Brandywine Realty Trust (BDN) 2010 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Brandywine Realty Trust First 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).

I would now like to turn the conference over to Mr. Jerry Sweeney, President and CEO of Brandywine Realty Trust. Please go ahead, sir.

Alatanga, thank you and thank you all very much for joining us for our first quarter 2010 earnings call. Participating on today's call with me today are Gabe Mainardi, our Vice President and Chief Accounting Officer; George Johnstone, our Senior Vice President of Operations; Tom Wirth, our Executive Vice President of Portfolio Management and Investments and Howard Sipzner, our Executive Vice President and Chief Financial Officer.

Before I begin I'd like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the Federal Securities law. Although we believe that the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved. For further information on factors that could impact our anticipated results please reference our press release as well as our most recent annual and quarterly reports filed with the SEC.

On to the agenda, during the first quarter we continued our capital market activities and strong leasing performance. As you look at this past quarter, and more importantly the balance of the year, several overall observations to note. First, leasing activity remains strong. Leasing velocity was up significantly and we do expect fundamentals to continue firming.

While most markets will have negative absorption for the year, thereby continuing the existing tenants' market, some markets are in fact progressing faster than others. Rental rate declines, tenant move outs and tenant contractions are factored into our business plan and we believe that the worst is generally behind us. As such, our 2010 plan reflects our view on the market bottoming accompanying by rental rate stability in some markets with continued downward pressure in several others.

As shown by our first quarter results, negative operating trends will persist in the near term. During the quarter we leased over a million square feet, have about 75% of our annual spec revenue target executed but still experienced negative absorption during the quarter along with a resultant decline in occupancy. This transitions period, where activity levels are increasing but not at a pace that fully offsets known contractions and terminations, is our current dilemma and one of the more frustrating aspects of being at this point in the cycle. Our business plan anticipates these negative trends continuing for the rest of the year with hopefully positive trends developing by Q4 and into 2011.

Our tenant retention rate for the first quarter was 77.2%, excluding early terminations, and 65% with early terminations. Same store occupancy for the quarter was 87.8% and our capital costs were 14.5% of gross revenues for new leases and 8% of gross revenues for renewals, all of these very much in line with our expectations.

During the quarter we commenced occupancy on 788,000 square feet including 571,000 square feet of renewals, 93,000 square feet of new leases and 124,000 square feet of tenant expansions. We currently have over 1.8 million square feet of executed leasing in place, scheduled to commence subsequent to March 31st, 2010. And, as previously announced, subsequent to the quarter end we did execute a 334,000 square foot, seven-year renewal with Wells Fargo Bank at our Concord Airport Plaza, a two building complex in Concord, California, keeping that complex at 99% occupied.

During the quarter traffic through the portfolio was up 34% quarter-over-quarter and 36% year-over-year. Every region but one was up and we had solid increases in showings in Pennsylvania, D.C. and our New Jersey and Delaware operations.

The pipeline of transactions remains strong with 2.4 million square feet of new prospects of which 640,000 square feet are on active lease negotiations. Our strongest performing markets are Philadelphia CBD, the Radner Plymouth Meeting corridor in suburban Philadelphia, the Toll Road corridor in DC, Austin and Richmond, Virginia. We continue to face leasing challenges in New Jersey, Delaware and Maryland.

During the quarter, as we announced, we leased over one million square feet in 124 separate transactions, 831,000 square feet of which generated forward-leasing activity, which will help offset any further early terminations or tenant departures. Despite these strong leasing levels, as I mentioned, we continue to face higher than normal rate of tenant move outs and terminations, which are negatively impacting our portfolio statistics. That activity has clearly been factored into our 2000 plan and, as I mentioned, hopefully a lot of that is in the rear view mirror.

As outlined on our last call, our 2010 operating and business plan assumptions are; the major objectives for 2010 is simply to lease space and control our operating margins, really nothing more complicated than that. That's the primary focus of the entire organization. The original business plan contemplated a 46% tenant retention rate. Based on results thus far, we believe that our actual retention rate will approach 55%.

Core portfolio occupancy, which is our same store plus our recently completed developments, stands at 87.2%. The primary drivers of the occupancy declined from last quarter's 88.4% was 168,000 square feet of early terminations, 124,000 square feet of bankruptcies or lease defaults, 102,000 square feet of tenant contractions upon lease renewal and 147,000 square feet of tenants simply shutting down their offices. These negative drivers were partially offset by 124,000 square feet of expansions and our new leasing activity.

As mentioned on the last call, we expect our occupancy levels to drop to the 85% range in the third quarter, primarily due to several known tenant move outs, which are out pacing our new leasing commencements.

On our IRS Philadelphia campus, also knows as the post office, we expect occupancy NOI to commence in September of 2010. This event will trigger the funding of the $256.5 million forward financing. That development yield will remain steady around 8.5%, although we do anticipate some cost savings that we'll be factoring in as the project construction cycle ends in the third quarter. Upon completion, the GSA will become our largest single tenant comprising 7.2% of our annual base rents and our percentage of revenue contribution on an NOI basis from Philadelphia CBD will rise to about 19%.

During the quarter, we closed an $11 million sale in which we booked a gain of $6.3 million. We are also evaluating the sale of a number of additional non-core properties and our 2010 business plan contemplates an additional $69 million of sales.

