Brandywine Realty Trust Q4 2007 Earnings Call Transcript

Feb.21.08 | About: Brandywine Realty (BDN)

Brandywine Realty Trust (NYSE:BDN)

Q4 2007 Earnings Call

February 21, 2008 11:00 am ET

Executives

Gerry Sweeney - President and CEO

Howard Sipzner - EVP and CFO

Bob Wiberg - EVP

George Sowa - EVP

Darryl Dunn - VP and CAO

Gabe Mainardi - Corporate Controller

Analysts

Anthony Paolone - JPMorgan

Jordan Sadler - KeyBanc Capital Market

Ian Weissman - Merrill Lynch

Jamie Feldman- UBS

Rich Anderson - BMO Capital Markets

John Guinee - Stifel Nicolaus

Michael Bilerman - Citi

Chris Haley - Wachovia

Mitchell Germain - Bank of America Securities

Operator

Good day ladies and gentlemen and welcome to the Brandywine Realty Trust fourth quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time.

As a reminder, this conference call is being recorded. Prior to Mr. Sweeney's remarks, please let me read the following disclaimer on behalf of the company. The information to be discussed on this earnings conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words anticipate, believe, estimate, expect, intend, will, should, and similar expressions as they relate to us are intended to identify forward-looking statements.

Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions. These statements are not guarantees of results and no assurance can be given that the expected results will be delivered. Such forward-looking statements and all other statements that are made on this earnings conference call that are not historical facts are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected.

Among these risks are risks that we have identified in our annual report on Form 10-K for the year ended December 31, 2006, a copy of which is on file with the Securities and Exchange Commission including our ability to lease vacant space and to renew or relet space expiring leases at expected level.

Competition with other real estate companies for tenants, the potential loss or bankruptcy of major tenants, interest rate levels, the availability of debt and equity financing, competition for real estate acquisition and risks of acquisitions, dispositions and development including the cost of construction delays, and cost overruns, anticipated over operating and capital costs, our ability to obtain adequate insurance, including coverage for terrorist acts dependence upon certain geographic markets and general and local economic and real estate condition, including the extent and duration of adverse changes that affect the industries in which our tenants compete.

For further information on factors that could impact us, please refer to additional filings with the SEC. We are subject to the reporting requirements of the Securities and Exchange Commission and undertake no responsibility to update or supplement information discussed on this conference call unless required by law. Thank you.

I would now like to introduce our host for today's conference, Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust.

Gerry Sweeney

Jacqui, thank you very much. Good morning everyone, and thank you for joining us for our fourth quarter 2007 earnings call. Participating on today's call along with me are Howard Sipzner, our Executive Vice President and Chief Financial Officer, Bob Wiberg, the Executive Vice President, George Sowa, Executive Vice President, Darryl Dunn, our Vice President and Chief Accounting Officer and Gabe Mainardi, our Corporate Controller.

Our year end results were in line with expectations. Of particular note in the quarter was the continued decline in capital costs, which has been a positive trend occurring throughout the year. 2007 also saw good leasing activity whereby we improved our core occupancy to 93.9% and had net positive absorption for the year of almost 300,000 square feet. We closed out the year with a tenant retention average of 72.8%. Our same store numbers are moving in the right direction exceeded our original 2007 plan and built momentum for the portfolio going into 2008.

For the year, we had positive GAAP rents on both renewals and new leases, positive cash rent growth on renewals but continued that negative cash rent growth on new leases. Market conditions remained stable, but our outlook is cautious. Although, we have not noticed a perceptible flowing in activity, accessing real tenant demand remains challenging. In fact, traffic that has showings through our core portfolio was 37% higher in the fourth quarter over the third quarter of 2007.

The same held true for our development projects, which saw a doubling of traffic in the fourth quarter versus the third quarter. We did achieve some leasing in the development pipeline, most notably 30% at the Park in Austin, 10% at Metroplex and 67% in our 100 Lenox Drive rehab.

Pipeline activity is solid but the timing of deals remains less certain. Most of our markets continue to experience positive absorption in 2007 with several markets most notably the Pennsylvania suburbs, Richmond, Philadelphia CBD, suburban Maryland and Oakland all posting measurably increased absorption over 2006, while Northern Virginia and New Jersey posted lower year-over-year absorption levels. Vacancy rates continue to decline in several markets specifically in the Pennsylvania suburbs, Philadelphia CBD, Wilmington and Richmond, but increased year-over-year in Northern Virginia, suburban Maryland, Northern California and Austin.

On today's call we'll like you to focus on several key themes. Our 2008 business plan is based on conservative and very achievable assumptions. It excludes a lot of speculative income onetime items and incorporates a minimal level of sales activity with no program, acquisitions or developments. We'll also draw your attention to several other initiatives the company is pursuing. These efforts are designed to sharpen our capital deployment, create additional liquidity and move the company to a more effective right size and given our cost of capital.

We also have a keen focus on our forward funding obligations the largest of which is our IRS historic rehab build-to-suite in University of city Philadelphia. We are actively exploring strategies I'll talk about in a few moments to create an attractive funding framework for that project. It has been a little more than two years since we undertook the Prentiss transaction and it's time for candid assessment. Brandywine and Prentiss combined to broaden our operating platform in the higher growth markets to generate better earnings growth. Thus far as illustrated by the following points all of these objectives have not been completely achieved.

Overall portfolio performance and same store growth results had been below original expectations. Our sales program has been successful but the data is focused on selling slower growth assets, improving portfolio quality and consisted primarily of higher cap rate sales that have resulted in some earnings dilution.

Further during the two year period, asset pricing and our cost of capital precluded expansion into some of the new markets. Also due to the limited size of the asset base in several markets, we operate with higher deployment costs and minimal economies of scale, which impact our margins. The slower than anticipated lease up of our development projects has temporarily created a capital consumer and a bank risk overhang.

We made each of these development decisions based on then market conditions and full confidence in our local teams. We remained convinced that these projects will be successful, but the realty that lease up to-date has not delivered the targeted growth.

Finally, last year we made several capital allocation decisions most notably our share repurchase effort that in retrospect the utilized capacity less effective than we would have hoped. Execution on these original objectives has created a situation, where we have been under delivering. Our 2008 business plan is designed to change that situation, eliminate any creditability gap and enable us to deliver consistent predictable returns.

A few comments on the 2008 plan. We anticipate achieving both positive GAAP and cash same store NOI growth rates. From an investment standpoint, while we have more activity underway, we have only programmed $160 million or so of sales activity. We currently anticipate that the taxable gain from these sales can be absorbed within our 2008 dividend so that no special distribution will be required.

We have not programmed any acquisition activity in 2008 nor are we anticipating any further development activity unless accompanied by both significant pre-leasing and improved financial capacity. Our capital uses for the year are anticipated to be about a $175 million deployed primarily into our development and redevelopment pipeline. An important point to note is that our total unfunded development balance at 2000 year end will be about $320 million of which $290 million relates to the postal office building at Cira Center South.

Given the overall state of the economy and our cautious outlook, we are projecting an average year end occupancy in our five ground-up developments of just 35% ranging from 0% at South Lake to 75% at Metroplex. Our 2008 projections incorporate less than $3 million of NOI from these properties as well as incorporate the impact of expensing interest as capitalizable interest periods burn off. Going in yield projections on a cash basis, we expect to range between 7.5 to 8 and 3 quarters percent and between 8% and 9.5% on a GAAP basis.

While we certainly hope to exceed these leasing targets, until there is greater clarity on the timing of pending activity, we believe caution is the right approach. We do not have any -- for any external financings during 2008. The business plan Howard will walkthrough is fully funded and also positioned to meet our forward funding requirement.

Our detailed projections show a good increase in our 2008 CAD number over 2007. We expect that dividend funding shortfall to be about $15 million and that we will be at a breakeven CAD payout ratio by year end 2008. As a consequence, the Board has determined to maintain our current dividend payout of $1.76 per share for 2008.

In making this determination, we have carefully reviewed all projected lease transactions and all related capital costs for the year and believe we have a clear path for full dividend coverage. Just as importantly we analyzed all the data relative to 2009 that's available. We show a continuing improvement in our CAD payout ratio certainly aided by portfolio stability and additional NOI from our developmental projects.

We anticipate achieving positive mark-to-market from a GAAP standpoint on both new leases and renewals in 2008. The numbers indicate good portfolio performance and improvement but giving the rolling impact of 2007 sales activity, 2008 projected sales activity, the exclusion of other than known-- items of other income the more conservative lease-up on our development projects, we produced the guidance range that we outlined in our press release last evening.

Howard will walk through the methodology in detail behind all of these projections. Our objective this year is to set a very deliverable expectation based on predictable revenue sources that the portfolio will deliver based on known conditions. That approach while delivering a range beneath consensus creates a higher quality projection base from which we can growth.

At this point, Howard will review our fourth quarter results and our 2008 business and financing plans.

