Brandywine Realty Trust (BDN) 2012 Q1 法說會逐字稿

Good morning. My name is Latangi, 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. (Operator Instructions)

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

Latangi, thank you very much.

Good morning, everyone, and thank you for participating in our First Quarter 2012 Earnings Call. On today's call with me are George Johnstone, our Senior Vice President of Operations; Gabe Mainardi, our Vice President and Chief Accounting Officer; Howard Sipzner, our Executive Vice President and Chief Financial Officer; and Tom Wirth, our Executive Vice President of Portfolio Management and Investments.

Prior to beginning, I'd like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the Federal Securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that 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.

So with that said -- the first quarter was a solid continuation of the momentum we built in 2011. My comments will provide an overview on our three key focal areas of operations, balance sheet management and investments. George and Howard will then discuss our operating and financial results in more detail, and certainly Tom and Gabe are available to answer any other questions.

First, an overall observation -- general economic uncertainty we see every day is moderating the pace of the office market recovery. One day the news is good, the next day not so much. However, the general (inaudible) line remains positive. And based on what we see at least in our markets, the office market recovery is certainly continuing. Vacancy rates continue to decline in most of our markets. First quarter leasing activity in most of our markets was lower than in the fourth quarter of 2011, but generally as expected.

Leasing remains our number-one priority, and market data supports continued confidence in our business plan. Several of our markets continue to have a tenant-driven pricing dynamic. But in other markets, we see encouraging signs of rental rate growth. Across the board in all of our markets, we're still benefitting from a flight up the quality curve as our product is at the top end of available inventory.

Our leasing approach remains tactical. That is, in some markets we are increasing rates, lengthening lease terms and creating downward pressure on capital concessions. This approach is working well in Austin, Philadelphia CBD and the crescent markets in the Pennsylvania suburbs.

In other markets, we're accelerating absorption through aggressively gaining market share. Results along these lines remain measurable and positive. And in these markets, particularly New Jersey and Northern Virginia, while we recognize we have marginal current pricing power, we are well positioned to achieve above-market absorption levels and position those portfolios for long-term growth.

Our watchword remains aggressive pursuit of tenants, with a goal of meeting all of our business plan targets. Based on our year-to-date activity and forward pipeline, as evidence of our confidence, we did increase our 2012 speculative revenue target by 2%. And year-to-date, we have achieved 80% of this new annual target.

Looking at the quarter -- we had good leasing benchmarks and solid operating metrics. Most notably, our pipeline of transactions, which we define as prospects who have been issued proposals, remains constant at 3.4 million square feet. The number and square footage of prospects touring or inquiring about our properties during the quarter averaged 37 companies and 400,000 square feet per week. For the quarter, these numbers were 26% greater than in the fourth quarter of 2011.

So while general market activity leasing levels were generally down, we had a very good quarter of tenant inquiries and inspections, evidencing from our standpoint continued emergence of tenant demand and the previously mentioned flight to quality product and landlords.

Our goal of having positive same-store growth for 2012 remains on track. Mark-to-market leasing spreads were consistent with our 2012 business plan, albeit lower for the quarter, particularly on a cash basis, than our targeted run rate for the year. For the balance of the year, we expect better forward leasing spreads based upon the composition of our projected leasing activity.

Concession package remained fairly steady. Where we are seeing higher capital costs, we are attempting to mitigate that through extended lease terms. Our TI costs for the quarter were in line with our business plan assumptions but continue to be an area of heightened focus. George will address capital in more detail, but our CAD ratio this quarter was a solid 79%. We also had positive absorption for the portfolio this quarter.

George again will touch on these operating metrics and pipeline activity in more detail. But from an operating standpoint, we're pleased with the quarter and, more importantly, with the continued improvement in the overall tone and velocity of our tenant traffic.

Looking at our balance sheet -- we remain extremely liquid with no near-term debt maturities. Additionally, with the exception of $100 million that remains floating, we are completely insulated from any floating rate interest risk. Continued NOI improvement, augmented by our investment strategy, will continue our EBITDA-improving deleveraging program. We closed the quarter with $334 million of cash and securities on hand as a result of early asset sales and the funding of our previously announced $600 million term loan facilities. These cash balances provided funds to retire the $151.2 million balance of our 5.75 unsecured note that was due April 1st.

Liability management efforts continued during the quarter, and we purchased $4 million of our unsecured notes. While we incurred a slight loss on that extinguishment, it does represent our approach in effectively managing our forward liabilities. And from a debt maturity standpoint, the Company is in extraordinarily good shape, and our next unsecured note is not due until November of 2014.

For the quarter, we improved our net debt-to-gross assets to 43.7%. We have no outstanding balance on our $600 million unsecured revolving credit facility. And we also made good progress along our EBITDA-improvement path and we had 7.2 times ratio of net debt-to-annualized EBITDA. And Howard in his presentation will review all those metrics in more detail.

The cash is certainly fungible. And our sources of cash have been slightly larger borrowings under our term loans and the proceeds from asset sales, our Allstate joint venture, and now the preferred offering. We view our cash on a net debt basis, and our bank term loan structures provide an opportunity to reduce debt with minimal breakage costs.

But while the economic climate remains uncertain, it's important to maximize flexibility and liquidity. As such, we plan to remain very liquid with ample financial capacity, while our portfolio transitions to higher occupancy levels, consistent NOI growth and EBITDA improvement.

