Jul 30, 2009
Operator
Good morning. My name is Potangie and I will be your conference operator today.
At this time I would like to welcome everyone to the Brandywine Realty Trust Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks there will be a question and answer session. (Operator Instructions) Thank you.
I would now like to turn the conference over to Mr. Gerry Sweeney, President and CEO of the Brandywine Realty Trust.
Sir, you may begin.
Gerard H. Sweeney
Well, Tangie thank you very much and thank you all for joining us for our second quarter 2009 earnings call. Participating on today's call with me are Howard Sipzner, our Executive Vice President and Chief Financial Officer; George Johnstone, our Senior Vice President of Operations; and Gabe Mainardi, our Vice President of Accounting and Treasurer.
Before we begin, I'd like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the Federal Securities Law. Although, we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.
For further information on factors that could impact our anticipated results, please reference our press release, as well as our most recent Annual and Quarterly Reports filed with the SEC. To start our call, during the second quarter, we continue to make progress on our capital plan and ensuring stability in our real estate portfolio.
On our call today, we will update you on our capital activities, review operating results and provide color on the investing and the real estate markets. Addressing the capital plan first; during the quarter we further strengthened our balance sheet.
Key action steps were first, we issued 40.5 million shares that generated net cash of $242.5 million. That this one's occurred on June 2 at a pricing of $6.30 per share, while re-equitizing our balance sheet at that pricing level was painful, they significantly strengthened our balance sheet and was a necessary step.
Based upon this equity offering and our cumulative sales activity, at quarter end our debt to gross assets measured 46.3% compared to a peak level of 54.3%. So, over the past five quarters, we reduce debt by over $750 million.
While a steady gross asset ratio is within our historic 45 to 50% target, it is not enough. Therefore our business plan does contemplate continued de-leveraging.
Our net debt to annualize quarter-wise EBITDA was 6.1% during the quarter, well below our 7.8 times in Q3 '08, but we still plan on making additional progress along these lines as well. As a consequence of some of these activities, at the end of quarter, we had approximately $500 million available under our credit facility.
As you know the $600 million credit facility has extension rights to June of 2012. Our objective is to run our company with no more than 50% of line of credit balance outstanding.
Second, I want to capital plan is on a secured financial front and we have already met our targeted $150 million of mortgage financing for 2009. We achieved this goal through two mortgages, the first was the Two Logan financing, which we described on last quarter's call.
On July this year we also closed the $60 million first mortgage financing on our One Logan project, a previously unencumbered Class A tower sold out to CBD. That loan was provided by PB Capital Corporation at a floating rate of LOBOR plus 350 with a seven year term with three years interest only, followed by a third year amortization schedule at a 7.5% rate.
Next component of our plan was the serial post office financing; we closed into Asgrow our previously announced $256.5 million, twenty year fully amortizing mortgage at a rate of 5.93% We expect that loan will fund in during Q3, 2010 applying project completion. This funding will create a net source of cash for us in 2010, the cost for both the garage and the post office are expected to beat the 4A savings through $355 million, of this amount, 216 million remains to be funded.
Sources of funding for this are $58 million in tax credit payments that will come into us in 2009 and 2010 and projects to draws upon our line of credit. So our $256.5 million of forward funding will provide a net cash recovery for us in 2010.
In addition, with this stake out in place, we continue to evaluate whether to fund remaining cost off our line of credit facility or execute a short-term construction loan to further preserve line capacity. The next component of our capital plan is property sales.
The sales market remains challenging with no real velocity. Our business plan originally contemplated a $180 million goal for 2009.
Post our equity offering, we revised that goal down over to $145 million for 2009 and $90 million for 2010. While we hope to exceed these goals, there is no question that the investment market remains in a state of flux.
In the second quarter, we sold one property generating $26.5 million of proceeds, bringing our year-to-date sales to $37 million or 25% of our annual goal. We currently have approximately $300 million of sales transactions in the market with $85 million under contract and 35 million in active discussions with perspective buyers.
Our program remains due in place discovery by having a number of drivers in the marketing or bid solicitation and we remain confident that we'll meet our sales target for 2009. The property under contract is awaiting a final sign off on a financing commitment.
If that financing commitment materializes, we anticipate being able to close that transaction during the third quarter. In general, on the sales front, it seems as though both buyers and sellers are digging a lion of sand and fairly wide bid ash spreads remain common.
While the overall investment market tone is beginning to improve, spot pricing levels remain somewhat unattractive. That said the transactions with close to date have bided in average 8.9%, cash cap rate and a 9.4% GAAP Cap rate.
So to wrap up of our capital discussion, our plan is to remain a strong investment grade credit with a high quality world diversified portfolio. To further our de-leveraging efforts we continued to take advantage where available of any discounts remaining in the bond market.
Along these lines in May we completed a tender offer on two of our on our a portion of our 2010 bonds and you'll also note loss on page 19 in our supplemental package, we have materially reduced our near term maturities to our overall open market debt repurchasing and debt tender program that Howard is been coordinating. So during the second quarter, we make progress on both the leveraging and excluding the plan that fully addressed our intermediate term maturities.
More importantly, I can assure that our disciplined approach to reducing leverage and improving liquidity is a key construct of every component of our business plan. Now turning attention to the real estate market, the bottom-line is that we anticipate at least the next year to remain a challenge.
Fundamentally in this type of market, the proverbial pie is getting smaller through both lower leasing activity and absorption levels. Our major objective is to garner an increasing share of this shrinking pie and we believe we are well positioned to do this.
Our properties is to higher end of the quality curb in our competitive sub markets, our leasing teams aggressively pursue all kind of leads and our property management teams exercise proactive vendor and supplier management to ensure we maintain our operating margins. So while its unclear how long that it'll take the market to recover.
We are well positioned to ensure that we continue our long track record of market out performance. And looking at some of the quarterly statistics, our same store occupancy declined from 91.2 to 89.7%.
This was very much in line with our expectations and was primarily driven by the 125,000 square feet of early terminations and some known tenant departures. This drop was fully expected and we expect to end the year at around 89% in occupancy levels in our same store.
Despite this expected same store decline, we had a fairly active quarter with some good data points. During the quarter, we had over 1 million square feet of leasing activity and based upon lease commencement dates, consisting of 369,000 square feet of new deals, 126,000 square feet of expansions by existing tenants and 520,000 square feet of renewals.
