Brandywine Realty Trust (BDN) 2011 Q1 法說會逐字稿

Good morning. My name is Latangia and I will be your conference operator today. 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 speaker's remarks, there will be a question-and-answer session. (Operator Instructions).

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

Latangia, thank you very much. Good morning and thank you all for joining us for our first quarter 2011 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 of Portfolio Management and Investments; and Howard Sipzner, our 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 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 results filed with the SEC.

As our first quarter results indicate, our 2011 business plan remains very much on track. Market conditions continue to improve, and we are seeing increased activity levels through most our markets. The pace of tenant contractions has slowed. This dynamic, coupled with increased tenant activity levels reflects the steady state of recovery. While business outlook remains positive, economic uncertainty does remain an ongoing concern. Macro issues such as job creation, the federal deficit, the divide on public policy, state and municipal budgetary constraints are all keeping uncertainty at the forefront of many business leaders' thinking. However, bottom line, consistent with our long-held view, we expect the real estate recovery for suburban office space to continue, be steady, but remain slow.

Looking out over the next several quarters, we anticipate the following within the Brandywine portfolio; with the markets still in the recovery phase, we will generate leasing results primarily by increasing market share rather than through our markets operating at the historic absorption levels. Leasing activity levels will remain constant and in some markets, continue to increase. Most of our markets will continue to have a tenant-driven pricing dynamic, but we are also seeing encouraging signs of rental rate growth in some of our core suburban markets where our vacancy rates in Class A products have continued to decrease. The flight up the quality curve by customers will continue and will directly benefit our portfolio. This benefit will be additional absorption, not necessarily across the board upward pricing pressure, as many tenants are looking to more the higher quality buildings at higher price points because they anticipate a longer term rental rate recovery.

In looking at our plan, we are 82% complete on our 2011 speculative revenue targets and 46% completed on our 2011 renewals. Pages 29 and 30 of our supplemental package summarizes our progress on these various business metrics. George will review in more detail, but all operating metrics were in line with our business projections and we saw continued acceleration of our 2011 revenue targets. Looking at the balance of the year, we expect stable to improving occupancies, consistent same-store numbers and a declining mark-to-market, all reflective of the continued improvement in market conditions. Our concession packages have remained fairly steady and where we are seeing capital costs increase, we are getting more lease term.

So with those overview comments, highlights from the first quarter results are; we exceeded the first quarter consensus by $0.0.1 and posted FFO of $0.33 per share. As such, even with our debt issuance acceleration, we raised the bottom end of our 2011 FFO guidance up $0.01 for new guidance range of $1.27 to $1.34 per share. Howard will review our financial performance and related implications in more detail in a few moments.

We also posted another quarter of leasing activity in excess of one million square feet. That strong performance was further reinforced by a tenant retention rate of over 68%. The overall tone of the market continues to be positive. Our new leasing pipeline stands at 3.2 million square feet, of which 482,000 is in active negotiations.

Our conversion rate also continues to improve. For the first quarter, that conversion rate was 40%, and we executed 37% of our first quarter leasing transactions on a direct basis. Four out of seven of our primary markets experienced positive absorption for the quarter, led lead by Austin, Texas, Richmond, Virginia, Philadelphia, BCD, and our New Jersey, Delaware region. Leasing activity levels were up in all but one of our markets for the first quarter compared to the same quarter last year.

Another sign of improving market conditions is that traffic throughout our portfolio was up 40% from Q4 and up 30% year-over-year. All of our operations reported much higher levels of leasing activity in Q1 versus 2010, in some cases, by very wide margins. These activity levels are fairly broad based with no one particular industry leading the way.

As we have talked before, market share remains key, and on that front our plan continues to progress well. By way of example, in southern New Jersey, our leasing teams did 53% of all deals in the market compared to a 20% ownership stake. And that was accompanied by a strong performance in our Pennsylvania suburbs, where we captured 32% of the market share for new leasing activity versus a 14% ownership stake. The markets in which we expect to continue performing well in 2011 are the Pennsylvania suburbs, Philadelphia CBD, Richmond, Virginia, and Austin, Texas. We continue to expect to face continued leasing challenges in our New Jersey, Delaware operations as well as the Dulles toll road corridor in northern Virginia. Both of these operations have been impacted by a fairly high number of known tenant contractions and move-outs. These markets remain competitive, but traffic through our portfolio in New Jersey was up 78% quarter-over-quarter and 16% year-over-year. And activity on our toll road properties was up 33% quarter-over-quarter and 18% year-over-year. So we're seeing an increasing number of activities through our portfolio basis in those markets.

Looking at our overall business plan, consistent with prior calls, our 2011 plan -- business priority is leasing vacant space. That's clearly our biggest growth opportunity. Our plan projects our year-end 2011 forward leasing percentage to be 88%. But our stretch objectives anticipate exceeding that. There is no single bigger contributor to our growth profile than simply leasing our existing vacant space. We are making strong progress on that front, and that remains the number one priority focus for the Company for the balance of the year.

Looking at the broader investment market, the investment market clearly remains bifurcated between the gateway and the non-gateway markets. During the quarter, we continued to pursue a number of transactions in the Metro DC market place, but no opportunities met our entry point pricing and future growth objectives. Given the tremendous investment demand in pricing in that marketplace, we are exploring a joint venture program on several of our northern Virginia assets to harvest both existing value and to form a cull investment vehicle to acquire additional properties. This process is going well, and we would expect that if it is successful, a transaction would close by the end of this year.

