Brandywine Realty Trust (BDN) Q3 2008 Earnings Report, Transcript and Summary

Good morning my name is Amanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. (Operator Instructions). Thank you. I would now like to turn the call over to Gary Sweeney. Please go ahead sir. Gary Sweeney – President and Chief Executive Officer: Amanda, thank you very much and good morning everyone and thank you for joining us for our third quarter 2008 earnings call. Participating on todays call with me are Howard Sipzner, our Executive Vice President and Chief Financial Officer; Bob Wiberg and George Sowa, two of our Executive Vice Presidents; George Johnstone, our Senior Vice President of Operations; and Gabe Mainardi, our Vice President of Corporate Accounting. Before we begin, 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 assurances that the anticipated results will be achieved. For further information on facts as they could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports on file with the SEC. There is no other question the last 60 days have been unprecedented on a variety of fronts. These circumstances impacted every company including ours and have certainly been a factor as we formulated our 2009 and 2010 business and capital plan. Keep in mind that in this environment our primary focus remains balance sheet management, liquidity enhancement and the efficient operation of our portfolio. Our third quarter results reflect solid performance in our core portfolio. The ongoing lease of a large development projects, and prudent balance sheet management. The results of these activities together with the sales of a five property office portfolio in Oakland California and office build sell in Richmond Virginia put us a in a very strong liquidity position going into 2009. As a result we have increased our full year FFO guidance for 2008 to be in the 239 to $2.43 per share range and provided 2009 guidance range of $2.17 to $2.27 per share. Howard will discuss the assumptions driving our guidance in more detail. During the quarter we made good progress on a number of key near term priorities with outlines of our last two earnings calls. Those priorities were continued operational improvement advancing our development pipeline leasing and executing on our balance sheet program. From an operational standpoint we continue to reduce improvement cost, our blended cost per square foot for the quarter also came in a very good number in $1.14 per square foot and overall capital cost were less than 10% of GAAP rents, so well within our operating guidelines. More importantly our year-over-year CAD ratio has improved to 91% versus 120% in 2007 and our 2008 year-to-date CAD is a $1.45 per share versus a $1.10 per share in the first nine months of 2007 or an increase of about 30%. During the quarter we showed better mark-to-market our renewal leases that we have in the previous eight quarters, our GAAP renewal rates are up 10% with cash renewal rents up almost 3%. GAAP rental rate on new leases was also up about 3.6%, but slightly negative on a cash basis. We have fairly active leasing during the quarter with total volume of about 670,000 square feet, compared to 595,000 square feet in the second quarter. However, reflecting continued tough market conditions these numbers are down from our activity levels in the first quarter of 2008 and fourth quarter of 2007. Our leasing staff continues to sort out direct deals and during the quarter we had 54 transactions representing 43% of rents and 37% of square footage done directly by our leasing staff. While these are all solid accomplishment, for the year our same store number excluding termination fees was down 2% on a GAAP basis, but up 1% on a cash basis. As Howard will discuss, we continue to experience a sequential decline in non-cash items and are well position for a steady improvement in the cash component of our revenue stream. During the quarter the only disappointing note we had 86,000 square feet of negative absorption, but our total year-to-date negative absorption to about 315,000 square feet or about a 1% decline in our same store occupancy targets. We do expect occupancies will remain flat for the balance of the year. The economic crisis is having a significant impact on tenant demand, tenant cytology and continue impact leasing velocity. Leasing activity and absorption levels are generally below those of last year and our year-to-date leasing activity absorption levels are down year-over-year in just about everyone of our markets. Certainly not surprising but there are few additional points of note. Most our markets did see a slight increase in year-over-year vacancy rates. In the Pennsylvania suburbs however vacancy rates trying to down 70 basis points from 15 point to 14.7% and in Southern New Jersey trying to down from 14.1 to 13.5%. That would also indicate CBD in Philadelphia where vacancy rates decrease 600 basis points from 10.7 to 10.1%. In our four major markets of Pennsylvania, New Jersey Virginia and Austin were outperforming larger occupancy levels by between 310 and 900 basis points. During the third quarter on activity standpoint we had 264 shillings, getting traction is still higher than it was 12 months ago but its down form our run rate in the last two quarters. For the quarter these rates were inline with our expectations, free rent and concession remained a minor issue and for leases executed year-to-date only about 13% of those contain some element of free rent. Next topic I will spend a moment on our development projects and since our last call there have been several points of interest. We have 36 tenant prospects in our development project pipeline totaling just shy as 700,000 square feet, this compares to our second quarter pipeline of about 28 prospects and 625,000 square feet. So again quarter-over-quarter pickups were down from last years volumes. Along those lines, we did make strong progress since our last call. The sale of a 2100 Franklin Project in Oakland, the recently announced 235,000 square foot lease at our South Lakes Project in Northern Virginia and other activity has moved out, ground up development pipeline to approximately 82%, we’re about 58% lease excluding our fully leased IRS project. South Lakes upon full lease-up we have a stabilized GAAP return of 7.6%, and an average cash return of about 7.5% excluding or management fees. Leasing activity on the remaining 30,000 square feet or so looks very promising. On our remaining development projects, Metroplex, Lennox Drive and Bargon Queak, as we did last quarter we continue to project initial development yields between 