Brandywine Realty Trust (BDN) 2009 Q3 法說會逐字稿

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

Latangy, thank you very much. Good morning, everyone, and thank you for joining us for our third quarter 2009 earnings call. I would also like to welcome all the Phillies and Yankee fans to the call. It should be a great series, and remember, all of us in Philadelphia are extremely gracious and open-minded, particularly when we win. But 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 would like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the Federal Security law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports filed with the SEC.

To start off, during the third quarter we made good progress in our capital plan and in executing our operating strategy. On the call today, we will provide an update on our capital activities, review operating results, provide color on the investment and real estate markets, introduce 2010 earnings guidance and discuss our dividend policy. From an overview standpoint before we get into the details, several observations. While all economic data is useful, like the deposit of GDP surprise earlier today, in reality jobs are what really drive our near term yield. From a Philadelphia regional perspective, we think most of the major job losses have already occurred. The Philadelphia region actually outperformed the nation by losing only 3.4% employment year-over-year versus 4.4% nationally. And as a result, the Philadelphia MSA ranks 5th out of the 12 largest MSAs in the country.

While expectations are that the region's current 8.8% employment rate will slightly increase in 2010, it will remain below the national average -- at least that's what we are hearing hearing from economists. We do expect additional job losses, however, to impact the professional and business service sectors, which has continued to lose jobs for the past 15 months. Richmond has also outperformed the national picture, with a current unemployment rate of about 8%, and current projections on that market is that that level is expected to remain pretty steady during 2010. Metro D.C. is a bit of a different story, as you would expect, with a current unemployment rate in Northern Virginia of 6.4% and suburban Maryland at 5.5%. 2009 job losses are projected to be 15,500 in Northern Virginia and about 8,500 in suburban Maryland. For 2010, current projections indicate net job growth in both of those markets, but at a pace below the 2009 job loss levels. So relatively flat, but slightly improving picture. Finally, Austin's current 7.2% unemployment rate is projected to improve below 7% by year end 2010.

Looking at the real estate picture, while not necessarily calling it a bottom, we do believe that the markets are showing increasing signs of stability, with more tenants looking at office space options, and that's reflected in the pipeline numbers that we will review shortly. Give the projected slow pace of the economic recovery and the employment picture, our 2010 outlook is guided by our expectation of lower absorption and leasing activity levels, along with corresponding continued pressure on rental levels. In addition, given the overall economic conditions, we believe we have less than our usual visibility on tenant activity in the second half of 2010, which again has reinforced our slightly conservative bias. Our 2010 guidance, which we'll review, reflects the impact of the economic climate, our sales secured financing program, and our equity issuance. More importantly, it also reflects acceleration on the timing of us reaccessing the unsecured debt market, and the impact of all these liquidity enhancing and balance sheet strengthening efforts were not fully reflected in all the First Call numbers, and they clearly reset through these activities our earnings platform for 2010.

Our FFO number of $0.44 even after adjusting for bond gains and other items was solid and exceeded estimates, and our revenue, expense and capital trend lines were in line for expectations. With those comments as a framework, let me start by addressing our capital plan first. During the quarter, we were very active on the capital front and had continued success on our balance sheet program. Key actions steps were meeting our $150 million mortgage financing target for the year by closing a $60 million first mortgage on One Logan, a previously unencumbered 6000 square-foot Class A office tower in Philadelphia. We were also very pleased to be able to participate in the recovery of the investment grade market, and during the third quarter we closed a $250 million unsecured senior note financing due May 15, 2015. We also continued to be pleased with our secondary issuing trading ranges and what appears to be a general overall tightening of spreads. We also repurchased $203 million of our unsecured notes through a series of both open market and tender transactions.

These transactions took advantage of the rapidly closing debt discount window and generated aggregate gains of $5.1 million on the early extinguishment of debt during the quarter. In the aggregate, through our bond repurchase program we have repurchased a total of over $574 million of bonds at an average discount of 8.4% and generated about $42 million of gains, of which $23.7 million or $0.22 per share are included in our 2009 FFO numbers. That number will change slightly to about $0.20 per share due to our increasing share count. Also, on a very important front door, during the quarter we closed in escrow our previously announced $256 million, 20 year fully amortizing mortgage on our [Seara] post office project. That rate you may recall is 5.93%. That loan is expected to fund in during Q3 2010 upon project completion. That project remains on budget and on schedule, and this funding will create a net source of cash for us in 2010. The cost for both the garage and the main post office project are expected to be before any savings $355.5 million.

Of this amount, $174 million remains to be funded as of September 30, 2009. Sources for funding this are the $58 million in future contracted tax credit payments and projected draws on our line of credit for the $118 million balance. So our $256 million forward funding will provide a net cash recovery for us in 2010 of almost $140 million. Obviously, with the bond deal completed, this permanent financing in place, and we will not be pursuing a separate construction facility but will fund all of our remaining costs net of the tax credits off of our credit facility. The third component of our capital plan is property sales, and while the business plan contemplated $145 million of sales for all of 2009, we are pleased to have accomplished $129.5 million year to date. Subsequent to quarter end, we completed the sale of two properties in Trenton, New Jersey, for an aggregate purchase price of $85 million, $22 million of which we deferred as 7.64% secured second mortgage, and also completed a $7.9 million sale to a tenant of a 40,500 square foot condominium interest in our 100 Lenox Drive redevelopment property in Lawrenceville, New Jersey.

