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Brandywine Realty Trust (NYSE:BDN)

Q2 2012 Earnings Conference Call

July 26, 2012 09:00 ET

Executives

Gerry Sweeney – President and Chief Executive Officer

George Johnstone – Senior Vice President, Operations

Gabe Mainardi – Vice President and Chief Accounting Officer

Howard Sipzner – Executive Vice President and Chief Financial Officer

Tom Wirth – Executive Vice President, Portfolio Management and Investments

Analysts

Jordan Sadler

Jamie Feldman – Bank of America

Brendan Maiorana – Wells Fargo

Josh Attie – Citigroup

John Guinee – Stifel

Rich Anderson – BMO Capital Markets

Michael Knott – Green Street Advisors

Ross Nussbaum – UBS

Mitch Germain – JMP Securities

Operator

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

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

Gerry Sweeney

(Steve), thank you. Good morning and thank you everyone for participating on our second quarter 2012 earnings call. On today’s call with me today are George Johnstone, our Senior Vice President of Operations; Gabe Mainardi, our Vice President and Chief Accounting Officer; Howard Sipzner, our Executive Vice President and Chief Financial Officer; and Tom Wirth, our Executive Vice President of Portfolio Management and Investments.

Prior to beginning our prepared comments, I would like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although, we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.

For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports filed with the SEC.

We made significant progress on all aspects of our 2012 business plan during the second quarter. Our objectives remain very much on track and we are well positioned to finish the year strong. I’ll provide an overview of our three business plan components that is operations, balance sheet management and investments, then George and Howard will discuss our operating and financial results in more detail and Tom is certainly also available to discuss investment market activity.

Overall, the macroeconomic picture remains the biggest risk to our business plan and frankly the business plans of every other company. Data continues to shift like you we track it daily and try to discern the impact of this ever changing climate on our business plan. Due to the many conflicting data points in which we are all familiar, the word uncertainty has begun to creep back into some customer conversations during the last quarter. So, while we continue to be very pleased with the level of tenant activity through our portfolio, we fully understand the impact that macroeconomic data can have on tenant psychology. As such accelerating leasing absorption is our continual priority. And from an overall standpoint we still believe that the moderate recovery in our office markets remains well underway. Vacancy rates continued to decline in most of our markets and total leasing activity remained solid through most of our portfolio.

Looking at the operational components of our business plan several of our markets have a positive pricing dynamic and in these markets we continued seeing encouraging signs of rental rate growth. In all of our markets we continued to benefit from a flight up the quality curve. Our leasing approach remains tactical and is sub-market driven. Our stronger markets Austin, Philadelphia, CBD and the Crescent markets in the Pennsylvania suburbs are experiencing increasing rental rates, lengthening of lease terms and downward pressure on capital concessions.

In other markets we continued to pursue absorption through expanding our market share of current tenant activity levels. Levels of activity in the Philadelphia, CBD the Pennsylvania suburbs and Austin Texas is strong and solid. These three operations will exceed our original business plan revenue forecast. Conversely we have not seen a continuation of leasing activity that we saw last year in Northern Virginia. In particular activities and levels in that market are below our expectations and we will not achieving the 2012 spec revenue levels that we originally anticipated.

Additionally our operations in Richmond are beginning to fall a bit behind plan due a lower level of anticipated tenant activity in our Southwest Richmond market in particular. Our Southern New Jersey operation we continued to experience strong leasing activity significantly above last year’s levels. We anticipate meeting our business plan projections in our New Jersey, Delaware operations. And given the current high activity levels have a potential to perform to the upside. Our expectation is that out-performance in our strongly performing markets will overcome any anticipated shortfalls in either Northern Virginia or Richmond. As such we are maintaining our $44.9 million spec revenue goal and are 87% executed on that target.

From operational and leasing standpoints notable accomplishments during the quarter, the transaction pipeline remained steady at 3.1 million square feet. During the quarter we had a solid 73% customer retention rate which brings us to year-to-date average of 69%. Even given no move-outs, we’re now forecasting an overall improvement to our 2012 retention rate of 60% which is up from 57% in our last forecast. George will outline the operational improvements in more detail. But given the strengthening of the portfolio’s overall metrics we’ve increased our same store NOI growth range on both GAAP and cash basis and we’ve also improved the range of our rental rate mark-to-market.

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

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

We closed the quarter with great cash balance of $232 million including the securities which have now been reduced to zero. During the quarter we did pay off $151.2 million balance of our 5.75% unsecured notes. From a liability management standpoint the company is in extraordinarily good shape and our next unsecured note is not due until November of 2014.

