Feb 19, 2009
Executives
Gerard H. Sweeney - President and Chief Executive Officer Howard M.
Sipzner - Executive Vice President and Chief Financial Officer Bob Wiberg - Executive Vice President George Johnstone - Senior Vice President Gabe Mainardi- Vice President of Accounting
Analysts
Michael Dillerman – Citi Jordan Sadler – KeyBanc Markets Jamie Feldman – UBS John Guinee – Stifel Nicolaus Dave Rodgers – RBC Capital Markets Richard Anderson – BMO Capital Markets Fredrick Litchien – Green Street Advisors Michael Odell – Medlife Chris Haley – Wachovia
Operator
Good morning. My name is Crystal and I will be your conference operator today.
At this time, I would like to welcome everyone to the Brandywine Realty Trust fourth quarter earnings conference call. (Operator Instructions) Thank you.
I would now like to turn the call over to Mr. Gerry Sweeney, President and CEO.
Please go ahead sir.
Gerard H. Sweeney
Crystal, thank you very much. Good morning, everyone, and thank you for joining us for our fourth quarter 2008 earnings conference call.
Participating on today’s call with me are Howard Sipzner, our Executive Vice President and Chief Financial Officer, Bob Wiberg, Executive Vice President, George Johnstone, Senior Vice President of Operations, and Gabe Meynardie, our Vice President of Accounting. Before we begin, I’d like to remind everyone that certain information discussed during the call may constitute forward-looking statements within the meaning of the Federal Securities Law.
Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. For further information on factors that could impact our anticipated results, please reference our press release as well as most recent annual and quarterly reports filed with the SEC.
So with that said, moving into the call. For the foreseeable future, our primary efforts remain focused on liquidity enhancement, continued deleveraging, and stable real estate operations.
In 2008, we leased 2.4 million square feet, ended the year with a 72.7% retention rate, and a 93.1% occupancy. We sold $512 million of assets.
We improved our debt to gross assets ratio from our high of almost 55% five quarters ago and as part of that process reduced our debt balance by over $500 million. By resetting our dividend during the latter half of 2008, we have moved the company to a strong positive cash flow operating position.
To touch on the major punch line first. From a liquidity standpoint, our total capital needs for 2009 approximate $550 million.
This consists of $152 million bond payoff in Q4, $69 million of a mortgage maturing at Two Logan in our Center City operation, a $160 million of anticipated spend on post office and garage project, and $169 million of other capital expenditures including our remaining development buildout, redevelopments, tenant improvements, and leasing commissions. So total capital requirements of that $550 million.
Our projected sources for 2009 consists of $180 million of projected sale proceeds. You may recall back on November call we had projected about $100 million of sales.
Due to all of our accelerated bond buyback activity during the latter half of the year, we’ve increased this target. We are also anticipating a $180 million of secured mortgage refinancings of which $90 million is in process and Howard will touch on where we stand with the balance of our program.
Approximately $106 million of a line of credit draw or a Sierra construction loan funding, $24 million of funding from our tax credit, and $60 million of excess cash flow after our dividend payments. So with only $174 million outstanding on our $600 million line today and most of that relating to our bond buyback program, we clearly have ample capacity to execute our plan and cover any delays or shortfalls in any of the above line items.
So with 2009 recapped. Our major focus is on 2010 and really the fourth quarter of 2010.
Our total uses in 2010 we project to be about $522 million including $265 million of bonds coming due in December of 2010, $57 million of mortgages, post office and garage funding of $110 million as well as other projected capital costs with that $90 million. So in looking at 2010 continued success in our sales, joint venture, and secured financing front are important components of our 2010 plan.
In 2010, we’ll also have the benefit of an additional $34 million of tax credit funding, repayment of our $40 million purchase money mortgage from the Oakland sale, and our post office project coming online during the third quarter of 2010. In anticipation of the marketplace and to be well ahead of our liquidity requirements, we are proceeding down the following specific paths.
First, our major forward capital commitment remains at 100% fully leased GSA project at University City Philadelphia. As we disclosed, we completed the historic tax and new market tax credit which raised a total gross source of permanent capital of $77 million or 22% of total project costs.
With this equity raise completed, we are now in the process of obtaining another funding source for the balance of our project commitment. Our two key options include a multiple year construction loan as well as potentially longer, more permanent source of capital.
Both avenues are being pursued. Achieving this objective will, at a minimum, provide a noncredit facility source of capital for this project; thereby ensuring additional line capacity.
This is our highest financing priority in the company and consistent with the timeline we laid out on our last call, we project a midyear 2009 execution. The other path is the continued pursuit of asset sales, joint ventures, and secured mortgages.
We had great success during 2008 and while the market remains very challenging, we believe our approach should result in 2009 and 2010 average sales execution targets of between $150 and $200 million. Our 2009 business plan contemplates between $160 and $180 million of sales with a similar amount program for the following year.
While there is no real visibility to pricing, joint ventures and sales remain one of the more compelling sources of capital we can access. As evidenced by the success of our bond buyback program, we’re able to sell assets at market cap rates, a credibly acquire bonds, and accelerate our deleveraging plan.
Based on this opportunity, individual asset pricing is somewhat less important than the overall theme of ensuring multiple year liquidity and intermediate term deleveraging. As such, we are test marketing for sale a number of assets of different sizes, qualities, and location.
So we can see what presents our best combination of potential outcomes. Our first wave of properties is in the market and we should have more clarity of velocity and pricing over the next several months.
