Oct 29, 2009
Executives
Gerard H. Sweeney - President and Chief Executive Officer Howard Sipzner - Executive Vice President and Chief Financial Officer George D.
Johnstone - Senior Vice President of Operations Gabe Mainardi – Vice President of Accounting and Treasurer.
Analysts
Ross Nussbaum – UBS [Chris Kattan] – Morgan Stanley James Feldman - Bank of America Merrill Lynch Jordan Sadler - Keybanc Capital Markets Michael Bilerman - Citi John Guinee – Stifel Nicolaus & Company, Inc. Daniel P.
Donlan - Janney Montgomery Scott John Stewart - Green Street Advisors
Operator
Welcome to the Brandywine Realty Trust Third Quarter Earnings conference call. (Operator Instructions).
I would now like to turn the conference over to Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust.
Gerard H. Sweeney
Good morning everyone and thank you for joining us for our third quarter 2009 earnings call. We'd also like to welcome all of the Phillies and Yankee fans to the call.
It should be a great series. And remember all of us in Philadelphia are extremely gracious and open-minded, particularly when we win.
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 off, during the third quarter we made good progress in our capital plan and in executing our operating strategy. On the call today, we'll provide an update on our capital activities, review operating results, provide color on the investment and real estate markets, introduce 2010 earnings guidance and discuss our dividend policy.
From an overview standpoint, before we get into the details, several observations. While all economic data useful like the positive GDP surprise earlier today, in reality jobs are what really drive our near-term view.
From a Philadelphia regional perspective, we think most of the major job losses have already occurred. The Philadelphia region actually outperformed the nation by losing only 3.4% employment year-over-year versus 4.4% nationally.
And as a result, the Philadelphia MSA ranks fifth out of the 12 largest MSAs in the country. While expectations are that the region's current 8.8% employment rate will slightly increase in 2010, it will remain below the national average at least that's what we're hearing from economists.
We do expect additional job losses, however, to impact the professional and business service sectors, which has continued to lose jobs for the past 15 months. Richmond has also outperformed the national picture with a current unemployment rate about 8%.
And current projections on that market is that level is expected to remain pretty steady during 2010. Metro D.C.
is a bit of a different story as you would expect, with a current unemployment rate in Northern Virginia of 6.4% and suburban Maryland of 5.5%. 2009 job losses are projected to be 15,500 in Northern Virginia and about 8,500 in suburban Maryland.
For 2010, current projections indicate net job growth in both of those markets, but at a pace below the 2009 job loss levels. So a relatively flat, but slightly improving picture.
Finally, Austin's current 7.2% unemployment rate is projected to improve below 7% by year end 2010. Looking at the real estate picture, while not necessarily calling it a bottom, we do believe that the markets are showing increasing signs of stability with more tenants looking at office space options, and that's reflected in the pipeline numbers that we'll review shortly.
Given the projected slow pace of the economic recovery and the employment picture, our 2010 outlook is guided by our expectation of lower absorption and leasing activity levels along with corresponding continued pressure on rental levels. In addition, given the overall economic conditions, we believe we have less than our usual visibility on tenant activity in the second half of 2010, which again has reinforced our slightly conservative bias.
Our 2010 guidance, which we'll review, reflects the impact of economic climate, our sales secured financing program and our equity issuance. More importantly, it also reflects the acceleration on the timing of us re-accessing the unsecured debt market and the impact of all these liquidity enhancing and balance sheet strengthening efforts were not fully reflected in all the first call numbers and they clearly reset through these activities our earnings platform for 2010.
Our FFO number of $0.44, even after adjusting for bond gains and other items, was solid and exceeded estimates. And our revenue, expense and capital trend lines were in line with expectations.
With those comments as a framework, let me start by addressing our capital plan first. During the quarter, we were very active on the capital front and had continued success on our balance sheet program.
Key action steps were meeting our $150 million mortgage financing target for the year by closing a $60 million first mortgage on One Logan, a previously unencumbered 600,000 square foot Class A office tower in Philadelphia. We were also very pleased to have been able to participate in the recovery of the investment grade market.
And during the third quarter we closed a $250 million unsecured senior note financing due May 15, 2015. We also continue to be please with our secondary issuing trading ranges and what appears to be a general overall tightening of spreads.
We also repurchased $203 million of our unsecured notes through a series of both open market and tender transactions. These transactions took advantage of the rapidly closing debt discount window and generated aggregate gains of $5.1 million on the early extinguishment of debt during the quarter.
In the aggregate, through our bond repurchase program, we have repurchased a total over $574 million of bonds at an average discount of 8.4% and generated about $42 million of gains of which 23.7 or $0.22 per share are included in our 2009 FFO numbers. That number will change slightly to about $0.20 per share due to our increasing share count.
Also, on a very important front during the quarter we closed into escrow our previously announced $256 million 20-year fully amortizing mortgage on our Sierra post office project. That rate you may recall is 5.93%.