For the quarter we improved our net debt to gross assets to 42.8%, so clearly moving in the right direction towards our long-term targets. There is no balance outstanding on our $600 million line of credit and our improving portfolio metrics kept us well on the path with EBITDA improvement with the second quarter 7 times ratio of net debt to annualized EBITDA. As mentioned at the onset of my comments, we do remain in a period of economic uncertainty. As such, we plan to remain very liquid with ample financial capacity, while our portfolio continue to transition to higher occupancy levels, consistent NOI growth, and stronger same-store operating performance.

And looking at investments, we have already achieved our $175 million 2012 sales target. During the quarter, we sold Pacific Ridge Corporate Center and 84% lease to building property in Carlsbad, California for $29 million or $239 per square foot. That sale was part of our program effort to exit the California market as market conditions permit. Subsequent to the quarter end, we also sold the Oakland’s Corporate Center project and eleven-property office and flex portfolio in Exton, Pennsylvania for just shy of $53 million or $113 per square foot. And that sale was consistent with our plan of recycling out of 9 core assets.

On the acquisition front, subsequent to the quarter end, our Brandywine-AI joint venture acquired Station Square, a 92.8% leased, three-property office portfolio totaling just shy of 500,000 square feet in Silver Spring, Maryland for $120.6 million. The venture’s equity contributions were augmented by 55% loan-to-value, $66.5 million 7-year, 3.22% interest-only non-recourse financing.

We are delighted to close this first acquisition with our partners are Allstate and certainly planned to continue looking for additional opportunities. Our overall investment goals for 2013 to 2015 contemplate annual dispositions between $100 million to $250 million per year with an acquisitions target between $75 million and $150 million per year. Our pipeline of deals on both the buy and sell side today remains fairly fluid and we remain poised to take advantage of additional opportunities.

As we assess it, clearly, a lower interest rate environment increased yet not perfect visibility on economic growth and relative yields have kept major sources of capital focused on office space as the viable investment option. Our investment objective is to continue to increase our urban and town center concentrations and reduce exposure to commodity suburban space.

Our goal of monetizing up to 35% of our existing land bank over the next several years remains very much on track and we continue to pursue a number of near-term deployments, particularly in the Pennsylvania/New Jersey suburbs as well as CBD Philadelphia. Our investment approach has the penultimate goal of balance sheet improvement and achieving better forward NOI and asset value and asset value growth profile. Our stock price continues to remain below net asset value to limiting the ability for us to de-leverage the equity issuance without eroding that value. And as such, our investment program contemplates us to be net sellers and the contemplated acquisitions will be financed through asset sale or existing cash balances.

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

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

George Johnstone

Thank you, Gerry. We continue to see good levels of leasing activity during the second quarter, which has again allowed us to raise certain elements of the business plan. Our best performing sub-markets continue to be Philadelphia CBD, the Crescent, Pennsylvania submarkets of Radnor, Conshohocken, Plymouth Meeting, and Newtown Square, along with Austin. These four submarkets are combined 96% leased and comprise 47% of the company’s NOI.

The tone and pace of leasing activity has continued as expected. Deals executed in the second quarter averaged 103 days from initial increase to lease execution as compared to 113 days in the first quarter and 115 days in the fourth quarter of 2011. In terms of the second quarter, specifically, we commenced 600,000 square feet of leases including a 175,000 square feet of new leases, 345,000 square feet of renewal leases and 80,000 square feet of tenant expansions. This leasing activity resulted in positive absorption of 20,000 square feet and an occupancy percentage of 86.9%. We are holding our year end occupancy target of 89.4% as the regional graphs in our supplemental package highlight. Pennsylvania suburbs and Philadelphia will contribute more occupancy than originally projected to counterbalance slides in both Metro D.C. and Richmond.

Retention for the quarter was a very strong 73.3% and based on achieved leasing and additional clarity on our remaining lease expirations, we’ve raised our annual retention rate projection from 57% to 60%. Leasing capital for the quarter was $3.68 per square foot per lease year. A contributing factor to this above normal run-rate was the commencement of an 11-year 116,000 square foot relocation and renewal lease on the total road.

Capital, excluding this one deal, was $2.59 per square foot per year, our third best quarter in the past six and in line with business plan expectations. Average lease term for the quarter was 6.3 years, 5.2 years, excluding the aforementioned total lease. Capital control and lengthen of the lease term remain the core objectives for our regional leasing themes. Mark-to-market for the quarter saw positive gap rent growth for both new leases and renewals 4.3% combined. Cash mark-to-market was still negative, but improved over first quarter results.

We’ve tightened our range on mark-to-market for the year as our business plan now contemplates a range from flat deposit of 2% on a GAAP basis and negative 4% to negative 6% on a cash basis. Austin, Philadelphia, CBD, and the Crescent markets continue to demonstrate the best rental rate growth characteristics in our portfolio.