This total leasing activity is greater than leasing activity any of our pervious four quarters. Also as noted in our recent press release, for the first half of 2009, we leased 1.9 million square feet, most of that generating for leasing activity which will help offset any future early terminations or tenant departures.
Our tenant retention rate for the quarter, excluding the early terminations of 67.1%. Year-to-date was eyeing just shy of 72%, which is slightly below our historical run rate of 75.7%.
For the quarter excluding early terminations we have positive absorption of 53,000 square feet. We factor in those early terminations, we actually have negative absorption of 73,000 square feet.
Looking at those numbers on a year-to-date basis, with a negative absorption of about 300,000 square feet, but without the early terminations positive absorptions of 3000 square feet. Turning to capital cost, capital cost as a percentage of GAAP rents rose to 11.3% from 9.9% last quarter.
This increase was primarily driven by nine longer term in fact almost 10 year average of leased transaction who skewed this number from our recent run rate.. As per these nine transactions which we believe create good long-term value, our capital cost as a percentage with GAAP rents was 6.1% which is well below our targeted levels.
Our best performing market in terms of capital allocation was Richmond, Virginia, where we allocated 4.9% of capital cost as the percentage of GAAP rents. Our highest consuming capital region was Metro DC where five of the aforementioned longer term lease transactions occurred.
Activity levels that is traffic through our portfolio actually rose 8% quarter-over-quarter and remained flat with where we were at this time last year. Traffic activity increases were the strongest in New Jersey and Delaware which was up 36% quarter-over-quarter, Pennsylvania was up 31% quarter-over-quarter and Metro DC was up 4% quarter-over-quarter.
Activity levels declined in Austin, Richmond and in California. Our pipeline of transactions is strong with 2.0 million square feet of new prospects of which 350,000 square feet are on active lease negotiations.
We continue to effectively manage up with pressure on our concession packages, particularly relating to capital but the percentage of deals incorporating free rent rose quarter-over-quarter to 26%, this quarter versus 23% in Q1. We continue to make progress on our 2009-2010 expirations.
Of the original 3.5 million square feet expire in 2009 we have executed 1.8 million square feet or 51% to-date. On our 2010 expirations, of the 4.1 million square feet expiring, we have already executed 896,000 square feet or 21.7% of those expirations to date.
More importantly when we look ahead to 2010 and 2011, we have a very manageable remaining roll over exposure of 12.4% in 2010 and 12% in 2011. In both of these years, the current annualized base rent on expiring leases is less than $22 per square foot.
During the quarter, we had mix results on rental levels. For new leases we have 1.8% cash decline with a 7.8% GAAP increase.
Our strongest performing market on the new leasing activity plan was Metro DC, which showed a 9.6% cash rent growth and over 23% GAAP growth rates on new leases. Our lowest performing operation during the quarter on new leases was Richmond, Virginia, which while they had a 10% decline on both the cash and GAAP basis, is also where we posted our lowest level of capital investment.
Our renewals, we have 5.4% decline on a cash basis and a 3.4% increase on a GAAP basis. Our strongest performing market for renewals was Richmond, Virginia, which showed a 2% cash rent growth and a 6.8% GAAP rent growth on our renewal activity.
Our leasing staff continues to ferret out direct transaction and during the second quarter we have 52 transactions representing 48% of our total deal volume and 27% of our total square footage done directly by our leasing staff. Its becoming clear is that the state of the financing market is impacting leasing.
In particular, we are beginning to see a clear separation in landlord's abilities to invest capital to either attract or renew existing tenants. In fact, during the quarter we executed several transactions through a combination of our leasing agent's hard work, the quality of our portfolio but also frankly due to the inability of competitive landlord's to react quickly to tenant capital requirements.
My expectation is that, this trend will accelerate fairly quickly and put well capitalized companies like Brandywine in an increasingly strong position to attract a larger share of that shrinking pie I referred to you earlier. Looking at the broader market, year-to-date leasing activity absorption levels are down in most of our key markets.
The only market where we saw year-over-year increase in leasing activity was Central New Jersey and Richmond Virginia. Absorption levels in general remained anemic, markets where we saw year-over-year improvement absorption were Southern and Central New Jersey, Delaware and suburban Maryland.
But even those levels have improvement really weren't noteworthy. So we continue to operate our portfolio on a premise that market conditions will remain challenging for the foreseeable future.
To wrap up the operating commentary, we remain focused on portfolio performance, aggressively pursuing every potential lease transaction and using both the quality and location advantage of our portfolio and our capital position to continue our track record of outperforming these down markets. On our development and redevelopment pipeline, our total projected cost of $455 million, approximately 243 million remains to be funded, of that 216 relates to the Cira Main post office and garage project, leaving a total remaining funding of $28 million for the balance of our entire pipeline.
Our Overall pipeline is now 90.5% at least. A few quick observations on our development project, Cira Main post office and garage project is tracking very much on budget and on schedule.
We anticipate some savings which we expect to quantify over the several quarters. Now our South Lake project at Dulles Corner is now 100% leased, the tenant moved in earlier than we initially anticipated and will fully occupy the building sometime in September upon completion of there space.
We had excellent success during the quarter at our Austin development project, as identified in our supplemental, this project currently stands at 92.5% leased. Overall, our entire Austin portfolio is over 95% leased with only 50,000 square feet or 3% roll over in 2010.
So we have this market in great shape for the next six quarters. At Metroplex in the as many suburbs, additional leasing activity took that project to 69% leased with about 50,000 square feet of remaining quality prospects.
100, Lenox Drive in Central New Jersey is almost 90% leased with some additional activity, and 1200 Lenox also in Central New Jersey picked up some additional leasing during the quarter and is now 58.1% leased. On our redevelopment projects.
Our big leasing news was the signing of the 150,000 square foot; 14 and three quarter year leased at our Radnor Corporate Center. Across the board we continue to make some additional progress in all these redevelopments as they are now 79.6% leased versus 70% leased last quarter.
During the quarter we also decide to continue the ongoing renovation of the Juniper Street parking garage in Philadelphia, CBD. This incremental $10 million investment will completely renovate the facility into a 220 car garage which will be delivered in April of 2010.
