Brandywine Realty Trust (BDN) 2009 Q4 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust fourth quarter earnings conference call.

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 like to turn the conference over to Mr. Gerry Sweeney. Please go ahead, sir.

Thank you. Good morning to everyone and thank you all for joining us on what appears to be another snowy morning here in Philadelphia as we go through our fourth quarter earnings call.

Participating on today's call with me are Howard Sipzner, Chief Financial Officer; Tom Wirth, our Executive Vice President, Portfolio Management Investments; George Johnstone, our Senior Vice President of Operations; and Gabe Mainardi, our Vice President and Chief Accounting Officer. 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 securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as our most recent annual and quarterly reports filed with the SEC.

With that being said, 2009 was characterized by a series of capital market activities and good leasing performance. Those accomplishments are outlined in our press release and encompass several mortgage financings, an equity offering, an unsecured note issuance, asset sales and debt repurchases that all combine to significantly improve our balance sheet and liquidity position as the year progressed. We were very pleased to have successfully executed the liquidity plan we charted out at the beginning of 2009 and several key accomplishments are as follows.

During the year, we reduced net debt by about $259 million or 9.5%. And since the third quarter of 2007, we've reduced our overall leverage by approximately 800 basis points. Our $600 million line of credit, which has extensions that go through 2012, had only $92 million or 15% drawn at the end of 2009 and provides us, as Howard will outline, with ample liquidity. The long-term financing on our IRS project will provide a $162.5 million net source of cash to the Company during 2010. All of our financial covenants remain in a strong position. We closed, during the year, $130 million of asset sales at an average cap rate of 8.5%. We raised $242.5 million of net equity at $6.30 a share.

Also during the year, we began funding of our $77 million of gross tax credit financings, with up to $34 million remaining to fund during 2010. We've re-accessed the unsecured debt market in September by issuing a $250 million unsecured note at a rate of 7.5%. During the year, we also retained $90 million of cash flow after recurring CapEx and dividends, which further advanced our liquidity objectives. Through our $440 million debt repurchasing program, we significantly reduced our 2010, 2011, and 2012 debt maturities. And from an operational standpoint, we commenced leases during the year on 3.8 million square feet, consisting of 1.5 million square feet of new leases and 23 million square feet of renewals.

With our new dividend rate of $0.15 per quarter, which was recently increased from $0.10 per quarter, our FFO and CAD payout ratios are among the lowest in the sector providing a strong cushion for challenging economic times and ample room for upside as market conditions improve. Based upon the mid-point of our new 2010 FFO guidance, our FFO payout ratio is 46% and our CAD payout ratio is 67%. Further more, our 2010 business plan contemplates that we will generate free cash flow of between $40 million to $50 million. From an operational standpoint during 2009, we exceeded our spec revenue targets. As you may recall, we had budgeted $38.5 million of total spec revenue for the year. We actually achieved $39.3 million or 102% of our target. Our tenant retention rate for the year was 78% excluding early terminations and 67% after factoring in those early terminations.

We ended the year with same store occupancy of 88.5%. On the last call, we indicated that that would be between 87% and 88%. So we ended slightly better than where we thought we would. In addition, our capital costs were within our targets of 15% of gross revenues for new leases and 7% of gross revenues for renewals. While overall marketing conditions remained challenging, we are seeing increased activity in some of our markets. As we discussed on the last call, 2010 is the year of the shrinking pie with generally negative or lower levels of overall absorption. Our objective in this type of climate is to be singularly focused on leasing office space, and be as aggressive as we need to be to maintain portfolio occupancy levels.

While we'll discuss different marks in more detail during the G&A, the following metrics guide our perspective on overall market conditions. Traffic through our portfolio is up 23% year-over-year. Traffic activity levels increased in metro DC by 39%, while inspection levels declined slightly in Pennsylvania and in Richmond. In New Jersey and Delaware, Austin, and California, our activity levels remain unchanged. The pipeline of transactions is strong with 2.4 million square feet of new prospects, of which 392,000 square feet are in lease negotiations. This compares very favorably to our pipeline last quarter of 1.5 million square feet.

Regarding average deal time, which is another key metric, that decreased during the fourth quarter to 93 days, which was down from 106 days the previous quarter and down from 129 day average in 2008. So tenants are fortunately beginning to get in their cars, look at space, and when they make a decision, make that decision a little bit quicker. Despite this, there is no question that generally speaking, there continues to be downward pressure on rents due to higher vacancy levels, tenant consolidations, and generally lower leasing activity. The core market most seriously impacted by this trend is New Jersey. Despite having positive absorption in South Jersey during Q4, we anticipate continued challenge in that market for at least the balance of 2010. However, from an overall standpoint, we're increasingly encouraged by the level of activity; and more importantly, by our leasing team's ability to maximize our competitive advantages in all the markets in which we do business.

To wit, during the fourth quarter we leased over 641,000 square feet in 119 separate transactions. 458,000 square feet of which generated forward leasing activity which will help offset any further early terminations or tenant departures. Despite these strong leasing activities, we still continue to face a higher than historical run rate of tenant moveouts and early terminations. That activity has been factored into our 2010 plan and hopefully a lot of that is in the rear view mirror. 2010 will definitely present a window of separation between landlords that have financial flexibility and those that do not. We see this evidence every day on the leasing front; and to further solidify our advantage, we're proactively investing capital to refurbish some of our key existing properties to improve their competitive position and to send a clear positive message to the tenant in the brokerage marketplaces.

