Brandywine Realty Trust (BDN) 2012 Q2 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust Second-Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions).

Mr. Jerry Sweeney, President and CEO of Brandywine Realty Trust, you may begin your conference.

Steve, thank you. Good morning and thank everyone for participating in our Second-Quarter 2012 Earnings Call.

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

We made significant progress on all aspects of our 2012 business plan during the second quarter. Our objectives remain very much on track and we are well-positioned to finish the year strong.

I'll provide an overview of our three business plan components, that is operations, balance sheet management and investments. Then George and Howard will discuss our operating and financial results in more detail and Tom is certainly also available to discuss investment market activity.

Overall, the macroeconomic picture remains the biggest risk to our business plan, and frankly, the business plans of every other company. Data continues to shift. Like you, we track it daily and try to discern the impact of this ever-changing climate on our business plans.

Due to the many conflicting data points in which we are all familiar, the word uncertainty has begun to creep back into some customer conversations during the last quarter.

So while we continue to be very pleased with the level of tenant activity through our portfolio, we fully understand the impact that macroeconomic data can have on tenant psychology. As such, accelerating leasing absorption is our continual priority.

And from an overall standpoint, we still believe that the moderate recovery in our office markets remains well underway. Vacancy rates continue to decline in most of our markets. And total leasing activity remains solid through most of our portfolio.

In looking at the operational components of our business plan, several of our markets have a positive pricing dynamic. And in these markets we continue to see encouraging signs of rental rate growth. In all of our markets, we continue to benefit from a flight up the quality curve.

Our leasing approach remains tactical and is submarket driven. Our stronger markets, Austin, Philadelphia CBD, and the crescent markets in the Pennsylvania suburbs, are experiencing increasing rental rates, lengthening of lease terms, and downward pressure on capital concessions.

In other markets, we continue to pursue absorption through expanding our market share of current tenant activity levels. Levels of activity in the Philadelphia CBD, the Pennsylvania suburbs, and Austin, Texas, is strong and solid. These three operations will exceed our original business plan revenue forecast.

Conversely, we have not seen a continuation of leasing activity that we saw last year in Northern Virginia. In particular, activity levels in that market are below our expectations and we will not be achieving the 2012 spec revenue levels that we originally anticipated.

Additionally, our operations in Richmond are beginning to fall a bit behind plan due to a lower level of anticipated tenant activity in our Southwest Richmond market in particular.

Our Southern New Jersey operation, we continue to experience strong leasing activity, significantly above last year's levels. We anticipate meeting our business plan projections in our New Jersey-Delaware operations, and given the current high activity levels, have the potential to perform to the upside.

Our expectation is that outperformance in our strongly performing markets will overcome any anticipated shortfalls in either Northern Virginia or Richmond. As such, we are maintaining our $44.9 million spec revenue goal and are 87% executed on that target.

From an operational and leasing standpoint, some notable accomplishments during the quarter -- the transaction pipeline remains steady at 3.1 million square feet. During the quarter, we had a solid 73% customer retention rate, which brings us to a year-to-date average of 69%.

Even given known move-outs, we're now forecasting an overall improvement to our 2012 retention rate of 60%, which is up from 57% in our last forecast.

George will outline the operational improvements in more detail, but given the strengthening of the portfolio's overall metrics, we have increased our same-store NOI growth range on both a GAAP and cash basis. And we have also improved the range of our rental rate mark-to-market.

We are maintaining our year-end same-store occupancy target of 89%. And overall, given both the lease-up of our portfolio as well as the generally improving state of the office markets, portfolio metrics are clearly moving in a more positive direction. This continued strong performance puts us well on path to achieve our 2013 to 2015 occupancy and leasing targets.

Now, looking at our balance sheet, we remain in extremely strong shape, as outlined in our Investor Day. With continued NOI improvement augmented by our investment strategy, we are on track to continue our de-leveraging program. Our interim target is 40% debt to GAV and a 6.5 EBITDA multiple, with a longer term target of mid 30% debt to GAV and a below 6 times EBITDA target.

We closed the quarter with great cash balances of $232 million, including the securities which have now been reduced to zero. During the quarter, we did pay off $151.2 million balance of our 5.75% unsecured notes. From a liability management 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 42.8%. So, clearly moving in the right direction towards our long term targets.

There is no balance outstanding on our $600 million line of credit and our improving portfolio metrics kept us well on the path of EBITDA improvement with a second-quarter 7 times ratio of net debt to annualized EBITDA.

As mentioned at the onset of my comments, we do remain in a period of economic uncertainty, as such we plan to remain very liquid with ample financial capacity while our portfolio continues its transition to higher occupancy levels, consistent NOI growth, and stronger same-store operating performance.