The price per square-foot on the Trenton sale was about $180 and on the Lenox Drive sale was $195 per square-foot. While the overall investment market tone is beginning to improve, spot pricing levels remain somewhat unpredictable. That said, the transactions I mentioned above had cash cap rates between 8 and 8.5%, and the transactions we have closed year to date have been an average 8.6% cash CAP rate and 9% GAAP CAP rate inside of our previous guidance. We will continue to monitor the market and look for opportunities to continue to spin out low growth non-core assets. However ,given the recovery of the debt and the equity markets, as well as the success of other components of our capital plan, we will be increasingly selective on pushing sales simply to raise capital and will be much more focused on market positioning and future growth opportunities. And in fact, while we have several smaller properties remaining on the market for sale, we do not necessarily expect any more sales to close this year.

As a consequence of all these capital activities, at the end of the quarter we had zero balance outstanding on our $600 million credit facility and very strong overall credit metrics. Our credit facility has extension rights through June of 2012, and as Howard will explain in more detail, we were in good shape from capital capacity and a covenant standpoint. Now turning attention to the real estate market conditions, bottom line, we expect next year to remain challenging, leasing and absorption levels to remain anemic. In this environment, our major operating mission is to garner an increasing share of this lower level of activity.

Our tools to accomplish this are well-positioned properties at the higher end of our quality curve, strong submarket positions, capital capacity and a leasing strategy to aggressively pursue all available deals. In looking at our third quarter results, same store occupancy declined from 89.7% to 88.8%. That was in line with our expectations. We expect to end the year between 87 and 88% same store occupancy, which is just slightly below the levels we thought last quarter. For the quarter, we had 1.157 million square feet of leasing activity based on commencement date, consisting of 262,000 square feet of new deals, 182,000 square feet of expansions by existing tenants, and 714,000 square feet of renewals.

So for the second quarter in a row, this total leasing activity is greater than the leasing activity in any of the previous four quarters. In addition, during the quarter we leased over 724,000 square feet in 110 separate transactions, 466,000 square feet of which generate forward leasing activity which will help offset any further early terminations or tenant departures. So from a leasing standpoint, we were are good strong leasing levels, but we continue to face a higher than normal rate of tenant moveouts and early termination which are negatively impacting our portfolio statistics. Our tenant retention rate for the quarter was a strong 75.5%, which is consistent with our historical run rate. Capital cost as a percentage of GAAP rents decreased to 8.6% from 11.3% last quarter and 9.9% in the first quarter of this year.

Our best performing region in terms of capital allocation was the New Jersey/Delaware region, where we allocated 5.6% of capital cost as a percentage of rents. Our highest capital consuming core market was Austin at 12.2%, but even this was well within our guidelines. Quarter over quarter traffic through our portfolio was flat, but notably, it's up 34% year-over-year. Traffic levels increased in Richmond and Austin and declined slightly in Pennsylvania, D.C., and in New Jersey activity levels remain unchanged quarter over quarter. Our pipeline of transactions is strong, with 1.5 million square feet of new prospects, of which about 480,000 square feet are in lease negotiations.

Average deal time, which is the time basically from the time we show the tenant the space through the lease execution, decreased to 106 days during the quarter, which is down from 134 days during the last quarter and down from 129 day average in 2008. So even though it's still taking tenants a long time to execute leases, at least they are moving in a positive direction. We continue effectively to manage upward pressure on concession packages, particularly on the capital side. But the percentage of deals incorporating free rent rose slightly quarter over quarter to 27% from 26% in Q2. We continue to make progress on our 2009 and 2010 expirations. Of the original 3.5 million square feet expiring in 2009, we have executed 1.9 million square feet. Of the remaining 546,000 square feet scheduled to expire in 2009, we expect an additional 162,000 square feet will renew. 57,000 square feet remain unknown, and the balance of over 300,000 square feet will vacate. And this impact was known and is built into our plan, and has a residual carry over impact into 2010. On our 2010 expirations, of the 4.2 million square feet expiring, we have already executed 946,000 square feet, or about 22% of the total year to date.

During the quarter, Company-wide for new leases, we had a 5.8% cash decline and a 2% GAAP decline. Our strongest performing market on the new leasing activity front was D.C., which showed a 5.4% cash rent growth and a 14.4% GAAP rent growth on new leasing. Our lowest performing operation on new lease activity was in New Jersey and Delaware, which had a 13% decline on a cash and a .8% decline on a GAAP basis. On renewals, Company-wide we had a 4.6% decline on a cash basis and a decline of 1.5% on a GAAP basis. Our strongest performing market on renewals was New Jersey, which shows a .8% cash rent growth and a 2.9% GAAP rent growth on renewals. Our lowest performing submarket on renewals was PA, where we had a 5.3% decrease in GAAP rent renewals, and almost a 1% decrease in cash.

During the quarter, we had 60 direct deal transactions representing 45% of the deals and 23% of the square feet done directly by our leasing staff, ,and we continue to see an emerging separation in landlords' abilities to invest capital to either attract or retain existing tenants. Our 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 transactions. In looking at the broader market, year to date leasing activity and absorption levels are down in almost every one of our key markets. The only markets where we saw a year-over-year increase in leasing activity were central New Jersey and Wilmington. Absorption levels remain primarily negative. Markets where we saw a year-over-year improvement in absorption levels were Southern and Central New Jersey, suburban Delaware and Pennsylvania CBD -- Philadelphia CBD and the Pennsylvania suburbs.

