Brandywine Realty Trust Q1 2008 Earnings Call Transcript

| About: Brandywine Realty (BDN)

Brandywine Realty Trust (NYSE:BDN)

Q1 2008 Earnings Call

May 1, 2008 11:00 am


Gerard Sweeney – President and CEO

Howard Sipzner – EVP and CFO

Bob Wiberg – EVP

George Sowa – SVP

Darryl Dunn – VP and CAO

Gabe Mainardi - Corporate Controller


Irwin Gusman – Citi

Jordan Sadler with KeyBanc Capital Markets

Ian Weisman with Merrill Lynch

Jamie Feldman of UBS

John Guinee of Stifel

Cedrik Lachance - Green Street Advisor

Rich Anderson with BMO Capital Markets

Mitch Germain of Bank of America


Good day ladies and gentlemen and welcome to Brandywine Realty Trust first quarter earnings call. At this time, participants are in a listen only mode. (Operator instructions). 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, intent, 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 under this earnings conference call that are not historical facts and subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those expected.

Among these risks are the risks that have identified in our annual report on Form 10-K for the year ended December 31, 2007, a copy of which is on file with the Securities and Exchange Commission, including our ability to lease vacant space and to renew or re-let space under expiring leases at expected levels, 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 acquisitions and risks of acquisitions, dispositions and developments, including the cost of construction delays and cost overruns, unanticipated 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 conditions, including the extent and duration of adverse changes that affect the industries in which our tenants compete.

For further formation on factors that could impact us please reference our 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 your host for today's conference, Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust.

Gerard Sweeney

Ilsa, thank you very much. Good morning and thank you for joining us for our call today. Participating in today's call are Howard Sipzner, our Executive Vice President and Chief Financial Officer, Bob Wiberg and George Sowa, two Executive Vice Presidents, Darryl Dunn, our Chief Accounting Officer, and Gabe Mainardi our Corporate Controller.

The first quarter was a good start to the year. Our core operations were very much in line along with a solid reduction in tenant capital costs. We achieved an 82.4% retention rate. Additionally, we had positive GAAP rental rate growth on both new and renewed leases.

Our capital cost showed a nice improvement over previous quarters and on a per square foot basis we are slightly north of $1 per square foot per lease year. We're slightly less than 5% of GAAP rents. This core performance, coupled with the gain on the debt extinguishment, our higher retention rate and lower capital costs, created an FFO above expectations but more importantly a CAD ratio that even without the gain was our best in several years.

For the quarter we had total leasing activity of 1.2 million square feet comprised about 987,000 square feet of renewals, 119,000 square feet of new lease activity and 98,000 square feet of expansions. In addition, we also had a very good quarter in terms of direct deals, with about 56% of our total square footage being done on a direct basis.

Looking at the market. Market conditions remain stable but continue to generate mixed messages. As such, in this uncertain environment our outlook for the balance of the year remains cautious as reflected in us maintaining our current guidance. For the first quarter we had tenant showings that had a significant increase over the fourth quarter of 2007, up over 70% and that equated to about 330 showings including 77 in our development and redevelopment pipeline.

However, although not really supported by the experience in this past quarter, we do believe tenant demand is uncertain and deficient timelines are lengthening. There is no question that this is the case with larger tenancies and we continue to see that directly impact our development and redevelopment pipeline. This uncertainty however is offset by an increased likelihood of tenants staying put in our core inventory and in most markets accompanied by a big drop-off in new supply.

Most of our markets had continued to climb to year-over-year vacancy and in all of our markets Brandywine's vacancy rates remained significantly below market averages with the exception of our portfolio in Oakland.

Leasing activity throughout the various markets were up year-over-year in several key markets like New Jersey and Philadelphia CBD and absorption levels were also mixed throughout our various markets. The absorption numbers were down in Southern New Jersey, Wilmington, the PA suburbs in Richmond, but conversely, we saw year-over-year absorption increases in central New Jersey, the Philadelphia CBD, northern Virginia, suburban Maryland and in Austin.

In the last call we spoke about some key benchmarks. Howard will further describe our offering of financial targets and results. The challenges that persisted during the quarter were we had a slight decline in occupancy from Q4 '07, we expected that and also expect another small decline in Q2 based upon known move-outs.

We continue to have negative mark-to-markets on a cash basis as rental rate growth is just barely exceeding in some cases some of the increases in operating expenses. And we had marginal progress in our development leasing, I'll speak to in a few moments.

Looking ahead, however, we've already achieved about 80% of this speculative revenue we forecast for the year. That's up from 60% on our last call. There's still risk as we've only achieved about 50% of our targeted third quarter square footage, which is up more than double from where we were two months ago and about 34% of our fourth quarter square footage which is up nicely from less than 15% two months ago. In total, when you look at the bottom line, we have about $9.7 million of speculative rents that have yet to be achieved for the balance of the year.

