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Brandywine Realty Trust (NYSE:BDN)

Q4 2010 Earnings Conference Call

February 17, 2011, 10:00 am ET

Executives

Gerry Sweeney – President & CEO

George Johnstone – SVP, Operations & Asset Management

Howard Sipzner – EVP and CFO

Tom Wirth – EVP, Portfolio Management and Investments

Analysts

Jamie Feldman – Bank of America/Merrill Lynch

John Guinee – Stifel Nicolaus

Jordan Sadler – KeyBanc Capital Markets

Josh Adie – Citi

Mitchell Germain – JMP Securities

Rene Bayaran [ph] – Wells Fargo Securities

Dan Donlan – Janney Montgomery Scott

Dave Rodgers – RBC Capital Markets

Operator

Good morning. My name is Latangie, and I will your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions)

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

Gerry Sweeney

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

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

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

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

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

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

During 2010, we executed on our investment program closing on two transactions in CBD Philadelphia, Three Logan Square, and our joint-venture with Thomas Properties at Commerce Square. Those transactions represent an aggregate investment of $154 million, and were substantially equity financed. We also sold $52.6 million of non-core properties with five building sales occurring late in December, 4 in southern New Jersey and one in

Austin, Texas.

Our cap rates for the year on projected cash NOI were between 6.9% and 8.6% on properties with a 62% average occupancy, and we recorded overall gain for the year of $11 million on those sales.

During 2010, we saw our core occupancy decline by 2.6 percentage points, 80 basis points of that is due to the inclusion of Three Logan, which is at 63% leasing in those numbers. The remaining 1.8% occupancy decline related to known tenant contractions and move outs. We ended the year at 85.6% leased or occupied slightly above the projection on our last earnings call, and our year-end 2010 forward leasing number is 87.7%.

That spread of 200 basis points over actual occupancy is a return to the historical spread that we have had on forward leasing, another positive sign of market recovery. Furthermore, 4 out of 7 of our primary markets experienced positive absorption for the year, led by Northern Virginia, suburban Maryland, Austin Texas, and Richmond Virginia. In all cases positive absorption levels were below historical averages, and in the case of New Jersey and Pennsylvania suburbs, the negative absorption numbers were a significant improvement over the numbers in 2009.

Just as importantly though market activity levels were up in all but one of our markets on a year-over-year basis. So, the overall tone of the market remains positive, our leasing pipeline stands at 2.8 million square feet, of which 537, 000 square feet is in active lease negotiations, our conversion rate also continues to improve. For 2010 our conversion rate was 44% and we also did 24% of our leasing transactions on a direct basis during 2010.

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

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

The more important focus though is on 2011. We are pleased we what we have seen thus far this year, increased absorption in tenant activity levels that put us in a position, where we are 54% on our 2011 business plan. You will note in the supplemental package on pages 34 and 35 we provided some additional schedules to capitalize our progress on various business plan metrics.

We will update that quarterly, so you will have a clear synopsis of our business plan progression. Based on progress thus far, we have moved up the bottom end of our FFO guidance range by $0.02 for a new range of $1.26 to $1.34 per share. As I just touched on, the market tone continues to improve. All of our operations reported much higher levels of leasing activity in 2010 versus 2009, in some cases by very wide margins. Those activity levels are fairly broad-based with no one particular industry-leading the way.

As discussed on previous calls, during this recovery period, the major focus is on increasing market share, while the absorption numbers in those markets catch up to historical levels. On that front, the plan is progressing pretty well. By way of example, in southern New Jersey, our leasing term did 56% of all the deals in the market compared to a 20% ownership position, and additionally in the PA [ph] suburbs we captured 44% of market share for new leasing activity versus 14% ownership stake.