Additionally, we continue to evaluate the sale of several other non-core assets in northern Virginia in response to the very strong investor demand in that market place. While this near-term tactic runs counter to our overall strategy of increasing our revenue contributions from the Metro DC region, it does reflect our approach of defining core versus non-core properties and taking advantage of pricing windows to optimize value on non-core assets. Outside of Metro DC, the investment market is still only in the nascent stage of recovery. However, pricing levels in those gateway markets are driving increased amounts of capital to look at some of our existing markets outside of DC. We are beginning to see this, and we do expect that investment demand in our other markets will pick up significantly as the year progresses, and we have identified a number of non-core assets for sale. The plan is currently structured, incorporates a sale of about $80 million of properties in 2011 and the business model has those sales occurring with a more heavy weighting toward the second half of the year.

During the quarter, we completed the acquisition of Overlook I and II, which are two fully leased buildings in Richmond, Virginia, aggregating 126,000 square feet, for a purchase price of $12.5 million. The price per square foot was $99 with a going-in cash cap rate of about 11%. We don't have any additional acquisitions built into our 2011 plan. We will continue to see quality additions to our portfolio, both directly and through joint venture opportunities and would anticipate that those investments would continue to be financed primarily on an all equity basis.

During the quarter, we issued about 200,000 shares of common stock under our continuous equity program, realizing $2.2 million of net proceeds. Subsequent to quarter end, we issued an additional 500,000 shares under the program, realizing just shy of $6 million of proceeds. We have 8.6 million shares remaining under this program. We remain fully committed to moving up the investment grade ratings curve. As we have discussed before, this 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 a balance sheet improving basis. While reducing overall debt levels will continue as part of our plan, the largest driver in reducing our EBITDA multiple to our target level of the mid 6's is simply achieving our leasing objectives.

As mentioned in our last call, our 2011 capital plan originally anticipated a $300 million seven or ten-year unsecured note issuance in the fourth quarter of 2011.As we previously announced, we took advantage of a favorable debt market to complete the early execution of a $325 million, seven-year unsecured financing at a coupon of 4.9% with a yield-to-maturity of 5.137% and realized $319 million of net proceeds. We used the net proceeds of this note issuance to repay the full outstanding balance of our unsecured revolving credit facility and establish cash balances for both general corporate purposes that include the future repayment of maturing indebtedness.

At this point, let me turn the presentation over to George Johnstone. He will provide an overview of first quarter operational metrics. George will then turn it over to Howard for a financial review.

Thank you, Jerry. Leasing activity for the quarter was solid, resulting in significant progress on the business plan. During the quarter, we commenced 1.1 million square feet of leases, including 443,000 square feet of new leases and tenant expansions. We had 232,000 square feet of contractions by tenants who did renew a portion of their lease, 200,000 square feet of which was in our northern Virginia portfolio. An additional 173,000 of tenancies simply vacated at the end of their lease term, 75% of which were office closures and or company downsizings. This activity resulted in absorption before early terminations of 38,000 square feet. In terms of early terminations for the quarter, several of these were negotiated to accommodate existing tenant expansion. Only 20,000 square feet of the 138,000 square feet that terminated is left to lease. Occupancy at March 31st was 85.3%, down 30 basis points from last quarter, but inline with expectation.

As a result of our leasing efforts this quarter, we have again increased the amount of speculative revenue on our plan. Our revised target for the year is now $32.4 million, up $1.7 million or 5.5% from previous guidance. As of today, we have achieved $26.6 million or 82% of that spec revenue. As the graph on page 30 of our supplemental package portrays, only our Austin operation has yet to reach the home turn. However, the pipeline of activity is strong, including several leases currently being negotiated, that would bring this region into the 70th percentile of achievement.

Expectation on tenant retention remains unchanged at 56%. We are still estimating a decline in same-store GAAP NOI between 4% and 6%. Rental rate declines have improved, now down 1.5% to 3% on a GAAP basis, and down 6% to 9% on a cash basis. Our actual rental rate declines on the 82% of the plan achieved to date, have been a decline of 2.1% on a GAAP basis, and down 9.5% on a cash basis.

As we assess the open assumptions in the plan for 2011, for new leases, there is an active line of prospects. 482,000 square feet of which are under negotiations and 2.7 million who are in receipt of a proposal. In order to achieve the open leasing assumptions in our plan for new leasing, we will need to convert 32% of today's active pipeline. As Jerry mentioned in his commentary, our conversion rate during Q1 was 40%.

In terms of projected occupancy, we now expect the trough to be 84.8% during the third quarter. This is a 60 basis point improvement over our last update. Occupancy will improve 90 basis points in the fourth quarter, to close the year at 85.7%. Two regions worth highlighting; Austin, as mentioned earlier, has several deals in negotiations that will backfill the known move-outs in the second quarter, restoring occupancy to 96.2% at year-end. Richmond also has a strong pipeline of activity in advanced stages to offset its second and third quarter move-outs, restoring occupancy to 91.6% at year-end.