That loan is expected to fund in during Q3 2010 upon project completion. That project remains on budget and on schedule and this funding will create a net source of cash for us in 2010.
The cost for both the garage and the main post office project are expected to be before any savings, $355.5 million. Of this amount, $174 million remains to be funded as of September 30, 2009.
Sources for funding this are the $58 million in future contracted tax credit payments and projected draws on our line of credit for the $118 million balance. So our $256 million forward funding will provide a net cash recovery for us in 2010 of almost $140 million.
Obviously with the bond deal completed this permanent financing in place, we will not be pursuing a separate construction facility, but we'll fund all of our remaining costs net of the tax credits off of our credit facility. The third component of our capital plan is property sales.
And while our business plan contemplated $145 million of sales for all of 2009, we are pleased to have accomplished $129.5 million year-to-date. Subsequent to quarter end, we completed the sale of two properties in Trenton, New Jersey for an aggregate purchase price of $85 million, $22 million of which we deferred as a 7.64% secured second mortgage.
And also completed a $7.9 million sale to a tenant of a 40,500 square foot condominium interest in our 100 Lenox Drive redevelopment property in Lawrenceville, New Jersey. The price per square foot on the Trenton sale was about $180 and on the Lenox Drive sale was $195 per square foot.
While the overall investment market tone is beginning to improve, spot pricing levels remain somewhat unpredictable. That said the transactions I mentioned above had cash cap rates between 8% and 8.5%.
And the transactions we have closed year-to-date have been at an average 8.6% cash cap rate and a 9% GAAP cap rate inside our previous guidance. We will continue to monitor the market and look for opportunities to continue to spin out low growth non-core assets.
However, given the recovery of the debt and the equity markets, as well as the success of other components of our capital plan, we will be increasingly selective on pushing sales simple to raise capital and will be much more focused on market positioning and future growth opportunities. And in fact, while we have several smaller properties remaining on the market for sale, we do not necessarily expect any more sales to close this year.
As a consequence of all these capital activities, at the end of the quarter we had zero balance outstanding on our $600 million credit facility and very strong overall credit metrics. Our credit facility has extension rights through June of 2012, and as Howard will explain in more detail, we are in very good shape from a capital capacity and a covenant standpoint.
Now, turning attention to the real estate market conditions, bottom line we expect next year to remain challenging, leasing and absorption levels to remain anemic. In this environment, our major operating mission is to garner an increasing share of this lower level of activity.
Our tools to accomplish this are well positioned properties at the higher end of our quality curve, strong submarket positions, capital capacity, and a leasing strategy to aggressively pursue all available deals. In looking at our third quarter results, same-store occupancy declined from 89.7% to 88.8%.
That was in line with our expectations. We expect to end the year between 87% and 88% same-store occupancy which is just slightly below the levels we saw thought quarter.
For the quarter, we had 1.157 million square feet of leasing activity based on commencement date consisting of 262,000 square feet of new deals, 182,000 square feet of expansions by existing tenants, and 714,000 square feet of renewals. So for the second quarter in a row, this total leasing activity is greater than the leasing activity in any of the previous four quarters.
In addition, during the quarter we leased over 724,000 square feet in 110 separate transactions, 466,000 square feet of which generate forward leasing activity which will help offset any further early terminations or tenant departures. So from a leasing standpoint, we're having good strong leasing levels, but we continue to face a higher than normal rate of tenant move outs and early terminations, which are negatively impacting our portfolio statistics.
Our tenant retention rate for the quarter was a strong 75.5% which is consistent with our historical run rate. Capital costs as a percentage of GAAP rents decreased to 8.6% from 11.3% last quarter and 9.9% in the first quarter of this year.
Our best performing region in terms of capital allocation was the New Jersey Delaware region where we allocated 5.6% of capital costs as a percentage of rents. Our highest capital consuming core market was Austin at 12.2%, but even this was well within our guidelines.
Quarter-over-quarter traffic through our portfolio was flat, but notably it's up 34% year-over-year. Traffic levels increased in Richmond and Austin and declined slightly in Pennsylvania and D.C., and in New Jersey, activity levels remained unchanged quarter-over-quarter.
Our pipeline of transactions is strong with 1.5 million square feet of new prospects of which about 480,000 square feet are in lease negotiations. Average deal time, which is the time basically from the time we show the tenant the space through release execution, decreased to 106 days during the quarter, which is down from 134 days during the last quarter and down from 129 day average in 2008.
So even though it's still taking tenants a long time to execute leases, at least they're moving in a positive direction. We continue to effectively manage upward pressure on concession packages, particularly on the capital side.
But the percentage of deals incorporating free rent rose slightly quarter-over-quarter to 27% from 26% in Q2. We continue to make progress on our 2009 and 2010 expirations.