So the name of the game clearly remains to see all deals and execute as many as we can. The markets that we expect to perform well going into 2011 are the Pennsylvania suburbs, CBD Philadelphia, Richmond and Austin. We continue to expect to face leasing challenges in our New Jersey Delaware operations, as well as the Dulles Toll Road Corridor. Both of these operations have been impacted by a fairly high number of tenant contractions and move outs, and those markets will remain competitive, but as I touched on activity levels in New Jersey were up 19% year-over-year, and in the Toll Road Corridor, activity levels were up over 25% year-over-year.

Our inventory in those markets are high quality, well situated in their competitive set, and we are confident of our ability to restore these occupancy levels to their historic run rates. For 2011 in general we expect stable to improving occupancies, consistent same-store numbers, and a declining negative mark-to-market, all reflective of continued improvement in our overall market conditions.

Our concession packages have remained fairly steady, and we are seeing capital costs increase we are getting much more in terms of lease maturities. We wrapped up 2010 with about 40% of our leases incorporating free rent, and would expect about 55% of our leases in 2011 to have some element of free rent in their lease terms.

From an investment standpoint, we expect the following. Business plan incorporates the sale of $80 million of properties, our business model has those sales appearing with more heavyweights towards the second half of the year, with $20 million in Q2, 30 million in each of Q3 and Q4, at cap rates 10% or lower. Our plan will continue to target non-core and slower growing properties for sale.

We do not have any acquisitions built into our 2011 plan, we will continue to see quality additions to our portfolio, both directly and through joint venture opportunities. Those investments will be financed primarily in an equity basis to further improve our balance sheet and to improve our investment grade rating.

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

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

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

We do remain fully committed to moving up the investment grade ratings curve. As we have discussed before, that is a multiple year plan that we will achieve through a combination of NOI growth, occupancy improvement, disposing of slower growth assets, and funding acquisitions on an equity basis. Our capital plan for 2011 anticipates a $300 million 7-year or 10-year unsecured note issuance in the fourth quarter, our pro forma rate in our financial model is 6.25%. Current indications are slightly below this target. Additionally we plan on another $300 million note issuance in the first-half of 2010.

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

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

George Johnstone

Thank you Gerry. This quarter we added two new pages to the supplemental package to outline our achievement on the 2011 business plan objectives. For 2011, we have increased the amount of speculative revenue from 25 million to 30.7 million. As of today, we’ve achieved 16.5 million or 54% of that speculative revenue.

The additional renewals included in our business plan result in a revised retention percentage of 56%. We are still estimating they decline in same-store GAAP NOI between 4.2% and 5.2%. Rental rate declines are estimated to be 2.5% to 7.5% on a GAAP basis and 5% to 10% on a cash basis. The actual rental rate declines on the 54% of the plan achieved to date have been 2.5% on a GAAP basis and 10.7% on a cash basis.

Our updated leasing plan for 2011 assumes 3 million square feet of speculative leasing consisting of 1.7 million square feet of new leases and 1.3 million square feet of renewals. This leasing activity when combined with our 555,000 square feet of forward new leasing already executed and anticipated contractions will produce a 20 basis point increase in year-over-year occupancy.

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

As we assess the speculative revenue plan for 2011, on new leases there is an active pipeline of prospects, 537,000 under current negotiation, and 2.2 million square feet of prospects who are in receipt of a proposal.

In order to achieve the open leasing assumptions in the plan, we will need to convert 41% of today’s pipeline. As Gerry mentioned in his commentary, our conversion rate during 2010 was 44%. In terms of tenant mindset, our regional operating teams are in constant contact with the tenant base. Most companies are feeling better about their own businesses and we continue to see good levels of tenant expansions.

While the number of tenants expanding exceeds those contracting, the larger downside by a few tenants has offset expansions on a square footage perspective. At this time we feel that all of the large tenant contractions are identified and are incorporated in the updated plan.

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

Howard Sipzner

Thank you George and thank you Gerry. In the fourth quarter, funds from operations or FFO available to common shares and units totaled $47.9 million. It represented $0.33 of FFO per diluted basis per share and it beat analyst consensus by $0.01. It is a high quality FFO figure, in that fourth quarter termination revenue, other income, management fees, interest income, and JV income totaled $7.5 million gross or $6.1 million net and are in line with our 2010 guidance range for these other revenue components.