Our cash balances are available for continued liability management, acquisitions and direct debt pay-downs. We have a very stable and flexible debt platform, where we have the option to accelerate debt-free payments or, alternatively, use cash from sales to redeploy the better-growth assets.

And in pursuit of this liquidity objective, subsequent to the quarter end we took advantage of strong capital markets through a $100 million opportunistic preferred equity issuance of 6.9% coupon preferred shares. A portion of these proceeds will fund the redemption of all of our outstanding 7.5% Series C Cumulative Redeemable Preferred Shares.

The issuance of this preferred stock at a 6.9% coupon is excellent permanent capital for our company. The coupon is extremely attractive. Market demand was very strong; enabled us to upsize our offering after the launch, and consequently redeem our 7.5% preferreds.

This issuance and related redemption cost was not in our original plan and has a near-term cost. That cost, as indicated in our guidance, needs to be expensed for both the redemption as well as the anticipated dividends on the net preferred issuance, and will be about $0.03 per share during 2012.

Looking at investments -- the low-interest rate environment, increased visibility on leasing activity, and the relative yield against other real estate sectors have created a much more active bidding pool for our asset class. And there is ample available capital looking for acquisitions. To take advantage of that opportunity, we are increasing our sales target for 2012 from $80 million to $175 million. Our previous guidance contemplated an $80 million target occurring ratably during the year at cap rates ranging between 7.5% and 9%.

Given what we've seen thus far, we anticipate better progress than that. For example, we sold our fully leased 268,000-square foot South Lake building for $91.1 million, or $340 per square foot. We also completed the disposition of a 33,000-square foot office building in Moorestown, New Jersey.

We currently have over $200 million of assets either on the market for sale or in reverse-inquiry discussions. These assets are located in Pennsylvania, New Jersey and California. Of this amount, approximately $80 million is either in buyer due diligence or buyer underwriting and bid review. To the extent that these pending $80 million of transactions close, there will be a timing acceleration versus our original business plan and, as a result, dilutive to 2012 FFO.

To put a finer point on it -- our $94 million of sales to date have cost us about $0.03 per share in current-year FFO versus our previous guidance. And if the properties under contract and underwriting close on their projected timeline, that will cost us roughly about another penny per share versus our prior, slower-assumed pace. So overall, our earlier and higher sales volumes are about $0.04 dilutive to FFO in 2012.

During the quarter, we did complete a small acquisition. We acquired a 150,000-square foot vacant office building located in Plymouth Meeting, Pennsylvania, next to our Plymouth Meeting Executive Campus. Our price was $9.1 million, or $59 per square foot. We immediately commenced redevelopment with an overall budget, including our acquisition cost, approximating $28 million.

We expect to deliver the finished building by the end of the year, stabilize by year-end 2013; and are already 58% preleased. We expect to achieve an 11% free-and-clear return on an overall investment base of about $180 per square foot. This value-add acquisition was a perfect complement, both from an offensive and defensive leasing standpoint, to our existing 800,000-square foot inventory in Plymouth Meeting.

In general, our investment approach is governed by continual balance sheet improvement and achieving a better forward-growth profile. Our 2012 guidance does not contemplate any additional acquisitions, but we continue to actively evaluate a range of opportunities both in our Allstate joint venture and for direct acquisitions. We would anticipate that any contemplated acquisitions would be financed through asset sales or existing cash balances.

One final point -- we have a land inventory of the approximately $109 million, or roughly 2.2% of our asset base. Most of that land is [entunneled] for office development. Given the realities in some markets facing future office development, last year we commenced a plan to examine all parcels for alternative and higher-value uses. That process is beginning to pay off, and we recently received approvals on our Plymouth Meeting land for about 400 multifamily units. We have several additional parcels proceeding through the same process. And once achieving new [entunnelments], our plan would be to either sell that land or identify quality residential companies and/or institutional investors to develop the project whereby Brandywine would be an investment partner.

To wrap up with some commentary on our guidance -- as we did note in our press release, we issued a revised FFO range for 2012 of $1.30 to $1.35 per share. The reduction in the bottom end of the range of $0.05 is comprised of $0.03 due to the preferred offering, the $0.04 I mentioned due to the accelerated and larger sale target; offset by $0.02 of operational improvements driven by strong leasing and expense savings.

At this point, George will now provide an overview of our first-quarter operating activity, and then George will turn it over to Howard for a review of our financial activity.

Thank you, Jerry.

We continued to see good levels of leasing activity during the first quarter, which has allowed us to raise certain elements of the business plan. An overall flight to quality continues as tenants seek quality landlords, buildings and locations, which has benefitted our portfolio.

Submarkets that continue to demonstrate recovery and improving metrics are Philadelphia CBD, the crescent Pennsylvania submarkets of Radnor, Conshohocken, Plymouth Meeting and Newtown Square; along with Austin and Richmond, where rent growth and tighter capital control are becoming more the norm. Other markets, while showing some signs of improvement, remain in a buying occupancy mode.

In terms of the first quarter specifically -- during the quarter, we commenced 982,000 square feet of leases, including 442,000 square feet of new leases, 421,000 square feet of renewal leases and 119,000 square feet of tenant expansions. This leasing activity resulted in positive absorption of 77,000 square feet and an occupancy percentage of 86.7%. Occupancy exceeded our business plan projection by 20 basis points after factoring in the 10-basis point decline from the sale of the South Lake building in Northern Virginia. More importantly, we are holding our year-end occupancy target of 89.4%.