Also, given the size of our unencumbered pool, we have the ability to execute a reasonable amount of secured mortgages while still maintaining very strong covenant compliance. From an overall leverage standpoint, we made very good progress during 2008.
Coming into the year our debt to gross booked was just short of 55%. We ended the year with over $500 million reduction in our overall debt balances from 2007 peak levels.
Our overriding objective remains bringing our overall debt to gross asset ratio to between 45 and 50% over the next several years. Moving towards these overall leverage targets may create some downward pressure on FFO.
However, as we’re anticipating it assuming relatively stable core portfolio performance, increasing cash contributions from our development projects including the post office project coming online, a negative arbitrage and our debt rollover exposure, and the positive impact of our historic tax credit are multiple year projections show that we can achieve our overall leverage target by year end 2011 and do that in a fairly non diluted manner to our current earnings forecast. Moving on to the real estate market.
Our concerns remain the velocity of new leasing transactions, existing tenant stability, and tenant credit. To address these concerns, we are first proactively reacting to market conditions.
This involves meeting the market on rental rates. Even more active leasing campaigns and establishing clear guidelines for leasing achievement that meet the market, manage our capital investment, and preserve asset value.
Along these lines, we had a very good year in 2008 and while 2009 will be a challenge, we have a good operating plan in place. On the stability of our existing tenant base.
We have aggressively sought out early renewals. At the beginning of this year, we had 3.5 million square feet with 13.2% of our portfolio rolling.
Year to date, we have already locked away 1.1 million square feet. So our net remaining 2009 rollover is about 8.7%.
In looking at 2010, we had about 14% of our portfolio rolling so our two year average about 11% and we expect to make significant progress on these numbers as the year progress. Finally, in this environment tenant credit remains a top concern.
We had fortunate that over a very long period of time, our tenant defaults have been very low. That is due to strong upfront credit qualification and active ongoing monitoring.
In this environment, even those strong practices will be strengthened. Additionally, as Howard will touch on, we have increased our accounts receivable reserves, tightened our credit standards as part of our year end review process.
So with those macro comments as an overriding frame of reference in looking at the fourth quarter we did have some fairly strong core portfolio performance. We continue to have very good success reducing tenant improvement costs.
Our blended cost per square foot of capital came in at about $1.50 per square foot and our overall capital costs were less than 7% of gap rents which is well within our guidelines. We also showed better mark to market on renewals than we have in the previous eight quarters.
Our gap renewal rents were up 6.7% with cash rents up 2%. Gap rental rate growth on new leases was up 11% which is still slightly negative on a cash basis.
We also had a very active leasing quarter with total volume of 742,000 square feet. That compares favorably to our 670,000 square feet in the third quarter of 2008 but reflecting tough market conditions, both of these third and fourth quarter numbers are down from our activity levels in the first quarter of 2008.
In this challenging market, our leasing staff continues to throw direct deals and during the fourth quarter we had 47 transactions representing 48% of total deal volume and 37% of square feet done on a direct basis. For the year we did 206 direct deals representing 45% of total deal number and 41% of executed square feet.
In looking at the broader market, year to date leasing activity and absorption levels are down in just about every one of our key markets; certainly given the overall economic climate that is not surprising. In most of our markets we did see a slight increase in year over year vacancy.
In our four major markets, though Pennsylvania, New Jersey, Virginia, and Austin, we are outperforming market occupancy levels by between 150 to 1600 basis points. More importantly, if you go back and look at the last difficult operating climate of between 2001 and 2004, our portfolio has with very few exceptions outperformed the competitive marketplace by a wide margin.
For example, our Pennsylvania operations where we have our largest square footage outperformed market averages by between 600 and 1100 basis points in the timeframe between 2001 and 2004 which were the last years of peak vacancy in this marketplace. We have the same historical trendline in CBD Philadelphia, New Jersey, and in Richmond.
So in this time of increasingly challenged fundamentals, we are confident that history will repeat itself and our submarket positions and asset quality will deliver relative outperformance. Just a couple of thoughts on our development projects.
Since our last call, our major tenant has taken substantially all the remaining space in our West Lake building. At our Austin project, we made some progress during the quarter and are still in very advanced stage of negotiation with several tenants aggregating approximately 100,000 square feet.
So in this project, we’re hopeful of executing at least a portion of those transactions and continue to see some good activity despite some very tough local market conditions. For the existing round of developments which, as you will note, are now into our operating portfolio.
Our game plan is to achieve stabilized occupancy by year end. Our 2009 plan incorporates an average 49% occupancy versus 15% year end 2008, approximately $3 million of NOI contribution, and a yearend occupancy level of about 80%.
As a construction update; on the main post office IRS transaction, the project is progressing on schedule. The major changes on this project since our last quarter is that we reduced the number of parking spaces we plan to construct to 1662 by basically building two less parking levels and that generated a cost reduction of about $15 million.
That’s so noted in our supplemental package. As we note in our press release, we have adjusted our 2009 guidance based on examining several key factors.
It is clear that capital capacity and economic conditions are not conducive for additional new developments. So as part of our standard yearend review, we spent a significant amount of time assessing our plan for each project, its current value, and its future profitability.
This process had two conclusions; one affecting 2008 results and one affecting our 2009 guidance. As you notice in our financial disclosures, we are taking a noncash charge of $10.8 million in the fourth quarter of 2008.
