Brandywine Realty Trust (BDN) 2009 Q2 法說會逐字稿

Good morning. My name is Latangie, and I will be your conference operator today. At this time I would like to welcome everyone to the Brandywine Realty Trust Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO of Brandywine Realty Trust. Sir, you may begin.

Latangie, thank you very much and thank you, all, for joining just for our second 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 Accounting and Treasurer.

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

To start our call, during the second quarter we continued to make progress in our capital plan an insuring stability in our real estate portfolio. On our call today we will update you on our capital activities, review operating results and provide color on the investment and the real estate markets.

Addressing the capital plan first -- during the quarter we further strengthened our balance sheet. Key action steps were, first, we issued 40.5 million shares that generated net cash of $242.5 million. That issuance occurred on June 2nd at a pricing of $6.30 per share. While re-equitizing our balance sheet at that pricing level was painful, the action significantly strengthened our balance sheet and was a necessary step. Based upon this equity offering and our cumulative sales activity, at quarter end our debt to gross assets measured 46.3% compared to a peak level of 54.3%.

So over the past five quarters, we have reduced debt by over $750 million. While this debt to gross asset ratio is within our historic 45% to 50% target, it is now enough, therefore our business plan does contemplate continued deleveraging. Our net debt to annualized quarterized EBITDA was 6.1% during the quarter; well below our 7.8 times in Q3 '08, but we still plan on making additional progress along these lines as well.

As a consequence of some of these activities, at the end of the quarter we had approximately $500 million available under our credit facility. As you know this $600 million credit facility has extension rights through June of 2012. Our objective is to run our company with no more than 50% of our line of credit balance outstanding.

Second item on the capital plan is on the secured financing front and we have already met our targeted $150 million of mortgage financings for 2009. We achieved this goal through two mortgages, the first was the Two Logan financing which we described on last quarter's call. On July 8th of this year we also closed a $60 million first mortgage financing on our One Logan project, a previously unencumbered class A tower in Philadelphia CBD. That loan was provided by PB Capital Corporation at a floating rate of LIBOR plus 350, with a seven year term with three years interest only, followed by a 30 year amortization schedule at a 7.5% rate.

Next component of our plan was the Cira Post Office financing. We closed into escrow our previously announced $256.5 million, 20 year fully amortizing mortgage at a rate of 5.93%. We expect that loan will fund in during Q3 2010, upon project completion. This funding will create a net source of cash for us in 2010. The costs for both the garage and the post office are expected to be, before any savings $355 million, of this amount, $216 million remains to be funded. Sources of funding for this are $58 million in tax credit payments that will come into us in 2009 and 2010 and projected draws upon our line of credit.

So our $256.5 million forward funding will provide a net cash recovery for us in 2010. In addition, with this take out in place, we continue to evaluate whether to fund the remaining costs off our line of credit facility, or execute a short term construction loan to further preserve line capacity.

The next component of our capital plan is property sales. The sales market remains challenging with no real velocity. Our business plan originally contemplated a $180 million goal or 2009, post our equity offering we revised that goal downward to $145 million for 2009 and $90 million for 2010. While we hope to exceed these goals, there's no question that the investment market remains in a state of flux.

In the second quarter we sold one property generating $26.5 million of proceeds, brining our year-to-date sales to $37 million, or 25% of our annual goal. We currently have approximately $300 million of sales transactions in the market, with $85 million under contract and $35 million in active discussions with prospective buyers.

Our program remains doing price discovery by having a number of properties in the market or bid solicitation process, and we remain confident that we will meet our sales target for 2009. The property under contract is awaiting a final sign-off on a financing commitment. If that financing commitment materializes, we anticipate being able to close that transaction during the third quarter.

In general, on the sales front it seems as though both buyers and sellers are digging a line in the sand and fairly wide bid/ask spreads remain common. While the overall investment market tone is beginning to improve, spot pricing levels remains somewhat unattractive. That said, the transactions we have closed to-date have been at an average 8.9% cash cap rate and a 9.4% GAAP cap rate.

So to wrap up our capital discussion, our plan is to remain a strong investment grade credit with a high quality well diversified portfolio. To further our deleveraging efforts we have continued to take advantage, where available of any discounts remaining in the bond market. Along these lines, in May we completed a tender offer on two of our -- on a portion of our 2010 bonds. And you'll also note on page 19 in our supplemental package, we have materially reduced our near term maturities through our overall open market debt repurchase and debt tender program that Howard has been coordinating.

So during the second quarter, we made progress on both deleveraging and executing a plan that fully addressed our intermediate term maturities. More importantly, I can assure you that our disciplined approach to reducing leverage and improving liquidity s a key construct of every component of our business plan.

Now turning attention to the real estate market, the bottom line is that we anticipate at least the next year to remain a challenge. Fundamentally, in this type of market the proverbial pie is getting smaller through both lower leasing activity and absorption levels. Our major objective is to garner an increasing share of this shrinking pie, and we believe we are well positioned to do this.

Our properties at the higher end of the quality curve in our competitive submarkets, our leasing teams aggressively pursue all tenant leads, and our property management teams exercise proactive vendor and supplier management to ensure we maintain our operating margins. So while it's unclear how long it will take the market to recover, we are well positioned to ensure that we continue our long track record of market outperformance.

In looking at some of the quarterly statistics, our same store occupancy declined from 91.2% to 89.7%. This was very much in line with our expectations and was primarily driven by the 125,000 square feet of early terminations and some known tenant departures. This drop was fully expected, and we expect to end the year at around 89% occupancy levels in our same store.

Despite this expected same store decline, we had a fairly active quarter with some good data points. During the quarter, we had over 1 million square feet of leasing activity based upon lease commencement dates consisting of 369,000 square feet of new deals, 126,000 square feet of expansions by existing tenants and 520,000 square feet of renewals. This total leasing activity is greater than leasing activity in any of our previous four quarters.

Also as noted in our recent press release, for the first half of 2009 we leased 1.9 million square feet, most of that generating forward leasing activity which will help offset any future early terminations or tenant departures. Our tenant retention rate for the quarter, excluding the early terminations is 67.1%. Year-to-date we're running just shy of 72%, which is slightly below our historical run rate of 75.5%.