As a consequence, we anticipate investing about $16 million during 2010. Those numbers are built into our business plan, and those dollars will be spent on everything ranging from roof replacements, energy savings, sustainability initiatives, mechanical system upgrades, public area improvements, and building renovations. All of this investment is designed to take advantage of this market trough to reposition our well located properties so that as economic conditions improve, we have a higher quality tenant base with better NOI growth potential.

With that overview, let me spend just a few moments reviewing our 2010 business plan assumptions. The major objective for 2010 is to lease office space, frankly nothing more complicated than that. Our current business plan incorporates $28 million in speculative revenue, broken down between $12 million of new leasing and $16 million of renewals. We're pleased to report that year-to-date, we have already executed $12.4 million or 45% of that spec revenue target. Our original business plan also contemplated a 46% tenant retention rate. Based on results thus far and what we expect to happen, we believe our retention rate will actually approach 55%. Our overall occupancy stands north of 88%. We anticipate we will close out 2010 about 200 basis points below that level; and as I mentioned in the last call, we expect those occupancy levels to drop down into the 85% to 86% range in the third quarter, primarily due to several known and planned for tenant moveouts.

We continue to effectively manage upward pressure on concession packages, particularly on the capital side. But our 2010 plan does anticipate that 38% of our leases will have a free rent component versus 27% of transactions in 2009, reflecting continued pressure and our aggressive stance to both meet the market and beat our competition. On our IRS Philadelphia campus, also knows as the Post Office, we expect occupancy and NOI to commence in September of 2010. This event will trigger funding of the $256 million forward financing. That loan, as you may recall, fully amortizes over the 20 year term of the GSA lease and has an interest rate of 5.93%.

From a balance sheet standpoint, several points of emphasis. We remain fully committed to our objective of moving up the investment grade ratings curve one notch. We understand this is a several year process, and will require us to continue to reduce our leverage below current levels. We plan to achieve that through a combination of NOI growth, occupancy improvement as the market conditions recover, as well as to the extent that we pursue any acquisitions, financing those on an all equity basis. The combination of these three items, we believe will have the effect of achieving our overall deleveraging objective. During the year, we also predict having moderate usage on our $600 million revolving credit facility. As indicated earlier with extensions, this facility has a June 2012 maturity. We anticipate that we will utilize less than 35% of the committed amount at any point during the course of the year.

We have not programmed any acquisition or joint venture activity into our business plan. We are projecting about $80 million in property sales. We have already closed an $11 million sale in January, leaving $69 million to accomplish this objective. Howard will walk through our source and use schedule, but our business plan does not contemplate any new financing activity other than utilizing our credit facility to pay off our $199 million of 2010 bonds due in December, and paying off our $42 million secured mortgage on Plymouth Meeting Executive Campus also in December. While there are other components, the major source of cash to do this are the anticipated $34 million remaining funding of the tax credit proceeds, the loan repayment from CIM of $40 million, and the net recovery of $128.5 million from the funding of the IRS campus $256 million mortgage loan. We also, during the year, plan on exercising the first of two one-year extensions our $183 million term loan ultimately pushing that maturity to 2012.

In summary, we made good progress during 2009 particularly on leasing and our capital plan execution. We are also very mindful, however, of the fact that we have a lot more work to do particularly in an economic landscape that remains volatile. Our 2010 leasing plan reflects our view point on the market bottoming, accompanied by rental rate stability in some of our markets with continued downward pressure in several others. We are pleased with our progress on achieving our spec revenue target year-to-date. As a result of this success, renewals to date as well; and most importantly, visibility on some forward leasing activity, we are increasing the bottom end of our guidance by $0.02 to a new range of $1.25 to $1.34.

This upward revision does incorporate the seemingly endless impact of this heavy snow season where thus far this year, 2010, we spent $4.3 million versus a budget of $1.4 million for a net overage of $2.9 million. Given our lease structures, we'll recover 66% or $1.9 million leaving a net uncovered landlord expense of approximately $1 million. Looking ahead, one of you're key objectives is to remove non-core or slow growth properties from our portfolio via either outright sales or contributions to joint ventures.

Our track record on this front has been fairly good in that since 2007 we have sold $1.25 billion of non-core assets at an overall cap rate of 7.6%. Over the next several years, we anticipate that we will continue to call out slow growth assets and focus on key submarket concentrations. By way of illustration, upon completion of the post office project, the federal government will become our largest single tenant comprising 7.2% of our annual base rents, and our percentage of NOI contribution from Philadelphia's CBD will rise from 12% to about 19%. Therefore, by year end 2010, our top three submarkets: Philadelphia CBD, the Dulles Toll road corner, which generates about 17% of NOI, and our premier Radner submarket in the PA suburbs will comprise almost 45% of our overall company net operating income.

As we look at our business plan for the next several years, identifying attractive investment opportunities, whether they be in a wholly-owned or joint venture basis is returning as a point of focus. We have been spending an increasing amount of time looking at new investment opportunities. But as I mentioned previously, the execution of any of these opportunities will be part of our balance sheet strengthening program, and not be done through releveraging the Company. On that point you can certainly be sure.

We already took significant dilution through our June equity raise, so our plan going forward is to manage further dilution primarily through match funding stock issuances and any acquisition activity. Looking at acquisitions, certainly nothing of great consequence has presented itself, but we are currently evaluating a number of transactions that are primarily private development company and smaller portfolio recaps, working with some banks and financial institutions on restructuring some existing loans. Looking at the overall state of the investment market, we don't anticipate that in our markets, with the possible exception of metro DC, there will be a high volume of retail option sales types of activity for at least the first half of the year. What we have seen thus far, at least in metro DC, is where there have been properties from the market. There has been a fairly active bidding pool and no sign that sellers are willing to capitulate to disadvantageous spot versus what the expectation is of long-term value. So we really view our investment activity efforts during 2010 as doing missionary work and engaging in a number of discussions on private development recaps, meds financing structures, and direct pocket investment opportunities, all of which would be in our existing core markets.