Lease rates we've achieved are inline with our expectations and capital costs continue to trend down. Free rent remains a minor issue. For leases year-to-date only about 14% of our leases contain any element of free rent. Looking at capital, while we had very good experience on capital during the quarter, we still had about a third of our leases that we've executed year to date that exceed our capital guidelines of 15% of rents on new leases and 7% on renewals.

Our capital cost decreased this quarter. It was driven by several larger longer term deals that were part of our almost one million square foot of renewals which was up nicely from a couple of the previous quarters.

So while the first quarter capital is extraordinarily good and the trend line is good, pressure on capital costs will undoubtedly continue. The key point is that as we look at our trend line for projected revenue maintaining capital spend for the balance of the year, we are in line with what we talked about on the last call of about $45 million.

Now looking at our developments. While we posted additional leasing activity in several of our projects, most notably 1200 Lennox, Metroplex in the Atrium and we have a good prospect list, we still do not have great visibility on the stabilization dates on these properties.

Therefore you'll notice that in the supplemental development schedule we identified the core shell [ph] completion dates for each of these properties and then uniformly established a pro forma Q4 '09 stabilization date for all of our ground up developments.

We have high expectations of converting some existing activity and certainly hope to out-perform these projections. But given the difficulty of projecting exact timing we often take this more conservative approach.

In addition, we've increased the cost on several projects to reflect additional carry and leasing costs most notably at the Park in Austin. Certainly these variable costs can change either up or down based on actual leasing activity.

Finally, given this cautious bias [on development, we are projecting initial development yields of 7.5% to 9% on a GAAP basis and 7% to 8.5% on a cash basis, a decline of about 50 basis points from our comments last quarter.

Leasing these projects remains one of our key challenges and while we're encouraged by activity levels, we clearly have work to do to get these projects on track. The pace of our lease up on these projects was really a disappointment for us for the quarter. So at this point I'll turn the conversation over to Howard.

Howard Sipzner

Thank you. Gerry. Just to recap a few high level observations. You'll recall that on December 19th we closed the sale of 29 properties to a joint venture in which we maintain a continuing interest. The income of those properties remained above the line in prior periods but for the first quarter and beyond will be accounted for under the equity method.

Lastly, at year-end 2007 we re-classed certain expense reimbursements related to management activities to the management income and expense lines in our income statement. And we believe this new treatment is more reflective of our management activities and will give you a better ability to understand that.

Let's recap the first quarter income statement and FFO results. Our FFO for the quarter totals 62.4 million in Q1 versus 58.6 million in the first quarter. And as a result we reported FFO per diluted share in the first quarter of $0.69 versus $0.63 a year ago, a gain of 9.5%.

A few observations on this relative and absolute out-performance for our FFO. We included a gain on the early extinguishment of a portion of our exchangeable notes in the amount of $3.4 million. You will note and see on the income statement that this is partially offset by approximately $400,000 of incremental accelerated amortization of the associated issuance costs.

We also experienced a reduction in our G&A of approximately $1.5 million but what we would expect to be our normalized run rate of $6.5 million we came in at about $5 million and this reduction is due to reduced compensation costs paid out in the first quarter and the associated reversal of 2007 accruals.

Our core portfolio as Gerry mentioned is running roughly in line with expectations and we also benefitted in the first quarter from lower interest expenses due to favorable LIBOR rates in the first quarter.

Somewhat dissipated since that time and our interest expenses in the first quarter are also impacted by our absolute lower levels of debt versus prior periods. The pay-out ratio as Gerry mentioned on the $0.44 dividend is 63.8% for the first quarter.

Let's highlight a few key income statement items. On a same-store basis our cash rents increased by $2.5 million while non-cash rent items decreased by roughly the same, portending a more favorable shift to cash rental income going forward.

Our recoveries decreased by $1.1 million. Our termination and other revenue increased by $2.6 million net and our expenses were essentially flat, resulting in an increase in same-store NOI of about $1.6 million or 1.9% on a GAAP basis. When adjusting for the non-cash rental items, the same-store NOI increase was actually much greater at 5% and all of these metrics were for the most part in line with our expectations.

Looking at the rest of the income statement. Interest income of 209,000 declined from 787,000 in the period a year ago and 590,000 a quarter ago due to lower cash balances and lower absolute investment rates, reflecting among other things more efficient cash management. Interest expense as I mentioned was down significantly from 40.4 million to 37.5 reflecting the aforementioned items as well as slightly higher capitalized interest in the current period.

Turning to key operating metrics. EBITDA coverage ratios were 2.7 times on interest, 2.5 times on debt service and 2.4 times on fixed charges. We're very pleased with these and they reflect our commitment to the best possible credit metrics we can have.

On the operating side, we had a 61.3% overall NOI margin, a 31.7% recovery margin and reflecting among other things the gain on the convertible buy-back of 64.1% EBITDA margin. You will note that our recovery margin came in a bit below the 34% expected level because among other things we did not have much snow in our markets in the first quarter and snow recovery typically runs at a higher absolute rate.