For the quarter, excluding early terminations, we had positive absorption of 53,000 square feet. When we factor in those early terminations, we actually have a negative absorption of 73,000 square feet. Looking at those numbers on a year-to-date basis, we've had negative absorption of about 300,000 square feet, but without the early terminations positive absorption of 3,000 square feet.

Turning to capital costs. Capital costs as a percentage of GAAP rents rose to 11.3% from 9.9% last quarter. This increase was primarily driven by nine longer term, in fact, almost ten year average lease transactions which skewed this number from our recent run rate. Absent these nine transactions, which we believe created good long term value, our capital costs as a percentage of GAAP rents was 6.1%, which is well below our targeted levels.

Our best performing market, in terms of capital allocation was Richmond, Virginia, where we allocated 4.9% of capital costs as a percentage of GAAP rents. Our highest consuming capital region was metro DC, where five of the aforementioned longer term lease transactions occurred. Activity levels, that is traffic through our portfolio actually rose 8% quarter-over-quarter and remained flat with where we were this time last year.

Traffic activity increases were the strongest in New Jersey and Delaware, which was up 36% quarter-over-quarter. Pennsylvania was up 31% quarter-over-quarter, and metro DC was up 4% quarter over quarter. Activity levels declined in Austin, Richmond and in California. Our pipeline of transactions is strong with 2.0 million square feet of new prospects, of which 350,000 square feet are in active lease negotiations.

We continue to effectively manage upward pressure on our concession packages, particularly relating to capital, but the percentage of deals incorporating free rent rose quarter-over-quarter to 26% this quarter versus 23% in Q1. We continue to make progress on our 2009, 2010 expirations. Of the original 3.5 million square feet expiring in 2009, we have executed 1.8 million square feet or 51% to-date.

On our 2010 expirations, of the 4.1 million square feet expiring, we have already executed 896,000 square feet or 21.7% of those expirations to-date. More importantly, when we look ahead to 2010 and 2011, we have a very manageable remaining rollover exposure of 12.4% in 2010 and 12% in 2011. In both of these years, the current annualized base rent on expiring leases is less than $22 per square foot.

During the quarter we had mixed results on rental levels. For new leases we had a 1.8% cash decline, but a 7.8% GAAP increase. Our strongest performing market on the new leasing activity front was metro DC, which showed a 9.6% cash rent growth and an over 23% GAAP growth rate on new leases. Our lowest performing operation during the quarter on new leases was Richmond Virginia, which while they had a 10% decline on both the cash and GAAP basis is also where we posted our lowest level of capital investment.

On renewals, we had a 5.4% decline on a cash basis and a 3.4% increase on a GAAP basis. Our strongest performing market for renewals was Richmond Virginia, which showed a 2% cash rent growth and a 6.8% GAAP rent growth on our renewal activity. Our leasing staff continues to ferret out direct transactions and during the second quarter we had 52 transactions, representing 48% of our total deal volume and 27% of our total square footage, done directly by our leasing staff.

What's becoming clear is that the state of the financing market is impacting leasing. In particular, we're beginning to see a clear separation in landlord's abilities to invest capital to either attract or renew existing tenants. In fact, during the quarter, we executed several transactions through a combination of our leasing agent's hard work, the quality of our portfolio, but also, frankly, due to the inability of competitive landlords to react quickly to tenant capital requirements.

My expectation is that this trend will accelerate fairly quickly and put well capitalized companies like Brandywine, in an increasingly strong position to attract a larger share of that shrinking pie I referred to earlier.

Looking at the broader market. Year-to-date leasing activity and absorption levels are down in most of our key markets. The only market where we saw year-over-year increase in leasing activity was central New Jersey and Richmond Virginia. Absorption levels in general remain anemic. Markets where we saw year-over-year improvement in absorption were southern and central New Jersey, Wilmington Delaware and suburban Maryland, but even those levels of improvement really weren't noteworthy. So, we continue to operate our portfolio on the premise that market conditions will remain challenging for the foreseeable future.

To wrap up the operating commentary. We remain focused on portfolio performance, aggressively pursuing every potential lease transaction and using both the quality and the locational advantage of our portfolio and our capital position to continue our track record of outperforming these down markets.

On the development -- on our development and redevelopment pipeline of our total projected costs of $455 million, approximately $243 million remains to be funded. Of that $216 million relates to the Cira [main] post office and garage project, leaving a total remaining funding of $28 million for the balance of our entire pipeline. Our overall pipeline is now 90.5% leased.

A few quick observations on our development projects. The Cira main post office and garage project is tracking very much on budget and on schedule. We anticipate some savings which we expect to quantify over the next several quarters. Our South Lake project at Dulles Corner is now 100% leased. The tenant moved in earlier than we initially anticipated, and will fully occupy the building sometime in September upon completion of their space.

We had excellent success during the quarter at our Austin development project. As identified in our supplemental, this project currently stands at 92.5% leased. Overall, our entire Austin portfolio is over 95% leased with only 50,000 square feet or 3% roll over in 2010, so we have this market in great shape for the next six quarters.

At metroplex in the Pennsylvania suburbs, additional leasing activity today that project to 69% leased with about 50,000 square feet of remaining quality prospects. 100 Lenox Drive in Central New Jersey is almost 90% leased with some additional activity and 1200 Lenox, also in Central New Jersey picked up some additional leasing during the quarter and is now 58.1% leased.

On our redevelopment projects, our big leasing news was the signing of the 150,000 square foot 14.75 year lease at our Radnor Corporate Center. Across the board we continue to make some additional progress in all these redevelopments as they are now 79.6% leased, versus 70% leased last quarter. During the quarter, we also decide to continue the ongoing renovation of the Juniper Street parking garage in Philadelphia CBD. This incremental $10 million investment will completely renovate the facility into a 220 car garage which will be delivered in April of 2010.

With that capital plan and market overview, Howard will now review our second quarter financial results and provide additional color on our capital plan.