With that overview, Howard will now review our fourth quarter results and update on you our 2010 financial plan.

Thank you, Gerry.

FFO available to common shares in units totaled $58.2 million in Q4, 2009. On a diluted basis, FFO per share was $0.34. We met analyst consensus and actually felt pretty good about the $0.34 result in that we note the quarter was at the low end on termination management income and JV income, featured a $548,000 loss on bond repurchases, balanced out by a $906,000 hedge gain. So again, we're generally pleased with both the Q4 and the 2009 results. Our payout ratio on a $0.10 dividend paid in October was 29.4%.

A few observations on the components of our Q4, 2009 performance. Rental revenue was down nominally both sequentially and versus a year ago, straight line rent as a component of that was down versus a year ago and sequentially versus Q3, reflecting lower levels of free rent and a greater movement to cash in the rental stream. Recovery income was up substantially, sequentially, and nominally versus last year reflecting the Q4 true up phenomena, especially this year where we had a more substantial increase in operating expenses. About $1.4 million of is snow related in the fourth quarter while the balance is accelerated repairs and maintenance activity. Term fees, other income, interest income, and gross and net management income was at $4.7 million on a net basis or $6.4 million gross, and were light, as noted above.

Our management income declined and will remain at these lower levels due to the scheduled exploration of a large management contract in October 2009 as expected. In Q4, 2009, we had net bad debt expense of approximately $800,000 in line with recent activity and reflective of an appropriate level of reserves and good credit quality. Interest expense increased sequentially due to the unsecured note issuance, but decreased year-over-year due to lower debt balances from our debt reduction program on account of the buybacks. Our interest expense included $725,000 of noncash APB14-1 costs on our exchangeable notes. We recognized $906,000 in connection with the ineffectiveness and mark-to-market related to forward starting swaps that we entered into as a hedge bringing the year-to-date figure on this process to a $906,000 net expense.

G&A though in line with prior levels, actually included $800,000 attributable to the write off of an abandoned land option; and therefore, came in lower than recent levels. We incurred $548,000 of losses on $43.6 million of aggregate debt repurchases. Lastly, deferred financing costs declined to $1.1 million in the fourth quarter, reflecting the prior period acceleration of deferred amounts as a result of larger debt repurchases in those periods. On a same-store basis, cash rents were down $4.4 million reflecting lower occupancies and rent levels with noncash rent items declining $1 million within there as we continued to improve the cash quality of our income stream. Termination fees, and other items increased by $670,000. Expenses increased by $4.6 million with a resulting recovery rate of 37%, again reflecting lower occupancy. The expense ramp was attributable to a $760,000 increase in real estate taxes as we trued up in this fourth quarter and compared ourselves to certain true ups in the fourth quarter of 2008.

And lastly, our regular operating expenses jumped $3.9 million due to $1.4 million of extra costs for snow removal and $3 million of year end R&M projects to fill expense budgets and maximize recovery income offset by certain minor janitorial savings. For the quarter same store NOI declined 11.4% on a GAAP basis and 10.8% on a cash basis. Both these figures are elevated versus the prior run rate, but did bring our full year 2009 level in as expected at a 4.3% decline on GAAP and a 2.2% decline on cash.

In terms of our 2010 guidance, we are raising the bottom end of our $1.23 to $1.34 range to now be at $1.25 to $1.34 reflecting, as Gerry said, the accomplishment of certain components of our leasing and operating plan. This FFO level essentially equates to a quarterly run rate of between $0.32 and $0.34 and is in line with current levels. Key assumptions include the following: we're projecting and modeling for about a 5% GAAP same store NOI decline, excluding termination and other revenues; and for a 6% cash same store NOI decline, again without termination and other items. We expect our rents to be down on a GAAP basis about 4% to 6% and cash to be down 7% to 9% in line with the prior quarter's guidance as well.

Year end occupancy should be between 86% and 87%, and will be down about 100 to 200 basis points for the year by the end of 2010. The renewal retention assumption is now 55% based on our latest reforecast, and our 2010 plan calls for about 3.1 million square feet of aggregate leasing revenue to produce $28 million of speculative revenue in 2010 against which we are about 45% completed. We're modeling about $25 million to $30 million gross or $20 million to $25 million net for all other income items including termination revenues, other income, management revenues, interest income, JV income, and bond repurchase activities, which of late have actually represented moderate losses. We see 2009 G&A of $21 million to $22 million or about 5.5 million a quarter. Our interest expense should run at about $140 million for the year or about $35 million a quarter, roughly in line with the Q4 level. And as a result of about $40 million of revenue maintaining capital, we see our CAD coming in at a range of $0.85 to $0.95.

Our payout ratios will be just under 50% on an FFO basis and in the mid-60s on a CAD basis. Our plan, as Gerry outlined, produces $40 million to $45 million of free cash flow. We'll spend a few minutes on our capital plan as well. For 2010, we have total capital needs of about $601 million. $218 million of that represents investment activity incorporating $128 million for the post office and garage completion, $23 million related to recently completed development and redevelopment leaseup programs and other ongoing projects, about $40 million budgeted for revenue maintaining CapEx, and $27 million of new leasing and other CapEx incorporating some of the items Gerry mentioned earlier. We will require about $295 million for debt repayments, $198 million for the 2010 note, $46 million spent quarter to date on buybacks, and $51 million for mortgages including amortization during the year and we're projecting right now the current level of the dividend and the preferred dividends to require about $88 million of cash, which we are assuming will be paid in cash.