Howard Sipzner

Thank you, Gerry. If any of you do not have a copy of our supplemental package, which was released yesterday evening you may get one on our website at www.brandywinerealty.com in the Investor Relations financial reports tab. The same store calculation purposes for the 12 month period, we once again adjusted the NOI and related numbers for any Prentiss assets for the four days, we did not own those properties in 2006 to make a comparable period-over-period comparison. The reconciliation of 12 month same store NOI on page 13 or on page 12 rather goes into this in greater detail.

On December 19, we closed the sale of 29 properties to a joint venture in which we maintained a continuing interest. As a result the income of these sold properties remained above the line and not in discontinued operations. These properties have been excluded from the various same store calculations and will be accounted for under the equity method from December 19th forward.

And lastly, we have re-classed certain expense, reimbursements and other related matters related to management activities to both a management income and expense line on the income statement. Previously these were either included in other revenues or netted against the property operating expenses. We believe this new treatment is more informative on a go forward basis.

Quick highlights from the income statement for the fourth quarter. We reported FFO of $53.5 million versus $59 million in the fourth quarter, a year ago. FFO per share came in at $0.59 versus $0.63 a year ago. If you adjust the $0.59 for a non-cash charge of $3.7 million or $0.04 per share the settlement of an expired hedge transaction, our FFO would have been $0.63 and in line with consensus estimate. A lower share count from prior buyback activities and reduced impact from contingent securities also contributes to the FFO per share level. The payout ratio on our $0.44 regular common stock dividend equaled 74.6%.

Turning to a few income statement line items. On a same store basis rents increased $1.2 million while recovery has decreased $3.3 million resulting in an overall decrease in same store NOI of $2.1 million or 1.5% on a GAAP basis. The recovery decline reflects the outsized recoveries in the fourth quarter of 2006, as a result of some catch up in that activity with respect to the overall 2006 year.

Please note that we have provided greater detail as well in the same store and regular income statement for the various components of other income. Our G&A expense came in at $6.5 million and that reflects the benefits of the reorganization, we implemented this past summer and has a good run rate going forward as we'll talk about it a bit later.

On the rest of the income statement, interest income continues to show moderate declines on a sequential basis. It came in at $590,000 versus $1.8 million a year ago and $1.1 million a quarter ago and this reflects lower cash balances reflecting among other things more efficient cash management.

Interest expense was down significantly from $44.7 million a year ago to $40.6 million reflecting higher capitalized interest of $4.7 million versus $2.3 million on our larger development activities, slightly lower debt balances due to asset sales and debt repayments along with declining floating rates.

Turning to other operating metrics EBITDA coverage ratios of 2.4 on interest, 2.2 on debt service and 2.1 fixed charges all came in line with historical results. I'll just emphasize in terms of margins are 33.8% or roughly 34% recovery margin reflects a very consistent level for this category for 2007 and what we would expect to see going forward and differ somewhat from the experience in 2006.

On a CAD basis, we came in at $0.36 per share and despite a 120% CAD payout ratio in 2007 overall we are as Gerry noted experienced declining trends in capital expenditures and also seen year-over-year declines in straight line rent and FAS 141 leading to improvements in the CAD results.

On a full year basis, our FFO came in at $2.55 or $2.59 without hedge expense that's at the top end of our prior range and $0.01 above consensus and reflects an FFO payout ratio of 69%. The CAD for the full year of $146 million results in an aggregate $27 million to $28 million dividend shortfall for the year, which was covered by financing activities and Gerry touched on dividend coverage and we'll talk about it a bit more, when we discuss the 2008 guidance.

Just quickly on account receivables. We really had no undue activity in terms of credit experience in the fourth quarter and that's a very positive and encouraging trend. At year end we had about $21.7 million of operating receivables and a reserve of $3.7 million or 17% and we counted on our books just under $90 million of straight line rent receivable with a reserve of $6.4 million. We did increase our reserve slightly in the fourth quarter to provide a greater cushion against future rental income write-offs. Without the non-recurring hedge cost again our FFO of $0.63, net Q4 consensus and our 2007 figure of $259 million exceeded the full year consensus by a penny.

Let's talk now about 2008 guidance, which we gave some detail about on the press release last night and we'll amplify it a bit more on this call. We are providing 2008 guidance of $2.46 to $2.56. Let me underscore a couple of key assumptions. Firstly, no 2008 acquisition activity is included in our plan. We do have between a $155 million and $162 million of net sales activities on five specific properties between a range of 7.5% to 8% blended cap rate one is closed, one is expected to now close on February 29, two are in discussions with a variety of bidders and one is speculative later in the year.

As Gerry mentioned, we need to fund approximately $175 million of combined development, redevelopment and capital expenditures. To break that down, we see about $75 million of expenditures in the development pipeline about $25 in redevelopments and another $75 of combined leasing commissions, tenant improvements and various building capital.

Of that last $75 between $45 million and $50 million is expected to be revenue maintaining capital expenditures and that compares favorably to the $61 million we incurred in 2007 and is one of the data points we are using to gain more comfort on the dividend coverage. In addition to the $175 million we track about $10 million of internal construction leasing and development costs from capitalized overhead that gets prorated amongst these activities and is added into the total.

For our five major ground-up developments, we expect to achieve about 15% average occupancy for the year and between 30% and 35% occupancy by year end to generate somewhere between $2.5 million and $3 million of NOI contribution in 2008. Capitalized interest and expenses on any un-leased or non-income producing construction in progress will be cut off between August and December 2008.

For our same store properties, we expect GAAP same store NOI growth in a range of 0.5% to 1% and cash same store NOI growth of between 2% and 2.5%. And I think the dynamic between those two illustrates the increase in the cash components of our income. We see same store occupancy increasing up to 100 points by year end. But as we'll touch on in a moment a significant portion of that is in fact back ended in fourth quarter.

As Gerry mentioned, we see GAAP mark-to-market increases on both new leases and on renewals in the 3% to 4.5% or 5% range. We see a decline of anywhere from $5 million to $6 million in straight line rent and a smaller $1 million to $2 million decline in FAS 141 income. We are projecting a consistent recovery profile of between 34% and 35% very much in line with the 34% we achieved in 2007. Our overall recovery profile continues to improve, as we move more and more tenants to a triple net lease structure.

With respect to overall 2008 leasing activity, we have about $60 million of speculative leasing revenue for both new and renewals in our 2008 plan. To-date, we have executed on 60% of the associated revenue, which is a relatively good number as we see it. Though we point out that the fourth quarter of 2008 represents about 40% of our 2008 speculative leasing and is only now about 40% executed at this time in line with this bias there is a similar upward trend in the expected fourth quarter FFO and CAD numbers.

Let's talk about other income items. The $30 million to $38 million range we outlined will incorporate several categories including termination fees, management income now reflecting the expense reimbursements, as we re-classed in Q4 and all prior periods, any other rental income items, interest income, JV income from our various JV activities including the joint venture with DRA and any other non-recurring items.

In 2007 to compare against this $30 million to $38 million range, we had $47 million in this category. My point out there was a typographical error in some of the early versions of the press release that stated its $49 million the correct figure for 2007 would be $47 million of this category. So we are showing a marked decrease in our expectations on those numbers.

We need to repay about a $135 million of maturing debt. We are targeting no 2008 financing activity and we do not need any, while we'll look at mortgages on stable properties, where the terms make sense. G&A is expected to run at $6.5 million to [$6.25] million per quarter reflecting cost savings and certain reclassification of cost to operating expenses in line with Q4 '07. We have a reasonable cushion in our G&A line for the potential costs of a new Chief Operating Officer, whose search is currently underway. We expect leverage to remain flat to slightly down as a result of steady operations and the identified asset sales.

And lastly with respect to our CAD, we are currently projecting it to be in a range of a $1.55 to a $1.65 per share and that would translate to anywhere from a $10 million to $20 million GAAP on our dividend and neutral to slightly positive by the end of 2008. Our 2007 shortfall was about $28 million by comparison and if we achieve the results in our plan it sets us up for full coverage in 2009. As Gerry outlined this all sums up to the expectation that we'll maintain our $1.76 dividend, $0.44 per quarter, but as always subject to Board approval.

We don't typically give our quarterly guidance. But I would like to share a few observations to make sure we get the year started right in many of the models that the analysts produce. Our FFO run rate in the fourth quarter would be $0.63 excluding the hedge expense. For Q1 2008, we should all consider the following adjustments with respect to the DRA transaction, we see Q1 NOI dropping by about $0.04 a share net of management income and reflecting our share of the JV debt. We see Q1 interest expense dropping by $0.2 per share due to debt repayment from the proceeds from the DRA JV.

Lastly, we do expect tenant reimbursements to drop about $0.01 a share because in the fourth quarter, we still did have some onetime activity in 2007. And lastly the other income categories as a whole would need to drop by anywhere from $0.01 to $0.02 to match our range. This result in a $0.59 run rate. We have received a large termination payment already in Q1 of $3 million, which adds about $0.02 per share versus the $760, 000 we received in Q4. This leads to a preliminary Q1 view of about $0.61. And we hope this sets the stage for both the quarterly and full year review of 2008.

