Brandywine Realty Trust (BDN) 2010 Q4 法說會逐字稿

Good morning. My name is Tangie, and 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).

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

Tangie, thank you very much.

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

Prior to beginning, 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 that the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports filed with the SEC.

To begin our commentary, before addressing our specific performance for the quarter and the year, a quick observation on the overall state of the real estate markets and the economy. We continue to see a consistent recovery in our markets. As with the broader economy, the real estate recovery while steady, remains slow. There are an increasing number of tenants already looking at their late 2011 and 2012 space requirements. That remains somewhat offset, but less so than in prior quarters by tenant downsizing and space givebacks.

Our business planning efforts recognize that markets, while they'll be positively biased, will remain competitive well into the second half of this year. We are, however, encouraged by overall activity levels and tenant sentiment. For 2011, with the market still in this recovery phase, we anticipate generating leasing results primarily by increasing our market share, rather than through seeing markets operating at their historic absorption levels.

With that overview comment, a quick recap of 2010, highlighted by the following points. We had a record year, leasing approximately 4.2 million aggregate square feet, a great accomplishment by our leasing teams. That strong performance was further reinforced by a tenant retention rate of 66%, compared to our original forecast of less than 50%. We continue to experience negative mark-to-market on executed leases and posted a 9.3% decline on a GAAP basis for new leasing and a 2.6% decline for renewals.

Our average lease term for 2010 was 5.3 years, which was an improvement over our 2009 average lease term of 5.2 years. Our capital costs remain fairly constant year over year, with a 2010 average of $2.19 per square foot per lease year, compared to $2.24 per square foot per lease year in 2009. The 2010 numbers translated to a 15.4% of gross revenues on new leases and 10.1% on renewals. We do expect those numbers to increase slightly in 2011 to 18% on new leases and about 10.5% on renewals.

During 2010, we executed on our investment program, closing on two transactions in CBD Philadelphia, Three Logan Square and our joint venture with Thomas Properties at Commerce Square. Those transactions represented an aggregate investment of $154 million and were substantially equity financed. We also sold $52.6 million of non-core properties, with a five building sales occurring late in December, four in southern New Jersey and one in Austin, Texas. Our cap rates for the year on projected cash NOI were between 6.9% and 8.6% on properties with a 62% average occupancy, and we recorded a gain -- an overall gain for the year of $11 million on those sales.

During 2010, we saw core occupancy decline by 2.6 percentage points. 80 basis points of that is due to the inclusion of Three Logan, which is at 63% leasing in those numbers. The remaining 1.8% occupancy decline related to known tenant contractions and moveouts. We ended the year at 85.6% leased or occupied, slightly above the projection on our last earnings call. And our year-end 2010 forward-leasing number is 87.7%. That spread of 200 basis points over actual occupancy is a return to the historical spreads that we've had on forward leasing, another positive sign of market recovery.

Furthermore, four out of seven of our primary markets experienced positive absorption for the year, led by northern Virginia, suburban Maryland, Austin, Texas, and Richmond, Virginia. In all cases, positive absorption levels were below historical averages. And in the case of New Jersey and Pennsylvania suburbs, the negative absorption numbers were a significant improvement over the numbers in 2009. Just as importantly though, market activity levels were up in all but one of our markets on a year-over-year basis.

So, the overall tone of the market remains positive. Our leasing pipeline stands at 2.8 million square feet, of which 537,000 square feet is in active lease negotiations. Our conversion rate also continues to improve. For 2010, our conversion rate was 44%. And we also did 24% of our leasing transactions on a direct basis during 2010.

Another sign of that improving market is that traffic through our portfolio was up 5% from Q3 and up 47% year-over-year. Our strongest performing markets in terms of activity and rental rates remain Philadelphia CBD, the Radnor, Plymouth Meeting, Newtown Square sub-markets in suburban Philadelphia and Richmond.

To support our investment program during the year and continue to improve our liquidity position, we issued approximately $150 million of stock, which also includes $78 million of units we issued as part of the Three Logan transaction. Through our continuous equity offering program, we raised slightly less than $71 million of net proceeds by issuing 5.7 million shares. We have 9.3 million shares remaining available underneath that program.

The more important focus, though, is on 2011. We are pleased with what we have seen thus far this year. Increased absorption and tenant activity levels have put us in a position where we are 54% completed on our 2011 business plan. You will note in the supplemental package, on pages 34 and 35, we provided some additional schedules to capsulize our progress on various business plan metrics. We will update that quarterly, so you will have a clear synopsis of our business plan progression. Based on progress thus far, we have moved up the bottom end of our FFO guidance range by $0.02 for a new range of $1.26 to $1.34 per share.

As I just touched on, the market tone continues to improve. All of our operations reported much higher levels of leasing activity in 2010 versus 2009, in some cases, by very wide margins. Those activity levels are fairly broad-based, with no one particular industry leading the way. And as discussed on previous calls, during this recovery period, the major focus is on increasing market share while the absorption numbers in those markets catch up to historical levels.

On that front, the plan's progressing pretty well. By way of example, in southern New Jersey, our leasing team did 56% of all of the deals in the market, compared to a 20% ownership position. And additionally, in the PA suburbs, we captured 44% of market share for new leasing activity, versus a 14% ownership stake. So, the name of the game clearly remains to see all deals and execute as many as we can.