With that capital plan and market overview, how will now review our second quarter financial results and provide additional color our capital plan.
Howard Sipzner
Thank you, Gerry. In the three months since our last call, we've dramatically improved our balance sheet with the combination of equity issuance, mortgage financing, sales, the post office garage forward commitment and excess cash flow.
Later on, I'll go into to some detailed as to what this means with respect to our 2009 and 2010 capital plan. For the second quarter, FFO available to common shares and units totaled $59.2 million, versus 50.4 million in the second quarter of 2008 or 37.3 million if that quarter is reported with about to $6.9 million impairment charge we took in Q2, 2008.
Our FFO per diluted share in Q2, 2009 was $0.59 versus $0.55 a year ago. And this reflects an increase in our share count from on average 91 million shares to 106 million shares in the current quarter.
We beat the $0.46 analyst consensus by $0.10 per share, which is largely attributable to our greater than expected bond gains on repurchases. Our FFO payout ratio in the second quarter of 2009 is 17.9% on the $0.10 dividend paid reflecting our interim under payment of the dividend.
Few observations on the components of our Q2, 2009 performance, where all revenue was down slightly but maintain the trend to better cash rent with straight line of rent down $2.5 million versus a year ago and flat sequentially. Recovery income was down both sequentially and versus last year reflecting a $3.2 million downward land adjustment 2009 to address delayed spending of general expenses and better than expected decreases in real estate taxes.
Term fees, other income, interest income and both gross and net management income were inline with expectations in recent results. Our management income will begin to tail off a bit through the second half of 2009 as the number of existing contracts expire.
Operating expenses were down sequentially and verses the year ago to the combination of expense management initiatives, tax appeals and timing factors. In the second quarter of 2009, we had net bad debt expense of $700,000.
This compares to $3.2 million in the first quarter of 2009. We continue to monitor our receivable for credit quality in any events which we should take precautions for.
Interest expense declined sequentially and year-over-year due to lower debt balances from our debt reduction program. Interest expense includes, $800,000 of cost due to APB 14-1 on our exchangeable notes and higher swap costs for the quarter on average.
We expensed $300,000 in the second quarter in connection with the change in our assessment of when we are most likely expect to utilize a forward starting swap we enter into as a hedge for interest rate risk. We realize $12 million of gains on a 122.6 million of aggregate debt repurchases and lastly deferred financing costs were elevated to $1.9 million due to the acceleration of deferred amounts as result of our debt repurchase activities.
On a same store basis, our cash rents reflect while non-cash rent items decreased by about 2.7 Recovery is decreased by $2.2 million, as expenses on a same store basis decreased by $1.7 million bringing our recovery rate down to 33%. For the quarter same store NOI decreased 4% on a GAAP basis and 1% on a cash basis, both excluding termination fees and other income items and largely as a result of lower occupancy in the same store portfolio.
Our CAD result, cash available for distribution was $0.23 a share and resulted in a 23.3% CAD payout ratio for the second quarter. The shift in the $0.10 dividend payment in April as a key driver of this payout ratio along with moderate capital expenditures, lower non-cash straight line real income although CapEx did increase some what in Q2 due to several larger and longer term leases as Jerry identified.
Our coverage ratios were quite strong at 2.8 on interest, 2.5 on debt service and 2.4 for fixed charges and all of our margins were inline with expectation at the higher end of recent performance. For 2009 guidance, we are increasing our previous guidance of $1.60 to $1.74 per diluted share to be now in a range of $1.75 to $1.80 for 2009.
The easiest way to thing about this increase is to equate the Q2 bond gains to about $0.10 per share on a full year basis. And therefore see that we increase the bottom of the range by an extra $0.05 a share or by $0.15 in total, increased the mid point of the range by an extra cent and the half or by about $0.115 and affectively reduce the top of the range by $0.4 per share as we now reflect better on the overall leasing in revenue for 2009.
Key assumptions for the balance of 2009 include that we will have a negative 3.5 to 4.5% GAAP same store NOI for the year and this will be excluding termination and other revenue. We expect cash same store NOI to be a little bit better at negative 1 and negative 2%.
On the late side, we continue to see good trends in rent with GAAP mark-to-market up to 2 to 4% but cash mark-to-market at flat to minus 2%. In our year-end occupancy figures are now expected to be about 89% in the same store portfolio.
We are seeing much higher levels of overall other income items, now coming in at 50 to $55 million gross the year or about 40 to $45 million net of management expenses and this will cover all other income items including bond gains which we now see for the year to total about $20 million or about $2 million more than we've done year-to-date. For G&A, we don't see any change and are continuing to see our figures in the 5 to $5.5 million per quarter.
On interest expense we are expecting flat to slightly low interest expense trends to continue and that's a reflection of our lower overall debt levels. On the CapEx side, this will translate to some fairly strong numbers, with CapEx expected to be in the $1.25 to $1.35 range and this will provide a nice amount of capital retention even after we deal with the dividend show up.
All of this has very favorable implications for our capital plan. If we look at the balance of 2009 starting July 1, 2009 and all of 2010, we track about $995 million of total capital leads for that 18 months period, breaking down roughly as $370 million of investment activity, the bulk of which is the Post Office and the Garage and the rest is related to development and lease-up and capital expenditure relating to our leasing.
We see about 445 million of debt repayment related to the 2009 and 2010 notes and other mortgages, and then we're tracking roughly about the $180 million of aggregate dividends, assuming the dividend are all cash and current levels of taxable income continue through 2010. To raise this $995 million, we are projecting for the next 18 months about $275 million of cash flow from operations and cash on hand.
As Gerry pointed out, we have an expectation to receive over the 14 months or so, about $58 million of additional capital of proceeds from our partners on the historic tax credit transaction and we expect to be repaid it 0 million seller financing note in August of 2010. The balance of our plan includes $177 million of sales activity, 85 million of that is under contract.
We expect 27 more million of sales in 2009 to round out our plan and are projecting 90 million for 2010. On the garage and post office we do have in place the $256 million forward commitment and we expect that will fund in the third quarter of 2010.
And we are projecting a $180 million of mortgages for that 18 month period. Of course 60 million of that was already completed in the first week of July, leaving $120 million to be done in 2010.