Our $0.51 CAD was much higher than our prior results which had been in the mid to high $0.30 range. We're quite pleased to report an 86.3% CAD payout ratio. Even without the two non-recurring items, the extinguishment gain and the one-time G&A savings, we would have been positive on dividend coverage for the quarter.

You should note that the $6.8 million of revenue maintaining capital costs are the key driver of this out performance. We're clearly not yet prepared to say these levels are permanent but they are instructive of how well our portfolio can perform when these results are achieved. You will note that the Q1 numbers are also affected by certain timing relationships which should correct themselves over the remaining quarters of the year.

To summarize Brandywine's first quarter operating results, I think they demonstrate the defensive characteristics of our markets, properties and tenant base. We'll highlight this when we talk about operating receivables where we had a reduced amount of operating receivables at the end of Q1 '08 and $18.8 million and had them extremely well reserved with about $4.8 million or 25%.

In Q1 2008 we nominally increased our operating receivable reserves to provide a greater cushion against future rental income write-offs. We feel very comfortable about our tenant credit profile. Our Q1 2008 FFO per diluted share of $0.69 exceeded the Q1 consensus of $0.62 by $0.07 per share.

If we exclude between $0.05 and $0.06 of extinguishment gain and G&A savings, we would have still exceeded the consensus by about $0.02 per share, due primarily to lower interest costs. For 2008 as Gerry mentioned, we are maintaining our 2008 fiscal guidance of $2.46 to $2.56 per diluted share and are leaving most of our assumptions from our last discussion unchanged.

These include no 2008 acquisition activity, about 155 million of programmed individual sales activity and a 7.5% to 8% blended cap rate. Three of these have already closed, providing about $55 million of capital to our investment activities. One sale is in discussions with bidders and the rest are still speculative.

We still see for the full year 2008 about $200 million of aggregate investment activities encompassing our developments, redevelopments, and leasing expenditures breaking down between those that maintain our current level of leasing, and those that will expand it, primarily later in the year.

For our five major ground-up developments, we are no longer as confident on the delivery timeframes as before and are less optimistic that we will hit our prior guidance of $2.5 to $3 million of NOI in 2008. This is one of the reasons why we have maintained our guidance where it is. Capitalized interest and expenses on unleased projects will be cut-off between August and December 2008 and we have now provided the detail for these dates on page 30 of our supplemental package.

Similarly, we are projecting that our seven redevelopments will begin to produce the bulk of their incremental 2008 NOI in the fourth quarter where we currently expect to see about a $1 million periodic increase over the Q1 run rate.

For our same-store properties, we are continuing to expect GAAP same-store NOI growth in the year of .5% to 1% but better cash same-store NOI growth of between 2% and 2.5%. With respect to leasing activity as Gerry mentioned, we now see about 80% of our speculative leasing in hand and that gives us a reasonable degree of confidence on the plan but still have about $10 million to be done with the bulk of that oriented towards the third and fourth quarters.

We continue to see all other income items in the $30 to $38 million range including termination fees, gross management income, including expense reimbursements, other rental income items, interest income, JD income on the equity and income line item and any other non-recurring items including the gain on the convertible buy-back.

You will note that as of the February call, about two months ago, we had already realized $2.7 million of the gross gain we will see but for obvious reasons could not discuss that. We do not currently expect we will do any more debt buy-back activity for the balance of 2008 among other reasons the credit spreads have begun to narrow and no longer present as attractive a buy-back opportunity.

We expect G&A to run at about 6.5 million per quarter reflecting cost savings in certain reclassification of costs in line with Q4 2007. We have a reasonable cushion in our G&A line item for the potential costs of a new COO later in 2008. We are pleased that our leverage has now come down two sequential quarters and expect it to continue to moderate as a result of steady operations and selected asset sales.

Thus, for the year we're continuing to see a range of cash available for distribution per diluted share of between $1.55 and $1.65, with a resulting $10 to $20 million aggregate GAAP on the dividend and becoming neutral by year-end 2008, setting us up for much better performance on the dividend coverage in 2009.

In terms of run rate, when we last spoke about our guidance in February 2008, we noted a $0.59 run rate before termination and other income items. We now see that climbing up a bit to about $0.60 before we include non-recurring items such as termination revenue. This can be derived from our first quarter numbers by subtracting the $8 million or about $0.09 per share from the $0.69 result reflecting the convertible buy-back gain, the G&A savings, and the termination revenue.

Just to recap on the balance sheet. Our debt to gross real estate cost continued its second quarterly decline coming in at 53.1%. This reflects our desire to create more balance sheet flexibility and bring our debt down to lower more historical levels.

It was helped in the first quarter by a combination of asset sales, absolute coverage after dividend or positive cash flow, as well as the leverage savings from buying back our convertible bonds at a discount. Our secure debt remains quite low creating maximum balance sheet flexibility and our floating rate perhaps somewhat regrettably only represents 7.3% of total debt or 3.9% of total gross assets.