Our FFO payout ratio in the fourth quarter was 45.5% on the $0.15 dividend we paid in October 2010. Few other observations on the components of our fourth quarter performance, cash rent of $115.7 million was up $4.1 million versus the fourth quarter of 2009, and 5.9 million versus the third quarter of 2010. After adjusting for the effects of deconsolidating three joint ventures, effective January 1, 2010, and the fourth quarter 2010 sales.

Straight-line rent of 4.5 million was also up 2.2 million versus Q4 2009 and 750,000 versus the third quarter of this year. These sequential increases are for the most part attributable to the Post Office, Garage, and Three Logan Square assets we completed or acquired during the third quarter.

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

Interest expense in the fourth quarter of 35.4 million increased sequentially by $0.9 million or 900,000 and by $1.7 million year-over-year as we absorb the expense of the Post Office and Garage permanent loan. Interest expense in the fourth quarter includes $310,000 of non cash APB 14-1 costs related to our remaining exchangeable notes, and just 900,000 of capitalized interest or about 1.8 million less than we had in Q3 2010, as a result of development completions.

G&A at 4.8 million benefited from a $1 million reversal of bonus approvals based on year-end true ups, and was otherwise in line with our expectations. Deferred financing costs increased sequentially to 1.1 million, reflecting the full commencement of our amortization on the Post Office Garage loans.

In the fourth quarter, we had net bad debt expense of only $203,000, in line with expectations and reflecting various write offs, recoveries and adjustments to reserves. And lastly we incurred about $0.5 million or 500,000 of losses on 13.7 million of aggregate debt repurchases, offset by $100,000 benefit on a mortgage prepayment.

For the quarter, same store NOI declined 4.9% on a GAAP basis and 5.1% on a cash basis, both excluding termination fees and other income items, and largely as a result of lower occupancy in the same store portfolio.

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

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

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

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

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

Looking very briefly at the 2011 capital plan, we have total capital needs of 458 million in 2011. That represents 135 million of investment activity, up to $14 million to finish all expenditures on the Post Office and Garage, $56 million of revenue maintaining capital expenditures, $41 million for remaining redevelopment outlays, and lease up of recently completed projects, $15 million for funding of our commitment on the Thomas Properties Commerce joint-venture, and $9 million for the land parcel we just bought earlier in January.

We will have $230 million of potential debt repayments, $60 million for the remaining balance on our 2011 exchangeable notes, $130 million for mortgages, and we have built into the plan the potential of $40 million for a possible JV debt repayment. We plan to extend our $183 million bank term loan and our $600 million credit facility to June 29, 2012 by exercising our extension option in April 2011. And lastly maintaining the current level of dividend activity, and reflecting the fact that the units of the Three Logan Square transaction will not pay any distributions until later in 2011. We see about $93 million of aggregate dividends on our common and preferred shares.

To raise this $458 million we’re projecting the following. Approximately 165 million of cash flow from operations. We will fund the remaining $3 million on the historic tax credit transaction during the middle of this year. We had $16 million of cash on hand. Gerry outlined the sales activity of $80 million, as well as the $300 million unsecured note.

Net-net, this will result in a $106 million pay down on our credit facility from its 183 million balance at 12/31/2010 to approximately 77 million at year-end 2011. As I mentioned earlier, bad debt expense was very benign in the quarter. Total reserves against receivables at 12/31/2010 were $15.2 million, $3.7 million of that was on about 19.9 million of operating or other receivables at 18.5% level, and 11.6 million went against 107.1 million of gross straight-line rent receivables or around 11.5%.

These figures are consistent with prior activities and don’t reflect any undue credit activity. Our balance sheet and credit metrics remain conservative, and in line with prior quarters. We are 100% compliant on all of our credit facilities and indenture covenants, and only had $183 million drawn on our line at year-end with $16.5 million of cash on hand.