This results in about $10 million of net credit facility borrowing. This could be higher if we do additional borrow repurchases, but I believe the strength of this plan as we assess the $995 million is that about 758 million of it is either cash flow which we have good expectations about plus or minus, is either completed to-date is committed in contracts or is under contract and that leaves just $237 million over the 18 months period to be done via sales and mortgages.
That's offset by approximately $500 million or more than double that's available on the line giving us a relatively high degree of comfort for our capital plan in 2009 and 2010 and setting us up very well for 2011 and 2012. On account receivables, we continue to be a very active monitor of the credit quality of our tenant's non-receivables.
At June 30, 2009 we had 14.4 of operating receivables with a total reserve of 5.4 million or about 38%. We also had straight line tenant receivables of $97.8 million and a reserve of $12.1 million or about 12%.
In Q2, we had a net reduction to our aggregate reserve is by about $500,000 reflecting changes to the reserves and specific write-offs of reserved and unreserved activity. And lastly, the recap on the balance sheet, our debt profile continues to be very conservative and has strengthened significantly in the last quarter where we ended up with 46.3% debt to gross real state cost.
We have relatively low secured debt and even lower floating rate debt. Our $600 million credit line was $74 million drawn on June 30 and stands at $49 million drawn today.
We are 100% compliant on all our credit facility and indenture covenants, with better result sequentially in virtually all credit metrics. And rounding out our credit picture, we have once again about 4 billion of gross unencumbered assets to facilitate our secured borrowing and sales activity.
And with that I'll turn it back to Gerry for some closing comments.
Gerard H. Sweeney
Great, Howard, thank you very much. To wrap up, in this type of climate, we are really operating on the premise that nothing can be taken for granted and really no stone should be left unturned.
Our capital plan is on target. But as Howard and I both mentioned, we intend to continue to pursue all of our objectives.
The portfolio is performing inline with expectations and we certainly expect that to continue and reiterate our long track performance. The real estate-equitization of balance sheet certainly eliminated significant event risks.
The execution of IRS financing, achieve in the mortgage financing objectives has put the company very good capital position. We planned to continue to fully debt of sales and join venture market to improve our balance sheet over the next several years and while the investor market as I mentioned early, remains the same still.
I do expect the velocity of transactions to improve over the next few quarters as buyer and seller expectations become more aligned and more importantly there is a lot more clarity in the pricing of long-term debt. While there is much talk regarding capacity for future opportunities, our singular focus remain optimizing our own capital position.
That being said, we are keeping an eye out for spot invest -- strategic investment opportunities by frankly saying that any compelling investment opportunities are still some time away and will be determine primarily by activities in the debt markets. Therefore, our goal is to continue to make progress in our balance sheet program, so we will be in a position to capitalize on whatever future opportunities may arise in our core market areas.
As a final comment on the company's dividend, our Board approved dividend policy remains the same. We intend to match aggregate 2009 common share dividends to our 2009 taxable income.
Given the recent equity offering, some clarifications probably worthwhile. We're still projecting taxable income to be in $108 million range, pre-equity about $1.20 per share, we've talked about all year.
Post equity $0.94 per share. Year-to-date, we've distributed 54 million, assume we maintain the same common dividend and preferred distributions.
By the end of the year we'll have distributed about $71 million. Our last dividend announcement in corporate is going to do a catch up year end adjustment.
The ultimate size and composition of that dividend payment will be at function of the Board's perspective on what our final taxable income is after facts are any property sales, the overall strength of our balance sheet and specific indicators in the real estate financing and investment markets. How we done in our capital plan execution and certainly looking at whatever are the tools you may have at our disposal to effectively manage our taxable income.
We would expect that more clarity on this year-end dividend situation during our next quarterly call. With that, I'd like to open the call up for questions, we would answer it interest of time to limit yourself to one question and a follow-up.
Thank you.
Operator
(Operator Instructions). Your first question comes from the line of Chris Canton (ph) with Morgan Stanley.
Unidentified Analyst
Hi, good morning. My question is on the secured markets and sounds like you are still in the market, testing it out, wondering what the capacity is with the insurance company is, then if the composition of the lenders there has changed it all over the last 90 days?
Gerard Sweeney
Well I think we are in we'll continue to actively canvas the secured market. I think Howard and his team has done a great job, meeting our objectives for 2009.
I think what we've seen is an increasing number of lenders coming into the marketplace. Now its best evidence by the dead list we saw on the our One Logon versus our Two Logon financing, where we saw our much broader based range of potential lenders on that second financing.
More importantly we continued to be actively time a number of traditional balance sheet lenders for looking for combination of good quality properties, predictable cash flow streams and frankly with good sponsorship. So I think as we look forward for the balance of 2009 and 2010, we'll continue to work towards identifying opportunities where we can think we can pursue some good levels of secured financings.
As Howard touched on, one of our key objectives is to keep our levels secured financing fairly low to maintain our very strong unencumbered metrics. But certainly we have seen a continued increase in the number of lenders out there looking to do some financing, at least from our narrow window into the world.
Unidentified Analyst
And One Logan was in the high sevens on the interest rate, if I remember correctly. How do you see that changing or is that too much of forecast?
Howard Sipzner
This is Howard. The One Logan financing is currently floating rate at LIBOR plus 350.
It will begin to amortize beginning I year 4, 5% rate to drive that constant, but if one more to swap it today, I believe would be in the mid to low sixes. But we left it floating rate for the time being in reflection of our overall floating rate balances.
Unidentified Analyst
Thank you.
Operator
The next question comes from the line of Jordan Sadler with KeyBanc.
Jordan Sadler
Good morning. Just wanted to ask you question about the leasing velocity during the quarter.
Gerry, do you think to some extent the leasing you did during the quarter was a function to pant up demand and how do you see it so far into the third quarter?
Gerard Sweeney
Yeah. That's a great question Jordan.
I wish, I had a clear answer for you. I think what we have seen in the leasing velocity in the last quarter is I mean, I think a lot of our tenant base and certainly the prospects we are seeing in the market have just delayed making a real estate decision for so long.
Because of the over hang in the economy and their total lack of uncertainty on their own business plan. They are now reaching kind of critical decision says.