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

Our spec revenue target remains unchanged at $44.9 million, $39.3 million, or 87% has been achieved leaving a $5.6 million balance for the remainder of the year. At this time last year, we had a $2 million remaining balance on a $34.4 million target. Similar to our revised year end occupancy composition, our performance in Pennsylvania, Philadelphia CBD, and Austin has offset slides in Metro D.C. and Richmond. The regional figures can be found on page 33 of our supplemental package.

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

To conclude, we are very encouraged by these operating results and the improved metrics now being projected for retention, mark-to-market, and same-store NOI growth. At this point, I will turn it over to Howard for the financial review.

Howard Sipzner

Thank you, George and thank you Gerry. For the second quarter of 2012, funds from operations or FFO available to common shares and units totaled $44.6 million. This translated to $0.30 of FFO per diluted share per for the quarter and it met analyst consensus. The FFO payout ratio in the second quarter is an even 50% on the $0.15 distribution we paid in April 2012.

I’d like to make a couple of observations regarding our second quarter results. Our NOI, net operating income and EBITDA margins at 61.3% and 65% respectively were the highest levels for these metrics all the way back to early 2009. Our same-store NOI growth rates were particularly strong at 3.8% GAAP and 2.4% cash, both excluding termination fees and other income items.

We met analyst consensus for FFO per share despite incurring a 1.25 or one and a quarter million debt extinguishment cost related to unsecured note repurchase activity in the second quarter. We also incurred a $2.1 million charge related to the early redemption of our Series E preferred shares. We consider our FFO to be a very high-quality result with aggregate termination revenue, other income, management fees, interest income, JV income, and bond buyback costs totaling $5.2 million gross or $3.9 million net on the low end of our targeted 2012 quarterly run rate.

Second quarter interest expense of $33 million declined versus $34.1 million in the first quarter when we incurred certain double charges pending repayment of the unsecured notes on April 2. Our $1.8 million interest income was higher due to recognition of $1.1 million from the strength in note repayments and interest income on higher cash balances. And lastly, $11.6 million of revenue maintaining or recurring capital expenditures, a moderate level gave us $0.20 of cash available for distribution or CAD per diluted share, and a 75% CAD payout ratio.

With respect to our balance sheet and financial metrics, I would emphasize the following points. Our debt to GAV of 42.8%, our debt to total market capitalization of 53.6% and our 7 times debt to EBITDA ratio are at their best levels in 5 to 7 or more years. We have virtually no floating rate exposure with a $100 million of floating rate debt more than offset by our combined $232 million cash and securities balance. Subsequent to quarter end, we did reduce our $42 million securities balance to zero and now have $229 million of cash and cash equivalents as of yesterday’s close and we continue to have no outstanding balance on our $600 million unsecured revolving line of credit.

And lastly, as Gerry pointed out, we have over two years until we face any significant maturities in late 2014. As Gerry noted, we are revising our 2012 FFO guidance to $1.32 to $1.36 per diluted share versus a prior range of $1.32 and $1.35. Excluding the $0.08 store tax credit income that we will recognize in the third quarter of 2012, our recurring quarterly FFO run rate for Q3 and Q4 2012 should be in the range of $0.295 to $0.315 per diluted share. Most of the assumptions are included in the business plan section of our supplemental package and I encourage you to review those.

Other points include gross other income unchanged in the business plan at $20 million to $25 million gross or $14 million to $19 million net of expenses, representing a basket of other items such as termination revenues, other income management revenues, less associated expenses of net interest income and various JAV income items.

Our G&A for 2012 remains unchanged at $24 million to $25 million. We are reducing interest expense to a range of $132 million to $135 million versus $133 million to $140 million previously. And this is slightly above the 2011 figure. We have completed our 2012 sales activity and no further sales are assumed for 2012. We are not anticipating any issuance under our continuous equity program and no additional note buyback activity. And lastly, we continue to assume 147 million shares for the count for FFO in 2012.

Using the midpoint of the range of $1.32 to $1.36, we are projecting a very strong 45% FFO pay-out ratio on an assumed $0.60 cumulative distribution. And for CAD, we are continuing to project $0.60 to $0.70 of CAD per diluted share, reflecting an additional $35 million to $40 million of revenue maintaining CapEx in the second half of 2012.

