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Brandywine Realty Trust (NYSE:BDN)

Q1 2012 Earnings Call

April 26, 2012 09:00 a.m. ET

Executives

Gerry Sweeny – President, Chief Executive Officer & Treasurer

George Johnston – Senior Vice President Operations & Asset Management

Gabriel Mainardi – Chief Accounting Officer, Vice President & Treasurer

Howard M. Sipzner – Chief Financial Officer & Executive Vice President

Thomas Wirth – Executive Vice President Portfolio Management & Investments

Analysts

James Feldman – Bank of America Merrill Lynch

Josh Attie – Citigroup

Jordan Sadler – Keybanc Capital Markets

John Guinee – Stifel Nicolaus

Richard Anderson – BMO Capital Market

David Rogers – RBC Capital Market

Michael Knott – Green Street Advisors

Steve Sakwa – ISI Group

Young Ku – Wells Fargo Securities, LLC

Ross Nussbaum – UBS

Operator

Good morning, my name Letangie [ph] and I will be your conference operator today. At this time I would like to welcome everyone to the Brandywine Realty Trust First Quarter Earnings Conference Call. All lines have been placed on mute to prevent anybody background noise. After the speaker’s remarks there will be a question and answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Gerry Sweeny, President and CEO of Brandywine Realty Trust. Please go ahead sir.

Gerry Sweeny

Letangie thank you very much. Good morning everyone and thank you for participating in our first quarter 2012 earnings call. On today’s call with me are George Johnstone, our Senior Vice President Operations, Gabe Mainardi, our Vice President and Chief Accounting Officer, Howard Sipzner, our Executive Vice President and Chief Financial Officer and Tom Wirth, our Executive Vice President of Portfolio Management and Investments.

Prior to beginning I 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 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.

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

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

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

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

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

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

Looking at the quarter, we had good leasing benchmarks and solid operating metrics. Most notably, our pipeline of transactions which we defined is prospects of an issued proposals remains consistent 3.4 million square feet.

The number and square footage of prospects touring or inquiring about our properties during the quarter averaged 37 companies and 400,000 square feet per week. For the quarter, these numbers were 26% greater than in the fourth quarter of 2011. So while general market activity leasing levels were generally down, we had a very good quarter of tenant inquires and inspections evidencing from our standpoint continued emergence of tenant demand and as previously mentioned flight the quality product and landlords.

Our goal of having positive same-store growth for 2011 remains on track, mark-to-market leasing spreads were consistent with our 2012 business plan albeit lower for the quarter particularly on a cash basis than our target of run rate for the year. For the balance of the year, we expect better forward leasing spread based upon the position of our projected leasing activity.

Concession package remained fairly steady, where we’re seeing higher capital cost we’re attempting to mitigate that through extended lease terms. Our TI cost for the quarter were in line with our business plan assumptions but continue to be an area of heightened focus.

George will address capital in more detail, but our CAD ratio this quarter was a solid 79%, we also had positive absorption for the portfolio this quarter. George again will touch on these operating metrics and pipeline activity in more detail, but from an operating standpoint we’re pleased with the quarter, and more importantly with the continued improvement in the overall tone and velocity of our tenant traffic.

Looking at our balance sheet, we remain extremely liquid with no near term debt maturities. Additionally, with the extension of A $100 million that remains floating, we are completely insulated from any floating rate interest risk. Continued NOI improvement augmented by our investment strategy we’ll continue our EBITDA improving deleveraging program. We closed the quarter with $334 million of cash and securities on hand as a result of early asset sales and the funding of our previously announced $600 million term loan facilities.

These cash balances provided funds of $151.2 million balance of our 5¾ unsecured notes that was due April 1st. Liability management efforts continued during the quarter and we purchased $4 million of our unsecured notes. While we incurred a slight loss on that extinguishment, this does represent our approach in effectively managing our forward liabilities, and from a debt maturity standpoint the company is in extraordinarily good shape and our next unsecured note is not due until November of 2014.