Just to wrap up the commentary on the operating side, we remain focused on portfolio performance, capitalizing on submarket dynamics and aggressively pursuing every lease transaction. We plan to use both the quality and locational advantage of our portfolio and our capital position to continue our track record of outperforming down markets. Then, frankly, as we stand right now, our level of relative outperformance in our core markets ranges from 200 to 1,500 basis points over market levels. On our development and redevelopment pipeline, of our total project costs of $417 million, approximately $192 million remains to be funded. Of that, about 90% relates to [Seara] post office and the garage, which I talked about a few moments ago, leaving a total of about $18 million for the balance of our entire pipeline. That overall pipeline is about 92.7% leased.

Three of our redevelopments have been placed in service and moved into the core portfolio. These three projects are only 75% leased, so they had a 30 basis point downtick to our core occupancy levels during the quarter. In looking at 2010, as you saw in our press release, we introduced 2010 guidance. At the current time, we are projecting a guidance range between $1.23 to $1.34 per share. Some of the key drivers behind these numbers are as follows. Given the lack of visibility on future tenant demand, our assumptions include speculative revenue that is about 28% below that of our 2009 achieved spec revenue on our same store properties, and only about 60% of our total 2009 actual spec revenue, including our development projects. We anticipate capital costs remaining relatively flat during 2010 and averaging between $13 and $15 per square-foot versus our year to date 2009 average of $15.30 per square-foot.

For 2010, we are projecting a year end same store occupancy of 87% that will trough down to the mid-80s later in the third quarter. So overall by year end, about a flat to 100 basis point decline over year end 2009 levels. We are projecting a GAAP same store decline between 4.5 to 5.5% versus the 4.5% decline we are having in 2009. Most notably, our guidance projects a renewal rate of less than 50%. That number is obviously extremely low based on our 2009 results, and frankly, when compared to our ten year average. However, given the lack of visibility in the second half for the year, for any tenant that we do not have a firm idea of their renewal status, we have assumed they vacate, with the corresponding loss of NOI. So we expect a tough re-leasing environment and projected decline on new and renewal rents in some of our markets, and on average we expect about 4 to 6% GAAP decline on new and renewal leasing.

From a balance sheet standpoint, we're projecting to have about $80 million of asset sales during 2010 and a program, no acquisitions. On the sales, we have assumed they occur midpoint during the year at a conservative CAP rate of 10%. This is obviously purely speculative, as we don't have specific properties under contract and/or identified. So all in all, we think 2010 will be a challenging operating year. We believe our speculative revenue targets are very achievable given the pipeline of leasing transactions, with a big variable in our plan, as Howard will touch on, being our tenant retention success story during the course of the year. Final comment relating to our dividend, our Board-approved dividend policy remains the same. We intend to match aggregate 2009 common share dividends to our 2009 taxable income. Through some very effective tax planning work done in-house, we have determined that our aggregate year to date distributions are sufficient to match our projected 2009 taxable income, and as a result, do not expect any further distributions to be made with respect to calendar year 2009.

For 2010, we are currently projecting an increase in our quarterly common share distributions to approximately $0.15 per common share per quarter or $0.60 per common share in an annualized basis, subject to quarterly declaration, obviously, by our Board of Trustees. This represents a 50% increase from our current distribution rate of $0.10 per common share, and based on the bottom end of our 2010 guidance range, reflects a conservative 49% FFO payout ratio and a 70% CAD payout ratio, so extremely well-covered with room for growth as economic conditions improve. Payouts at this level also enable us to generate between $40 million to $45 million of annual free cash flow to contribute to our deleveraging efforts. With that capital market real estate and guidance review, Howard will now review our second quarter financial results and provide some color on our guidance.

Thank you, Gerry. In the three months since our last call, we've continued to improve our balance sheet with a combination of mortgage financings, asset sales, the unsecured debt issuance and retention of excess cash flow. We continue to have no outstanding balance on our revolving credit facility and have significantly reduced the series of near-term maturities through aggressive debt buybacks. And with that introduction, I will jump right into the third quarter, where FFO available to common shares in units totaled $58.2 million versus $52.3 million the third quarter of 2008, resulting in a $0.44 per share FFO figure for the current quarter. This was $0.07 above the $0.37 analyst consensus and is attributable to about $1 million of extra term fees over more typical levels, about $0.5 million of extra management fees related to third party leasing activities, about $0.5 million of lower G&A on a run rate basis, $3.5 million of lower interest costs related to the cumulative effect of the buy back activities. $5.1 million of gains on debt repayment offset by 1.5 million related to hedge costs that had to be expensed.

Our FFO payout ratio in the second quarter is a remarkable 22.7% on the $0.10 dividend paid in July of 2009. A few other observations on 2009 third quarter. Rental revenue was up nominally and straight line rent was up about $200,000 versus a year ago and $500,000 sequentially, reflecting as Gerry noted, slightly higher levels of free rent concessions in our leasing. Recovery income was up sequentially and versus last year, reflecting more balanced expenses and the associated 35% recovery level. Nonetheless, our year to date expenses are running below plan, and we have accrued an aggregate $5 million reduction of recovery revenue until we establish that the spending returns to expected levels. Term fees other income, interest income and both gross and net management income at $7.4 million net or $9.7 million gross were a bit high, as noted above. Our management income will tail off a bit through the end of 2009 and into 2010 as a number of existing contracts expire. Operating expenses were up slightly sequentially and also versus a year ago.

In the third quarter of 2009, we had a combination of certain bad debt expense writeoffs, changes in recoveries and other factors related to our overall credit activities. But the net effect of this was just a $20,000 increase in our reserves, highlighting the combination of a very effective credit process and the continuing durability of our tenant base. As I mentioned, interest expense declined sequentially and year-over-year due to lower debt balances from our debt reduction program. Notably, interest expense includes about $866,000 of additional costs related to APB-14-1, as well as higher swap costs in the current quarter. We expensed 1.5 million in connection with the ineffectiveness in mark-to-market related to forward starting swaps, but have attributed a substantial portion of those swaps to the financing we entered into the third quarter. And lastly, we realized $5.1 million of gains on $203 million of aggregate debt repurchases. On a same store basis related to net operating income, cash rents were down $3 million while non-cash rent items declined a quarter of a million dollars. Recoveries increased by $900,000, while expenses on a same store basis declined by $1.7 million.