In looking at investments, we've already achieved our $175 million 2012 sales target. During the quarter, we sold Pacific Ridge Corporate Center, an 84% leased 2-building office property in Carlsbad, California, for $29 million or $239.00 per square foot. That sale was part of our programmed effort to exit the California market as market conditions permit.

Subsequent to the quarter-end, we also sold the Oaklands Corporate Center project, an 11 property office and flex portfolio in Exton, Pennsylvania for just shy of $53 million, or $113.00 per square foot. And that sale was consistent with our plan of recycling out of non-core assets.

On the acquisition front, subsequent to the quarter-end, our Brandywine AI joint venture acquired Station Square, a 92.8% leased 3-property office portfolio, totaling just shy of 500,000 square feet in Silver Spring, Maryland, for $120.6 million.

The venture's equity contributions were augmented by 55% loan to value, $66.5 million 7-year, 3.22% interest-only non-recourse financing.

We were delighted to close this first acquisition with our partners at Allstate and certainly plan to continue looking for additional opportunities.

Our overall investment goals for 2013 to 2015 contemplate annual dispositions between $100 million to $250 million per year, with an acquisitions target between $75 million and $150 million per year.

Our pipeline of deals on both the buy and sell side today remains fairly fluid and we remain poised to take advantage of additional opportunities.

As we assess it, clearly a lower interest rate environment, increased yet not perfect visibility on economic growth, and relative yields have kept major sources of capital focused on office space as a viable investment option.

Our investment objective is to continue to increase our urban and town center concentrations and reduce exposure to commodity suburban space.

Our goal of monetizing up to 35% of our existing land bank over the next several years remains very much on track and we continue to pursue a number of near-term deployments, particularly in the Pennsylvania and New Jersey suburbs, as well as CBD Philadelphia.

Our investment approach has the penultimate goal of balance sheet improvement and achieving better forward NOI and asset value growth profile.

Our stock price continues to remain below net asset value, eliminating the ability for us to de-leverage the equity issuance without eroding that value. And as such, our investment program contemplates us to be net sellers and any contemplated acquisitions will be financed through asset sale or existing cash balances.

To wrap up, as a result of the progress on all aspects of our business plan, we have increased our 2012 FFO guidance range from its current $1.30 to $1.35 per share to a new FFO range of $1.32 per share to $1.36 per share.

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

Thank you, Jerry.

We continued to see good levels of leasing activity during the second quarter, which has again allowed us to raise certain elements of the business plan.

Our best performing submarkets continue to be Philadelphia CBD, the crescent Pennsylvania submarkets of Radnor, Conshohocken, Plymouth Meeting and Newtown Square, along with Austin. These core submarkets are a combined 96% leased and comprise 47% of the Company's NOI.

The tone and pace of leasing activity has continued as expected. Deals executed in the second quarter averaged 103 days from initial inquiry to lease execution, as compared to 113 days in the first quarter and 115 days in the fourth quarter of 2011.

In terms of the second quarter specifically, we commenced 600,000 square feet of leases, including 175,000 square feet of new leases, 345,000 square feet of renewal leases, and 80,000 square feet of tenant expansions. This leasing activity resulted in positive absorption of 20,000 square feet and an occupancy percentage of 86.9%.

We are holding our year-end occupancy target of 89.4%, as the regional graphs in our supplemental package highlight. Pennsylvania suburbs in Philadelphia will contribute more occupancy than originally projected to counterbalance slides in both Metro DC and Richmond.

Retention for the quarter was a very strong 73.3% and based on achieved leasing and additional clarity on our remaining lease expirations, we've raised our annual retention rate projection from 57% to 60%.

Leasing capital for the quarter was $3.68 per square foot per lease year. A contributing factor to this above normal run rate was the commencement of an 11 year, 116,000 square foot relocation and renewal lease on the toll road.

Capital, excluding this one deal, was $2.59 per square foot per year, our third best quarter in the past 6 and in line with business plan expectations.

Average lease term for the quarter was 6.3 years, 5.2 years excluding the aforementioned toll road lease.

Capital control and the lengthening of lease term remain the core objectives for our regional leasing teams.

Mark-to-market for the quarter saw positive GAAP rent growth for both new leases and renewals, 4.3% combined. Cash mark-to-market was still negative, but improved over first-quarter results.

We've tightened our range on mark-to-market for the year as our business plan now contemplates a range from flat to positive 2% on a GAAP basis, and negative 4% to negative 6% on a cash basis.

Austin, Philadelphia CBD, and the crescent markets continue to demonstrate the best rental rate growth characteristics in our portfolio.