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

The cash is certainly fungible and our sources of cash have been slightly larger borrowings under our term loans and the proceeds from asset sales are Allstate joint venture and now they are preferred offering. We view our cash on a net debt basis and our bank term loan structures provides an opportunity to reduce debt with minimal breakage cost. But while the economic climate remains uncertain, it’s important to maximize flexibility and liquidity. As such, we’ve planned to remain very liquid with ample financial capacity while our portfolio transitions to higher occupancy levels consistent NOI growth and EBITDA improvement.

Our cash balances are available for continued liability management, acquisitions and direct debt pay downs. We have a very stable and flexible debt platform, where we have the option to accelerate debt free payments or alternatively use cash form sales to redeploy in the better growth assets. And in pursuit of this liquidity objective, subsequent to the quarter end we took advantage of strong capital markets through a $100 million opportunistic preferred equity issuance of 6.9% coupon preferred shares. A portion of these proceeds will fund the redemption of all of our outstanding 7.5% Series E cumulative redeemable preferred shares.

The issuance of this preferred stock at a 6.9% coupon is excellent permanent capital for our company. The coupon is extremely attractive, market demand was very strong, enable us to upsize our offering after the launch and consequently redeem our 7.5% preferreds. This issuance and related redemption cost was not an original and has a near-term cost. That cost, as indicated in our guidance, needs to be expensed from both the redemption as well as the anticipated dividends on the net preferred issuance, and will be about $0.03 per share during 2012.

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

Given what we’ve seen thus far, we anticipate better progress than that. For example, we sold out our fully leased 268,000 sq. ft satellite building for $91.1 million or $340 per sq. ft. We also completed the disposition of a 33,000 sq. ft office building in Morristown, New Jersey. We currently have over $200 million of assets either on the market for sale or in reverse inquiry discussions. These assets are located in Pennsylvania, New Jersey, and California. Of this amount, approximately $80 million is either in buyer due diligence or buyer underwriting and bid review. To the extent that these pending $80 million of transactions close, will be a timing acceleration versus our original business plan and as a result the loot of the 2012 FFO.

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

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

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

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

One final point, we have a land inventory of approximately $109 million or roughly 2.2% of our asset base. Most of that land is entitled for office development, given the realities in some markets based in future office development last year we commenced a plan to examine all parcels for alternative and higher value uses. That process is beginning to payoff and we recently received approvals on our Plymouth Meeting land for about 400 multifamily units.

We have several additional parcels proceeding through the same process and once it’s achieved new entitlements our plan would be to either sell that land or identify quality residential companies and/or institutional investors to develop the project were by Brandywine would be an investment partner.

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

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

George Johnstone

Thank you Gerry. We continue to see good levels of leasing activity during the first quarter which has allowed us to raise certain elements of the business plan. And overall flight to quality continues as tenants seek quality landlords, buildings, and locations which has benefitted our portfolio. Some markets that continue to demonstrate recovery and improving metrics are Philadelphia CBD, the Crescent Pennsylvania submarkets of Radnor, Conshohocken, Plymouth Meeting, and New Town Square, along with Austin and Richmond where rent growth and tighter capital control are becoming more of the norm. Other markets while showing some signs of improvement remain in a binding occupancy mode.

In terms of the first quarter specifically, during the quarter we commenced 982,000 square feet of leases including 442,000 square feet of new leases, 421,000 square feet of renewal leases and a 119,000 square feet of tenant expansions. This leasing activity resulted in positive absorption of 77,000 square feet and an occupancy percentage of 86.7%.

Occupancy exceeded our business plan projection by 20 basis points, after factoring in the 10 basis points declined from the sale of the South Lake Building in Northern Virginia. More importantly we are holding our year end occupancy target of 89.4%.

Retention for the quarter was 59.7%, early termination rates exercise by handful of tenants accounted for 1000 basis points of lost retention. For the year, tenant retention is still expected to be 57% based on 1.1 million square feet of renewals already executed, current lease negotiations, and known tenant move outs. Leasing capital for the quarter was $2.85 per square foot per lease year. Our average lease term for the quarter was 5.7 years. Regions operated under the average capital spend for the quarter, were the Pennsylvania Suburbs, New Jersey, Delaware, Richmond, and California.

Philadelphia CBD and Metro DC continue to outpace the company average on average lease term. Lengthening lease term and controlling capital continues to be an area of focus. Rental rate declines for the quarter were 4.3% on a GAAP basis and, 14.2% on a cash basis.