And now I will turn back to Gerry.

Gerry Sweeney

Great Howard. Thank you very much. George thank you as well. To wrap up our prepared comments, while the market continues to do well and we have had good success going into 2011, we certainly still have a lot more work to do, and remain very focused on getting it done.

We were pleased to have accomplished many of our key objectives in 2010, and looking ahead, our best growth strategy as George touched on is to simply lease up our existing vacancy. We are focused on that objective singularly, and believe that our liquidity, inventory, quality and strong market position provide a good competitive advantage for us.

2011 is operating on track. We are pleased with what we have been able to do thus far, and we certainly continue to plan on executing an aggressive leasing strategy to ensure that we achieve all of our business plan objectives.

With that, we will be delighted to open up the floor for questions. We would ask that in the interests of time to limit yourself to one question and a follow up.

Latangie, we are ready to open up for Q&A.

Question-and-Answer Session

Operator

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

Jamie Feldman – Banc of America/Merrill Lynch

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

Gerry Sweeney

Jamie, a great question. I think as we view it, and I touched on a little bit in the comments is our regional and leasing teams are very much focused on you know, gathering additional market share. I mean, we fully expect that absorption levels are going to remain below their 10-year averages as we track them. We had a couple of markets you know, actually did much better in 2010, than we frankly thought they would do, but there's no question until there’s really, you know, sustainable, predictable job growth you know, the net new demand is going to be somewhat anemic, while that is partially offset by new construction coming online, it clearly doesn't absorb all the existing vacancy in those markets, and we clearly do operate on the premise until these vacancy rates get down to 10% or below, it's difficult to have general pricing power with our tenant base.

So we do remain very active in trying to gather market share through aggressive cold calling programs. We significantly expanded the size of our leasing teams in a couple of our key regions last year, and are seeing the benefits of that. The leases themselves, George maybe you can jump in in terms and chat about what we're seeing, but it is actually fairly broad-based. I mean, you know, our activity levels when we look at our different operations, the numbers are pretty positive relative to year-over-year activity.

I mean, you know, PA we were up, the PA suburbs that is, you know, our Q4 activity levels were up almost 26%, New Jersey 19%. I think I touched on the call, Richmond up 31% and that's quarter-over-quarter, year-over-year the numbers are even more compelling. I mean, PA our activity levels year-over-year were up you know, just shy of 70%. That in our mind is really reflective of both tenants getting much more constructive on doing forward business plans.

The brokerage community getting much more aggressive in getting out there and advising their clients that now is a good time to enter the marketplace before rents actually start to move up, and I think those two reasons are the primary market rationale that we're seeing additional activity. I think we're seeing probably a little more activity than maybe some of our competitors because of the aggressiveness of our cold calling program, but, I don’t George, if you can add any additional color to what we see in different markets.

George Johnstone

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

I think some of our other key submarkets are actually showing the ability to push rents in the PA suburbs for the deals we did in 2010. You know, we are able to grow rents almost 8%, in Plymouth Meeting almost 7%, in Newtown Square and overall had you know, a 0.5% increase in our PA suburbs from a rent growth perspective. I think we are still expecting some continued job growth in both Metro DC and in Austin and in southern New Jersey we’ve actually seen you know, our deals were a 4% decline in GAAP rents during 2010, but I think when you kind of again look at the 38 corridor versus the 73 corridor, we are seeing, you know, better market conditions along the A quality inventory.

Jamie Feldman – Banc of America/Merrill Lynch

Great. Thanks George.

Operator

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

John Guinee - Stifel Nicolaus

Great, thank you. Gerry, you made a big bet on Center City, Philadelphia, last year and then with the land this year. You got in Three Logan and Commerce Square I think at about 180 or 190 a foot stabilized, you now own, I think over 50% of the class A space, you are taking down some land. Can you sort of walk-through for everybody, why this market which has historically really lagged, will we start seeing some rent growth in the foreseeable future?