Of the original 3.5 million square feet expiring in 2009, we have executed 1.9 million square feet. Of the remaining 546,000 square feet scheduled to expire in 2009, we expect an additional 162,000 square feet will renew, 57,000 square feet remain unknown, and the balance of over 300,000 square feet will vacate.
And this impact was known and is built into our plan and has a residual carryover impact into 2010. On our 2010 expirations, of the 4.2 million square feet expiring we have already executed 946,000 square feet or about 22% of the total year-to-date.
During the quarter, companywide for new leases, we had a 5.8% cash decline and a 2% GAAP decline. Our strongest performing market on the new leasing activity front was D.C.
which showed a 5.4% cash rent growth and a 14.4% GAAP rent growth on new leasing. Our lowest performing operational new lease activity was New Jersey and Delaware, which had a 13% decline on cash and a 0.8% decline on a GAAP basis.
On renewals, companywide we had a 4.6% decline on a cash basis and a decline of 1.5% on a GAAP basis. Our strongest performing market on renewals was New Jersey which showed a 0.8% cash rent growth and a 2.9% GAAP rent growth on renewals.
Our lowest performing submarket on renewals was PA where we had a 5.3% decrease in GAAP rent renewals and almost a 1% decrease in cash. During the quarter we had 60 direct deal transactions representing 45% of the deals and 23% of the square feet done directly by our leasing staff.
And we continue to see an emerging separation in landlord's ability to invest capital to either attract or retain existing tenants. Our 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 transactions.
In looking at the broader market, year-to-date leasing activity and absorption levels are down in almost every one of our key markets. The only market where we saw a year-over-year increase on leasing activities were central New Jersey and Wilmington.
Absorption levels remain primarily negative. Markets where we saw a year-over-year improvement in absorption levels were southern and central New Jersey, suburban Delaware, Philadelphia CBD and the Pennsylvania suburbs.
Just to wrap up the comments here on the operating side, we remain focused on portfolio performance, capitalizing on submarket dynamics, and aggressively pursuing every lease transaction. We plan to use both the quality and the location advantage of our portfolio and our capital to continue our track record of outperforming down markets.
And, frankly, as we stand right now our level of relative out performance in our core markets ranges from 200 to 1,500 basis points over market levels. On our development and redevelopment pipeline, of our total project cost of $417 million, approximately $192 million remains to be funded.
Of that, about 90% relates to Cira Post Office and Garage, which I talked about a few moments ago, leaving a total of about $18 million for the balance of our entire pipeline. That overall pipeline is about 92.7% lease.
Three of our redevelopments have been placed in service and moved into the core portfolio. These three projects are only 75% leased, so they had a 30 basis point downtick to our core occupancy levels during the quarter.
In looking at 2010, as you saw in our press release we introduced 2010 guidance. At the current time, we're projecting a guidance range between $1.23 to $1.34 per share.
Some of the key drivers behind these numbers are as follows. Given the lack of visibility on future tenant demand, our assumptions include speculative revenue that is about 28% below that of our 2009 achieved spec revenue on our same-store properties and only about 60% of our total 2009 actual spec revenue including our development projects.
We anticipate capital costs remaining relatively flat during 2010 and averaging between $13 and $15 per square foot versus our year-to-date 2009 average of $15.30 per square foot. For 2010, we're projecting a year end same-store occupancy of 87% that will trough down into the mid-80s later in the third quarter.
So overall by year end about a flat to 100 basis point decline over year end 2009 levels. We're projecting a GAAP same-store decline between 4.5%to 5.5% versus the 4.5% decline we're having in 2009.
Most notably, our guidance projects a renewal rate of less than 50%. That number's obviously extremely low based on our 2009 results and frankly when compared to our ten-year average.
However, given the lack of visibility in the second half of the year, for any tenant that we did not have a firm idea of their renewal status, we've assumed they vacate with the corresponding loss of NOI. So we do expect a tough re-leasing environment and project a decline on new and renewal rents in some of our markets and on average we expect about a 4% to 6% GAAP decline on new and renewal leasing.
From a balance sheet standpoint, we're projecting to have about $80 million of asset sales during 2010 in a program no acquisitions. On the sales, we've assumed they incur midpoint during the year at a conservative cap rate of 10%.
This is obviously purely speculative, as we don't have any specific properties under contract and/or identified. So all in all, 2010 will be a challenging operating year.
We believe our speculative revenue targets are very achievable given the pipeline of leasing transactions with a big variable in our plan, as Harold will touch on, being our tenant retention success during the course of the year. Final comment relating to our dividend, our board-approved dividend policy remains the same.
We intend to match aggregate 2009 common share dividends to our 2009 taxable income. Through some very effective tax planning work done in-house we determined that our aggregate year-to-date distributions are sufficient to match our projected 2009 taxable income, and as a result do not expect any further distributions to be made with respect to calendar year 2009.