This charge was recorded as the carrying amount of these parcels exceeded their current fair value based on what we think net realizable value is in today’s environment. The second conclusion of this process is that while we will continue to perfect approvals and build value, we do not realistically see significant development activity this year.
The reality is that it’s hard to make a rational case that land values are going up or that development yield requirements are going down. Until we get better clarity on true land value and future yield requirements, it does not make sense for us to continue to increase our investment in these land holdings.
As a result, we will no longer capitalize interest, real estate taxes, and other carrying costs in the land basis on any projects during 2009. Rather all of the previously capitalized charge will hit our 2009 income statement and that primarily accounts for the reduction in the upper end of our range from 227 down to 221.
In looking at the lower end of our guidance as Howard will elaborate on. Our previous low end was 217.
When you adjust that for this land carry issue as well as several threats of potential income loss to unknown tenant credit situations and just simply a more cautious outlook on the backend 2009 leasing rental ramp due to a continued challenging market conditions that brings the bottom of our new range down to $2.04. So our new range is $2.04 to $2.21.
At this point, Howard will now review our yearend financial results and provide some additional color on our guidance and capital plan.
Howard M. Sipzner
Thanks Gerry. We had a very productive fourth quarter on both operations and financial activities and enter 2009 with some of the strongest financial metrics and balance sheet characteristics that Brandywine has delivered over the past few years.
These include liquidity, leverage, covenant compliance, and financial flexibility to execute our plan. Yet we are fully aware of the challenges ahead and are taking all possible steps to further strengthen our liquidity and capital availability.
In looking at the fourth quarter, FFO, funds from operations, totaled $57.8 million in the fourth quarter or $68.7 million without the impairment charge versus $53.8 million in the fourth quarter of 2007. FFO per diluted share in Q4 2008 was $0.64 or $0.75 without the impairment charge versus $0.59 a year ago.
Adjusting for debt repurchase gains and the noncash land impairment as many of you do, our $0.58 adjusted FFO beat the Q4 consensus FFO of $0.54 by $0.04 a share, a testament to the strong performance of our core portfolio. Our FFO payout ratio is a very strong 68.8% on the $0.44 dividend paid in October or 58.7% without impairment.
A few observations on some of the components of our Q4 performance. Rental revenue was up slightly on a sequential basis with a continued positive shift towards increasing cash rent versus a year ago.
Recovery income was boosted by a little over $4 million of fourth quarter CAM true-ups. Term fees and other income were at the low end of recent results.
Our gross management income was $5.2 million or $2.6 million net of associated costs in line with Q3 and recent results. We booked $4.6 million of JV income.
This was boosted by a $3.2 million sale related distribution on Five Tower Bridge which we exclude from funds from operations. Our operating expenses of $44.5 million are up from recent levels due to our incurring an extra $2.5 million of noncash reserves in the fourth quarter for potential bad debt.
Our G&A at $5.1 million was a bit lower than our typical run rate due to true-ups on yearend bonus accruals offset by severance charges for certain headcount reductions. Interest income includes imputed income on the mortgage loan from the Oakland sale in October 2008, interest on other notes receivable, and interest on temporary cash balances.
Interest expense of $35.9 million was a bit higher than recent periods despite lower debt balances due to lower capitalized interest in the fourth quarter. As of January 1, 2009, we’ll be capitalizing interest on a reduced construction and process balance.
Deferred financing fees are higher than recent trends due to accelerated write-offs on account of the debt repurchases. We realized $16.3 million of gains on these purchases which aggregated a $134.2 million of face debt amounts.
Lastly, we booked a $10.8 million noncash impairment charge related to review of our land inventory. On a same store basis, cash rents increased $3 million while noncash rent items decreased by $4.2 million amplifying our shift to more favorable cash rental income.
Recoveries increased by $5.4 million whereas expenses on a same store basis decreased $1.7 million. For the quarter, same store NOI increased 3% on a GAAP basis and 8.8% on a cash basis.
Both excluding termination fees and other income items. FFO for the full year totaled 249 per diluted share or $2.68 with the $0.19 of total impairments added back in.
Our full year FFO payout ratio equals 70.7% or a very strong 65.7% with the impairment added back. CAD remained robust at $0.59 per share versus 46, 48, and 52 in the prior three quarters.
We are continuing our run of low CapEx, declining noncash items, and good dividend coverage. We’re pleased to report a 74.6% CAD payout ratio for the fourth quarter.
The $11.4 million of revenue maintaining capital costs in the quarter are the driver of this result along with significantly lower noncash straight line rental income. Year to date or for full year 2008, our CAD per share totaled $2.04 resulting in a 86.3% CAD payout ratio with a $1.76 of common share dividends paid.
We expect even better CAD and FFO coverage ratios with our new $1.20 dividend guidance. Our ratios for both NOI, recovery, and EBITDA margin were strong with the recovery margin boosted by the fourth quarter CAM true-ups and it’s reflective overall of a movement to more triple net lease structures.
In terms of 2009 guidance, Gerry gave a lot of the highlights and I’ll fill in a few other pieces. As he mentioned, we’re revising 2009 FFO guidance from 217 and 227 to now be in a range of 204 to 221.
This revision is attributable to suspension of capitalized interest and expenses on land which we estimate in total at about $0.05 per share, uncertainty on yearend 2009 leasing targets, and potential credit losses which in the aggregate could be as much as $0.06. Key 2009 assumptions include for the same store properties negative 3.5 to negative 2.5% GAAP same store NOI growth or declines rather excluding termination and other revenue.