The markets that we expect to perform well going into 2011 are the Pennsylvania suburbs, Philadelphia CBD, Richmond, and Austin. We continue to expect to face leasing challenges in our New Jersey Delaware operations, as well as the Dulles Toll Road Corridor. Both of these operations have been impacted by a fairly high number of tenant contractions and moveouts, and those markets will remain competitive. But as I touched on, activity levels in New Jersey are up 19% year-over-year. And in the toll road corridor, activity levels are up over 25% year-over-year. Our inventory in those markets are high quality, well situated in their competitive set, and we are confident of our ability to restore these occupancy levels to their historic run rates.

For 2011 in general, we expect stable to improving occupancies, consistent same store numbers, and a declining negative mark-to-market, all reflective of continued improvement in our overall market conditions. Our concession packages have remained fairly steady, and while we are seeing capital costs increase, we're getting much more in terms of lease maturities. We wrapped up 2010 with about 40% of our leases incorporating free rent and would expect about 55% of our leases in 2011 to have some element of free rent in their lease terms.

From an investment standpoint, we expect the following. Business plan incorporates the sale of $80 million of properties. Our business model has those sales occurring with more heavy weight towards the second half the year, with $20 million in Q2, $30 million in each of Q3 and Q4, at cap rates 10% or lower. Our plan will continue to target non-core and slower growing properties for sale. We do not have any acquisitions built into our 2011 plan. We will continue to seek quality additions to our portfolio, both directly and through joint venture opportunities. Those investments will be financed on primarily an equity basis to further improve our balance sheet and improve our investment grade rating.

Substant to quarter end, we did close on the purchase of a parcel of land in Philadelphia CBD, which we intend to hold for development purposes. We hold this site with a 50% institutional partner who also adds a potential space requirement. This site is being actively planned for a mixed-use development containing parking, retail, multifamily rental, and an office component.

For 2011 though, make no mistake, our biggest growth opportunity is to accelerate the lease up of our vacant space. The portfolio currently stands at 86% occupied, and our stretch objective is to significantly exceed that as the year progresses. Our current plan shows a year-end 2011 forward leasing percentage of 88%. As I touched on earlier, there is no one single big contributor to our growth profile, other than simply leasing up our existing space. And that does, in fact, remain the primary focus for the Company.

For 2011, we estimate we will execute approximately 3.6 million square feet of leases. To provide a frame of reference, our total leasing pipeline, including renewals, stands at 3.8 million square feet, so we're confident of meeting our target leasing objectives for both new and renewal leases. And George will touch on that in a few moments.

We do remain fully committed to moving up the investment grade ratings curve. As we've discussed before, that is a multiple-year plan that we will achieve through a combination of NOI growth, occupancy improvement, disposing of slower growth assets, and funding acquisitions on an equity basis. Our capital plan for 2011 anticipates a $300 million seven- or ten-year unsecured note issuance in the fourth quarter. Our pro forma rate in our financial model is 6.25%. Current indications are slightly below this target. Additionally, we plan on another $300 million note issuance in the first half of 2010.

We also plan on keeping our line of credit balance in line with our previous forecasts, with an average of a third or less funded and a projected year-end 2011 balance below $100 million. We are continually monitoring the debt markets, tracking our spreads, and evaluating the right time for us to re-access this unsecured market.

At this point, George Johnstone will review our -- the key 2011 revenue drivers and provide an operational metric overview. George will then turn it over to Howard for a financial review of the fourth quarter and 2011. George?

Thank you, Gerry.

This quarter we added two new pages to the supplemental package to outline our achievement on the 2011 business plan objectives. For 2011, we have increased the amount of speculative revenue from $25 million to $30.7 million. As of today, we have achieved $16.5 million or 54% of that speculative revenue. The additional renewals included in our business plan result in a revised retention percentage of 56%. We are still estimating a decline in same store gap NOI between 4.2% and 5.2%. Rental rate declines are estimated to be 2.5% to 7.5% on a GAAP basis and 5% to 10% on a cash basis. The actual rental rate declines on the 54% of the plan achieved to date have been 2.5% on a GAAP basis and 10.7% on a cash basis.

Our updated leasing plan for 2011 assumes three million square feet of speculative leasing, consisting of 1.7 million square feet of new leases and 1.3 million square feet of renewals. This leasing activity, when combined with our 555,000 square feet of forward new leasing already executed and anticipated contractions, will produce a 20 basis point increase in year-over-year occupancy.

Occupancy is expected to drop during the third quarter, due to large moveouts in excess of this speculative new leasing. Our northern Virginia portfolio is impacted the most, where we expect over 600,000 square feet of tenant contractions during the year. The majority of these contractions are occurring in our Dulles Toll Road properties.

As we assess the speculative revenue plan for 2011, on new leases, there is an active pipeline of prospects -- 537,000 under current negotiation and 2.2 million square feet of prospects who are in receipt of a proposal. In order to achieve the open leasing assumptions in the plan, we will need to convert 41% of today's pipeline. As Gerry mentioned in his commentary, our conversion rate during 2010 was 44%.

In terms of tenant mindset, our regional operating teams are in constant contact with the tenant base. Most companies are feeling better about their own businesses, and we continue to see good levels of tenant expansions. While the number of tenants expanding exceeds those contracting, the larger downsizing by a few tenants has offset expansions on a square footage perspective. At this time, we feel that all of the large tenant contractions have been identified and are incorporated in the updated plan.

I will now turn it over to Howard for the financial review.

Thank you, George, and thank you, Gerry.