For 2010, we are currently projecting an increase in our quarterly common share distributions to approximately $0.15 per common share per quarter or $0.60 per common share on an annualized basis, subject to quarterly declaration, obviously, by our board of trustees. This represents a 50% increase from our current distribution rate of $0.10 per common share, and based on the bottom end of our 2010 guidance range reflects a conservative 49% FFO payout ratio and a 70% CAD rate payout ratio.
So extremely well covered with room for growth as economic conditions improved. Payouts at this level will also enable us to generate between 40 to $45 million of annual free cash flow to contribute to our deleveraging efforts.
With that capital market real estate and guidance overview, Howard will now review our second quarter financial results and provide some color on our guidance.
Howard Sipzner
In the three months since our last call, we've continued to improve our balance sheet with a combination of mortgage financings, asset sales, the unsecured debt issuance and retention of excess cash flow. We continue to have no outstanding balance on our revolving credit facility and have significantly reduced the series of near-term maturities through aggressive debt buybacks.
And with that introduction, I'll jump right into the third quarter where FFO available to common shares and units totaled $58.2 million versus $52.3 million in the third quarter of 2008, resulting in a $0.44 per share FFO figure for the current quarter. This was $0.07 above the $0.37 analyst consensus and is attributable to about $1 million of extra term fees over more typical levels, about $0.5 million of extra management fees related to third-party leasing activities, about $0.5 million of lower G&A on a run rate basis, $3.5 million of lower interest costs related to the cumulative effect of the buyback activities, $5.1 million of gains on debt repayment offset by $1.5 million related to hedge costs that had to be expensed.
Our FFO payout ratio in the second quarter is a remarkable 22.7% on the $0.10 dividend paid in July 2009. A few other observations on 2009 third quarter, rental revenue was up nominally and straight-line rent was up about $200,000 versus a year ago and $500,000 sequentially reflecting, as Gerry noted, slightly higher levels of free rent concessions in our leasing.
Recovery income was up sequentially and versus last year, reflecting more balanced expenses in the associated 35% recovery level. Nonetheless, our year-to-date expenses are running below plan and we have accrued an aggregate $5 million reduction of recovery revenue 'til we establish that the spending returns to expected levels.
Term fees, other income, interest income in both gross and net management income at $7.4 million net or $9.7 million gross were a bit high, as noted above. Our management income will tail off a bit through the end of 2009 and into 2010 as a number of existing contracts expire.
Operating expenses were up slightly sequentially and also versus a year ago. In the third quarter of 2009, we had a combination of certain bad debt expense write-offs, changes in recoveries and other factors related to our overall credit activities, but the net effect of this was just a $20,000 increase in our reserves, highlighting a combination of a very effective credit process and the continuing durability of our tenant base.
As I mentioned, interest expense declined sequentially in year-over-year due to lower debt balances from our debt reduction program. Notably, interest expense includes about $866,000 of additional costs related to APB 14-1, as well as higher swap costs in the current quarter.
We expensed $1.5 million in connection with the ineffectiveness in mark-to-market related to forward-starting swaps, but have attributed a substantial portion of those swaps to the financing we entered into in the third quarter. And lastly, we realized $5.1 million of gains on $203 million of aggregate debt repurchases.
On a same-store basis related to net operating income, cash rents were down $3 million while non-cash rent items declined $0.25 million. Recoveries increased by $900,000 while expenses on a same-store basis declined by $1.7 million.
For the quarter, same-store NOI declined 0.8% on a GAAP basis and 0.5% 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. 2009 third quarter CAD increased to $47.2 million sequentially and measured $0.36 per share.
We achieved a 27.8% CAD payout ratio for the third quarter and continue to benefit in terms of cash retention from the 2009 shift to the $0.10 dividend. Our capital costs on a recurring basis came in at $10.5 million and were in line with recent levels and expectations.
When looking at our various margins, NOI margin and EBITDA margin, it is somewhat remarkable that we're maintaining margins at or near their highest levels despite higher core vacancy, reflecting expense control and better overall rent levels and recovery provisions. To turn to 2009 guidance, which we tightened up and increased on the press release, we're revising the guidance to be in a range of $1.82 to $1.85 for FFO per share from the prior range of $1.75 to $1.80.
And this $0.07 increase is really outlined earlier on the third quarter results and it's offset by the fourth quarter for the higher interest costs related to our unsecured note issuance. which on a full run rate basis will cost us about $17 million more a year of interest expense, $4 million a quarter, a little over $0.03.
Thus for the fourth quarter, we see a run rate effectively between $0.32 and $0.35 which is at or just below the $0.35 consensus that a number of analysts, as Gerry noted, have not yet updated for the new note issuance. As 2009 winds down, we're seeing the following conditions.
We expect same-store NOI to come in on a lower level on the fourth quarter and it reflects the increased vacancy that we now expect, and it will do so as well on a cash basis. We continue to see flat to perhaps downward trends in rent levels as we make sure we achieve every tenant opportunity we can.