Retention for the quarter was 59.7%. Early termination rights exercised by a handful of tenants accounted for 1,000 basis points of lost retention. For the year, tenant retention is still expected to be 57% based on 1.1 million square feet of renewals already executed, current lease negotiations and known tenant move-outs.

Leasing capital for the quarter was $2.85 per square foot per lease year. Our average lease term for the quarter was 5.7 years. Regions operating under the average capital spend for the quarter were the Pennsylvania suburbs, New Jersey-Delaware, Richmond and California. Philadelphia CBD and Metro DC continue to outpace the Company average on average lease term. Lengthening lease term and controlling capital continues to be an area of focus.

Rental rate declines for the quarter were 4.3% on a GAAP basis and 14.2% on a cash basis. Philadelphia CBD, the Pennsylvania suburbs and Metro DC posted positive GAAP rental rate growth for the quarter. Cash declines were driven by five deals rolling off leases done at the height of the market. Excluding these five deals, cash declines were 6%. We do expect rental rate trends to improve from those posted in the first quarter, as our business plans still contemplate the range from negative 1% to positive 2% on a GAAP basis, and negative 4% to negative 7% on a cash basis.

Traffic for the quarter was up 26% sequentially and up 5% over last year's average quarterly traffic. The pipeline remains strong and unchanged at 3.4 million square feet, 2.5 million square feet of new deals, 900,000 square feet of renewal deals. 611,000 square feet of deals are in lease negotiations, with the balance all entertaining proposals.

We've increased our speculative revenue target by $1 million, or 2%. $35.9 million, or 80%, has been achieved, leaving $9 million still to be done over the balance of the year. At this time last year, we had $11 million remaining on our spec revenue target. Austin, Philadelphia CBD, Pennsylvania suburbs, New Jersey-Delaware are all north of 80% achieved. Of the remaining $9 million to be achieved, 35% is in active negotiations, 25% are entertaining proposals, and 40% still needs to be sourced. These leasing assumptions and trends will translate into same-store NOI growth of 0.5% to 2.5% on a GAAP basis and flat to 2% on a cash basis; both excluding early termination and other income.

Leasing remains the primary focus of the regional teams. But continued examination of our contracted services, energy procurement and conservation efforts and aggressively appealing real estate taxes will aid in reducing operating costs and improving margin.

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

Thank you, George. And thank you, Jerry.

The first quarter 2012 income statement featured FFO available to common shares and units of $47.1 million. This compares favorably to $47.4 million in the fourth quarter of 2011 and $48.2 million in the first quarter of 2011, given the interim sales and disposition activity.

Our funds from operations or FFO per diluted share came in at $0.32, which matched analyst consensus for the quarter. Our payout ratio on the $0.15 dividend we paid in January 2012 was a very strong 46.9%. And our first quarter FFO figure was high quality, with termination revenue, other income, management fees, interest income, JV activity and bond buyback costs, totaling $6.3 million gross, or $5 million net; each in line with our 2012 expectations.

A few observations on the components of our first quarter performance -- cash rent of $108 million was down $6 million sequentially versus the fourth quarter of 2011 due to fourth-quarter and first-quarter 2012 sales activity. Straight-line rent, however, of $6.8 million was up $1.4 million sequentially due to increased leasing activity and the associated straight-lining components.

Recovery income of $19.3 million was down $1.2 million sequentially versus $20.5 million in the fourth quarter of 2011 due to the mild winter and, again, the impact of the sales. Our recovery ratio of 35.5% on expenses was in line with our expectations. Property operating expenses of $40.2 million were down $4.1 million sequentially versus $44.3 million in the fourth quarter of 2011 due to the aforementioned sales activity and, again, the mild weather this past winter. Real estate taxes were up $0.3 million, or $300,000 sequentially, due to a variety of minor factors.

Our interest expense in the first quarter of 2012 came in at $34.1 million and represented an increase of $2.2 million sequentially versus $31.9 million in the fourth quarter of 2011, as we had double outstandings for portions of our debt on the quarter pending repayment, and we also absorbed the cost of locking interest rates for the current and future periods. Our G&A at $6.1 million was in line with our expectations and with the prior quarter.

In the first quarter of 2012, we had net bad debt expense of just under $800,000 included in our operating expenses. And for the most part, it is proportional to the increase in our overall straight-line rent activity. Compared to a year ago, the first quarter same-store NOI increased 2.6% on a GAAP basis and decreased 0.3% on a cash basis, both excluding termination fees and other income items and in line with our expectations for the quarter.

Our cash available for distribution or CAD increased sequentially to $27.8 million from $22 million and measured $0.19 per share versus $0.15 in the prior quarter. Our 78.9% first-quarter 2012 CAD payout ratio is our best level of the last five quarters.

EBITDA coverage ratios are off their highest levels and came in at 2.4 times interest, 2.2 times debt service and 2.1 times fixed charges, due primarily to doubling of debt balances in the quarter and reduced exposure of floating rates. Margins remained very strong with improving occupancy levels and came in at 60.7% for NOI and 62.9% for EBITDA.

As Jerry noted, we are revising our 2012 FFO guidance to now be in a range of $1.30 to $1.35 per diluted share for the full year. Excluding the roughly $0.08 of historic tax credit income we will recognize in the third quarter of 2012 and the $0.015 of costs for the preferred share redemption we will recognize in this second quarter, our recurring quarterly run rate for the second quarter to the fourth quarter should be in a range of $0.295 to $0.31 per diluted share.