Our $600 million line was $138 million drawn on 3/31/08 providing in the aggregate with other credit facilities close to $470 million of capital availability and no need to do any financings in 2008 regardless of the success of our sales initiatives. With that I'll turn it back to Gerry.

Gerard Sweeney

Thank you Howard. On the last call we laid out three key themes that will guide our business for the next couple of years. To recap those themes were better operational execution, balance sheet strengthening, and portfolio alignment.

On the first theme, operational execution, our key focal points remain meeting our leasing projections, emphasizing strong cost control and maintaining strict discipline on all of our capital allocation decisions.

As Howard reviewed, we made progress during the quarter on a number of these fronts and going forward we are very much focused on the need to continue to generate net cash flow, maintain high occupancies and improve our operating margins.

The second theme, balance sheet strengthening, our current leverage level is above our target historic run rate. While we have the availability, as Howard touched on, to fund our existing obligations, our objective is to continue to reduce our leverage levels initially towards the 50% target and to improve our overall investment grade metrics.

[Inaudible] to achieve this goal are discipline capital deployment, executing on the asset sales or co-investment strategies and leasing up our development portfolio. Two initiatives we have underway to strengthen our balance sheet relate to our University City Project.

On the first [inaudible], which is the IRS transaction, our objective is to find a co-investment partner, the goal to capture some of the value we've created, reduce exposure to University City and offset part of our forward-funding obligations.

We've made progress and are in advanced discussions with two potential partners who would take a majority stake in this project. This effort would be non-dilutive and will significantly improve our balance sheet.

We also continue to make good progress on Sierra Center. On the last call you may recall we were in the process of collecting bids. Since then significant diligence has taken place. We have narrowed the process to several potential buyers with a major focus on securing advantageous debt that will support the pricing. We continue to assess this venture on an ongoing basis and in the context of our other sales activities.

Our third key theme is portfolio alignment. The objective is to deploy capital and operate only in those markets where we have a competitive advantage. Executing on this theme will also create capacity. Our tactics on this theme are to recapitalize or exit portions of our California portfolio and to continue to sell off slower growth assets in our core markets. In northern California, we have made significant progress and are in advanced discussions and diligence on a transaction encompassing several of our assets.

Also, as we discussed on the last call, in southern California, that property is going through re-leasing to position it for a future sale event and that effort is fully on track. During the quarter as Howard touched on, we also sold two properties and a land parcel and have one property that we closed subsequent to the quarter end that was a $28 million sale transaction on a suburban Philadelphia asset. The price on that was about $276 per square foot with a cash cap rate of about 7.2%.

Clearly, the execution of these initiatives will drive the overall strategic direction of the company. While these transactions are clearly subject to uncertainty in the investment market, we do remain encouraged with the level of interest we are seeing and look forward to announcing definitive results.

When we look at the second quarter, our priorities are to continue progress on our operational improvement and I think we feel as though the trend lines are moving in that direction. We absolutely need to make more progress in our development leasing activity and execute on various components of our balance sheet program.

On a final note, we have made significant progress on our board search for new trustees and also in identifying a short list of candidates in our search for Chief Operating Officer. At this time I will also open the floor for questions and we would ask all of the listeners in the interests of time if you could limit yourself to one question and a follow-up.

Question-and-Answer Session


Thank you. The floor is now open for questions. (Operator instructions) Our first question is coming from Irwin Gusman with Citi. Please go ahead.

Irwin Gusman – Citi

Good morning. Michael Dorman's on the phone as well. I just wanted to clarify that the $0.05 gain on the debt extinguishment was in addition to, or over and above the $30 to $38 million of other income that you outlined last quarter and is effectively being offset by lower development NOI. Is that accurate?

Howard Sipzner

No, that's partially accurate. When we produced our prior range and our current range of $30 to $38 million, sort of these non-rental revenue items, we already had visibility or already executed the buy-back attributable to 2.7 or about 60% of the ultimate gain that we now have in hand. So a portion of it is unexpected to the 30 to 38 range but is of a small enough magnitude that it doesn't get necessitated change in that range.

Irwin Gusman - Citi

Okay. And can you comment on a press that came out about Black Rock potentially moving into Sierra South during the quarter.

Howard Sipzner

Irwin, the only thing we really say about that is that, look, we're certainly actively marketing what we deem to be the future development sites. It's a whole variety of larger tenants. Certainly those development sites are located in the same tax zone as the existing Sierra Center is so it's a very good focal point for the city and for the region to bring in companies from outside.

Black Rock is an existing tenant in Sierra Center. I think the location has proven to be a very effective one for them. So they are in the market looking for office space but that search I think it still has a way to go and they're looking at a number of states. The Sierra Center complex is one of the properties they have targeted. We are also talking to a number of other large potential tenants who again would find the access to the north-east corridor very attractive.

Irwin Gusman – Citi

Okay, thanks. I'll queue back in.