We are pleased with the level of achievement to date on our plan. And with that, I will now turn it over to Howard for the financial review.

Thank you, George and Jerry. In the first quarter, FFO available to common shares and units totaled $48.2 million or $0.33 of FFO per diluted share, which beat the analysts' consensus by $0.01 per share. It is a high quality FFO figure, in that our first quarter termination revenue, other income, management fees, interest income and JV income totalled just $6.1 million on a gross basis or $4.6 million, net of associated expenses, inline with our 2011 guidance range for these other revenue components and below 2010 levels. The FFO payout ratio in Q1 2011 is 45.5% on the $0.15 dividend we paid in January 2011 for each common share.

A few other observations on the components of our Q1 2011 results; cash rent at $115 million, was up $5.1 million versus Q1 2010. Straight line rent of $4.7 million was up $1.8 million versus Q1 2010, and up $200,000 sequentially versus Q4 2010. The quarter-over-quarter increases are primarily attributable to the post office and garage completions related to the IRS campus and the Three Logan acquisition, all in Q3 2010. Recovery income at $23.1 million and our recovery ratio of 38.2%, reflected typical expense recovery condition, along with higher snow recoveries and are inline with our expectations. Property operating expenses and real estate taxes were essentially flat sequentially, as higher snow costs in Q1 were offset by lower expenses in several other operating categories.

Interest expense of $32.4 million, decreased sequentially by a full $3 million, as we temporarily benefited from a higher level of floating rate debt and the accumulated benefits of 2010 bond repurchase activity. Interest expense in Q1 includes $272,000 of non-cash APB 14-1 costs related to our remaining exchangeable notes, and just $380,000 of capitalized interest or $540,000 less than we had in Q4 2010, and $2.8 million less than Q1 12010, reflecting the lower development activities.

G&A at $6.2 million was inline with our expectations. In Q1 2011, we had benign credit conditions with net bad debt expense of just $366,000, inline with expectations.

For the quarter, same-store NOI declined 5% on a GAAP basis and 5.3% 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, all inline with expectations.

2011 first quarter CAD decreased sequentially to $25.4 million from $26.5 million, and measured $0.18 per share. We achieved an 83.3% CAD pay-out ratio for the first quarter. Revenue maintaining capital expenditures were elevated, due to timing of disbursements on previously executed leases.

In terms of 2011 guidance, as Jerry noted, we are increasing our previously issued 2011 guidance range from $1.26 to $1.34 per diluted share, by $0.0.1 on the lower end, to now be $1.27 to $1.34, notwithstanding the approximately $0.05 dilutive impact of the early bond financing. Following our $0.33 per share Q1 result, this translates to a quarterly rate of $0.29 to $0.31, if we exclude the $0.07 historic tax credit transaction impact that we'll recognize in Q3 2011.

George mentioned many of the portfolio metrics that we expect to see going forward, so I'll just touch on a few other elements of our guidance plan. We are still projecting $20 million to $25 million of gross or $13 million to $18 million of net all other income items, such as termination revenues, other income, management revenues, less management expenses of net, plus interest income and JV income, and in that case, including the Thomas properties investment as a preferred return on our investment andany bond repurchase losses, to the extent we move forward at that front. At the mid-point, this bucket is about $6.8 million or $0.05 per share below our $28.3 million gross, $22.5 million net 2010 figure.

G&A should remain flat at $6 million a quarter. Interest expense will rise now for 2011, and we see it in a range of $136 million to 140 million, increasing slightly as we move through 2011 quarter-over-quarter and up $6 million from prior guidance, due to the impact of the early 2011 bond issuance. As I mentioned previously, the net historic tax credit recognition impact will be about $0.07 per share and we will recognize that in the third quarter of 2011, as $0.08 in a new revenue line item 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% each year over five years of the net proceeds to be realized in connection with the historic tax credit financing on the post office project.

We still project $80 million of 2011 sales activity, up to a 10% cap rate, but as Jerry mentioned, these are now more weighted to year-end, with approximately a $1.8 million income loss included in our model for these sales. We don't anticipate any additional issuance under our continuous equity program in our guidance, nor any additional debt buy back activity. Our assumed share count for FFO purposes, is therefore, 147 million shares.

On the capital plan, we really are in great shape. We have total capital needs of $350 million over the last nine months of 2011. This would include $100 million of investment activity including -- incorporating up to $5 million to finish up any remaining billings on the post office and garage, $50 million of revenue maintaining capital expenditures over the last nine months, $30 million for remaining redevelopment outlays and lease-up of recently completed or acquired projects, and we still expect to fund $15 million in 2011 for commerce JV contributions.

We see $179 million of debt repayments, $60 million for the 2011 exchangeable notes, $6 million for interim debt repurchase and $113 million for mortgage repayments. I will point out that we extended our $183 million funded bank term loan and $600 million unsecured revolving credit facility, both to June 29th, 2012. We also will distribute about $71 million of aggregate dividends on our common and preferred shares.

To raise this $350 million, we are projecting or have already completed the following; $119 million of cash flow before financings and investments, we'll still fund an additional $3 million, most likely in the second quarter, the final installment on the historic tax credit financing, the $80 million of sales, and the now completed $325 million unsecured note issuance. The result of these capital activities will be an effective $170 million credit facility pay down through year end 2011 and a projected year end balance of $27 million versus $197 million that we had at quarter end March 31st. We actually now have about $70 million of excess cash on hand and zero outstanding on our credit facility, following all of these activities.