And we see year-end occupancy in the core somewhere in the neighborhood of 88% and this is about 100 basis points, or 1% lower than our prior expectation. In terms of all other income items, including gains on debt repurchases, we still see that remaining in a $50 million to $55 million gross level or about $45 million net for our management expenses and that's in line with our July 2009 update.
Our 2009 G&A remains in line with expectations at $21 million to $22 million overall. And as I noted, we'll see rising interest expenses in the fourth quarter related to the recent note issuance.
Overall for the year, we see CAD coming in at a range of between $1.45 and $1.48 and this is much higher than the prior estimate and that's related to the gains on the bond repurchases, which we are counting in our CAD calculation, as well as moderate capital expenditures. So, net-in-net, our projected 2009 CAD of $165 million to $170 million will provide approximately $100 million of free cash flow as we close out 2009 and that's been a key component of our 2009 deleveraging.
We also introduced, as Gerry noted, 2010 FFO guidance of between $1.23 and $1.34. Gerry gave a number of the key components and I'll just reiterate a few and add one or two others.
We do see GAAP and cash same-store NOI both declining in 2010. GAAP in the neighborhood of 4% and cash perhaps at 1% worse as we see an increase in free rent in the associated straight-line free rent impact and we are expecting that on a GAAP basis, our mark-to-market on rents will be down, somewhere in the mid single digits and cash possibly a bit more.
Year-end occupancy should be in the mid to high 80s, probably around 87%, but it is dependent on a fair amount of leasing in the second half of 2010. And Gerry did note the renewal retention of 46%, which is one of the items in the guidance, which better provide some upside to the range.
Aggregate 2010 leasing will total about 3.1 million square feet and it breaks down roughly 50/50 between new and renewal activity. We're coming in much lower in other income items because notably we don't expect any of the 2009 bond repurchase gains in 2010 and that figure should be $25 million to $35 million gross, or $17 million to $27 million net.
It includes termination revenues, other income, management revenues, interest income and income from our JV actives. G&A will remain flat at about $5.5 million a quarter, or $22 million and interest, as I said, will pickup and then remain level for the year at about $35 million a quarter on average.
This all results in a CAD result for the year against that FFO guidance of about $0.85 to $0.95 and it will cover about $40 million of revenue maintaining capital, $10 million a quarter, roughly in line with recent activities. So, if you do the math in terms of our newly expected dividend, we should be well covered on the $0.60 on FFO payout ratio somewhere in the 45% to 50% and a CAD payout ratio somewhere in the 60% to 70% and most importantly we'd have $40 million to $45 million of free cash flow from this operating and capital plan.
Which leads me to turn to the 2009 remaining capital plan and the 2010 plan. As we look at the aggregate in the five quarters beginning October 1, we see needs of about $200 million in the fourth quarter of 2009 and $570 million in 2010.
These break down to about $290 million of investment activity, $170 some odd million that Gerry mentioned for the MPO, the post office and the garage, $17 million for recently completed redevelopment lease up, another $19 million for other existing projects and these are all outlined on page 32 of our supplemental package. And then we expect about $50 million over the five quarters of revenue maintaining CapEx or about $10 million a quarter and another $30 million of other leasing related and building capital expenditures.
We see $380 million of debt repayments, $105 million 2000 note that we'll repay actually next Tuesday, $211 million for the year0end 2010 note, $8 million actually spent quarter-to-date on some nominal buy back activity and $56 million for mortgages. And lastly, incorporating all of our different dividend expectations we'll distribute about $100 million of cash to shareholders, both preferred and common over the five quarters.
To raise this $770 million, we have a number of different avenues, most of which are quite predictable or are in hand and they include about $200 million of cash flow from operations over the five quarters, roughly $40 million a quarter in each of 2009 and 2010. Gerry identified the $58 million, give or take, of contractual historic tax credit proceeds.
We are expecting funding by no later than the fourth quarter of 2010 on the $256 million post office garage loan. We are also expecting a $40 million repayment of a first mortgage loan to the buyer of our Oakland portfolio on August 2, 2010 and picking up on October 1, we see $170 million of aggregate sales activity on a net basis, and that's $202 million of gross sales less $32 million of seller financing.
Notably, the $85 million sale on the Trenton property is already closed. The $7.9 million sale on the tenant condominium already closed.
We have about a $29 million sale under contract through the balance of this year with some seller financing which may or may not close, and we're looking at approximately $80 million in 2010. So, when you add all those items up that leaves just $46 million of projected net credit facility borrowing based on a zero balance on October 1.
So, we're anticipating very low usage on the credit facility on average and it gives us room if any of the sales components don't materialize. Lastly to touch on a few other items, account receivables at September 30, 2009, we had a very controllable amount of $12.7 million of operating receivables with a very comfortable $5 million reserve, or about 40%.