Thank you. Our next question is coming from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler – KeyBanc Capital Markets

Thank you. Good morning. I just wanted to follow up on your commentary regarding the sale or search for a co-investment partner in Sierra South as well as in Sierra. It sounded like the Sierra South process might be further along than the Sierra project. Maybe you could put a little bit more color in terms of timing and expectations on that for us, given the fact that it seemed last quarter that the stabilized to your project was a little more advance than the Sierra South project.

Gerard Sweeney

I'm sorry, Jordan, you cut out at the end on that. But in terms of Sierra South, we've had very substantive discussions with two very high-quality investors who have both undertaken a lot of due diligence on the project. It is a fully leased a 15-year government lease, I'm sorry, 20-year government lease and as such has a very definable delivery date and income stream.

So, we do remain encouraged. Those discussions are moving along nicely and we hope to be able to achieve our goal there of selling a majority stake in that project. As we've talked on previous calls, Sierra South, that IRS project is a significant component, actually 85% or 95% of our forward-funding obligation and mitigating that is one of our key objectives.

Jordan Sadler – KeyBanc Capital Markets

And the stabilized Sierra project? What's the timeframe on that?

Gerard Sweeney

Well, again, I think we've gone through the bid process. We've narrowed it to several buyers who have again done varying degrees of work. The major timing issue there is really the search in the debt markets for debt that would be attractive enough to support the joint venture formation.

Jordan Sadler – KeyBanc Capital Markets

Would you anticipate putting debt on it in advance of a transaction, like you did with the DRA portfolio?

Gerard Sweeney

We're not contemplating that right now.

Howard Sipzner

Yes, I mean we in fact had not done that Jordan on DRA, that happened co-terminus with the formation of the venture. So that's not an asset that we would necessarily seek to encumber. In fact, we've been de-leveraging or unencumbering most of our assets over the past year or so.

Jordan Sadler – KeyBanc Capital Markets

Okay, thank you.


Thank you. Our next question is coming from Ian Weissman with Merrill Lynch. Please go ahead.

Ian Weissman – Merrill Lynch

My question has been answered. Thank you.


Thank you. Our next question is coming from Jamie Feldman of UBS. Please go ahead.

Jamie Feldman - UBS

Thank you very much. Can you give a little bit more color on the development pipeline in terms of, is it 2100 Franklin, South Lake at Dulles, MetroPlex, basically the very under-leased assets. Just give us a little more commentary on what's going on with them. I think you mentioned that you took down your assumption for NOI from the pipeline in a way. What's that new number as well?

Howard Sipzner

Well the plan still has up to $2.5 to $3 million but it's becoming increasingly clear to us, Jamie, that it will be hard to hit that with the lead times of building out the space, we'd have to have some pretty rapid success with a couple of the prospects to retain that level. It's looking increasingly difficult.

Gerard Sweeney

But Jamie regarding your questions, and Bob I'll turn it over to you to talk about South Lake if you don't mind.

Bob Wiberg

Sure. Just to touch on the Reston Herndon [ph] market for new construction in general. We had a pretty decent year last year in terms of absorption at about 450,000 square feet at sub-market and so far year to day we've had about 350,000 feet absorbed, which is pretty good I think.

But with all the new construction, about 2 million feet over the past 18 months, the vacancy rate's gone up to about 13.5%. The end of the development wave in Rust and Herndon is now in sight with about 750,000 square feet set to deliver by the end of this year and then the supply and new space will dry up.

So the entire development wave about 2.8 million feet, about 35% has been leased to date. I think what that implies is that the vacancy rate will really cap out at the end of this year probably at about 15% then the recovery will be driven by the tenant demand.

So what we're seeing in terms of tenant demand itself is there are several large tenants on the toll road looking for space. Two of these tenants are really focused on the Herndon market that are each over 100,000 square feet and we think both of those tenants will make a lease commitments in the next couple of months.

In addition to the big tenants, there's a number of tenants in the 10,000 to 25,000 square foot range that we're talking to that would be an ideal follow-on to the lead tenant. But our preference is still to find a big tenant before we break a floor in that building.

Clearly, we're in a very competitive environment. Tenants are making decisions based on location quality, amenities, and of course, price. I think as we said before, South Lake offers the best combination of quality and environment of any of the building in the Herndon market and portended to put a premium on those. I think it will always be a preferred choice for a tenant to really sign on the toll road that is a little bit different mix than what we offer.

But I think in addition to, you know, to talk about South Lake, it's important to note that our portfolio in the median market is actually doing quite well. Despite the slow pace of leasing in the new building, our same store portfolio at this point is about in the Reston Herndon market it's about 96% occupied, 97% leased.

In Dulles Corner we're at 99% leased currently. Our lease in the Dulles Corner has been strong. We've signed about 75,000 square feet of leases in the past two quarters. In terms of rents and rental rates, renewals have been in the $30 to $31 range, which is about where it's been for the past couple of years. For new tenants we're signing leases in the $30 to $35 foot range.