Our receivables at $331 were $15.3 million reserves -- I'm sorry, at $331, were $15.3 million, $3.7 million on $22 million of operating and other receivables, and $11.6 million on $111 million of straight line rent receivables. All of these percentages and aggregate amounts are inline with historical levels.

Our balance sheet and credit metrics remain strong, with debt levels inline with expectations. Our balance of fixed and floating rate debt at a comfortable level, and our overall unencumbered portfolio running at very high levels. We are 100% compliant on all of our credit facility and indenture covenants.

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

Howard, thank you very much. George, thank you as well. To wrap up our prepared part of the presentation; fundamentally, we are very pleased with first quarter results and the progress made towards executing our 2011 business plan. During the quarter, solid leasing activity and very strong tenant retention rate, good control on capital costs, coupled with our investment program and bond offering solidified our framework for success in executing our overall 2011 plan.

With that, we are delighted to open the floor for questions. We would ask that in the interest of time, you limit yourself to one question and a follow-up. Thank you.

(Operator Instructions). Your first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Thanks, good morning. Jerry, I'm curious about the joint venture plan. It sounds like you are in the process of -- I know you might not want to be too detailed here -- but any additional color you can provide on the strategy and the thinking, maybe the scope of such a sale. And what kind of ownership you would look to retain or the strategy on -- if it's longer term. That would be helpful.

Happy to do it, Jordan. And Tom, please weigh in. The structure that we are looking to achieve is -- really there are two goals we mentioned, which is: harvesting some value from some existing properties and then coupling that with an equity commitment from our institutional partner going forward to enable us to acquire some very high quality assets we'd bring into our portfolio on a joint venture basis. We have identified about $150 million of properties that we would contribute to that joint venture. Tom is running that program for us, we've just simply entered the market in the last week or so, in terms of contacting institutions. The objective would be to spend the next quarter or so working with some of those potential partners on, both underwriting our existing assets and developing a framework for co-investing going forward. And if we can reach an agreement on those terms and consummate the venture, the targeted investment area would be Metro DC, with primary emphasis on inside the Beltway and inside the district.

And so you basically seed the JV with $150 of your assets and then there is an equity commitment from an institutional partner and the objective is to basically increase the exposure to Metro DC, closer in, and maybe in the CBD -- within the JV.

Within the JV, yes.

And you have identified assets for acquisition for the JV?

The good thing about Metro DC is there is no shortage of assets entering the market on a daily basis for targeted investment opportunities. We have identified the Brandywine assets we would contribute. We have a solid pipeline of potential investments that we are reviewing as part of that discussion with joint venture partners. But no one specific asset has been identified, simply given the uncertainty of both the execution and the timing of this joint venture effort.

Jordan, this is Tom. We have been looking as assets, as you know, throughout the year. And so we have identified certain assets that we feel would be assets we underwrote. So far this year, there are recent transactions and we playing those out as transactions we would target with the committed equity. We are showing them a profile of asset that we would like to see in the targeted market, which we believe should be inside the Beltway and potentially including the District.

I assume the assets you'd seed with would be stabilized assets?

We have looked at a mix of assets. One stabilized, one that may have a little more role of leasing and a little more vacancy. We are blending it to be a little bit of growth as well as stable.

I'm curious, why the joint venture structure for the new investment?

As we have been pointing out every quarter, we've been looking at the assets -- we feel strongly that the best growth is for assets inside the Beltway. And as we take a look at some of the transactions that have been occurring inside the Beltway; the yields have been fairly low, pricing has been high. We feel that at least if we have a partner, we can take advantage of the mortgage financings that are very strong for these assets. We will be able to increase our footprint by bringing in an institutional partner.

Thank you. I will get back in the queue.

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

Yes, David Shamis on with me. Just following on the joint venture, from a size stake perspective; how much equity are you looking to raise above and beyond contributing your assets? Is this a billion dollar joint venture or is it $750 million?

And Tom, to your point, yields are very low in the district. How do you think about that relative to your cost of capital on an equity side, which is higher? I would assume that the assets you contribute in the JV are going to be higher yielding. If you raise equity your stocks trading at a lower multiple, higher implied cap rate, become difficult to make the deals accretive.

To answer your question on equity, we are looking to raise about $200 million committed equity from an institutional partner. The size of the platform will depend on a couple of factors, including what interests we maintain in it, different investment partners will have different parameters on that. As well as how much leverage we put on the asset, it could range anywhere from 40% to 60%.

In terms of our yields, I think when you put our equity position below 50%, it could be as low as 25%, and then you couple that with a modest mortgage in the 40% to 60% range, the returns begin to not look as dilutive, as long as we also maintain management leasing of the properties.

Hi, guys, it is David here. Turning to your guidance, it looks like your year-end occupancy guidance hasn't really changed from around 86%, but at the same time, you are effectively increasing your FFO by $0.06, in part due to better leasing. Just wondering if you can explain that.

Yes, part of that is just the same level of leasing just earlier than anticipated -- is really the primary driver. Some deals that we thought were going to commence third or fourth quarter, we have actually been able to accelerate the timing on those.