Gerry Sweeney

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

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

For us that was truly an opportunistic purchase. It was a combination of us being able to buy into one of the higher-quality building CBD that – had essentially a leasing market for a number of years. We are able to buy that for, you know, $125 a foot, which will put and stabilize as you touched on about 180, which is about where our investment base is in One and Two Logan. So we saw a lot of market/leasing synergies in acquiring that property.

And I think you know, what we are seeing thus far that project itself has about 600,000 square feet of active prospects between, renewable tenancies about a couple of 100,000 square feet with the balance being new prospects that we're talking to, all of our renewable deals, the newer transactions are at rates well in line with their pro forma activity. In terms of the broader question, I think as we view Philadelphia, it is certainly a marketplace we know extremely well, very well steeped in both the business, political, and civic community within the city, and as a result I think we're able to generate a fairly significant percentage of lease transactions that many others – many other owners may not in fact see.

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

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

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

John Guinee - Stifel Nicolaus

And as a follow up question, George you mentioned that the – for the year you are down 4% on GAAP and 9% on cash, those are gross rents, what is that number roughly on a net rent basis, when you have to deal with increases in OpEx also?

George Johnstone

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

John Guinee - Stifel Nicolaus

All right. Thank you.

George Johnstone

Hello.

John Guinee - Stifel Nicolaus

That is it. Thanks.

George Johnstone

Okay John. Thank you very much.

Operator

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

Jordan Sadler - KeyBanc Capital Markets

Thanks, good morning.

Gerry Sweeney

Hi Jordan.

Jordan Sadler - KeyBanc Capital Markets

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

George Johnstone

Yes, that was just converting today's pipeline. So if nothing new came in, we simply just need to convert 41% of what we have today in, you know, active discussion. And the track record on that George has been – that pipeline is really, you know, a snapshot point in time. And I think one of the things and one of the reasons we talk about that pipeline on every call is it’s a fairly dynamic number.

I mean, you know, we’re continually doing showings, tenants who are leaving the pipeline, tenants who are coming into the pipeline, and one of the big areas we focus on during our in-house leasing calls that we have on a regular basis with the managing directors and our leasing agents is what the velocity, what the throughput is through the inventory. So we very closely track everything from phone inquiries to broker calls to tenant showings, et cetera, and I think what we've been kind of pleased with because we're always looking at what the you know, are there deals that are still coming in, and I think certainly as the numbers indicate you know, progressively through 2010 there has been a continued velocity of transaction.

So we would certainly expect that that pipeline would stay around these levels, maybe increase, I mean, it did increase over where it was last quarter at 2.4 million square feet. So sometimes it is seasonal. A lot of people look for office space the first of couple quarters of the year, and don't really aren’t that active in the summer months and pick up in the fourth quarter, but I think generally speaking across every one of our markets we are pretty pleased with the level of velocity that we've seen.

Jordan Sadler - KeyBanc Capital Markets

It definitely sounds like given sort of – coupled with the absorption you got in the quarter that you have got an acceleration of activity, I know you have got to balance that with some of the known move outs you have got here, but it definitely sounds like an acceleration from previous calls, is that fair?

Gerry Sweeney

I think that's fair. I think, the caveat there is with these known move outs. So, I mean, as I think George touched on and we discussed that on our last call you know, we've had tremendous leasing velocity, particularly during 2010 the 4.2 million square feet was an all-time high for the company, but just to pose that against the 85.6% year-end occupancy is a low for the company. And the major driver there was just a lot of contractions that happened you know, primarily in two of our major markets, but certainly across the board. That's why George’s observation in his commentary is important because as we stress test what visibility, we can have on future tenant activity, we do in fact think we picked up and accounted for in our business plan what known contractions are out whether it’s space being subleased or whether it's, you know, tenants who are not fully utilizing their space or frankly tenants who have told us they're going to reduce their square footage.