For the quarter, same store NOI declined 0.8% on a GAAP basis and 0.5% 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. 2009 third quarter CAD increased to $47.2 million sequentially and measured $0.36 per share. We achieved a 27.8% CAD payout ratio for the third quarter and continue to benefit in terms of cash retention from the 2009 shift in the $0.10 dividend. Our capital costs on a recurring basis came in at $10.5 million and were in line with recent levels and expectations. When looking at our various margins, NOI margin and EBITDA margin, it is somewhat remarkable that we are maintaining margins at or near their highest levels despite higher core of vacancy, reflecting expense control and better overall rent levels and recovery provisions.

To turn to 2009 guidance, which we tightened up and increased on the press release, we are revising the guidance to be in a range of $1.82 to $1.85 per FFO per share from the prior range $1.75 to $1.80. And this $0.07 increase is really, as outlined earlier on the third quarter results, and it's offset by the fourth quarter for the higher interest cost related to our unsecured note issuance, which on a full run rate basis will cost us about $17 million more a year of interest expense -- $4 million a quarter or little over $0.03. Thus, for the fourth quarter, we see a run rate effectively between $0.32 and $0.35, which is at or just below the $0.35 consensus, though a number of analysts, as Gerry noted, have not yet updated for the new note issuance. As 2009 winds down, we are seeing the following conditions. We expect same store NOI to come in on a lower level in the fourth quarter and it reflects the increased vacancy that we now expect, and it will do so as well on a cash basis.

We continue to see flat to perhaps downward trends in rent levels as we make sure we achieve every tenant opportunity we can. And we see year end occupancy in the core somewhere in the neighborhood of 88%, and this is about 100 basis points or 1% lower than our prior expectations. In terms of all other income items, including gains on debt repurchases, we still see that remaining in a $50 million to $55 million gross level or about $45 million net for our management expenses, and that's in line with our July 2009 update. Our 2009 G&A remains in line with expectations at $21 million to $22 million overall. And as I noted, we will see rising interest expenses in the fourth quarter related to the recent note issuance. Overall for the year, we see CAD coming in in a range of between 1.45 and 1.48. This is much higher than the prior estimate, and that's related to the gains on the bond repurchases which we are counting in our CAD calculation, as well as moderate capital expenditures.

So net-net, our projected 2009 CAD of $165 million to $170 million will provide approximately $100 million of free cash flow as we close out 2009, and that's been a key component of our 2009 deleveraging. We also introduced, as Gerry noted, 2010 FFO guidance of between $1.23 and $1.34. Gerry gave a number of the key components, and I will just reiterate a few and add one or two others. We do see GAAP and cash same store NOI both declining in 2010 -- GAAP in the neighborhood of 4% and cash perhaps 1% worse, as we see an increase in free rent and the associated straight line rent impact. And we are expecting that on a GAAP basis our mark to market on rents will be down somewhere in the mid-single digits, and cash possibly a bit more. Year end occupancy should be in the mid to high 80s, probably around 87%, but it is dependent on a fair leasing in the second half of 2010. And Gerry did note the renewal retention of 46%, which is one of the items in the guidance which have better would provide some upside to the range. Aggregate 2010 leasing will total about 3.1 million square feet,it and breaks down roughly 50/50 between new and renewal activity.

We are coming in much lower on other income items because, notably, we don't expect any of the 2009 bond repurchase gains in 2010, and that figure should be $25 million to $35 million gross or $17 million to $27 million net. It includes termination revenues, other income, management revenues, interest income and income from our JV activities. G&A will remain flat at about $5.5 million a quarter or $22 million, and interest, I said, will tick up and then remain level for the year at about $35 million a quarter on average. This all results in a CAD result for the year against that FFO guidance of about $0.85 to $0.95, and it will cover about $40 million of revenue maintaining capital, $10 million a quarter, roughly in line with recent activities.

So if you do the math in terms of our newly expected dividend, we should be well covered on the $0.60, an FFO payout ratio somewhere in the 45 to 50% and a CAD payout ratio somewhere in the 60 to 70%. And most importantly, we would have $40 million to $45 million of free cash flow from this operating and capital plan; which leads me to turn to the 2009 remaining capital plan and the 2010 plan. As we look in the aggregate at the five quarters beginning October 1, we see needs of about $200 million in the fourth quarter of 2009 and about $570 million in 2010. These break down to about $290 million of investment activity; the $170 some odd million that Gerry mentioned for the MPO, the post office the and garage, $17 million for recently completed development of redevelopment lease up, another $19 million for other existing projects -- and these are all outlined on page 32 of our supplemental package. And then we expect about $50 million over the five quarters of revenue remaining CapEx or about $10 million a quarter, and another $30 million of other leasing related and building capital expenditures.

We will see $380 million of debt repayments, $105 million, 2000 note that will repay actually next Tuesday, $211 million for the year end 2010 note, $8 million actually spent quarter to date on some nominal buy back activity, and $56 million for mortgages. And lastly, incorporating all of our different dividend expectations, we will distribute about $100 million of cash to shareholders, both preferred and common, over the five quarters. To raise this $770 million, we have a number of different avenues, most of which are quite predictable or in hand, and they include about $200 million of cash flow from operations over the five quarters -- roughly $40 million a quarter in each of 2009 and 2010.