We also had straight-line rent receivables of just about $99 million and a reserve of $12.1 million against those, or about 12%. And in Q3 we had a net reduction to our reserves, as I mentioned earlier, of about $400,000 from last quarter's level reflecting changes to the reserve and a specific write-offs of reserved and unreserved activity.
Our balance sheet is at some of its strongest levels of many years with a 46.4% debt to gross real estate cost. We were very pleased that we could re-access the unsecured debt market at the end of the quarter and that bought our line balance down to zero where it stands today with about $46 million of cash on hand, which we will use for next Tuesday's note repayment.
And in the aggregate, we've repurchased $574 million of our debt over the last year and nine months realizing almost $42 million of gains. Beyond the gains that we've achieved, we've been very successful in bringing down the levels of a variety of forward maturities.
We closed the quarter 100% compliant on all of our credit facility and indenture covenants with better results sequentially in virtually all categories. And we remain with a $4 billion unencumbered asset pool about 80% of our total assets, which enhances our unsecured credit metrics.
Now I'll turn it back to Gerry for some closing comments.
Gerard H. Sweeney
To wrap up our prepared comments, we expect economic recovery to begin to be reflected in real estate market performance, but as always there's clearly a lag factor. And as a consequence, our 2010 guidance we project operating challenges will continue through next year.
We are, conversely, very pleased in our capital plan execution has put us in a very strong position. The accomplishment of our mortgage financing target, the equity sale, the sales targets and in re-accessing the public debt markets has truly put the company at a strong financial position.
We go into 2010 recognizing that while times will be tough I mean our portfolio has historically done pretty well during challenging times. We've laid out 2010 guidance's, I think by definition conservative but pragmatically so.
We certainly have every intention of trying to outperform some of those statistics that Howard and I touched on, but given the lack of real visibility later in the year on job growth, it's hard to project that. So, to really wrap up as Yogi Berra once famously said, "The other team could make trouble for us if they win."
So, now I am not sure if he made that same comment to the first and second ladies on the way to the mound last night, but I can tell you that Brandywine plans on winning more leasing games than we lose during 2010, and we're confident in our ability to successfully navigate the challenges that lie ahead over the next four or five quarters. So, with that we'd be delighted to open up the floor for questions.
We would ask that in the interest of time you limit yourself to one question and a follow up.
Operator
(Operator Instructions) Your first question comes from Ross Nussbaum – UBS.
[Rob Sailsbury] with Ross Nussbaum – UBS
This is [Rob Salisbury] here with Ross. Can you take a minute to walk us through how the post office project is going to flow through the P&L next year?
I think there were a couple of moving parts with the tax dependents and everything.
Howard Sipzner
The post office transaction, all the implications of that have been deferred on our balance sheet, both the assets and the liabilities. And once the project begins to operates, we'll ship the accounting of those and we'll begin to reflect an amortization of the net balance of those two figures over a five year service period.
That'll be both the case for the historic tax credit transaction, as well as for the new market tax credit transaction that encompasses the garage. But we expect to recognize those revenue items at the end of each successive 12-month period, so we won't see any impact for those in 2010 as we currently envision it because that effect would be concentrated in the third or the fourth quarter of 2011 for the first year.
And it should be roughly in the neighborhood $10 million per year on a current estimate that will run through both the income statement and FFO. But clearly as a non-cash item, we intend to deduct it from our CAD calculations.
Operator
Your next question comes from [Chris Kattan] – Morgan Stanley.
[Chris Kattan] – Morgan Stanley
My question is on the disposition markets. I think you heard you say that it's improved somewhat.
I'm wondering is that more and better bids than you'd expected, and if you could what color is there? How has it evolved over the last few months, and then the seller financing you talked about in your metrics and the need to provide that?
Gerard H. Sweeney
Chris, I missed the very beginning part of your question, so if I don't answer it completely, please advise me. I think on the sales market as we look at it, fundamentally there's not a lot happening.
There are not a lot of trades. What's out there gets fairly short bid lists.
It's becoming increasingly clear that a lot of traditional buyers have their own issues they're beginning to grapple with whether it's a debt or valuation. There's still, I think, a sense of waiting for fundamentals to firm a little bit and for the debt markets to further stabilize, and I think that's the general theme we continue to see.
Now, what's been interesting though is in the last 30 days we've definitely had a higher level of reverse inquiries from institutions looking ahead towards 2010 and being interested in either JVs on existing assets or looking to jointly underwrite new acquisitions. So I think we're beginning to get that there's clearly a sense that this much anticipated "flood" of potential opportunities, I think people are going to think it's more going to be a multiyear trickle and that there may no be the level of deep distress that many folks were thinking about several months ago.
So I think we're seeing a little more optimism on the part of buyers that the economy and debt markets are stabilizing and that the bottom may be reached. We're getting again anecdotally a sense of upward pressure on cap rates is abating.