Turning quickly on the balance sheet. We continue to monitor our debt profile and saw a slight improvement on the debt to gross real estate cost at 53.6%. Our secured debt remains quite low at 10.4% of total assets and our floating rate debt though that's a good thing to have right now is only 4.2% of total assets. Our $600 million credit facility was a $120 million drawn on December 31, 2007 and this significant reduction outstandings reflects the $150 million term loan we funded on October 19 and the roughly $230 million of proceeds from the DRA joint venture.

We had aggregate availability under our lines of over $475 million at 12/31/07 and have no need to do any financings in 2008 regardless of the success of our indicated sales initiatives. Lastly, I want to note that we completed reviews of our plan with the three rating agencies in January 2008 and received generally positive feedback from all three. We appreciate their support and remain committed to a strong investment grade rating.

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

Gerry Sweeney

Howard, thank you. Looking ahead after carefully assessing the real estate markets, our operating history over the last two years and factoring a near term capacity considerations, we plan to operate and deploy capital only in those markets, where we have a clear competitive advantage accompanied by a quality asset base and a strong management infrastructure. This execution will ultimately right size our portfolio further streamline our cost structure and better position us to deliver a higher return on invested capital.

Achieving this objective requires capital execution relating to several parts of our portfolio. The primary hurdle to this execution is the current state of the investment market, which is as you well know still fought with extensive price discovery. As such the pace and timing of this investment activity is uncertain and the process will take sometime.

With that in mind as both Howard and I have touched on our 2008 plan only incorporates the $160 million of tactical sales activity. It does not reflect some of the investments strategies that I'll go into in a few moments. By way of backline in the last two years, we have actively sold the higher cap rate assets I alluded to earlier in the discussion. For example we sold approximately $800 million of properties, which represented higher cap rate assets from Dallas, Reading, Harrisburg and our Northern Pennsylvania suburbs.

In 2007 alone we sold over $600 million of properties of which $400 million were assets in Philadelphia. These sales have been dilutive and accumulative impact is clearly reflected in our up coming plan. So, we've been fairly active on the sales side. We could have sold less which would have created a higher FFO. But we believe all of these sales transactions improved both our market position and our portfolio quality.

To invest significant capital only in those markets, where we have a competitive advantage we'll certainly necessitate the recapitalization or exit from several of the smaller markets in which we currently do business. Prior to addressing those let me spend a moment talking about our University City and Philadelphia region based initiatives.

As announced in our last call the marketing process for a joint venture on Cira Center is underway. We have 35 investors, who have expressed interest in the project property towards or underway and we expect five to ten quality offers. Our rationale for this transaction is to reduce our Philadelphia exposure provide additional liquidity and harvest profit. These numbers aid the impact of any joint venture from Cira is not reflected in our 2008 plan.

On the fully leased post office building and related garage structure, we have clearly created volume. Our primarily objective is to capture this through a financial structure and mitigate our forward funding obligation. We are currently in active discussions with several potential joint venture partners who will take a major equity stake in this project. While there is still a number of moving pieces, even in today's climate we are very pleased with the level of response received due to the long-term nature of the government lease, the quality of that income stream and it's near term delivery.

As I mentioned earlier, 90% of our post 2008 development funding commitment that's $290 million out of $320 relates solely to this property. The rationale for proceeding with this effort is to create an overall total investment vehicle to mitigate our funding obligation, harvest potential profit and create a high quality going forward revenue stream. This effort will be non-dilutive. It will better position our balance sheet and it is our top priority.

Howard outlined the transaction we consummated with DRA Advisor Group on our Northern Pennsylvania suburban portfolio. This is a very effective capital strategy for us. During 2008, we'll continue our asset calling efforts and we'll certainly be looking to replicate that capital structure on other portions of our suburban Philadelphia based asset pool.

Now moving on to the broader picture and looking at other parts of the company, we have a small portfolio in Southern California that portfolio consist of 437, 000 square feet or about 2% of our overall portfolio. To gain asset level control, we encumbered those assets from secured financings from a joint venture late last year. As we originally anticipated, we have concluded that we do not have a competitive advantage in this marketplace.

Our expectation as such is that we'll sell this portfolio by the end of 2008. The total estimated dollar amount, we anticipate to be slightly north of a $100 million and as such we expect the dilution if any to be immaterial that market is truly in a state of flux, so the timing of this effort is subject to some projected lease up activity and the health of the investment market.

The next market I'd like to spend a moment on is Northern California. That asset base represents about 9.5% of our net operating income. We have a strong market position in Oakland but have been unable to expand into the East Bay markets as we originally anticipated. We evaluate several billion dollars of transactions but have not been able to acquire any properties on any acceptable economic terms. As such our choices for this market are to simply stay as we are or to look for creative way to recapitalize.

The approach for exploring right now is to recapitalize all our portions of this portfolio which a joint venture partner, who will reduce our invested capital, generate liquidity and rationalize our investment program for this market. Again given the state of the investment market the timing of this undertaking is uncertain but it is a direction in which we are moving.

In the interim we had a strong management team, good market position and good leasing activity underway. The remaining smaller operation is Austin, Texas. We have not yet made a conclusive determination on the ultimate outcome of this market position. We continue to like both the dynamics and the demographics of this market. We enjoy a strong competitive position with a high quality asset base, good land holdings and an excellent management team. The over all market size unlike the very large markets of Northern and Southern California is also one where we can deploy limited capital and continue to improve our competitive position. That market however has experienced some headwinds due to lower than normal absorption in construction deliveries. So, our plan is to continue to carefully monitor that market for deployment and our project level recapitalization strategies.

The objective of all these efforts is to recognize the realties of both the market and our capital capacity regarding growing these operations establishing the economy of scale creating the competitive advantage we want and deploying capital on terms that make sense. We also recognized that the timing and execution of this strategy is subject to overall investment market conditions.

We are in a type of market, where frankly everything is for sale and nothing is for sale. Pricing and velocity is very uncertain and as such our business plan reflects only what we're convinced we can deliver on all fronts including this investment arena. We are also in a market where stability, certainty and predictability matter. Looking back over the last two years, we were probably at times overactive and I view 2008 as a year to strictly focus on operational execution, balance sheet strengthening and our leasing activities.

On a personal note the dramatic pull back in the pricing of REIT securities and more to the point Brandywine stock has created a high level of disappointment. Our stock underperformed in 2005 after we announced the merger with Prentiss performed generally in line with our peer group in 2006 and then underperformed our peer group in 2007.

The objective in laying out the 2008 business plan is to establish a realistic and achievable benchmark from which you can measure us. We also laid out some strategic objectives relative to the capital allocation and portfolio rebalancing. The execution of which will improve liquidity sharpen our execution and return Brandywine to having a competitive advantage in every one of the markets in which we operate, to achieve our paramount goal of generating better growth rates.

One last but very important comment, a key driver in the Prentiss transaction was the strength in the relationship that I have with both Mike Prentiss and Tom August. Those relationships remain very strong and as such I very much regret this recent turn of events.

By way of background, even the volatility in the capital marketplace and more importantly, the challenging operating climate, we made the determination to expand the management team and add another seasoned executive in the role of Chief Operating Office. From my standpoint, this is a very welcome addition.

At the time of the merger, to build a consensual management approaching culture, we did not expand our top ranks. Neither Prentiss nor Brandywine had a Chief Operating Officer and we felt having a very good creative interchange while we built the culture of a company after the merger between all the managing directors is very important.

Based on the market and operating challenges we encountered in 2007, but really more importantly looking ahead into 2008 and 2009, it was clearly time to change that approach. The Board, that's including Mike, Tom and myself, felt that this was a necessary objective. Given the press of Tom's other opportunity, the Board and Tom began an accelerated process, trying to structure a way in which Tom could fill the role of Chief Operating Officer.

For a variety of reasons, these negations were not successful and Tom decided that it was in his best interest to pursue the very attractive opportunity in Dallas, which was announced the other day.

Simply put, we all care very much about the success of the company and sometimes that creates emotional reactions. I can assure you that there were none and there are no significant palsy or strategic disagreements at the Board or senior management level. Just a lot of anxiety over how we get the stock price moving again.

One of the [important act] comes to the process went through as an internal email Tom used to communicate to the Board was required by SEC rules to be filed as part of his resignation. Tom regrets that and we all regret this had to be included as it portrayed a different picture than the process that was truly underway.

I really do wish Mike and Tom the best. Thank them both for their contributions, for their two years on the Board. We are moving forward with our management with a formal search for Chief Operating Officer and those costs are building to our projections.

And additionally and more importantly, the Board has begun the process of evaluating additional board candidates with the objective of bringing on to our Board very well respected individuals from our industry.

And to close, our entire team is resolved to continue to working together to make sure that we do realize the value that we can glean out of this market and that we anticipate as part of the merger transaction.

Jacqui at this point, we would like up the floor for questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). Your first question is from Anthony Paolone from JPMorgan.

Anthony Paolone - JPMorgan

Thanks, good morning. Gerry, can you walk through as you look out in the next couple of years in your core market. What would need to happen so that rents and core NOI growth would actually start to move a little bit higher than the 0.5%, 1% you are kind of trending at?