On the capital plan, our plan for 2012 was essentially done with $232 million of cash and securities substantially meeting all of our needs. Our remaining uses from July 1st forward totaled $253 million that include $7 million for mortgage ammonization, a $196 million of total investment activity, representing an assumed $38 million of revenue maintaining capital expenditures, the midpoint of the earlier range, $70 million for various revenue creating capital expenditures, lease up of previously vacant space, and new project lease up such as those for Three Logan in Philadelphia plus $88 million or really up to $88 million for other capital projects, including our Plymouth Meeting redevelopment, possible purchase of ground leases, funding of certain JVs and other projects that may get started in the latter part of the year. It also includes $27 million that is already been funded for our share of the Station Square acquisition.

And lastly from July 1, onward there would be $50 million of aggregate dividends on common and preferred with $22 million of common and $3 million of preferred already paid earlier this month leaving remaining 2012 dividend payments of approximately $25 million. To fund this $253 million, we're projecting the following from July 1 onwards, approximately $84 million of cash flow before financings, investments and dividends, $51 million of additional net sales proceeds already received from the Oaklands closing. And $118 million of cash usage to round out the plan leaving us with the projected 2012 year end cash balance of about $114 million. And of course we do not expect any financings or any credit facility usage for the balance of the year.

Lastly, a quick word on accounts receivables, we concluded June 30, 2012 with $16.2 million of total reserves. This consisted of $3.2 million of reserves on $14.6 million of operating receivables, just under 22% and $13 million of reserves on a $127.8 million of straight line rent receivables are just over 10%. In the second quarter of 2012, we had very typical activity with respect to receivables and reserves and no major credit issues.

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

Gerry Sweeney

Great. Howard, thank you very much and George thank you as well. To conclude our prepared remarks, look the second quarter went very well I mean we – as evidenced by our comments operational throughput remained strong, the balance sheet strategy is very much on track. We accomplished all of our investment goals for the year. So, we are very confident we will achieve our 2012 objectives. We also remain convinced on our product quality and the skill of our operational teams and our field operations will continue to provide us a competitive advantage. And we expect that advantage to become even more further evident as fundamentals as many of these markets continued to improve.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jordan Sadler. Your line is open.

Jordan Sadler

Thanks. Good morning.

Gerry Sweeney

Good morning.

Jordan Sadler

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

Gerry Sweeney

Sure, George and I will take. Maybe from tenant softening standpoint that’s probably too broad of a characterization. I think we’ve seen in a number of the markets where we expect to see good activity we’ve seen that. And actually one of the stats that we do track and George articulated was this compression time from post-lease execution. So, that seems to be trending in the right direction. But it a number of our markets New Jersey, Delaware, Pennsylvania suburbs most of the sub-markets in Pennsylvania suburbs Philadelphia CBD, Houston we are still seeing very good levels of activity.

And the activity we’re seeing out there is real. They are not just window shopping there was decisions being made. I think where we have seen softening that we – that our original business plan did not contemplate is really in the Northern Virginia corridor and that certainly topic that’s often discussed in a number of other companies calls as well. But I think we were anticipating somewhat of the continuation the activity levels that were taken place in 2011. And I think we call the macro issues at play, we simply haven’t seen that take place. In our Richmond market we continued to do well in all of our sub-markets with the exception of the Southwest which is simply not showing the levels of activity that we anticipated. So, all in all I think the activity levels Jordan are remaining pretty solid. We are just always very focused on any fraying at the edge is in corporate decision making rooms based upon every headline within the financial periodical, so George any additional color there.

George Johnstone

Yeah Jordan I think the stat that we continued to be pleased with is the fact that expansions are outpacing contractions. So, while we’re seeing a little bit of a slowdown in both Northern Virginia and in Richmond, we’re seeing good levels of activity or willingness to make decision and tenants actually going through expansion modes in the greater Philadelphia markets.

Jordan Sadler

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

George Johnstone

No I mean I think the activity coming into the pipeline through both inquiry and inspections has remained somewhat consistent. I think the amount of deals that naturally just do not come to fruition has remained somewhat consistent. And the velocity of how those deals are moving up the pipeline is somewhat consistent within 10 days of the last two quarters. So, what we’re always going to have a couple of tenants in the marketplace who are out-shopping you for a stapler. But quite frankly we’ve got some of our tenants doing that who ultimately renew with us, so.

Gerry Sweeney

All that being said we’re still very mindful as I mentioned on the fact that headline risk in a macroeconomic climate has a much more significant barring on tenant psychology and color of our lease brochure how we do on the tenant showing. So, we are very focused as we have been and continued to be on accelerating absorption through our entire portfolio. So, we do remain very keenly tuned to the tone of our tenant discussions as a great communication channel within the company in terms of leasing pipeline. So, it’s monitored very closely by our Managing Directors as well as George and other members of the executive team.