Traffic for the quarter was flat sequentially and down 2% from last year's second-quarter. The pipeline remains strong at 3.1 million square feet, 2.1 million square feet of new deals, and 1 million square feet of renewals. 470,000 square feet of deals are in advanced lease negotiations with the balance all entertaining proposals.

Our spec revenue target remains unchanged at $44.9 million. $39.3 million or 87% has been achieved, leaving a $5.6 million balance for the remainder of the year. At this time last year, we had a $2 million remaining balance on a $34.4 million target.

Similar to our revised year-end occupancy composition, outperformance in Pennsylvania, Philadelphia CBD and Austin has offset slides in Metro DC and Richmond. The regional figures can be found on Page 33 of our supplemental package.

Leasing achievement and the remaining assumptions in the plan will translate into same-store NOI growth of 1% to 3% on a GAAP basis and 0.5% to 2.5% on a cash basis, both excluding early termination and other income. These new ranges are 50 basis points better than our prior quarter update.

To conclude, we are very encouraged by these operating results and the improved metrics now being projected for retention, mark-to-market and same-store NOI growth.

At this point, I will turn it over to Howard for the financial review.

Thank you, George and thank you, Jerry.

For the second quarter of 2012, funds from operations, or FFO, available to common shares and units totaled $44.6 million. This translated to $0.30 of FFO per diluted share for the quarter and it met analyst consensus.

The FFO payout ratio in the second quarter is an even 50% on the $0.15 distribution we paid in April 2012.

I'd like to make a couple of observations regarding our second-quarter results.

Our NOI, net operating income, and EBITDA margins at 61.3% and 65% respectively were the highest levels for these metrics all the way back to early 2009. Our same-store NOI growth rates were particularly strong at 3.8% GAAP and 2.4% cash, both excluding termination fees and other income items.

We met analyst consensus for FFO per share despite incurring a $1.25 million, or one and a quarter million, debt extinguishment cost related to unsecured note repurchase activity in the second quarter.

We also incurred a $2.1 million charge related to the early redemption of our Series C preferred shares. We consider our FFO to be a very high quality result with aggregate termination revenue, other income, management fees, interest income, JV income, and bond buy-back costs totaling $5.2 million gross, or $3.9 million net, on the low end of our targeted 2012 quarterly run rate.

Second-quarter interest expense of $33 million declined versus $34.1 million in the first quarter when we incurred certain double charges pending repayment of the unsecured notes on April 2nd.

Our $1.8 million interest income was higher due to recognition of $1.1 million from the Trenton note repayment and interest income on higher cash balances.

And lastly, $11.6 million of revenue maintaining or recurring capital expenditures, a moderate level, gave us $0.20 of cash available for distribution, or CAD, per diluted share and a 75% CAD payout ratio.

With respect to our balance sheet and financial metrics, I would emphasize the following points. Our debt to GAV of 42.8%, our debt to total market capitalization of 53.6%, and our 7 times debt to EBITDA ratio are at their best levels in five to seven or more years.

We have virtually no floating rate exposure with $100 million of floating rate debt, more than offset by our combined $232 million cash and securities balance. Subsequent to quarter-end, we did reduce our $42 million securities balance to zero and now have $229 million of cash and cash equivalents as of yesterday's close. And we continue to have no outstanding balance on our $600 million unsecured revolving line of credit.

And lastly, as Jerry pointed out, we have over 2 years until we face any significant maturities in late 2014.

As Jerry noted, we are revising our 2012 FFO guidance to $1.32 to $1.36 per diluted share versus a prior range of $1.30 to $1.35.

Excluding the $0.08 of historic tax credit income that we will recognize in the third quarter of 2012, our recurring quarterly FFO run rate for Q3 and Q4 2012 should be in a range of $0.295 to $0.315 cents per diluted share.

Most of the assumptions are included in the business plan section of our supplemental package and I encourage you to review those. Other points include gross other income, unchanged in the business plan, at $20 million to $25 million gross or $14 million to $19 million net of expenses, representing a basket of other items such as termination revenues, other income, management revenues, less associated expenses of net, interest income, and various JV income items.

Our G&A for 2012 remains unchanged at $24 million to $25 million. We're reducing interest expense to a range of $132 million to $135 million versus $133 million to $140 million previously. And this is slightly above the 2011 figure.

We have completed our 2012 sales activity and no further sales are assumed for 2012. We're not anticipating any issuance under our continuous equity program and no additional note buy-back activity.

And lastly, we continue to assume 147 million shares for the count for FFO in 2012. Using the midpoint of the range of $1.32 to $1.36, we're projecting a very strong 45% FFO payout ratio on an assumed $0.60 cumulative distribution.