Okay, thanks.

Your next question comes from the line of Anthony Paolone with JPMorgan.

Thanks, good morning. On the $80 million of asset sales you outlined, I was a little confused. Did that include the contribution of assets into the joint venture? Or is that other stuff? I couldn't tell whether you also meant that that also incorporated potentially going further out into the non-core stuff outside of northern Virginia that you might sell.

Tony, it is Howard. Those are two different initiatives. The $80 million is sort of our baseline property disposition capital recycling program -- part of the capital plan, part of the asset plan. The JV that Jerry and Tom talked about is really a focused initiative, how to increase presence, ultimately, in the Metro DC area.

And so that $80 million then, that would include the non-core stuff in northern Virginia you said the bid looks strong enough that you are willing to cut those assets loose?

It could. At this point, a lot of that assumption is generic, without specific assets identified until later in the year.

Those assets, Tony, would be in the queue that we are evaluating for meeting that target.

Got it. And then can you give us an update on your leasing progress at Three Logan, both in terms of addressing the tenants that come due next year? And also, requirements for large space you might be pitching for the vacancy in that building?

Sure. We continue to be very pleased with the activity and the tone and the stage of the discussions we are having with both, some of the existing sub-tenants and with new tenants on the vacant space. You may recall, we have 400,000 square feet to lease in that building, in the lower half of the project. We are operating under a letter of intent -- executed letter of intent and advanced lease negotiations with one tenant for about 150,000 square feet. We are also in very advanced discussions with about another 350,000 square feet of tenants for that bottom half of the building. The rental rates are very much inline with our projections. Capital is in line on a couple of the deals, it is a little bit higher on a per square foot basis, but we are picking up an additional five to ten years of lease term. So when we look at it, it is a much more effective deployment of capital than even our pro forma contemplated.

On the upper half of the building, we have made very good progress with extending a number of the sub-tenant leases. We have frankly put a little bit of that on hold, given the accelerated activity we are seeing on the bottom half of the building. Once those activities achieve more clarity and we get some of that bottom level space put away, then we will reinvigorate some of the discussions on the upper banks. All in all, great level of activity on the existing space, the existing sub-tenants who we have not renewed continue to clamor for renewals, so we expect to meet our targets on the upper half as well.

Thank you.

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

Thank you and good morning. I'm hoping you guys can talk a little more about sentiment among tenants across your major markets? How things feel this quarter versus last quarter, especially given some of the macro headwinds we're seeing -- and even with the removal of QE2, what people think may happen to their businesses?

Right, I will start that off and George, maybe you can fill in, based upon what you're hearing from the field folks. Generally, the best bell weather for us are the activity levels and the amount of that activity that is actually converting to leases. That tells us people are doing some forward planning. Perspective customers are assessing their options and actually making capital decisions on how they run their business.

Jaime, there has really been no change significantly up or down since we had this conversation on the last quarterly call. I think even with the positive bias, I do think some of those points we talked about at the beginning of the call, in terms of the federal deficit, the continued emergence of state budget crisis in almost every state we do business in, and including some of the major municipalities. That's created a bit of an overhang on where tenants look to relocate their businesses. But generally speaking, we are very confident with what we have seen, that our customer base, both existing and perspective, have really shifted from an expense control margin, maintenance mentality in how they run their business to one that's much more focused on revenue creation. When that shift occurs, that tends to portend good things for the office business because they look at what they need to do, in terms of creating a platform to accomplish those revenue goals over the next few years.

And George, maybe you can add some additional color.

Jaime, we continue to see good levels of activity and we also see that -- we are still signing over one million square feet of leases per quarter. And we have been able to maintain approximately one-half million square feet of forward leasing and one-half million square feet in that advanced negotiation stage. Even with the success of converting proposals into leases, we are then also converting other proposals and inspections into active lease negotiations. So the pipeline remains strong. All of our regions, reported increased traffic levels, and as we alluded to in our prepared commentary, inspections were up 40% over last quarter.

Does that answer your question, Jaime?

Yes, thank you. If I could just ask a quick follow-up, Jerry, can you talk about the decision to invest further in Richmond, given -- sounds like you want to stay in some of the better growth markets, like a northern Virginia or inside the Beltway. That just seems a little off.

It's actually not too off, in terms of how we assess things. The property is located in the Innsbrook section of the Richmond suburban market. The buildings were actually built by our team down there. There is -- the buildings are fully leased with no real significant rollover for the next several years. Rents are pretty much tagged to where existing levels are today. From our standpoint, it was really an opportunity to buy a property at a very, very attractive price per square foot, very good going in return with good growth objectives coming off that specific asset base. So that thought process we go through is very much in -- was very much inline with what we typically evaluate on any acquisition, which is entry point pricing, both in terms of price per square foot, specific rollover characteristics, and what we think we can realize from a gross standpoint off that one asset.

And we looked at Overlook I and II. The quality asset was very good, so it was a positive quality addition to our Richmond portfolio. It was, from an occupancy margin tenant mix standpoint, a positive for our market position in that marketplace. And we look at the entry point pricing and the rental levels currently being paid. We thought it had the ability to be at the upper end of the performance curve of our existing Richmond portfolio.