Gerry identified the $58 million give or take of contractual historical tax credit proceeds. We are expecting funding by no later than the fourth quarter of 2010 on the $256 million post office/garage loan. We are also expecting a $40 million repayment of a first mortgage loan to the buyer of our Oakland portfolio on August 2nd, 2010. And picking up on October 1st, we see $170 million of aggregate sales activity on a net basis, and that's $202 million of gross sales less $32 million of seller financing.

Notably, the $85 million sale on Trenton property has already closed. The $7.9 million sale on the tenant condominium already closed. We have a $29 million sale under contract through the balance of this year, with some seller financing which may or may not close, and we are looking at approximately $80 million in 2010. So when you add all those items up, that leaves just $46 million of projected net credit facility borrowing based on a zero balance on October 1. So we are anticipating very low usage on the credit facility on average, and it gives us room if any of the sales components don't materialize.

Lastly, to touch on a few other items, accounts receivables at September 30, 2009, we had a very controllable amount of $12.7 million of operating receivables with a very comfortable $5 million reserve, or about 40%. We also had straight line rent receivables of just about $99 million, and a reserve of $12.1 million against those or are about 12%. And in Q3, we had a net reduction to our reserves, as I mentioned earlier, of about $400,000 from last quarter's level, reflecting changes to the reserves and specific writeoffs of reserve and unreserved activity. Our balance sheet is at some of its strongest levels in many years, with a 46.4% debt to gross real estate cost. We were very pleased that we could reaccess the unsecured debt market at the end of the quarter, and that brought our line balance down to zero where it stands today with about $46 million of cash on hand, which we will use for next Tuesday's note repayment. And in the aggregate, we repurchased $574 million of our debt over the last year and nine months, realizing almost $42 million of gains. Beyond the gains that we've achieved, we have been very successful in bringing down the levels of a variety of forward maturities.

We closed the quarter 100% compliant on all of our credit facility and indenture covenants, with better results sequentially in virtually all categories, and we remain with a $4 billion unencumbered asset pool about 80% of our total assets, which enhances our unsecured credit metrics. And now I will turn it back to Gerry for some closing comments.

Great, thank you very much, Howard. To wrap up our prepared comments, we expect the economic recovery to begin to be reflected in real estate market performance, but as always, there is clearly a lag factor. And as a consequence, our 2010 guidance we project operating challenges will continue through next year. We are conversely very pleased that our capital plan execution has put us in a very strong position. The accomplishment of our mortgage financing target, the equity sale, the sales targets and then reaccessing the public debt markets, has truly put the Company in a strong financial position. We go to 2010 recognizing that while times will be tough, our portfolio has historically done pretty well during challenging times.

We have laid out 2010 guidance as, I think, by definition conservative, but pragmatically so. We certainly have every intention of trying to outperform some of those statistics that Howard and I touched on. But given the lack of real visibility later in year on job growth, it's hard to project that. So to really wrap up, as Yogi Berra once famously said, the other team could make trouble for us if they win. So now I'm not sure if he made that same comment to the first and second ladies on his way to the mound last night, but I can tell you that Brandywine plans on winning more leasing games than we lose in 2010, and we're confident of our ability to successfully navigate the challenges that lie ahead over the next four or five quarters. So with that, we'd be delighted to open up the floor 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 come from of line of Ross (inaudible) with UBS.

Guys, this is Rob [Salzbury] here with Ross. Can you take a minute to walk us through how the post office project is going to flow through the P&L next year? I think there are a couple of moving parts with the tax payments and everything.

The post office transaction -- all the implications of that have deferred on our balance sheet, both the assets and the liabilities. And once the project begins to operate, we will shift the accounting of those and we will begin to reflect an amortization of the net balance of those two figures over a five year service period. It will be both the case for the historic tax credit transaction, as well as for the new market tax credit transaction that encompasses the garage. But we expect to recognize those revenue items at the end of each successive 12 month period. So we won't see any impact for those in 2010 as we currently envision it because that effect would be concentrated in either the third or the fourth quarter of 2011 for the first year, and it should be roughly in the neighborhood of $10 million per year on our current estimate that will run through both the income statement and FFO. But clearly, as a non-cash item, we intend to deduct it from our CAD calculations.

Your next question comes from the line of Chris Canton, Morgan Stanley.

Hi, I had a question just on the distribution markets, and I think I heard you say that it has improved somewhat. I'm wondering, is that more and better bids than you expected? And if you could, what color is there, how has it evolved over the past few months? And then, this seller financing you talked about, any metrics and the need to provide that? Thanks.

Sure. Chris, I missed the very beginning part of your question, so if I don't answer it completely please advise me. Look, I think on the sales market, as we look at it, fundamentally there's not a lot happening. There are not a lot of trades. What's out there gets fairly short bid lists. It's becoming increasingly clear that a lot of traditional buyers have their own issues they're beginning to grapple with, whether it's a debt or evaluation. There is still, I think, a sense of waiting for fundamentals to firm a little bit and for the debt markets to further stabilize, and I think that's the general theme we continue to see. Now what's been interesting, though, is in the last 30 days we have definitely had a higher level of reverse inquiries from institutions looking ahead towards 2010, and being interested in either JVs on existing assets or looking to jointly underwrite new acquisitions. So I think we are beginning to get that there is clearly a sense that this much anticipated "flood" of potential opportunities, I think people are beginning to think it's more going to be a multiyear trickle, and that there may not be the level of deep distress that many folks were thinking about several months ago. So I think we are seeing a little more optimism on the part of buyers that the economy and the debt markets are stabilizing and that the bottom may be reached. We are getting again, anecdotally, a sense that upward pressure on CAP rates are abating.