In terms of other income items for the full year, we are projecting no change in our $20 million to $25 million gross figure, or $14 million to $19 million net figure after expenses, for a basket of other items such as termination revenues, other income, management revenues, less associated expenses of net, interest income, JV income; including the now financing obligation cost featured on our income statement for the non-consolidated property in our joint venture.

We don't expect any change in 2012 G&A, and it'll be in a total range of $24 million to $25 million. And there's no change in our expectation for interest expense for the full year, and we're maintaining it in the $133 million to $140 million range. The wideness is reflective of the possibility that we may end up doing some debt pay-downs as the year progresses, and we'll be substituting costs of those debt pay-downs for the underlying interest expense.

We're now projecting $175 million of total 2012 sales activity. And with the higher pace and earlier activity, that has a detrimental impact to our FFO, along with sales completed of about $0.04 per share.

We're including the Series E Preferred Shares at 6.9% dividend cost going forward, offset by the repayment on May 3rd of the $50 million Series C Shares. That, together with the cost of redeeming the Series C shares, will be about $0.03 dilutive in 2012. And as mentioned earlier, we'll recognize the $0.08-per-share gross historic tax credit impact in the third quarter. This revenue component is essentially noncash and will be excluded from our CAD calculation. It reflects the second occurrence of 20% of the net proceeds realized through the historic tax credit financing in 2010 and will be recognized in the third quarter of each year, from 2011 through 2015.

We're not anticipating any further issuance under our continuous equity offering program, and no additional note buyback activity is reflected in our guidance. And as a result, we see 147 million shares as our count for fully diluted shares and units outstanding for FFO calculation in 2012.

Reflecting approximately $53 million of additional revenue-maintaining capital expenditures for the last nine months of 2012, we see cash available for distribution per diluted share staying in the range of $0.60 to $0.70 per share as previously outlined. The 2012 guidance revision is impressive from our perspective, as we encourage $0.07 of dilution versus the prior disclosure and only reduced our guidance by $0.05, reflecting $0.02 of better and more certain operating performance.

Our capital plan in 2012 is remarkable and simple. Our $284 million cash balance, not to mention $50 million of securities on hand, will cover all our needs. And we do not expect to do any financings or use our credit facility this year at all.

Our uses from April 1st, 2012 forward total $446 million and are as follows -- $160 million for debt repayments. $151 million of that has already been funded on April 2nd for our 2012 notes and leaves just $9 million for mortgage amortization over the course of the year.

We have a variety of investment activity scheduled for the balance of 2012. It includes the $53 million of revenue-maintaining capital expenditures, $103 million for revenue-creating capital expenditures, lease up of vacant space, and new project lease up, including such properties as Three Logan Square and 3020 Market Street, plus another $55 million for a combination of smaller various capital projects, including our Commerce Square joint venture contributions.

We will pay $75 million of aggregate dividends on the common and preferred. $22 million on the common and $2 million on the preferred were already paid earlier in April, leaving 2012 remaining dividend payments of $51 million inclusive of the new Series E Preferred.

To fund this $446 million, we are projecting the following from April 1st onward -- $100 million of cash flow before financings, investments and dividends but after interest payments, which are lumpy and tend to occur in April and May on the cycle of semiannual payments, $81 million of additional sales proceeds from the sales Jerry outlined, $47 million from net preferred stock activity, reflecting the funds we raised in the Series E offering, the costs of that offering less the $50 million we will disburse to redeem the Series C shares. And we'll use $218 million of our cash balance, leaving us with a projected year-end 2012 balance of about $116 million, inclusive of the $50 million of securities that will mature prior to year end. So our capital plan is very transparent and very clean from our perspective.

Accounts receivables at 3/31/2012 had reserves of about $16.1 million -- $3.4 million on $17.4 million of operating receivables, or just under 20%; and $12.7 million on $123.5 million of straight-line rent receivables, as we call them, or 10.3%. We are 100% compliant on all of our credit facility and indenture covenants, with 84% of our gross real estate book value unencumbered at 3/31/2012.

With the refinancing of our credit facility, we are now working under the new credit facility compliance metrics, and those are all captured in our supplemental package.

With that, I'll turn it back to Jerry for some additional comments.

Thank you very much, Howard. And thank you as well, George.

To conclude our prepared remarks -- first quarter results were strong and consistent with our announced 2012 business plan. As evidenced by our collective commentary, we remain confident in our ability to achieve our 2012 objectives, including the increase in our spec revenue target. We remain convinced that our best growth strategy remains simply to continue outperforming our markets by leasing space. Our high-quality product continues to provide a competitive advantage, and we expect that advantage will accelerate as fundamentals continue to improve.

Our balance sheet strategy remains very much on track. And as discussed, we have become more aggressive on our disposition target for the year given increased visibility on suburban office valuations.

So thank you again for participating in the call.

One final note -- we want to mention that we will be hosting an Analyst and Investor Day on Tuesday, June 26th. That tour will include presentations by our senior team as well as a tour of our Philadelphia CBD assets. We look forward to the opportunity to welcome many of you to Philadelphia to present both the strength of our market position and the quality of our asset base and regional management teams. Invitations will be mailed out next week, and we hope you can join us. We look forward to seeing you in June.