Gerry Sweeney

Sure. I will start on that, Tony, and then turn it over to both Bob and George to talk about what they are seeing in the different marketplaces they are involved in. I mean, clearly we need a steady state economy that will not be subject to any significant job backs or corporate relocations. Most of our markets have had that steady state for the last year. In addition to that, one of the benefits of the economic disruption we’re going through is that there won’t really be our expectations as over the near term, I mean, the next couple of years, any significant increase to any construction activity.

I think the lending environment is different. Developers, be they public or private, are much more cautious on job creation and assessing the timing of tenant demand. So I think there is going to be continued downward pressure generally in most of our markets on existing vacancy rates. They’ll be a combination of hopefully steady state and lower construction volumes.

Another positive that we would hope to see happen over the next couple of years, is we’ve been very fortunate to have a pretty good tenant retention rate through almost every operation in the company. One of the positives, you can call it that from a slower economic time, is that really only very happy people move. You see that in the residential marketplace and certainly from an office standpoint, tenants tend to focus more on near term business objectives as to deploying significant capital with leases in the near term when they’re going through this type of process.

That certainly, we’ve seen the impact of that on some of our development projects. Our hope is that we will see that continue to be reflected in our existing core portfolio, which will generate as you see statistically, pretty good returns on rents, but more importantly much lower capital costs across the Board. Bob, why don't you talk about some of the things you are seeing in your market?

Bob Wiberg

Yeah, I think the growth in the DC portfolio there are a few drivers that will affect us. The big one of course is leasing our new building at South Lake and we're obviously very actively trying to get that accomplished. We also have a redevelopment project, 6600 Rockledge, which gives us opportunity to increase our performance. I think a couple of other factors to know, one is in the past couple of years, one of the big negative has really been the operating cost growth that we've seen, and that's been through property tax increases and utility increases. A lot of the property tax was driven by the increased valuations of buildings that will clearly slow down, whether it is an offset from in the [military], we don't know. But I think that growth will slow.

Also utility-wise, our big exposure was because of the deregulation of utilities in Maryland, that’s pretty much played through. So while there will be expense increase due to fuel costs and things, I think that hyper growth that we saw is behind us.

As Gerry mentioned, I think retention's a positive, because it is expensive to move. We've seen the retention rates go up across the Board in the DC area and we'll continue to see that.

I think the final, what I would like to note is when we look at our growth rate, one of the challenges we really have in the DC area is the historic high rents that we achieved in the 1999 and 2000 timeframe, and when we're burning out those leases and going to new ones, there are cases certainly where we have rent roll downs. Those are pretty much played through the system at this point and I think as a result we'll be seeing more growth generally lease to lease and in our portfolio going forward

George Sowa

And Tony on the Pennsylvania, Philadelphia area, I think we have seen a couple of things too and where to grow income, really could be a couple of ways. One is certainly to increase the rent. The other, and that could be done in a number of ways, but also and may be more importantly in some cases, is how do we improve our margins. And to that end we have actually utilized a triple net lease structure on a price two-thirds, if not more, of our leases done within the last two years or three years at this point. And so again, we are improving our margins overall through the utilization of that triple net lease structure, and also have better control on our capital costs. If you looked at the trend lines on the capital, TI or the number of deals that we do directly with our excellent leasing staff that we have throughout the region, I think you'll see that trend as well.

Again, if you look at the suburban markets specifically, right now there are 29,000 new farm jobs created just since July 2006 in the area. I think you are seeing that kind of play out through overall vacancies, a little more than 15%, about 13.6% on a direct basis. But more importantly, it's about 1100 basis point improvement from the high back in 2003.

So, I think you are seeing some of that play through and the one thing too, if the economy continues to have some uncertainty, if you look back to times that we went through several years ago. What ended up happening, we continued to have very high tenant retention rates. The terms generally were a bit shorter, but we also didn't have to spend as much capital, where people are in an indecisive mode, but certainly not in a contraction mode, nor necessarily in expansion mode. But at the same time, they stay put, which is from a landlord perspective not a bad thing. We didn't spend much capital as a result, and when things turned around again, they continued to expand.

Anthony Paolone - JPMorgan

All right. And I guess and maybe this is an accounting question, but your FAS 141, taking into account, kind of what you are talking about in your markets and where you should may be going. Your FAS 141 is like $3 million a quarter, and I guess that was set because at the time you purchased Prentiss, the idea was market rents were higher than were in-place rents. But it has been a couple of years now and it seems like your cash rents that you're signing are really rated about the level of expiration. So, I might wonder when does that 141 really burn off is that made from an accounting point of view or is still exist of GAAP or did that potentially be written-off or how does that work.

Howard Sipzner

Yeah, I mean Tony, its Howard. A lot of questions embedded in there. It is primarily from the Prentiss transaction. The assumptions tracking back to the end of 2005 were predicated on achieving higher rents than those were in placed to some degree that's not presented itself. There is no write-off to extent that that's not realized. It was an appropriate assumption presumably at the time.

There is an expected decrease from what was a peak in 2007. I mentioned, we added about $1 million to $2 million and that will contribute to better CAD. But fundamentally, your question's right on target that the expectation is that the combination of cash and 141 income does migrate to a pure cash equal or greater amount overtime and we've had mixed results on that front.

Anthony Paolone - JPMorgan

All right. And last question Gerry with respect to Cira talking about doing something with the IRS site and bringing in a partner there to help fund those costs and then selling some other suburban assets maybe into JV and what not. Why still feel the need to showing interest in an asset like Cira, if it seems like maybe you can achieve some of your funding goals with some of these other transactions?

Gerry Sweeney

Well, Tony that's a good question. I think what I try to do is outline a range of different paths that we're exploring all of which again were focused on putting us in a much better competitive position at a real estate level and generating additional liquidity for the company. And that liquidity we're going to look at in two ways, one is a short-term liquidity aspects of further strengthen the balance sheet the other corollary to that is, is obviating the need to fund in future dollars.

So, I think what our approach right now given really the lack of clarity in investment market generally is to pursue a number of different avenues, see how those processes work their way through and then make what we think will be the best decision predicated upon the options that we've in place. I mean at this point and time, we've got good interest in on Cira Centre. But we don't know and again won't know for probably another 20 or 30 days on what the pricing will be or it could be even longer than that based upon how the bid process works.

Anthony Paolone - JPMorgan

Okay. And if some of those trends actually like Cira happened in Southern California, maybe joint venture in Northern California if some of those things do hit this year. What would that do to -- to say your dividend guidance or your earnings guidance for that matter?

Howard Sipzner

Tony, I'll jump in and then we'll probably turn it back for other questions. Our plan does not contemplate these additional transactions. To the extent, there are any one or more larger sales or JV activities that would either dilute earnings and/or create the need for a special dividend that would in all likelihood be accompanied by a full review of the dividend at the time. But that's not in the plan nor contemplated at this time.

Anthony Paolone - JPMorgan

Okay, thanks.

Operator

Thank you. Your next question is from Jordan Sadler with KeyBanc Capital Market

Jordan Sadler - KeyBanc Capital Market

Good Morning.

Gerry Sweeney

Good Morning

Jordan Sadler - KeyBanc Capital Market

Just wanted to sort of circle up on some of these proposed transactions. I'm trying to, I guess, understand exactly what you guys are looking at following I guess the merger with Prentiss you gained access to an exposure to Northern California, Austin and northern Virginia which was not mentioned in your sales plans. And it sounds like you're potentially thinking about retreating from these markets at the time when you merged, I thought that you identified these markets as superior growth markets and that was sort of one of the reasons behind the merger. And so can you maybe explain what the thought process might be and maybe getting out of these markets now and maybe how the thought process may have changed?

Howard Sipzner

Sure and it's a good question. We had mentioned from the beginning that we always thought that we'll go into a two year period of evaluating Southern California and I think from the beginning we indicated we did not think that will be a long-term market for us unless we were able to expand that market position significantly.

Jordan Sadler - KeyBanc Capital Market

That I remember.

Howard Sipzner

I'm sorry that's Southern California.

Jordan Sadler - KeyBanc Capital Market

Yeah I remember that.

Howard Sipzner

Yeah. So I think we've talked about here on that market is very consistent with what we talked about originally. Relative to Northern California that's a marketplace where again I tried to lay the balance first, if we like it. We've a good position in Oakland. But I think what's really happened is that it has become clear that where pricing levels are in that marketplace.

Our cost of capital is going to be hard for us to grow our operation and create a real competitive advantage outside of the pod we have right now in Oakland fully utilizing our balance sheet. It's just not going to happen from that standpoint. So, what we're looking at doing at that market is recapitalizing via joint venture our operation. So, we can reengage and actually get some money back again increase in liquidating the company, but certainly create a -- hopefully a different investment landscape for that marketplace.

And so that's more of a recapitalization versus simply indicating that market may not work for us. And I think Austin is in the same situation relative to our long-term pricing as to what the right capital plan is. Certainly, we do have a significant competitive advantage in Northern Virginia and the DC area and suburban Maryland. And our hope would be as it was we're beginning to continue to grow those operations and to generate better long-term average growth rates.