Looking ahead, over the next several years one of our objectives is to remove non core or slow growth properties from our portfolio via either outright sales or contributions to joint ventures. To illustrate this focus on our longer-term objective and to key in on our top performing sub-markets, by year-end 2010 our top three strong sub-markets, Philadelphia CBD, the Toll Road corridor and the Radner sub-market in the PA suburbs will comprise almost 45% of our overall Company NOI, so good progress on that front.

Looking at investments, we're definitely seeing more activity within our existing markets. We have also been actively talking to a number of private capital sources, who have clearly reinforced that there is a lot of capital waiting to move into real estate. Our recent experience has been that on high quality, stabilized "core properties" the bid lists are increasingly long with well capitalized bidders bidding pricing up and cap rates down. We're seeing this in particular in the metro DC area, which within the scope of our geographic footprint is leading the way in cap rate compression.

Given this very quick and aggressive pricing climate in that market, our view on near-term rents and our cost of capital, our focus is really spent on transactions that require some capital stack reconfiguration were ones that we would term as value added situations. There are some emerging opportunities to purchase vacancy at very good risk-adjusted prices at an investment base well below replacement costs that will position those assets for significant growth, as market conditions continue to firm.

The execution of any of these opportunities will be part of our balance sheet strengthening program. As we talked in our last call, we already encouraged significant dilution through our previous equity raise. So our plan is to manage further dilution through funding any acquisition activity through stock issuance. The bottom line, we continue to view these investment efforts as doing missionary work and we will remain engaged in a number of discussions with private development re-capitalizations, mezzanine financing structures and smaller investment opportunities.

While the pipeline of activity is increasingly larger, we have not programmed any acquisition activity or joint venture activity into our 2010 plan. This quarter we did initiate our continuous equity offering program. That is designed to strengthen our balance sheet, assist in moving our debt to GAV towards our 40% target range, position us for a rating upgrade and create additional financial capacity for any potential future investments.

We have issued 2.7 million shares of common stock thus far for total net proceeds of $33.5 million. During the first quarter we issued 1.3 million shares realizing $16.1 million in net proceeds. Net proceeds that we generated were used primarily to repay balance under our unsecured revolving credit facility. We have 12.3 shares remaining and anticipate a continuation of this program assuming equity market conditions remain stable.

During the first quarter we also re-purchased $48 million of our 2010 notes, 2011 unsecured senior exchangeable notes and 2012 unsecured senior notes generating an aggregate loss of $1.2 million on the early extinguishment of this debt. With the debt markets continuing to firm and move in a positive direction, positive or buy-back buying will continue to diminish and our business plan doesn't really contemplate any further purchases but we will continue to track the market and remain opportunistic.

We are fully committed to our objective of moving up the investment grade ratings curve one notch. We plan to achieve that through a combination of future NOI growth, occupancy improvements and, as I mentioned, funding any acquisitions on primarily an equity basis. The combination of these three items will have the effect of achieving our overall de-leveraging objective.

Our 2010 business plan does not contemplate any new financing activity, other than utilizing our credit facility to pay off our $198 million of 2010 bonds due in December, paying off our $42 million secured mortgage on Plymouth meeting executive campus in December 2010 or possibly earlier. While there are other components, the major sources of cash include the anticipated CIM loan repayment of $40 million in August, the $30 million remaining funding on our tax credit proceeds and the net recovery of $182 million against the remaining cost to complete on the IRS project and garage.

We also plan on exercising the first extension option on our $183 million term loan pushing that maturity to June 2011 and we are projecting a year end 2010 line of credit balance of less than $120 million.

We did, as indicated in our press release, revise up the bottom end of our 2010 guidance range to a new range of $1.27 to $1.34 versus our prior range of $1.25 to $1.34. Based on the mid-point of our new 2010 FFO guidance our FFO payout ratio is 46% and our CAD payout ratio for the quarter was 60%. Our 2010 business plan further contemplates that we will generate free cash flow of between $30 million and $40 million.

With that overview, Howard will now review our first quarter results.

Thank you, Jerry. Please note in the financial statements that effective January 1st, 2010 we de-consolidated three previously consolidated variable interest entities or JVs in accordance with FAS 167. This deconsolidation is applied prospectively, so quarters prior to this one will still reflect the results of these three entities, while the current quarter and future quarters will not.

For Q1 and forward the net impact of our pro-rata share will be reflected on the equity and income of unconsolidated entities. To facilitate periods-to-period comparisons we have added two pages, nine and ten, to our quarterly supplemental package describing the impact of these changes. Our Form 10-Q for the first quarter will also provide additional information on this accounting change.

In terms of the results, FFO available to common shares and units totaled $45.6 million in the first quarter or $0.34 per diluted share. We beat the $0.33 analyst consensus, even after the incurrence of about $0.01 unanticipated losses on early debt extinguishment. Note that termination revenue, other income items, management income and JV income in the first quarter totaled $7.1 million gross, or $5.7 million net after management expenses, and was in line with our annual guidance for these components. And our FFO payout ratio on the $0.15 dividend we paid in January 2010 was 44%.