Thank you, Gerry. In the three months since our last call, we've dramatically improved our balance sheet with a combination of equity issuance, mortgage financings, sales, the post office garage forward commitment and excess cash flow. Later on, I'll go into some detail as to what this means with respect to our 2009 and 2010 capital plan.

For the second quarter, FFO available to common shares and units totaled $59.2 million, versus $50.4 million in the second quarter of 2008 or $57.3 million if that quartered is reported without the $6.9 million impairment charge we today in Q2, 2008.

Our FFO per diluted share in Q2 2009 was $0.56 versus $0.55 a year ago, and this reflects an increase in our share count from on average 91 million shares, to 106 million shares in the current quarter. We beat the $0.46 analysts' consensus by $0.10 per share, which is largely attributable to our greater than expected bond gains on repurchases. Our FFO payout ratio in the second quarter of 2009 is 17.9% on the $0.10 dividend paid, reflecting our interim underpayments of the dividend.

A few observations of the components of our Q2 2009 performance. Rental revenue was down slightly, but maintained the trend to better cash rent with straight line rent down $2.5 million versus a year ago and flat sequentially. Recovery income was down both sequentially and versus last year, reflecting a $3.2 million downward CAM adjustment in Q2, 2009 to address delayed spending of general expenses and better than expected increases in real estate taxes. Term fees, other income, interest income, and both gross and net management income were in line with expectations and recent results.

Our management income will begin to tail off a bit through the second half of 2009 as a number of existing contracts expire. Operating expenses were down sequentially and versus a year ago, due to a combination of expense management initiatives, tax appeals and timing factors. In the second quarter of 2009, we had net bad debt expense of $700,000; this compares to $3.2 million in the first quarter of 2009. We continue to monitor our receivables for credit quality and any events which we should take precautions for.

Interest expense declined sequentially and year-over-year, due to lower debt balances form our debt reduction program. Interest expense includes $800,000 of costs due to APB 14-1 on our exchangeable notes and higher swap costs for the quarter on average.

We expensed $300,000 in the second quarter in connection with the change in our assessment of when we most likely expect to utilize a forward starting swap we entered into as a hedge for interest rate risk. We realized $12 million of gains on $122.6 million of aggregate debt repurchases and, lastly, deferred financing costs were elevated to $1.9 million due to the acceleration of deferred amounts as a result of our debt repurchase activities.

On a same store basis, our cash rents were flat, while non-cash rent items decreased by about $2.7 million. Recoveries decreased by $2.2 million, as expenses on a same store basis decreased by $1.7 million bringing our recovery rate down to 33%. For the quarter, same store NOI decreased 4% on a GAAP basis and 1% on a cash basis, both excluding termination fees and other income items and largely as a result of lower occupancy in the same store portfolio. Our CAD results, cash available for distribution was $0.43 a share and resulted in a 23.3% CAD payout ratio for the second quarter.

The shift to the $0.10 dividend payment in April is a key driver of this payout ratio, along with moderate capital expenditures, lower non-cash straight line rental income. Although CapEx did increase somewhat in Q2 due to several larger and longer term leases, as Gerry identified. Our coverage ratios were quite strong at 2.8 on interest, 2.5 on debt service and 2.4 for fixed charges, and all of our margins were in line with expectations and at the higher end of recent performance.

For 2009 guidance, we are increasing our previous guidance of $1.60 to $1.74 per diluted share, to be now in a range of $1.75 to $1.80 for 2009. The easiest way to think about his increase is to equate the Q2 bond gains to about $0.10 per share on a full year basis, and therefore see that we increased the bottom of the range by an extra $0.05 a share of by $0.15 in total, increased the midpoint of the range by an extra $0.015 or by about $0.115 and effectively reduced the top of the range by $0.04 per share, as we now reflect better on the overall leasing and revenue for 2009.

Key assumptions for the balance of 2009 include that we will have a negative 3.5% to 4.5% GAAP same store NOI for the year, and this will be excluding termination and other revenue. We expect cash same store NOI to be a little bit better at negative 1% to negative 2%. On the rental rate side we continue to see good trends in rent with GAAP mark to market up 2% to 4%, but cash market at flat to minus 2%. And, our year end occupancy figures are now expected to be about 89% in the same store portfolio.

We're seeing much higher levels of overall other income items now coming in at $50 million to $55 million gross for the year, or about $40 million go $45 million net of management expenses, and this will cover all other income items including bond gains, which we now see for the year to total about $20 million or about $2 million more than we've done year-to-date.

For G&A we don't see any change, and are continuing to see our figures in the $5 million to $5.5 million per quarter. On interest expense, we're expecting flat to slightly lower interest expense trends to continue and that's a reflection of our lower overall debt levels. On the CAD side, this will translate to some fairly strong numbers with CAD expected to be in the $1.25 to $1.35 range, and this will provide a nice amount of capital recession even after we deal with the dividend true-up.

All of this has very favorable implications for our capital plan. If we look at the balance of 2009, starting July 1st of 2009 and all of 2010, we track about $995 million of total capital needs for that 18 months period, breaking down roughly as $370 million of investment activity, the bulk of which is the post office and the garage, and the rest is related to development and lease-up and capital expenditures relating to our leasing. We see about $445 million of debt repayment related to the 2009 and 2010 notes and other mortgages, and then we're tracking roughly about $180 million of aggregate dividends, assuming the dividends are all cash and current levels of taxable income continue through 2010.

To raise this $995 million, we're projecting for the next 18 months about $275 million of cash flow from operations and cash on hand. As Gerry pointed out, we have an expectation to receive over the next 14 months or so, about $58 million of additional capital proceeds from our partner on the historical tax credit transaction, and we expect to be repaid a $40 million seller financing note in August of 2010.

The balance of our plan includes $177 million of sales activity, $85 million of that is under contract. We expect $27 million more of sales in 2009 to round out our plan, and are projecting $90 million for 2010.

On the garage and post office we do have in place the $256 million forward commitment, and we expect that will fund in the third quarter of 2010. And we're projecting $180 million of mortgages for that 18 month period, of course $60 million of that was already completed in the first week of July, leaving $120 million to be done in 2010.