And for CAD, we're continuing to project $0.60 to $0.70 of CAD per diluted share, reflecting an additional $35 million to $40 million of revenue maintaining CapEx in the second half of 2012.

On the capital plan, our plan for 2012 is essentially done, with $232 million of cash and securities substantially meeting all of our needs. Our remaining uses from July 1st forward total $253 million and include $7 million from mortgage amortization, $196 million of total investment activity representing an assumed $38 million of revenue maintaining capital expenditures, the midpoint of the earlier range, $70 million for various revenue-creating capital expenditures, lease-up of previously vacant space, and new project lease-ups such as those for Three Logan in Philadelphia, plus $88 million, or really up to $88 million, for other capital projects including our Plymouth Meeting redevelopment, possible purchase of ground leases, funding of certain JVs and other projects that may get started in the latter part of the year.

That also includes $27 million that has already been funded for our share of the Station Square acquisition. And lastly, from July 1st forward, there would be $50 million of aggregate dividends on common and preferred, with $22 million of common and $3 million of preferred already paid earlier this month, leaving remaining 2012 dividend payments of approximately $25 million.

To fund this $253 million, we're projecting the following from July 1st onward, approximately $84 million of cash flow before financings, investments and dividends, $51 million of additional net sales proceeds already received from the Oaklands closing, and $118 million of cash usage to round out the plan leaving us with a projected 2012 year-end cash balance of about $114 million.

And of course, we do not expect any financings or any credit facility usage for the balance of the year.

Lastly, a quick word on accounts receivables. We concluded June 30, 2012 with $16.2 million of total reserves. This consisted of $3.2 million of reserves on $14.6 million of operating receivables, just under 22%, and $13 million of reserves on $127.8 million of straight line rent receivables, or just over 10%.

In the second quarter of 2012, we had very typical activity with respect to receivables and reserves and no major credit issues.

And now I'll turn it back to Jerry for some additional comments.

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

To conclude our prepared remarks, the second quarter went very well. As evidenced by our comments, operational throughput remains strong. The balance sheet strategy is very much on track. We accomplished all of our investment goals for the year. So, we are very confident we will achieve our 2012 objectives.

We also remain convinced that our product quality and the skill of our operational teams in our field operations will continue to provide us a competitive advantage and we expect that advantage to become even more further evident as fundamentals in many of these markets continue to improve.

With that, we'd be delighted to open up the floor for questions. Steve, as always, we ask that everyone in the interest of time limit yourself to one question and a follow up.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster.

Jordan Sadler, KeyBanc Capital Markets.

Could you guys just expand a little bit on the tenant softening you may have been experiencing throughout the recent weeks and months?

George and I will tag team. From a tenant softening standpoint, that's probably too broad of a characterization. I think we've seen in a number of the markets where we'd expect to see good activity, we've seen that.

And actually one of the stats that we do track, and George articulated, was this compression time from kind of proposal to lease execution. So, that seems to be trending in the right direction.

But in a number of our markets, New Jersey, Delaware, the Pennsylvania suburbs, most of the submarkets in the Pennsylvania suburbs, Philadelphia CBD, Austin, we're still seeing very good levels of activity. And the activity we're seeing out there is real. They are not just window shopping, there's decisions being made.

I think where we have seen softening that our original business plan did not contemplate is really in the Northern Virginia corridor. And that's certainly a topic that's oft discussed in a number of other companies' calls as well.

But I think we were anticipating somewhat of a continuation of the activity levels that were taking place in 2011. And I think with all the macro issues at play, we simply haven't seen that take place.

In our Richmond market, we continue to do well in all of our submarkets, with the exception of the Southwest, which is simply not showing the levels of activity that we anticipated.

So, all in all, I think the activity levels, Jordan, are remaining pretty solid. You know, we're just always very focused on any fraying at the edges in corporate decision-making rooms based upon every headline they read in the financial periodicals.

George, any additional color there?

Yeah, Jordan, I think the other stat that we continue to be pleased with is the fact that expansions are outpacing contractions.

So, while we are seeing a little bit of a slowdown in both Northern Virginia and in Richmond, we are seeing good levels of activity, a willingness to make decision and tenants actually going through expansion modes in the greater Philadelphia markets.

You're not seeing deals fall out of negotiation or out of the pipeline, any attrition that's greater than it was in the prior quarter, are you?

No, I think the activity coming into the pipeline through both inquiry and inspections has remained somewhat consistent. I think the amount of deals that naturally just do not come to fruition has remained somewhat consistent. And the velocity of how those deals are moving up the pipeline is somewhat consistent, within 10 days of the last two quarters.