So, certainly incandescing our managing directors, a lot of the leasing activity that we accomplished last quarter, it was really stuff that was percolating for fairly long of period. And those companies really reached the point where they needed to make kind of decision.
George, I -- you have any observation for all we've seen thus far this quarter.
George Johnstone
Yeah. I mean thus far this quarter we have kind of seen similar increases in the willingness of tenants to make a decision.
Our second quarter deals on average took about a 118 days from kind of start to finish. We're starting to see that gap kind of narrow.
And during the quarter we actually saw in the 118 leases totaling in 1.1 million square feet of actual signed leases. So again I think tenants are willing to make a decision I think as they kind of start to get into their own budget cycles, what kind of know what their commitments can be for 2010.
And hopefully that will accelerate some additional decision making on the tenants in the portfolio.
Jordan Sadler
Helpful and just as a follow up, what is the prospects of like for terminations as those in yet another million dollars or so this quarter, what are these if the tenants why actually it's look like or what that pipeline telling you either George or Jerry?
Gerard Sweeney
I think -- we are going to be continue the same approach we've had on terminations which is if with dealers out, there is a re-leased opportunity that becomes a catalyst for executing a early termination with the tenant to the extent we have a tenant who has under utilized in their space is looking for some type of concession. That part then becomes more of a credit decision for us.
But I think our bias has always been to keep the tenants in their space and have them pay rent even if they're not using it. A lot of our leases, Jordan have a fairly good sublease language or we have the ability to recapture or in many cases remarket the space and in many cases share in a sublease profits.
So it's very much a case-by-case basis, but I don't know if George you or Howard have any thoughts on -- from a credit standpoint?
George Johnstone
No, I mean they are sometimes unpredictable which is why we bracket that number in a larger bucket of other income. No real significant events year-to-date, but that doesn't rule out the possibility that we could have one or two larger ones over the second half.
But only when it makes sense from our side.
Howard Sipzner
Yeah, I think the watch list is actually starting to shrink a little bit. I think a lot of those that have experienced trouble have already surfaced.
You know clearly our reserved amount weren't as much this quarter. So we're kind of -- hoping that we've turned the corner and most of bad debt news is behind us.
Jordan Sadler
Thank you.
Operator
The next question comes from the line of David Shapiro with BGB Security
David Shapiro
Hi guys.
Gerard Sweeney
Good morning.
David Shapiro
I was hoping that you could review some more of the transaction market out there, I think, may be review exactly what is left in queue here on the contracts and do you expect sort of a cap rates to be relatively inline with you have completed so far by way of sales?
George Johnstone
I'll take the lead on that. I mean what we have under contract are frankly two buildings in New Jersey that's been under contract for us sometime awaiting a final financing commitment.
We were being led to believe that that financing equipment should be forth coming. It should be priced and underwritten at the expected terms.
But that the approval process is it's taking a little bit longer than people anticipated in the financial institution. And that is a larger size deal and I think what we're seeing to give some you some color is on deals of any significant size.
And I think in this climate, anything north of $50 million will redeem these significant. Those transactions are fewer and far between, there's a not of equity from level of equity in a project at least in a lot of course of urban markets.
And the financing the debt financing seems to be more problematic to achieve. So in light what we're targeting for sellers still those projects that 15 to $25 million range.
We certainly have seen a fairly wide bit ash spreads on some of our props that we put the market. We've been, I think fortunately in getting the properties across the finish line thus far this year at cap rates very much in line with their expectations.
If the major transaction closes that will be inside of our average cap rate for close transactions thus far and on some of the smaller assets, we're seeing cap rates really from the 8 to 11% range and then it becomes an issue for us in terms of evaluating what we see is the point of sale departure versus the value correct by holding an asset for the next several years. But there is no question there is a fairly large bit ash spread remaining on a number of these transactions.
David Shapiro
So the spread you mentioned I am assuming the spread is not really 8/11 but, you're sort of giving a range on where the bids are. So maybe just looking at your portfolio, maybe what you are seeing with other properties that are out there for sale.
Mid nines sort of or high nines or sort of where in aggregate, things seem to be settling out?
George Johnstone
Yeah, its hard to say where they're selling out, just to be perfectly canned because I just don't think there's been that level of velocity. But when I take a look at the transactions where that have actually occurred which means there has been a meaning of the mind.
I think in that 9 to 10% range seems to be the general Cap rates to that.
David Shapiro
Okay, thanks for the color.
Operator
The next question comes from the line of Michael Bilerman with Citi.
Michael Bilerman
Hi, good morning.
Gerard Sweeney
Good morning.
Michael Bilerman
If fixed income versus the leasing, you talked about this million 9 square feet of lease based non-occupied, the majority of that 1.4 million that's post office. Things got about 300,000 which represents ultimate development -- re-development and about 250,000 square feet that effectively is leased but not occupied in portfolio.
So, maybe you can just walk through a little bit on that for when that starts to take occupancy and then offset that with, you talked a little bit about on terminations and some scheduled expressions in the quarter, sort of, give a little bit more color as what happened this quarter. And also what you are expecting for the back half of the years, so we can get a better picture of how cash flow was trending?
Gerard Sweeney
Sure. It's a lot of questions in one question Michael and we'll do the best what we can.
George Johnstone
Michael, this is George. Well on the forward leasing, we've got a roughly 317,000 square feet that will commence during the third quarter.
170,000 square feet that will commence during the fourth quarter and then 75,000 square feet that will commence in 2010 and then the balance as you pointed out is the 1.4 million square feet at the post office and garage facility. So that's kind of the timing of that 1.9 million square feet of forward leasing that we have achieved to date.
But the terminations that we had during this quarter again 23,000 square feet of that 125 were bankruptcies, 87,000 square feet were actual default or evictions and 16,000 square feet were actually where we negotiated the termination and took some termination fee income again because we had an opportunity in hand to back field to space. To trying to predict that that's going to be going forward We forward is a little bit difficult.
Clearly it will be as Jerry alluded to kind of a credit decision on our part if someone comes to offer us the space back, I do think from, as we mentioned from an AR perspective, I think a lot of our troubled tenants have kind of new come to light. So, what we don't know today, I would think, we said about 200,000 square feet in the first quarter that decline to 125 in the second quarter, if I have to get expected it to further decline.