This results in about $10 million of net credit facility borrowed. This could be higher if we do additional bond repurchases, but I believe the strength of this plan as we assess the $995 million is that about $758 million of it is either cash flow, which we have good expectations about plus or minus, is either completed to-date, is committed in contracts, or is under contract. And that leaves just $237 million over the 18 month period to be done via sales and mortgages.

That's offset by approximately $500 million or more than double that's available on the line, giving us a relatively high degree of comfort for our capital plan in 2009 and 2010, and setting us up very well for 2011 and 2012.

On account receivables, we continue to be a very active monitor of the credit quality of our tenants and our receivables. At June 30, 2009, we had $14.4 million of operating receivables with a total reserve of $5.4 million or about 38%. We also has straight line rent receivables of $97.8 million, and a reserve of $12.1 million or about 12%. In Q2, we had a net reduction to our aggregate reserve is by about $500,000 reflecting changes to the reserves and specific write-offs of reserved and unreserved activity.

And lastly, to recap on the balance sheet, our debt profile continues to be very conservative and has strengthened significantly in the last quarter, where we ended up with 46.3% debt to gross real estate costs. We have relatively low secured debt and even lower floating rate debt. Our $600 million credit line was $74 million drawn on June 30th, and stands at $49 million drawn today.

We are 100% compliant on all of our credit facility and indenture covenants, with better results sequentially in virtually all credit metrics. And rounding out our credit picture, we have once again about $4 billion of gross unencumbered assets to facilitate our secured borrowing and sales activity.

And with that, I'll turn it back to Gerry for some closing comments.

Great, Howard, thank you very much. To wrap up, in this type of climate, we're really operating on the premise that nothing can get taken for granted and really no stone should be left unturned. Our capital plan is on target, but as Howard and I both mentioned, we intend to continue to pursue all of our objectives. The portfolio is performing in line with expectations. We certainly expect that to continue and reiterate our long track record of our performance.

The re-equalization of the balance sheet certainly eliminated significant event risk. The execution of the IRS financing, achieving the mortgage financing objectives put the Company in a very good capital position. We plan to continue to fully vet the sales and joint venture market to improve our balance sheet over the next several years. And while the investment market, as I mentioned earlier, remains at a standstill, I do expect the velocity of transactions to improve over the next few quarters as buyer and seller expectations become more aligned and more importantly there's a lot more clarity in the pricing of long term debt.

While there is much talk regarding capacity for future opportunities our singular focus remains optimizing our own capital position. That being said, we are keeping an eye out for spot investors or strategic co-investment opportunities, but I frankly think that any compelling investment opportunities are still some time away and will be determined primarily by activities in the debt markets. Therefore, our goal is to continue to make progress in our balance sheet program, so we will be in a position to capitalize on whatever future opportunities may arise in our core market areas.

As a final comment on the Company's dividend. Our board approved dividend policy remains the same. We intend to match aggregate 2009 common share dividends to our 2009 taxable income. Given the recent equity offering, some clarifications probably worthwhile. We are still projecting taxable income to be in the $108 million range, pre-equity that's that $1.20 per share we've talked about all year. Post equity, $0.94 per share.

Year-to-date we've distributed $54 million. Assuming we maintained the same common dividend and preferred distributions, by the end of the year we'll have distributed about $71 million. Our last dividend announcement incorporates the ability to do a catch up year end adjustment. The ultimate size and composition of that dividend payment will be a function of the board's perspective on what our final taxable income is after factoring any property sales, the overall strength of our balance sheet and specific indicators in the real estate financing and investment markets.

How we've done on our capital plan execution and certainly looking at whatever other tools we may have at our disposal to effectively manage our taxable income. We would expect to have more clarity on this year and the dividend situation during our next quarterly call.

With that, I'd like to open the call up for questions. We 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 comes from the line of [Chris Canton] with Morgan Stanley.

Hi, good morning. My questions on the secured markets and it sounds like you're still in the markets testing it out, wondering what the capacity is with the insurance companies and if the composition of the lenders there has changed at all over the last 90 days.

Well, I think we -- we'll continue to actively canvass the secured market. I think Howard and the team have done a great job meeting our objective for 2009. I think what we've seen is an increasing number of lenders coming into the marketplace, and that was best evidenced by the bid list we saw on our One Logan versus our Two Logan financing, where we saw a much broader base range of potential lenders on that second financing.

More importantly, we continued to be actively contacted by a number of traditional balance sheet lenders who are looking for a combination of good quality properties, predictable cash flow streams, and frankly with good sponsorship. So I think as we look forward for the balance of 2009 and 2010, we'll continue to work towards identifying opportunities where we think we can proceed with some good levels of secured financings.

As Howard touched on, one of our key objectives is to keep our level of secured financings fairly low to maintain our very strong unencumbered metrics, but certainly we've seen a continued increase in the number of lenders out there looking to do some financings, at least from our narrow window into the world.

And One Logan was in the high sevens on the interest rate if I remember correctly. How do you see that trending, or is that too much of a forecast?

This is Howard, the One Logan financing is currently floating rate at LIBOR plus 350. It will begin to amortize some principal beginning in the year four, it will use a 7.5% rate to drive that constant, but if one were to swap it today, I believe it would be in the mid to low sixes. But, we've left it floating rate for the time being in reflection of our overall floating rate balances.

Thank you.

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

Morning. Just wanted to ask you a question about the leasing velocity during the quarter. Gerry, do you think to some extent the leasing you did during the quarter was a function of pent-up demand and how do you see it so far into the third quarter?

Yes, that's a great question, Jordan, and I wish I had a clear answer for you. I think what we've seen in the leasing velocity in t he last quarter is -- I mean, I think a lot of our tenant base and certainly the prospects we're seeing in the market have just delayed making a real estate decision for so long because of the overhang in the economy and their total lack of uncertainty on their own business plan that they're now reaching kind of critical decision base.