7 and 9% on a GAAP basis and 7 and 8.5% on a cash basis. Metroplex is located in the Plymouth meeting somewhat in our Pennsylvania suburbs or Brandywine's 15 building totaling approximately a million square feet. Year-to-date in that submarket we have executed a 163,000 square feet of transaction, of those a 115,000 square feet were new leases, of those 43,000 square feet were in Metroplex. Our Plymouth meeting portfolio is about 96% leased excluding Metroplex and 90% leased including Metroplex. And Metroplex have recently signed three leases totaling, total lease square footage to 45% of the building which is up from 24% last quarter. We are also in the late stage negotiations with two additional prospects totaling an additional 42,000 square feet. Assuming these two additions to get signed, we have not leased about 80% of the project. In Austin, we have approximately 100,000 square feet of leases either out for signature were operating negotiations under a letter of intent. So on this project we have seen a big pickup in activity since the last quarterly call. 1200 Lennox and our Central New Jersey market is currently 49.3% leased, was up from 30% last quarter and is now 37% occupied. So overall, pretty good progress on the development projects since our last quarterly call. Howard will discuss our balance sheet in much more detail, but the touch on initiatives relating to our University City projects, on the IRS transaction we’re working on a historic tax credit for this facility which we anticipate will provide $50 million source of capital over the next two years. Upon closing of this structure, we will revisit the joint venture market and plan to move forward with a construction loan on this project. Our funding schedule for the IRS in the garage complex is at by year-end 2008, we will have $82 million invested with a 155 million projected spend in 2009 and a $134 million projected in 2010. As we all know the investment market stopped on a dime and as such we are delighted wit our 2008 sales activity. Including Northern California we have had over $500 million of sales activity at a blended cap rate of 7.7% with cap rates ranging from 6.2% to 8.3%. We also have about $60 million under contract over advanced negotiation. However, given the significant disruption over the last 60 days we won’t consider these deals done until the closed, but regardless we are worrying very much of our 2008 business plan projections. I would like to spend a moment on our dividend announcement. Our current annualized dividend rate is $1.76 per share. We expect our 2009 dividend to be $1.20 per share or $0.30 per quarter which equates to our current projected 2009 taxable income. The reality of this current economic and financing necessitate a reevaluation of our dividend payout. A clearly, likely intermediate term outcome of this environment will be a more expensive cost of capital for our entire industry. As such, it became increasingly clear that retaining earnings is the most cost effective and correct financial decision. As (inaudible) has reviewed our existing dividend given both financing uncertainty and a cost of replacement capital, the board did not use this as an appropriate time to either subsidize or grow into our dividend. As our 2008 number show, we made four more significant progress in our current payout ratio in many projected. We expect our 2008 CAD to be at $1.90 per share or about a 90% payout ratio on our current dividend. Here the remarkable improvement driven obviously driven obviously by the burn-off and straight line rents, should capital control and a tenant buyers toward shorter term lower capital consuming leases. However, looking at our 2000 financial plan we did increase our capital run rate over 2008 assuming a further deterioration of market condition. This assumption and projected leasing activity puts our CAD projection between a $1.49 and a $1.59 per share. Another component of the dividend decision of the composition of our 2008 dividend payments. During the year we had about $50 million of projected taxable gains from sales $0.5 per share. As such approximately 30% of our current rule represents special distributions to our shareholders. As we look at it, our new $1.20 dividend run rate, our FFO payout ratio will be between 53 and 55% with a CAD payout of 75% to 80% very strong and very secure payout levels. To the extent that we generate gains from either additional sales or handle those to either a special dividend distribution or other tax planning techniques. When this current pricing dislocation ends at a most certainly well, we plan to deem on those companies who puts us a strong financial and operational platform to grow our dividend as we did for many years and pace with our earnings growth. We will spend a few movements on our 2009 business plan before I turn the floor over to Howard. As you look at 2009 based on our view of real estate market and financing conditions our plan does contemplate a continued challenging environment. The key elements of our 2009 plan are as follows. First, our existing portfolio, we are targeting same store occupancy range between being down of 150 basis points and flat with 2009 year end occupancy levels being between 91 and 93%. We would also be targeting during the year even more stringent cost control over both our operating expenses and capital cost. As we build our 2009 projections we were very focused on our 2009 renewal profile. During 2009 we have 3.2 million square feet or 13% of our portfolio expiring. To date we had already renewed 876,000 or 27% leading a remaining 2009 rollover number of 2.3 million square feet or 8.8% of our portfolio. Of this amount, 347,000 square feet or about 15% is out for signature or in advance negotiation leading a net 7.5% of remaining of 2009 rollover as of today. In terms of large exposure our top 15 leases that are expiring during 2009 account for approximately 30% of our original rollover. 