In the fourth quarter, funds from operations or FFO available to common shares and units totaled $47.9 million. It represented $0.33 of FFO per diluted share, and it beat analyst consensus by $0.01. It is a high-quality FFO figure in that fourth quarter termination revenue, other income, management fees, interest income, and JV income totaled $7.5 million gross or $6.1 million net and are in line with our 2010 guidance range for these other revenue components. Our FFO payout ratio in the fourth quarter was 45.5% on the $0.15 dividend we paid in October of 2010.

A few other observations on the components of our fourth-quarter performance. Cash rent of $115.7 million was up $4.1 million versus the fourth quarter of 2009 and $5.9 million versus the third quarter of 2010, after adjusting for the effects of deconsolidating three joint ventures effective January 1, 2010, and the fourth quarter 2010 sales. Straight line rent of $4.5 million was also up $2.2 million versus Q4 2009 and $750,000 versus the third quarter of this year. These sequential increases are, for the most part, attributable to the post office, garage, and Three Logan Square assets we completed or acquired during the third quarter.

Recovery income of $20.7 million and our recovery ratio of 34.7% reflected typical expense recovery conditions and are in line with our expectations. Our property operating expenses did increase $3.5 million sequentially, with much of that attributable to the full period for the new assets, as well as about $700,000 of above-budgeted snow costs in the fourth quarter. Real estate taxes were essentially flat sequentially.

Interest expense in the fourth quarter of $35.4 million increased sequentially by $0.9 million, or $900,000, and by $1.7 million year-over-year, as we absorb the expense of the post office and garage permanent loan. Interest expense in the fourth quarter includes $310,000 of non-cash APB 14-1 costs related to our remaining exchangeable notes and just $900,000 of capitalized interest, or about $1.8 million less than we had in Q3 2010 as a result of development completions. G&A at $4.8 million benefited from a $1 million reversal of bonus accruals based on year-end true ups and was otherwise in line with our expectations. Deferred financing costs increased sequentially to $1.1 million, reflecting the full commencement of our amortization on the post office and garage loans.

In the fourth quarter, we had net bad debt expense of only $203,000, in line with expectations and reflecting various write-offs, recoveries, and adjustments to reserves. And lastly, we incurred about $0.5 million, or $500,000, of losses on $13.7 million of aggregate debt repurchases, offset by $100,000 benefit on a mortgage prepayment. For the quarter, same store NOI declined 4.9% on a GAAP basis and 5.1% on a cash basis, both excluding termination fees and other income items and largely, as a result, of lower occupancy in the same store portfolio.

Our fourth quarter 2010 cash available for distribution decreased sequentially to $26.5 million from $29.7 million and measured $0.19 per share. We achieved a 78.9% CAD payout ratio for the fourth quarter. Revenue maintaining CapEx was higher than trend, due to timing of disbursements on previously executed leases. Our EBITDA coverage ratios and margins are all strong and consistent with prior levels, despite higher levels of vacancy.

For the full year 2010, we achieved FFO per diluted share of $1.34, beating the $1.33 analyst consensus by $0.01 and hitting the very top end of our guidance range for 2010. As Gerry mentioned, we are increasing our previously-issued 2011 FFO guidance of $1.24 to $1.34 per share by $0.02 on the lower end of the range to now be $1.26 to $1.34. This translates to a quarterly run rate of between $0.29 and $0.32, excluding the $0.07 historic tax credit transaction impact, which we will recognize in the third quarter of 2011.

In addition to the metrics that George laid out for portfolio performance, we have a couple of other items to outline for the 2011 guidance. In our modeling, we are projecting $20 million to $25 million gross or about $13 million to $18 million net for all other income items such as termination revenue, other income, management revenues, and again, less management expenses of looked at net, plus interest income, JV income, including the new Thomas Properties joint venture, and a bond repurchase of gains, though none are expected. At the midpoint of our range, it is a $6.5 million or $0.05 per share below our figures for 2010, and is an important factor in our overall guidance.

In terms of G&A for 2011, we expect about $6 million per quarter on interest expense. We see total costs of between $130 million to $134 million, increasing slightly as we move through 2011. As I said earlier, the net historic tax credit impact will be about $0.07 per share in the third quarter of 2011, reflecting $0.08 of revenue and an extra $0.01 of interest expense. These are essentially non cash and will be excluded for our CAD calculation, and they reflect the per share impact of 20% of the net proceeds to be realized in connection with the historic tax credit financing. This phenomenon will repeat in each of the next five years, beginning in 2011, for a five-year period.

We don't expect any issuance under our continuous equity program, unless there is some kind of match-up with investment activity and no additional buyback activity on our debt. We're assuming 147 million shares for the FFO calculation versus about 139 million in 2010. And this should produce a range of $0.70 to $0.80 of cash available of distribution per diluted share, reflecting between $20 million and $30 million of free cash flow for us to invest or pay down debt.

Looking very briefly at the 2011 capital plan, we have total capital needs of $458 million in 2011. That represents $135 million of investment activity, up to $14 million to finish all expenditures on the post office and garage, $56 million of revenue maintaining capital expenditures, $41 million for remaining redevelopment outlays and lease up of recently completed projects, $15 million for funding of our commitment on the Thomas Properties Commerce joint venture, and $9 million for the land parcel we just bought earlier in January. We'll have $230 million of potential debt repayments, $60 million for the remaining balance on our 2011 exchangeable notes, $130 million for mortgages, and we've built into the plan the potential of $40 million for a possible JV debt repayment. We plan to extend our $183 million bank term loan and our $600 million credit facility to June 29, 2012 by exercising our extension option in April 2011.