Jordan Sadler - KeyBanc Capital Markets

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

Gerry Sweeney

Sure. I mean, the land parcel in Philadelphia, I would say it is a development site on the west Market Street Corridor that sits across 20th street from our newly formed partnership with Thomas Property Group. We were working with an institutional partner that had a potential office requirement, decided it is large enough for other uses such as retail, parking, and multi-family rental. So the planning protocol for that project right now is to master plan that site for those 4 uses, certainly to the extent that the multi-family market is robust as the indications are.

We would probably seek a residential company to do that transaction for us, and move forward to maybe some other pieces of the site. So, for us it was an opportunity to acquire probably the most – the premium development site in the Philadelphia CBD at a very low cost per square foot, and do that on a joint venture basis and commence the planning process. So…I am sorry.

Jordan Sadler - KeyBanc Capital Markets

What are some of the parameters that would cause you to start development, I mean, like what kind of preleasing, what kind of churn expectations…

Gerry Sweeney

I think on the office side, we view that as a long term opportunity based upon this partner’s requirement. It will almost be a build to suit for them Jordan. You know, the other components, I think we will go through the plan in the approval process. See what development bonuses we can get through the new Philadelphia zoning code, and at that point determine what the most effective marketing strategy is.

Jordan Sadler - KeyBanc Capital Markets

Thanks.

Operator

Your next question comes from the line of Josh Adie with Citi.

Josh Adie – Citi

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

Gerry Sweeney

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

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

But certainly have a very good leasing team down there. We are augmenting our existing leasing resources to make sure that we have many feet on the street to sort out every potential deal. And our expectation is that as the year progresses, we will continue to see some good prospects, and hopefully convert some of those prospects to tenants. George, I don’t know if you have any other observation.

George Johnstone

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

So our expectation is that there is deal flow in that market, and a lot of it would just turn into occupancy in the beginning half of 2012.

Josh Adie – Citi

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

Gerry Sweeney

Well, the actual guidance numbers do not reflect a lot of additional occupancy this year for 2011. That being said, the leasing program is moving forward quite nicely, but frankly the financial impact of that most likely start to be seen in 2012. With the Glaxo consolidation to the Navy Yard, you know they will be leaving in a couple of years. Two buildings that are on the northern side of the called the CBD, and one is a – one building they will be vacating entirely, the other building substantially.

And I think the way the Philadelphia real estate community view that is everyone in the marketplace knew that that Glaxo was not fully occupying of their square footage. So that overhang of space was well-known in the marketplace, and was certainly factored in as we assessed our risk profile on Three Logan. Different submarket, different type of building, different community packages between our Three Logan, or actually one and two Logan as well.

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

Josh Adie – Citi

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

Gerry Sweeney

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

Josh Adie – Citi

Okay. Thank you.

Operator

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

Mitchell Germain - JMP Securities

Good morning guys.

Gerry Sweeney

Good morning.

Mitchell Germain - JMP Securities

Howard, what caused the reduction to other income, your assumption [ph]?

Howard Sipzner

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

Mitchell Germain - JMP Securities

And then I might have missed it, your G&A forecast for the year?

Gerry Sweeney

Essentially flat, no real changes. We are expecting about 6 million a quarter, could be up or down a few hundred thousand, but somewhere in that range.

Mitchell Germain - JMP Securities

Okay, and then finally George, if I remember last quarter about 55% retention, 35% known move outs, and about 10% kind of assumed move outs, so you weren’t exactly sure. Where does that 10% bucket stand today?

George Johnstone

Well, I mean we have changed – we moved up marginally from 55 to 56, but I think the chart that we now have on page 35 of the supplemental, we’re kind of at a all things go our way, it could 58 and potentially higher if some of those that said will they ultimately change their mind.

Mitchell Germain - JMP Securities

Right. Thanks.

Operator

Your next question comes from the line of Rene Bayaran [ph] with Wells Fargo.

Rene Bayaran - Wells Fargo Securities

Thanks. Good morning.

Gerry Sweeney

Good morning.