51% of this square footage has always been renewed with another 36% in advanced negotiation. So overall as you look at our plan very good progress on proactively addressing our next year rollover exposure. Next for our existing development for 2009 our gain plan achieved stabilized occupancy levels by year end, our Metroplex, South Lakes, 1200 Lennox, 100 Lennox and the Park at Barton Creek, our 2009 plan numbers incorporate an average 47% occupancy or about $4.1 million of NOI to offers these projects. We will also during the year continue our on time, on budget completion of the IRS facility in the garage. From our investment standpoint our 2009 business plan does not contemplate any direct acquisition, we have also programmed a $100 million of dispositions, and an 8.5% cap rate occurring in the second half of the year. Targeted dispositions for the next several years are properties that are allocated in either non-core markets were properties that fallen to the bottom 25% are projected performance based on our NOI and CAD growth rates. In addition to earlier we will continue to actively explore additional sale and joint venture opportunities. From the development standpoint we have not programmed any additional development starts in 2009. Using that investment posture as a takeoff point, our 2009 capital strategy will be to continue to improve our balance sheet, credit capacity for our 2010 maturities and position the company well for long term growth. The casual sources of funds or the assets sales I mentioned pursued of joint ventures were less than a 3% of our asset base is currently in joint ventures. So we certainly would expect recognizing its direct asset sale market is challenging, we will push on achieving some additional joint venture activity during 2009. Less than 10% of our debt is secured which creates a good potential source of capital, while our clear focus would be on a quality and a size of our earning cum report we will certainly explore spot and opportunities to allow secured leverage for checking on a couple of problems at secured longs maturing in the next two years. Our 2009 business plan does contemplate we obtain construction financing on 100% GSA lease facility. As Howard will take it, we’re in discussion with several key lenders and our trials to finalize construction funding arrangements in the first half of 2009. While this construction loan approach will be a bit more expensive than our line of credit, it will be inline with the carrying cost incorporated into our construction budget. Our primary objective is to use this construction loan and in conjunction with other sourcing activities to reserve line capacity. And finally, we generated additional cash flow from our dividend policy revision, the potential and historic investment tax credit to put us in a good position as we look at our 2010 capital plan. At this point Howard will walk us through our 2008 and 2009 financial plan. Howard? Howard Sipzner – Executive Vice President and Chief Financial Officer: Jerry, thank you. Before we begin I just want to point out that we are all quite proud to be reporting this earnings call from the home of the work champion Philadelphia utilities. If we are going to according to plan, there are some company shortly for more and more other professionals sports teams. Now onto the highlights. FFO in the third quarter totaled $53.6 million versus 62 million in the third quarter of 2007. On a per share diluted basis we realized $0.59 per share versus $0.68 a year ago and as $0.59 exceeded analyst consensus by $0.01 per share. Notably the quarter a year ago had $7.6 million of termination revenue versus just 300 pounds in the current quarter representing virtually all of the difference in performance. On our $0.44 dividend the FFO pay out ratio for the third quarter was 74.6%. A few key components of the Q3 income statement are mainly declines in our key revenue items on a sequential basis due to downtick in sequential occupancy, offset by gains and rental rates. We also realized 338,000 of termination fees and other income of $784,000. Our growth management income was $4.4 million or $2.6 million on a net basis. And we realized 1.1 million of unconsolidated joint venture income. On expenses property operating a reversely taxes we in line with prior periods, G&A of 6.9 million was a bit higher than prior quarters due to certain severance accruals in the third quarter, and interest expense was inline with our expectations. On a same store basis our cash rents increased 1.7 million, while our non-cash rent items decreased by $3.5 million, amplifying our shift to more favorable cash rental income profile. Recoveries decreased $400,000 whereas expenses on a same store basis increased by $700,000. Overall our ratio declined a bit in the third quarter to 33.4%, but remained inline with our expectations on a full year basis. Overall, our same store NOI on a cash basis excluding termination of other revenues increased 600,000 or 0.8%. All of these metrics were inline with our expectations. FFO for the nine months totaled a $1.85 per share or a $1.93 with a 0.8 or the $0.8 impairment added back in from the second quarter. Our FFO payout ratio on the historical of 3% dividend run rate equal 71.4% or 68.4% with the impairment added back in. CAD remain robust at $0.36 per share inline with 48 and 52 in the prior two quarters. We are continuing our run of low capital expenditures declining non-cash items and good dividend coverage, and we are pleased to report a 95.7% payout ratio for the quarter of almost $0.44. The $8.9 million of revenue maintaining capital cost for the quarter are the key driver of these results along with significantly lower non-cash straight line income. Year-to-date our CAD per share totals a $1.45 resulting at a 91% CAD payout ratio for the $1.32 of common share dividends paid. Obviously, both our CAD and FFO coverage ratios are going to improve dramatically with our new dividend guidance. Looking briefly at accounts receivables at September 30 we had $14.3 million of operating receivables on our books and a reserve of $4.9 million or about 34%. In Q3 2008 we nominally increased our operating receivables to provide a greater question against potential, rental income write-offs. We have had no write-offs year-to-date and feel comfortable that our tenant credit profile will continue to monitor. Our dividend guidance for 2009 is $0.30 per quarter or a $1.20 for the year versus $0.24 per quarter or a $1.76 for the 2008 year. This sets our 2009 dividend to roughly match our expected taxable income and will conserve about $50 million in annual cash flow for our ongoing needs. As Jerry noted we are increasing our 2008 FFO guidance to 239 to 243 from 232 to 242 and that amount latter for the year both numbers reflects the Q2 impairment. That represents about $0.4 of the midpoint for those who look on a calculation. This increase reflects the six weeks delay in the closing of the open sale transaction along with better than expected performance in various other income items. With a $1.85 of FFO per share already achieved year-to-date fourth quarter FFO guidance effectively works out to be in a range of $0.54 to $0.58 per diluted share. Couple of notes about in the fourth quarter, we