So certainly in canvassing our managing directors, a lot of the leasing activity that we accomplished last quarter, was really stuff that was percolating for a fairly long period of time and those companies really reached the point where they needed to make some kind of decision.

George, I don't know if you have any observations on what we've seen thus far this quarter?

Yes, I mean, I think thus far this quarter, we've kind of seen similar increases in the willingness of tenants to make a decision. You know our second quarter deals on average today about 118 days from kind of start to finish. We're starting to see that gap kind of narrow. And during the quarter, we actually signed 118 leases totaling 1.1 million square feet of actual signed leases.

So again, I think tenants are willing to make a decision. I think as they kind of start to get into their own budget cycles they'll kind of know what their commitments can be for 2010 and hopefully that will accelerate some additional decision making on the tenants in the portfolio.

Helpful. And just as a follow up, the -- what are the prospects of like for terminations, I noticed you had another $1 million or so this quarter. What is either the tenant watch list look like, or what's that pipeline telling you, either George or Gerry?

Well, I think we're going to continue the same approach we've had on terminations which is if we feel as though there is a release opportunity that become a catalyst for executing an early termination with a tenant. To the extent we have a tenant who has an under-utilizing their space and is looking for some type of concession.

That, frankly, become more of a credit decision for us, but I think our bias has always been to keep the tenants in the space, and have them pay rent even if they're not using it. A lot of our leases, Jordan, have fairly good sublease language where we can -- we have the ability to recapture or in many cases, re-market the space and in many cases, share in a sublease profits. So it's very much a case by case basis, but I don't know if George, you or Howard have any thoughts on -- from a credit standpoint.

No, I mean they are sometimes unpredictable, which is why we bracket that number in a larger bucket of other income. No real significant events year to date, but that doesn't rule out the possibility that we could have one or two larger ones over the second half. But only when it makes sense from our side.

And I think the watch list is actually starting to shrink a little bit. I think a lot of those that have experienced trouble have already surfaced. You know clearly our reserve amounts weren't as much this quarter and so we're kind of hoping that we've turned the corner and most of that bad news is behind us.

Thank you.

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

Hi, guys.

Morning.

I was hoping that you could review some more of the transaction market out there? I think you -- maybe review exactly what is left in queue here on the contracts. And, do you expect sort of a cap rates to be relatively in line with what you've completed so far by way of sales?

Yes, I'll take the lead on that. I mean what we have under contract are frankly two building in New Jersey that have been under contract for some time awaiting a final financing commitment. We were being led to believe that that financing commitment should be forth coming. It should be priced and underwritten at the expected terms, but that the approval process is - is taking a little bit longer than people anticipated in the financial institution.

Now, that is a larger sized deal. And I think what we're seeing, to give you some colors on deals of any significant size, and I think in this kind of climate anything north of $50 million would be deemed to be significant. Those transactions are fewer and far between. There is a not a lot of equity firms that want to invest that level of equity in a project, at least in our -- in a lot of our core suburban markets. And the financing -- or the debt financing seems to be more problematic to achieve.

So, a lot of what we're targeting for sale are still those projects in that $15 million to $25 million range. We certainly have seen a fairly wide bid/ask spreads on some our props that we put to market. We've been, I think, fortunate in getting the properties across the finish line thus far this year, Cap rates very much in line with our expectations.

If the major transaction closes that will be inside of our average cap rate for closed transactions thus far. And on some of the smaller assets, we're seeing cap rates really from the 8% to 11% range. And then, it becomes an issue for us in terms of evaluating what we see as the point of sale departure versus the value we create by holding an asset for the next several years. But there's no question there's a fairly large bid/ask spread remaining on a number of these transactions.

So the spread you mentioned, I'm assuming the spread is not really 8% by 11%, but you're sort of giving a range on where the bids are and so maybe just looking at your portfolio, maybe what you're seeing with other properties that are out there for sale, mid nines as sort of - or high nines as sort of where in aggregate things seem to be settling out?

It's hard to say where they're settling out, just to be perfectly candid because I just don't think there's been that level of velocity. But when I take a look at the transactions where -- that have actually occurred, which means there has been a meeting of the minds, I think in that 9% to 10% range seems to be the general cap rate today.

Okay, thanks for the color.

Your next question comes from the line of Michael Bilerman with Citi.

Hi, good morning, guys.

Morning.

Can we just go over some of the leasing. You talk about this 1.9 million square feet of lease space that's not occupied, the majority of that, 1.4 million is post office. And you've got about 300,000 which represents the stuff that's also in the development -- the redevelopment, and then about 250,000 square feet that effectively is leased but not occupied in the core portfolio.

So maybe you can just walk through a little bit on that core, when that stuff starts to take occupancy and then offset that with if you talked a little bit about some terminations and some scheduled expirations in the quarter. Sort of give a little bit more color as to what happened this quarter and also what you're expecting for the back half of the year so we can get a better picture of cash flow is trending.

Sure, that's a lot of questions in one question, Michael, but we'll do the best we can.

I'm efficient that way.

Michael, this is George. Well, on the forward leasing we've got roughly 317,000 square feet that will commence during the third quarter, 170,000 square feet that will commence during the fourth quarter and then 75,000 square feet that will commence in 2010 and then the balance, as you pointed out, is the 1.4 million square feet at the post office and garage facility. So, that's kind of the timing of that 1.9 million square feet of forward leasing that we have achieved to-date.

The terminations that we had during this quarter, again, 23,000 square feet of that 125 were bankruptcies. 87,000 square feet were actually default or evictions and 16,000 square feet were actually where we negotiated the termination and took some termination fee income in because we had an opportunity in hand to backfill the space.

To try to predict what that's going to be going forward is a little bit difficult. You know clearly it will be, as Gerry alluded to, kind of a credit decision on our part if someone comes to us to offer us the space back, I do think, from -- as we mentioned from an AR perspective, I think a lot of our troubled tenants have kind of come to light so kind of short of what we don't know today, I would think we've had about 200,000 square feet in the first quarter, that declined to 125 in the second quarter, I would -- if I had to guess I would expect the further to - the further decline.

