Where they're located and then how that cap rate is calculated?

Sure, I'm happy to. Yes, the sales that we've achieved through the announcement yesterday, we had one property in Maryland and two in Pennsylvania. The properties are under agreement are in New Jersey and the ones under letter of intent and contract negotiations again are in Pennsylvania and New Jersey.

The cap rates range, again we're looking in a blended cap rate which is at 9.5% range, somewhere are obviously below that, some are north of that based upon what the individual specifics of each property. So for example there is a variability between cap rates base on location, quality of the mark to market, rollover in capital cost, but you know pricing is coming in pretty much where we thought it would be. In some cases, not optimal, as we talked on the last call. But as we looked at the ability to generate capital via this avenue, it's only a very effective way for us to raise capital and accomplish our capital plan targets.

But those are your trailing cap rates or trailing cash?

Actually that the cap rates I'm talking about -- that would be on the 2009 budgeted net operating income numbers. So it's not really a trailing number, it's kind of in place today looking forward.

GAAP or cash?

They are cash.

Okay and then two quick ones. Time Warner, any visibility on the move in date?

I think as I mentioned very briefly Jordan, we're expecting that to occur no later than August 1, 2009. So everything there is progressing on schedule with no hitches at all.

And then the reserves, Howard you talked about that? I think is it $5.6 million versus a receivable which is a 36 % reserve?

That's correct.

Is there anything in there that you already know about? It seems that it's a pretty high level of reserve and just give me some color.

Yes, about a third of it are situations where we're already pursuing legal action and we're fully reserved on those and to extent we get recoveries, we would be able to reverse some of that. So those are a 100% reserve and the rest breaks down against a certain specific tenant situations that look a little dicey.

So we would go on and peg a specific number on those but more generally in the increase itself reflex just looking at the different buckets of 30 to 60, 60 to 90 and so on and so forth and dialing up the reserve levels that we used because we're mindful if you got money heading out to somebody which we try not to have of the certain duration, it becomes that much harder in this economy to recapture it and we're tracking the experience in the portfolio in using that to learn. But to date, most of it has just been a build up of reserve with minor write offs.

What was the total bad debt? The write off?

The total actual write off in the quarter was about $370,000. That was actually written off and abandoned.

Thank you.

Your next question comes from the line of [Sheldon Godlewski] with [Godlewski Associates].

It's Sheldon Godlewski with Godlewski Associates. Good morning everyone.

Brandywine has a fair amount of unsecured debt as part of this picture and that is creating some of the diceyness to your liquidity this recession. Does the company have a long term strategy of reverting to mortgage secured financing to cover most of its permanent needs?

Sheldon. Gerry Sweeney. Good question. I think as the company looks at our financing landscape going forward, as I mentioned, we certainly plan on remaining an investment grade company. We're not quite ready to abandon the investment grade market at this point.

Certainly the flexibility that provides the company like ours going forward in terms of just what we're saying on these asset sales programs is very powerful tool for us. Certainly the dislocation in the [vine] market in the last six quarters and the lack of visibility on that in the intermediate term creates some pressure on us to look at other sources of raising capital.

Fortunately, a lot of the assets we have in our portfolio demonstrated thus far this year, we have an ability to sell, we have an ability to raise capital through joint ventures and given the breath of the existing unencumbered pool, we do have the ability to layer in select mortgages -- secured mortgages to provide with those three in combination more than ample capacity to meet our pending bond maturity.

So I think the path for the company is still investment grade. It's still focused on the unsecured debt market but clearly given the pricing disconnect in today's environment, we're moving very aggressively to raise capital from other sources to meet those pending maturities.

You don't feel that in the long run that mortgage that would be a more desirable form of financing than unsecured debt?

I don't think we're prepared to make that decision at this point. I mean there still lack of clarity on what's going to happen to the bond market. I think there are certain assets in our portfolio that given their size and tenant mix seem to be better suited to secured mortgages such as a One Logan or a Two Logan and on those types of properties, you'll see us do secured mortgages as part of our program going forward.

Thank you.

You're welcome.

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

Thank you. With your share price having more than doubled in the last month or so, what's your thought process in regards to equity issuance?