continue to assume low acquisitions, we are programing up to another $45 million of sales activity then we will not count that until they are actually closed. We expect to fund about $45 million of investments in the fourth quarter representing commitment to our ongoing development and redevelopment projects, revenue maintaining capital expenditures and certain expenditures related to new leasing activity. Overall, we expect our 2008 plan to come in with about $187 million of total capital expenditures with our $200 million expectation at the beginning of the year. We have no incremental income in the fourth quarter for our four ground up developments. We recognized that capitalized interest and expenses four of these projects included Metroplex which has already happened will end by December 2008 at which point we reclassified as operating properties with their full results including the core portfolio. This will decrease our core occupancy by 200 to 250 basis points from that going forward. We obviously expect we will recover from that as lese up continues throughout 2009. We will see all other income items for 2000 and coming in as high as $40 million gross or $31 million net after management expenses versus our prior range of 30 to $38 million on a gross basis. Remember that this bucking includes termination fees, gross management income, other rental income, interest income, JV income and any other line of recurring items including items such as the extinguishment gains we recognized earlier in the year. We expect our G&A inline at about 6 in the quarter $6.5 million in the fourth quarter, and therefore with an expectation of about a $1.90 CAD and a full year dividend of a $1.76 under the prior rate, we should do about 90% coverage for the year. Now turning to our 2009 guidance, which we’ve introduced in a range of 217 to 227 per diluted share. Notably, this was results in FFO coverage on payout basis of 53 to 55% on assume $1.20 dividend. Key assumptions for 2009 include no acquisitions after 300 million average investment activity. This incorporates about a 155 million for the post office and garage projects, 55 million of revenue maintaining capital expenditures and new mode as Jerry reported out that’s much higher than we experienced in 2008, and about 60 million of new leasing CapEx. And this last category includes about $40 million for the substantial completion of the four developments that would be in the corporate portfolio as of year end 2008. We work to range in the aggregate about $400 million of total capital in 2009. We see 30 million of that coming from free cash flow after the new dividend up to a $100 million of asset sales, up to $120 million of mortgage financing and up to $150 million of construction financings. Kindly, any of these can go higher or lower and be offset by increases in the others, but our goal remains to source about $400 million of incremental capital during 2009 and therefore place our credit facility at a similar low balance for the way we end 2008. For our same stores properties in 2009 we expect flat GAAP growth or low growth, but expected growth to see our cash same stores NOI growth by 2 to 3%. For that same other income bumping items we're projecting $25 to $35 million of gross income or 15 to 25 on a net basis, first of the 30 million gross or 31 net we now expect for 2008. We see 2009 G&A are between $22 and $24 million. We expect to slight decline in interest expense during 2009 due to lower debt balance and you note that our interest expense projections for 2009 include between $4 and $4.5 million of incremental interest for the convertible revaluation under NPD141 at a 5.5% rate. We will add back this non cash interest expense in our presentation of CAD. We expect a $5 to $10 million improvement in the non-cash components of FFO over 2008 and that provides a preliminary guidance for CAD of a $1.49 to $1.59 representing at least 30 million of free cash flow and coverage on a CAD basis with an assume $1.20 dividend of 75% to 80%. Our debt to gross real estate cost looking at the balance sheet came in at 930 ’08 at 52.5%. We are seeing meaningful improvements in all of our leverage metrics by the end of the year reflecting the transactions we closed earlier in October. And once again our secured debt remains quite lower at 8.5% of total asset and our holding rate debt very manageable at 9.5% of total debt. Our $600 million line was a $175 million on drown September 30, 2008. As we pointed out in the press release following the closing of the October sales and other activity on early October we had no balance on our line at a $145 million of cash on hand to the future needs. We since use a portion of this cash to fund various expenditure. And now I will turn it back to Gerry to some additional comments. Gerry Sweeney – President and Chief Executive Officer: Great. Thank you Howard. To closing our prepared comments as we look – as you look at the forth quarter our priorities remain continued operational improvement, executives to maintain our occupancies and deliver the number that Howard referenced, continue to make progress on our development and redevelopment pipeline, and continue with the execution on components of our balance sheet program particularly Cira South tax credit and advancing the discussions on the construction financing. As we close there is no question 2009 could be rest letting for the economy and for our industry. We are prepared for it and our projections reflect as much. Looking at the situations to a slightly different wins, as shift in tenant by forming at the economic climate could create some operational traction for us at the margin. First, our primary markets are historically, fairly stable and we have minimal exposure during the next 12 months. Second, our portfolio quality is at the upper end of our competitive set and in many of the marks in which we do business we have an extremely strong market share. Third, we have strong leasing in property management teams that keep us very much in the deal flow and look at the percentage of direct deals reduce evidence of the depth of the local relationships. And finally, while every company must navigate in this capital constrained environment, many of our local competitors are much more leverage constrained with much lesser flexibility, thereby providing us with a distinct competitive advantage in the ongoing battle for additional tenants. We thank you for listening to our call. At this time we have opened the floor for question. We would ask that in the interest of time you limit yourself to one question. Thank you very much.