While on a cash basis, it will be flat to down 1%. We still expect good performance on our rental rates with gap mark to market of 2 to 4% up and a cash mark to market of flat to down 2%.
Yearend occupancy reflecting the third and fourth quarter ramp inactivity is projected to be up 100 basis points to 93.4%. We’re still seeing $25 to $35 million of gross all other income items and $15 to $25 on a net basis.
Our G&A should be in the $20 to $22 million level overall or between $5 and $5.5 million per quarter. We have no acquisitions programmed for 2009.
Gerry already touched on the investment activity and the financing needs as well as sources of those. Jumping down, the interest expense should be lower due to lower capitalized interest, despite lower balances.
Our guidance also includes about $4 million of incremental interest for convertible revaluation under APB 14-1 at a 5.5% rate. We will add back this noncash interest expense in our CAD calculation.
In terms of dividend guidance, we’re still holding at $1.20. We laid out last quarter as being reflective of our 2009 taxable income and this should conserve $40 to 50 million of additional capital for our liquidity needs.
We’re still expecting to pay an all-cash quarterly dividend, though our board will continue to evaluate it at its regular quarterly dividend set dates. In terms of accounts receivable, at 12/31/08, we had $3 million of fairly predictable third party receivables and $13.6 million of operating receivables with a reserve of about 4.9 million or about 36%.
We also had straight line rent on a gross basis of about $97 million and a reserve of about 10.6 or about 11%. In the aggregate, we boosted our reserves by an extra $2.5 million in the fourth quarter.
On the balance sheet, we’re very pleased with the movement in our debt-to-gross real estate costs coming in at 50.9% as we move to push this below the 50% level. Our $600 million line was $153 million drawn on 12/31/08 and reflecting activity over the past six weeks is now about $174 million drawn.
As a result of sales financing activities, including debt-repurchase in operations, our covenant compliance on both our credit facilities and unsecured senior debt is generally at its strongest levels in over two years. We are proud of this result and hope to build on it in the coming quarters.
A strong balance sheet is our top priority.
Jerry Sweeney
Great, thank you very much, Howard. There is no question, as glad as we all were to have 2008 end, 2009 will no doubt be a tough year for both the economy and our industry.
The economic environment has wide-ranging, still-evolving implications. And the office business will certainly feel the effects of job layoffs, dislocated capital pricing, and global deleveraging.
While the implication of this turmoil may be pervasive, at an operating level, out team and portfolio has seen difficult times before and we know the ingredients to successfully navigate a downturn in real estate fundamentals. One thing that is clear is that in this type of climate, definitive actions need to be taken to ensure a successful outcome.
All of our objects that I have touched on and Howard touched on start with the recognition that holding our breath and simply waiting for the recovery is not an acceptable strategy. A clear path with well-understood expectations is the appropriate course.
We believe we have outlined a defined path with reasonable targets and milestones to address our maturities and developing commitments over the next several years. We have a very well positioned asset base with a strong operating team, a strong pipeline of leasing activity, free cash flow, and a very strong competitive position.
The portfolio has been cycle tested and historically performed well. So as challenging as we expect 2009 and possibly 2010 to be, we are well-positioned to outperform our competitive set.
Our tenant service teams in every one of our regional offices has done a great job of building strong tenant relationships that really do make a difference in times like this. There is little doubt that the collapse of the investment grade and CMBS markets have injected risk into everyone’s capital structure.
Whereas we spent a great deal of time in the past layering out a very manage stage debt maturity schedule, the current financing climate has made that strategy moot and creates pressure for us to ensure ample liquidity as we look out into 2010 through 2012. And with our mid-term debt trading at north of 18% yield to maturity, our stock trading at a 12% implied cap rate, the market is clearly focusing on our ability to access capital.
In this climate, we understand that skepticism and can only allay your concerns through continued execution. We had a very good last five quarters in terms of selling to venture activity by raising approximately $750 million of liquidity.
While a portion of that went to our development and redevelopment pipeline, over 500 million, as we have touched on, went to reduce debt and create capacity through 2010. Like most companies, we still have work to do and are determined to get it done.
While pricing in the sales, joint venture, and secured markets are not as favorable as any of us would like, we still expect to meet the targets we have outlined earlier. In our stock trading range debt pricing dislocation, we have a good opportunity to enhance liquidity, delever, and do that with a marginal level of dilution.
And we plan to take advantage of what opportunities that window presents. Given the total overlay of uncertainty, any plan has execution risks.
Ours does as well. Given that immutable, however, our targets, we believe, are very reasonable, manageable, and create a very effective plan to bridge us through to a time of more financial market stability.
Aside from planning for our debt maturities, our largest capital exposure is our 20-year fully leased government project in University City, Philadelphia. There is clearly a financing market for this transaction.
Again, pricing may not be what we originally hoped for, but we are confident that meeting our object of finding an off-credit facility funding source for this project will in and of itself create an excellent source of capital at a corporate level for us to address future maturities. In addition to addressing liquidity and having stable operations, an additional objective is to manage our G&A and administrative expenses.
We have implemented over the last few months a variety of tactics ranging from base-salary freezes, vendor renegotiation programs, aggressive real estate tax appeals, damping level reassessments, and discontinuing some noncore functions all to ensure that we operate as effectively as possible. On a final note, and to amplify Howard’s commentary, there has been much discussion regarding stock for cash dividends.