Yes, I mean the good -- if there's a piece of good news, I mean a lot of these credit issues tend to surface pretty quickly.

Right.

And so, we really -- I think we got hit disproportionately in the first and a little bit in the second quarter on some of these early terminations and I think what we've seen, Michael, in terms of a little bit more color is we had about 125 -- during the quarter -- the second quarter, we had about 125,000 square feet of expansions by existing tenants. Now the majority of that occurred in Pennsylvania and New Jersey where we have a lot of smaller tenants. So that seems to be a pretty good sign that some of these smaller companies where review might be more out on the credit curve are actually starting to feel better about their business.

We had -- our biggest negative news was when we had about 200,000 square feet or so of leases that when they expired tenants actually closed their offices or significantly downsized, and again, when we talk to our managing directors, there's certainly the prospect of some of that happening in the 2010, but again there are decisions that tend to be made pretty early on by a lot of tenants, particularly tenants of the size base that we typically deal with.

As we've certainly gone through our re-forecasting process, one of the avenues where we do see a bit of an opportunity for us and it certainly would be the same opportunity there for some other well capitalized companies is there really are going to start to be some increasing rub points with the inability of some of the less well capitalized, smaller, private however you want to define them, landlords.

Right.

To provide capital to not just attract tenants, but also to retain existing tenants. I mean, a lot of these properties traded 2005 on. They could very well be inverted from a valuation standpoint, they may be facing debt maturities. The equity investors have lost substantial portions of their investment if not all of it.

So, put those landlords in a very challenging position to meet tenant requirements and the early warning system for that really is through the brokerage community. The brokers get very, very attuned very quickly to who can pay them commission checks and who cannot. So, I think, as I mentioned, we saw a couple of transactions during the past quarter. We have a number in our pipeline today where there is clearly going to be an opportunity for a company like ours to move very aggressively to improve our competitive position vis a vi some of our less capitalized brethren.

So you're -- the expirations you're talking about, that was 200,000 in the quarter where you said they -- it just expired and terminated, they didn't realize their space. In the back half, that million square feet that's rolling, is there anything that we should be cognizant of in terms of big move outs? I think you mentioned 2010, you were worried about something, but I didn't know, at least in near term if anything.

Yes, let's just give me -- let's give a second just to --. I think in terms of the -- during the quarter some of the big leases that we had that did not review was AT&T down in Tyson's Corner where they renewed for a long term but reduced their square footage. We had a couple of known move outs, closed offices in our northern 202 Pennsylvania suburban location. And George, I don't know if you have any --

Yes, I think of the 1 million square feet that's kind of left to deal with for '09, I mean we've got 320,000 square feet of that that we expect to renew, 176,000 square feet of that we're still negotiating with. But we do know, based on what we've been told by the tenants thus far is that about 0.5 million square feet will in fact vacate during the balance of 2009.

So that kind of know exit, combined with what we already have in the pre-leased is kind of why we're kind of holding that 89% occupancy through the balance of the year.

Right. Does that sublease concern you? The potential sublease space is up at 4.2% relative to call it mid 3.5%.

No, I mean -- I think the increase we had in the sublease space primarily related to the bearing point subleased to Deloitte in anticipation to KPMG moving in our Tyson's Corner project. That was the sole contributor. The rest of the sublease spaces stayed very constant over the last couple years.

And we actually feel good about a lot of the subtenants that are in that space becoming direct tenants when in fact the leases roll over.

Great. Thank you.

You're welcome.

Your next question comes from the line of Jamie Feldman with Bank of America.

Thank you very much. I was hoping you could speak little bit more generally about the Philadelphia and northern Virginia markets and just give some color on where you think we are in the cycle in terms of kind of which -- how many -- the amount of tenants in the market that are still potentially going to give back space or have we -- or has that kind of cleared at this point and then also the amount of tenants and potential impact on the market from tenants that are actually looking.

Hi, Jamie. On the -- on kind of a greater Philadelphia area, look I think w continue to feel pretty good about what's been happening in CBD Philadelphia. I mean, the leasing numbers were not great from a market standpoint in the second quarter, although we did a pretty good job down town in getting all of our stuff pulled together. So, I think the risk in kind of the Philadelphia CBD I think remains -- to the extent that there is a major job cut back or a major layoff by one of the larger employers downtown, which we don't really have any sign of that happening at this point.

The Philadelphia burbs actually had leasing activity of about 423,000 square feet during the second quarter of '09. Well that's down year-over-year, it's an improvement over where we were this time last year. Certainly have lot of feedback that there is a lot of tenants queuing up for and RFP process, looking at requirements late 2010 and 2011. So I guess, our read on the markets in general is that the tenant psychology is gradually beginning to change.

Certainly not done yet, but I think as a lot of our tenants, or potential tenants feel more positive about their business plans, they're certainly going to start to look a little bit ahead to what their real estate requirements are. I think in terms of bottoming out, to go to your questions, I think we feel pretty good about what's happening in a couple of the key submarkets in the Pennsylvania suburbs, Philadelphia CBD, I mentioned Austin, we feel very good about the progress our team made down there in the last couple quarter, but particularly the last quarter.

I think we do have a high degree of concern relative to what's happening in southern and central Jersey. Even though those absorption numbers improved year-over-year, they weren't good last year so there still seems to be an overhang of space in both of those submarkets. You know, George Sowa and his team are doing a great job trying to stay ahead of all the leasing activity.

We actually saw that -- one of the great data points we had this past quarter was our largest increase in activity through our portfolio occurred in our New Jersey and Delaware operation, where at last quarter, that was our worst performing in terms of traffic. So, that's a clear sign that tenants are starting to shop.

That's the good news; the bad news is they may be out there shopping because they think that now might be a good time to buy real estate leases, because the market's soft over there, but I think our objective there will be what it's always been which is to meet the market and be very aggressive and certainly in that marketplace, there's a number of less well capitalized development companies that we think are ripe for us to exercise some competitive leverage.