Thank you.

You are welcome.

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

Thanks, good morning. Jerry or Tom, could you give us a sense of how big the pool of assets is, the non-core assets? The $80 million that you are planning to sell this year; how big that pool is overall? And what we might expect for, as we look out over the next several years, what those dispositions of non-core assets may look like?

Yes -- as we look at it, we probably have -- and you take a look at what we have done the last several years, in terms of selling non-core assets. We defined what is core and what is non-core through a collaborative process with our field personnel and our investment team here at corporate, where we look at the property's ability to generate additional tenant activity for us, operating efficiencies, costs to maintain that asset at a high leasing level and what we think the ultimate quality issues are relative to the rest of the portfolio. So with that as our framework, we have identified $80 million of sales as the target for this year. We would expect probably in 2012 to be at that level as well. And we certainly look at being able to spin-off some of the non-core assets in a fairly programatic way as the investment market recovers.

The exceptions to that are obvious. We have announced publicly that one of our plans is to exit the California markets over the next couple years. So where those assets are some very good quality assets, just from a market positioning standpoint, they are not deemed to be core. So we would expect that that $80 million might be accelerated beyond that level due to getting something done in California in the next couple years.

And would the hold back, in terms of increasing that target for this year, I would say maybe over the next couple of quarters, be on the flip side, what you could invest in? Is that what the difference would be, in terms of if you accelerated $80 million up to $150 or something like that?

That's a great question, Brendan. And it is really -- the reinvestment lag time, so to speak, is not really a primary determinant of how we set our sales targets. It is certainly something we are mindful of, in terms of the impact of our guidance. But the fundamental reality of what we do on all of these properties that we've targeted for sale, is that we track the investment market very closely.

As we alluded to in my comments anyway -- the investment market is really just starting to take hold in some of these non-gateway markets. Pricing pressures in a DC and a New York and some of the real cache markets have now reached an inflexion point where capital is beginning to look beyond those key markets into markets like a Philadelphia, et cetera. To the extent that that accelerates and we think there is an opportunity to sell some more assets at what we think is optimal, best value pricing, and define that as the sales price exceeds the MPV of the hold, then you could see the sales number accelerate. We are not operating under any governor that says we -- until we can find a reinvestment solution, we won't optimize vale on a non-core asset.

Sure. And a quick follow-up to the earlier commentary on the 350,000 square feet of tenants that you are in advanced discussions with at Three Logan; are any of those tenants that would come out of your existing portfolio or is all of that organic growth for BDN?

They would be new additions to our inventory.

Great. Thank you.

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

Yes, good morning, guys. Howard, with regard to the proposed asset sales, the joint venture and potentially investing in new, whether it be value add or core buildings in and around Metro DC; what is your outlook for fixed charge coverage, particularly this year, as occupancies relatively flat from the beginning to the end of the year? And how do you feel that these changes to the disposition plan or accelerations would impact that number this year?

Well, David, the most significant impact to the coverages this year are going to be the early execution of the unsecured financing. So as I mentioned earlier, they will boost interest expense over the course of the year and put a little bit of downward pressure on those coverages until we see greater recovery in the overall occupancy levels. Nothing outside of what we can tolerate, given the rating, but certainly putting a little bit of downward pressure on those numbers.

And the transactions you talked about and the guidance you gave for the NOI reduction from the asset sales in your prior comment; what type of impact does that have, if meaningful, to the coverage going into the early part of 2012?

Going into 2012, those sales would be fully annualised and would have impact as it picks up through the first quarter. But still a bit early to match up with that, what we expect to have happened on either the leasing side or potentially the investment side. Either of those could be meaningful offsets to that phenomena.

Great, thank you.

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

Good morning, everybody. Just on speculative revenue, I was looking back at our notes from third quarter of 2010, you had targeted speculative revenue of $25 million for 2011 and it is now close to $33 million. Can you talk -- can you bifurcate what is driving those increases? Is it just a conservative posture to begin with? Or could you comment where it is coming from, either from new leases or renewals or whatever? If you can break it down a little bit.

Sure. When we put the $25 million target out, that was based on the original roll-up of our 2011 business plan, which I think was, in someways, conservative. I think the field took the appropriate approach, where if they didn't have a live prospect or were not in active negotiations with an existing tenant, then they kind of either left the space vacant or assumed that the renewal would not occur and wrote them out of the plan. We've seen new leasing go from $13 million in that original $25 million, up to $18 million. Some of that, as I alluded to earlier, is the fact that some of the new leasing has occurred earlier in 2011 than once forecasted. And then we have also seen an increase in renewals from $12 million in the original $25 million to where we are now at $14.5 million in our current $32.4 million target.

Great, That's great color, thanks. And then a follow-up question on New Jersey. Obviously, that had been a thorn in your side over the recent past. You have had some good progress recently. Did that change your strategy at all, as it relates to what you might end up doing in New Jersey?

In terms of whether we will be selling assets there or not, is that --?

Yes, yes.

No, I don't think so. I think the strategy we've laid out for Jersey is pretty clear. Mission critical for us was to recover from some of those large tenant contractions we experienced in late 2009 through 2010 and into 2011. So we have some wood to chop there to stabilize some of those assets. Conversely, I think George Sowa and his team have done a very good job, in terms of really outpacing what we thought our market share would be in the last couple quarters, both in terms of renewing existing tenants, but more importantly, bringing new tenants into our portfolio.