Cedric, Gerry. Good question. As we view it, our capital plan is progressing on schedule. The target levels in the plan were designed to, number one, be achievable and two, not rely on the equity of the unsecured debt market. So that's how we crafted the plan last quarter.

We're making good progress to resolve our 2009 targets. We're confident on our mortgage levels be achieved. Sales are progressing very much on pace so we have a high degree of confidence in executing that. And the IRS financing, we feel very positive will be accomplished. Looking beyond 2009 as we parse to our 2010 objectives, we certainly think that they are readily achievable as well.

Yet, that being said, the execution of the plan that we'd outlined while addressing all of our intermediate term liquidity requirements does not advance our number one goal of measurably reducing overall leverage. And to accomplish that objective, we're certainly looking at sales level to exceed our stated targets. Doing select joint ventures on larger pools of assets to generate more liquidity for the company and reduce our overall leverage and if the market windows permit, potentially do more debt repurchases that have the effect of de-leveraging the company.

Our hope is that as these execution steps are accomplished, our equity pricing will improve even further and we will be better positioned to evaluate accelerated de-leveraging through exploring a variety of equity options. So while remaining keenly focused on deleveraging, the success in our plan thus far is also commits that our sequencing approach has the potentially creates the best value results for our shareholders and with that all being said, we are actively monitoring obviously what we are seeing in both the debt market and the equity markets and are operating on a very accelerated plan to make sure that we get all of our 2009 capital plan component executed, provide a high level of visibility to the market place so that this company is in an appropriate position to evaluate how we might advance our direction of reducing overall leverage going forward.

Okay. So when you look out a couple of years, what's your target leverage? What would you like to achieve and how close to it do you get from asset sales?

Look, I don't think that's changed at all from our previous conversations. You know we're targeting at mid 40% range for our optimal leverage level and obviously that will be a function of -- in addition to that leverage level, will be a function of the portfolio composition as well what are debt maturity schedules are.

But you know, we've run the company historically and that mid 40% range. It's crept up as we know beyond that. But our objective singularly is to get that level back to that mid 40% range and depending upon market conditions maybe even lower than that.

Okay. Can you give us a little more color on the impairment charge? Which property was it and you know what kind of implied cap rate are we at to book an impairment charge?

We only can say is that it was taken in advance of the property whose sale closed yesterday. We're still parsing through the confidentiality agreement related to that transaction to see exactly what we can and cannot say. So at this point that's -- we're limited to that level of disclosure.

Okay. In terms of your Southern California portfolio, you did market it about a year ago. Since then, you know obviously I can see it come down quite a fair bit -- the market has softened a lot. What's your plan here for Southern California and you know what you can you do to turn around the occupancy in that portfolio?

Well, I think the plan for Southern California is to ultimately exit that portfolio as market conditions permit. We did and we continue to have a dialogue with the number of potential sources of capital to recharacterize our investment in that portfolio. The market has continued to erode. We fortunately had a very small percentage of our portfolio rents coming from Southern California.

We have a very good on the ground local team there that's covering their overhead through property management fees and other sources of revenue. And they are doing a very effective job of doing the best they can in the face of fairly significant headwinds. In fact through our recent re-forecast, they've actually been able to do better than they had forecast over in the last quarter. So they are being very aggressive on both the tenant calling, the tenant relations, the capital management, broker relations to generate as much activity as we can through that very small portfolio to make sure that it is well positioned as the investment market and the real estate marketing conditions firm over the next year or so.

Okay. Thank you.

Your next question comes from the line of Dave Rogers with RBC Capital Market.

Hey, Gerry. What's the appetite , if any, out there for land acquisition and would you guys consider if that market warmed up a bit of liquidating some of that land in favor of holding some of the cash flowing

Look, there's no question. We ran a number of situations. We are looking at potential marketing some of our land for sale. We go through a very rigorous process on a quarterly basis to assess both our plans for each asset, as well as what we anticipate the ultimate reliability is from any potential sale. But as we've looked at it Dave, it's certainly, there's a number of parcels that we continue to have discussion with and to the extent we can generate some liquidity through assets that are not earning any current return for us and in some cases their appreciation capability doesn't have a lot of visibility. That is certainly something that is on our plate.