Jordan Sadler

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

Gerry Sweeney

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

Jordan Sadler

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

Gerry Sweeney

Pretty much the same type concentration we’re seeing with communication companies, law firms, insurance companies, financial service companies pretty much the same range of tenancies that we’ve been executing leases with over the last year and a half. What’s kind of interesting Jordan is a couple of those larger prospects have been in the market for a while but they are actually looking to expand their current space hold which is actually a very good sign for the market. So, we’re diligently pursuing all of those tenants with a hope that some of them will make a decision to join the Brandywine family of tenants.

Jordan Sadler

Okay, thank you.

Operator

Your next question comes from the line of Jamie Feldman with Bank of America. Your line is open. Hello, Jamie Feldman from Bank of America, your line is open.

Jamie Feldman – Bank of America

Thank you. Do you hear me?

Gerry Sweeney

We can hear you.

Jamie Feldman – Bank of America

I was hoping you guys could discuss any potential changes and maybe the acquisition market as things started to slowdown here, any signs that maybe you will find more opportunities as maybe potential bidders dropout what are your latest thoughts?

Gerry Sweeney

Tom, why don’t you take that initially?

Tom Wirth

Yeah. Hi Jamie, taking look at the markets I would agree there has been a bit of a slowdown in the last quarter in terms of the acquisition activity. We’ve seen little activity in the Philadelphia CBD. The suburbs have also been relatively quiet. We did have our opens trade there has been a couple of smaller trades with local buyers. The DC market outside the Beltway, we continued to see very little activity there our trade in the first quarter on South Lake. Other than that they haven’t been many large trades in the area we are looking to buy.

And then when you look inside the CBD, we’re seeing a number of properties come back to market, take longer to close or they’ve been pulled for the market or refinance again with the interest rates where they’ve been we’ve seen that. Also in Richmond slow market, haven’t seen many opportunities much less demand. And then Austin there has been a bit more activity. We have been involved in looking at a number of properties we’ve been interested in our market, but not able to execute that market is – seems to have the deepest pool other than the Washington CBD in terms of our markets. And but again that slowed up a little bit this past couple of months.

Jamie Feldman – Bank of America

Okay and then do you forecast or get a sense that maybe you’ll be in a pretty good position going forward?

Gerry Sweeney

We feel that – usually after the summer usually some chooses start coming out. We are really focused on looking for some opportunities with the All State JV. We did close on Station Square. We would hope to find other types of transactions just like that good profile of stability. And we will continue to look in our core markets and see what comes up with the following, we hope to get something closed in the fourth quarter, but nothing eminent on the horizon. We also are looking in a number of market transactions and those are always difficult to predict timing on those.

Jamie Feldman – Bank of America

Okay. Thank you.

Gerry Sweeney

Jim is that on to that in DC I think what the our team is very focused on in conjunction with our partners off is really tracking not just the number of deals in the marketing and what the sub-market is doing, but also really been very keenly tuned into any change that we think cap rates might be in that market. I mean certainly with the growth projections in that market for rental rate being pulled back significantly that where they were at 12 to 18 months ago, there is the levels of leasing activity is certainly down, negative absorption in a number of those key markets from the Barack situation.

There is certainly an expectation that cap rates could back up a little bit. And then certainly one of things we’re very keenly focused as we assess all these opportunities. And then on the privately marketed transactions look those Tom touched we have a number of those that we’re looking at. I will tell you that several of those are fairly in (indiscernible). But and as much as they are not being going to an auction process. They tend to be a little more protracted and delicate in the pace of getting them accomplished. But look, we are still very much following on opportunities not just on the potential buy side, but certainly continuing to monitor we think is a pretty good pool of potential buyers for assets as well.

Jamie Feldman – Bank of America

Okay thank you

Operator

Your next question comes from Brendan Maiorana from Wells Fargo. Your line is open.

Brendan Maiorana – Wells Fargo

Thanks. Good morning, hey guys. So, a question just looking at the occupancy ramp that’s expected in the back half of the year, is any of that driven by some of these dispositions that appear to be at low occupancy levels and so on a same store basis or how much ramp do you think you are going to get?

Gerry Sweeney

Look good question in terms – and tackling that, but we look at what we are fulfilling and how we don’t call that into our occupancy forecast, its really not very much focused on hey let’s sell assets that are less occupied, improve the overall occupancy of the portfolio, it’s more focused on where we think we get the most optimal pricing for trade. For example one of the things you did heard our occupancy early in the year was we sold 100% lease building in Southlake that certainly had an impact on our occupancy targets for Washington DC. The two transacts we had this quarter specific region Oakland were below our average occupancy levels.