And lastly, maintaining the current level of dividend activity and reflecting the fact that the units of the Three Logan Square transaction will not pay any distributions until later in 2011, we see about $93 million of aggregate dividends on our common and preferred shares. To raise this $458 million, we are projecting the following. Approximately $165 million of cash flow from operations will fund the remaining $3 million on the historic tax credit transaction. During the middle of this year, we had $16 million of cash on hand. Gerry outlined the sales activity of $80 million, as well as the $300 million unsecured note. Net-net, this will result in $106 million paydown on our credit facility from its $183 million balance at 12/31/2010 to approximately $77 million at year-end 2011.

As I mentioned earlier, bad debt expense was very benign in the quarter. Total reserves against receivables at 12/31/2010 were $15.2 million, $3.7 million of that was on about $19.9 million of operating or other receivables, an 18.5% level, and $11.6 million went against $107.1 million of gross straight line rent receivables, or around 11.5%. These figures are consistent with prior activities and don't reflect any undue credit activity. Our balance sheet and credit metrics remain conservative and in line with prior quarters. We are 100% compliant on all of our credit facilities and indenture covenants and only had $183 million drawn in our line at year-end, with $16.5 million of cash on hand.

And now, I'll turn it back to Gerry.

Great, Howard, thank you very much. George, thank you as well.

To wrap up our prepared comments, while the market continues to do well and we've had good success going into 2011, we certainly still have a lot more work to do and remain very focused on getting it done. We were pleased to have accomplished many of our key objectives in 2010. And looking ahead, our best growth strategy, as George touched on, is to simply lease up our existing vacancy. We're focused on that objective singularly and believe that our liquidity, inventory quality, and strong market position provide a good, competitive advantage for us.

2011 is operating on track. We're pleased with what it's -- we've been able to do thus far. And we certainly continue to plan on executing an aggressive leasing strategy to ensure that we achieve all of our business plan objectives.

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. Tangie, we're ready to open it up for Q&A.

(Operator Instructions). Your first question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

Thank you and good morning.

I was hoping you could focus a little bit more on the kinds of leases you're signing and potentially the backlog. From your comments, it certainly sounds like you're able to win tenants from other landlords, given portfolio quality and balance sheet strength. Where are we in the cycle of that happening and tenants coming off the sidelines to sign leases, and what do you think going forward here, given a world of very limited office job growth? Can you keep up the same magnitude of leasing activity?

Jamie, great question.

I think as we view it and touched on a little bit in the comments is, our regional and leasing teams are very much focused on gathering additional market share. We fully expect that absorption levels are going to remain below their ten-year averages as we track them. We had a couple of markets that did -- actually did much better in 2010 than we frankly thought they would do.

But there's no question until there's really -- you know, sustainable, predictable job growth, you know, the net new demand is going to be somewhat anemic. While that's partially offset by no new construction coming online, it clearly doesn't absorb all the existing vacancy in those markets. And we clearly do operate on the premise that until these vacancy rates get down to 10% or below, it's difficult to have general pricing power with our tenant base.

So, we do remain very active in trying to gather market share through aggressive cold-calling programs. We significantly expanded the size of our leasing teams in a couple of our key regions last year and are seeing the benefits of that. The leases themselves, George, maybe you can jump in terms and chat about what we're saying. But it's actually fairly broad-based.

Our activity levels, when we look at our different operations, the numbers are pretty positive relative to year-over-year activity. PA, we were up -- the PA suburbs that is -- our Q4 activity levels were up almost 26%. New Jersey, 19%, as I think I touched on the call. Richmond, up 31%. And that's quarter-over-quarter. Year-over-year, the numbers are even more compelling. I mean, PA, our activity levels year-over-year were up just shy of 70%.

That, in our mind, is really reflective of both tenants getting much more constructive on doing forward business planning. The brokerage community getting much more aggressive and getting out there and advising their clients that now is a good time to enter the marketplace, before rents actually start to move up. And I think those two reasons are the primary market rationale that we're seeing additional activity. I think we're seeing probably a little more activity than maybe some of our competitors because of the aggressiveness of our cold-calling program.

But George, if you can add any additional color to what we see in different markets.

I think, Jamie, the other thing we're seeing is a flight to quality. I think a lot of tenants in B buildings are looking to move up to the A-quality buildings. We saw that especially in our southern New Jersey portfolio. I mean, tenants along the Route 73 Corridor moving over to the Route 38 Corridor and you know, the 73 Corridor is then where we actually had the four buildings that we sold in the fourth quarter.

I think some of our other key submarkets are actually showing the ability to push rents in the PA suburbs for the deals we did in 2010, you know, we were able to grow rents almost 8% in Plymouth Meeting, almost 7% in Newtown Square. And overall, had -- you know, a 0.5% increase in our PA suburbs from a rent growth perspective.

I think we are still expecting some continued job growth in both metro D.C. and in Austin. And in southern New Jersey, we've actually seen -- you know, our deals were a 4% decline in GAAP rents during 2010. But I think when you kind of, again, look at the 38 Corridor versus the 73 Corridor, we were seeing better market conditions along the A-quality inventory.

Great. Thanks, George.

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

Great. Thank you.