To raise this $601 million, we see about $160 million of cash flow from operations and cash on hand, $34 million from the historic tax credit financing, $256 million from the escrowed funds on the garage and post office loan, $40 million on the CIM Oakland note repayment, and $80 million of sales of which about 11 have already been done. This leaves just $31 million to be borrowed on our line, taking its balance up to a projected year end 2010 level of $123 million or about 20%. We think we have a very balanced and conservative capital plan, which emphasizes low usage on the credit facility keeping it available for opportunities and other situations.

Looking for a moment that account receivables our reserves at 12-31-09 totaled $16.4 million, $4.2 million on $15.1 million of operating receivables or about 28%, and $12.2 million on $99 million of straight line rent receivables or about 12%. With our overall reserve percentage at 14.3%. Our reserves declined from the September 30th level reflecting the increase of $800,000 that we noted earlier offset by a use of $1.9 million that was used to cover write-offs of previously reserved AR. So again, we believe our reserves and receivable situations are in a very balanced and conservative posture.

On the balance sheet we had a 60.1% debt to total market cap and a 45% debt to gross real estate costs. These are our best ratios in two years and reflect the continuing deleveraging of the Company; and in line with our overall credit objectives, we're keeping secured debt low at just 10.2% of assets and floating rate debt at a low level at just 6.1% of total debt and keeping our credit line very available. As Gerry mentioned, we're 100% compliant on all of our credit facility and indenture covenants.

And with that, I will turn it back to Gerry.

Great, Howard, thank you very much.

To wrap up the prepared comments portion of the call, 2010 will be a challenging year operationally. The economy is still recovering, and we're certainly very mindful of still some of the negative news that tends to hit us on an every week basis. We also recognize we've made very good progress, but more importantly realize we have a lot more to do. Having 45% of our spec revenue put to bed is great this time of the year but that means we still have 55% more to do. We recognize the mission for the year, and anecdotally what we're seeing, however, is reflective of a higher level of confidence by the majority of our tenants that economic conditions are increasingly stable and office space is once again becoming a point of discussion around corporate conference tables.

We do think that's a good early cycle message, and we're seeing that with increasing frequency. I mean, from activity will obviously come absorption and with absorption will come some positive movement in rent. That's still a way off but it starts with activity, which is why we measure that in our ability to capture market share of activity as a real barometer of our health in the markets. The capital market and leasing accomplishments of 2009 put us in a very good position to take advantage of opportunities in 2010, both on the leasing and the investment front. The capital position, which will continue to improve, has a leasing level clearly created a competitive advantage for us against many of our private market counter parts. We anticipate using our leasing teams and capital investment programs to ensure that we maximize that advantage during the course of the year.

While I spoke a little bit about pursuing future opportunities and they are important, our primary focus remains on leasing office space, retaining tenants, optimizing our own portfolio performance, and making sure that we meet all of our leasing goals, occupancy targets, and capital requirements. With that, we would 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 very much. At this point we'll open up the mic to questions.

(Operator Instructions)

Your first question comes from the line Jordan Sadler with KeyBanc Capital.

Hi, guys. Good morning.

First question is just about the--I don't want to say aggressive, but definitely more the greater posture that considers being a little bit more offensive. You plan to sort of refit the portfolio somewhat, repositioning some of these properties, opportunistically seemingly ahead of an up turn, as you said at the market trough. You've hired Tom and George, maybe you could just provide some color as around maybe these two sort of sets of things that you're doing, why now is the right time to spend the money on the portfolio? And separately the types of opportunities that Tom and George are looking at, is it M&A or one-offs around the edges, like that? Thank you.

Great. Jordan, let me take those in some sequence. I think the message we would like to drive home at a thematic level for the Company is while as you touch on we have started to retool the infrastructure here to look at growth opportunities, we are not by any way or any stretch of the imagination taking our eye off the leasing ball. A tremendous amount of all of our senior executive time is being spent on making sure we maximize our entire leasing advantage; and recall that a big piece of Tom and George's responsibility is also really focusing on efforts with our regional managing directors on our portfolio management strategy, so we actually fine tune our multiple year plan on a number of assets through our portfolio. Mission critical for us is making sure that we focus on existing market conditions and making sure that we perform very well.

In terms of looking beyond the existing inventory base, we did view that it was important to send a very strong message to the marketplace that we have the capacity and the desire to continually upgrade and invest money in our existing stock. As we look around through all of our different regions, there is a number of landlords that don't have the ability to upgrade stock, have some level of financial distress, not the ability to really generate internal capital to meet leasing requirements. Part of the message we want to send to the tenants who are touring our portfolio or brokers who control those tenants is that we have the wherewithal and the desire to continue to upgrade our existing stock. And we have been very surgical in where we're investing that money, the properties are well located in core markets. Based upon the recommendations of the managing directors, we focused on those properties where we thought we could either accelerate absorption, change the historical trend line of that property's NOI, or increase overall rental rates as market conditions improve by investing dollars in those properties today. So I think psychologically and economically we create the right landscape to get a desired result.

In looking broader, and, Tom, you can jump in and certainly talk about some of the things we're looking at. But the objective was to basically get out there and start having a meaningful dialog with as many people as we could both institutional investors, pension funds, advisors, a lot of the banks in which we do business, a lot of our private market counter parts to really start to ferret out where we thought there might be some opportunities for us to add to our submarket positioning. At this point, we don't really anticipate any big M&A or strategic work, but in talking to a lot of private development companies on small portfolios there seem to be some good opportunities there.