A few observations on the components of our Q1 2010 performance; cash rental revenue was down nominally, sequentially and a bit more versus a year ago after adjusting for the effects of de-consolidating the three JVs. Straight line rent was up versus a year ago and sequentially versus Q4 reflecting increased levels of free rent in our leasing. Recovery income of $21.5 million and the associated ratio of 36.9% overall were in line with recent quarters. Snow removal costs in Q1 were more than $3 million above expectations but our ultimate recovery of these tends to be higher due to specific lease provisions.

In Q1 2010 we had net bad debt expense of $1.3 million, in line with expectations and reflecting various write-offs, recoveries and adjustments to reserves. The net effect in Q1 was about a $730,000 decrease in our overall reserve balances.

Interest expense decreased sequentially by $1.4 million and by $3.3 million year-over-year due to lower debt balances from our debt reduction program. Interest expense in Q1 includes $524,000 of non-cash APB 14-1 costs associated with our exchangeable notes.

G&A in Q1 at $6.1 million was somewhat above our expected $5.5 million run rate due to a variety of minor items.

We incurred $1.2 million of losses, as Jerry said, on $48 million of aggregate debt repurchases and lastly our debt financing -- our deferred financing costs declined to $1 million reflecting the prior period acceleration of deferred amounts, as the result of debt repurchase activities.

On a same-store basis, cash rents were down $3 million, reflecting lower occupancies and rent levels, with non-cash rent items increasing $1.1 million, as we provided greater levels of free rent.

Termination fees and other items increased by $1.5 million year-over-year, as we saw increased levels of early move outs and associated termination payments. Property operating expenses increased by $4.7 million, with over $3 million of that attributable to snow costs. Real estate taxes decreased by $1.7 million reflecting more favorable valuations and our recovery rate ended up at 36.2% in the same-store portfolio, in line with expectations and the prior quarter.

So for the quarter same-store NOI declined 4.9% on a GAAP basis and 6.2% on a cash basis, both excluding termination fees and other income items and largely as a result of lower occupancy in the same-store portfolio.

Our first quarter cash available for distribution increased sequentially to $33.9 million from $32.6 million and measured $0.25 per share. As a result, we achieved a 60% CAD payout ratio on the $0.15 dividend in the first quarter.

Our EBITDA coverage ratios were solid at 2.5 times interest, 2.3 times debt service and 2.2 times fixed charges and our margins are stable and in line with recent quarters for both NOI and EBITDA.

As Jerry noted, we are raising the bottom end of our $1.25 to $1.34 2010 FFO guidance to now be at a $1.27 to $1.34 range. This is our second consecutive quarterly increase to our guidance and this level of guidance going forward accommodates quarterly FFO to be in a range of $0.31 to $0.34 in any given quarter for the balance of 2010.

Key assumptions include the following; a 4% to 5% decline on a GAAP basis in same-store NOI excluding termination and other revenue and a 5% to 6% decline in cash NOI on a similar basis; mark-downs in rent of 4% to 6% on a GAAP basis and 7% to 9% on a cash basis. All of these assumptions are unchanged from the last quarter.

Year-end occupancy is now expected to be in the 85% to 86% range, down perhaps as much as 300 basis points for the year, and a bit lower than previously expected. Renewal retention of 55% is in line with our expectation of a quarter ago. Our aggregate 2010 leasing of 2.8 million square feet, reflecting 1.2 million new and 1.6 million of renewal square footage, will produce $27.3 million of speculative revenue, which as Jerry said we are now 75% completed on.

For all other income items including termination revenues, other income, management revenues, both gross and net plus interest income, JV income and the effective of any bond repurchases we're expecting $25 million to $30 million gross or $20 million to $25 million net without predicting any individual one of these items.

Our G&A should continue to run about $5.5 million per quarter and our total interest expense for the year should be about $130 million to $133 million with the next two quarters in line with Q1 and Q4 2010 rising due to the drawdown of the MPO of the post office and garage financing. The interest figures are below last quarter's figures due to lower debt balances, the de-consolidation of the three variable entities and the proceeds from the CEO equity program reducing our debt levels.

And lastly, we're projecting between $0.88 and $0.95 of CAD per diluted share, reflecting a total of $40 million, or an additional $30 million of revenue maintaining capital expenditures. As a result, our plan produces $30 million to $40 million of free cash flow.

Very quickly we'll look at our capital plan for the balance of 2010. From the end of Q1 forward we have total capital needs of about $488 million. This includes $174 million of investment activity, $104 million of that for the post office and garage, $30 million of revenue maintaining CapEx and $40 million for remaining redevelopment completion costs, lease up of recently completed projects and other vacant space and capital projects.

In addition, we'll utilize or spend $248 million for debt repayments, $198 million for the 2010 note, $1 million spent [quarter] the date on buy backs and $49 million for amortization and remaining balances on mortgages. And, we expect to maintain the current dividend levels and pay out approximately $66 million of aggregate dividends all in cash.

To raise this $488 million we are projecting the following; approximately $120 million of cash flow from operations for the rest of 2010; $30 million of proceeds from our historic tax credit financing. This down from an earlier expectation of $34 million, due to lower qualified expenditures on the post office project, reflecting as Jerry noted anticipated savings in construction costs.