I think the anecdotal evidence we have on that is I think from some of our sales activities earlier this year that we walked away from, we see that several kind of unsolicited refreshed bids that have driven the cap rates down lower than where they were off of their highs earlier in the year. So I think there's still generally a lack of clarity, but people are beginning to think about 2010, particularly with the debt markets stabilizing and there being more positive dynamics on the general economic front.
I think for our part, we're staying prepared. We're fine tuning our portfolio and management strategy.
We're looking at our internal infrastructure to address the investment market. We want to continue it, as I touched on, to prune our slow growth non-core assets looking at both outright sales and joint ventures.
While our focus during the year is clearly going to be in operations and balance sheets strengthening, we are beginning to be approached with some interesting opportunities, but I think it's way too early to focus on those at this point. So as a result, we didn't put any acquisitions in our 2010 plan.
But I do take it as an encouraging sign that a lot of folks were talking to feel as though they may have kind of missed the bottom that the level of distress may not be as deep or as broad-based as they think, and that a number of these institutions are looking ahead towards their 2010 agendas.
[Chris Kattan] – Morgan Stanley
The second part was just with regards to the seller financing. Are you offering strong rates there?
Or is there a need to provide this financing in the sense that maybe that it couldn't be obtained elsewhere? That was the second part.
Gerard H. Sweeney
Great question, too, we wound up finding seller financing on the Trenton transaction, that's about a 7.6% secured second mortgage. As I think we've talked on the call, is we prefer no to do any seller financing.
That transaction was an $85 million trade. The buyer had success in only getting about 50% loan to value of primary first.
Those two buildings are leased at a substantially state of New Jersey, so we felt very comfortable with the coverage requirements on the second mortgage, and we felt we were going to get a little bit of an earning asset that we would cover over a number of years. So I think we go into each of the transactions not planning to have to provide seller financing, but particularly when this transaction was struck a number of quarters ago, there just wasn't the velocity or predictability of the debt market.
So having to incorporate that seller financing was a key part of getting that transaction closed. With the debt markets getting better and hopefully there being more visibility on underwriting, our hope is that that will be a less frequent occurrence.
Operator
Your next question comes from Jamie Feldman – Bank of America Merrill Lynch.
Jamie Feldman - Bank of America Merrill Lynch
Gerry, I want to go back to your comments at the outset of the call where you said there's an expectation that business services employment continues to decline in Philadelphia or in your region. I was hoping you could talk about that.
And then if actually we could talk about what's going on in Northern Virginia as well in terms of kind of with the government spending how that's playing out and how much more we have to see.
Gerard H. Sweeney
Yes, and I'll give you what little color I have. Most of it is coming through some economists that we talked to locally and their level of being able to accurately project I don't think is beyond reproach.
I think the expectations in Philadelphia primarily has a service and a professional based economy, most of the job losses thus far have occurred in that sector. As I mentioned, that sector has lost jobs for the last 15 consecutive months.
I think with the expectation from the folks we talked to is that if there is continued upward pressure on the unemployment, it's going to be coming out of those sectors. Nothing of particular note, I do think the general feeling is that a lot of the job losses were taken early in this marketplace, so we're not really expecting a lot of other shoes to drop, but again I'm not sure they have any real true visibility in what's going to happen with the region as a whole.
James Feldman - Bank of America Merrill Lynch
So I guess when you speak to your tenants and get a feel for what they're thinking, do you sense that more of them have more layoffs to do, or? One of the things that our economists here are saying is that they think the job market actually that companies cut too much.
So like when you talk to your tenant base, do you get the same sense or do you sense that maybe they're right sized or they actually have more to go?
Gerard H. Sweeney
I think it's more that they feel that they're right sized with not too much more to go which is why I think even on the last call, we talked about how we tracked unemployment stats within our portfolio through our security systems and through tenant interviews. There is clearly, I think, most of our tenants move very rapidly to cut their employment bases quickly, even to the extent that they were just looking to reduce overhead and maintain margins, they used the economic turmoil as they cover for that.
Now what that has done is created a little bit of an overhang in space utilization. So our guess is as some of those companies start to rehire, they'll first be absorbing excess capacity within their own space prior to leaping beyond new space requirements.
But I think it's notable, we did have about 180,000 square feet of expansions, I think. Was that the number, George?
George Johnstone
Yes.
Gerard H. Sweeney
During the quarter, so we are seeing tenants begin to start to expand, but I think generally throughout our portfolio we're not getting any definitive trend line from tenants that they are expecting to do more and more employment cuts. I think quite the opposite.
I think people are beginning to preach business stability. I think that's one of the reasons why we were seeing such a nice stability to our activity levels where tenants are actually now beginning to think a little bit more longer term than a year or two and actually going into the marketplace to look at space requirements, because they have more predictability to their employment situations, to their revenue lines and view that now may be a good time to be purchasing a real estate lease.