This initiative, led by NAREIT, gives all companies an opportunity to evaluate this option as the year unfolds. We are clearly living in unprecedented times.
And preserving optionality is a key part of any business strategy. That being said, our board has made no determination on our future dividend composition.
We believe that we have an excellent roadmap to raise sufficient capital to the programs we discussed on this call. Our board, while certainly recognizing the need for continual assessment, is a very strong advocate of the REIT model and that a cash dividend is a key component of that structure.
As such, while we would never rule that inaction might be in our best long-term interests, our strong preference is to maintain our dividend at its current readily supported level and to continue to pay it 100% in cash. I would like to thank you for listening to the call.
At this time, Crystal, we will open the floor up to questions and we ask that in the interest of time, you limit yourself to one question and a follow-up. Thank you.
Operator
(Operator Instructions) Your first question comes from Michael Dillerman with Citi.
Michael Dillerman – Citi
Good morning (inaudible). Howard, you talked about your same-store cash going.
Obviously, last quarter you were up 2 to 3%, so about a 3% change or $10 million or so. You talked about this credit loss of tenants you haven’t targeted yet, but sort of baking in some and then maybe some leasing targets.
Can you just sort of walk through some of the specifics about what actually changed between the November forecast and today in terms of that 300 basis-point move and your thinking just so that we can sort of understand it a little bit better?
Howard Sipzner
Well, I think our new plan, as we’ve laid it out builds in a much higher degree of caution and conservatism both around the prospects for the upper-end of that leasing range as well as for what unexpected credit events may happen this year. We don’t break it out specifically by quarter as to how it might happen, but on an overall basis, we felt that bringing to those new levels was more realistic and reflective of the risks in front of us.
Michael Dillerman – Citi
But how much credit reserve was there in the previous same-store versus today? I’m just trying to isolate the two things if it’s really a change in occupancy targets into the year or how much is due to this unexpected credit loss.
And the change here is about $10 million on NOI. It’s just the 3%, so I’m just trying to isolate that a little bit more and really understanding how your thinking changed.
Howard Sipzner
We see about $0.06 related to the combination of uncertainty on leasing as well as the potential credit loss. So that translates to more like 5.5 to 6 million.
I’m not sure where your $10 million number is coming from.
Michael Dillerman – Citi
I’m just doing the change—3% on 340 million or so of same-store NOI in terms of change in previous guidance.
Howard Sipzner
I don’t have an answer to your question as you phrased it.
Michael Dillerman – Citi
Irwin had a follow-up as well.
Irwin - Citi
Gary, you mentioned in your prepared remarks the delevering plan and ways which you were planning on mitigating the FFO dilution. I’m just wondering if you can give us some more specifics on bridging the gap.
I’m having trouble sort of getting to a number that isn’t very diluted just because of the very, very low rate of the debt that’s maturing over the next couple of years—somewhere between 4 an 6% versus the refinance options that are out there either secured debt or asset sales at yields that are well higher.
Howard Sipzner
Yes, Irwin, it’s Howard. I think the control factor in all of that, or the wildcard, is how much debt repurchase we can do as we lay in those sales because the rates at which we’ll be retiring that debt potentially far exceed the rates at which we’ll be selling properties.
So we’ll both protect the dilution as amplify the delevering in that process, and you saw a lot of that in Q4.
Jerry Sweeney
I think that, Irwin, coupled with these development projects at which we are covering at pretty much the full value today (ph 00:41:45) coming on line over the next couple of years will also be a contributing factor to that. But certainly one of the opportunities this market place presents with its dislocation on the debt pricing side gives a company like our an opportunity to be more aggressive on generating sales and joint venture proceeds and applying those dollars into a buy-back of some of our mid-term debt maturities.
Operator
Your next question comes from the line of Jordan Sadler with KeyBanc Markets.
Jordan Sadler – KeyBanc Markets
Good morning. I just wanted to follow-up on two things.
The financing, can you just walk us through where you stand? I know in your opening remarks, Gary, you mentioned the sources for 2009—160 million to mortgage refinancing and maybe a million are in process.
I don’t know if I missed the punch line there. I didn’t hear the rest of where that stands.
And then secondly just on Sierra, where are we in that process and what expectations, pretty broadly, do you have for that?
Jerry Sweeney
Okay, great. Howard, why don’t you take the first part?
Howard Sipzner
Yes, Jordan, I’ll jump in. On the mortgage refinancing, as you know we have about a $70 million principle mortgage maturing in July.
We’ve got a refinancing lined up that will actually slightly increase the proceeds reflective of a reasonable loaned value. And we hope to close that some time in the second quarter.
That would leave us with about $90 million of additional mortgage financing in our plan. We’re going to market with a particular situation we think could raise as much as 50.
And that would leave as yet unspecified $40 million in one to two other situations. And we may exceed that, but that’s what we’ve built in right now.
In terms of the Sierra financing, we are in the market right now to a group of banks who are evaluating materials and information for the potential construction loan. It’s still too early to tell how that’s going to shake out, but we do have a lot of interest in what’s clearly a very unique and high-quality project.
Out of those efforts and really out of our own desire, some longer term permanent solutions are also being pursued with a number of intermediaries and potential long-term lenders.
Jordan Sadler – KeyBanc Markets
Jerry Sweeney
I’m not sure I understand you. Did you say do we have the ability to stop developing the post office project?