Jordan Sadler - KeyBanc Capital Market

Would you be able to maybe give us a sense of what the IRRs have been on Prentiss assets sold? And going forward, will you maybe be able to provide that for us? So we could sort of measure how you guys did relative to the buy?

Gerry Sweeney

I mean Jordan I don't have a specific IRRs. But what I'll say is with respect to all the sales' activity we sold at or above gross cost and obviously realized good NOI and income along the way. And at the point of those sales included in the basis any unamortized TI or capitals. So, I'd say the sales premise and the pricing promise all held up but the growth premise did not hold up.

Jordan Sadler - KeyBanc Capital Market

Okay. And then could you just give us some more color on the $153 million to $160 million of asset sales that are in guidance?

Howard Sipzner

Yes.

Jordan Sadler - KeyBanc Capital Market

Where are those?

Gerry Sweeney

Well we identified two thus far. I can't identify the other three because they are in various stages of discussion or one is not yet in the market per se. But the two that's sold, one was a small industrial building that originally had been part of the Northern PA asset group because it was industrial that fell away; we put it back on the market and sold it at a nice profit as will be disclosed in Q1 and in line with pricing expectations or small transaction.

Second that closing was supposed to be today but is now moving to the last day of the month. But it's still under a hard contract. It is a single tenant building in New Jersey on which we didn't see much upside because of single tenant long-term lease and found a motivated buyer for that.

The other two are other assets that have various characteristics on the portfolio and have both been identified as good candidates for sale. Generally those are two assets that have full occupancy stable to flat income and are really the prototypical assets that seem to sell best in this uncertain market and we received good expressions of interest. We assume those later two sales occur into and through the second quarter and the last speculative sale is a late third quarter event. But no real color on that.

Jordan Sadler - KeyBanc Capital Market

And so what sort of a capital is raised from these -- it's not clear whether or not these are held leverage these assets are that you are pairing, I mean, I'm assuming there will be some?

Gerry Sweeney

No leverage on any of them.

Jordan Sadler - KeyBanc Capital Market

So the capital is coming in, you have some access liquidity. What is the purpose of that access liquidity and will be for what uses?

Gerry Sweeney

It will fund our development activities and capital expenditures in the long run. We outlined about a $175 million of those for the year. We've debt repayments going on through the year. The largest of which is at year end and all with an eye to maintaining maximum availability on our line of credit. I mean, we really have subscribed and do subscribe to the notion that the capital market conditions are of uncertain length and we are going to make sure that we're in a comfortable position beyond anybody's reasonable expectation, how long that's going to last. It may turn around in three or six months, it may not turn around in 2009, and we're thinking 2009, 2010 and beyond, in terms of making sure we don't have to do any kind of financial transaction, we wouldn’t otherwise want to do.

Jordan Sadler - KeyBanc Capital Market

We shouldn't necessarily expect a big buy back program?

Howard Sipzner

We have no buybacks programmed into the plan for 2008. We do believe they’d be attractive, but our first priority is to address the current capital markets conditions, and make sure we're comfortable with respect to them.

Jordan Sadler - KeyBanc Capital Market

Thanks.

Operator

Thank you. Your next question is from Ian Weissman from Merrill Lynch.

Ian Weissman - Merrill Lynch

Hi. Yes Good Morning, in your guidance, you have I assume, a fairly bullish view of internal growth. I mean, you're looking at a 100 basis point increase in occupancy and call it 3% to 5% rollups. Can you maybe talk specifically about what the slowing economy has meant in your markets and why you're somewhat bullish on the outlook for '08?

Gerry Sweeney

Yeah Howard and then perhaps some of the others will jump in. I mean firstly that pick up in occupancy is to some degree back ended. It does contemplate some periods during the year, when there will be interim vacancy. And that really speaks to why the NOI growth is a little bit muted with respect to the rental growth. The economy is cutting both ways and also not necessarily visible.

Our leasing activity remains reasonable. We've had renewal activity out of that, particularly with some larger tenants already in the first quarter. I think probably the statistic that underscores how we are doing in this economy, is that 60% of our speculative revenue, as we sit here on February 20th, is already executed.

So, we obviously have exposure, but it really sits with only 40% of our overall plan for the year. A portion of that obviously is renewals, which have a much higher probability, and the rest in some speculative leasing, primarily towards the end of the year. So, those are the risks on the upside in the plan.

Howard Sipzner

Yeah, I mean, just to add to Howard's comment, Ian, for the first quarter we've got over 90% of those rents already executed, it's about 80% for the second quarter and then about 60 some percent for the third quarter for an overall average for the year about 60%-61%. So, we spend a lot of time scrubbing through all the individual assumptions that were developed by the Managing Directors, relative to what they thought they could realistically achieve in every component of the portfolio.

Ian Weissman - Merrill Lynch

The drop-off in retention ratio for the quarter, how much of that is related to tenants moving to new developments?

Howard Sipzner

Actually none. One of the big drops in the fourth quarter was that we had a tenant roll out in a building that we were planning on selling to DRA, they got pulled from that transaction, and that was about 70,000 square foot. So that was a big piece of the negative roll. We had a couple of longer term tenants that were on sub-lease that rolled out and that counted towards the lower retention rates.

Ian Weissman - Merrill Lynch

You spent a lot of time adamantly defending the dividend, just given your '08 business plan. Do you care to paint the scenario where the Board would consider a dividend cut?

Howard Sipzner

The Board has spent a lot of time evaluating the details of the plan. Management has spent a lot of time reviewing the details of the plan. There would have to be a pretty adverse change in unforeseen circumstance, because right now, as I mentioned, we do believe we had a clear path towards coverage. Certainly, if you assume some of the things we were chatting about a moment ago relative to good retention rates, will even create some better room on that coverage ratio.

So I think the only circumstance that we create a relook at the dividend, is something unexpected happened within our portfolio, or there was one of these larger portfolio transactions that we concluded we had no good deployment opportunities, and that it was better for us to make a special distribution to meet the tax requirement. I think at that point, the company would spend a lot of time thinking about what we would do to that payout ratio going forward.

Ian Weissman - Merrill Lynch

Can you define what coverage ratio you are uncomfortable, maintaining this?

Gerry Sweeney

The only thing I will say is historically, the company ran around at about 70% FFO payout ratio, which were at or even better than, but also an 85% to 90% CAD ratio, which were clearly above. But we do get positive under this plan in the mid to high 90s in the fourth quarter of 2007, again assuming all the assumptions are hit and then I think set up very nicely for 2009, which is obviously premature to talk about. But we have set out a set of very clear detailed assumptions as to what we need to do fully communicate internally, and we do believe that if we hit for the most part, most of those assumptions, we can maintain the dividend.

Ian Weissman - Merrill Lynch

Okay, thank you very much.

Howard Sipzner

Thanks Ian.

Operator

Thank you. Your next question is from Jamie Feldman with UBS.

Jamie Feldman- UBS

Great, thank you. And thank you for the detail on laying out dividend coverage. Can you talk a little about what do you are seeing in terms of tenant behavior in terms of TI, free rents, kind of where tenants are by market and what they want? And then what your base assumption is for TI's and leasing commissions for the '08 guidance.

Howard Sipzner

Yes Jamie, I will jump in on the last question. We outlined about $75 million of total capital, about $45 million of that is with respect to, what we call revenue maintaining space that we're either rolling or that was recently leased. So, another 25 to 30 or so would be for previously vacant space. In terms of rates, the cost to tenant, the renewal space is actually quite low and it kind of runs to your earlier question. We are seeing some short-term decisions, where a tenant will say, let me just ride this out for 12 to 18 months and then I will let the other folks jump in. And those are typically low or no costs and they do tend to bring the averages down.

But clearly in our plan, the more renewal activity we have and we've been reasonably consistent on the assumptions there, probably somewhere around 55% to 60%, even a bit below our historical averages. But more renewals will obviously bring our costs down dramatically. There is almost a three or four to one relationship whether you look at per square foot or percent of revenue or whatever the metric between renewals and new leases obviously. The only place where we really want to spend new lease dollars are in our developments, and we've given a fair amount of leeway to the field to get those deals done at the market.

Jamie Feldman - UBS

How would your leasing teams characterize what they have to do to get deals done in their markets, today versus maybe a year ago? Free rent versus TIs?

Howard Sipzner

I think there are a couple of things. The free rent was never that prevalent in the Philadelphia area, you come down to with a few exceptions in it. And on the TI side, again depending on the type of space, where your construction costs are clearly going up, so in some cases, the TI has tracked the real cost of what the construction actually is. From a concession, they're not shy about asking, but again depending on who it is and where it is and the type of leverage the respective parties have, you certainly don't have the need where we found tenants have been contributing their own dollars in some cases.

And I guess, most importantly, if you look at the trend line quarter-over-quarter and over last year, in every one of the sub-regions in the Philadelphia area, with very few exceptions, we’ve actually had a positive trend line on the capital we've committed, anywhere from 11% reductions to maybe 40% reductions, quarter-over-quarter. So its one that we’ve had some good trend lines on the capital side.