(Operator Instructions). Your first question comes from Michael Dillerman with Citi.

Good morning in front of me as well. I assume we both have one question each for both on the line. Lets talk about the joint venture on center I mean, how did – I know, you started going down the road in that process. Where did it sort of go and sort of how do you think about that wrapped with fewer service, project in the IRS leases going on?

Micheal I will take the first part of that and ask Howard to chime in on some the technicalities. On the IRS facility we had identified a joint venture partner that we were quite pleased with both the partner and the structure. The challenge is that they were tax exempt entity, and there are a number of various complications involved in receiving a start tax credit with a tax exempt entity. So we have opted to do, it’s a proceed with the negotiations to achieve and start tax credit, once that structure is finalized we will then revisit the joint venture market, that market would be somewhat limited to taxable entities, and then also move toward the construction financing program. On the Cira Center project we did enter the marketplace for a joint venture. We again had identified a joint venture partner and the disruption in the debt markets going back to the middle part of the summer, change some of those fundamental underwriting criteria. So we made a decision that given the success we were having on some of our other sales activities most notably the sale of the open California portfolio that we would Cira Center right now as a large unencumbered asset and then revisit the joint venture market when there was more clarity on the secured debt market.

Okay, that’s helpful we will queue up.

Your next question comes form Jordan Sadler with KeyBanc.

Thank you and good morning.

Good morning.

Could you just give us a little bit more color on the asset sales that are currently deed up and what pricing looks like?

We were under contract as well as the ones for next year that might, you might shut.

Okay we have – of the dollar amount that I mentioned we have about $11 million of that is under agreement for closing with the balance under contract negotiations. There are properties in the metropolitan Philadelphia and the cap rates range from mid 70s to low 80s. In terms of the projection for 2009 Jordan, the $100 million, we have program those for the latter part of the year. We actually due to the investment market be continually, fairly slow, showing to the end of this year and the early part of next year, and if we look at lying in our capital plan we layered in those sales to be occurring randomly in the second half of the year recognizing that the more challenging investment market we have moved up our sale cap rate assumptions on those assets to about 8.5% which is well above 9.7% average cap rate we experienced thus far in 2008.

I am sorry, that has been identified or its..?

They are not, the part of the assets will be going to touch the market with.

Okay, thank you.

Your next question comes from Jamie Feldman with UBS.

Thanks. I was hoping you could say a little bit more light from the development progress particularly South Lakes, I guess what I am trying to figure our kind of what changed, did you guys maybe give more than the market had expected or than the tenants wanted mostly rent, kind of what got things flowing in the development pipeline?

Bob, why don’t you take that?

Sure. It sounds like really what happened in this quarter is it was derivative expansion of the existing turmoil and cable lease, and they are initially committed to a 195,000 feet knowing that was probably a minimum, and as they work through there is a baseline they really expanded out to a 335,000 fee we currently have leased and it was taken on the same terms as the original deal. We still have a flowing less in that goal and we have got a number of prospect and we have discount also the possibility that Time Warner cable will take that as well.

And then I guess, just a quick followup, I mean, how are you guys approaching this market, are you willing to put more TI's in, are you pushing more for full rent and then what are your competitors doing?

In the resident hurdle market we don’t have any progress in our deal. In the construction they are significant in terms of TI's, because that’s where we will take the build space today. But we see a variety of different deal structure. I think there is a couple of transaction occurring now where there is significant prevail included but the pace rate is pushed out by to account for that. So, I think there is a range in market down there maybe $30 to $50 of fence rate, but again most of that driven by free rent.

And one more question on markets, and that’s my last followup?

Yeah, we completed to deal with when we did our deal with a company that we did a deal 10 years ago and you change companies for anywhere in other locations. So that actually would got and actually lot of portfolio rent and G&A for that. So we are right over the actual rate and we have to be in the right location at the right time. Generically, CDA the market though and it has, I think it actually don’t target with regard to TI, its based on – it has cost more to put out and we are looking for the retailer to form that which I will probably increase amortization of those cost we look at in, but there are lot we combined alternatives with rent.