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

Traffic for the quarter was up 26% sequentially and up 5% over last year’s average quarterly traffic. The pipeline remains strong and unchanged at 3.4 million square feet, 2.5 million square feet of new deals, 900,000 square feet of renewal deals. 611,000 square feet of deals are on lease negotiations with the balance all entertaining proposals. We have increased our speculative revenue target by $1 million or 2%. $35.9 million or 80% has been achieved leaving $9 million still to be done over the balance of the year.

At this time last year we had $11 million remaining on our spec revenue target. Austin, Philadelphia CBD, Pennsylvania Suburbs, New Jersey Delaware are all north of 80% achieved. Of the remaining $9 million to be achieved, 35% is in active negotiations, 25% are entertaining proposals, and 40% still needs to be sourced. These leasing assumptions and trends will translate into same store NOI growth of 0.5% to 2.5% on a GAAP basis and flat to 2% on a cash basis both excluding early termination and other income.

Leasing remains the primary focus of the regional teams, we’ll continue examination of our contracted services, energy procurement and conservation effort and aggressively appealing real estate taxes for aid in reducing operating costs and improving margin. I will now turn it over to Howard for the financial review.

Howard Sipzner

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

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

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

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

Our interest expense in the first quarter of 2012 came in at $34.1 million and represented an increase of $2.2 million sequentially versus $31.9 million in the fourth quarter of 2011. As we had double outstanding proportions of our debt on the quarter pending repayment and we also absorbed the cost of locking interest rates for the current and future periods.

Our G&A at $6.1 million was in line with our expectation and with the prior quarter. In the first quarter of 2012 we had net bad debt expense of just under $800,000 included in our operating expenses and for the most part it is proportional to the increase in our overall straight line rent activity.

Compared to a year ago, the first quarter same store NOI increased 2.6% on a GAAP basis and decreased 0.3% on a cash basis both excluding termination fees and other income items and in line with our expectations for the quarter.

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

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

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

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

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

We’re now projecting a $175 million of total 2012 sales activity. And with the higher pays and earlier activity that has a incremental impact to our FFO along with sales completed at about $0.04 per share. We’re including the Series E preferred shares at 6.9% dividend cost going forward, offset by the repayment on May 3rd of the $50 million Series C shares. That together with the cost of redeeming the Series C shares will be about $0.03 dilutive in 2012.

As I mentioned earlier, we’ll recognize the $0.08 per share gross historic tax credit impact in the third quarter. This revenue component is essentially non-cash and will be excluded from our CAD calculation. It reflects the second occurrence of 20% of the net proceeds realized through the historic tax credit financing in 2010 and will be recognized in the third quarter of each year from 2011 through 2015. We’re not anticipating any further issuance under our continuous equity offering program and no additional note buyback activity is reflected in our guidance.

And as a result, we see a 147 million shares as our count for fully diluted shares in units outstanding for FFO calculation in 2012. Reflecting approximately $53 million of additional revenue maintaining capital expenditures for the last nine months of 2012 we see cash available for distribution per diluted share staying in the range of $0.60 to $0.77 per share as previously outlined.

The 2012 guidance revision is impressive from our perspective as we incurred $0.07 of dilution versus the prior disclosure and only reduced our guidance by $0.05 reflecting $0.02 of better and more certain operating performance.

Our capital plan in 2012 is remarkable and simple. Our $284 million cash balance, not to mention $50 million of securities on hand, will cover all our needs and we do not expect to do any financings or use our credit facility this year at all. Our uses from April 1st, 2012 forward totaled $446 million and are as follows. A $160 million for debt repayments, a $151 million of debt has already been funded on April 2nd for our 2012 notes, and lease just $9 million for mortgage amortization over the course of the year.

We have a variety of investment activity scheduled for the balance of 2012. It includes the $53 million of revenue maintaining capital expenditures, a $103 million for revenue creating capital expenditures, lease up of vacant space, and new project lease up including such properties as 3 Logan square and 3020 Market Street, plus another $55 million for a combination of smaller various capital projects including our Commerce Square Joint Venture contributions.