So, we're always going to have a couple of tenants in the marketplace who are out-shopping you for a stay-put. But quite frankly, we've got some of our own tenants doing that who ultimately renew with us.

Now all that being said, we're still very mindful, as I mentioned, of the fact that headline risk in the macroeconomic climate has a much more significant bearing on tenant psychology than the color of our lease brochures or how we do on the tenant showing.

We are very focused, as we have been, and continue to be, on accelerating absorption through our entire portfolio. So, we do remain very keenly attuned to the tone of our tenant discussions. There's a great communication channel within the Company in terms of leasing pipeline.

So, it's monitored very closely by our managing directors as well as George and other members of the executive team.

That's helpful. As a follow up, I'm curious if you could expand on what you discussed at your Investor Day in terms of the pipeline in Central and Southern New Jersey.

The total amount of that pipeline remains at that 500,000 square foot range. We've got some towards the upper end of that, but with really no actual deals executed since our Investor Day 30 days ago, but we continue to address proposals and negotiate back and forth with a number of those prospects, some of which have a late fourth-quarter '12 occupancy requirement and others that have an early 2013 occupancy requirement.

Is it a broad subset of industries that are represented there? Or any concentrations?

Pretty much the same type concentration we're seeing with communication companies, law firms, insurance companies, financial service companies, pretty much the same range of tenancies that we've been executing leases with over the last year and a half.

What's kind of interesting, Jordan, is a couple of those larger prospects have been in the market for a while, but they're actually looking to expand their current space holdings, which is actually a very good sign for that market.

So, we're diligently pursuing all of those tenants with the hopes that at least some of them will make a decision to join the Brandywine family of tenants.

Jamie Feldman, BofA Merrill Lynch.

I was hoping you guys could discuss any potential changes in maybe the acquisition market. As things start to slow down here, any sense that maybe you'll find more opportunities as maybe potential bidders drop out? What are your latest thoughts?

Tom, why don't you take that, initially?

Hi, Jamie. Taking a look at the markets, I would agree there's been a bit of a slowdown in the last quarter in terms of the acquisition activity. We've seen little activity in the Philadelphia CBD. The suburbs have also been relatively quiet. We did have our Oaklands trade. There's been a couple other smaller trades with local buyers.

The DC market, outside the Beltway, we've continued to see very little activity there. Our trade in the first quarter on South Lake, other than that there haven't been many large trades in the area we're looking to buy.

And then when you look inside the CBD, we've seen a number of properties come back to market, take longer to close, or they've been pulled from the market or refinanced. Again, with the interest rates where they've been, we've seen that.

Also in Richmond, slow market, haven't seen many opportunities much less demand. And then Austin, there has been a bit more activity. We've been involved in looking at a number of properties we've been interested in in our market, but not able to execute. That market is, seems to have the deepest pool other than the Washington CBD in terms of our markets. But again, that's slowed up a little bit this past couple months.

And then do you forecast or get a sense that maybe you'll be in a pretty good position going forward?

Usually after the summer, usually some teasers start coming out. We're really focused on looking for some opportunities with the Allstate JV. We did close on Station Square. We would hope to find other types of transactions just like that, good profile of stability. And we will continue to look in our core markets and see what comes up in the fall. And we would hope to get something closed in the fourth quarter, but nothing imminent on the horizon.

We also are looking at a number of off-market transactions. And those are always difficult to predict timing on those.

Jamie, let me just add onto that. In DC, I think what our team is very focused on in conjunction with our partners at Allstate is really tracking not just the number of deals in the market and what submarkets they're in, but also really being very keenly tuned into any change that we think CAP rates might be in that market.

Certainly with the growth projections in that market, for rental rate being pulled back significantly where they were 12 to 18 months ago, the levels of leasing activity certainly down, negative absorption in a number of those key markets from the [Brack] situation, there's certainly an expectation that CAP rates could back up a little bit. And that's certainly one of the things we're very keenly focused on as we assess all these opportunities.

And then on the privately marketed transactions, as Tom touched on, we have a number of those that we're looking at. I will tell you that several of those are fairly intriguing. But inasmuch as they're not going through an auction process, they tend to be a little more protracted and delicate in the pace of getting them accomplished.

But we're still very much ferreting out opportunities. Not just on the potential buy side, but certainly continuing to (inaudible) what we think is a pretty good pool of potential buyers for assets as well.

Brendan Maiorana, Wells Fargo.

Just looking at the occupancy ramp that's expected in the back half of the year, is any of that driven by some of these dispositions that appear to be at low occupancy levels? And so, on a same-store basis, how much ramp do you think you're going to get?