I don't know, Tom, if you have anything to add there.

Not much to add. But one of our key objectives is seeing all the transactions that are going on. And here you are seeing a wide variety of marketed transaction, which are getting a lot of interest in the DC market, but you're also seeing some more opportunistic items coming up. And we're just going to at this point assess all of them and make sure that we're in the markets to see these transactions as they occur, and if any of them meet with our criteria on a risk adjusted basis we'll take a look at them.

Okay. I think Craig has a quick follow-up.

Good morning.

Howard, is the opportunity still there to continue to buy back the unsecures that come due at the end of the year, maybe earn the spread between the coupon and the line; or is that market getting a little too thin?

That's exactly what it is limited to. Typically we're buying back at money market type rates, incurring small losses on occasion on the buyback, but getting a fair trade in terms of using the lower cost line. So we'll continue to do that. We like that it brings down those future maturities as it has already done because it creates more optionality in terms of what we do in 2011 and 2012. As Gerry said, 2010 is really already taken care of by the excess on the post office financing.

Great. Thank you.

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

Good morning.

Good morning.

Just a question between the lease and the occupied, just looking at the supplemental page 27, you have a spread of about 70 basis points at year end, which obviously is much lower than the historic range, I guess as more of a lease space to occupancy is the difference between 88.2 and 88.9. And I was just trying to determine on page 23 you have the percent leased at 89.6. Does that reflect increased leasing that you have done so far this year; and I guess when you look at those statistics if it is right, where it is now gone back to historical spread, I am trying to figure out what is really driving that; and I guess you're still sticking to this that that occupancy is going to dip down to the 85%, 86% level and stay that way through year end? Maybe you can just sort of reconcile both.

George, do you want to take that?

Yes. The pre-lease percentage is actually the 89.6%. It looks like like we may have a typo on page 27, but 89.6% is currently where we are. We have got forward leasing in the Company, about 323,000 square feet in the core portfolio and about 1.5 million in the development and redevelopments.

You still feel that that trending towards the level of scheduled moveouts maybe just go over I guess given the fact that you're almost 90% leased today, how you're going to lose 400 basis points of occupancy through year end?

Well, I mean, we've got about 4.2 million square feet rolling in 2010 at a 55% retention. That's going to be about 1.9 million square feet of moveouts, and we have got about 1.1 million of spec leasing--new spec leasing still to achieve in addition to completing the balance of the renewal that are not done to date. So that's kind of the roll forward of how we expect to get from the 88.5% and end 2010 down about 200 basis points.

We certainly--we know that there is a number of tenants moving out later in 2010, which is why we've projected that we're going to trough down into that 85% or 86% range. We're not really losing any of those tenants to any competitors. Basically they're downsizing or in the case of one large tenant buying their own building. So the plan has that space being vacated. I think in almost every case. We're not really showing that space being released this year once they vacate, so there might be an opportunity to shoe horn a tenant in there before the end of the year and change the dynamic. But that's one of the conundrums we see in the market today.

We've had very strong pipeline activity, we're very pleased with the level of leasing activity we've had, but confounding our ability to make progress as well as a lot of other companies is this trend towards consolidation, downsizing, moveouts, etc., which are far beyond what we have previous experienced in particularly a number of our core markets. South Jersey being a key example of a portfolio where we've historically have run that asset base into the mid-90% range, between 92% and 94%, and we're currently in the mid-80s, and that's going to drop down even further as some of these tenants move out.

Just as a follow-up, I think in your prepared remarks you said something about $800,000 write off for land auction.

Right.

I want to make sure I heard you right and where is that sort of in the P&L, and then also what exactly were you spending almost $1 million on for land?

This was an option that we had in existence for about three years on a piece of property in Austin, Texas. The money that we spent was about $800,000 or so, and that was a partially nonrefundable deposit, but also engineering and planning and design costs spent on the land in preparation for getting that piece of property through the approval process. We made good progress on getting it through the approval process, but with the change in the economy, and the--certainly the change in the rental rate profile in Austin, we made a decision that the price at which we had the property under option for was well above what we thought the true value was, and the buyer--or I am sorry, the seller was content to hold their pricing, and we were not content to proceed. So we decided to not pursue that project and as a consequence of taking the write off and I think, Howard, you mentioned it is in our G&A number.

That full 800 is in the G&A?

That's correct.

I thought you said auction, not option.

Option.

It must be the snow down here. It was actually an option we had on a piece of land in Austin, not auction.

All right. Goodbye. Thank you.

Your next question comes from the line of James Feldman with BofA.

Thank you very much.

So as you think about your largest markets like the Philly region and then metro DC, can you talk a little bit about potential leases that will really move that market, whether it is tenants that you know are in the market looking to down size, and I guess my point is I am just trying to figure out how far we are away from these markets really firming? So what would be the drivers for the upside or the downside?

Great question, Jamie.

I think we have our largest asset base in the PA suburb, almost 40% of our adjusted annual base rents. And what we have seen is very good levels of activity in Radner, Conshohocken, and New Town Square, 202 Carter and Plymouth Meeting where we have bulk of our portfolio. The market, however, still has been generating negative absorption, and there has not been one single tenant who I think I could point to you and say that was really driving the train. I mean, for the fourth quarter, the PA suburbs had about 300,000 square feet of total positive absorption, which is good but year-to-date they were down about 300.