We will pay $75 million of aggregate dividends on the common and preferred. $22 million on the common and $2 million on the preferred were already paid earlier in April, leaving 2012 remaining dividend payments of $51 million inclusive of the new Series E preferred. To fund this $446 million we are projecting the following from April 1st onward. A $100 million of cash flow before financings investments and dividends but after interest payments, which are lumpy and tend to occur in April and May on the cycle of semiannual payments.

$81 million of additional sales proceeds from the sales of Gerry outlined, $47 million from net preferred stock activity reflecting the funds we’ve raised in the Series E offering, the cost of that offering less the $50 million we will disperse to redeem the Series E shares. And we’ll use $280 million of our cash balance leaving us with a projected year end 2012 balance of about a $116 million inclusive of the $50 million of securities that will mature prior to year end. So our capital plan is very transparent and very clean from our perspective.

Accounts receivables at March 31st, 2012 had reserves of about $16.1 million, $3.4 million on $17.4 million of operating receivables or just under 20% and $12.7 million on a $123.5 million of straight line rent receivables as we call them or 10.3%. We are 100% compliant on all of our credit facility and indentured covenants with 84% of our growth real estate book value unencumbered at March 31, 2012. With the refinancing of our credit facility we are now working under the new credit facility compliance metrics, and those all are captured in our supplemental package.

With that I will turn it back to Gerry for some additional comments.

Gerry Sweeny

Great, thank you very much Howard and thank you as well George. To conclude our prepared remarks, first quarter results were strong and consistent with our announced 2012 business plan. As evidenced by our collective commentary we remain confident in our ability to achieve our 2012 objectives including the increase in our spec revenue target.

We remain convinced that our best growth strategy remain simply to continue outperforming our markets by leasing space. Our high quality product continues to provide a competitive advantage and we expect that advantage will accelerate as fundamentals continue to improve.

Our balance sheet strategy remains very much on track, and as discussed we have become more aggressive on our decision target for the year given increased visibility on suburban office evaluations. So thank you again for participating in the call.

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

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of James Feldman with Bank of America Merrill Lynch.

James Feldman – Bank of America Merrill Lynch

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

Gerry Sweeny

Sure, George?

George Johnstone

Yeah, Jamie I think as I mentioned earlier we’ve got you know $9 million of spec revenue left to achieve that’s going to require us to do just a little bit north of a million and a half square feet. You know the pipeline is strong it’s 3.4 million square feet in total. 2.5 million square feet of that are new prospects and 900,000 of renewal prospects, and we feel confident that with the pipeline that we have the conversion rates that we’ve demonstrated last year our conversion was 40%, it was 31% for the first quarter, but we have got several markets that continue to kind of outperform that 40% company average.

Gerry Sweeny

I think to add on to that Jamie just in terms of, one of the things we really do track is the traffic that comes to through our pipeline. But that tends to be a harbinger of forward leasing activity. Then I think even with the overall market levels being down a bit Q1 versus Q4 we are very pleased with the increase in traffic through our portfolio. And that was pretty much throughout our inventory across all the market. I think with the pipeline remaining constant, the number of deals that we have in negotiations, the percentage of deals that we have totally issued for I think we’ll continue to remain very confident on our ability to achieve all these targets.

James Feldman – Bank of America Merrill Lynch

And then I guess this bigger picture on sentiment among tenants and among decision makers. I mean do you sense people are getting more cautious here with the election and the economic data getting more mixed or no change.

Gerry Sweeny

Well, not a big change since the last conference call. Certainly the market that we are in is the most sensitized to the federal government and it’s a budgetary matter both in Northern Virginia and in Maryland. I think the decline in leasing activity in Q1 in that market I think is reflective of the fact that a number of tenants are on the sidelines or pausing before they make a lot of poor lease commitments so they get a better flavor for what the political climate will be going forward.

Certainly with some of the appeal processes recently issued by the federal government in terms of awarding contracts that has a bit of a delay in the actual award of those contracts and creates a more protracted timeline. When we look beyond that I don’t think we are really seeing the impact of the election in our other markets. I mean the pipeline, feedback from our leasing agents, the managing directors does not seem to indicate that people are really focusing on that political climate as a key driver in their space decisions.

James Feldman – Bank of America Merrill Lynch

Okay, thank you.