The $256.5 million post office and garage loan is expected to fund by the end of the third quarter. We expect in August of 2010 to receive repayment of a $40 million first mortgage loan that we had extended two years ago. We see $69 million of potential sales from the portfolio and, as a result of all of these activities, we'll be able to pay down our 331 line of credit balance from a $160 million by $44 million to a projected year-end balance of about $116 million. Capital plan is very achievable and most, if not all of the items, are already arranged or contracted for.

In terms of balance sheet, we have a fairly conservative debt profile with a 58% debt to total market cap and a 45.3% debt to gross real estate costs and these are among our best ratios in the past two to three years. Our secured debt remains low, as does our floating rate debt, and we are 100% compliant on all of our credit facility and indenture covenants and, with that, I'll turn it back to Jerry.

Thank you very much, Howard. To wrap up our prepared comments, the balance of 2010 will present continued operating challenges. We have made very good progress and we're pleased with the progress we've made but we still have more to do. As Howard and I both touched on, we have 75% of our spec revenue, which we define as new leasing and renewal revenues, already achieved but that's 25% we don't have done and we're still working on those. So we recognize we still have more to do and that the near term markets will still present ongoing challenges for us.

However, even within this small universe of perspective tenants, we think our capital position, inventory quality and strong sub-market positioning provide a clear competitive advantage for us I think, as you can see as evidenced by our year-to-date leasing velocity and our strong pipeline. We do anticipate continuing to use our leasing teams and capital flexibility to insure that we maximize those advantages and achieve all of our 2010 business plan objectives.

With that, Alatanga we'd be delighted to open up the floor for questions. We would ask everyone, in the interest of time, you limit yourself to one question and a follow-up. Thank you very much.

(Operator Instructions). Your first question comes from the line of Michael Bilerman with Citi.

Good morning, guys. This is [David Shamus] here with Michael. Strategically how do you guys think about raising equity with respect to the transaction market getting better and with your new ATM program, just kind of long term?

Well I think in terms of the, you know, it's all within that context of making sure that we focus on continuing to improve our balance sheet. The equity market has been fairly stable for our stock, although it's not and some days it is but we certainly look at number one, our primary objective is to manage our own portfolio secondarily, to the extent we can identify opportunities that we think generate some future growth for us. We would plan to finance those primarily through utilization of either the CEO program or other equity issuances.

And just a quick follow up with respect to the transaction market, can you just give us some color on your pipeline today, your asset sales kind of what phase they are in, anything close?

Well sure, the asset sales, as I mentioned, we closed the one transaction. We have several other small transactions at various levels of under contract, in due diligence, etcetera, and then our expectation is that we would be putting a number of properties on the market in the early part of the third quarter, trying to gear up for a fourth quarter close if possible. But certainly that's very much tied into the portfolio management program we have underway, which where we're identifying some of these slower-growth assets.

And anecdotally we're also tracking what appears to be a number of other intriguing suburban office portfolio sales in other parts of the country to see where pricing settles in and certainly doing a lot of investigatory work on some of core market transactions, particularly the metro D.C. area, as some kind of harbinger where we think cap rates may move to in the kind of this tri-state area.

It's been surprising to see, I think, the length of the buyers lining up for high quality core assets, particularly in D.C. and the rapidity with which some of the cap rates have come down on some of the properties, as well as from our standpoint the fairly aggressive view point on near-term rental-rate growth.

So, while we continue to track a lot of activity, we are certainly very much, as I touched on, focused on those situations that we would view to be kind of special situations that may require co-investment vehicles, purchasing vacancy at a big discount, things that we really think can add value to our pipeline going forward and don't necessarily generate very low going in cap rates on a stabilized asset.

Thanks, Jerry and Howard. This is Josh. Can you -- one more question. Does your occupancy guidance for the year include the post office being delivered at 100%?

Yes it does.

Jordan Sadler, KeyBanc Capital Markets.

It's [Craig Melman] here for Jordan. Just to follow up on the investments a little bit more, Jerry, to give some detail on sort of the depth of the bidding in D.C. but maybe you could just touch on some of the other core markets, what you're seeing in terms of value add opportunities and maybe just how you're underwriting them in terms of rent growth expectations.

Sure Tom and I will tag team this. I mean I think what we're seeing, again as I touched on it and kind of the metro D.C. area is a very frothing bidding process and certainly a lot of buyers having near-term expectations of rental rate acceleration. We're much more cautious in our viewpoint in those markets in terms of where we see rents going, whether it be in the toll road corridor or some of the other sub markets we're looking at in D.C. So we've not really been, I think, a too qualified a bidder for some of those assets.

When we look at some of our other markets, there really has not been a lot of product on the market in call it kind of the Philadelphia through Washington, north of the Washington corridor, including Jersey, Delaware, Pennsylvania and the things that we are beginning to see are discussions or [opportunities] are coming out of discussions with private landlords, banks and kind of institutional offsite owners who are I think getting a bit more realistic on spot pricing and intermediate term pricing and taking a look at where they see rental rates going.

I think, as we underwrite rents, we're assuming a fairly benign rate environment in all of our markets for the next couple years. Certainly expense management is a key issue, as we start to underwrite some acquisitions, but I think probably the sweet spot for us, if there is a sweet spot on any acquisitions, is going to be focused much more on looking at high quality assets that have some element of dislocation, whether it's a capital stack issue, maturing debt or near-term maturities at tenancies or existing current vacancies.