Rene Bayaran - Wells Fargo Securities

I just wanted to follow up on the leasing a little bit as well, I’m looking at page 32 on the supplemental, and I think the remaining square footage expiring is as of the end of last week, 2.2 million square feet, how does that compare to or how does the 950,000 square feet of leases that were signed in Q4, but are going to take occupancy sometime during 2011 compared to that 2.2 million square feet. Does that mean that you have got sort of at risk 1.3 million square feet as you look out at the remainder of the year, and if that is the case how does that compare to kind of the 3 million of leasing that you expect to do?

Gerry Sweeney

Yes, I mean, as we execute those renewals and they kind of just, they moved further down the chain on page 32. That is kind of why those two columns in total offset each other. But yes, we have got 2.2 million square feet that we are still actively negotiating with.

Rene Bayaran - Wells Fargo Securities

But I’m just trying to understand that we think the disclosure that you guys put back in January of the leases that were signed in Q4, there was a lot of that that takes effect later in 2011. So, between Q1 and Q4 of 2011 about 950,000 square feet, is that number reflected in the 2.2, or is the 2.2 million square feet that is going to expire still sort of all at risk?

Gerry Sweeney

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

Rene Bayaran - Wells Fargo Securities

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

Gerry Sweeney

Well, we had 550,000 square feet of preleased new square footage. Some of that had been signed prior to the fourth quarter, but a lot of it had been signed in the fourth quarter.

Rene Bayaran - Wells Fargo Securities

Perfect. Okay, that is helpful. And then just maybe to follow up, I don’t know this could be probably either for Howard or Jerry, but if you guys moved your spec revenue number up by about $5 million from last quarter to this quarter, you have now 54% of your spec revenue accounted for for 2011, that number was lower last year. It was around 45% at the beginning of last year. So what would it take to move the high end of guidance, is the spec revenue just you know, there is not enough of that that occurs in ’11 to sort of move you to move the high end of guidance number up, is there something else that could move your high end of that number north?

George Johnstone

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

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

Rene Bayaran - Wells Fargo Securities

Okay. Fair enough. Thanks.

Operator

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

Dan Donlan - Janney Montgomery Scott

Yes, sorry. My questions have been answered.

Gerry Sweeney

Thank you Dan.

Operator

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

Dave Rodgers - RBC Capital Markets

Hi, good morning guys. With regard to your reason for taking share, you know, a year ago we talked about the competition out there, not really having the capital available to lease, clearly with free rent coming down, what is the number one reason I guess today for your ability to take share to continue to be that and what is driving the transaction in your direction this year?

Gerry Sweeney

Actually George touched on a very good point, which – I gave an answer. I think we’re still seeing a real bias of tenant towards the higher end of the quality curve, quality curve being defined as location, building deployment, superstructure, how the building presents itself, and what its efficiencies are, as well as the stability of the management team.

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

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

Dave Rodgers - RBC Capital Markets

Another thing, that is going along, and I understand you were talking kind of the leasing perspective, but talking about the demand in the for sale market for some of your assets. Clearly it hasn’t been as strong at 10% cap rate guidance, potentially for next year the assets sales at ’11, the asset sales it appears that may be it is not recovering, but give us the sense of kind of where that market today, and throughout 2011 versus what had been?

Gerry Sweeney

Sure. And Tom and I will tag team. I think when you take a look at the financial model that we talked about earlier, the cap rate we have the in the plan really is fairly conservative. Certainly compared to what we are actually able to do this year relative to selling assets at 6.9% to 8.6% cap rate. So, we take a conservative bias when we put together our financial plan just to make sure that we have ample room.

The investment market in some of our core areas, whether it is Pennsylvania suburbs or Southern New Jersey, or Central Jersey, suburban Maryland, you know have been slower to recover then we would have told you they would be probably this time last year. I think we were expecting more velocity on the sales front.