Bob Wiberg

And I think down in the Metro DC area, what we've seen is certainly for new space, in particular, everyone's trying to hold the base rates as much as they can. The TIs are clearly expensive these days. We've been pretty successful in extending term. So, when we put out more money, we expect more term. We've got up to 15 years and in some cases, to amortize that out.

But I do think free rent is coming back into the market down in Metro DC. I think that's where the concession is made to complete a deal and I think that will continue to be a factor, certainly through the wave of the construction we’re seeing in '08 and to some degree in '09.

Jamie Feldman - UBS

And then, back to the JV question. I think when you were answering Tony's final question, I think, I heard you say that you felt that any JV would be dilutive in the near term, or did I hear that wrong?

Howard Sipzner

JV’s would be dilutive in the near term to the extent of funds used to pay down line of credit costs I mean with floating rates where they are. I'm not sure we see ourselves doing sub for cap rates on our JVs though we would certainly welcome them.

But I think more globally the purpose of the JVs are part of balancing our holdings in certain markets dealing with markets where we don't have a competitive advantage and also dealing with some longer-term funding obligations and some of those will be positive to FFO and some will be negative. But we'll blend those combined issues in making decisions.

Jamie Feldman - UBS

You could be referencing the credit line currently. And then finally can you characterize a little bit about the types of partners that are out there now and maybe you have that universal change over the last year or so?

Howard Sipzner

Yeah. I mean I'd say with respect to the initiatives we have it's too early to tell. I mean it would be not fair of the process. So, we'll just wait until we have something definitive on any of the transactions to a later date.

Gerry Sweeney

I think it's a pretty traditional institution based. Certainly the joint venture that we went through on the PA north properties attracts a different partner than Cira Center some of these other ones. But it's pretty broad based. I think one of the real unsettled aspects is just people are kind of waiting to see where debt settles in which I think is one of the reasons why people are taking longer to kind of underwrite the real estate because it's hard to draw a definitive conclusion on what your return on equity is going to be until you're locked into your debt.

So, I think still what we've seen is certainly reflects what you read in the periodicals. There is a lot of capital out there looking for a home; some of that capital wants to try and get in earlier in 2007 because they think things will tighten up significantly in terms of dual velocity later in the year and there is a pricing advantage today.

Other folks are just looking at deals and taking their time on the bidding process. But I haven't really noticed dramatic changes in the composition of some of the institutions that have raised their hands on some of our initiatives.

Jamie Feldman - UBS

I mean what about a change in their IRR with respect to return?

Howard Sipzner

I think it's too early to tell to be honest with you.

Jamie Feldman - UBS

All right. Thank you very much.

Operator

Thank you. Your next question is from Rich Anderson with BMO Capital Markets.

Rich Anderson - BMO Capital Markets

Hey, thanks and good morning or good afternoon. Just a quick softball - first the other income when you say JV income are you talking about management income off of the joint venture. What is JV income to you?

Gerry Sweeney

No JV income is what we book on the income statement as our equity.

Rich Anderson - BMO Capital Markets

Okay.

Gerry Sweeney

Is unconsolidated entity.

Rich Anderson - BMO Capital Markets

Okay got you. And then for lease termination fees you've done $3 million already. What is your expectation for '08 versus '07 on that line item?

Howard Sipzner

We were specifically not breaking out individual categories, but really encapsulated that with the other four or five categories in one larger number. All of these individual items save management fees and perhaps the JV income tends to be very unpredictable and therefore we're not going to venture any kind of number on what individual ones will be.

Rich Anderson - BMO Capital Markets

Okay. On the sort of broader picture the developments' activities that you've undertaken and it's interesting to me that you don't have development starts for 2008. I assume that has to do with some of the strategic decisions that you're making. Have you any pursuit cost issues with that plan a change of strategy?

Howard Sipzner

No. I mean really development activity on a go forward basis will be predicated on at least two things, number one getting leasing done in our existing ground-up developments and to a lesser degree the redevelopments which are further along and more generally just the state of the economy. I mean it's a tricky time right now because while it's obviously not the time to start right now, it might very well be the time to deliver two or three years forward.

So, with that in mind, you will notice that on pages 32 and 33 of our supplement, we have both our active development description as well as our land bank, where nothing is really happening for the moment. Within those two categories some things do move back and forth. And I think about 10 projects we're doing some active planning to keep approvals in place to have schematics available and even doing some light marketing on some build-to-suite. But it is all low level supportive activity as opposed to hard starts.

Rich Anderson - BMO Capital Markets

Okay. And then, an even bigger picture I guess, not to be a cynic. But I think you know when we came out of the box after the Prentiss merger our general thesis was that you would ultimately sell East Bay in Austin, Southern California and focus back to Washington DC that was sort of our thinking right from the get go.

And it just feels like that might have been always on the back of your mind that you're really wanted DC to sort of close the loop between Richmond and Philadelphia. How much of that was really right?

Gerry Sweeney

Well we made no secret from the very beginning that the primary driver of our thoughts on the merger was the expansion of the asset base into the metro DC market that was almost 30% of Prentiss's EBITDA, great diversity of product in that market and a lot of different submarkets. So, that was clearly a review that as a very important component of the deal.

But we also wanted to give the other markets a very good run. Again, good teams, good quality asset base so I think, as I touched on in the beginning, one of the material things that changed was, we started to try and expand our operation and again pushing operations, which is Northern California. I mean, you saw cap rates drop into the 3%, 4%, 5% range.

Our cost of capital would never get us into that position, number one. Number two, the growth assumptions that were driving some of those deals were simply too dear for us to appreciate as real estate people as opposed to financing people and we just weren't able to grow. And if you're unable to grow on operation, you need to explore alternative ways to generate profitability. And as we look at Northern California, we're hopeful that a partnership structure out there will enable us to harvest some profit, rationalize that platform and create expectations for growth going forward.

If that in fact doesn't prove to be the case then the exit there is more optimal from a pricing stand, but we'll certainly look at that too, but that is to be determined. We have good people, and good assets in those markets. But our cost of capital and our capacity to deploy capital for the foreseeable future, we need to be realistic and recognize that we just don't have that ability to grow and increase our competitive advantage in those marketplaces.

That's why we talked early on about the need to really be competitive in every single market in which we do business from every point of real estate cycle. Part of that is having control over tenants, broader brokerage relationships, landholdings, quality asset bases and in some of those markets it may be hard for us to do on our own balance sheet.

Rich Anderson - BMO Capital Markets

Understood. And, I mean, just an observation. I think, hunkering down into what makes you guys interesting is sort of a mid-Atlantic type of portfolio or Philadelphia to D.C. portfolio that would be well received, it's just a matter of getting there that would be my guess. So, anyway, good call. Thank you.

Gerry Sweeney

Thank you.

Howard Sipzner

Thank you.

Operator

Thank you. Your next question is from John Guinee with Stifel.

John Guinee - Stifel Nicolaus

Hi, gentlemen, nice job. A quick question on page 32, what you said was that your four or five different spec office buildings, all shipped from capitalized into expensing interest sometime towards the latter part of this year. Do you walk through your accounting policies for the planning and design stage land as well as land held for future development as well as your redevelopment?

Howard Sipzner

Okay. I mean, John, this is Howard. There is a clear break with respect to our land bank, which includes properties or land parcels on page 32 and those on page 33 and therefore explains some of the movement that took place. And just conceptually the land that is on page 32, the $51 million aggregate value for which we're capitalizing interest and expenses that land and those projects have active work going on with them.

We have people from our development team working on various projects, laying out designs. We're incurring third party costs and we're getting ready, so to speak, to do something; emphasis is on getting ready. The projects on page 33 represent a longer-term land bank, for which there is no discernible or meaningful current activity and they are simply longer term core holdings in DC, Jersey, Pennsylvania, Richmond, etcetera, all the various markets where we do see development opportunities in the future and therefore land banking is appropriate, but nothing in the near term is indicated. In certain cases, we have sold land parcels out of both buckets, primarily the non-active bucket, just because we have found better opportunities to monetize and to proceed.

John Guinee - Stifel Nicolaus

So, on 70 million of land held for future development, are you capitalizing or expensing your carry there?

Howard Sipzner

We are expensing it.

John Guinee - Stifel Nicolaus

And then how are you handling your redevelopment?

Howard Sipzner

On redevelopments, we allocate some internal overhead, where it is appropriate on those projects and the 28.2 million of construction and progress related to those projects and the bulk of it is the full scale redevelopment of Lennox Drive. As you see, we do attract capitalized interest on those amounts as well.

John Guinee - Stifel Nicolaus

But you are expensing your interest on the $241 million?

Howard Sipzner

We are expensing our interest on the 167.6, but that's in service. The 241 represents the total project cost.

John Guinee - Stifel Nicolaus

Is it also safe to say that when you cut through all this that the ability to cover the dividend and 2009 is largely dependent on getting up to a stabilized level of occupancy on the five spec buildings?

Howard Sipzner

It really isn't. I mean, if you think about it, the way our plan is built with the sales, with the core activity, we'll cover in the fourth quarter rather with really just 30% year end occupancy.