Operator

Your next question comes from the line of Josh Attie with Citigroup.

Josh Attie – Citigroup

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

Gerry Sweeny

Certainly, a real quick overview and Tom can give you kind of around the horn what we are seeing on the investment side. But I think the reason when we raised this capital that we didn’t pay down the debt immediately was just to preserve complete optionality, and we have – as you know from our bank term loans structure, a pretty flexible platform to pay down that debt as we see fit with some acceleration of costs but minimal break to expand this.

So I think when we analyze where we are we retain the option to apply cash to future debt pay downs or as we did in this past question to – I think some pretty good tactical liability management, and we are seeing more things on the investment side which Tom can certainly touch on.

Thomas Wirth

Sure. Josh, on the investment side I think if you look at the markets I think Philadelphia tend to be slower, not seeing much activity at this point. Continue to see some activity in Austin that we monitor. That market continues to be well received when product is out there. And we continue to look at the CBD in South West for opportunities. And in Metro DC I think it’s a tale of two story lines. We have the outside the belt way which other than our trade has been very few. Outside of belt way trade they have been taking longer to get done. So we are monitoring that very closely just to see with cap rates are going to go higher out there or whether we see that nothing trades. Inside the belt way we are still seeing a lot of good activity. And that activity in the trophy class, there is plenty of capital out there finding that product as well as – but some product it isn’t trading as the expectations. People are expecting, especially with – I think as you mentioned on the political side we’ve seen rent sort of come down a little bit. We have seen it in our portfolio, we are seeing it in the district also with some negative absorption that people are pulling product and in some cases refinancing. So there is some haves and have nots. We are looking in a district and inside the belt way markets we are targeting now with our Allstate joint venture. So we are certainly looking for opportunities in our targeted markets which are all inside the beltway. We are seeing some good opportunities, we are taking a look at them, most of the things we are looking at are going to be conservative. We are not looking for a lot of leasing exposure or near-term leasing risk, and we continue to be pleased by what kind of lending you are seeing on assets inside the beltway by various institutions.

Josh Attie – Citigroup

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

George Johnstone

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

Josh Attie – Citigroup

Okay, thank you very much.

Operator

Your next question comes from the like of Jordan Sadler with Keybanc Capitals.

Jordan Sadler – Keybanc Capital Markets

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

Gerry Sweeney

We are looking at a range in the mid 7% to 8%.

Jordan Sadler – Keybanc Capital Markets

Mid 7 to 8 now.

Gerry Sweeney

On a blended basis, it will be some lower, some higher when we look at the pipeline.

Jordan Sadler – Keybanc Capital Markets

Okay. And then separately just looking at the revenue generating CapEx in the small capital projects which include 3 Logan, 3020, and presumably the Plymouth Meeting asset you guys just touched on, you are talking of Plymouth Meeting but can you walk through what are the expected overall returns embedded in guidance on the 160 million you expect to deploy from April on? Does that fall in the sort of 10% to 12% unlevered range or what?

Howard Sipzner

Jordan, it’s Howard. A lot of it goes to leasing of vacant space. So putting it in the context of the 3 Logan, that’s an asset we originally underwrote at a substantially vacant basis to yield in a 9% to 10% range. So this is spent or part of it that will take place in 2012 is towards meeting that goal. 3020 could be an asset that yields ultimately in excess of 10%. The development project in Plymouth Meeting at 11% return. The money that we spent in the Thomas Properties Group, Commerce Square Joint Venture, a little bit over 9% with some fees on top of that. So, generally, very attractive returns as you look around the landscape of where those are going.

Jordan Sadler – Keybanc Capital Markets

My last question Gerry, just looking at sort of – the cash on your balance sheet today looks $230 million, $240 million. I think numbers are higher at quarter end. I know that you are keeping your options open. But I guess it basically seems that your option is open outside of debt repayment, which are a certainty. It would mean that you have got investment opportunities that you are looking at. Can you maybe just characterize that for us? It seems like you have got potential size there, and maybe just frame that up in terms of what you are seeing is the most attractive potential opportunities.