Yeah, there is the good news and a lot of these credit issues tend to surface pretty quickly. And, so we really, I think we got hit disproportional in first and little bit in second quarter on somebody's early terminations.
I think we have seen Michael, in terms of a little bit more color is we had about a 125 during the quarter, the second quarter. We had about 125,000 square feet of expansions by existing tenants.
Now the majority of that occurred in Pennsylvania and New Jersey. We have a lot of smaller tenants, so that seems to be a pretty good sign that somebody's smaller company were reviewed, might be more on the credit curve or actually starting to feel better about their business.
We had -- our biggest negative news was when we had about 200,000 square feet or so of leases that when they expired, tenants actually closed their office or significantly downsize. And again when we talk to our managing directors, there is certainly the prospect that some of the happenings in the 2010.
But again their decisions that tend to be made pretty early by a lot of tenants particularly tenants of the size based that we typically we deal with. As we've certainly gone through our re-forecasting process, one of areas where we do see a bit of an opportunity for us.
And it's certainly would be the same opportunity there are for some other well capitalized companies. If they are going to start to be some increasing rub points with the inability of some of the less well capitalized smaller private everyone defined them landlords to provide capital to not just attract tenants but also to retain existing tenants.
So I mean a lot of these properties trade 2005 on, they could very well be inverted from a valuation standpoint but they might be facing debt maturities. The equity investors have lost substantially a substantial portions of their investment, not all of it.
So, put those landlords in a very challenging position to meet tenant requirements. And the early warning system for that really sort of brokerage community, the brokers get very, very acute very quickly.
If you can pay them commission cheques, you cannot. So, I think as I mentioned we saw a couple of transactions during the past quarter.
We have a number of in our pipeline today where there is clearly going to be an opportunity for a company like ours to move very aggressively to improve our competitive position. These are this some of our less capitalized brother.
Michael Bilerman
So you're the expirations -- if we are talking about that with 200,000 in the quarter recently. It is expired and terminated and release their space.
In the back half, of that million square feet is rolling if there is anything that we should be de-cognize in terms of big move outs, I think you mention 2010, you were worried about something, now at least near term, anything?
Gerard Sweeney
Yeah. Let's just give -- just give a second.
I think in terms of the -- during the quarter some of the big leases that we had that did not renew was 18 and keyed down in a renewed for long-term but reduced our square footage. We had a couple of known move outs closed office in our Northern to Pennsylvania suburban location and George if you have any...
George Johnstone
I think as a million square feet is kind a left to deal with for '09, I mean, we've got 320,000 square feet of that, that we expect to renew a 176,000 square feet of that we are still negotiating with, but we do know based on what we have been told by the tenants thus far is that about half a million square feet will in fact vacate during the balance of 2009. So that known exit combined with what we already have in the pre-leased is kind of why we're holding that 89% occupancy through the balance of the year.
Michael Bilerman
So that sublease concern you the percentage of sublease spaces on that 4.2% relative to kind of mid 3.5?
George Johnstone
No, I think that the increase around sublease space primarily related to the bearing point subleased devoid in an anticipation of KPMG move in, in our license owner price that was the sole contributor. The rest of the sublease space of state very constant over the last couple of years.
Gerard Sweeney
And we actually fell good about a lot of subtenants that are in that space becoming direct tenants when in fact the leases roll over.
Michael Bilerman
Okay, thank you
Gerard Sweeney
You're welcome.
Operator
Your next question comes from the line of Jamie Feldman with Banc of America.
James Feldman
Thank you very much. I was hoping you could speak a little bit more generally about the Philadelphia and Northern Virginia market and just give some color on where you think we are in the cycle?
In terms of kind of which -- what's the amount of tenants in the market that are still potentially going to get back space or is it that kind of clear at this point and then also the amount of tenants and potential effect on the market from tenants that are actually looking?
Gerard Sweeney
Hi Jamie. On kind of the greater Philadelphia area, look I think we continue to feel pretty good about what's been happening in CBD, Philadelphia I mean the leasing numbers were not great from a market standpoint in the second quarter we did a pretty good job downtown in getting all of our stuff up full together.
So, I think the risk in kind of the fill up in CBD, I think remains to the extent that there is a major job cutback or major layoff by one of the larger employers downtown, which will have any sign of that happening at this point. The fills up your burbs actually had leasing activity of the about 423,000 square feet during the second quarter of 09, well as it down year-over-year some improvement over where we were at this time last year, certainly have a lot of feedback that there is a lot of tenant's queuing up for an RFP process looking at requirements late 2010 and 2011.
So, I guess our read on the markets in general is that the tenant's psychology is gradually beginning to change. Certainly not done yet, but I think as a line of our tenants -- potential tenants feel more positive about their business plans.
They are certainly started to look a little bit ahead to what the real estate requirements are. I think in terms of bottoming out to your earlier question, I think we feel pretty good about what's happening in couple of the key sub markets in Pennsylvania suburbs --- I mentioned Austin we feel very good about the progress or team made down there in the last couple of quarters but particular the last quarter.
I think we do have a high degree of concern relative to what's happening in Southern Jersey. Even though those absorption numbers improved year-over-year, they weren't good last year.
So there is still seems to be an overhang of spacing in both of those sub markets. George Stone and his team are going a great job trying to stay ahead of all the leasing activity they actually saw that one of great data points we had this past quarter was our largest increase in activity through our portfolio occurred in our New Jersey and Delaware operation whereas last quarter that was our worst performing in terms of traffic.
So that's a clear sign that more tenants are starting to shop. That's the good news.
The bad news is that maybe our their shop is I think its now maybe a good time to buy real estate leases because the market is soft over there. But I think our objective there will be what is always been which is to meet the market and to be very aggressive and certainly in that marketplace there is a number of less well capitalized without comfortably think of right for us exercise complete heads of leverage.
The measures, do you seem like it? Our team down there's done a great job.
We had a good rental from both the cash and GAAP basis, they nailed some of the big near-term leasing exposure we had. We have a one property in Delaware which is going through a minor face lift that we're in the process of releasing right now.
The 278 quarters in Maryland is stalling a little bit I think primarily due to lot of space coming online so we would view that is one of our softer sub-markets, I think that evidenced the best buy the low level of leasing velocity we've seen on our 66 and Rock ledge project over the last several quarters. But we're all definitely seeing more tenants out there so on a look ahead which is a good sign.