Tom, I don't know if you want to add anything to that or not.

I agree that we are seeing some opportunities and we are looking at opportunities that do have some vacancy. There has been not that much product out on the market in any of our markets. You're starting to see some movement and special servicing, more assets going that way and we're certainly monitoring that and seeing if there's any opportunities that may come out of that.

And then, just on the leverage, what do you guys see on that, that leverage target? Would you be in the 40 range or would you be a bit higher?

I'm sorry I missed the first part of the question.

Oh just on in ask just specific leverage target on any new investments, kind of where you guys would shake out.

Oh I think -- I mean, we're under -- all of our underwriting is being done on kind of an unlevered IOR basis and, again, I think one of the drivers of this whole investment program is to continue to move our overall leverage target down. And, as Howard touched on, we're sitting at 45% debt to [GAV]. Our objective is to get that ratings upgrade and then the agencies become more positively biased towards both the commercial real estate and us, so we certainly see ourselves moving towards that 40% target as time progresses.

Great that's helpful. And then just a quick one on leasing, it looks like contractions kind of ticked up this quarter. Just trying to get a sense of how much of those contractions were from leases that had been signed a while back versus kind of what you're seeing in the one million square feet of leasing that you just did. How much contraction activity was involved in those?

Yes this is George. I mean, contractions were up but we continue to see expansions exceed those contractions. Most of the contractions that commenced during the first quarter were from leases we had done third quarter and early fourth quarter of last year. We do continue to see and expect contractions to continue on the balance of the renewals that we have to do.

Great that's helpful. Thanks, guys.

[Shannon Gowan] of Bank of America/Merrill Lynch.

I was wondering, can you please discuss your weaker markets in more detail and kind of what signpost you'd be watching to indicate that they might start firming up, maybe in terms of the New Jersey, Delaware and Maryland you mentioned, which is doing better than the others?

Well, I think you mentioned the three weaker markets that we're in so George and I will take that. The -- I mean look I think we really do when we talk about it on every earnings call is we really do track our pipeline of activity and the number of prospects coming through our portfolio so this quarter with New Jersey, for example, we were fairly pleased to see that quarter-over-quarter our traffic vibe in both of our New Jersey and Delaware operations is up about 31%. That seems to be a good benchmark for us in terms of measuring forward leasing velocity.

In the New Jersey market we frankly have a very good team and very well positioned assets, more so than any other market we've been involved in in the last couple years. That market has had more than its fair share of tenant contractions and market move outs and with that, George maybe can talk about what we had to do with the same store decline in New Jersey and what's really driving that.

Yes I mean I think we've got most of our larger known vacates that are going to occur second, third, fourth quarter are all coming out of that New Jersey portfolio. You know, just looking at tenants in excess of 20,000 square feet, there are nine of them in that New Jersey/Delaware portfolio that aggregate about 360,000 square feet that we know they're going to move out and we currently see our New Jersey portfolio tracking occupancy wise down to about a level of 73% by year-end. They're currently at about just shy of 85% but, again, pipeline, there's a pipeline of some new deals but just not enough of a pipeline to overcome these known vacates. And many of those known vacates are the result of some of those tenants closing operations and the largest in the mix is a company that actually purchased their own building.

So our expectation for New Jersey and Delaware, and we have a fairly small footprint in Maryland, the same expectation in Maryland because they rock fill. This is going to be a tough slog for the foreseeable future. I mean, the vacancy rates in New Jersey are hovering in the mid teens. Our major objective there is to capture more than our fair share of whatever leasing activity is out there and our team has done a good job of accomplishing that. There are a few larger tenants in the marketplace now for space. The good news is there are some large tenants in the marketplace for space and that we have, for better or for worse, some larger blocks of high quality so our hope is we can get some of those larger blocks of space put away over the next twelve months or so but we really do forecast that that -- those two markets of particularly Jersey and Delaware will remain soft with a downward bias for at least the next four quarters.

Thank you and are you coming across any other interesting kind of build-to-suit opportunities in any of your markets?

We are actually. I mean, there's been a surprising uptick in the number of build-to-suit presentations we are making and that's almost been across all of our regions. Interestingly though, I think that most of those are tenant benchmarking new, whether it be efficiency driven, whether it be consolidation driven, environmentally focused in terms of lead certification focus. A lot of those tenants I think are testing the waters to ascertain what the rental rates would be to occupy a newly constructed building today. Our experience has been that in most of those situations those tenants will decide that probably now is not a time to buy up rental rate and, in fact, they will -- they either renew at their existing location or use the construction cost numbers as a benchmark to negotiate a lease with an existing piece of inventory.

That being said, there are some interesting opportunities out there that we are aggressively pursuing and every once in a while lighting does strike and these tenants, for a variety of internal corporate priorities, will make a decision to move into a new building. But it's a very good question because there has been a perceptible uptick in the number of build-to-suits that we've been responding to in the last quarter.

Thank you very much.

Brendan Maiorana, Wells Fargo.