Gerry Sweeney

Sure, I will take a stab at it for you. First of all that math that Howard walked through in his commentary shows the application of a good portion of that cash during the course of the year. So you need to be mindful of that as we take a look at some of the things you just inquired about in terms of 3 Logan, 3020, Plymouth Meeting, and we think they are good high-quality capital investments to make as those projects stabilize to develop a good rate of return. So as we look at our high net cash position it’s probably not as big as you are looking at for the first quarter. So, you need to be mindful of that overlay.

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

Jordan Sadler – Keybanc Capital Markets

Do you expect that to be recapitalized this year?

Gerry Sweeney

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

Jordan Sadler – Keybanc Capital Markets

Okay, thank you.

Operator

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

John Guinee – Stifel Nicolaus

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

George Johnstone

Sure, would be happy to John and they are good questions. I wouldn’t necessarily agree with your total characterization but I understand your theme. As we looked at the time we were in transaction that lease that we did was going out through 2019, but had termination rights that were kicking in kind of starting in the middle part of 2016 and 2017. We did that transaction not quite to the height of the financial prices but pretty close to it. So there was a real urgency to get that building occupied and the structure in which we did that at least provided not just for those early termination options to give Time Warner the flexibility they required but also provided for fairly flat rental rate structure.

So from our standpoint we have pretty much optimized the value in that asset to bring the property to stabilization and getting the cash flow coming in once the tenants are paying cash rent. Given those termination options, given the – we thought could be a declining value investment market at least temporarily based upon some of your observations, we thought that we reached the optimal value point of that. The trade occurs at about 6.8% cap rate, $340 a sq. ft which we thought on both metrics were very good value recoveries for us. It enabled us to recover a profit on that project and our team could then devote all their resources to leasing our currently vacant space in that market.

John Guinee – Stifel Nicolaus

Great, thank you.

Operator

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

Richard Anderson – BMO Capital Market

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

Gerry Sweeney

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

Richard Anderson – BMO Capital Market

Would you qualify that as a reversed inquiry trade or is that not falling…

Gerry Sweeney

No, that was not a reverse inquiry trade. That was part of a marketing program we had underway. Just didn’t have any visibility on it as those were being executed.

Richard Anderson – BMO Capital Market

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

Gerry Sweeney

Yeah well Rich I think disappointing, but I think a little bit of a continuum of recent trends where some of our larger corporate clients are still kind of going through this downsizing, right sizing. You look at a tenant still hasn’t fully vacated yet but a big impact on our retention is [inaudible] they have given us back a 110,000 sq. ft and we have been successful in re-letting that space, but from a retention statistic it has a negative impact. We have got 22 tenants north of 10,000 sq. ft still in our will vacate column for the duration of the year. And our hope would be that we can ultimately convince some of the tenants less than 10,000 sq. ft also to change their mind and continue to kind of work the tenant expansions, which has a positive impact on the retention calculation.

Richard Anderson – BMO Capital Market

Okay. And if I could just quickly say the $0.02 operating improvement – I know I'm on my third question. I apologize, I will be real quick. No change to your same store range for 2012. You are just saying top end of that range now basically?

Howard Sipzner

Yeah that would be correct. It’s a function of the addition million dollars we added to the leasing plan. The somewhat better expense profile in the first quarter and then just a lot of little stuff. But it’s not big enough yet to move us outside the range we outlined earlier.

Richard Anderson – BMO Capital Market

Okay great, thanks.

Operator: Your next question comes from the line of Dave Rogers with RBC Capital Markets.

David Rogers – RBC Capital Market

Hi guys, just talking about some of the dispositions that you shared about earlier in the call on the Q&A, what would cause you to maybe hit the high end of that range or could you increase the range again this year in terms of the total disposition activity if pricing is right and would you need to see alternative investment opportunities or would you be happy holding more cash maybe going into the end of the year?

Gerry Sweeney

Yeah, two things could drive the sort of guidance is we do acquisitions and we did better than we are anticipating right now on lease executions and NOI generation during the year certainly to the extent that the sales target exceeded 175 without having a redeployment of that that would create some downward pressure for sure.

David Rogers – RBC Capital Market

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

Gerry Sweeney

Yeah, it wasn’t about the weather, right? Yeah, I mean clearly our operating expenses were lower than we had originally projected due to the lack of snow. But also keep in mind that snow expense for us has roughly 60% reimbursement associated with it. So about 40% of the expense that was not incurred fell at the bottom-line.