Jordan Sadler – KeyBanc Markets
Yes, you have 275 million left to spend. If you can’t raise $150 or 200 million of cash to fund it, you’ve got a tougher struggle ahead of you in the forward looking two years.
So, do you have the ability to stop it to preserve liquidity to –
Jerry Sweeney
Yes, we’re under a lease with the federal government on the project and definitive delivery date, so while you never preclude the impossible, all of our focus right now is centered on maximizing the financing structure there. And one thing that has gotten a little bit lost in the shuffle, we’ve raised a permanent source of capital in the company.
Gross proceeds are $77 million or 22% of that project’s cost while the accounting flow through is a bit different, that does provide a good frame of capital for us to address the construction there. And certainly to add on to Howard’s commentary, given the breadth of the discussions we’ve had with both interim construction lenders and several very high-quality longer term sources, the strength and the bondable nature of that government lease, we feel very confident we’re going to be able to meet our financing objectives on the project.
Jordan Sadler – KeyBanc Markets
That’s helpful. Thank you.
Operator
Your next question comes from Jamie Feldman with UBS.
Jamie Feldman – UBS
Thank you very much. Can you talk a little bit about your change in assumptions in credit reserves or credit reserves, just kind of where these tenants are, what industries they’re in, what’s changing, in your view, since the first time you gave guidance?
Howard Sipzner
For the adjustment we made in the fourth quarter, Jamie, we went industry-by-industry, category-by-category and looked at the historical ranges we’ve used to reserve and, in many or even all instances, moved up the dial a little bit within those ranges. It is not necessarily reflective of any particular bad debt experience to date.
So it is exactly what we said it was. It is a noncash reserve, but we do believe there will be surprises out there.
We just don’t yet know what they are or have clear signals as to who they are. For 2009, we built in the same potential expectation of the possibility or even probability that we’ll have to add at some point during the year in a similar construct.
And that was a component of the guidance revision. But at this point, it’s nonspecific.
Jerry Sweeney
Jamie, we’ve always operated on the premise that we’re of course a great degree of secondary business and as this climate has changed, we’ve got people in our field offices doing additional space walk-thrus, reconciling security card cancellations to layoffs, having a lot more conversations with regional managers in decision makings that are tenant-based. I just think we’re focused on narrowing up what we view as the quantitative side of what we’re seeing in the tenant’s financial statements with what we’re actually seeing at an operating level to ensure that we do everything we can to stay ahead of the curve on any potential credit issues or that’s addressed by taking up-front reserves and increasing our waiting as Howard and Gabe do at the end of the year.
The other is the operational reviews and the third is what we’ve done in our 2009 guidance, which is just factor in a level of caution relative to tenant credit fallouts.
Jamie Feldman – UBS
So which markets did you say are causing you the most incremental concern?
Jerry Sweeney
I’m sorry Jamie. You cut out.
Jamie Feldman – UBS
Which geographic markets would you say your view has changed the most to the downside?
Jerry Sweeney
From a credit standpoint?
Jamie Feldman – UBS
Yes.
Jerry Sweeney
I think it’s across the board. We go through a pretty thoughtful process based on SIC classifications.
We assign weightings to all those different SIC codes. Every tenant is categorized in that framework.
And it’s really more of an industry versus a geographic computation that takes place. And then we actively review that to makes sure that we think we’re generally well-reserved and then certainly to the extent we think we have any credit exposure, we talk about those as part of our ongoing business reviews of all of our managing directors.
Every managing director brings in their list of credit concerns they have that might be driven by lower utilization of space, overall tenant credit situations or just rumblings they’re hearing on the street. So we have a real time discussion flow through the company that’s really geared to identifying where we might have some potential hurdles.
Jamie Feldman – UBS
And then on the fourth quarter sales, I see there’s some seller financing. Do you think that’s something we should expect to see going forward and how would you characterize your process in dispositions right now?
What –
Jerry Sweeney
I’m not sure it’s something that we want to do in any event, but sometimes to bridge it. In this case was a fairly small one year piece of paper that was simply designed to bridge out the timing of some equity contributions with the debt level provided by the local bank.
I think it amplified the fact that in this kind of climate you just need to be flexible on pricing and also flexible on terms. But as we are in the market for either a sale or a joint venture, we’re looking to raise as much cash as we can to the extent that there is a fairly good pricing tradeoff behind bridging behind the first mortgage with sufficient equity and cash flow behind it.
That’s actually not a bad business for us right now in order to meet our longer term objectives.
Operator
Your next question comes from the line of John Guinee with Stifel Nicolaus.
John Guinee – Stifel Nicolaus
John Guinee here, thank you. Nice job on the sources and uses.
A couple of questions, first, Howard, on page 16, your CAB analysis, any reason you didn’t deduct your debt extinguishment gain out of that?
Howard Sipzner
We just don’t do it. We didn’t do it in the first quarter, the second quarter, or the fourth quarter when we had those gains.
We do believe they reflect a cash event because, in fact, we will not have to repay that cash. Exactly how and where you apply it could be up to debate, but our practice is to book it and leave it in.
Obviously in the quarter, it’s realizing.
John Guinee – Stifel Nicolaus
Okay, second, can you discuss your unencumbered asset pool in terms of number assets and amount of NOI and your ability to borrow against this asset pool until you hit up against some sort of covenants?