I think the anecdotal evidence we have on that is I think from some of our sales activities earlier this year that we walked away from, we see that several kind of unsolicited refresh bids that have driven the CAP rates down lower than where they were off of their highs earlier in the year. So I think there is still generally a lack of clarity, but people are beginning to think about 2010, particularly the debt market stabilizing and there being more positive dynamics on the general economic front. I think for our part, we are staying prepared. We're fine tuning our portfolio management strategy, we're looking at our internal infrastructure to address the investment market. We want to continue, as I touched on, to prune our slow growth non-core assets, looking at both outright sales and joint ventures. While our focus during the year is clearly going to be on operations and balance sheet strengthening, we are beginning to be approached with some interesting opportunities. But I think it's way too early to focus on those at this point. So as a result, we didn't put acquisitions in our 2010 plan. But I do take it as an encouraging sign that a lot of the folks we're talking to feel as though they may have kind of missed the bottom, that the level of distress may not be as deep or as broad based as they think, and that a number of these institutions are looking ahead towards their 2010 agendas.

That's helpful. Thank you. The second part was just with regards to the seller financing. Are you offering the strong rates there? Or is there is a need to provide this financing in the sense that maybe there couldn't be obtained elsewhere? That was the second part.

Great question, too. We wound up providing seller financing on the Trenton transaction. That is about a 7.6% secured second mortgage. As I think we've talked on the calls, we would prefer not to do any seller financing. That transaction was an $85 million trade. The buyer had success in only getting about 50% loan to value of primary first.

That -- or those two buildings are leased -- to the substantial leased to the State of New Jersey, so we felt very comfortable with the coverage requirements on the second mortgage. And we felt that we could create a little bit of an earning asset that we would recover over a number of years. So I think it's -- we go into each of the transactions not planning to have to provide seller financing. But particularly when this transaction was struck a number of quarters ago, there just wasn't a velocity or predictability of the debt market, so having to incorporate that seller financing was a key part of getting that transaction closed. With the debt markets getting better, and hopefully there being more visibility of underwriting, our hope is that that will be a less frequent occurrence

Thank you.

Your next question comes from the line of Jaime Feldman with Banc of America-Merrill Lynch.

Thank you. Gerry, I want to go back to your comments at the outset of the call where you said there is an expectation that business services employment continues to decline in Philadelphia or in your region. I was hoping you could talk about that. And then if, actually, we could talk about what's going on in Northern Virginia as well in terms of kind of what the government is spending, how that is playing out and how much more we have to see?

Yes, I will give you what little color I have. Most of it's coming through some economist that we talked to locally, and their level of being able to accurately project is -- I don't think is beyond reapproach. The -- I think the expectation is since Philadelphia primarily has a service and a professional based economy, most of the job loss have occurred in that sector. As I mentioned, that sector has lost jobs for the last 15 consecutive months. I think what the expectation from the folks we talked to is that if there is continued upward pressure on the unemployment, it's going to be coming out of those sectors. Nothing of particular note. I do think the general feeling is that a lot of the job losses were taken early in this marketplace, so we're not really expecting a lot of other shoes to drop. But again, I'm not sure we have any true visibility on what's going to happen with the region as a whole.

I guess when you speak to your tenants and get a feel for what they are thinking, do you sense that more of them have more layoffs to do? Or -- I mean, one of the things that our economists here are saying is that they think the job market actually -- that companies cut too much. So like when you talk to your tenant base are they -- do you get the same sense? Or do you sense that maybe they are right sized, or do they actually have more to go?

I think it's more that they feel that they are right sized with not too much more to go, which is why I think even on the last call we talked about how we track unemployment stats within our portfolio through our security systems and through tenant interviews. There is, clearly, I think -- most of our tenants move rapidly to cut their employment bases quickly. And even to the extent they were just looking to reduce overhead and maintain margins, they used the economic turmoil as the cover for that. Now what that has done is created a little bit of an overhang in space utilization. So our guess is that as some of those companies start to rehire, they will first be absorbing excess capacity within their own space prior to leaping beyond new space requirements. But I think it's notable, we did have about 180,000 square feet of expansions. I think -- was that the number, George?

Yes.

During the quarter. So we are seeing tenants begin to start to expand. But I think generally throughout our portfolio we are not getting any definitive trend line from tenants they are expecting to do more and more employment cuts. I think quite the opposite. I think people are beginning to preach business stability. I think that's one of the reasons why we are seeing such a nice stability to activity levels where tenants are actually now beginning to think a little bit more longer term than a year or two, and actually going into the marketplace to look at space requirements, because they have more predictability to their employment situation, to their revenue lines and view that now may be a good time to be purchasing a real estate lease.

Are you seeing more activity from start ups of people that were laid off?

I don't think so, Jaime. George, are you seeing anything?

Not that I would say a noticeable trend there, no.

Yes, I think that with the feedback we are getting, Jaime, from our property managers, leasing agents, managing directors -- those of us senior executives that spend time with key tenants -- is much, much more a sense of stability. I won't be so bold to say that a lot of our tenants think they cut too much, because I think they're still waiting for some visibility in their earnings as well. But we are not projecting a lot of other shoes to drop, but we don't really have any particular guarantee on that, either.

And in Northern Virginia -- I'm just trying to get a sense of where we are in the cycle, given the amount of capital that has been allocated in the region by the government?