Gerry, you made a big bat on Center City, Philadelphia, last year and then with the land this year. You got in both Three Logan and Commerce Square, I think at about $180 or $190 a foot, stabilized. You now own, I think, over 50% of the class-A space. You're taking down some land.

Can you sort of walk through for everybody why this market, which has historically really lagged, will start seeing some rent growth in the foreseeable future?

Sure.

John, we have increased our investment base in Philadelphia CBD, as you touched, on for sure. And it is important -- and, you know, one particular point that's important there is that investment base has very much been folks on the very high end of the inventory class. So, when we take a look at the general Philadelphia CBD market, it really is one that's been significantly bifurcated between the A-quality/trophy class versus the B inventory.

So, a couple of the factors that led us to increase our investment position in Philadelphia was that, you know, given the leasing stability that we have in our pre-acquisition inventory base, whether it is the post office coming online with a 20-year, full 100% building lease, to the Internal Revenue Service, Cira Centre in University City where we have very little rollover at all for the next five or six years. And our One and Two Logan properties, which again, had very little rollover near term, really kind of opened up the door for us to evaluate some other opportunities. As we discussed last year, we made the acquisition announced on Three Logan.

For us, that was truly an opportunistic purchase. It was a combination of us being able to buy into one of the higher quality buildings in the CBD that had essentially -- to add a leasing market for a number of years. And we were able to buy that for $125 a foot, which will put a stabilize, as you touched on, about $180, which is about where our investment base is in One and Two Logan.

So we saw a lot of market/leasing synergies in acquiring that property. And I think, you know, what we've seen thus far, that project itself has about 600,000 square feet of active prospects between renewal tenancies, about a couple hundred thousand square feet with the balance being new prospects that we're talking to. All of our renewal deals and the newer transactions are at rates well in line with our pro forma activity.

In terms of the broader question, I think as we view Philadelphia, it is certainly a marketplace we know extremely well. Very well steeped in both the business, political, and civic community within the city. And as a result, I think are able to generate a fairly significant percentage of lease transactions that many other owners may not, in fact, see.

I think we do view Philadelphia as a stable environment for us. Rents have been stable to slightly moving up in the trophy-class inventory over the last year. And we certainly would expect that while Philadelphia has put its tax reduction program on hiatus during the recession, we would certainly expect that tax reduction program to go into place in the succeeding fiscal years, which we think will attract some additional businesses downtown.

Also, over the last decade, Philadelphia has done a wonderful job of increasing the residential population in the city. Which again, particularly from a younger demographic standpoint, portends, I think, good things in terms of employers locating there to access a highly talented young, vibrant workforce. The eds and meds which comprise a significant portion of the Philadelphia employment picture through both major academic institutions and healthcare facilities continue to expand. There is over $0.5 billion of NIH grants that flow into particularly University City, Philadelphia, on an annual basis.

So, there are a number of reasons why we think that Philadelphia, while it has never been a top grower, it is certainly one that we look to be very stable going forward. And given the strategic position that we've obtained in that class-A inventory, feels as though we're in a very good position to capitalize on whatever opportunities that market presents us.

As a follow-up question, George, you mentioned that the -- for the year, you're down 4% on GAAP and 9% on cash. Those are gross rents. What's that number roughly on a net rent basis when you have to deal with increases in OpEx also?

John, I'll have to get back to you on that one. Off the top of my head, I'm just not sure.

All right. Thank you.

Hello?

That's it, thanks.

Okay, John, thank you very much.

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

Thanks. Good morning.

Hi, Jordan.

George, as you were going through some of your numbers and Gerry, I think you touched on it as well. I think, in order to hit the leasing goal for the year, you said you had to hit -- basically convert 41% of the pipeline versus 44% in your track record for 2010. Does that mean no additional -- that's excluding anything incremental that comes into the pipeline?

Yes, that was just converting today's pipeline. So, if nothing new came in, we simply just need to convert 41% of what we have today in active discussion.

The track record on that, Jordan, has been -- that pipeline is really you know, a snapshot point in time. I think one of the things is -- one of the reasons we talk about that pipeline on every call is it is a fairly dynamic number. We're continually doing showings, tenants are leaving the pipeline. Tenants are coming into the pipeline. And one of the big areas we focus on during our in-house leasing calls that we have on a regular basis with the managing directors and our leasing agents is what is the velocity, what the throughput is through the inventory. So we very closely track everything from phone inquiries to broker calls to tenant showings, et cetera.

And I think what we've been kind of pleased with, because we're always looking at -- are there deals that are still coming in? And I think certainly, as the numbers indicate, you know, progressively through 2010, there has been a continued velocity of transactions. So, we would certainly expect that that pipeline would stay around these levels, maybe increase. It did increase over where it was last quarter at 2.4 million square feet. So, sometimes it is seasonal. A lot of people look for office space the first couple quarters of the year and don't really -- aren't that active in the summer months and then pick up in the fourth quarter.

But I think generally speaking, across every one of our markets, we're pretty pleased with the level of velocity that we've seen.

It definitely sounds like, given sort of -- coupled with the absorption you saw in the quarter, that you've got an acceleration of activity. I know you've got to balance that with some of the known moveouts you've got here. But it definitely sounds like an acceleration from previous calls. Is that fair?

I think that's fair.

I think the -- the caveat there is with these known moveouts. As I think George touched on and we discussed at the -- on our last call, you know, we've had tremendous leasing velocity, particularly during 2010. The 4.2 million square feet was an all-time high for the Company. But juxtapose that against the 85.6% year-end occupancy is a low for the Company. And the major driver there was just a lot of contractions that happened, primarily in two of our major markets, but certainly across the board.