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

(Operator Instructions) Jamie Feldman, Bank of America Merrill Lynch.

Can you talk a little bit more about the current leasing pipeline, I guess in terms of what you have left to do for the rest of the year? And then also, with the election coming, people concerned about the fiscal cliff -- what's your sentiment in terms of kind of business decision-making for the rest of the year?

Sure. George?

Yes. Jamie, I think, as I mentioned earlier, we've got $9 million of spec revenue left to achieve. That's going to require us to do just a little bit north of 1.5 million square feet. The pipeline is strong -- it's 3.4 million square feet in total. Two and a half million square feet of that are new prospects, and 900,000 of renewal prospects. And we feel confident that with the pipeline that we have, the conversion rates that we've demonstrated -- last year, our conversion was 40%. It was 31% for the first quarter. But we've got several markets that continue to kind of outperform that 40% company average.

[I guess you] --

And I'd add onto that, Jamie, just in terms of -- one of the things we really do track is the traffic that comes through our pipeline. But that tends to be a harbinger of forward leasing activity. And I think even with the overall market levels being down a bit Q1 versus Q4, we were very pleased with the increase in traffic to our portfolio. And that was pretty much throughout our inventory across all the markets.

So I think with the pipeline remaining constant, the number of deals that we have in negotiations, the percentage of deals that we have proposals issued for; I think we're continuing to remain very confident about our ability to achieve all these targets.

And then, just bigger picture on sentiment among tenants and among decision-makers -- do you sense people are getting more cautious here with the election, and the economic data getting more mixed --

Well, look, certainly --

-- or no change?

Well, not a big change since the last conference call. Certainly, the market that we're in that is the most sensitized to the federal government and its budgetary matters is both in Northern Virginia and in Maryland. And I think the decline in leasing activity in Q1 in that market I think is reflective of the fact that a number of tenants are on the sidelines or pausing before they make a lot of forward lease commitments, so they get a better flavor for what the political climate will be going forward. Certainly, with some of the appeal processes recently issued by the federal government in terms of awarding contracts, that has a bit of a delay in the actual award of those contracts and creates a little more protracted timeline.

When we look beyond that, I don't think we're really seeing the impact of the election in our other markets. I mean, the pipeline feedback from our leasing agents and managing directors does not seem to indicate that people are really focusing on that political climate as a key driver in their [space] decisions.

Okay, thank you.

Josh Attie, Citi.

Can you talk a little bit more about what the acquisition pipeline looks like, and maybe even development? When you did the preferred offering, you chose to increase the cash balance instead of paying down debt or -- and I guess that kind of implies that you're seeing more growth opportunities. Can you talk about that a little bit?

Certainly. And make just a real quick overview comment, and Tom can give you, kind of around the horn, what we're seeing on the investment side.

I think the reason when we raised this capital that we didn't pay down the debt immediately was just to preserve complete optionality. We have, as you know from our bank term loan structure, a pretty flexible platform to pay down that debt as we see fit with some acceleration of cost but minimal breakage expenses.

So I think when we analyzed where we are, we've retained the optionality to apply cash to future debt pay-downs or -- as we did this past quarter -- to, [I think], some pretty good tactical liability management. And we are seeing more things on the investment side, which Tom can certainly touch on.

Sure, Josh.

On the investment side, I think if you look at the markets, I think Philadelphia, Richmond tend to be slower. Not seeing much activity at this point. Continue to see some activity in Austin that we monitor. That market continues to be well received when product is out there. We continue to look at the CBD and Southwest for opportunities.

And in Metro DC, I think it's a tale of two storylines. We have the outside-the-Beltway, which -- other than our trade, there's been very few outside-the-Beltway trades. They've been taking longer to get done. So we're monitoring that very closely just to see if cap rates are going to go higher out there or whether we see that nothing trades.

Inside the Beltway, we're still seeing a lot of good activity. And that activity in the trophy class -- there's plenty of capital out there funding that product, as well as -- but some product that isn't trading at the expectations people are expecting, especially with -- I think as you mentioned, on the political side, we've seen rents sort of come down a little bit -- we've seen it in our portfolio, we're seeing it in the district also with some negative absorption -- that people are pulling product and, in some cases, refinancing. So there is some haves and have-nots.

And with our looking in the district and in inside-the-Beltway markets, we are targeting that with our Allstate joint venture. So we're certainly looking for opportunities in our targeted markets, which are all inside the Beltway. We're seeing some good opportunities, we're taking a look at them. Most of the things we're looking at are going to be conservative. We're not looking for a lot of leasing exposure or near-term leasing risk. And we continue to be pleased by what kind of lending you're seeing on assets inside the Beltway by various institutions.

And how should we think about the redeployment of the asset sale proceeds? You increased the asset sale guidance. Should we think of those proceeds as going towards sitting in cash until you can find acquisition opportunities? Or would some of those proceeds go to pay down the term loans?

Well, I think as I mentioned at the beginning, I think we just keep our flexibility. We have the option of paying down certainly the $100 million floating rate term loan as we choose. Howard continues to track the liability market for any frictional trades we can make to look at our forward liabilities. And Tom and his team are continuing to beat the bush on investments. So I think -- those three avenues, I think, are good ones for the Company. And as situations arise that we think justify the deployment of capital, we'll move down that path.

Okay. Thank you very much.

Jordan Sadler, KeyBanc Capital.