And I think Jamie in general we look at the Hardman is clearly with slower activity. One the key attributes we have which I think is reflected in the numbers we are looking out for 2009 is with the quality of our leasing in property management teams. We are well ahead of the curve and are closing our tenants for renewal. Now the reality in todays market place looking for new office space, for lot of our tenants its not a number one priority. So to servicing them effectively over the lease given that we have no reasons to leave I think we will revise it in getting out talk one of our existing tenants which is why we have some reducing on ’09 exposure significantly rolling the fourth quarter of ’08. In terms of general marketing approach, again we have great people they have got – their mission is to go out there and actively identify prospects over the local brokerage community, be involved in the community itself, identify prospects and we track everyone these deals for our entire system and focus on our conversion rate and get people through the door its probably major challenge as much as we do. Once we get come through the door, we identify exactly what we need to do make that deal work. The nature of the relation we have with the tenant or the broker is good enough that we think we are able to leverage those relation as part of the lease negotiations and then position the managing directors and Howard and George Johnstone to really make a quantitative and qualitative evaluation unless the terms of that specific lease, create t value, covers on cost or bridge a GAAP for us and if they need that criteria we go forward in Middle east. They guys want the reason why we always been pretty aggressive in both good and bad market in terms of getting square footage signed up off.

Okay. Thank you very much.

Our next question comes from Dave Rodgers with RBC Capital Markets.

Hi Gerry thanks for on your capital spending needs with respect to your existing development as well as the IRS and garage facility, on the Cira, I guess South campus development beyond the IRS s facility and the garage. Can you remind me what your constraints are or what your mandates are in terms of starting additional projects, funding those and if you have any flexibility with respect to extending any types of additional commitment due to financing or other types of criteria in the market?

Yeah Dave, our perspective right now as you recall, a Cira South development has three components parts to it. The garage which we are starting as part our capital plans, and then two towers that could range from 300,000 to 700,000 square feet. At the talent time we don’t have any plans to start one of those towers and don’t have the obligation to do so at this point. Its been mentioned in the press and on previous calls that there is a couple of largely tenants are looking at larger block or space of one of those towers but certainly in this type of environment our desire to proceed with any of those alternatives is going to be a function of what the capital plan is a makes with the lease economic belt mostly with the capital plan for that projects. So as we are reviewing Cira south today it is the completion of the IRS k facility and the completion of the garage.

Your land agreement don’t require you’re starting any particular time given any of the completion date of the garage or any other component?

We are provisioned on the land lease that have, that provide timeframes that we do not meet others timeframes in the future, we can loose, control those respective hads.

Do those impact you in either 2009 and 2010 or you got make a decision over the next 24 month?

We don’t believe so now.

Okay. Thank you.

Your next question comes form Chris Haley, with Wachovia.

Very good to hear you, Howard, would you lose that yet?

I am predominantly in trench.

It was actually one of the unprecedented out of the – in the last 60 days which is, Howard becoming a fairly standard affiliates actually going the world s.

Congratulation on the dividend cut going forward. But I wanted to explain little bit on sources and uses. I want to make sure I have these number corrects and I would agree the use the turn hope to raise $400 million of total capital. The assets sales are 100 million a 120 million of mortgage financing and 150 million of construction financing use $400 million. Could you round that for me and in top of development funding as well as the as you mentioned your leasing CapEx?

Well, for 2009 Chris it actually is larger than that I mean, that sort of on a net basis. Just to look it on a gross basis, we’ve a 100 and I am really running it through the fourth quarter this year because of ones got the 930 numbers in front of them.

Okay. So your 400 million expected sources is a 15 month number?

Exactly yes in broad term. So let me math that with the next 15 months, it looks like a 14 months. We’ve got the $130 million note coming to at end of this year. We got a $275 million note in November of next year we got a $68 million mortgage to coming during July and net of 55 million of revenue maintaining CapEx that’s really built into the CAD and the cash flow, we have got $245 million of incremental investments. That’s about $700 million.

So it’s $190 million of non-leasing CapEx?

I am going to ignore your comment. I will try to finish the overall story.

Sorry.

So 700 million of total uses over the next 14 months. As we look at that, we see $30 million released to the extra cash flow after the dividend and after revenue maintaining CapEx that was built in there. We think the historic tax credit will provide funding if it closes above the $40 million during the next 14 months. We had cash on hand after the closing of the bond trial resale transaction of $145 million and that requires us to use about $480 million from the revolver to complete the sources of $700 million. But we clearly don’t want to end the 2009 with $480 million or more drawn on the revolver. So the design of the $480 million capital plan is effectively to reset that revolver down to a very low balance as close to zero as possible during the course of and certainly by the end of next year will then confront to 2010 needs. And those roughly are about $530 million. Finishing the Cira projects, loans and mortgages and again some incremental revenue creating CapEx. If we get that credit facility down to that level with the 2009 capital plan, we will be able to make the same statement at the end of next year that we can make right now. We can get well into early 2010 with doing absolutely nothing, not just we want to do that, we are looking at mortgages, sales, perhaps JVs, other transaction and those in the aggregate is most importantly not having as many eggs in one basket, will balance us out for 2009 and set us up for a very successful 2010.

Okay, thank you for that. And just to – so you mentioned $245 million of project spend. Did you – was 55 million included in that from your revenue maintaining CapEx so therefore…?