David Rogers – RBC Capital Market

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

Gerry Sweeney

Well that’s purely a market-by-market analysis. The 3020 market acquisition was purely a value-add. It’s actually in the sub-market with less than 5% vacancy factor and were 100% leased. Plymouth Meetings, that was the unique opportunity to acquire a very well constructed design building right within the heart of our Plymouth Meeting Executive campus. We felt as though given the leasing velocity and the need for tenant expansions we were saying that that was a glove fit to our portfolio. When you look beyond that I think it has to be an evaluation point on what our portfolio looks like in that marketplace. For example in a Southern New Jersey or in Northern Virginia where we still are facing our own internal head wins has been a very different pricing matter we will evaluate to take on any additional risk in that market.

We like opportunities where leasing teams and regional management teams can really create value for us through an effective vibe. But I think we are very mindful of balancing that capital return with the return we will be getting from our existing assets in those markets that are probably facing the same leasing head wind with potential acquisition.

David Rogers – RBC Capital Market

Thank you.

Operator

Your next question comes from the line of Michael Knott with Green Street Advisors.

Michael Knott – Green Street Advisors

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

Gerry Sweeney

Yeah, look I think a clear is on every tenant’s wish list. Basically the cover moving costs keep wiring cabling sometimes furniture things on those lines that they need to come out of pocket for. It ranges anywhere from one to two months per lease year depending on the market and the overall capital investment that we are making on physical improvements. We have started to see a little bit of trend even on renewals where the introduction of free rent has now become part of the equation, but not necessarily on a every deal basis.

Michael Knott – Green Street Advisors

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

Gerry Sweeney

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

Michael Knott – Green Street Advisors

Okay and then on the redevelopment asset that you bought there in Philly Suburbs sort of the stabilized cap rate a value per pound would be upon sort of stabilization as you are going to be all in a 180 a foot, and 11 yield, what would sort of the hypothetically if you were going to flip that stabilize that on the future what sort of ballpark figure there. Just curious how the 180 would compare to a stabilized value in sort of a full replacement cost?

Gerry Sweeney

Yeah, look depending upon the level of finishing a building like that the you are in kind of the 70% to 80% of replacement cost calculation. So from that standpoint it was also a very good transaction for us. Although the property’s location in the Plymouth Meeting market which as we calls for that Crescent suburban class, is one of the higher investment sub markets in the Philadelphia region that we certainly think that delivering that asset at an 11% free and clear return fully loaded creates a lot of value for the company.

Michael Knott – Green Street Advisors

And then last question. Even though your stock has had a nice run this year it still traded about 15% below our NAV assessment. So just curious if the –and to increase dispositions and sort of not exclusively target additional acquisitions as sort of part of your plan that to get out of that box so to speak that you have been in for a quite a while I’d say.

Gerry Sweeney

We are doing everything we can to move our stock up to at least net asset value. And we think a lot of the leasing activity over the last couple of years, in particular last six quarters has really done a lot to move our NAV up particularly when you take a look at the ability to fill up the empty space. We are very mindful of both current and intermediate term projected NAV. As a consequence, on our last earnings discussions we talked about it with stock pricing at the levels that we are at we certainly would not be using our ATM program or any other equity issuances as that would be aiding in our deleveraging plan but certainly creating a detrimental effect on our next asset. So we are hopeful that the continued acceleration of leasing through our portfolio will help our stock price get caught up to our current NAV. And once we continue to demonstrate that we can outperform markets and the general bias on leasing velocity and suburban office space becomes more positive that that NAV will continue to rise in conjunction with our improved NOI.

Michael Knott – Green Street Advisors

Thank you.

Operator

Your next question comes from the line of Steve Sakwa with ISI Group.

Steve Sakwa – ISI Group

Good morning. Just one quick question. The $50 million of securities on the balance sheet, did you tell us what those are?

Howard Sipzner

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

Steve Sakwa – ISI Group

Okay, thanks.

Operator

Your next question comes from the line of Young Ku with Wells Fargo Securities, LLC.