I was just looking to get clarification. On the asset sales, you said previously the expectation was for cap rates in the 7.5% to 9% on the $80 million you had in guidance ratable over the year. What's the blended cap rate now?

We're looking at a range of in the mid-7%s to 8%.

Mid-7%s to 8 now?

On a blended basis; there'll be some lower, some higher, when we look at the pipeline.

Okay.

And then, separately, just looking at the revenue-generating CapEx and the small capital projects -- which include Three Logan, 3020, and presumably the Plymouth Meeting asset you guys just took down -- you talked about Plymouth Meeting -- but can you walk through, what are the expected overall returns embedded in guidance on the $160 million you expect to deploy from April on? Is that all in that sort of 10% to 12% unlevered range, or what?

Jordan, it's Howard. A lot of it goes to leasing of vacant space. So putting it in the context of a Three Logan, that's an asset we originally underwrote on a substantially vacant basis to yield in a 9% to 10% range. So this spend, or part of it that'll take place in 2012, is towards meeting that goal. 3020 could be an asset that yields ultimately in excess of 10%, the development project in Plymouth Meeting an 11% return, the money that we spend in the Thomas Properties Group Commerce Square joint venture -- little bit over a 9%, with some fees on top of that. So generally very attractive returns as you look around the landscape at where those are going.

My last question, Jerry -- just looking at sort of the cash on your balance sheet today looks -- $230 million, $240 million, I think, is the number; I know it's higher at quarter end. I know that you're keeping your options open. But I guess it basically seems that your option is open outside of debt repayment, which [has] certainty. It would mean that you've got investment opportunities that you're looking at. Can you maybe just sort of characterize that for us -- it seems like you've got potential size there -- and maybe just frame that up in terms of what you're seeing as the most attractive potential opportunities?

Sure. I'll take a stab at it for you.

Well, first of all, the math that Howard walked through in his commentary shows the application of a good portion of that cash during the course of the year. So we need to be mindful of that as we take a look at some of the things you just inquired about in terms of Three Logan, 3020, Plymouth Meeting. We think they're good, high-quality capital investments to make that, as those projects stabilize, will develop a good rate of return.

So as we look at our kind of net cash position, it's probably not as big as you're looking at for the end of the first quarter. So need to be mindful of that in [over light].

But look, we are beginning to see some more opportunities. They need to be mined, need to be worked. A lot of our transactions were focused on our off-market. We certainly like the structure of what we're able to achieve with Commerce Square. We're able to invest in a preferred position and create a good rate of return and accelerate absorption and value in an asset that we invest in.

Some of the Allstate --

Do you expect that to be recapitalized this year?

Well, the debt is -- first piece of debt is due in 2013 at Commerce Square. So certainly I think the partnership -- as the year progresses, we'll have a number of discussions about what the best method to do that is. But that certainly looms on the near-term horizon as a capital discussion the partnership needs to have.

Okay. Thank you.

John Guinee, Stifel.

Jerry, you guys did an awfully impressive asset sale at Dulles Station, which is a miserable leasing market, as we all know. Can you drill down and talk about, in addition to the price per pound, the cap rate, the lease expiration schedule, any early expirations they might've had; and then also sort of how you looked at it on a wholesale basis and what your price point was at which you became a seller versus a holder?

Sure, be happy to, John. And they're good questions. I wouldn't necessarily agree with your total characterization, but I understand your theme.

As we looked at the Time Warner transaction, that lease that we did was going out through 2019 but had termination rights that were kicking in, kind of starting in the middle part of 2016 and 2017. We did that transaction not quite the height of the financial crisis, but pretty close to it. So there was a real urgency to get that building occupied. And the structure in which we did that lease provided not just for those early termination options to give Time Warner the flexibility they required, but also provided for a fairly flat rental rate structure.

So from our standpoint, we had pretty much optimized the value in that asset through bringing the property to stabilization and getting the cash flow coming in once the tenant started paying cash rent. Given those termination options, given the -- we thought could be a declining value investment market -- at least temporarily based upon some of your observations -- we thought that we reached the optimal value point of that. The trade occurred at about a 6.8% cap rate, $340 a square foot, which we thought on both metrics were very good value recoveries for us and enabled us to recover a profit on that project. And our team could then devote all their resources to leasing our apparently vacant space in that market.

Great. Thank you.

Welcome.

Rich Anderson, BMO Capital Markets.

On that Herndon deal, I guess I'm curious -- why wasn't it in guidance for your disposition target when you reported fourth-quarter results? It only happened a month later.

Yes, Rich, it's a great question. I think the only thing we can tell you on that is that literally up till the 11th hour, the certainty of that execution was in question. And we also, in the intervening months, have gotten much more confident of the depth of the sales market for a suburban asset class. So we actually -- in lieu of prefunding our $80 million original sales target with the $91 million trade at Time Warner, we actually made a decision based upon the pipeline of sales velocity we saw to actually keep the $80 million and become additive to the target. So it was an awkward timing situation for us. And then, with the passage of time, we just gained a lot more confidence in what we're seeing on the buy side of the market.

Would you qualify that as a reverse-inquiry trade? Or does that not qualify --

No, that was not a reverse inquiry trade. That was part of a marketing program we had underway.

Okay.

Just didn't have any proof of visibility on it to be able to be executed.

Okay. Fair enough.