They tend to wash themselves that’s not really a data point as we start to assess how we improve overall occupancy because in fact some of our properties now that are below average occupancy levels for the company we think are great value opportunities for us as we start to lease that space up. I think we look at the selling properties that are below average occupancy levels just because we’ve made the investment – we have drawn the investment conclusion that the price tune is to sell that asset today is marginally better than the net present value of going through the downtime capital cost to re-tenant the existing vacant space. So, I wanted – there is not an algorithm we’ve developed that kind of says move that occupancy target. It’s more focused on how we do the investment market and where we see actually our build to drive rental rate growth over the next couple of years.

Brendan Maiorana – Wells Fargo

That’s helpful. So, I mean sort of part of the pertains to this year, but then part of it pertains to next year and I mean even a multiyear outlook as I think about what you guys put up for the – at the Investor Day where next year’s target is 91 to 92. And I think the longer target is maybe 92 to 93. So, as we think about the 91 to 92 next year, we can assume that that’s on kind of a same pool basis as we would think about it that’s it still a viable target?

Gerry Sweeney

Actually I think that’s a fair way to look at. I mean the thing that we never loose side of is the fact that year end ’07 we were about 94% occupied. So, that’s the target we know we want to get those portfolio back to as market conditions present themselves. So, we certainly we laid out very specific targets for ‘13 and ‘15 timeframe. We’re very confident the overall portfolio will perform at those levels certainly even as we sell properties or as we buy property that’s really focused on overall growth rate not as end point occupancy target.

Brendan Maiorana – Wells Fargo

Okay, it’s helpful and then just follow-up. If I look at these spec revenue target that’s left ago it looks like its $0.04 would be a $0.04 swing kind of to earnings is it fair to assume that the low end it doesn’t assume anything like its in there. And can you give us a sense of how much actual leasing square footage that spec target equates to?

Howard Sipzner

Yeah, I mean it’s Howard I’ll jump on the earnings that’s one of the major contributors to the earnings guidance but by no means the only so there can I draw a straight line from all are not in there to all are not on the guidance would miss many other factors. Then I’ll give it over to George for the square footage side.

George Johnstone

Yeah I mean on the square footage side between new and renewal we’ve got just north of about 600,000 square feet left to execute and again that’ both new deals and renewal deals.

Brendan Maiorana – Wells Fargo

Okay great. Thank you.

Operator

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

Josh Attie – Citigroup

Hey good morning. Can you just talk about the cap rates on the assets that you sold in Pennsylvania recently?

Gerry Sweeney

Certainly, Tom?

Tom Wirth

The cap rates that we sold the Oakland was an 8% cash and an 8.2% GAAP and that’s based on current ‘12 projections.

Josh Attie – Citigroup

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

Tom Wirth

I think based on what we mentioned is our range for the next couple of years, certainly we have assets that we targeted for sale to the extent we think that there is improvement in markets where those assets are. We’ll look to put them on the market sooner rather than later. We think there is an appetite for some of the assets that we’re considering for future sale. And again you’re seeing not that you may get the same terms. But the financing market has improved and as we saw with our Station Square acquisition, the financing from financial institutions has also started to be more constructive on top of the life company. So, to the extend we feel there is a good opportunity they will sell again as Gerry mentioned we’ll take a look at the future operations as well as portfolios and if we think that there is a better chance of selling than to operate them when we look at our downside or upside scenario we’ll put those on the market.

Josh Attie – Citigroup

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

Tom Wirth

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

Josh Attie – Citigroup

And you kind of along the same lines how do you think about the redeployment of sale proceeds, the cash balance was almost $200 million at the end of the quarter and you probably have a little more coming in after you sold down the securities portfolio. I guess anything about the redeployment of that cash would you prefer to pay down some of the term loans and do you ever are those does that cash being held for reinvestment?

Gerry Sweeney

As we mentioned I think even in the last quarter call I think we want to do at this point is preserve flexibility. And we have good cash balances through the bank refinance that was done this year. We created really a debt balance as big – as a good pieces of that are pre-payable based upon how we view the intermediate environment. So, we continue to focus on maintaining those cash balances as Howard touched on, the companies really insulated from – from floating rate risk although certainly floating rates have moved down significantly over the last couple of months. It’s certainly the right decision for the company to stay where we are.

Relative to redeployment, Josh, you raised a very good question we are always looking for – always going through price discovery on any number of access in the portfolio. So, even though as Tom touched on, we don’t have anything actively being marketed right now either to reverse, encourage private discussions, relationships, there is always dialog taking place, on what’s – what we can do with the existing portfolio or as we touched on what we can do in terms of deploying that money into new acquisition opportunities. It is a very fluid investment market. Actual prints are down over from where they were a few quarters ago, but I don’t think that in anyway implies, there is not a lot of activity taking place within the various companies including Brandywine on what sales or what acquisitions can happen.