Howard Sipzner
Generally about 80% of our assets are unencumbered. I don’t have exact counts in front of me.
That’s about $4 billion of gross value real estate that fully supports a tremendous amount of mortgage debt capacity. We’re going to monitor covenants on a go forward basis.
Certainly the plan we’ve laid out for 2009 and well into 2010 works on all fronts, but we’ll continue to watch NOI levels at the respective properties. The costs of the debt, all those are inputs into those calculations.
And we’ll continue to maintain a very healthy margin on all of those calculations and recognizing that the fourth quarter was really one of our strongest yet.
John Guinee – Stifel Nicolaus
Okay, so to try to get a little specific, you’ve got unsecured debt now at about $480 million. How high can that number get until you’ve maxed-out against your unsecured debt covenants?
Howard Sipzner
We have not calculated nor provide that number. What we can say with certainty is $180 million in the plan, the amounts we’ve contemplated for 2010 and beyond are all accommodated by our covenant calculations.
Operator
Our next question comes from the line of Dave Rodgers with RBC Capital Markets.
Dave Rodgers – RBC Capital Markets
Jerry Sweeney
Hi Dave.
Dave Rodgers – RBC Capital Markets
I wanted to ask a little bit more on the packages for disposition that you either have in the market now or maybe contemplating, maybe less on pricing, but more of the characteristics that got you to those assets, maybe what type of LTV and rut frames you have there and ultimately what you hope to get out of those sales.
Jerry Sweeney
Great, I’ll address parts of that and then the rest of the team can certainly jump in. As I mentioned on the last call, we went through a fairly extensive process on an annual basis and we updated that towards the end of last year.
We analyzed every property in our portfolio based upon its NOI growth rate, its capital to NOI ratio, as well as what we view to be value accretion possibilities over the next five years through a fairly detailed financial model for each project. That was a key point in screening what assets we want to put on the market.
It was coupled with recommendations by our managing directors who obviously know the local market specifics better than we do relative to what they thought would be an executable transaction in this kind of marketplace. As we look at the first wave of assets we are marketing, Dave, it’s north of about $300 million.
It is in five different states. The asset sizes range from as low as $3 to 4 million to a high of $60 million.
Some assets are stand alone. Some are small parks.
And I think, as I’ve talked on the call before, one of the things we’re going to see for the next few quarters is probably a higher level of traction on some of these smaller sales. And I think that what we’ve layered out there in terms of projects we’re marketing down in the metro DC area and Richmond and Pennsylvania and Delaware and New Jersey all factor into the criteria that we think based upon our own financial analysis and what feedback we’ve gotten from the brokers that we’ve higher to market the properties.
It should be in good shape in terms of getting some projects across the finish line.
Dave Rodgers – RBC Capital Markets
What about debt on these assets? Is there any characteristic with respect to debt across the board?
Jerry Sweeney
That is a very good question. Most of the assets we have on the market today are unencumbered.
We are certainly, in some of our joint venture discussions and some of the portfolio discussions we were having with specific parties, there is a combination of aspects that are not included in this pool I just mentioned that have some level of secured debt. So we are no adverse of all to the idea of looking at some of our debt pools and marrying those up with a potential equity source for either a sale or a joint venture undertaking.
Dave Rodgers – RBC Capital Markets
And did you say in your initial comments 160 to 180 million of asset sales was what was contemplated this year and then again next year?
Jerry Sweeney
Yes, we were hoping to average between $150 and 200 million in each of the next two years. Our target for 2009 is between 160 with the upper-end of 180.
When I walked through the source in use, we use the 180 number.
Operator
Your next question comes from Richard Anderson with BMO Capital Markets.
Richard Anderson – BMO Capital Markets
Thanks and good morning. I just wanted to touch more on the disposition topic again.
First of all, when did it offset from previous guidance? Why did it go up and what shortcoming did you have that required you to up your disposition target?
Jerry Sweeney
I think one of the key issues—and I’ll defer to Howard for the detailed answer—is that we accelerated our bond buyback activity in the later part of 2008 and continue that into the early part of 2009. That’s an important consideration for us because as you remember from our call in November, one of the things we really wanted to try and do is to keep our line of credit as unused as possible.
Look, that line of credit with its maturity extension goes out to 2012. It’s a $600 million line.
It is an arguable point today whether that line would be renewed at its current level even at a different pricing metric. So I think one of the things we are trying to do as we develop our capital plan for the next several years is to rely as little as we need to on the line of credit as our primary financing vehicle.
It does put additional pressure on us to meet our asset sales targets and to more aggressively look at joint ventures and, as Howard articulated, layer in some very achievable secured financings. But I think the driver, Rich, was really just the acceleration of our debt buyback program.
Remember, most of our line of credit outstanding balance is because we’re buying back debt. But the reality is that the driving predicate we have is we want to try and keep that line of credit subject to the discipline of pursuing other capital.
Richard Anderson – BMO Capital Markets
Okay, and so with higher dispositions in an ever-changing and a tougher marketplace, higher rates, yet no impact on guidance, so that means of course you’re offsetting that dilutive impact of higher dispositions by a higher level of debt repurchases. I assume that’s how the mask works.
Is that right?
Howard Sipzner
Yes, I mean potentially. It’s not a precise science.
It also depends on the timing of some of these sales, but we do believe if we can execute our sales earlier where they’d be more dilutive to the year, we can offset that and perhaps even overcome it in a positive way with accelerated bond buybacks.