That's why George's observation in his commentary is important, because as we stress test what visibility we can have on future tenant activity, we do, in fact, think we've picked up and accounted for in our business plan what known contractions are out there, whether it is space being subleased or whether it's tenants who were not fully utilizing their space, or frankly, tenants who have told us they're going to reduce their square footage.

Right. Understood.

And just as a follow-up, the previous sort of investments had been in stabilized assets, or assets with some lease up opportunity. But you know, definitely an income component. Can you maybe flesh out the land purchase in December in New Jersey, and then the one in January, and then what these opportunities look like a little bit more?

Sure.

I mean, the land person in Philadelphia would say it is a development site on the West Market Street Corridor that sits across 20th Street from our newly-formed partnership with Thomas Property Group. We were working with an institutional partner that had the potential office requirement. The site is large enough to accommodate other uses such as retail, parking, and multifamily rental. So, the planning protocol for that project right now is to master plan that site for those four uses. Certainly to the extent that the multifamily market is as robust as the indications are. We would probably seek a residential company to do that transaction for us and move forward with maybe some other pieces of the site.

So, for us, it was an opportunity to acquire probably the most -- the premier development site in the Philadelphia CBD at a very low cost per square foot, and do that on a joint venture basis and commence the planning process. So --

What are some of the parameters --

I'm sorry?

What are some of the parameters that would cause you to start development? I mean, like what kind of pre-leasing, what kind of return expectations?

I think on the office side, we view that as a long-term opportunity based upon this partner's requirement. It's almost -- would almost be a build to suit for them, Jordan.

The other components, I think, will go through the planning and the approval process. See what development bonuses we can get through the new Philadelphia zoning code, and at that point, determine what the most effective marketing strategy is.

Thanks.

Your next question comes from the line of Joshua Attie with Citi.

Hey, thanks.

Can you talk about a little bit more about metro D.C. and northern Virginia? Guidance seems to assume large vacates in the third quarter, followed by occupancy growth in the fourth. And looking at the supplemental, over 60% of that leasing has not been done yet, and those markets seem a little bit weaker. Can you talk about the leasing dynamics in those markets and what, if any, the lower government spending could have?

Sure. George and I will tag team that.

I mean look, the northern Virginia portfolio, you know, right now is about 87% leased to as of the end of the year. Based upon our projections, that's projected to drop down mid-year to about 82% leased, to about 80% occupied with some pre-leasing done with one of the major tenants. And that increased vacancy, which George and Howard have articulated on previous calls, is really due to some known moveouts. And those large space contractions have, in fact, created some headwinds for us in terms of near-term occupancy levels.

The market itself actually had a fairly robust leasing year. Doing a lot -- not quite at historical activity levels of 13 million square feet, but around 12 million square feet of activity. So I guess as we look at and risk assess the northern Virginia portfolio, where we have the vacancy is in very well-located, very high-end properties. There's a continual throughput of deals in that market. It is very competitive, as you can imagine.

But certainly, we have a very good leasing team down there. We're augmenting our existing leasing resources to make sure that we have many feet on the street to ferret out every potential deal. And our expectation is that as the year progresses, we will continue to see some good prospects and hopefully convert some of those prospects to tenants.

George, I don't know if you have any other observations.

Yes. I think, Josh, on the moveouts, remember, a lot of those were first quarter events. And then in particular, the Deltek deal, you know, will move from their current location and expand by 40,000 square feet in Q4 of 2011. So I mean, I think the market dynamic there is that it is a little bit of a longer forward market. A lot of the prospects we're talking to today, while some have a fourth quarter '11 occupancy requirement, most have you know, a first and some even a second quarter '12.

So, I think our expectation is that, you know, there's deal flow in that market. And a lot of it would just turn into occupancy in the beginning half of 2012.

Okay. Separately, could you remind us what does guidance assume for leasing and occupancy at 1717 Arch Street, and does the space that's going to be vacated by Glaxo in Philadelphia, does that make the environment more competitive? Or is that space competitive with what you're trying to lease?

The actual guidance numbers do not reflect a lot of additional occupancy this year, for 2011. That being said, the leasing program is moving forward quite nicely. But frankly, the financial impact of that will most likely start to be seen in 2012.

With the Glaxo consolidation to the Navy Yard, it will be leaving in a couple of years. Two buildings that are on the northern side of the -- call it the CBD, and you know, one is a -- one building will be vacating entirely, the other building substantially. And I think -- the way the Philadelphia real estate community viewed that is everyone in the marketplace knew that Glaxo was not fully occupying all of their square footage, so that overhang of space was well-known in the marketplace and was certainly factored in as we assessed our risk profile on Three Logan. Different submarket, different type of building, different amenity packages between our Three Logan, or actually One and Two Logan, as well.

So, I think we -- it was not a surprise that that was coming, and it certainly was something that we factored into our underwriting. The timing of that should be fortuitous in terms of our leasing efforts on Three Logan, as well as what little rollover we'll have on One and Two as well.

Okay. Thanks.

And then just one last question on -- it looks like on the same store portfolio, the real estate taxes came down quite a bit in the fourth quarter. Were there any one-time rebates or refunds for -- do you expect the taxes to continue to be lower in 2011?