No. I mean, to keep things clear, we look at that as embedded into the calculation, which it is. We look at the cash available after the payment of the new dividend, we think at least $30 million and we look at the net capital after that.

Okay. So the net would be 245, is that…?

Approximately that’s right.

And that’s the amount of money that you would expect to spend on remaining fixed spend on redevelopment and development projects not yet funded?

That’s correct. And the bulk of that clearly is going to go for Cira and the garage.

Okay. With regard to the – how much of the mortgage financings have you built into your 2009 guidance and approximately at what rate?

Actually built into our 2009 guidance is the assumption that we use the line, and really the plan calls for offsetting these various points in the year by these various techniques. And I think the strongest element of our plan is that we can get through 2009, they are not coming in at all, they are coming in quite late. We clearly don’t intend to let that happen, but have designed the plan laying out the sources, uses, the impact on income statement, we have enough capacity on the line with the cash we enter into fourth quarter to meet all of our obligations. I think it’s very important to win.

We agree with that and I appreciate you reemphasizing. And when you offer 2009 guidance in a 220, low 220s versus the Q4 run rate, which has a little bit of the Oakland stuff in there. If I use a low to mid 50s number, I can get to that 220 range just by annualizing the fourth quarter. Obviously there are offsets when you look on an annualized basis for the fourth quarter run rate, so that would be you are expecting positive same store, are you expecting – do you -- from the development deliveries, are you expecting dilution from the mortgage financings, I am just trying to understand the give and take to get to your current guidance for 2009 and how conservative or aggressive it is?

Well, I think the key element once we get to January 2009, we will fully absorbing all of the associated interest cost and uncovered expenses on those four projects until they get to an occupied status. And it sounds like it’s interesting because it’s fairly least but it won’t begin into January income until some time in the third quarter. We still have some leasing to go, but that will lead to not only the dip in occupancy that I pointed out but a corresponding dip in income as we move through certainly the first and probably a good part of the second quarter and then we will pick that up with the coming online of the leases we already know we have and ideally other incremental leasing. We do not provide quarterly guidance typically but that does show up a reasonable look at how 2009 will play out.

I appreciate. That’s very helpful. Either in your fourth quarter or upcoming meetings or either a presentation to I would suggest you guys provide something like that on your web where say your investors can see regarding this business plan recognizing that the financial side, the balance sheet side is very critical today. And anything you can offer to mitigate some of these risks and concerns I think would be helpful. Thank you.

Great Chris, thank you.

Your next question comes from Stephen Mead with Anchor Capital Advisors.

Do you hear me?

I don’t know we heard the name actually. What’s your name?

Steven Mead.

Hi Steve.

Am I on? Is it me?

You are on.

Could you talk about just your bankers in the lines, some of the terms of the lines and just how you manage that going through this period in terms of the availability of the revolver?

Okay. We used to have a 18 or even 19 bank group. But with completed and pending bank transactions will be down to 15 banks and one or two net new names. But we have not lost any bank from our bank group and we have really taken those steps with respect to our credit facility to – I mean for example we have seen some other companies in the real estate and other space to a full draw. We have considered that and we’ve shortly thought about, but we have not done that. So we really don’t know if anything outstanding on our line today and clearly in the business plan expected to be fully available not from our side of the table. We are absolutely meeting ever covenant we need to with one to spare to be able to do so. So on our side, we are in a comfortable position. We have monitored the banks and the bank group. Nothing untoward has happened and we are satisfied with the current situation. That facility runs through June 2011 and has a one-year extension option solely at our option through June 2012.

And the pricing?

Is based on our current investment grade rating, the LIBOR plus 72.5.

And then if you lose, what LIBOR are you talking about?

Any LIBOR we choose when we typically buy around one month.

Okay. And then in terms of – if you lose the investment grade rating, what does the pricing do?

I don’t have that in front of me but the pricing would increase.

Alright. But I mean, in terms of availability, does it affect the timing on the maturity or the availability on the need for loans?

No, there is no relationship between use of the loan and our credit rating other than the pricing.

Okay. Alright, thanks.

Your next question comes from Frederick (Inaudible) with Green Street Advisors.

Thanks. Just continuing a little bit along the same lines. In regards to the secured best covenant you may have on your lines are on the unsecured bonds. How much more can we borrow for mortgage loans secured basis versus the way it operates now?

I don’t have an exact number in front of me but certainly quite a bit more than we are contemplating doing over the next couple of years. We recognize that over the years, we have seen a dramatic reduction in our secured debt so over $100 million and that has improved all of the credit metrics associated with that particular calculation.

So when you limit financing the unsecured obligations again in the annually for non -- the retailer you are going to have is primarily mortgages or do you think it will be other sources?

We hope we would be able to return to the unsecured markets, and certainly the most efficient way for a company of our size that market is not currently available in anyway we can tell, so we are contemplating other mechanisms. And I think in particular this IRS transaction with a 20-year bondable government credit lease presents a lot of interesting financing opportunities that we expect to explore through the balance of this year and into next year that can be a very good source of even this permanent debt capital. We have other properties, a little over $4 billion of gross unencumbered real estate. We have a very pristine portfolio with lots of flexibility. We will use mortgage debt in certain instances but it would be limited, not because of the ability to do so, but because of the desire when things come back to normal we want to slow the unsecured buyer or take advantage of that market.