Young Ku – Wells Fargo Securities, LLC

Yes, thank you. Just a quick couple of questions. In terms of your 2013 lease expirations, I know it’s still kind of early in 2012, but are there any major move as that you guys are anticipating?

George Johnstone

We have a few that we are tracking I mean I guess the largest probably with Intel in our Austin operation who were currently talking to about retaining some of the space and have an identified pipeline for taking the remainder and/or potentially all the space. It is a little bit early. We have been talking to several of the 13 expirations and, but they are probably the most notable on the potential move out list.

Young Ku – Wells Fargo Securities, LLC

And how big was that Intel space?

George Johnstone

About 164,000 square feet.

Young Ku – Wells Fargo Securities, LLC

Okay.

Gerry Sweeney

The interesting about the Intel space is we did a three year renewal with them, little way at the height of the crisis and the rental rates that they are paying is well below the same markets. Given the pipeline of leasing activities our local team has in place that the actual one of those opportunities we are looking forward to.

Young Ku – Wells Fargo Securities, LLC

Thank you. And just one other question about your investment opportunities. In terms of the types of products that you guys are looking for on the stabilized side what kind of cap rate are the assets – are they checking out right now?

Gerry Sweeney

The assets we are looking at are kind of in the –if we are looking in the district in kind of those target markets we are looking out we are seeing them in the 7% to 8% range and inside the district below that. There would have to be a story to tell on those type of cap rates in terms of our – because we are pretty much IRR driven, so the cap rate doesn’t necessarily tell the whole story, but that’s kind of where the cap rates we are seeing on now in that market. If you look at Austin which is another market there is enough trace you can get an idea as pretty much in the high stake 7% cap rate range.

Young Ku – Wells Fargo Securities, LLC

Okay, great. Thank you.

Operator

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

Ross Nussbaum – UBS

Hey guys, one quick question. I am cutting into your precious call time here. Are the $110 million of land that you guys have sitting on the book, how much of that do you really think you are going to monetize over the next year or two?

Gerry Sweeney

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

Ross Nussbaum – UBS

Okay and roughly speaking relative to book value. If you are going to be rezoning for multifamily do you think at the end of the day that it’s worth more than book?

Gerry Sweeney

We do.

Ross Nussbaum – UBS

How much was it?

Gerry Sweeney

Well, we are not going to give you number on that Ross, but we actually think the reason we are going down this path is we think at the higher best value for the land. And I think if we as you move through the process and demonstrate some result I think my observation will be proven out.

Ross Nussbaum – UBS

Sure. Thank you.

Operator

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

Richard Anderson – BMO Capital Markets

Trying to get out of the queue, but I will ask now here anyway. Can you just give us Howard a kind of a rough – I emailed you this so disregard the email – the preferred dividends for the second quarter and what they would be on a more run rate basis. I assume that there is a lag time so the second question might be a little funky?

Howard Sipzner

The second quarter actually has a little bit of a double dividend itself. Thus we pay about and all that’s captured in the guidance we pay I think about a $0.09 stub in closing out the preferred fee shares are repaid on the liquidation on the redemption date and then again subject to declaration which we obviously fully expect. The series each shares will get their first dividend in mid July on the regular cycle.

Richard Anderson – BMO Capital Markets

Oh, okay so the number should be the second quarter should be the same in terms of preferred dividends and then you start a new in the third quarter, is that right?

Howard Sipzner

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

Richard Anderson – BMO Capital Markets

Do you have a full year preferred dividend number?

Howard Sipzner

That will be 6.9% of $25.

Richard Anderson – BMO Capital Markets

Well, no, I mean okay, okay, that’s right.

Howard Sipzner

One of us to calculate.

Richard Anderson – BMO Capital Markets

Okay, I got, I get, that’s easy. And you said the charge, I think the charge of that penny and a half, is that right?

Howard Sipzner

Yes. The write off of the cost which have been booked to the equity section for the Series C which are now expensed upon redemption are about $2.1 million.

Richard Anderson – BMO Capital Markets

Okay, thanks very much.

Operator

At this time there are no further questions.

Gerry Sweeney

Excellent. Thank you again very much for participating in the call and we look forward to seeing at our June event. Thank you.

Operator

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

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