In the CBD there was a positive absorption in the fourth quarter, but again year-to-date down significantly so. What we're seeing in this market is that a lot of the tenants move fairly rapidly to downsize their space. Based upon feedback from our leasing teams and our managing director in charge of PA, the tenant downsizing has clearly slowed. There is good levels of activity and we're clearly seeing a trend line towards quality stable landlords and a movement away from those landlords that don't have, I guess, financial flexibility.

What was interesting in Pennsylvania is that a lot of the negative absorption was in--in fact about 90% of the negative absorption was in B&C quality inventory. So people are actually moving up the quality curve, which from an occupancy standpoint should help us. But until the market tightens overall with some actual new job growth, I think rental rates remain fairly flat. We have recently signed a couple of good sized leases in the 40,000 to 60,000 square foot range, which should help us out in our forward leasing in Pennsylvania. As you look at the Dulles Toll Road Carter activity down there was up year-over-year. A lot of the activity is with a lot of smaller tenants who are coming back into the marketplace, I think as the economic conditions stabilize.

There is a big focus on renewals, a clear flight to quality in that market. But some of the big tenants are still consolidating, if it's a Northrop Grumman or CA, they're certainly looking to do continued consolidations. A lot of brokers in that market are trying to get tenants to forward think about their 2012 expirations, and the top ten deals that were done in the marketplace, 80% were signed by the tenants that were either the US government or government contractors. So the job growth in that market for 2009 was about 40,000 jobs, about 32,000 of those were government sector employees. I think the expectation in DC is that hopefully the growth in government employment will start to offset some of the private market consolidations, and in fact, there is about 25,000 jobs--job growth projected for the metro DC region.

On the Maryland side of the 270 card that still remains a bit slow, more smaller tenants, again, in the market place, which I think is a good early cycle sign, but really not a lot of larger tenant activity.

Thanks.

I guess back to Philadelphia for one second, are there any large tenants that the market is waiting on to see what they decide to do or is it--?

I guess there is a couple around, George, any come to mind? There is a couple of big RP's out there from some of the hospitals and insurance companies, but I think a lot of--when a lot of the tenants come into the market, Jamie, I think we all run after it, but in many cases they decide to kind of stay where they are, so I wouldn't say that there is anybody out there that we're banking on moving the market during the next couple of quarters.

A little bit of a focus I guess on Verizon down in Philadelphia CBD.

Right.

But not in the suburbs, no, I don't think there is not one tenant kind of driving.

We have our antenna up and looking for that tenant but we just haven't seen them yet.

All right. Thank you very much.

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

Thanks. Good morning.

Good morning.

Gerry , you talked about 45% of your pro forma NOI coming from the Philly CBD, Dulles and Radner submarkets. How do you think that those numbers, as you kind of think about capital recycling out of some of your submarkets where you have less of a concentration in maybe acquisitions that you do into the submarkets where you've got more scale. How do you think that number sort of trends over the next couple of years, and what is your mindset in terms of selling some of your non-core assets that you would like to get out of in terms of selling now versus waiting until the market recovers where you may be able to get hopefully a little bit of a better price if you

Right. A couple of things.

Right now we have about 25% or so of our revenues coming from the metro DC region. As we've talked on previous calls, what we would like to do, again, in a pragmatic program way is increase that level of contribution. That contribution coming from either acquisitions, increasing that contribution coming from looking to do new things in that marketplace, particularly in the toll road corridor and in the district, to recycling out of some of the non-core assets in kind of the metro Philadelphia region. When we look at our core asset bases in the greater Philadelphia area, Philadelphia CBD has if you're in the right class of inventory, has shown a surprising level of resilience and stability, not necessarily accelerated growth but certainly a high level of stability. So I think to the extent we view anything as an addition in the Philadelphia CBD, it would remain in that trophy class category that where we have kind of directed our investment focus over the last few years. But certainly that would be an area of continued focus for the Company.

When we look at the suburban counties, I think we have a nice mix of assets and some core submarkets. I mean, certainly we view Radner as one of the strongest performing submarkets in the region over a long period of time. Conshohocken, where we have both direct investments and investments through our joint venture with the Polver organization. Plymouth Meeting where we control a significant amount of the inventory and control remaining land parcels. And then the northern 2020 King Prussia Carter. So I think anything beyond those markets in Pennsylvania, we have kind of viewed longer term as markets that we will probably exit out of. And I think the same thing would hold true for southern and central New Jersey where the focus is really on the 295 and the Route 38 corridor versus some of the--where we have some of our other inventory.

You raise a great question in terms of non-core asset sales. And we certainly face that thought process with our small operation--small residual operation in California. I think what we have done after spending an awful lot of time with those assets with our local management team have made the decision that we will work those assets through this tough point in the cycle, improve our occupancy levels, hope for a return to a more rational levels of pricing and some positive absorption in particularly Southern California. And at that point look to exit those properties at whatever price the market will bear. But to do that now seems to be a little bit shortsighted in that the market is so dramatically underperformed, particularly in Rancho Bernardo where we are in a couple of the other submarkets that we've made the decision to look at that on a multi-year basis versus liquidating that base today.

And just related to that in terms of the opportunities for acquisitions that you were thinking about and funding those with equity, do you feel like you are going to need to do acquisitions over time to reduce your leverage to target levels or do you think you could get there if you just kind of sold out of the markets or sold the properties that you've got on the target disposition list?