The range depends on the TI's, which have gone from $5 to $45 per foot. So I think, you know, we enter this challenging period, we're in it now, but as we go into it we're in a pretty strong position on our existing same-store portfolio and we're really working very closely with a number of tenants to try to get the new building leased out.

Howard Sipzner

Thanks, [Inaudible], do you want to talk about Jersey for a moment?

Male Speaker

Sure. On the Princeton projects we've actually had some good success here recently on both the development and the redevelopment projects there. At the 1200 Lennox which is a 75,000 square foot building.

And if you recall, that building was really built because that project the Princeton Pike project was essentially 100% leased at the time and we wanted inventory for a company that expressed an interest in expansion. That really hasn't happened from the company and I think you see that as a bias towards some of the renewals though. So it's not a totally bad news story.

And we're able to attract companies from outside of our portfolio into both the 1200 Lennox building we're about a third leased now and also the 100 Lennox which is a redevelopment project which is about two-thirds leased at this point.

Then also down in southern New Jersey we had some success in getting a company lease to get the building up to about 80% now at rents significantly higher than new place rents. So I think overall we've had some pretty good success the last quarter in meeting some of those goals.

Howard Sipzner

And Jamie, when you look around the horn I think what Bob outlined for South Lake is what the team's experienced on MetroPlex. We've had some leasing activity there during the quarter in that project. But they've also, in the last couple of quarters done over a 100,000 square feet of lease deals in the Plymouth Meeting Marketplace.

So we look at our same-store properties, Plymouth Meeting Executive Campus and Meeting House Business Center [inaudible], those occupancy levels have gone from about 88% to when the lease is out for signature, get's signed, it will be close to 96%.

So good, good traction through the market but there's clearly a bias towards lower price points and in existing product for renewals. That being said, I think our teams on all these projects are taking a very aggressive stance and pursuing every prospect, being aggressive in meeting the market in terms of rental rates and capital costs. So the pipeline is good. I think as Howard touched on, one of the things we're working through here is just the difficulty of projecting the timing of what some of these leases have.

Jamie Feldman - UBS



Thank you. Our next question is coming from John Smith of Stifel. Please go ahead.

John Guinee – Stifel

Actually John Guinee I didn't want to get the pronunciation wrong again. Hey, you guys did a great job of explaining how the run rate and basically for the rest of the year it sounds like you're at about a $0.60 run rate excluding any one-time items.

If you take out your crystal ball and go to 2009 you've got your 900,000 square feet of spec space which is going to shift from capitalizing to expensing the interest on the OpEx. At the same time you're hopefully going to get those to stabilize. When you do the math on that 200 plus million, at the end of the day is there any accretion from the $0.60 run rate or do these two roughly offset each other?

Howard Sipzner

Let me touch on two parts of that. The $0.60 run rate ideally moves higher as the year progresses and we should emphasize that point as additional leasing comes in. And it will also be augmented by other non-projectable one-time items that are in that bucket of items we've outlined. So I just wanted to clarify that first observation.

I think you make a good point, John Smith Guinee with respect to the 2009 setup. While I will say we've not done anywhere near the full level of planning for 2009, we do understand the math as well. And two observations. The overall trajectory of FFO and CAD will depend on many, many things that happen between now and then.

And as it relates to the accretion dilution on those particular projects, ultimately once and if they achieve their 7.5%, 7%, 8.5% to 9% yields, they will certainly be accretive relative to the debt cost that we will absorb on them. In fact, nicely so.

But as Gerry pointed out, we've been forced to push out the stabilization dates and have less conviction as to the pace on that activity. So it does potentially set up the early part of 2009 as having somewhat of a shortfall on those projects.

John Guinee – Stifel

And then the second half of that one question is that you've got about $400 plus million of below market debt rolling over in the next 18 months. When you do the math of that debt rolling over, offset or re-fi by a combination of new debt and/or asset sales, does the math there come out accretive or dilutive on that 400 plus million?

Howard Sipzner

You know, on an absolute basis, one would expect in today's credit markets that we'll not be able to achieve those same interest costs or interest rates. Hard to predict what they are. Even in the last couple of weeks we've already seen some rapid improvement, whether they go back to the 5% to 6% range where we've historically financed in the last two to three year timeframe, hard to say.

One of the other factors I think Gerry touched on is the aggregate level of our co-investment and sales activity. Could ultimately be the best source of capital for us to defer or not have to do some of these refinancings to the extent we're successful.

One of the earlier questioners asked which projects were coming first. There is a notion that more than one of them will ultimately happen up to, up to all of them. And those scenarios as we penciled them out creates some optionality as it relates to the timing and amount of some of the refinancing. But unfortunately we don't have specifics on that today.

John Guinee – Stifel

All right. Great. Thanks.


Thank you. Our next question is coming from Cedrik Lachance Green Street Advisor. Please go ahead.

Cedrik Lachance - Green Street Advisor

Thank you. Howard, can you explain why you chose to repurchase some of the convertible notes. Why this particular series instead of maybe some of the other bonds you had outstanding or item theories versus just [inaudible] your line of credit.