The metro DC market, our team down there has done a great job. We just - had god rent growth on both the cash and GAAP basis, they nailed some of the big near term leasing exposure we had. We have one property in Dulles Corner that is going through a minor face lift that we're in the process of releasing right now.

The 270 corridor in Maryland is stalling a little bit, I think, primarily due to a lot of space coming online so we would view that s one of our softer submarkets. And I think that's evidenced the best by the low level of leasing velocity that we've seen on our 6600 Rockledge project over the last several quarters. But we are definitely seeing more tenants out there starting to look ahead, which is a good sign. Where pricing settles in, I think, remains to be seen.

Okay, thank you and just a quick follow up. I think to Michael's question you said 500,000 of the 1 million square feet left to expire in 2009 is you expect to go vacant. The question is, is any of that backfilled? And then secondly, for 2010, of the 3.2 million, how much of that do you expect to go vacant?

We do expect to backfill some of that, and we have that kind of baked into our plan for the remainder of 2009. On the 2010, we've got about 590,000 square feet that we know we'll vacate when the time comes upon lease expiration in 2010.

And then the timing on the backfilling, is that immediate or is that going to take some time?

I think it will probably take -- some of it may occur late fourth quarter and the balance of it will probably happen over the first couple of quarters in 2010.

And do you know the magnitude?

No, I mean, I think it's just -- as we continue to see deals in the market we'll continue to try to capture as many of those as we can.

Give you a couple of the tenants, Jamie, that we know are going to vacate in 2010 are -- their leases expire in the latter part of 2010. It's not good news because you never want a tenant to leave, but what that does is that enables our teams to be out there marketing that space well in advance and we've actually in south Jersey have a couple of very good prospects to backfill some of the known vacations.

But it's going to take time, I mean as George touched on, the gestation from lease showing to getting the lease executed is long. I don't really expect that to compress too much going forward. So, I think as we look at our 2009 reforecast and certainly as we're going through our 2010 budgeting process. I think we're taking a very realistic view on what we think the market will present to us over the next five quarters.

Okay, thank you very much. I appreciate it.

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

Thanks, and good morning.

Good morning, Rich.

I think the best take away from all this is that the Q&A is centered on fundamentals and not the balance sheet, so I just thought I'd say that. I think that's very refreshing. But I'm going to ask a balance sheet question.

We're very pleased that George is getting a lot of questions.

The -- as far as you mentioned your deleveraging goals, you're already sort of at your range, your target range of 45% to 50% debt to gross assets, but you said that's not enough. Can you sort of characterize how much lower you're interested in going from that perspective?

Well look, I think that certainly it's a multiple year program and how we get there is going to be a function of what happens in combination of the unsecured, the secured debt markets, what type of velocity we can see happening in the sale, but particularly the joint venture marketplace and then certainly what we see happening on the equity front.

But as certainly as the board starts to contemplate the business plan for the next three to five years, we certainly -- we had set the goal to get from where we were down to that 45% to 50% range. We're there, we want to be -- now we're going to be moving that down to that 40% to 45% range. And certainly to the extent that that can occur sooner rather than later, that's as good thing. But I think we're going to be very careful in how we get there to make sure that we optimize value points as best as we can.

Okay.

But certainly going forward, Rich, I think you're going to see this Company continue to migrate down towards that 40% range.

Okay. And then just as a sort of kind of related follow up to Howard, what is your unused line balance fee?

It is -- I want to say 17.5 basis points, but it's not on the unused portion, it's actually termed a facility fee, so we pay it on the full $600 million.

So if you have anything outstanding you pay that?

We pay that $17.5 million regardless --

Regardless.

Of usage. And then we pay the 72.5 basis points over LIBOR on what we borrow and that's at the current grid point based on our ratings.

Okay, great. Thank you.

Your next question comes from the line of Dan Donlan with Janney Montgomery Scott.

Good morning. Just two questions.

Morning.

I you guys were to raise unsecure debt could you maybe give us a range as to where you think rates would be?

Well, we've been seeing our shorter term debt stay out to 2011, 2012 offered in the single digit range, anywhere from 7% to say 9%. So that's sort of one slice of the market and that's where we've done a fair amount of repurchase or tender.

On the longer debt, we don't have any debt in 2013 and then we start to have debt in '14, '16, and '17, so using the pricing of that debt as a proxy it seems like spots trades are taking place from 10.5% on up to 12%, 13%. So, I would imagine to put an issue out there in that latter timeframe which is the only place it really makes sense, would still carry a low double digit number. So as a result we've not included unsecured issuance for the time being as part of our capital plan because we would not want to be an issuer at those levels.

Right, okay. And just -- have you guys have any discussions with TALF officials about issuing CMBS debt?

We have explored the concept, we've talked to a number of banks, we're getting a lot of inbound traffic on that topic, but it seems to us that our overall needs for debt we're targeting $120 million of mortgages next year just seem to be too light to make sense to enter that program.

Okay, thank you.

Your next question comes from the line of [Michael O'Dell] with MetLife.

Thanks for taking the question. Just go back balance sheet question as well, unencumbered cash flow test to your revolving credit agreement, can you give us a sense as to where that calculation was a year ago?

And then in addition to that, is that a -- I'm trying to understand why the increase substantially the unencumbered asset test versus the pretty much stabilization in unencumbered cash flow [task] is it a trailing four quarter interest expense?

Good questions and to some degree, self answered, but I'll -- remind me if I miss any of them. On the unencumbered cash flow ratio that we showed 220 at Q2 '09, our Q2 2008 number would have been roughly comparable to that. In fact slightly below it. That calculation as dictated by the credit facility documents is quarterly NOI, annualized then against trailing interest expense. So even as we've brought debt down, which we have, the benefits of that are still somewhat ahead of us.

On some of the absolute sort of more balance sheet type tests, those tend to be more spot in their calculation so you do get more of an immediate move on those. So for example, the leverage calculations are at their lows, in fact they're at their lows going back three, four years as we track them. So depending on where future interest rates go, we do stand -- and where the income holds up of course, we do have a reasonable likelihood that those cash flow coverage tests could improve over time.