It is an interesting mathematical set. To simply rely on NOI growth and occupancy increases, coupled with assets sales may, in fact, not get us to where I think we need to be. Because certainly as we sell assets, we're losing that NOI, and we need to replace it in some manner. So I think we're certainly going to rely on asset sales as providing financial fuel for us to look at new acquisition opportunities, but my expectation would be that over the next few years we will need to look at issuing equity to fully finance on equity basis any valuable acquisition opportunities we identify. Or looking as we have done in the past property for stock swaps, which have the benefit to us of creating a current income stream and deleveraging the balance sheet immediately. And doing that on a much less diluted basis than simply paying down our line of credit at a 1% rate.

Sure. Okay. Thank you.

You're welcome.

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

Hi. Thank you.

A couple of questions, not really sure who this should go to, but your base building capital for the last couple years has averaged about $6 million a year, and I think, Gerry, you mentioned it would go up to about $16 million next year in 2010. You were woefully lacking in 2008 and 2009, $0.25 per square foot is a really light number, which is what you averaged in 2008 and 2009. How much of this $16 million is just catch up?

Well, we have done, John, between that $5 million and $6 million range in terms of we'll call it base building capital. That number this year is closer to $9 million with the balance between the $9 million and the $16 million being spent on renovation projects.

But maybe, George, you can amplify some of the thought process you go through on that.

I think part of the increase from the 5 to 6 run rate to 9 is a little bit of a catch up. And then the thought process, we got the together with all the managing directors and really looked at every building in the portfolio and assessed those where we thought an investment of additional capital dollars could reposition that asset in the marketplace. And I think as we mentioned earlier, that would hopefully either accelerate absorption, improve NOI, and possible even grow rental rates there, so a little bit of more of a focus on kind of poor base building systems, roofs, HVAC, parking lots, and then a little bit of repositioning strategy went into this year's plan.

And then along that same subject, I was actually reading your definition of CAD. What it says is that you're including capital to maintain revenues, but excluding capital to attract tenants. Then also you're excluding capital costs if the space has been vacant for greater than twelve months. Do we look at the TI dollars as being a little higher than reported, if I am reading this correctly?

John, it is Howard.

They always are. We always speak of that in a capital plan. For 2010, we have got $40 million of revenue maintaining, which will encompass some of these base building costs as we categorize them as well as leasing and commissions, and then we have $50 million of--for lack of a better phrase revenue creating. Now, a little more than half of that or about half of that is to finish up existing projects like naturally, and the balance will be either to lease that space that, in fact, has not created revenue for some period of time or in a number of limited instances to reposition buildings for higher rental streams. So we go through a fairly granular process on every capital expenditures and test it and classify it for those different buckets.

Great. Thank you.

Thank you, Tom.

Your next question comes from the line of Mitchell Germain with JMP Securities.

Good afternoon. Gerry.

The New Jersey region is about 35% enrolled this year. Can you just give some color as to your tendency? Who is in the market there, and how much of that prospect activity that you referenced earlier relates to that region?

I am sorry, Mitch, the beginning of your question cut out. I heard 35%, but I didn't hear --

I was talking about New Jersey, I am sorry, it's about 35% of your roll, so just want to look for some color on the tenants, who is in the market for space, and how much of that prospect activity that you referenced relates to that region?

Look, as I have indicated, New Jersey is--when we talk about New Jersey, it is really central and southern New Jersey. Central being defined as the Princeton Carter. George can walk us through some of the numbers on the pipeline. I think as--we view it from a theme standpoint. Their activity levels have been up in the last quarter, but that's a lot of chair shuffling. That is not a lot of new net demand in the marketplace. I think what we're seeing more often than not in that market is tenants who are in 30,000 square feet that need 25,000 square feet and they're moving. They're in the marketplace to find a new home.

Now, contrary to what we were seeing earlier in 2009, where there seemed to be a slight down the quality curve, the last several years that's reversed itself as we hoped it would be where tenants are moving up the quality curve and given the quality of the inventory we have in that marketplace, we think that's one of the reasons why we're seeing increased activity through our portfolio. I think in New Jersey there are very few blocks of very large space and most of that market is characterized by a lot of small vacancies. Our--southern New Jersey, in particular, for us is a small tenant market, and unfortunately, that is where a lot of the vacancy is throughout the market is in these small tenancies. I think from our view point and from certainly some of the key brokers in the market based on their market forecast, rents are going to continue to decline for the next couple of quarters. There will be very low levels of absorption.

I was frankly surprised positively by the positive absorption in southern New Jersey in Q4, and that was a good process. But people are expecting things to pick up as the year progresses, whether that is hope versus expectation, I think, remains to be seen. But George, what are we seeing in terms of the pipeline?

Our pipeline today is about 900,000 square feet of prospects looking for new leases. 100,000 square feet of that are currently in lease negotiations and the other 800,000 are still in the kind of the RFP process. A couple of large users in that pipeline, but again, our average suite in New Jersey is kind of that 4,000 to 6,000 square foot user. We have--our vacancy breaks down over there. We have 46 suites that are less than 2,500 square feet in size, we've got another 53 suites that are less than 5,000 square feet in size. So smaller users, I think, some of that also is indicative of companies kind of scaling back and downsizing over the last call it six quarters, but a lot of transactions to do. We have got I guess about $8 million of spec revenue assumed for New Jersey and they have achieved 40% of that to date. So a large portion of the remaining spec revenue over there, quite frankly, is associated with lease renewals versus new activity.

Thanks. Did that, Howard, did I hear you mention additional debt repurchase subsequent to year end?

Yes. We have repurchased about 46 million quarter to date in January and February. So wherever we can, we're continuing nibble at the near term maturities to bring down their levels and pick up a little bit of of arbitrage on the short-term interest rate versus those note costs. But there is typically a repurchase cost associated with that, and built into our 2010 numbers is the accommodation of some loss for that as well.