Yes, good morning. This is Young Ku here for Brendan. I just wanted to ask about potential acquisition opportunities out there. Jerry, I think you talked about how for core assets there are a number of bidders out there but there might be some opportunities out in the value add space but, since it seems like all the management teams have agreed that vacancy is cheap these days, what gives you the confidence that you might be able to take advantage of that versus others? And are you seeing an uptick in bidders for those types of assets?

Well, I think the general buying population is still a bit risk adverse to current vacancy. I think there still is a fairly good balance between current income and rental rate stability for at least the next couple years and a lot of the bidders are focused on five and ten-year IRRs that do show rental rate growth accelerating but off of an existing base of tenancies. We still do view the investor pool for, as I termed earlier, challenging or special situations as being fairly limited. It does not mean that it's exclusively ours by any stretch but certainly we're trying to use all of our market contacts with other owners, both institutional and private, with all of our banking relationships to try and ferret out those opportunities that we might be able to review before a broad based [option] process commences.

And then, because all these opportunities are within our existing footprint, we typically know these properties very well. We know exactly what the effective rates can be and we factor all of that into our underwriting assumptions. Now, in many cases, that presents a scenario where we're not aggressive enough to get the deal and we have lost a number of transactions because we have not been aggressive in some of our rental rate growth assumptions. But that, we'll see how that plays out. That's our objective is to continue underwriting, as we price vacancy really base it on where we think rents are today effectively, where we think they're going to be in the near term, what that discount is versus replacement cost and what type of operating or marketing synergies we can create by bringing that property into our portfolio.

Okay thank you for that and maybe this question is for Howard. You guys have completed about 75% of your spec revenue targets to date. Your commentary is saying that the fundamentals are firming up a little bit but the occupancy range for occupancy assumption was down and then the total leasing volume assumption was down for the year. I am just trying to figure out whether that's connected and what has to happen for you to get to the bottom end of your guidance essentially.

Well, the disconnect or the explanation is that we've had a little bit of a change in the mix and we've got more square footage on the renewal side, a little bit less on the new leasing side. Most of that by our forward planning is due to slippage that deals we thought might happen in the third and fourth quarter are now slipping a quarter or two. And clearly the timing of the deals, to the extent we get them done earlier in the year, they're more productive on an overall revenue basis.

Since the overall revenue, speculative revenue, figure really hasn't changed, it's kind of hovered for the past quarter or two in the $27 million to $28 million number, I would say it would take a dramatic jump in that amount of speculative revenue, or some other factor, to enable us to move the upper end of the guidance higher and it would take significant deterioration in the remaining leasing assumptions to push us to the lower end of the range. That level of production tends to put us somewhere around the mid point, in conjunction with many other factors as well.

Thank you.

Mitch Germain, JMP Securities.

Hey, guys, did you mention the terms of the Wells Fargo lease? Are they consistent with what you're seeing in your average portfolio trends?

They are. We -- it's a seven-year renewal and the terms of which were very consistent with what we had projected for our business plan and the mark-to-market was very consistent with what on both a GAAP and a cash basis, very consistent with what we've seen in the rest of the portfolio.

And, Jerry, you talked about some co-investment discussions. Is that specific investment or are you possibly looking to establish a fund?

No, Mitch. There's they tend to be more specific investments. We have not contemplated creating our own fund at this point.

Great thanks.

Richard Anderson, BMO Capital Markets.

I guess my question is on dispositions and it seems like you kind of teed up Concord a little bit, you know, the Oakland area in terms of an ultimate sale of that portfolio and I know you're kind of looking at California as not maybe -- or maybe you've said this. I don't want to put words in your mouth but not a long-term hold for the Company and, if that's true, then why are we -- is there like a delay tactic going on, you don't feel like this is the right time to be a seller out there or what is the strategy in California overall?

Well, I think in California you're absolutely on target where we do not view those as long-term hold markets for us and I think, as we talked on the last call or two, our focus out there right now is stabilizing the portfolio base in both northern and southern California, which is both pieces of which are fairly small components of our overall Company. While we're doing that continue to investigate the investment sales climate to find out whether there's an appropriate point for us to pull the trigger. And certainly, as I think more transactional activity occurs, those markets move more towards a positive bias. That may very, very well be the right moment for us to actually execute a trade. But, during that window of time, we're certainly continuing to keep all of our options open.

So would California, in its entirety or a big chunk of it, be a part of that portfolio or that list of assets that you might start putting up for sale in the third quarter?

Certainly pieces of it may very well be. We're kind of finalizing that list right now and but again, as I think the marketplace understands that we are not a long-term player in those California markets, so certainly we react to inbounds on a fairly regular basis. We have ongoing discussions with the investment sales brokers in those markets just to make sure that we have complete market recon on where values are, very much like we do on a number of other assets frankly in some of our mid-Atlantic marketplaces and I think we're really going through the process now of understanding where we think pricing will be, assessing the growth potential of every asset in the portfolio and using those two data points to finalize that ultimate of that sale list.

Okay well I think it would be great for the Company to get out of California. This is my view. And then to you, Howard, small question, what do you guys have assumed for that recovery of the snow removal costs for the remainder of the year, if at all, in your guidance?

Well, it could recover as high as 70% or so within that bucket so when you blend that in with the fact that our other expenses were down, snow was up and the mix of the different components, we don't see any dramatic shifts in our call it 35% to 37% expected recovery range.

Thank you.