Richard Anderson – BMO Capital Markets
How much bond buyback activity is in your ’09 guidance?
Howard Sipzner
We have not spiked that out. What we will tell you is that bond buyback gains are part of the $25 to 35 million of other income items that we expect to achieve for the year.
Operator
Your next question comes from the line of Fredrick Litchien with Green Street Advisors.
Fredrick Litchien – Green Street Advisors
Thank you. Howard, you alluded a couple of times to covenants being in a better position than they were two years ago.
Would you be able to quantify where you were two years ago and where you’re at today?
Howard Sipzner
No, I cannot and nor have we because we have not been a discloser of our covenant calculations in the past, but we are very pleased with how the results came in this morning.
Fredrick Litchien – Green Street Advisors
It seems to me that now would be the time to be a discloser.
Howard Sipzner
It is something we continue to evaluate.
Fredrick Litchien – Green Street Advisors
In regard to the construction loans for the IRS building, can you help me understand why that’s not closed yet given the type of lease you have?
Jerry Sweeney
I think the prime reason for the delay Fredrick as we have talked about in the last two calls is the proceeding with both the historic tax credit and the new market tax credit created a fairly complicated structuring challenge to ensure that we had, from a finance reporting and from a tax standpoint, all the cards lined up. So we needed to really see how that worked its way through the process and to some degree, those structuring details were determined by the buyer or the tax credits.
And until that closed, we actually couldn’t provide a clear roadmap to a construction or a permanent lender on exactly how the government would interplay with the master lease with the tax credit. So that’s why we’re very happy to get that done by the end of the year, get all the structuring documentation pulled together, and as Howard touched on, pull that together in an intelligent presentation for (inaudible).
Fredrick Litchien – Green Street Advisors
Okay, and maybe one final question. In regards to the asset dispositions that you had planned, can you give us a sense of the types of buyers that are in the market right now for those assets?
Jerry Sweeney
Sure, we’ve had a range of buyers. For example, the small sale that we closed a little bit ago was a local investment group that, frankly, accessed a regional bank for about 60 to 65% of financing.
On some of the larger transactions, parties that have executed confidentiality agreements range from, again, some of those smaller investment groups to some of the traditional buyers at properties be they pension fund advisors or be they direct pension fund declarers.
Operator
(Operator Instructions) Your next question comes from Michael Odell with Medlife.
Michael Odell – Medlife
Thank you. I’m just trying to reconcile Gary’s comments on the balance sheet liquidity being the priority and the fact that there’s execution risk around that liquidity plan with the plan to continue to pay your dividends in cash since that seems like a viable option.
Jerry Sweeney
I was very clear on my comments, as was Howard, on the fact that this stock dividend option does provide something for our board to evaluate based upon how they see the success of our capital plan progressing during the balance of 2009. The philosophical bias to the board or the management team is that we’ve reset our dividend towards the end of last year, set it to, as Howard articulated, a very reasonable support levels based on cash flow.
We do believe that if we can meet the provisions of our capital plan, that is a preferred way for us to raise capital as opposed to providing our shareholders with a percentage of stock as part of the overall cash dividend.
Michael Odell – Medlife
Okay, and then just on the secured financings, what is the average size you’re targeting there and who are the lenders?
Howard Sipzner
We will probably do one of the two larger ones, one in excess of 70 million and the other probably as much as 50. But generally, I suspect they’ll be smaller because that seems to be the deepest part of the market whether it be Life Company or some of the smaller banks.
So probably $20 million would be the minimum just for efficiency standpoint and probably up to $50 million seems to be the biggest spot of the market right now.
Michael Odell – Medlife
Great, thanks.
Operator
Your next question comes from Chris Haley with Wachovia.
Chris Haley – Wachovia
Good morning. If I could ask a couple of questions, I hope that’s okay.
I want to clarify the changes to the guidance range if I may. If I understand it correctly, Howard you are including the year-to-date buyback gains of 2009 in the new guidance.
Howard Sipzner
That’s correct.
Chris Haley – Wachovia
Okay, so at the low end, the $2.17 prior guidance moving to 2.04 includes a positive impact of approximately what amount?
Howard Sipzner
Now positive amount because buyback gains were certainly contemplated in the prior guidance for other income.
Chris Haley – Wachovia
Okay, thank you. On the land capitalization, you said roughly $0.05, $5 million.
What is the base, the denominator, or the dollar amount for land capital—ventures and capitalizing?
Jerry Sweeney
The only thing we’re going to capitalize is what’s on page 31 of our supplement. It’s primarily the two Sierra projects, a very small amount of construction and progress related to redevelopments and other projects, but it’s primarily Sierra at this point.
Chris Haley – Wachovia
Thank you. What dollar amount will you no longer be capitalizing?
Howard Sipzner
We pulled out, at quarter-end about $55 million specifically and then remember by the end of the fourth quarter all of our other projects had similarly migrated off the capitalized interest as a matter of course.
Jerry Sweeney
Chris, just so we’re clear, we’re not capitalizing interest on any of our land holdings in 2009.
Operator
There are no further questions at this time. Presenters are there any closing remarks?
Jerry Sweeney
Great, thank you all very much for participating in the call and we look forward to providing you with an update of our business plan on our first quarter call in a few months. Thank you.
Operator
Thank you for participating in today’s Brandywine Realty Trust fourth quarter earnings conference call. (Operator Instructions)