Good question, and we'll tag team that. But when we look at what we're selling and how we dovetail that into our occupancy forecast, it's really not very much focused on hey, let's sell assets that are less occupied to improve the overall occupancy of the portfolio.

It's more focused on where we think we think we get the most optimal pricing for a trade. For example, one of the things that did hurt our occupancy earlier in the year was we sold a 100% leased building in South Lakes. That certainly had an impact on our occupancy targets for Washington DC.

The two transactions we had this quarter of Pacific Ridge and Oaklands were below our average occupancy levels. So, they tend to wash themselves out. So, it's not really a data point as we start to assess how we improve overall occupancy, because in fact some of our properties now that are below average occupancy levels for the company we think are great value opportunities for us as we start to lease that space up.

I think when we look at selling properties that are below average occupancy level just because we've made the investment, we've drawn the investment conclusion that the price [that we can] sell that asset today is marginally better than the net present value of going through the downtime capital costs to re-tenant the existing vacant space.

So, there's not an algorithm that we've developed that kind of says we're moving to a specific occupancy target. It's more focused on how we view the investment market and where we see actually our ability to drive rental rate growth over the next couple years.

That's helpful. Part of it pertains to this year, but then part of it pertains to next year and even a multi-year outlook as I think about what you guys put up at the Investor Day where next year's target is 91% to 92% and I think the longer term target is maybe 92% to 93%.

So, as we think about the 91% to 92% next year, we can assume that that's on kind of a same pool basis as we would think about it? That's still a viable target?

Yes, I certainly think that's a fair way to look at it. The thing that we never lose sight of is the fact that year-end '07 we were about 94% leased and occupied. So, that's the target we know we want to get this portfolio back to as marketing conditions present themselves.

So, we certainly -- while we laid out very specific targets for '13 and '15, that time frame. We're very confident the overall portfolio will perform at those levels. Certainly, even as we sell properties or as we buy properties, it's really focused on overall growth rate not as much a pinpoint occupancy target.

Okay, that's helpful. And then just following up, if I look at the spec revenue target that's left to go, it looks like it's $0.04, it would be a $0.04 swing kind of to earnings. Is it fair to assume that the low end doesn't assume anything that gets in there? And can you give us a sense of how much actual leasing square footage that spec target equates to?

Yes, I'll jump in on the earnings. That's one of the major contributors to the earnings guidance, but by no means the only. So, to kind of draw a straight line from all or none in there to all or none of the guidance would miss many other factors.

Then I'll give it over to George for the square footage side.

Yes, on the square footage side between new and renewal, we've got just north of about 600,000 square feet left to execute. And again, that's both new deals and renewal deals.

Josh Attie, Citigroup.

Can you talk about the cap rates on the assets that you sold in Pennsylvania recently?

Certainly. Tom?

Yes, the cap rates that we sold the Oaklands was an 8% cash and an 8.2 GAAP. And that's based on current '12 projections.

Okay. And I know that you hit your asset sale guidance for the year, but are there other asset sales that are being contemplated and are there still a large amount of non-core assets in the portfolio that you'd like to sell over the next couple of years?

I think based on what we mentioned is our range for the next couple years, certainly we have assets that we have targeted for sale. To the extent we think that there's improvement in the markets where those assets are, we'll look to put them on the market sooner rather than later.

We think there is an appetite for some of the assets that we're considering for future sale. And again, not that you may get the same terms, but the financing market has improved. And as we saw with our Station Square acquisition, the financing from financial institutions has also started to be more constructive on top of the life companies.

So, to the extent we feel there's a good opportunity to sell, and again as Jerry mentioned, we take a look at future operations of those portfolios and if we think there's a better chance of selling than to operate them, when we look at a downside and upside scenario, we'll put those on the market.

Are there assets in the market now that you could sell in the back half of the year? Or are you not marketing anything?

Right now we don't have anything actively being marketed.

And along the same lines, how do you think about the re-deployment of sale proceeds? The cash balance was almost $200 million at the end of the quarter and you probably have a little more coming in after you've sold down the securities portfolio. I guess anything about the re-deployment of that cash, would you prefer to pay down some of the term loans and de-lever? Or is that cash being held for reinvestment?

As we mentioned, I think even on the last quarter call, I think what we want to do at this point is preserve flexibility. And we have good cash balances. Through the bank refinancing that was done earlier this year, we created really a debt balance that has good pieces of it that are pre-payable based upon how we view the intermediate environment.

So, we continue to focus on maintaining those cash balances. As Howard touched on, the Company's really insulated from floating rate risk, although certainly floating rates have moved down significantly over the last couple months. But it's certainly the right decision for the Company to stay where we are.