Josh Attie – Citigroup

Okay, thank you very much.

Operator

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

John Guinee – Stifel

Alright. John Guinee, Stifel. How are you? Nice job guys.

Gerry Sweeney

Thank you. How are you?

John Guinee – Stifel

Hey, couple things. Just I favor daily you have this as your commerce one and two, I think you’ve got about $25 million committed, not sure how much you funded of that so far and you’ve got a couple of loans maturing and your friends at Thomas on the Westcoast are sort of moving back to California. Can you give us an update on that deal?

Gerry Sweeney

Certainly, happy to, and the relation with Thomas Properties remains very positive and very constructive as we’ll have full $25 million invested by the end of this year. So, that’s on the rails, they will be invested sequentially over the next two quarters. Debt on one of the properties does mature in next year, both Thomas and Brandywine are in an active dialog on what approach that they take on refinancing that debt and certainly balancing investment flexibility with very attractive longer term rates. So, our expectation would be that over the next three to six months, the partnership will conclude what our best path is in terms of recapitalizing the venture with this pending debt maturity in the second quarter of next year.

John Guinee – Stifel

And the second building went to that mature on that one?

Gerry Sweeney

I think that’s ‘15.

John Guinee – Stifel

Yeah, end of ‘15.

Gerry Sweeney

End of ‘15.

John Guinee – Stifel

Okay. And then the second as we are looking at CapEx is over the last six quarters, TIs in leasing commissions have been about $23 a foot. And it looks like your normal run rate is about 800,000 to 1 million square feet per quarter. Should we look at that 800,000 to 1 million square feet per quarter and $23 a foot as a good run rate going forward?

George Johnston

Yeah. I mean, John it’s George. I mean our range is really two and a quarter per foot, per lease year to three and a quarter. We’ve had a couple of deals kind of skew the quarterly numbers, but I think somewhere in that $2.75 is probably the average expectation going forward.

John Guinee – Stifel

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

George Johnston

Yeah. That’s probably a safe assumption.

John Guinee – Stifel

Got it. Alright, thank you.

Operator

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

Rich Anderson – BMO Capital Markets

Yeah. Thanks and good morning. Just wanted to follow-up on John’s question, you cash guidance is $0.60 to $0.70 and that is it’s going to look at 50% of your FFO, pretty wide gap understandably trying in some markets to buy occupancy, but what do you think the long-term is in terms of the gap between the FFO per share and the CAD per share in a more normalized environment?

Howard Sipzner

It’s Howard. Historically, the company ran anywhere in the two-thirds to 66% to 75% area. Remember that for the last year, this year, and the next three years, $0.08 of FFO will be by definition non-cash from the historic tax credit transaction see if the fact would add into the mix and has been the case not so much in the last quarter or two, but certainly some other quarters that the capital spend has been higher to both maintain, in some cases, create the occupancy in tougher markets. We certainly believe as the portfolio occupancy inches up the balance between landlords and tenants will tilt more in our favor. There will be higher retention. There will be less concessions and little bit more negotiating power, and as already seeing in some of the tighter markets. So, we don’t anticipate any difficulty getting back to those higher better levels or ratios.

Rich Anderson – BMO Capital Markets

Okay, fair. And then the follow-up question is on the spec revenue staying constant at $44.9 million for the year? How much of that is just kind of holding the line being little bit conservative, because of the observations you are seeing in Northern Virginia, because I think New Jersey, Delaware is maybe surprising a little bit to the upside. So, and maybe I am wrong about that, but I think that, that’s correct. So, I mean, you are kind of holding the line, waiting to see how the year progresses, and hopefully we’ll see that spec revenue number go up a little bit as you get closer to the end of the year?

Gerry Sweeney

Well, that I think it’s a great question, something we really spend a lot of time evaluating in terms of assessing probability of the leasing pipeline, but as George and I outlined, we clearly expect that outperformance in a number of the markets, which we know we will already achieve is going to offset we expect to be an underperformance in our Met D.C. and Richmond operations. We do think that New Jersey, particularly driven by the leasing activity, Southern New Jersey, will create some performance to the upside there, but I think given the lack of visibility on what we think the execution rates will be in our Northern Virginia portfolio. I think we are very confident on the $44.9 million, but I think it would not be pragmatic of us to raise that or adjust that number up, given the fact that we still have a lot of work to do to get to that number by the end of the year.

Rich Anderson – BMO Capital Markets

Okay, fair enough. Thank you.

Gerry Sweeney

Thank you.

Operator

Your next question comes from Michael Knott with Green Street Advisors. Your line is open.