Can you give us any sense of, not necessary in dollar terms, maybe a bit in terms of your land bank of how much that might entail?

Well, I mean our land bank valued at $120 million. That has a very wide range of holding in it. You know some ranging from fairly small parcels to ones that are much bigger.

I mean certainly David, the parcels that are not necessarily part of existing parks that we own clearly are high in our priority list in terms of generating liquidity. Those who are adjacent to our existing buildings were in close proximity to parks we control. You know we continue to look at some other options for those.

David, it's Howard. When we took steps at the end of the fourth quarter both to suspend capitalization of interest on many projects. We went through evaluation of where those assets might be sold. Took a series of impairment charges at the end of Q4 and believed we now have those positioned for sale should we be able to go and execute those? And if some tenant should come back to us and need a piece of land either on an expansion or otherwise, we would evaluate that as well.

To just close the loop, Dave, I mean on the first part of your question. There does not seem to be a very robust market for land sales right now. So I don't want mislead you to think that there's a lot of people are looking to buy land. We've got great contacts out there and have a number of discussions underway but there's not a lot of people out there looking to buy land today.

Well it seems that at least you are positioned to take advantage of it if it does, which respect to the seller financing for the Oakland portfolio any status change on that?

No, in fact that portfolio, you may recall that $40 million piece is well secured by two properties in a first mortgage position, and the maturity date of that loan will sequence to the overall refinancing timeline for the rest of that portfolio. So we remain in a very secured position on that mortgage.

But in term of, I guess, receiving the cash, do you still feel comfortable in being taken out that position?

We certainly we do. Yes. We do. Very high quality owner who has a very low overall level of leverage in the portfolio and all from us with the significant amount of equity and the portfolio is performing, I think, in the course of their expectations. We have no qualms about anticipating that money coming in.

In giving that total financing is the new one that you were working on currently, was that netted, Howard, in the liquidity position you kind of gave us going forward?

Hi. If we end up doing seller financing, we would have to back that out as a capital source and replace it either with additional sales or other resources. We would look at it on that basis.

Thank you.

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

Hi. John Guinee here. Hey, very nice job guys. Question, I'm assuming that the asset that just closed on the last couple of days was your -- the [test] asset?

Hi John, we're still working through some confidentially issues there but that could be a good guess.

Question on the -- when you're going out for a financing on Sierra, are you just... are you trying to finance the office building and the garage or separate and distinct? And then can you talk about your expected yield on cost for the components separated?

John, Howard. All good questions. Part of what we're figuring out right now, in ultimately what we posses at the end of the day is a single lease with some incremental spaces that have been leased for shorter period of time, and to the lenders who finance this type of cash flow stream, they just want to see a fence put around that cash flow. They know they're going to get paid principal and interest every month on to some amortization schedule. So they -- it's almost independent of which asset is producing which level of cash and we do ultimately have to figure out the final split of the income from the lease between the garage and the box and the office building. So that makes yield discussions a little bit premature at this point.

And I'd have to say it's like handicap at 50/50 whether we finance just a box which is a sort of a traditional poster asset or we end up financing both together. And what we're hearing is the market likes the cash flow and the construction loan market likes that fact that there might be a take out on the back end, making it all fit together very nicely.

Great. Second, Gerry, I'm assuming that when you're quoting your leverage level, you're referring to gross book value?

Correct.

Got you. Okay, thank you very much.

Your next question comes from the line of Rich Anderson with BMO Capital Market.

Hey, Thanks and good morning guys. On the $5.6 Million in the reserve right now, how much of that, if any, is not delinquent it all?

Well, I think a dollar is delinquent, potentially that's not paid the day it's owed. Otherwise, we don't have a receivable. I mean delinquent. I'm not sure what you mean by delinquent -- receivable.

I guess, I just want to sort of get to like the real risk in that $5.6 Million.

Yes. I mean we have different buckets current with the, within the current calendar month. That was about a 3rd of the receivable. We have small amounts that stretched out over 30 - 60, 60 - 90, 90 - 120 and beyond and each of those buckets has formulaically an indicated reserve level.