Great. Thanks, guys.

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

Thank you.

Howard, just to follow up on that, what is the rationale for--I presume the loss is related to buying or paying a price slightly above par. What's the rationale for doing that?

It is a favorable trade. As we look out at interest rate projections, our own, the streets, we think we'll incrementally gain revenue for the Company over a year to two-year period versus those costs.

Just comparing the top ten at roster from quarter to quarter, it looks like you may have done a blend and extend with KPMG. Is that at a fair characterization, and if so, what market and what was the timing on that?

KPMG was really the tenancy was really bearing point with leases with KPMG guarantees. So we had them really in two primary markets. One is they occupied space in one of our Radner Corporate Center buildings, and secondly, they occupied several hundred thousand square feet down in our 1676 International Drive building in Tyson's Corner. They have vacated the space that they occupied in Radner, and we have back filled that with the VWR transaction, which we announced back in--sometime in the summer. And then Bob Wiberg and Janet Davis and the team down there did a wonderful job of working through a new lease structure with KPMG, not Bearing Point but actually KPMG in taking a lot of square footage in 1676 International Drive.

Okay.

I guess when during the quarter would that have been effective? Was it as of October 1 or --?

John, I don't know. Do you guys know?

The Radner downsizing was a Q4 event. We went direct with a couple of their subtenants, and then VWR will commence in third quarter of 2010.

Okay.

You have referenced a couple of known moveouts in 3Q, '10. Is there anything specific you can point us to there?

3Q, '10? Yes, the biggest driver there is a company called Automotive Rentals in New Jersey, which is in 160,000 square feet, 67,000 square feet of that in a single building, and then just shy of 100,000 square feet in a 200,000 square foot two-tower building across the street. That's really the biggest one in the quarter.

Okay. Thank you.

Thank you, John.

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

Good afternoon.

You mentioned some deal activity in DC. Could you maybe talk about pricing, what you're seeing there?

Well, when I talk about DC, it is really the Toll Road corridor as we define, which is where we have our major contract. I look at--there continues to be downward pressure on pricing there. Where that market was in the mid-30s a couple years ago, I think you're seeing deals happening certainly south of 30 and in some cases in the mid-20s depending upon the location. Certainly in the Dulles Corner area, a number of our transactions are being done in the very low 30s. You move further down into Westfield, you're looking at transactions in the--we don't have a presence there, but it is clearly create downward competitive pressure on the Toll Road. You're seeing transactions being done in the mid-20s, so our read is that rents in that market have continued to erode.

I think we're seeing some level of stability in rents in the very high quality end of the inventory curve, but there is still a lot of vacant space in that market. And I think that market is really in the queue waiting for some of these major government contractors, or the federal government themselves to take down a lot of square footage.

Okay.

And then you talked about investment in the CBD Philly area. You guys own a lot of the Class A stuff in Liberty as well. What else is there left to acquire in (inaudible) and do you think there is enough demand to move ahead maybe with Sears Center too, sometime this year, next year or what's your time? How do you look at that?

I answer each part of the question. I think when we look at CBD Philadelphia, again, our focus is on kind of the trophy quality class. There was a trade of a building in the--a month or so ago, the 2000 market, which was--is an example of a building that we would not be interested in. It is older, much older, has some significant issues, and it was something that we would not have been a player for, but certainly to the extent that one of the higher quality trophy properties in the city would come on the market, we might look at that, but again it is going to be a function where we view pricing versus where we view rental rates are going.

Philadelphia's enjoyed a fairly good level of rental rate stability. The vacancy rate and the trophy class is fairly low. As we track that market, we don't really view that there is the potential for a lot of tenant fallout. We view that as a fairly stable tenant base. And in the CBD, there is certainly rental rate levels are far off of where they would be to justify new construction at any kind of acceptable yield. As we look at our University City developments, we continue to engage in dialogs with several large potential prospects, but would not be in a position to start either the Walnut or the Chestnut Street Tower without having a significant pre-lease commitment.

Thank you.

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

Thanks. Good afternoon.

Good afternoon.

Can you remind me how high can retention possibly go in 2010? Say perfect situation.

I think in a perfect situation it could probably get into the mid to upper 60s.

Okay. So then is the 35% is what you know is a goner?

Well, 55 is what we have in the plan.

Right. You're saying it can get at high as 65, that means--I am just doing the math, 35% would be stuff that is absolutely known vacancy.

Yes, absolutely right.

I just want to make sure I understood. Okay.

And then just on disposition of $80 million, can you talk about how far along you are with the remaining that you haven't done yet, I guess $69 million? Is there anything under contract or anything like that at this point? Where would you be focusing the disposition for 2010?

Rich, this is Tom Wirth.

We are looking at some sales as we noted earlier, they're going to be sort of non-core assets in some of our markets. There is some activity on some property, but I think our dispositions of that balance on the 69 is going to be more singles and doubles. I don't think you're going to see a large property go out, but we will look at properties that smaller in size and it may be over the course of the year those smaller ones getting called out.

Nothing like is imminent at this point, kind of like a ratable--?

No, I don't think we have anything significant or imminent and they will probably be smaller transactions, one offs that we'll announce.

Okay. Thank you.

Your final question comes from the line of Jordan Sadler with KeyBanc Capital.

My questions have been answered. Thank you.

Thank you.

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

Just to thank everyone for their active participation in the call. We appreciate it. We look forward to updating on you our first quarter earnings conference call later this year.

Thank you.

Thank you.

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