Relative to re-deployment, Josh, and you raised a very good question. We are always looking for, always going through price discovery on any number of assets in the portfolio. So, even though as Tom touched on, we don't have anything actively being marketed right now, either through reverse inquiries, private discussions, relationships, there's always dialogue taking place on what we can do with the existing portfolio. Or as we touched on, what we can do in terms of deploying that money into new acquisition opportunities.

It is a very fluid investment market. Actual [prints] are down over from where they were a few quarters ago. But I don't think that in any way implies there's not a lot of activity taking place within the various companies including Brandywine on what sales or what acquisitions can happen.

John Guinee, Stifel Nicolaus.

Nice job, guys. Hey, couple things -- My favorite deal you have is your commerce one and two. I think you've got about $25 million committed, not sure how much you've funded of that so far. And you've got a couple of loans maturing and your friends at Thomas on the West Coast are sort of moving back to California. Can you give us an update on that deal?

Certainly happy to. And the relationship with Thomas Properties remains very positive and very constructive. We'll have our full $25 million invested by the end of this year. So that's on the rails and will be invested sequentially over the next two quarters.

Debt on one of the properties does mature next year. Both Thomas and Brandywine are in an active dialogue on what approach does it take on refinancing that debt. And certainly, balancing investment flexibility with very attractive longer term rates.

So, our expectation would be that over the next 3 to 6 months the partnership will conclude what our best path is in terms of recapitalizing the venture with this pending debt maturity in the second quarter of next year.

And the second building —when does the debt mature on that one?

End of '15.

And then the second, as we're looking at CapEx, is over the last 6 quarters, TIs and leasing commissions have been about $23.00 a foot. And it looks like your normal run rate is about 800,000 to 1 million square feet per quarter. Could we look at that 800,000 to 1 million square feet per quarter and $23.00 a foot as a good run rate going forward?

Our range is really $2.25 per foot per lease year to $3.25. We've had a couple of deals kind of skew the quarterly numbers, but I think somewhere in that $2.75 is probably the average expectation going forward.

And then how about an annual or a quarterly run rate for leases executed or commencing? Sort of 800,000 to 1 million?

Yeah, that's probably a safe assumption.

Rich Anderson, BMO Capital Markets.

Just wanted to follow up on John's question. Your CAD guidance is $0.60 to $0.70 and that is, it's kind of like 50% of your FFO. Pretty wide gap, understandably, trying in some markets to buy occupancy. But what do you think the long term is in terms the gaps between the FFO per share and the CAD per share in a more normalized environment?

Historically the Company ran anywhere in the two-thirds, 66% to 75% area. Remember that for last year, this year and the next three years, $0.08 of FFO will be by definition non-cash from the historic tax credit transaction. So, you have to factor that into the mix.

And it has been the case, not so much in the last quarter or two, but certainly some other quarters, that the capital spend has been higher to both maintain, and in some cases, create occupancy in tougher markets.

We certainly believe as the portfolio occupancy inches up the balance between landlords and tenants will tilt more in our favor. There'll be higher retention. There'll be less concessions and a little bit more negotiating power on our side, as we're already seeing in some of the tighter markets.

So, we don't anticipate any difficulty getting back to those higher, better levels or ratios.

Okay, fair. And then the follow up questions is on the spec revenue staying constant at $44.9 million for the year. How much of that is just kind of holding the line, being a little bit conservative because of the observations you're seeing in Northern Virginia? Because I think New Jersey-Delaware is maybe surprising a little bit to the upside. So, and maybe I'm wrong about that, but I think that's correct.

Are you kind of holding the line waiting to see how the year progresses and hopefully we'll see that spec revenue number go up a little bit as you get closer to the end of the year?

It's a great question, something we really spend a lot of time evaluating in terms of assessing probability of the leasing pipeline. But as George and I outlined, we clearly expect that outperformance in a number of the markets, which we know we will already achieve, is going to offset what we expect to be an underperformance in our Met DC and Richmond operations.

We do think that New Jersey, particularly driven by the leasing activity in Southern New Jersey, will create some performances to the upside there. But I think given the lack of visibility on what we think the execution rates will be in our Northern Virginia portfolio, I think we are very confident on the $44.9 million.

But I think it would not be pragmatic of us to raise that or adjust that number upward given the fact that we still have a lot of work to do to get to that number by the end of the year.

Michael Knott, Green Street Advisors.

Just wondering if you can pinpoint a little bit more why the improvement in the same-store NOI outlook for the year, and then also can you talk about, just revisit the defense tenant [expiry], say in 2012 and 2013. I think you touched on that at the Investor Day, but maybe just if you could revisit that.