(Operator Instructions). Stephen Mead, Anchor Capital Advisors.

Jerry, hi. When you were talking about the leasing number in terms of the $2.8 million, was that what is remaining for the rest of the year or is that what the total of 2010 looks like?

Total, that was total yes.

That was total for 2010.

Correct.

And you've completed 75% of that.

On a square footage basis we've done about 60% and change. Upon a revenue basis about 75%.

Yes we've got about 1.1 million square feet left to go, which pretty much is split right down the middle between new deals and renewals.

Okay I was just struck by the difference between the stronger markets and the weaker markets in this environment and it just begged the question about, as you look into 2011 in terms of square footage that you face in terms of running off, what market is it in generally and what do the prospects for 2011 kind of look like right now?

Well, again, I think, as we've touched on, the biggest run off is going to occur in our New Jersey/Delaware portfolio. I think the opportunities we have there for 2011 are well situated buildings, good local management teams and some larger blocks of space that, quite frankly, don't exist in any of our competing buildings, so ideally we'd get some large consumers of office space coming to that New Jersey operation and we've got the opportunity to backfill the space.

Kind of Maryland is a similar story. We've got some larger blocks there, particularly in our Rockledge redevelopment asset. And on the '11 rollover really I guess the -- you know, New Jersey does have quite a bit of 2011 rollover that we're going to have to deal with next year as well.

Right okay but New Jersey is really your -- that's the bugaboo.

Well, New Jersey I think it's the bugaboo from the standpoint that that more so than any other market I think took the brunt of the recession, where so many of -- that tends to be a regional office market and many companies either rapidly downsized, turned back space or bought buildings to consolidate their own opportunities so the leasing activity in that market has actually been fairly good. The problem is there's been such a large net negative absorption and it's created significant downward pressure on rents and, given our strong position in that market, we've taken more than our fair share brunt of tenant move outs.

Historically that's been a fairly good performing market for us so we would expect over the next couple of years that that market will return to some level of normalcy. As George touched on, we're already seeing a couple of large tenants kind of re-entering the marketplace but no question, Steve, I think New Jersey will be kind of the soft under belly for the next, at least the next year, and I lumped suburban Delaware and Wilmington CBD in that category as well. We run that as one operation.

Is there a large exposure in New Jersey to the restructuring that has to go on in the CMBS market? What's your sense?

Well, I mean, New Jersey is one of those marketplaces and, again, we define New Jersey we're really Princeton south, so we're kind of central and southern New Jersey. You know, there's those markets tend to be characterized, particularly the southern New Jersey markets by a lot of private landlords. A lot of those private landlords have, in fact, run into valuation issues, capital, capacity issues, loan maturity issues etcetera so our team over there has been very, very adroit in identifying all the other ownership in that marketplace and focusing on attracting tenants from those buildings that have some problems into our inventory, which I think is why our leasing levels in New Jersey have been fairly good, despite the fact that it's been adversely affected by some of these contractions.

So we very much in every one of our markets take a look at the financing on every one of our competitive projects, so we have a very good flavor for exactly what's happening from a financial standpoint on that project, because that really is a telling sign as to what that landlord can do relative to rental rates, capital investment and just as importantly sometimes the length of time it will take them to execute a lease transaction because they may need to get lender approval. If we think those three things have or are kind of red warning signs for that property, we're frankly all over those, that tenant base, to try and attract them to one of our properties.

Thanks.

Dave Rodgers, RBC Capital Market.

Jerry, just a question on a following I guess on Rich's question earlier but broader than just California, I mean, do you think you're just being too conservative on the asset sale side? You seem to have room on the dividend. You've got the equity program to help the fixed charge coverage and I guess why I am asking is it seems like there's a big difference in what you expect in terms of growth and what the buyers expect.

Capital seems to be very aggressive out there. You have a large number of cash flowing assets in markets that you don't really want to be in outside of California even that aren't your target markets. You know, why not offer those up? I am assuming that you're expecting your estimates to be right on growth and theirs to be wrong, in which case it would seem that that differential today is only going to narrow into the future. If you could give a little more color around that that would be great. Thank you.

Yes look, that's a great question. I think that's why I mentioned earlier that Tom and his team are carefully tracking what we're seeing on the entire investment front throughout the country because certainly a lot of the active aggressive buyers right now are targeting frankly kind of New York, Washington D.C. and some of the coast markets. And I do mean like a San Francisco versus a Concord, California. We're doing a lot of work making sure we understand where we think pricing is, how people are underwriting and, as those data points become more clear, we would be in a position to potentially put more properties on the market for joint venture or for sales.

That data is not complete at this point yet. I mean, you go back a couple years we did a very good transaction with a pension fund advisor on about two million square feet of stable yet slower growing assets. It's performing very well. I would not preclude that. We have not built that into our business plan but a lot of work is being done behind the scenes to make sure that we are in a position as the investment market, particularly in this Mid-Atlantic area, gets more clarity to fully test the market on moving some more assets.

Okay and then in a follow-up to that is the full ATM issuance in the guidance, it's not a big number, but and then also would you do more or would you only consider doing more if you were predicated upon acquisitions and deployment of capital? Are you going to really pursue that program in its fullest?