Right. And then just one more quick one. In terms of your $183 billion term loan, what types of covenants do they have on that deal? Is there any reason to believe you won't be able to use the extension options there?

Those are the same covenants as in our credit facility.

Okay.

And ultimately, both of those facilities are extendable to same date in June 2012.

Great. Thanks.

Your next question comes from the line of John Stewart with Green Street Advisories.

Just a couple quick questions, guys. Gerry, in terms of the strategy -- the financing strategy going forward, when you look at the - what you've got on tap going forward and what you've done this year, would you infer that you're moving away from the unsecured market and towards a secured financing strategy?

I would not. I mean I think we -- John, it's a great question and I'm sure the market will prove me completely wrong on this, but the -- I think we remain committed to the unsecured market right now. We have -- while we certainly have layered in a number of secured mortgages, I think what you've seen us do is layer in those mortgages on assets that are prime candidates to be secured.

I mean, One and Two Logan are CBD towers, they operate within their own competitive set and I think one of the reasons we migrated away from a lot of secured financings in the past was that it put additional -- it put some leasing encumbrances on what we could or could not do in some of our submarkets. So, I mean we do have a level of under -- if you look at our bond covenants, tremendously low level of secured leverage.

And as Howard touched, and I think when we look at our capital plan over the next couple years, certainly we've [factored] anything under $20 million next year and we'll certainly take a look at what we need to do to make sure that we more than amply meet all of our liquidity concerns. But that's all under the guise of hoping that the unsecured market at some point will be more effectively priced for Brandywine.

So, I think what we've really tried to do this year is through a combination of these different capital activities remain on a path where we are committed to the unsecured market, make sure that our bond covenants are in great shape and manage at the margins that generate liquidity in the absence of having an unsecured market that's priced effectively for us right now.

Right. But I guess, if you -- the pricing to issue would still be in the double digits. So the unsecured market doesn't seem to be giving you credit for some of the progress you've made on the liquidity front and a lot of the pretty assets that would make a cover for the annual report are going to have mortgages on them. It seems like you're migrating toward that strategy over time.

Well, look I think time will tell in terms of where we need to go on that. I think the to the extent that the unsecured market continues its path towards recovery, our hope is that some of that will impact Brandywine. That's why we're working so hard on our credit metrics. So you're right. I mean as of today, I think there is too wide of a bid/ask spread on secured versus unsecured. And we'll see -- we'll continue to monitor that market and see where that spread is in the next three to four quarters.

Hey, John, its Howard. Net at the margin will have added no assets to the encumbered list this year because we'll roll off one roll on to another, and in terms of dollars, we'll have added about $70 million, $80 million of mortgage debt. Similarly, next year we have a little over $50 million rolling off, and we expect to put 120 in. So, while we have financed in those markets this year and expect to do so right now next year, the marginal impact is actually going to be quite small relative to a $5 million balance sheet.

The only other project that will end up being mortgaged of course will be Cira and the garage, but that was really the best candidate of all given the government credit least to get that very attractive full financing, which you'd never get that level of credit for in the unsecured markets. That was the best candidate for all to take to the secured market and the results bear that out.

Sure but that's a pretty big number in and of itself. Just couple more quick questions. The $85 million that's under contract, what is the sales price relative to book on that?

Sales price relative to book is a positive spread. The balance price exceeds our book.

$5 million gain or --

John, it's actually quite a bit larger, but that transaction because we're going to be providing seller financing and a second mortgage potion is going to require purchase accounting valuations of that debt, which will adjust the proceeds from a book basis to allocate some of it to effectively -- interest earnings on that second to bring that to market. So, we are working through that process and don't have final numbers, but it will be impacted by those calculations.

Okay, and how about the other $27 million that's in the plan for the rest of the year?

That's really from a general pool of a larger number of assets and for the time being, all of those -- the most likely of those are above book as well.

And so the $108 million of taxable income, what does that contemplate in terms of gain?

It does not necessarily contemplate any additional gains on the taxable side. I mean for example in the under contract transaction because the -- because we might be providing that financing that would qualify for installment sale treatment and that would affect the recognition of timing of that game and until we really know the composition in terms of the other sales we're unable to include those in the taxable income.

And lastly, it's possible that we'll have sales that generate taxable losses and that could offset for the time being as well we're anticipating that we'll take advantage of the IRS provision and defer the recognition of our gain on debt repurchase to the 2014 timeframe. So all of those balls are up in the air but the best estimate is that we're still on track to where we opened up the year?

Okay. My last question is on the guidance. I guess I'm a little bit confused as to why you're raising by $0.10 just less than two months after giving the guidance -- following the equity offering. I mean you'd already bought back over $80 million of the debt that contributed to the gain as disclosed in the prospectus at the end of May so what -- why was that not reflected in the guidance that you issued in June?

We -- when we did that in June -- it's a good question John, we took the approach that we would simply adjust the guidance for the share count, which was the calculation you saw without taking into account any other factors, bond gains, operations, a host of other things that had taken place, because we just are not in the general practice of giving mid quarter updates, we didn't want to get into that habit.

There had been some transactions but we consciously chose, and I think we even included language in that press release at the time to try to make it clear that it was really just a mathematical adjustment for the shares. If that fell short you'll learn from that, but that was the intent back in June.

Okay, thank you.

Your next question comes from the line of Brendan Maiorana with Wells Fargo Securities.

Hey, good morning. Just wanted to follow up on the debt to gross asset target of 40%. Are you guys, as you think about that target, are you including the post office - Cira South facility in there? It just seems like that's kind of a unique asset given that you've got a credit tenant and a -- with a 20 year lease and a 20 year mortgage on a 20 year amortization schedule on it.

Yes, Brendan, we don't contemplate treating any particular asset differently in that calculation, that would be a true gross asset figure, and then when we take all of our debt and net off any cash on hand and then layer that against that gross asset as we've done for many quarters now.

Okay, very conservative. Thank you.

At this time there are no further questions.

Great. Thank you -- thank you all for participating in this call and we look forward to providing you our update on our third quarter earnings in October.

Thank you. This concludes today's conference call. You may now disconnect.