The other piece of color on that is -- the larger blocks of vacancy we have in south Jersey are literally in the best buildings in the marketplace. I know that is somewhat faint praise. But if you have to have vacancy, you want it in good buildings so you can lease up at a pretty accelerated pace, versus buildings that aren't as good. I think that is part of the reason we are seeing some of the activity. We have a very strong market position, good leasing team there and good quality inventory that is available in fairly large blocks of space, which is really not the driver in that market. There are a lot of smaller blocks of space available, not a lot of larger blocks.

But we did achieve some sales at the end of last year in south Jersey. We have certainly programmed some additional sales in New Jersey this year. And we would expect that to continue to progress. Certainly, one of the things we have followed with great interest is the potential sale that BXT announced on the Carnegie asset earlier this week. With that pricing per square foot and the projected cap rate we think is very attractive, and we hope that will be a harbinger of more investors looking at New Jersey as a viable place to invest capital on a risk adjusted basis. If that trend line continues, we would anticipate accelerating our efforts in New Jersey to achieve some of those sales.

And just a related quick one, the 88% target occupancy, what is the time frame to get there, portfolio wise?

I'm sorry?

You mentioned 88% as your target occupancy.

Well, I mentioned 88% is our targeted leasing percentage at the end of this year. We are happy and we talked about it in the last call, we are actually getting back to where we have historically been, which is about a 200 basis point spread between occupancy and forward leasing.

Got you, great.

And the game plan is to maintain that and hopefully accelerate it with some of the work George and the operating teams are doing.

Thanks very much.

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

Jerry, the leasing pipeline came down from 3.8 to 3.2 million square feet. Factoring in with what your discussions about activity levels, is that based just on execution?

Yes, I think we were able to actually execute a lot of activity within the pipeline and are waiting to rebuild the tool back up. We have been able to maintain a pretty good percentage of the pipeline in active lease negotiations. You have to remember the numbers that George cites are really -- defines our pipeline as tenants who have received a proposal through lease negotiations, not tenants that were responding to an RFP on, we've done space showings, they are more the traffic counts. There is really two data points you need to look at, in terms of measuring the through-put in our portfolio. One is activity levels, the actual number of customers that come through our portfolio. And as we've talked, that's up nicely across the board. Particularly, as we talked about in New Jersey and in the Dulles toll road carter. The leasing pipeline as we cite -- again proposals forward is down a bit from last quarter. That's just a function of where some of those customer discussions stand versus anything other than an uptick in traffic.

Yeah, Mitch, the other thing is, the 3.2 is new leasing only. There is another 750,000 square feet of renewal proposals that are in the pipeline. I would have to go back and double check if the 3.8 was exclusively new. But the 3.2 that we referenced in our commentary today was strictly new leasing and tenant expansion activity.

Great, thanks, guys, good quarter.

Thank you.

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

Yes, thanks. Just a quick question. I didn't hear you give -- did you give a yield on the Richmond acquisitions?

We did. It was a going in cash yield of about 11%.

Okay. And just as we think about your developments in Philadelphia going forward, how do you look at the Navy Yard versus what you have over at University City? And where do you think that shakes out in the next three to four years? How do you look at that?

Well, I think the Navy Yard as well as University City, where we have a large presence, I think are two very strong attraction points to continue to bring businesses in the city. The ultimate goal, obviously, is to continue to expand the amount of job growth and tenants who were domiciled within the City of Philadelphia. And I think the good work that is being done at the Navy Yard, along with some of the recent announcements, coupled with the continued progression of tenant demand in the University City section; all are additive to the overall health of the marketplace.

I think what you will see going forward is the emergence, really, of some additional markets within the City of Philadelphia. Whereas if you go back a long time, Philadelphia CBD was really, from an office standpoint, was defined as South Broad Street, East Market and West Market. As time has progressed, the premier office corridor in the CBD has really focused on the West Market Street corridor. And I think within the last five years, what you have really seen is the continued -- is the emergence of two new very vibrant submarkets. One is the University City submarket and the second one is the work being done at the Navy Yard. So as we look at it, it is an incredibly attractive selling point to bring businesses into the City of Philadelphia. And we would hope that both the growth in University City, the Navy Yard and Market Street corridor would continue.

Do you feel like the Navy Yard is culling more from New Jersey potentially than it is from suburban Philadelphia, even though they have announced some tenants moving out to that way from CBD Philadelphia?

The underlying presence of the planning process behind the Navy Yard was, given its proximity to Interstate 95, which is -- and close proximity to both the Benjamin Franklin and Walt Whitman bridges, that it would provide an attractive location for a company that had to draw either employees or customers from New Jersey or southern Delaware County or even out through Buxom Montgomery County. And I think you are seeing that happen, with what's happened with the Navy Yard in the last five years. I think that is why we are seeing a lot of the buildings that are typically more suburban in nature versus urban high rise. And that, again, would be a trendline that would continue.

Thanks.

The next question from the line of David Anderson with Green Street Advisors.

Good morning, guys.

Good morning.