On the same-store, a couple of things. One, we saw an increase in tenant retention. So, less downtime on some previously assumed lease rollover.

And then the properties that we did dispose of, those properties were actually running a 2.2% negative same-store characteristic to them. So, a little bit of a pickup in what is now go forward same-store.

And then 2013 expirations, not a lot to update since Investor Day. Clearly our biggest one that we've got all eyes focused on is with Lockheed Martin. We have issued them both a short term and a long term renewal proposal for their space in Maryland. And we're awaiting some feedback there.

But again, I think the expectation would be that they're going to lean towards a shorter term deal. And if they do go long it's going to be one that most likely would have some type of early termination characteristic built into it.

And then also at the Investor Day I think you suggested there was maybe $75 million of sales that you were working on and you announced obviously a little over $50 million. And I think you said today that you're done for the year. So, did that portfolio sale shrink from what it was initially contemplated? Or was that something else?

No, I think, I'm trying to remember the exact conversation. We had the Oakland sale in process. And I don't know if Pacific Ridge had closed by the Investor Day.

Pacific Ridge had closed by the Investor Day, but I think that was part of our remaining balance, what we were selling.

But, Michael, to put a fine point on it, let me just make sure we're clear. We have achieved our $175 million target for the year. As Howard laid out, our existing guidance does not anticipate any more sales this year.

Within that framework, though, we do continue to look at other sale opportunities. As Tom laid out, nothing is formally in the market where we've retained a broker and there's a brochure out there. But there are a number of other discussions that we continue to explore, as we always have, about doing a small individual asset sales, a small portfolio sale.

And look, I think frankly as we saw with the Oakland transaction, there is a continued pool of local investors who have access to -- particularly commercial bank financing, but certainly life company financing at fairly attractive rates -- who are in a pretty good position to do transactions in that $25 million to $50 million range.

So, while we increased our guidance from $80 million sales to $175 million, we've now achieved that and we're delighted with the result in terms of cap rate, net asset value, accretion, etcetera, the reality is that in this type of fluid market it's incumbent upon us to really continue to explore optimal price points on some of our assets.

Ross Nussbaum, UBS.

Jerry, you mentioned before that you think your stock continues to trade below net asset value and you're selling assets to de-lever which I think was absolutely the right decision. What exactly do you think your net asset value is?

We don't publish a net asset value, Ross. We rely on, certainly the analysts to do their own calculations. We look at ours on a detailed basis.

On an asset by asset basis, including currently leased assets, properties in lease-up and land values. The consensus for the NAV for the Company and the analysts is just shy of $13.00 a share. The stock is trading below that. So, even using published numbers that are based upon work by the various firms, the stock is trading below net asset value.

Let me try to tackle it this way. There haven't been many asset trades in Philadelphia CBD or even the crescent markets for that matter. Do you have a sense in your mind of what an appropriate cap rate or per square foot pricing would be for CBD and the crescent markets?

Certainly there have not been a great velocity of trades, but I think what we have seen is a property for example in Conshohocken, Pennsylvania, which is one of our crescent markets, that traded for about a 7% CAP rate, actually I think it was a little tighter than that, and a price well above $300 a square foot.

Certainly a high quality asset in a very key market, but that's certainly I think reflective of the quality and locational attributes that a lot of our crescent markets have as well.

The historical CAP rate differential between CBD Philadelphia assets has been between 100 to 200 basis points greater than what we typically see in Met DC and New York City.

So, you go back a number of years and see that trend line, just not has been a lot of things of great value trading that are stabilized from the city of Philadelphia. Did that help answer --

That's the reason I asked the question ultimately. Because I think one of the reasons perhaps the NAV discount persists is people struggle to put a value on those assets because they just don't, there's not a market comp for them.

The reality is in the Philadelphia CBD really you have two companies that own a significant portion of the Class A office space. They both tend to be hands on managers and leasing folks. And so it's a challenge to get a lot of visibility on what that is, but I think if you do take a look at some of the brokerage firm statistics, that again go back through peaks and troughs, and kind of do that graph of where CAP rates have been in the more 24 hour gateway markets in the mid-Atlantic area of New York and Washington and compare that to a Philadelphia, you'll see that that's historically been the spread of CAP rates.

Mitch Germain with JMP Securities.

I'm good, guys. Thanks a lot.

There are no further questions at this time. Presenters, I turn the call back over to you.

Steve, thank you very much. And everyone, thank you very much for participating in the Second-Quarter Earnings Conference Call. We look forward to our next earnings call and continued execution of our business plan. Thank you very much.

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