I wouldn't necessarily call it a high or a low target. I think it’s a realistic target, and you got to recognize that’s economic occupancy at which point we will begin realizing revenue in all cases the space where leasing has to be designed and built out. All we have done right now is corn shell. So, I think the answer to your question is to the extent we exceed that level and start to realize more income into 2009. It gets that much better.

John Guinee - Stifel Nicolaus

Great, thank you.

Howard Sipzner

Thank you, John.

Operator

Thank you. Your next question is from Michael Bilerman with Citi.

Michael Bilerman - Citi

Hey, guys. Gerry, you talked a little bit about COO role and making the decision at the time of merger not to put someone to that role given that your company and Prentiss didn’t have one, and that given Tom's other job opportunities sort of came to ahead. And it sounds like you've now employed a search firm and you're going to go out and get someone. What do you envision this person doing, and what roles or responsibilities would they fill other than what's being filled today and just walking through what changes would occur?

Gerry Sweeney

Sure, I would be happy to. I think at a core level, we are looking for someone to really take active engagement with all the field heads for leasing operation, construction and reporting manner. And to really take the lead on companywide asset management programs and monitor all those different activities. Certainly someone who would care our internal management committee, which is meeting at price of our senior executives that meets on a regular basis to do the company to-do list, so to speak. And then really actively participate along with Howard and myself and the Board and our capital allocation decisions really on the premise that additional brainpower is good today.

But, our focus really with the COO is to improve and accelerate the operational throughout we have, not necessarily there is anything broken at this point. But from our standpoint, we've had some support functions; we have a great individual, George Johnson, head up our senior VP of Operations, heads up a number of different functions. The COO would be a much broader role in the company, really work as a partner with Howard and myself, and the other senior executives, in really assessing all different components of the business.

And our hope is that we'll be able to assess some very good candidates, look for some fresh ideas. I mean, our company has changed significantly in the last couple of years, as has the marketplace. Howard came in a little bit more than a year ago, bought a fresh perspective and became a very effective contributor to the company. And I think we can all learn from this search process, see what talent is out there and see what additional value they can create for our management team and for our shareholder base.

Michael Bilerman - Citi

What timing are you looking at?

Gerry Sweeney

Well, the search is underway. So my guess is, it's a three or six month process and we'll see how well that plays out.

Michael Bilerman - Citi

Just trying to reconcile that I think, Howard you made the comment that it wouldn't affect your G&A guidance. I think you mentioned that your current run rate 6.5 to 7, that would imply about $26 million to $27 million of G&A relative to your guidance of $25 million to $27 million. So I was just wondering if you bring in a senior executive at the most executive rank of the company, why wouldn't that have pushed that number closer to the 30s?

Howard Sipzner

Well, I think what we expect to see is a little bit lighter in the first half of the year and creating in effect, a little bit of a cushion later on. We didn't get into that micro quarter-by-quarter. What it’s going to be and we will probably end up having somewhere to half or less of the cost of this person in 2008 plus or minus we may be off by $0.25 million to $0.5 million in the aggregate and I think we can absorb that.

Michael Bilerman - Citi

Gerry, still a bigger picture question. When you lay out all the potential JVs or asset sales that are potentially on the plate, it totals almost 25% over $1 billion of assets from your portfolio. Very meaningful in size, how many of these are mutually exclusive from each other or do you know if you're able to obtain the pricing that you go, company would be much-much smaller. How do you think about if you're going to execute on these, where you put the capital, how much of this can be debt pay down and reduced leverage from the low 50s down to low 40s. Just sort of step back from it and how you're evaluating it?

Gerry Sweeney

Good question. I think the driving predicated behind some of these discussions or initiatives is really to explore as many different options as we can, given where the marketplace is today. Now there are certain things that we know for sure, that are priorities. We clearly, as I mentioned and set as a priority, creating a venture structure to help mitigate the funding on the Cira South project and that’s an active ongoing dialog. But again it has no real current dilution effect and in fact we think it may have a very positive effect on our forward balance sheet commitments, and creates a very good framework for us and in a price which is clearly our largest capital of commitment.

We clearly have concluded that we do not have a competitive position in Southern California, and as a consequence building those assets leaves us even more susceptible to things we can't control. So that would be a clear priority.

When you look at our Northern California initiative that is us trying to be forward thinking in how we could effectively create a better return on our invested capital in that marketplace, through either joint venture structure, a partial sale of some of our interest. But more, trying to look ahead on how we create the right economic framework, to have very viable, positive, profitable enterprises in the marketplace that arguably have higher growth characteristics in some of the mid-Atlantic marketplace, is also one that from a pricing standpoint is very dear. And we will have to see how that works through this entire process.

Cira Center, again I think we’ll see what the pricing comes in on that. But that's clearly a very viable opportunity for us to generate some immediate liquidity and either recharge the balance sheet or use that capital to look to expand our operation to the extent we find good deployment opportunities down in the Metro DC area.

Michael Bilerman - Citi

What do you do with the capital in the interim? Is there a certain debt that can be repaid or are you going to just sit on the cash?

Howard Sipzner

Michael, its Howard. We really have minimal debt rolling in 2008. We had about $120 million outstanding on the line, so we could move those dollars around. We will be spending money on the capital side through the year, the timing of the sales, offset some of that. I mean even with the sales program, and all the related initiatives, I don’t see us as having excess cash and depending on size, we can certainly absorb a lot of any one of these, if it generates cash.

The related question is to what degree a special dividend would be required depending on timing and everything else going on. And then looking ahead, which we're doing all the time 2009 begins to bring both some mortgage and debt maturities that certainly we would not be versed to laying in some cash in advance of those in case the markets were not there in a satisfactory fashion.

Michael Bilerman - Citi

Right. It was helpful on the breakout you gave on all the other income pieces. What's embedded in the other revenue section the $6.1 million that you had in 2007, $5.5 in '06?

Howard Sipzner

Nothing individually of any note that really jumps out and says this needs to be handled separately or that merits any kind of explanation. So, I mean individual transactions with tenant selling up some obligations. It's a whole variety of all items. I don't think there was any one that was larger than a couple of $100,000. And that's why those tend to come, they are unpredictable. They are happening with the portfolio of couple of hundred buildings 2000 tenants and everything else we're doing. But it really is I mean it would be inappropriate to point anyone and suggest that it was going to repeat in the following year.

Michael Bilerman - Citi

But that's a pretty, I mean, just looking at the quarterly breakdown is pretty recurring in that $1 million to $2 million range. There should be no reason why that $6 million goes away, right?

Howard Sipzner

It was, the one that I'll point to that is of note is we converted one building from, I guess, it was an operating lease to an owned property by virtue of actually determination transaction that we did in 2007. And that was the Southpoint building that is -- that will not be in same store because of a different treatment. But that lease structure was booked on that line. I mean that was about a $1 million one of the $5.5. So, that clearly goes away that goes into NOI although not same store. I mean from here on down there is really nothing of any size that jumps out.

Michael Bilerman - Citi

Right. So I'm just trying your $30 to $38 and I know you haven't provided the details. But if you just take the $3 million of lease terms you booked, you take $5 million of this other income, $20 million of management fees, which is flat with last year and that should be going up because of where you're with the JV with DRA? And then maybe $2 million of interest income cutting it in half given lower rates and some modest increase in JV income you get the $35 million. So I'm just trying to reconcile what would take you to the bottom end of that $30 million? But also given the fact that lease terms are $3 million of them already booked, it sounds like you'll probably get to the $28 million potentially?

Howard Sipzner

I mean, I don't think we go below the 30 and I won't dispute the math you laid out in terms of the mathematical accuracies to whether those items materialize that way. I mean, our view going into 2008 is to paint a picture that's much more certain for investors and analysts and our Board internally.

And I think taking the straight and narrow path on many of these items is just the right way to go and to the extent we exceed them that's great. We'll have that much more FFO that much more income most of those items would of course be cash. It would provide that much better coverage. It certainly fits within the range the $0.10 range we laid out. I can't tell you sitting here in February whether we are more likely to be at $30 or $38 or even above $38 which is certainly possible. But I don't think we'll be 30.

Michael Bilerman - Citi

And that's what's embedded in the high and low end of your guidance?

Howard Sipzner

Not that individually, but any combination of all of these ranges -- again I don't think we're going to hit the high end of everyone of the categories low on cost, high on revenues to push us through. So, there is sort of bell curve that arises out of all the different scenarios.

Michael Bilerman - Citi

Right.

Howard Sipzner

And produces this range.

Michael Bilerman - Citi

And my final question Howard is; you talked about the fourth quarter being higher than the rest and you talked about $0.61 for the first quarter being boosted up by the $3 million lease term fee. You also talked about the interest capitalization stopping between August and December, where most of the developments were going to be 30% occupied by the end of the year. I'd have thought that would have had some negative impact to the fourth quarter FFO as you have to take in the full capitalization of those assets that's earning and economic low yield that would have been very dilutive to fourth quarter. And given the leasing that you're talking about getting done in the fourth quarter probably really doesn't start to impact fourth quarter as much as they would impact 2009. So, I'm just trying to put all these things together and really understand it?