We haven't seen much shift between the categories but we did dial the reserve levels up a bit in this month just given uncertainty as to the ultimate strength of our tenants. We did have one larger bankruptcy and a couple of small bankruptcies in the first quarter. We didn't have a lot of write-off activities, so in general, our tenants, even when they've gone bankrupt, have been staying current. We really have not seen any change in the pattern of the receivables. We're just looking out at the economy and sensing that we ought to be dialed up a little bit higher.

My question I'm stuck up I'm not smart enough on this is, is it just that even if they're current, they could still be a portion of that receivable amount, I mean, that reserve amount?

Yeah. I mean, the amount of receivable that we'd be calculated against the current bucket that would be de minimus because there's a full expectation that 99%, 99.5% of that, whatever the level, is ultimately going to pay based on prior history.

Okay. How much of that is Circuit City?

Circuit City receivable that we're carrying today was very light --

$80,000 --

Yeah, maybe $80,000.

Okay.

Yeah. I think, Richard, when we took a look at it and George and Howard work very closely with our field personnel, I mean.

We do operate as we talk on cost on the premise that we're secondary credit. And in this kind of environment where there is a concern on the general economic climate, the team goes through and takes a look at the SIC for every one of our tenants. We assigned ratings to those, and exercise really much of an over-abundance of caution on reserves. And we just don't know what could happen out there.

We keep very good communication with all of our tenants and the accounting, finance and operating teams spend a tremendous amount of time triangulating data points on cubicle occupancies. We're revealing financial reports, bank statements of our tenants. But in this type of climate, I think, even though we haven't seen a discernible increase in our overall accounts receivable, I just think it's prudent to make sure that we continue to make sure that we are more than adequately reserved.

It's because that we saw with Circuit City, you just don't expect those things coming until they actually appear in the paper.

Okay. What's the size of getting into the refinancing objective of $180 million this year? What's the size of that one loan that you reference that had a contingency to it that you were questioning whether or not I would go through or not?

That's about $40 million.

Okay. I'm just sort of shifting around here. Are you still pegging your taxable net income for the year at $1.20?

Well, that's a good question. The current estimate suggests that I think the biggest driver will be the mix of sales that are executed and their impact on that level as well as certain smaller transaction activity at the margin. But we continue to operate and project the dividend on that basis until we know otherwise probably much later in the year.

Okay. So it's $1.20 or lower maybe?

$1.20 based on what a 91 million share counts. We've not changed our dividend assumption in the aggregate. We did of course dial down the cash payment paid in April to preserve flexibility in a number of directions both as to absolute level and as to ultimate composition.

Okay. And then finally, back to the reserve question. How much additional reserves, if any, are contemplated in your full year guidance?

That's a good question. It is possible as we'll go through the monthly and quarterly reviews that we will have to dial it up further based on the indicated formulas, calculations and input from the field. It's also possible, even if that were to happen in say, the second or even third quarter that it could then begin to reverse itself when credit conditions improve if they do later in the year.

So we feel comfortable that our guidance accommodates a number of different scenarios around that. But we do not have, at this point, a hard number to give you on what we think it will be quarter to quarter. Or on where it will end up necessarily, at your end.

Okay. And actually, I just had one more quick one. I heard you mentioned the other income gross number of $35 million and that's sort of in your guidance. Last quarter, I believe, the range was $25 to $35 million. You didn't mention the low-end this time. I know you had a big gain this quarter. Is there something about other income that's keeping your guidance for '09 afloat to some degree?

It's a good question. And I think having for --

Usually, that's three for three in good questions, by the way -- and good day.

All your questions are good, Rich. And we're not just trying to soften you up. They are all good. Look, I think we already have done through March 31st about $13 million of aggregate other income items. Fully half of that is the gain on bonds. We did buy a fair number of the convertibles in the first quarter which tend to produce a larger gain.

We've targeted the tender on the 2010 as a slightly smaller gain. I don't yet know how much of that we'll get. Expect to do some other spot-buying back as we create liquidity in the plan. But when I looked at the aggregate, I'd say having done $13 million, to think we're only going to do $25 million, given that we have management income dialed in there and other things that just happen almost programmatically, would be unrealistic.

So I think anchoring around a $35 million number is good number. But taking out that range does not affect where our ultimate guidance comes in. But even as we produce that range in the first quarter, we're already seeing it lean toward the higher end.