We're pricing patterns and I think remains to be seen.
James Feldman
Hey, thank you, and just a quick follow-up. I think to Michael's question you said 500,000 of the million square feet left to expire in 2009 is you expect to make it, the question is any of that back filled and then secondly, the 2007 of the 3.2 million, how much of that you expect to go back in?
Gerard Sweeney
We do expect a backfill some of that and we have that kind of baked into our plan for the remainder of 2009. On the 2010, we've got about 590,000 square feet that we know will vacate when the time comes upon lease expiration 2010.
James Feldman
And then the timing and the backfilling is that immediate or that's going to take some time?
Gerard Sweeney
Yeah. I think it will quite picking out some of may occur late fourth quarter in the balance of the prior happened over the first couple of quarters in 2010.
James Feldman
And you know the magnitude?
Gerard Sweeney
No. I mean I think as we think is see the deals in the market continue to try to capture as many of those as we can.
George Johnstone
A couple of the tenants Jamie that we know are going to vacate in 2010 or there are leases expired in the later part of 2010. It's not a good news because you never wanted to tenant to leave.
But what that does is that enables our teams to be out there marketing that space well in advance. And we've actually in capture.
We have a couple of very good prospects to back fill some of the known vacations staff. But it's going to take time, I mean as George touched on the gestation vacation period re-shell is long.
I don't really expect that to compress too much going forward. So, I think as we look at our 2009 re-forecast and certainly as were going through our 2010 budgeting process.
I think we have taken a very realistic view on what we think the market will present to us over the next five quarters.
James Feldman
Okay. Thank you very much.
I appreciate it.
Operator
The next question comes from the line of Rich Anderson with the BMO Capital Market.
Richard Anderson
Thanks and good morning.
Gerard Sweeney
Good morning Rich.
Richard Anderson
I think the best take away from all this is that the Q&A is centered on fundamentals and not the balance sheet. But that's what I say that, I think very refreshing but I want to ask you a balance sheet question.
As far as you mentioned your de-leveraging goals, you already sort of act your range, your target range of 45 to 50% that's gross assets. But you said you're debt are not enough, can you sort of characterize how much lower your interested in going from that perspective?
Gerard Sweeney
Look, I think that certainly some multiple in your program. And how we get there is going to be function what happens and combinations of the unsecured to secured debt markets.
What type of velocity we can see happening in the sale of particularly the joint venture marketplace. And then certainly what we seen happening on the equity fund.
But, as certainly there is the Board starts to contemplate the business plan for the next 3 to 5 years. We certainly, we set the goal to get from where we were down to that 45 to 50% range, where there we want be, now we're going to be moving that down to that 40 to 45% range and certainly to the extent that that can occur sooner rather than later, that's a good thing.
But I think we're going to be very careful I think in how we get there to make sure that we optimize value points as best as we can. But certainly going forward Rich, I think you're going to see this company continue to migrate down towards that 40% range.
Richard Anderson
Okay. And then just as a sort of kind of related follow up to Howard.
What is your unused line balance sheet?
Howard Sipzner
It is I want to say, its17.5 basis points. But it's not on the unused portion.
It's actually termed a facility fee. So we pay it on the full $600 million.
Richard Anderson
Hope you have anything outstanding you paid that?
Howard Sipzner
We pay that $17.5 million regardless of usage and then we pay the $72.5 basis points over LIBOR on what we borrow and that's at the current grid point based on our ratings
Richard Anderson
Okay, great. Thank you.
Operator
Your next question comes from the line of Dan Donlan with Janney Montgomery Scott.
Daniel Donlan
Good morning, just two questions. If you guys were to raise unsecured debt, could you may be give us a range to where you think rates would be?
Howard Sipzner
Because we've been seeing our shorter term debt say out to 2011-2012 offer in the single-digit range anywhere from 7 to say 9%. So that's sort of one slice of the market and that's where we have done a fair amount of repurchase for tender.
On the longer debt, we done how many debt in 2013, then we start to have debt in 14, 16 and 17, so using the pricing of that there is a proxy it seems like spot trades are taking place from 10.5 on up to 12-13%. So I would imagine to put an issue out there in that latter timeframe which is going to push them that really make sense.
We'd still carry a low double-digit number. So as a result we've not included unsecured issuance for the time being as part of our capital plan because we would not want to be an issue of those levels.
Daniel Donlan
Right, okay. And just as have you guys had any discussion with top officials about issuance in San?
Howard Sipzner
We have a explored the concept. We've talked to a number of banks.
We're getting a lot of inbound traffic on that topic. But it's seems to us that our overall needs for debt we're targeting a $120 million of mortgages next year.
Just seem to be too light to really make sense to enter that program.
Daniel Donlan
Okay. Thank you.
Operator
Your next question come from the line of Michael O' Dell with MetLife (ph).
Unidentified Analyst
Thanks for taking the question. Just going back to balance sheet questions well, are we covered cash flow test in your revolver credit agreement?
Can you give us sense us to where that calculation was a year ago? In addition to that, is that some sort of why the increase substantially that covered asset to asset versus that pretty much stabilization in other company cash flow asset, is a trail before quarter interest expense?
Gerard Sweeney
Good questions and to some self answered. But remind me if I'm miss any of them on the unencumbered cash flow ratio that we showed 220 in Q2 '09 our Q2 2008 number would have been roughly comparable than in fact slightly below it.
That calculation as dictated by the credit facility documents is quarterly NOI, annualized that against trailing interest expense. So even as we brought debt down, which we have well, the benefits of that are still somewhat ahead of us.
On some of the absolute sort of more balance sheet type test, those tend to be more spot in their calculation, so you do get more of an immediate move on those. So for example, the leverage calculations are at their lows in fact they are at their lows going back three to four years as we track them.
So depending on where our future interest rates go, we do stand and where the income hopes up, of course, we do have a reasonable likely of that those cash flow coverage test could improve over time.
Unidentified Analyst
Right. And then, just one more quick one -- in terms of your 103 billion term loan, what types of coverage do you have deals there already, there's any reason to believe you will be able to use the special options there?
Howard Sipzner
Those are the same covenants as in our credit facility
Unidentified Analyst
Okay
Howard Sipzner
And ultimately both of those facilities are extendable to the same date in June 2012.