Well, I mean we've gone through an extensive, you know, appeal process with just about all of our properties and have -- you know, have won appeals on some and have negotiated reductions on others, both in 2010 and some negotiated savings going forward. But not a one-time, you know, refund event.

Okay. Thank you.

Your next question comes from the line of Mitch Germain, JMP Securities.

Good morning, guys.

Good morning.

Howard, what caused the reduction to other income from your previous assumption last quarter?

The biggest driver of that, Mitch, is the roll-off of 2011 versus 2010 of certain management contracts. We also have a much lower assumption in our plan for termination fees. As the year progresses, we'll often get proposals from tenants, often with a back fill opportunity, and we'll evaluate those. But as we sit here in February, we actually have very little known termination activity, very good for the occupancy stats, but ultimately, a negative for the comparison of that figure year-over-year.

And then I might have missed it. Your G&A forecast for the year?

Essentially flat. No real changes. We're expecting about $6 million a quarter. Could be up or down a few hundred thousand, but somewhere in that range.

Okay.

Then finally, George, if I remember last quarter, about 55% retention, 35% known moveouts, and about 10% kind of assumed moveouts. You weren't exactly sure. Where does that 10% bucket stand today?

We have -- we moved up you know, marginally from 55% to 56%, but I think the chart that we now have on page 35 of the supplemental -- you know, we're kind of at a -- all things go our way, could be 58% and potentially higher, if some of those that said we'll vacate ultimately change their mind.

All right, thanks.

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

Thanks, good morning.

Good morning.

I wanted to follow up on the leasing a little bit as well. I'm looking at page 32 on the supplemental. And I think -- the remaining square footage expiring as of the end of last week, 2.2 million square feet.

How does that compare to, or how does the 950,000 square feet of leases that were signed in Q4 but are going to take occupancy in -- sometime during 2011 compare to that 2.2 million square feet? Does that mean that you've got sort of at risk 1.3 million square feet, as you look out at the remainder of the year? And if that's the case, how does that compare to kind of the three million square feet of leasing that you expect to do?

Yes, I mean, as we execute those renewals, then they kind of just -- they move further down, you know, the chain on page 32. That's kind of why those two columns in total offset each other. But yes, we would have -- we've got 2.2 million square feet that we're still actively negotiating with.

But -- so, I'm just trying to understand the leasing disclosure that you guys put back in January of the leases that were signed in Q4. There was a lot of that, that takes effect later in 2011. Between Q1 and Q4 of 2011, about 950,000 square feet. Is that number reflected in the 2.2 million, or is the 2.2 million square feet that's going to expire still sort of all at risk?

Yes, the press release, some of that square footage was new. Not all of it was renewal. Those that were renewal are no longer in that 2.2 million square feet.

Can you give us a sense of how much of the 950,000 square feet that you signed in Q4 that is going to take effect in 2011 is new versus renewal?

Well, we had 550,000 square feet of, you know, pre-leased new square footage. Some of that had been signed prior to the fourth quarter. But a lot of it had been signed in the fourth quarter.

550,000? Okay. That's helpful.

And then just maybe to follow-up, I don't know, this could be either for -- probably either for Howard or Gerry, but you guys moved your spec revenue number up by about $5 million from last quarter to this quarter. You have now 54% of your spec revenue accounted for, for 2011. That number was lower last year. It was around 45% at the beginning of last year.

So, what would it take to move the high end of guidance? Is the spec revenue, just that there's not enough of that that occurs in '11 to move the high end of guidance number up? Is there something else that could move your high end of guidance number north?

Well, look, we go through a pretty detailed quarterly re-forecasting process and that's -- that plus the actual activity is what really created that movement from $25 million to $30.7 million. I mean certainly, as the year progresses, to the extent we get more visibility on leasing, we can get done -- and when I say done, executed, built-out, and commenced this year -- there is certainly an ability to move that spec revenue target up.

So, what it would take to move up to the top end of our guidance is really to exceed that -- those income levels that we're projecting at the current time.

Okay. Fair enough. Thanks.

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

Sorry, my questions have been answered.

Thank you, Dan.

Your next question comes from the line of Dave Rodgers with RBC Capital Markets.

Good morning, guys.

With regard to your reason for taking share -- a year ago, we talked about the competition out there not really having the capital available to lead. Clearly, with free rent coming down, what's the number one reason, I guess, today for your ability to take share, to continue to be that, and what's driving the transactions your direction this year?

Actually, George touched on a very good point, which I admitted -- and when I gave an answer. Which is, I mean, I think we are still seeing, you know, a real bias of tenants towards the higher end of the quality curve. Quality curve being defined as location, building appointments as superstructure, how the building presents itself, and what its efficiencies are, as well as the stability of the management team. So that does, in fact, remain a huge catalyst, I think, for some of the additional velocity we're seeing.

We also, I think took some pretty good moves in some of our core markets by -- as we touched on earlier, expanding our leasing activities. Bringing in of some talented people who could augment our existing team to make sure that we were, in fact, fully canvassing the market, both from a direct basis through the brokerage community, and through a lot of our other business and civic contacts.

So, I think you take those factors and you know, combine it with what George touched on relative to -- a more positive tenant sentiment, and I think an increasing awareness on the part of tenants that they -- now is probably a good time to go long in real estate. It is certainly, I think, providing the impetus for some of that additional activity.

You know, along the same line as going long, and I understand you were talking kind of the leasing perspective. But talk about the demand in the for-sale market for some of your assets. Clearly, it hasn't been as strong -- at a 10% cap rate guidance potentially for last year's asset sales, or '11's asset sales, it appears that maybe it's not recovering. But give us your sense of where that market is today and throughout 2011 versus where it has been.