Okay, great. Thank you.

Your next question comes from the line of David Shapiro with BGB Security.

Hi, guys, just a question here. You know, looking down the road here, a couple of years, you're facing revolver maturity in 2012. Capital markets, at least the equity markets, are now moving up or seem to be a little bit healthier at least under your term. I'm just wondering what revolver balance, if we were in the world right now, and let's say we were looking at the 2012 revolver coming, what revolver balance do you think the banks would be comfortable letting you carry? And then, you know, with that view, how do you also view going to the equity markets now and being preemptive using that sort of to start killing your 11 and 12 public note maturities? We're just sort of hoping that the equity markets continue to come up and allowing you to do that later on.

Dave, I think a lot of good questions in there. I think, Gerry outlined earlier thinking about the equity markets that we still have a fair number of tactical activities to get done. And I think getting those done and behind us, we believe will improve the company's position and take some of the risk from far away. You are correct that this is a multi-year process and we very much have our eye on both the term loan and the revolver as they come due ultimately on 2012.

The goal on the revolver will be to have that balance as low as possible. So we're in the strongest possible position we can be when that negotiation begins probably late 2011 or rather 2012 with a bank group, whose composition candidly is impossible to gauge at this point. And we have 15 plus banks in the group and all of them are facing varying conditions in their own business cycle right now. Some are quite strong and some are probably not as strong. So, we just have to wait and see, use it prudently or respect it as a source of capital, replenish it repeatedly as we've done. And I think there's a secret to getting that done successfully is being a strong position when you need to pick up the phone.

I mean, basically, as you look for your choices here raising capital, essentially, sort of the indication I'm getting from your comments is, well, as lousy as the private market is right now. I think that you were mentioning midnight cap rates here for asset sales. Clearly, the public markets are a lot worse and that's sort of why you're capping asset sales here and avoiding selling stock at these prices?

Well, yeah, I think that's on point. I mean, the math is fairly simple. I mean from our standpoint, we have been and will continue to believe that one of the best sources of liquidity we can generate is through the sale of assets. And we went through a fairly thoughtful process of identifying what assets we want to throw the market for sale and have some very good reasons for that.

You know, our hope is that with the tone in the market beginning to be positive, hopefully remaining positive, that we'll be able to at least accomplish and potentially exceed our capital plan goals in that regard. And as I mentioned, we will continue to monitor what we see happening in both the debt and the equity markets, to make sure that as we do embark on this or as we continue to embark on this multiple year program, we keep the company in the most optimal position we can.

Okay. And then long term, you guys have been historically been a pretty good developer and then you sort of got out here with the Prentiss acquisition, went into a lot of other areas that you weren't before been retrenching on that. Do you really see yourself sort of as a mid-Atlantic [rate] primarily going forward? And you see yourself more as an operator versus a developer? And of course, I mean, the financial markets are changing all the time but what's the long term goal here at this point at Brandywine?

Yeah, good question. I mean, look. Certainly, as we've articulated, we do view ourselves as a mid-Atlantic company. We have more than 80-some percent of our revenues coming in today from that market place.

We have a very strong operation in Austin, Texas, and that that's performing well. And we've analyzed a number of different financing strategies for that market place as the market continues to firm. We have really very small operation to this point in California, having sold the bulk of our Northern California portfolio last year.

But as we look out over the next few years, we would certainly expect to have the predominance of our activities in the New Jersey, Pennsylvania, Delaware, Maryland and Virginia marketplaces. And that's where our infrastructure is, that's where our submarket positions are the strongest. And that's where the bulk of our land inventory is. And we have always viewed ourselves to be both an operator and a developer based upon where the market conditions are. So certainly, we would expect as market conditions to change. We will be primarily an operator as we've always been with the full service operating platform, but also looked to do spot value creation opportunities through our potential development pipeline, based upon tenant credit and financing considerations.

Very good. Thank you.

There are no further questions at this time. Mr. Sweeney, do you have any closing remarks?

I don't other than just to thank everyone for participating in our first quarter call. We are generally pleased with our progress during the first quarter and look forward to continued positive updates as the year progresses. Thank you very much.

That does concludes today's conference call.