And then, a second follow-up is on retention, targeting still 57% for the year. Is that kind of a disappointment to you? I mean, you guys have historically seen retention targets rise over the course of the year. How do you feel about retention kind of staying put this quarter?

Yes. Rich, I think -- disappointing, but I think a little bit of a continuum of recent trends, where some of our larger corporate clients are still kind of going through this downsizing/rightsizing. You look at a tenant -- still hasn't fully vacated yet, but a big impact on our retention is [Sitor down] in the Toll Road Corridor, giving us back 110,000 square feet. Now, we've been successful in re-letting that space. But from a retention statistic, it has a negative impact.

We've got 22 tenants north of 10,000 square feet still kind of in our will-vacate column for the duration of the year. And our hope would be that we can ultimately convince some of the tenants less than 10,000 square feet to ultimately change their mind and continue to kind of work the tenant expansions, which has a positive impact on retention calculation.

Okay.

And if I could just quickly say -- the $0.02 operating improvement -- I know I'm on my third quarter, so I apologize, just real quick -- no change to your same-store range, though, for 2012. Are you just saying top end of that range now, basically?

Yes, I mean, that would be correct. It's a function of the additional $1 million we added to the leasing plan, the somewhat better expense profile in the first quarter; and then just a lot of little stuff, but not big enough yet to move us outside the range we outlined earlier.

Great, thanks.

Dave Rodgers, RBC Capital Markets.

Just talking about some of the dispositions that you had chatted about earlier in the call, in the Q&A -- what would cause you to kind of maybe hit the high end of that range? Or could we see you increase the range again this year in terms of total disposition activity if pricing is right? And would you need to see alternative investment opportunities, or would you be happy holding more cash, maybe, going into the end of the year?

Yes, there's two things that could drive the (inaudible) on that guidance is if we do acquisitions, and we do better than we're anticipating right now on lease executions and NOI generation during the year. Certainly to the extent that the sales target exceeds the [$175], without having a corollary redeployment of that, that would create some downward pressure, for sure.

And can you quantify the impact of the mild weather maybe this quarter, and then versus, when you think last year first quarter to second quarter, the type of impact that you saw this year? Was it anything meaningful in FFO?

No. It wasn't the balmy weather, right?

Yes, clearly, our operating expenses were lower than we had originally projected, due to the lack of snow. But also keep in mind that snow expense for us has roughly a 60% reimbursement associated with it. So about 40% of the expense that was not incurred kind of fell to the bottom line.

Got it.

And then, your ability or willingness to take on more value add -- I think I heard you talk about it in the context of DC. And I don't know if you addressed it more broadly, but just the aggressiveness with what you might be willing to take on more value add if in fact the leasing activity does continue to pick up, as you feel it might throughout the course of the year.

Well, that's purely a market-by-market analysis. As the 3020 Market acquisition was purely a value add, it's actually in a submarket with a less than 5% vacancy factor, and we're 100% leased. Plymouth Meeting -- that was a unique opportunity to acquire a very well-constructed and designed building right within the heart of our Plymouth Meeting Executive Campus. We felt as though given the leasing velocity, the need for tenant expansions, we were seeing that that was a glove fit to our portfolio.

When you look beyond that, I think it has to be an evaluation point on what our portfolio looks like in that marketplace. For example, in a Southern New Jersey or a Northern Virginia, where we still are facing our own internal headwind, it'd have to be a very different pricing metric we would evaluate to take on any additional risk in that market.

So we like opportunities where our leasing teams and regional management teams can really create value for us through an effective buy. But I think we are very mindful of balancing that capital return with the return we will be getting from our existing assets in those markets that are probably facing the same leasing headwinds if there's a potential acquisition.

Thank you.

Michael Knott, Green Street Advisors.

I'd just like to make an addendum to John Guinee's question [and] your commentary that that was a non-traded REIT buyer, I believe. Can you guys comment on free rent trends in the market? It seems like the direct capital leasing costs are fairly steady, but just curious how that part of it is trending.

Yes, I think it clearly is on every tenant's wish list basically to cover moving costs, wiring, cabling, sometimes furniture -- things along those lines -- that they need to come out-of-pocket for. It ranges anywhere from one to two months per lease year depending on the market and the overall capital investment that we're making on physical improvements.

We've started to see a little bit of a trend even on renewals, where the introduction of free rent has now become part of the equation, but not necessarily on an every-deal basis.

Can you just remind us what are sort of the standard free rent periods for new and renewals?

One to two months per lease year, typically, on a new deal.

Okay.

And then, on the redevelopment asset that you bought there in the Philly suburbs -- sort of the stabilized cap rate or value per pound would be upon sort of stabilization -- if you're going to be all in at $180 a foot, and an 11% yield, what would sort of the -- hypothetically, if you were going to flip that stabilized asset in the future, what's sort of a ballpark figure there? Just curious how the $180 would compare to a stabilized value and sort of a full replacement cost.

Yes, depending upon the level of finishing a building like that, you're in kind of the 70% to 80% of replacement cost calculation. So from that standpoint, it was also a very good transaction for us. The property's location in the Plymouth Meeting market -- which, as we call, is part of that crescent suburban class -- is one of the higher investment submarkets in the Philadelphia region. So we certainly think that delivering that asset as an 11% free and clear return, fully loaded, creates a lot of value for the Company.