Two quick questions. For the JV, just trying to get a sense of where do you see that, on a gross asset value, coming out? I know you had mentioned about a $200 million equity investment from the institutional partner. Do you have a sense, a ballpark of where, on a gross asset basis, you see that JV ending up?

Depending on where the ownership interests align, I think the gross asset basis will be over $600 million.

Okay. And that -- the ownership interest that is still influx, but maybe 25 or 50/50, is there kind of a couple of goalposts that you can set, in terms of where that might pan out?

Yes, look, I think in terms of -- we are early in the stages of investigating this as a potential option for the Company. But the joint ventures we have typically done -- Brandywine has retained a 20% to 25% stake. That is clearly a function of entry level pricing. A couple of dynamics taking place here. One is, we have identified some assets to seed this venture. As we continue through the discussion with some of these potential partners, how they are pricing that contribution will be a key determinant of whether we sell those assets outright or joint venture them. If we opt to joint venture them, the pricing will, to a great degree, determine what percentage ownership stake we remain holding.

Another factor in our ownership stake, going forward, will be the appetite of that potential partner to invest equity to expand the platform. We're want to be very mindful of our cost of capital being used to acquire assets that are clearly priced at below our cost of capital. The objective is to, through the financial co-investment structure, to achieve a result where we can have very good returns for our invested equity dollars.

Okay. Great. Thank you for that color. And just one other small follow-up. I'm just trying to reconcile something here. I know on your capital per square foot for lease year that you mentioned seems like a slight uptick this quarter but it seems like it was at its highest level since 2Q 2009. Not a meaningful jump, but I'm trying to reconcile that with some of the comments earlier about our CapEx going in, but we're getting greater lease term for it. Was this just a case of one lease with the [inaudible] requirements skewing the numbers for this quarter? Or is that kind of broad based?

I think it is a little bit broad based. But keep in mind, also, that what is in the supplemental are for deals that commence during the quarter, some of which were signed earlier in -- going back into 2010. I think some of our commentary is more -- that we made during the call, was more based on the deals we are signing today, where we have kind of seen a little bit of an increase in term. And would expect, going forward those, numbers would probably return back to where they used to be on a per square foot, per lease year basis.

Great.

I'm sorry, go ahead.

That was my question, thank you, guys.

Your final question comes from the line of Ross Nussbaum with UBS.

Hi, guys, good morning.

Good morning.

Two questions. One, operationally, are there any markets that you are in where rents are still declining -- where market rents are still declining? Or do you think they bottomed out everywhere at this point?

We think they have bottomed out, with the exception of potentially some of the larger deals in the toll road corridor and in southern and central New Jersey.

Okay. And the opposite of that question, any markets where you have seen a noticeable upward tick that you think is sustainable here for the rest of the year?

We have. The markets where we are seeing very good landlord pricing come back into vogue is in a couple of the core markets in the PA suburbs here; primarily Radnor, Conshohocken, some of our top product in Plymouth Meeting. CBD Philadelphia we continue to be pleased with the levels of rent -- both rent stability, but also some increases we are getting on some prospects down there. George, anywhere else that you think that -- ?

And I think in some of our assets actually in Richmond we are starting to see some of the more of the Class A midrise product.

Okay. And then lastly on the joint venture, just to flush out another question or two; how many assets and what square footage are we talking about, relative to that sort of ballpark $600 million number that you threw out to us?

The $600 million number assumes a lot of things. It assumes around 50% loan value on the portfolio going forward. Assumes about a $200 million equity commitment from the prospective partner, as well as a contributed value from our existing assets. So it is hard, Ross, to really put a number of square feet or a number of buildings on that, because that would be the ultimate call it, quote, unquote, build out of the venture. Once we make the asset contribution, Brandywine commits some of its capital and the partner commits their capital share and then we got out and we require additional properties on roughly a 50% LTV.

What stage are you at here? Down to a final couple of partners? Or are you really just dealing with one?

As I indicated, and Tom reinforced, we have just really started that process. We are in the market. And we have identified about a dozen different prospective partners that our team is having discussions with. Those discussions will ultimately winnow down the number to a few and then we will enter into advanced negotiations with a handful to see what the best results for the Company is.

From a timing perspective, would your goal be to have a transaction close by end of Q3? Q4?

As I mentioned in my comments, our objective would be, if this is successful, to get it done by the end of the year.

And obviously -- I'm assuming this is not in your guidance, so the near term dilution that would occur from selling a stake in a portfolio of this size, that is not contemplated in the numbers at this point?

It is not in our numbers right now. And the reason it is not a factor there, is we are not sure of the exact structure yet. We wanted to make sure that our investor base knew what we were doing. Secondly, it is too premature to identify what the dilutive might be, because we have not identified the -- either the pace of reinvesting those proceeds in new assets and the attendant returns we get from those assets plus the fee income that we would achieve through the venture, or identified what we would do with those proceeds in the interim, whether that be other investment opportunities, to reduce debt, or whatever it might be.

Thanks very much.

We would certainly anticipate, as this thing got more into focus, we would be able to quantify what the impact of those various points would be.

Appreciate it. Thank you.

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

Only to thank everyone for their participation and we look forward to making continued progress on the plan and updating you in our next quarterly call. Thank you very much.

Thank you for participating in today's conference call. You may now disconnect.