Howard Sipzner

Again, I think you just answered the question. I mean, I think we're recognizing that increased cost on the interest side in the fourth quarter. But we're seeing most certainly not all, but most of the development income falling in the fourth quarter. So, it has a good impact on the numbers. And again remember that if 30% on average is leased that only means we're going have the interest expense hit us on the other 70. It does outweigh the income on the front piece, but there is a certain matching up there that takes place.

And most importantly the rest of our plan has a big ramp in the fourth quarter, combination of new leases, replacements of some expirations and it all just combines. There is nothing unusual going on in the fourth quarter that would make it any different other than those factors we outlined.

Michael Bilerman - Citi

Great, okay. Thank you for your time.

Howard Sipzner

Thank you very much Michael.

Operator

Thank you. Your next question is from Chris Haley with Wachovia.

Chris Haley - Wachovia

Good afternoon. Howard, you mentioned the planned expenditures for 2008 $175 million, $75 million for development, $25 million for redevelopment and then a $75 million for leasing cost in building CapEx. Is that correct?

Howard Sipzner

That's correct.

Chris Haley - Wachovia

Okay. And within the $70 to $75 million of leasing building CapEx is $40 to $50 million of maintenance CapEx or revenue maintaining CapEx?

Howard Sipzner

That's correct.

Chris Haley - Wachovia

I look at your 2007 actual numbers for maintenance CapEx that number was approximately 60?

Howard Sipzner

61 million I think, that's right.

Chris Haley - Wachovia

So, what you're attributing the decline to?

Howard Sipzner

We're looking at a 94% leased portfolio. We've a reasonable assumption on renewals, first of all which as we outlined incurred much lower cost. And we do think we've been effective at controlling capital otherwise. I mean, we're just very heartened by both by the trends from the second through the fourth quarters. So, if you pickup from the fourth quarter, we did $4 million better roughly than in the second quarter.

And if we just maintain the fourth quarter level, which I think we can do a little better than, that would translate to about $53, $54. And then it's a little bit above our target and we certainly don't want to end up there. So, I think our target of $45 to $50 based on what we see, based again on the leasing that's been executed year-to-date and the carryover from the fourth quarter. We're reasonably comfortable that we can bring that capital back down off the 2007 peak. And that chips away at about half of the dividend shortfall.

Chris Haley - Wachovia

The amount of leasing that you're assuming would be my existing square footage plus a 100 basis points of occupancy growth, not maintaining other adjustments. So, in 2008 year you've approximately $2.9 million rolling on the consolidated portfolio. So, I'd layer on a little bit more than that, maybe another I guess about I'm saying to another quarter million square feet. So little over $3, $3.25 million the lease plus fee unconsolidated portfolio.

So, if I just make those calculations, I'm having a tough time getting to this $40 million to $50 million maintenance number. Are you making any differences between first generation and second generation or revenue maintaining and not revenue maintaining?

Howard Sipzner

No, we're maintaining all of our practices and disclosure consistent with what we adopted beginning I believe in the second quarter of this year. There is no change. Every lease transactions been analyzed on a forward-looking basis for how it would be booked and that's the basis for these calculations. So, I'll be happy to get with you in greater detail offline. But we should probably move on from…

Chris Haley - Wachovia

I'll. If I can -- that's helpful. And I'd like to follow-up, I have some thoughts on the credibility gap note mentioned, Gerry, early in the call. I tend to also think there is a performance gap issue and some of the things you noted early on are certainly opinions and they are influenced by the departures of certain executives. But after covering your company for almost a dozen years, it’s hard to see Board members leave like this. It’s certainly hard to see the turnover that has occurred in some of the executive partners that you have had and I look at the guidance that’s being offered this year relative to past years, and look at 2008 performance on an FFO per share basis actually being flat with where it was 8 years ago.

In fact, your cash flow per share as we calculated is approximately 20% to 30% below where it was eight to nine years ago. And we look at this Prentiss transaction which we’re looking backward and I am glad to hear that you are admitting that there were some challenges and things that weren’t executed. But this was supposed to be additive, provide growth, it wasn’t. I don’t know whether Brandywine was sold a bill of goods by the Prentiss guys, who knows, but you guys made the underwriting. And it certainly it makes me question Brandywine's underwriting.

But more clearly, we were sold a bill of goods and the facts remain, from 1989 to 1999, through 2007-2008, your compound average growth of cash flow per share is negative 3, and your company has actually grown the fastest of almost all the suburban office companies. So not only have you more than almost doubled the size of your asset base, you've grown per share -- they haven’t even grown per share cash flow. And I go to Cira Center, a good deal, no growth in per share, Rubenstein the portfolio, Radner, no growth in per share expected. Three quarters in a row of development deliveries being pushed out and the balance sheet is now levered almost 60%. And the decision in the short term on buying back stock at a time when the development dollars are going up, certainly makes me want to question these decisions on the short term on the part of the management team and the Board.

So in view of these short term decisions and long term strategy questions I ask, I can't help but enquire who is leading in guiding and watching this performance. This even excludes the fact or any references at stock. In performance, this is the only office company where today's price is below that of 10 years ago -- 10 years ago. So what to do? My initial take is these two Board seats are critical, that are now open. And it's unfortunate to see those guys go earlier than they were scheduled to go, or even earlier than we would have liked to have seen them go. Those two Board seats are very critical, and I think the Board and management needs to take a serious look about who they should bring in.

Regarding this capital plan in the short term, I know you are providing only 2008 guidance. But I think you need to provide a more realistic two to three year plan which is clearly indicating that more capital needs to be raised through dispositions and as you mentioned, moving out of some of the markets two years ago that you thought you were going to expand upon, and now you are turning around and saying well those are not working out as what we planned. So now we have a company that's much higher levered, we have an asset base that's $5 billion or 200% greater than where it was, zero growth over the last 10 years. That's I have to say. Thank you.

Gerry Sweeney

Thank you, Chris. We certainly recognize there are some challenges we have ahead of us. The Board, as I mentioned, is very focused on looking for some additional candidates and our objective in looking at and laying out the 2008 plan, is to set that new path going forward. And I understand your observations and recognize where they are coming from.

Operator

Thank you. Your next question is from Mitchell Germain of Bank of America Securities.

Mitchell Germain - Bank of America Securities

Good afternoon. That's tough act to follow. Gerry you just touching on demand a little, are you seeing it coming from the CBD to suburban is there a certain tenant type that's been driving that demand that you spoke about in the fourth quarter?

Gerry Sweeney

No. It's actually been pretty much across the board. Certainly not big movement between CBD and the suburban markets and so there have been some movements. I mean obviously we were able to capture Lincoln Financial Group earlier in 2006. But there has been some movements of other tenants downtown to Philadelphia as well as movements of tenants within the suburbs. And then certainly Bob and George one of you guys can comment on what you're seeing in your markets.

Bob Wiberg

I think, as it relates to the question specifically, CBD Philadelphia actually had very good run. It got 2 million square feet of net absorption here just in the last year lowest vacancy since 2001. So, on a concurrent fact though urban markets in Philadelphia as well actually have about 1.5 million square feet of positive absorption.

So, it's not one big into the other. In this case, both are doing quite well especially historically and particularly the 13 straight quarters of positive absorption in the suburban market. So, I think overall you're seeing, as Gerry mentioned, fairly stable job growth and it's across the spectrum, its education, health services, professional business services, government some cases. So, it really has been fairly wide spectrum of growth.

Gerry Sweeney

And I think in metro DC we've actually seen people coming from the CBD and going to Virginia in particular lately. It hasn't really affected our portfolio so much. But I think it has a crystal city market, and what's happened in Washington DC is the rents are very high and the operating costs are extremely high, especially property. And a lot of the associations in particular that don't have to be there, are seeing a lot of savings moving across the river, but still being on a metro stuff.

But if we've actually had pretty good success filling spaces here and as George said a lot of it is from diverse industry that really hasn't been driven by some of the factors that play historically in the DC market like defense procurement. So, I think we've been able to get some broad base support.

Mitchell Germain - Bank of America Securities

Great. And just a quick housekeeping question for Howard, your management fees are not getting net against the expenses didn't coming up with your guidance correct, other income guidance?

Howard Sipzner

No. We're looking at that category on a gross basis. Now the $30 to $38 which includes management fees on a gross basis, which ran about $20 million in 2007. To address the earlier question, we'll see increased management fees from the DRA joint venture. Clearly, but we also have offsetting that at least two medium sized contracts that were expiring in line with expectations. So, that there is a mix and that might explain why you are not seeing as much of a jump overall as you might you've expected. There is a little bit of remixing going on.

Mitchell Germain - Bank of America Securities

Great, thanks guys.

Operator

(Operator Instructions). Your next question is from Jordan Sadler with KeyBanc Capital Market.

Jordan Sadler - KeyBanc Capital Market

Sorry guys, I -- my question was answered, thanks.

Operator

Thank you. There are no further questions. I'd like to hand the floor to management for any closing remarks.

Gerry Sweeney

Great, Jacqui. Thank you very much. Thank you all for participating in the call. We look forward to our next quarterly update. Thank you.

Operator

Thank you. This does conclude today's Brandywine Realty Trust fourth quarter earnings conference call. You may now disconnect.

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