Sure. And Tom and I will tag team this.

I think when you take a look at the financial model that we talked about earlier, you know, the cap rate we have in the plan really is fairly conservative. Certainly compared to what we're actually able to do this year relative to selling assets at 6.9% to 8.6% cap rate. So, we take a conservative bias when we pull together our financial plan, just to make sure that we have ample room.

You know, the investment market in some of our core areas, whether it's Pennsylvania suburbs or southern New Jersey or central Jersey, suburban Maryland, you know, have been slower to recover than we would have told you they would be probably this time last year. I think we were expecting more velocity on the sales front. But there is -- as I'm sure you've heard on the call, there is a clear bifurcation in the investment market between the interest in the gateway markets and interest in some of the non-gateway markets.

Now, I think frankly, what's happening is that more and more people are beginning to focus on those non-gateway markets as the economy gets better, as leasing velocity continues to improve in most of the markets. And certainly, I think one of the things we really tracked was the fact that we had a number of markets this year that had positive absorption. I think when you take a look at increasing year-over-year leasing activity levels, positive absorption and pricing pressures in some of the gateway markets, those three components will start to lead to more investors looking at some of our traditional suburban markets. They'll get -- they'll have much more comfort on leasing velocity where they think rents will stabilize, expense management, all of those things that a year or so ago, they weren't confident on.

So, while we did fall short on our $80 million plan for 2010, we came in, as we talked about, at about $53 million, you know, one of the reasons for that is that investment market dynamic. The other reason for that is that, you know, a number of the properties that we were looking to sell are properties that, from a risk adjusted standpoint, were not that attractive to some of the investors in the marketplace. We were fortunate during the course of the year to get the deals done that we did, primarily to users who had a need for that space and were willing to pay what we thought was fair value for them.

Finally, Tom, maybe just what you're seeing in some of the other markets.

Yes, Dave, I think what Gerry just said about the dynamics we're seeing in some of the markets. When you look at the metro D.C. area, for example, you know, just this year, we've seen three million square feet come on to the market in terms of sales opportunities from different types of sellers. And while I think in the beginning, a lot of that has been in the D.C. market, you're seeing a lot more in the suburbs, and that's because of how dear the pricing has been inside the district and some of the core beltway areas.

So, you're starting to see maybe some product moving out to the suburbs, maybe a little less than A-quality. Couple of vacant buildings have showed up on the radar screen. So I think that D.C. is even seeing some of the -- they're still seeing a great velocity, but you're not seeing it in some of our other markets, one or two assets maybe come on Austin or Richmond, or we think there's some coming to market. So, again, big difference in the velocity in the various markets.

Last question, maybe for Howard.

You know, Howard, with regard to your comments for 2011, how do we think about the ATM program? Clearly, you tied it out in the past to the acquisitions that you're doing, and you've talked about wanting to deleverage through acquiring equity. But as you look to the year and as questions kind of have alluded to strong leasing activity already giving you confidence with the guidance, what would your preference be throughout the year in terms of either increasing asset sales or issuing more equity and maintaining the existing guidance versus changing the guidance around overall?

Well, I think if the sales market is there, as Gerry and Tom alluded to, we'll continue the process of recycling capital. It won't necessarily be a net reduction for the Company, because in many cases, we'll reinvest that in higher quality, higher growth assets, as effectively, we did in 2010.

So, not obvious that sales alone on the margin will be a deleveraging, though they have been in the past. Other avenues for deleveraging are certainly to fund our investments with equity. So, instead of sort of the traditional 50/50 split, we go to more of 100% equity financed deal, and that brings our averages and various metrics down, as we are planning to do.

Lastly, the recovery of the portfolio will generate a very high level of additional NOI of EBITDA. That capital will largely flow to the bottom line. And in and of itself will delever above what is already happening today. So, before we even think about using equity outright, we have a lot of other tools available, and we plan to use all of those. And we would really limit equity to a defined use that we could present to the marketplace.

And I guess finally, was there any specific guidance for that ATM use in the year?

None is contemplated, either in the FFO numbers or in the capital plan, as no additional investments are currently contemplated as well. But we obviously expect we will do some.

Great. Thank you, all.

You do have a follow-up question from John Guinee with Stifel.

Can you give us a little more color in terms of the major moveouts in the Dulles Corridor? I don't know if Bob is on the call or not.

He is not, but I can certainly walk through those.

I guess first was Computer Associates which, you know, we captured in our press release about that deal. So, the space Computer Associates gave us back is being taken by Deltek, coming out three of our other buildings. So kind of net-net, it really results in Deltek's space that we're left to lease. That was about 117,000 square feet. Verizon gave us back 91,000 square feet. National Rural Utilities Corp has given us back 97,000 square feet. And I'm just looking for the next largest one on the list here. We had a 20,000 square footer in our research office center portfolio in suburban Maryland also giving us back space.

And National Rural Utilities and Verizon, did they go to a different building, or did they leave the market?

National Rural is going back to, I believe, owned facility, and Verizon was just a downsizing. We had them at 180,000 in total and retained half of their tenancy.

Got you. Thank you.

You're welcome.

Thank you, John.

There are no further questions at this time.

All right. Great. Thank you all very much for participating in the call, and we look forward to updating you on our business plan progression on the next quarterly call. Thank you.

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