Well, I mean, I think the stats that we are getting in from -- I think it's George Mason and [Delta] Associates that our team in D.C. pulled together, is that they are projecting, as I mentioned, about 24,000 net new jobs in D.C., with about 13,000 of those occurring in Northern Virginia. We're looking for that to push the unemployment rate back down by 80 basis points by year end 2010. Look, they are projecting growth in subsequent years at 35,000 net new jobs in 2011, 42,000 jobs in 2012. The highest rate of job growth in the metro area is projected to be coming in out of Northern Virginia due to a lot of the government stimulus programs. The highest number of new jobs were created in the government sector, followed by education and professional business services, where the biggest losses, I think, were in construction and retail. So I think what we would expect to see down in Northern Virginia is very much driven by government related service and government spending. So the projections down there seem to be pretty rosy for 2011 and 2012. We will see how they play out.

Okay, thank you.

You're welcome.

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

Thanks, good morning. I just wanted to get some clarification on a couple of the underlying assumptions for 2010 guidance. And forgive me if I've missed these -- I know you guys have a lot of content in there. What are the known moveouts for 2010 as percent, maybe, in square-footage?

Yes, I guess as we is sit here today, we've got, I guess, roughly half a million square feet of tenants that we know are going to vacate. They've either already left the space and they're just performing under the balance of the lease term, or we know they have procured alternative spaces at their lease expiration.

And so that's 10, 15% or so of the expirations roughly?

Right.

Okay, and then the other question is just on the recovery reserve you were talking about, Howard?

Yes.

What is that? The $5 million reserve?

Well, as we run through 2009, we are billing tenants based on expectation of expenses, and booking that associated revenue. But when we see as the quarters unfold and our expenses are running lighter than would have been expected, we effectively withhold that income from the income statement. One of two things will happen. Either our expenses will ramp up in the fourth quarter, as they often do, and then that recovery amount will get back in balance. And/or -- and could be a combination of both -- will end up owing tenants some money. But if it's the latter case, we will have already accounted for it on an income statement basis, and recognizing we always try our best not to have to write checks to tenants. So we are going to endeavor to spend either on a project basis or just a regular R&M basis whatever we can the fourth quarter, and there is also the possibility that we will have bad weather in the northeast areas and incur some ,snow removal cost and that's a somewhat volatile factor as well.

And it is an ongoing reserve that will continue through 2010?

Well, it will work its way out by the end of this year. Either we'll be writing checks to tenants or we will be reversing it and recognizing a larger amount of revenue in the fourth quarter; but if that were the case, we would have a larger amount of expense as well.

Where are you relative to actual now? Sort of through the end of 3Q?

Well, through the end of 3Q we had withheld $5 million of revenue based on the expected recovery percentages. Too early to tell what's happened yet in the fourth quarter. We haven't seen final October numbers. We do spend a lot of time as we move through the second and third quarters with the regions making sure they understand on a property by property basis where they need to be.

Okay, so best case scenario, you could book an incremental $5 million of expense recoveries assuming no change in expense sequentially?

That would be the best case scenario, but that would mean a jump in expenses would go with it.

Right, okay. All right. Thank you.

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

Hi, thanks. It's Josh [Adie] with Michael here as well. First, with respect to CAP structure, when you did your first equity offering, I think you kept the proceeds at a pretty reasonable level, which kind of left the door open to do more down the road. How do you feel about equity at today's levels, and how much equity do you think needs to be put into the CAP structure, and does that fit at all into your capital plan for the next two years?

Well, look, I mean, as we've talked on our calls and all of our investor meetings, one of our overriding objectives is to continue to improve our balance sheet and move up the ratings curve. We did hold the -- besides the equity offering, given where the pricing of the equity was back in the second quarter, we've had some very good success in achieving some of our other goals, the equity deal being a key piece of that. I mean, that trade, as painful as it was, along with the other sales mortgages and thankfully the bond market opening back up has put us in a very positive cash and strong position, as Howard articulated in terms of our sources and uses. As such, and with very little additional activity, we have full capital capacity the next several of years. Yes, so while leverage is higher than we ultimately want it to be, and we are determined to remove leverage as a value blocker to our stock, we also want to make sure that we are pragmatic and disciplined in terms how we go through assessing our deleveraging options.

We have the flexibility to sequence a number of steps over the next couple of quarters. I mean, clearly, we will do everything we can to continue to improve our NOI. That will be clearly a challenge, but that's a key focus of ours. We will look at the -- accessing the sale of the joint venture marketplace. And then certainly as we look at the plan going forward, look to the equity markets as circumstances warrant; and whether that be a stand alone transaction or another event where we can demonstrate value creation as opposed to just dilution, we will make that decision when we get there. But the umbrella goal remains unquestioned and at the top of the board in management's priority, which is to continue to delever the Company, continue to strengthen our credit metrics. I think we want to make sure that we sequence our activities properly to make sure that we preserve the highest level of value we can for the share holder base.

Thanks. That's helpful. And the second question I have is I think you have about -- close to $75 million of seller financing loans outstanding now. What are you booking from an FFO perspective and also what are you booking from a cash perspective, and are any of those loans accruing or pick instruments? And also maybe just give us some color on the loan book in general.

As far as our notes receivable outstanding, we currently have about -- I think you had said 75 million -- I think it's actually around 50 million currently, and we are at around $300,000 a quarter of interest income associated with those notes.

And is that the same on a cash basis?