And then, last question -- even though your stock has had a nice run this year, it still trades about 15% below our NAV estimate. So just curious if the [end to] increase dispositions and not explicitly target additional acquisitions is sort of part of your plan to get out of that box, so to speak, that you've been in for quite awhile, I'd say.

Well, we're doing everything we can to move our stock up to at least net asset value. And we think a lot of the leasing activity of the last couple years, and particularly the last six quarters, has really done a lot to move our NAV up, particularly when you take a look at the ability to fill up the empty space. So we're very mindful of both current and intermediate-term projected NAV.

As a consequence of your call on our last earnings discussion, we talked about that with stock pricing at the levels that we're at, we certainly would not be using our ATM program or any other equity issuances. That would be aiding in our deleveraging plan, but certainly creating a detrimental effect on our net asset value.

So we're hopeful that the continued acceleration of leasing through our portfolio will help our stock price get caught up to our current NAV. And once we continue to demonstrate that we can outperform our markets, and the general bias on leasing velocity in suburban office space becomes more positive, that that NAV will continue to rise in conjunction with our improved NOI.

Thank you.

Steve Sakwa, ISI Group.

Just one quick question -- the $50 million of securities on the balance sheet -- could you tell us what those are?

Steve, it's Howard. We looked at our cash balances and realized we had more cash than we would reasonably need in 2012. And we've taken the opportunity to purchase a number of securities maturing, in that instance, November 2013 -- others in October, some in January -- just to improve the yield on the cash balances above what's available in the money market accounts.

Okay, thanks.

Young Ku, Wells Fargo.

Just a quick couple questions -- in terms of your 2013 lease expirations -- I know it's still kind of early in 2012, but are there any major move-outs that you guys are anticipating?

We have a few that we're tracking. I mean, I guess the largest is probably with Intel in our Austin operation, who we're currently talking to about retaining some of the space and have an identified pipeline for taking the remainder and/or potentially all of the space.

It is a little bit early. We've been talking to several of the 13 expirations. But they're probably the most notable on the potential move-out list.

And how big was that Intel space?

About 164,000 square feet.

Okay, thank you. And just --

The interesting thing about -- I'm sorry -- the interesting thing about the Intel space is we did a three-year renewal with them, at literally the height of the crisis. And the rental rate that they're paying is well below existing market. So given the pipeline of leasing activity our local team has in place, that's actually one of those opportunities we're looking forward to.

Thank you.

And just one other question about your investment opportunities -- in terms of the types of products that you guys are looking for on the stabilized side -- what kind of cap rates are the assets trading at right now?

The assets we're looking at are kind of in the -- if we're looking in the district in kind of those target markets we're looking at, we're seeing them in the 7% to 8% range, and inside the district below that. There would have to be a story to tell on those type of cap rates in terms of IRR, because we're pretty much IRR-driven. So the cap rate doesn't necessarily tell the whole story. But that's kind of where the cap rates we're seeing are now in that market. That's one -- and if you look at Austin, which is another market we're leased, there's enough trades that you can get an idea that it's pretty much in the [high] 7% cap rate range.

Great, thank you.

Ross Nussbaum, UBS.

One quick question -- I'm cutting into [Mitch Mershe's] call time here. Of the $110 million of land that you guys have sitting on the books, how much of that do you really think you're going to monetize over the next year or two?

Well, I think we have a number of parcels under planning and approval processes for alternative uses. So I think our target would be to do about -- this is a rough order of magnitude subject to political climate and local zoning ordinances of about a third of that in the next couple years.

Okay.

And roughly speaking, relative to book value, if you are going to be rezoning for multifamily, do you think, at the end of the day, that it's worth more than book?

We do.

How much more?

Well, we're not going to give you a number on that, Ross, but we actually think the reason we're going down this path is we think it's a higher or best value for the land. And I think as we move through the process and demonstrate some results, I think my observation will be proven out.

Thank you.

Rich Anderson, BMO Capital Markets.

Sorry to get out of the queue, but I'll ask, now that I'm here anyway. Can you just give us, Howard, kind of a rough -- I e-mailed you this, so disregard the e-mail -- the preferred dividends for the second quarter, and what they would be on a more run rate basis? I assume that there's a lag time. So the second quarter might be a little funky?

The second quarter actually has a little bit of a double dividend itself.

Right.

Because we pay about -- and all that's captured in the guidance. We pay, I think, about a $0.09 stub in closing out the preferred fee shares that'll be paid on the liquidation on the redemption date. And then again, subject to declaration, which we obviously fully expect, the Series E shares will get their first dividend in mid-July on the regular cycle.

Okay, so the number should be the -- second quarter should be the same in terms of preferred dividends, and then you start anew in the third quarter? Is that right?

Yes. I think the second-quarter Series E dividend will be slightly elevated because it settled on April 11th. But I don't have the exact math in front of me. There's a little bit of a stub period one way or the other, given its settlement date from an issuance standpoint, but nothing material.

Do you have a full-year preferred dividend number?

That would be 6.9% of $25, which --

Well, no. I mean -- okay, that's right.

One of us could calculate --

Okay, I got it. That's easy. And you said the charge -- I thought you said the charge is about $0.015, is that right, for the second quarter?

Yes. The write-off of the costs, which have been booked to the equity section for the Series C --

Right.

-- which are now expensed upon redemption are about $2.1 million.

Okay. Thanks very much.

At this time, there are no further questions.

Excellent.

Thank you again, very much, for participating on the call. And we look forward to seeing you at our June event. Thank you.

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