Okay. Do you have any covenants, can you quantify that for us in terms of the levels you can have --- the industry has to invest a fair amount of money in development versus new covenants on the lines and the bonds?

We do not currently provide that in any kind of disclosed fashion, but – so what we will say, I haven’t given numbers, that we can say all of the obligations we have outlined completing all of these projects, which on all of those covenants.

Alright. Thank you.

Your next question comes from Ian Weissman with Merrill Lynch.

Yes, good afternoon. I was wondering if you can just reconcile your comments about positive same store NOI growth when you are projecting that occupancy could be potentially down 150 points and at best I think rents are flat to positively down in your markets. Can you just walk me through that?

Yeah, Ian, I did the distinction – it’s Howard, on that comment is on the cash side. We are expecting an improvement in the relative mix of our base rental income from what we had a reasonable amount of non-cash income to when there will be more cash. So when we talk about same store growth, we have limited that to the cash calculation and I think I mentioned that on the GAAP side, we expect it to be flat. We are programming leasing in the 2009 plan and we expect that to have a positive impact as the year progresses.

The drop in occupancies, is that expected across the portfolio, just maybe you can address where your market share has seen the most weakness?

I think the biggest drop in occupancy is going to be sort of structural from an accounting standpoint as we migrate before has yet non-fully leased or non-fully occupied development projects on to the core. On a same store basis, any effect will be more meaning recognizing that we have had a decline nonetheless in the same store occupancy that’s presented in our financial statements and in the press release and elsewhere, but notwithstanding that same store decline which still have been able to achieve both year-to-date and on a GAAP to cash increase and that’s because of both the mix and the overall level of rents. And I think one of the points that Jerry made was that and I think it bears emphasize, well, rent performance has held up very very well in a tough economic climate. We have seen increasingly better mark-to-markets on our rents on both the cash and the GAAP side, not to offset some of the occupancy decline.

Okay. Thank you very much.

Your next question comes from John Guinee with Stifel.

John Guinee here, but you did a great job and answered all our questions. Thanks.

Thank you.

Your next question comes from Jordan Sadler with Keybanc.

I just wanted to follow-up on the tax credit order, the hurdles left to secure that?

We are fine-tuning the discussions with the perspective investor. We are well along in documentation. It’s a complicated transaction and a lot of in tact we are reviewing on that basis where we’re being very cautious in predicting whether it will and when it will happen though we have reasonable expectation and it will.

Just to clarify -- this is an investor who could utilize a tax credit as sort of an intermediary and then you would separately joint venture that property?

Using direct investor who will always depends on a partnership and that investor will receive will be designated the tax credits on the certain taxable aspects of the transaction.

Okay. Thank you.

Your next question comes from Steven (Zechlick) Private Investor.

Yes, the January dividend payment, can you let me consider the tax payment for 2008 or 2009. What you deserve look like little bit in today?

We have not yet made that determination. It’s a good question, the declaration of that dividend will be done likely in mid December, and at that point we will better clarity on the final constitution of our 2008 taxable income and historically last year that was push to the following years, so that would make it in 2009 dividend for our purposes and for investor purposes, but we have not yet made that final determination.

Okay. Thank you.

We do have a follow up question from Chris Haley with Wachovia.

Two aims, the $100 about of asset sales that will be completed is Cira North is off market?

Chris, I am sorry, you’re really cutting in out there.

The $100 million expected sales proceed in 2009 let me to believe the Cira North project is off market down? Or it is not expected to be sold next year?

Well I think we view that $100 million as a money, and as a target to be achieved the variety of source that could either to a joint venture in some of our existing assets of which certainly Cira North might be one of those. We are through the direct sale of some of the target assets that have identified for sale.

Okay. On the mortgages financings today when you look at to permanently finance, some of these projects, what would be a conservative assumptions in terms of all in costs, Howard?

Well, we would expect to these subject venture of this coverage that could range from I have heard 1.3, 1.4 as high as 1.6 that would change the pricing and we would expect our cost to be in the low to mid 6 as all in. The reasonable expectations based on our preliminary conversation with some lenders and what we’ve seen some other folks doing, what we have seen some of the buyers of our real estate tell us they can achieve. SO we’ve got a fairly good view into the market that we got everything else to report definitively.

And the only y qualify to that and its not really qualified just to express the obvious which is that the market is incredibly flowing. And very closed that they may not be there tomorrow and if they are there tomorrow they maybe worse with better based upon what's happening. So I think one of the things we have seen as we look at a number of these alternatives this is the tremendous volatility in both the numbers of sources available and their pricing. Yes.

That k you.

At this time there are no further questions. I would now like to turn the conference over to Gerry Sweeney for closing remarks.

Again, thank you all for participating in the call and we u look forward to providing you an update at the – subsequent to the end of the year. Thank you.

This concludes today's Brandywine Reality Trust third quarter earnings conference call. You may now disconnect.