Unidentified Analyst
Okay, great, thanks.
Operator
Your next question comes from the line of John Stewart with Green Street Advisors.
John Stewart
Just a couple of quick question guys; Gerry in terms of the strategy the financing strategy going forward when you look at the what you've got on tab going forward and what you've done this year, would you infer that you're moving away from the unsecured market and towards a secured financing strategy?
Gerard Sweeney
I would not I mean I think John, it's a great question and I am sure the market would prove me completely wrong on this. But I think we remained committed to the unsecured market right now.
We have -- while we've certainly have layered in a number of secured mortgages. I think, what you have seen is due is layer on those mortgages on asset that are prime candidate to be secured.
The One and Two Logan are CBD Towers, they operate within their own competitive set and I think one of the reasons we migrated away from the line of secured financings in the past was that it put some leasing encumbrances on what we could or could not do in some of our sub markets. So I mean we do have a level of -- You look at our bonds covenants tremendously low level of secured leverage and it's now our touch, I think we look at our capital plan over the next couple of years.
Certainly we taxed I think on the $20 million next year more certainly take a look at what we need to do to make sure that we more than happy meet all of our liquidity concerns. But that's all into the guys of hoping that the unsecured market at some point will be more effectively price for Brandywine.
So, I think we'd really try to do this year is through a combination with these different capital activities remain on a path where we are committed to the unsecured market. Make sure that our bonds covenants are in great shape.
And manage with the margin to generate our liquidity in ops of after having an unsecured market that's price effectively for us right now.
John Stewart
Right. But I guess if you, the pricing, the issue would still be in the double-digit.
So the unsecured market doesn't seem to be giving credit for some of the progress you've made on the liquidity front. And lot of that you know pretty assets that would make it a cover for the annual report are going to have mortgages on them.
It seems like your migrating towards that strategy over time.
Gerard Sweeney
Well look I think time will come in terms of where we need to on that. I think the extent of the unsecured market continue to path towards recovery.
Our hope is that some of that will impact Brandywine for our working so hard in our credit metrics. So you're right.
I mean as of today I think there is too wide of a bid ash spread on secured versus unsecured and we'll see we'll continue to monitor that market and see where that spread is in the next three to four quarters.
Howard Sipzner
Hey John, its Howard. Net at the margin we'll have added no assets to the encumbered list this year because we're roll off one and rolling in other and in terms of the dollars, we'll have added about 70-$80 million of mortgage debt.
Similarly next year, we have little over 50 million rolling off. And we expect to put a 120 in so, while we have financed in those markets this year and expect it to do so right now next year.
The marginal impact is actually going to be quite small relative to $5 billion balance sheet, the only other project that will end up being mortgaged is of course will be Cira and the garage. But that was really the best candidate of all given the government credit lease to get that very attractive for financing which should never get that level of credit for in the unsecured market that was the best candidate of all I think to the secured market and the results bear that out.
John Stewart
Sure, but that's a pretty big number in and in itself, just couple more quick questions. The $85 million that's under contract, what is the sales price relative to book on that?
George Johnstone
Sales price relative to the book is a positive spread. Looking -- that it meets our book.
John Stewart
$5 million gain or...
Howard Sipzner
John, it's actually quite a bit larger. But that transaction because we're going to be providing seller financing in a second mortgage position is going to require purchase accounting valuations of that debt which will adjust the proceeds off from a book basis to allocate some of it to effectively interest earnings on that second of market.
So we are working through that process and don't have final numbers. But it will be impacted by those calculations.
John Stewart
Okay and how about the other 27 million that's in the plan for the rest of the year?
Howard Sipzner
That's really from a general pool of a larger number of assets for the time being. All of those are, most likely of those are above book as well.
John Stewart
Okay and so the 108 million of taxable income, what does that contemplate in terms of gains?
Howard Sipzner
It dose not necessarily conflict any additional gains on the taxable side, I mean for example, in the under contract transaction because we might be providing that financing that will qualify for installment sale treatment and that would affect the recognition of timing of that gain and until we really know the composition in terms of the other sales, we are unable to include those in the taxable income. And lastly, it's possible that we'll have sales that generate taxable losses and that could offset for the time being as well.
We are anticipating that we'll take advantage of the IRS provision and the further recognition of our gain on debt repurchase to the 2014 timeframe. So all of those balls are up in the air but the best estimate is that we're still on track where we opened up the year.
John Stewart
Okay, my last question is on the guidance; I guess I'm a little bit confused as to why you're raising by $0.10 just but less than two months after giving the guidance following the equity offerings, I mean you've already bought back over $80 million of the debt that contributed to the gain. As disclosed in the prospectus at the end of May, so why that was not reflected in the guidance that you issued in June?
Howard Sipzner
When we did that in June it's a good question John. We took the approach that we would simply adjust the guidance for the share account which was the calculation you saw without taking into account any other factors, long gains operations a host of other things that have taken place because we just not in the general practice of giving mid-quarter updates.
We don't want to get into that habit. There have been some transactions but we consciously chose.
And I think we even included language in that press release in the thorough end and try to make it clear little bit that it was really just a mathematical adjustment for the shares. If that felt short, you'll learn from that, but that was there was intent back in June.
John Stewart
Okay, thank you.
Operator
Your next question comes from the line of Brendan Maiorana with Wells Fargo Securities.
Brendan Maiorana
Hey, good morning. Just wanted to follow up on the debt to gross asset target of 40%, are you guys as you think about target, are you including the post office, your South facility in there, it just seems like that's kind of a unique asset given that you got a credit tenant and a -- with a 20 years lease and a 20 year mortgage than as 20 year amortization schedule on?
George Johnstone
Yeah. Brendan, we don't contemplate trading any particular asset differently in our calculation, that would be a true gross asset figure and then we will take all of our debt and net off any cash on hand and then layer that against that gross asset.
As we've done for many quarters now.
Brendan Maiorana
Okay, very conservative. Thank you.
Operator
At this time there are no further question.
Howard Sipzner
Great, thank you. Thank you all for participating in this call and we look forward to providing you our update on our third quarter earnings in October.
Operator
Thank you. This concludes today's conference call.
You may now disconnect.