Howard Sipzner

I will. I mean first of all the aggregate decision to do it all together was influenced by a combination of three things that we saw happening during the first quarter, one, the individual sales activity hitting pretty much as expected and providing the expected level of capital availability.

Secondly, we were able to close an increase on our term loan bring an addition $33 million in mid-April that created additional capacity. And last, but not least, we did have positive cash flow over the dividend in the first quarter which gave us a little bit of maneuvering room.

As to the specific series, all of our bonds have priced below par in various quotes and whatnot. Something unusual seemed to happen with the convertible, perhaps because it was owned by hedge funds and it produced the most outsized gains and yield buy-back. I think our effective rate of buying back was somewhere in the mid-8's.

And we liked that series. There were opportunities and shorter dated and longer dated bonds but thinking about what may set up as a 2011 obligation. It dovetailed well with some of our other required refinancing.

It wasn't soon enough that we would not see clarity on the credit markets and it wasn't some of the longer dated debt which candidly we'd like more longer dated debt. We'd like more 7 and 10-year paper to properly set up our term. So we wouldn't go out of our way to buy back those series either.

Cedrik Lachance - Green Street Advisor

Okay. As far as the drop in CapEx per square foot basis. Can you give us a sense whether there is anything in there that can explain the large drop this particular quarter or if leasing conditions are simply that much better in your market?

Gerard Sweeney

Well, I think Sedrick, what drove a lot of that is we had such a high level of tenant retention rate. And I think it was about 56% of those deals were done on a direct basis, so there was a good savings of leasing commissions.

But it does reflect, I think we've seen it, a trend line over the last three or four quarters and I think one of the things that I actually touched on was the percentage of deals that kind of exceed our capital guidelines of 15% on new leases, capital cost being 15% of rents on new leases and 7% on renewals. That's by far the lowest percentage we've had in the last three or four quarters. It's just about half of what it was in Q4.

So I think it's a combination of the existing markets remaining stable, the bias for a lot of the existing tenants we have to stay put and look for shorter term leases. And the fact that with those existing tenants we are able to usually do those more often than not on a direct basis. I think those were some of the key drivers relative to, when you take a look at the [inaudible], even when you take out the larger renewals we did, we still were having run rate on capital cost below $2 a square foot.

Cedrik Lachance - Green Street Advisor

Okay. Thank you.


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

Rich Anderson – BMO Capital Markets

Thank you. Good morning everybody. Just a yes or no here. Does the advanced discussion on Sierra South also include the post office or may it include the post office building?

Howard Sipzner

Rich, it would include the post office building, yes.

Rich Anderson – BMO Capital Markets

Okay. I didn't hear you mention Austin. Unless I just missed it. Did you mention any progress being made on your know, joint venture partners out of Austin? And would you call Austin sort of the lowest on your priority scale of getting something done?

Howard Sipzner

Austin as I mentioned on the call last time. That was the lowest of our priorities, so our focus right now is on really the initiatives I discussed in my comments.

Rich Anderson – BMO Capital Markets

Okay. And then lastly. You know in the interest of the balance sheet. How far are you inclined to go in terms of buying back stock. Keep in mind you know your desire to de-leverage and maintain liquidity and all that sort of stuff.

Howard Sipzner

You know, look, Rich it's Howard. I think we had a clear shift through the third quarter of 2007 when credit concerns really emerged paramount in [inaudible]. I mean they weighed on our stock valuations. I think probably one of the best things we can do for our shareholders, at least the feedback we've gotten, is reduce the risk premium that the high level of leverage has imposed on the stock.

So in the short run, we're going to use incremental dollars to reduce debt. I mean to some degree the convertible buy-back was exactly that type of transaction, reducing debt by buying back at roughly $.86 on the dollar. So that was one extension of that same strategy. Ultimately, the biggest moves will come from some of the larger transactional initiatives that Gerry spoke about.

Rich Anderson – BMO Capital Markets

Okay. Thank you very much.


Thank you. Our next question is coming from Mitch Germain of Bank of America. Please go ahead.

Mitch Germain – Bank of America

Howard, just trying to drill down a bit further on what variables of the guidance have changed. It seems like some of the gains were included which is then offsetting the lower contribution from the developments. Can you just go over that one more time please?

Howard Sipzner

Yes. When we constructed the guidance in February 2008 we already had visibility on about 2.7 of what will prove out to be about $4.5 million worth of gain. So it would be fair for anyone to conclude that about 1.8 million of that is over and above what we had previously seen. And I would certainly acknowledge that. So the decision not to change the guidance, for example, by that 1.5 million or additionally you could say by the 1.5 million of G&A savings, which emerged later in the period, really do reflect some degree of caution as it relates both to development and redevelopment forward leasing. And just a general bias towards being more conservative in the guidance at this point. I mean we'd love nothing more than to begin an orderly process of raising our and your expectations but it's something we want to do in a very measured way.