Michael Knott – Green Street Advisors

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

Gerry Sweeney

Well, on the same-store, a couple of things, one, we saw an increase in tenant retention, so less downtime on some previously assumed lease rollover, and then the properties that we did dispose of, those properties were actually running a 2.2% negative same-store characteristic to them. So, a little bit of a pickup in what is now go-forward same-store. And then 2013 explorations, I mean, not a lot to update since Investor Day. Clearly, our biggest one that we have got kind of all lines focused on is with Lockheed Martin. We have issued them both the short-term and a long-term renewal proposal for their space in Maryland, and we are awaiting some feedback there, but again, I think the expectation would be that they are going to lean towards a shorter term deal, and if they do go along, it’s going to be one that most likely would have some type of early termination characteristic built into it.

Michael Knott – Green Street Advisors

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

George Johnstone

No I think I am trying to remember the exact comp, we had the open sale and process.

Unidentified Company Speaker

Origin to that cash

George Johnstone

I don’t know specific region closed by the Investor Day.

Unidentified Company Speaker

Specific which are closed by – but I think that was part of our remaining balance what we were selling.

Gerry Sweeney

But I guess Michael to a point, let me just make sure we’re clear. We have achieved $175 million target for the year. As Howard laid out our existing guidance does not anticipate any more sales this year. Within that framework, we do continued to look at other sale opportunities. As Tom laid out nothing is formally in the market what we’re repaying broker and there was sure out there. But there are a number of other discussions that we continue to expose. We always have about doing small asset sale small individual asset sale, a small portfolio sale. And look I think frankly as we solved the open transaction there is a continued pool of local investors who had access typically commercial banks financing, but certainly life company financing at fairly attractive rates who are in a pretty good position to do transactions in that $25 million to $50 million range. So, while we increased our guidance from $80 million sales to $175 million we have now achieved that and we’re delighted with the results in terms of cap rate, net asset value appreciation etcetera. The reality is that in this type of fluid market it’s incumbent upon us that really continued to explore optimal price points on some of our assets.

Michael Knott – Green Street Advisors

Thanks.

Operator

Your next question comes from Ross Nussbaum from UBS. Your line is open

Ross Nussbaum – UBS

Yes, Ross Nussbaum with UBS. Gerry you mentioned before that you think your stock continues to trade below asset value and you’re selling assets to do whatever you’re telling is absolutely the right decision, what exactly do you think your net asset value is?

Gerry Sweeney

We don’t publish net assets value Ross. We rely on certainly the analyst do their own calculations. When you look at ours in a detailed basis on an asset by asset basis including, we currently leased assets properties in leased up and land values. The consensus for the NAV for the company and the analysts is just shy of $13 a share. Stock is trading below that, so even using published numbers that are based upon work by the various firms, this stock is trading below net asset value.

Ross Nussbaum – UBS

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

Gerry Sweeney

Well, look certainly there would be – there have not been great velocity of trades, but I think what we have seen so property for example in (indiscernible) and Pennsylvania is one of our present market is traded for about a 7% cap rate actually I think look higher than that and a price well above $3 per square foot. Certainly high quality asset in a very key market, but that’s certainly have been reflective of the quality and location attributes that a lot of our Crescent markets has as well. Look the historical cap rate differential between CBD Philadelphia assets has been between a 100 to 200 basis points greater than what we typically see in Met DC and New York City. So, you go back a number of years and see that trend line this has not been a lot of things of great value trading that are stable as we can see Philadelphia

Ross Nussbaum – UBS

Yeah, that’s the reason I asked this question.

Gerry Sweeney

I think I’ve answered your question. I am sorry.

Ross Nussbaum – UBS

That’s the reason I asked the question ultimately because I think one other reasons perhaps NAV discount persist as people struggle to put a value on those assets because they just don’t there is not a market comfort?

Gerry Sweeney

Well the realty is in Philadelphia CBD really we have two companies that own a significant portion of the Class A office space. They both going to be hands on managers and leasing folks and so it’s challenging, a lot of this is building with it, but I think if you do take a look at some of the brokerage firms that (indiscernible), that again goes back through peaks and troughs and kind of do that graph of where cap rates have been in the more 24-hour gateway markets in the mid-Atlantic area of New York and Washington and compare that to a Philadelphia, you will see that, that’s historically been the spread of cap rates.

Ross Nussbaum – UBS

I appreciate it. Thank you.

Operator

Your last question comes from Mitch Germain with JMP Securities. Your line is open.

Mitch Germain – JMP Securities

I’m good guys. Thanks a lot.

Gerry Sweeney

Well, we do, thank you much.

Operator

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

Gerry Sweeney

I see. Thank you very much and everyone thank you very much for participating in the second quarter earnings conference call. We look forward to our next earnings call and continued execution of our business plan. Thank you very much.

Operator

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

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