But as we – I’m sure you have heard on the call there is a clear bifurcation in the investment market between the interest in the gateway markets, and interest in some of the non-gateway markets. Now, I think frankly what is happening is that more and more people are beginning to focus on those non-gateway markets. As the economy gets better, as leasing velocity continues to improve in most of the markets. And certainly one of the things we really tracked was the fact that we had a number of markets this year that had positive absorption.

I think when you take a look at increasing year-over-year leasing activity levels, positive absorption and pricing pressures in some of the gateway markets, those three components will start to lead to more investors looking at some of our traditional suburban markets. They will have much more comfort on leasing velocity, where they think rents will stabilize, expense management, all those things a year or so ago they just weren’t confident on.

So, while we did fall short on our $80 million plan for 2010, we came in at as we talked about $53 million, you know, one of the reasons for that is that investment market dynamic. The other reason for that is that a number of properties that we were looking to sell our properties are properties that from a risk-adjusted standpoint were not that attractive to some of the investors in the marketplace.

We were fortunate during the course of the year to get the deals done that we did, primarily to users, who had a need for that space, and willing to pay what we thought was fair value for them. Tom, maybe just what you are seeing in some of the other markets.

Tom Wirth

Yes, Dave, I think in the – what Gerry just said about the dynamics we’re seeing in some of the markets. When you look at the Metro DC area for example, just this year we have seen 3 million square feet come onto the market in terms of sales opportunities from different types of sellers, and while I think in the beginning a lot of that has been in the DC market you are seeing a lot more in the suburbs, and that is because of how dear the pricing has been inside the district, and in some of the core beltway areas.

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

Dave Rodgers - RBC Capital Markets

And then last question maybe for Howard, you know, Howard with regard to your comments for 2011, how do we think about the ATM program, clearly you tied it out in the past to the acquisitions that you are doing, and you’ve talked about wanting to deleverage through acquiring i.e. equity, but as you look through the year and as questions kind of have alluded to strong leasing activity already giving you confidence with the guidance, what would your reference be throughout the year in terms of either increasing asset sales, or issuing more equity, and maintaining the existing guidance versus changing the guidance around overall?

Howard Sipzner

I think if the sales market is there as Gerry and Tom alluded to, we will continue the process of recycling capital. It won’t necessarily be a net reduction

for the company, because in many cases we will reinvest that in higher quality, higher growth assets as effectively we did in 2010. So, not obvious that sales alone on the margin will be deleveraging though they have been in the past.

Other avenues for deleveraging are certainly to fund our investments with equity. So instead of sort of the traditional 50-50 split, we go to more of a 100% equity finance deal, and that brings our averages and various metrics down as we are planning to do. Lastly the recovery of the portfolio will generate a very high level of additional NOI or EBITDA. That capital will largely flow to the bottom line, and in and of itself will delever above what is already happening today.

So before we even think about using equity outright, we have a lot of other tools available, and we plan to use all of those, and we would really limit equity to a defined use that we could present to the marketplace.

Dave Rodgers - RBC Capital Markets

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

Howard Sipzner

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

Dave Rodgers - RBC Capital Markets

Great. Thank you all.

Gerry Sweeney

Thank you Dave.

Operator

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

John Guinee - Stifel Nicolaus

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

Gerry Sweeney

He is not, but I can certainly walk through those. I guess first was Computer Associates, which we captured in our press release about that deal. So the space Computer Associates gave us back is being taken by Deltek coming out of three of our other buildings. So kind of net-net it really results in Deltek space that we are left to lease. That was about 117,000 square feet. Verizon gave us back 91,000 square feet, National Rural Utilities Corp has given us back 97,000 square feet, and I’m just looking for the next largest one on the list here. We had 27,000 square foot in our Research Office Center portfolio in suburban Maryland allows given us back space.

Dave Rodgers - RBC Capital Markets

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

Gerry Sweeney

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

Dave Rodgers - RBC Capital Markets

Got you. All right. Thank you.

Gerry Sweeney

You are welcome. Thank you.

Operator

There are no further questions at this time.

Gerry Sweeney

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

Operator

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

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