Well, I think that the two issues related to the execution of the ATM program is where we think the stock price is as well as what we think the near-term opportunities are. As Howard outlined in our capital plan, we are pretty well booked in on our capital requirements really through the end of 2011 without much work at all. We have very good visibility in all those different components, so I think the thought process we're always going through is the trade off between improving our balance sheet by through de-leveraging and issuing dilutive equity versus where we think the growth opportunities in the portfolio will come from and external growth opportunities. So we did execute the program in the first quarter and did some subsequent to the end of the quarter and I think we'll continue to monitor the market as the circumstances present themselves during the balance of the year.

Thank you.

Dan Donlan, Janney Capital Markets.

Jerry, I was just wondering if you could comment on what you're seeing from the GSA and the government contractors in D.C. and if you think there could be some increasing leasing in the second half of the year.

Well, we are -- have one of the largest historic rehab projects underway today with the GSA as our client and tenant, so our expectation is when we deliver that building on time on budget with the very strong relationship with [Region Three], we would certainly be in a position to look at other opportunities. Along those lines, we are certainly looking at some opportunities right now from a GSA standpoint. If you believe the numbers, the GSA could be huge consumer of office space over the next several years and, having now accomplished or being close to accomplishing we think, of a tremendously successful project for the GSA, we think that that will be very additive to our reputation and that reputational advantage, plus the skill set of our existing team I think will position us very well to pursue other GSA opportunities.

Okay thank you and then, just as a follow-up, your suburban -- or excuse me, your CBD Philadelphia is well leased. Most class A space in Philadelphia is well leased. I was just curious if you could comment on where you think cap rates are for that high quality class A space in CBD Philadelphia and maybe where that spread is to some of the suburban office that you guys have.

Good question. I think generally from a market standpoint we continue to be very, very pleased with how strong Philadelphia CBD is doing, particularly in the trophy class assets. Our one and two Logan properties have experienced a tremendous success in both leasing up our near-term expirations as well as being able to move rental rates up. Rental rates in the trophy class space have continued an upward trend. There really have not been, Dan, any real trades in the Philadelphia CBD at this point with the exception of the 2000 market, which was clearly not a trophy class asset, and had its own special set of circumstances.

We are continuing to talk to investors about the CBD marketplace. We have a keen interest and we have a large presence between the Logans and our properties at University City, so our expectation again, which kind of touches on one of the previous questions, is I think as there gets to be more transactional clarity in kind of the top echelon markets in New York and D.C. etcetera, some of those buyers, who target those markets initially will start to re-focus their investment attention on markets like Philadelphia and our close and suburban markets.

And, if you look at our cap rate profile over the last ten years, Philadelphia is typically traded depending upon the asset quality and location 100 to 200 basis points wide of what you see in the district and in New York City so we've yet to see that trend line evidence itself because there just has been a dearth of transactions but our expectation is, as the year progresses, there will be some trades that occur and we would expect that that trend line of cap rate spread between Philadelphia and those other markets I mentioned would remain intact.

Thank you.

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

Jerry, you referenced the I guess near-term growth, rental rate growth, that some of the competitors on these bidding practice, particularly in D.C., and how those assumptions are more aggressive than yours. Maybe I could put this to Tom and ask you to quantify the difference between the winning bidders and what Brandywine is underwriting?

Yes, John, this is Tom. I think that what we're seeing is that the cap rates on these assets in the Washington Metro are basically in the seven range. We're seeing some actually dipping below that and, from our standpoint, we're not feeling that's at a level of cap rate that we would feel is accretive or good for the Company. We would look at some of those transactions, potentially on a JV basis, and we are talking to some potential capital to do that but our bids would be a couple hundred basis points, 150 above that.

Okay I'm -- so I guess I was also specifically curious in terms of the rental rate growth assumptions.

Well, I think on that side we're seeing rental rates pretty flat for the next couple of years. There's still a lot of occupancy. There's still a lot of consolidation. We're seeing some larger tenants consolidating space. There's a couple properties that were put on the market where there was a concern over consolidation of space from a very large user that had two buildings and so that property sale, which was aggressively priced, was pulled from the market just for those reasons. So we're still not feeling that there's -- we feel there's an ample supply of space out there that we're not underwriting significant rent growth right now.

Okay and do you have any sense for what the winning bidders are underwriting?

No don't have an idea of how they're underwriting is in terms of rental growth?

Yes.

Well, again, looking at some of the assets we've seen, we don't feel that those rental rates were significantly below market so we assume that to get to those, unless they're very comfortable with the yields they're seeing in the six to seven range, we would have to anticipate they've got some pretty steep rental growth over the next couple of years.

Right okay and then lastly, could you touch on and I apologize if I missed this but the cap rates that Brandywine is expecting to achieve on the dispositions that you expect to take to market?

Well, I think we wound up doing last year was in kind of that 8.5% range if I remember correctly.

Right and what do you expect on the next crop?

Well, I mean the -- we'd expect those cap rates to pretty much hold steady. We have, you know, I mean a number of the properties we have under agreement are significantly under leased so the cap rates become somewhat irrelevant but certainly we would expect that cap rates to kind of circle in at 8% to 9% range, John.

Okay thank you.

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

No just other than to thank everyone for their active participation in the call and we look forward to updating you on our next second quarter forecast. Thank you.

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