On a cash basis --

Recall that the Oakland note, the 40 million, is this free, and we are accruing up from a discounted balance to the $40 million maturity at 4% rate. So that accrual does run through the income statement, but there is no cash associated with it. On the new Trenton note, the $22.5 million, it's got a nominal 6% cash pay, but there would be periods where on account of amortization to the first that cash pay will reduce. Be that as it may, will ultimately earn up to 764 overall rate. And I think we stipulated that was worth -- if memory serves me -- about 5 million in change by the end of the seven year maturity. So there will be an additional -- I guess you could call that a pay in kind, if that's what you mean by that type of note. That will grow in size.

They are $50 million as of 9-30, but will be in the $70 million neighborhood after Trenton closes.

Right. And then so effectively, what is the current FFO that's being generated -- or will be generated -- from that $70 million is significantly in excess than the cash that you're generating -- you're backing that out for your CAD calculation?

I don't think we back out anything related to those notes for CAD purposes currently.

And so you had said it's basically a -- from an FFO yield perspective, these notes probably are yielding what? On the 75, you're accruing like an 8 -- a 7% yield effectively?

No, no, no Not on the whole, because that would be a 1.64% accrual related to the new note. And you also have to take into account that the installment sale accounting treatment that will be in place for the Trenton sale will limit our recognition of income on a go-forward basis -- not quite, but on an almost basis to cash received. It's going toi more closely be related as cash with -- and you will see in the fourth quarter, we won't book a large gain on sale from that transaction, because we have to defer that until we ultimately receive the final cash balances with the payment of the note.

Howard, does any other type of security -- I don't know if it's anything with the post office or anything else that you are doing where you are effectively booking income but there's not the cash flow there?

As we said at the outset -- there was a question earlier. The nature of almost the entire tax credit transaction has an element of cash received upfront during the development period. We've talked about those various payments. The ultimate deferral of that cash received, our incurring of costs on the other sides of that transaction and ultimately during a five year period once we begin operations, will recognize an amortization of those amounts. Because we do expect in both transactions that via the put cost structure there will be -- that our partner will exit that transaction for variety of economic reasons. So the whole purpose of that transaction has been cash up front, which Gerry and the rest of us have often couched in the context of effectively a reduction of the development costs, but ultimately the GAAP accounting dictates that we recognize that income during the later in-service period. As that happens, we will obviously spend time talking about it. It's projected to be a late 2011 event as currently contemplated, but it will be talked about, fully disclosed, so everyone will understand. It has got an income statement effect, but not a cash (inaudible) effect.

And there is no cash effect today? There is no difference today between income and cash?

Well, we're not recognizing any income related to those transactions today.

Okay, thank you.

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

John Guinee here. How are you? Couple of quick questions. First, I think what you are basically saying, Gerry or Howard, is there is reverse amortization on the Trenton deal and there's reverse amortization or accrual on the Oakland deal too?

They are slightly different. The Oakland deal was a $40 million, zero coupon seller financing that was booked on our balance sheet at a discount and then [accretes] up to the final cash payment amount. And it was booked at the time, given its low loan to value, at a 4% accrual rate.

And do they have the ability to repay that, or is there a hard asset security to that loan?

Yes. That's a first mortgage position on two buildings. So it's about -- from a real estate standpoint, John, about a 25% loan to value.

Great. Okay, next question. What is a Jupiter street? 220 car redevelopment?

Juniper Street is a garage that we are rehabbing right off of Broad Street in Philadelphia CBD, Royalty Avenue of the Arts. It's a rehab of an obsolete automated parking structure that we are going to modernize and place in service in the first -- in the spring of 2010. It's right off the avenue, the (inaudible) section of Broad Street and Philadelphia CBD, and we have that underway right now.

And that's for One and Two Logan?

Actually, One and Two Logan have their own garage. It would be a stand alone facility located right off the Avenue of the Arts.

Got you, okay. Thanks a lot.

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

Good afternoon. You guys mentioned your 2010 dividend should represent about 70% of CAD. Is that a level you guys are going to maintain going forward? Or is that something you are going to revisit if the credit markets and space markets improve?

Well, that is actually inside of the level we've previously articulated, which was an 85% target, so we are doing better than that from a cash retention standpoint. But we are sticking to the notion that we are going to try to match the dividend payments to taxable income, ,and as we best see 2010 shaping up that level ought to do it. But we will be evaluating and the Board will be evaluating that as the year goes on, and certainly as Gerry (inaudible), if conditions are better than expected, there's always the possibility of higher dividends.

Thank you.

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

Thank you. Howard, I'm a little bit confused by the hedge accounting, in particular on the unsecured note offering. It looks like in the press release you say that hedging costs add another 8 to the cost of the security. But this is obviously fixed. Are you swapping into floating?

No, what we -- and Gabe will no doubt jump in and help me here. But what we did is, I guess a couple of quarters ago, we booked a forward starting ten-year slot. And ultimately, we did not execute a transaction exactly in the time frame contemplated or in the format contemplated. So the combination of those two effects means expense a portion of the hedge -- and you see that running through the income statement, both in Q3 and more so in Q3. But then other portion of the hedge -- a substantial portion -- gets attributed to the financing we did, and that adds about an eighth of a point to the cost, because the underlying treasury and swap rate was higher, in fact, than the treasury at which we executed the financing.

So you allocated this debt instrument, even though it really wasn't related to the transaction?

Well, yes. I mean, it's deemed that it does relate, even though it's not for the full ten-year period. The expectation is that between that financing and ones that follow it, we'll absorb the amount that we hedged -- the amount that's been deferred to other comprehensive income.

Okay, thank you.

At this time, there are no further questions. Gentlemen, do you have any closing remarks?

Only to thank everyone for participating. I know it's been a long day with a lot of earnings calls, so we appreciate your participation and look forward to updating you on our next quarterly call. Thank you.

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