Mitch Germain – Bank of America

And, Gerry, just quickly, the appetite for core office and kind of what you're seeing right now in terms of marketing those various portfolios and assets.

Gerard Sweeney

Actually what we're seeing Mitch is on the small deals, like we've actually thus far this year there seems to be a pretty good appetite. Again, that appetite is tempered by, you know, rents in place, year term rollover risk, and deal size.

But we're just going through the bidding process on the asset that we sold and there was a pretty healthy bid list on that from a range of different institutions. So in that $155 million or so of guidance that Howard touched on for the smaller asset sales, there seems to be, certainly not as deep as it was before, but a good enough market to get some good traction on some of these smaller offerings.

Mitch Germain – Bank of America

Great. Thanks.


Thank you. Our next question is coming from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler – KeyBanc Capital Markets

Follow-up. Sorry on the pricing of the initiatives. You said the Sierra South transaction would be a non-dilutive which is understandable. I'm just curious as to your expectations on the other two projects that would be for sale.

Howard Sipzner

Well, Jordan, I think any sales we do at the margin and we would expect cap rates. Whether they're 5.5, 6, 6.5, 7 – wherever they are, they're going to be dilutive relative to the near-term redeployment of the capital which will be to pay down debt and specifically to pay down floating rate debt.

So that definitely would be some near-term dilution. Ultimately, those sales though, if you view them in the complete context, they really fund a combination of our future development activities which we expect to product 7.5% and up to 9% so that would ultimately prove accretive in the long run. And they also give us flexibility on timing an amount of refinancing activity and that could.

So viewed in that context, selling a property at a 7.5 cap rate and avoiding doing a financing at something at or even above that level seems to us to be a fairly good way to create some flexibility and maybe even create some accretion in the long run.

Gerard Sweeney

And certainly to add on Howard to your comment. Another consideration some of these sales, Jordan, is looking at what the net cash flow to us coming out of the properties are relative to the capital costs we're spending to maintain. So that's a key factor as we're looking at what assets to identify for sale and go to the market on them.

Jordan Sadler – KeyBanc Capital Markets

But do you have sort of order of magnitude in terms of how negative the spread might be versus, I mean I think in the immediate term you mentioned taking these proceeds and actually reducing the company's overall leverage. I know ultimately you've got some development teed up here. But we know about the development but we don't know about the magnitude of these, in essence, these capital raises which will be used for deleveraging.

Gerard Sweeney

Jordan, I mean we could create some sort of a grid or matrix, so many dollars, so much cap rate, so much reinvestment rate, and come up with numbers. I mean what we would not know and cannot know at this point in time is the timing of those transactions and how long whatever that dislocation or dilution is going to last.

I think it's potentially misleading for us to give those numbers when for the most part they'll have 2009 impact and we haven't yet had the benefit or given the market our complete or really any view on 2009. So that's one of the reasons why we're going to hold off.

Jordan Sadler – KeyBanc Capital Markets

I can appreciate that. Thank you. Just, lastly, you mentioned Howard or actually Gerry it might have been your opening commentary that it's a little bit of an occupancy slippage in 1Q '08 and that it might decline a little bit more in 2Q and I was just curious in terms of order of magnitude.

Gerard Sweeney

Well, this quarter we were down about 100,000 square feet and we expect something a little bit north of that for Q2. Again, part of our original business plan forecast.

Jordan Sadler – KeyBanc Capital Markets

Did it ramp back up a little bit in the back half? Obviously the 3Q …

Gerard Sweeney

Yes. We certainly would expect that to move to a positive absorption through the portfolio for both Q3 and Q4.

Jordan Sadler – KeyBanc Capital Markets

Okay. Thank you.


Thank you. The next question is a follow-up coming from John Smith of Stifel. Please go ahead.

John Guinee – Stifel

Hi there. A quick question for you guys. We're asking this of everybody. You have $50 million worth of planning and design, land and then you've got an undisclosed book value on the next page of land that looks like provides about 5.5 million square feet of developable FAR. What is your expensing versus capitalization policies on these two groups of assets?

Howard Sipzner

John, we actually do disclose the value of page 31 land on page 30 which is land held for future development of $70 million.

John Guinee – Stifel

Got you, good.

Howard Sipzner

We actually expense everything related to those land holdings on page 31. What we do is we're capitalizing interest carrying charges on the projects we have listed on page 30. And as you may recall last quarter we actually moved some properties off this page back to the lane held for development because there were not substantive activities to support the continued capitalization.

It's a review we go through every quarter based on where are the projects and the planning stage both in terms of approvals, infrastructure work, working through the design development or construction document process. Engage that based upon what we're seeing in the market in terms of real activity for those projects.

John Guinee – Stifel

Thank you.


Thank you. There appears to be no further questions at this time. I'll turn the floor back over to you for any further final remarks.

Gerard Sweeney

Ilsa, thank you very much. All of you, thank you very much for participating in the call. We look forward to an update of our second quarter results in the summer.


Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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