James Feldman - Bank of America Merrill Lynch
Are you seeing more activity from startups of people that were laid off?
Gerard H. Sweeney
I don't think so, Jamie. George, you seeing anything?
George Johnstone
Not that I would say is a noticeable trend there.
Gerard H. Sweeney
I think with the feedback we're getting, Jamie, from our property managers, leasing agents, managing directors, those of us senior executives who spend time with key tenants is much, much more sense of stability. I won't be so bold as to say that a lot of our tenants think they cut too much because I think they're still waiting for some visibility in their earnings as well.
But we are not projecting a lot of other shoes to drop, but we don't really have any particular guarantee on that either.
James Feldman - Bank of America Merrill Lynch
Then Northern Virginia, I'm just trying to get a sense of where we are in the cycle given the amount of capital that's been allocated to the region by the government.
Gerard H. Sweeney
Well, I think you know the stats that we're getting in from I think it's George Mason and Delta Associates that are teaming in D.C. pulled together, is that they're projecting, as I mentioned, about 24,000 net new jobs in D.C.
with about 13,000 of those occurring in Northern Virginia. Looking for that to push the unemployment rate back down by about 80 basis points by year-end 2010.
Look, they're projecting growth in subsequent years at 35,000 net new jobs in 2011, 42,000 jobs in 2012. The highest rated job growth in the metro area is predicted to be coming in out of Northern Virginia due to a lot of the government stimulus programs.
The highest number of new jobs were created in the government sector, followed by education and professional business services where the biggest losses I think were in construction and retail. So I think what we would expect to see down in Northern Virginia is very much driven by government related services and government spending.
So the projections down there seem to be pretty rosy for 2011 and 2012. We'll see how they play out.
Operator
Your next question comes from Jordan Sadler - Keybanc Capital Markets.
Jordan Sadler - Keybanc Capital Markets
I just wanted to get some clarification on a couple of the underlying assumptions for 2010 guidance and forgive me if I missed these I know you guys had a lot of content in there. What are the known move outs for 2010 as a percent maybe or in square footage?
Gerard H. Sweeney
I guess as we sit here today we've got I guess roughly half a million square feet of tenants that we know are going to vacate. They've either already left the space and they're just performing under the balance of the lease term or we know they have procured alternative space at their lease expiration.
Jordan Sadler - Keybanc Capital Markets
So that's 10%, 15% or so of expirations roughly, right?
Gerard H. Sweeney
Right.
Jordan Sadler - Keybanc Capital Markets
Okay. And then the other question is just on the recovery reserve you were talking about, Howard.
What is that, the $5 million reserve?
Howard Sipzner
Well, as we run through 2009 we're billing tenants based on expectation of expenses and booking that associated revenue. But when we see as the quarters unfold that our expenses are running lighter than would have been expected, we effectively withhold that income from the income statement.
One of two things will happen. Either our expenses will ramp up in the fourth quarter, as they often do, and then that recovery amount will get back in balance.
And/or and it could be a combination of both, we'll end up owing tenants some money. But if it's the latter case, we'll have already accounted for it on an income statement basis and recognizing we always try our best not to have to write checks to tenants.
So we are going to endeavor to spend either on a project basis or just a regular R&M basis whatever we can in the fourth quarter. And there's also the possibility that we'll have some bad weather in the Northeast areas and incur some snow removal costs and that is a somewhat volatile factor as well.
Jordan Sadler - Keybanc Capital Markets
Is it an ongoing reserve that'll continue to 2010?
Howard Sipzner
Well, it'll work its way out by the end of this year. Either we'll be writing checks to tenants or we'll be reversing it and recognizing a larger amount of revenue in the fourth quarter.
But if that were the case, we'd have a larger amount of expense as well.
Jordan Sadler - Keybanc Capital Markets
Where are you relative to actual now sort of through the end of 3Q?
Howard Sipzner
Well, through the end of 3Q we had withheld $5 million of revenue based on the expected recovery percentages. It's too early to tell what's happened yet in the fourth quarter.
We haven't seen final October numbers. We do spend a lot of time as we move through the second and third quarters with the regions making sure they understand on a property-by-property basis where they need to be.
Jordan Sadler - Keybanc Capital Markets
So best case scenario, you could book in the incremental $5 million of expense recoveries assuming no change in expenses sequentially?
Howard Sipzner
That would be the best case scenario, but that would mean a jump in expenses would go with it.
Operator
Your next question comes from Michael Bilerman - Citi.
[Josh Addie] with Michael Bilerman - Citi
It's [Josh Addie] with Michael here as well. First, with respect to cap structure, when you did your first equity offering I think you kept the proceeds at a pretty reasonable level, which kind of left the door open to do more down the road.
How do you feel about equity in today's levels? And how much equity do you think needs to be put into the cap structure?
And does that fit at all into your capital plan for the next two years?
Gerard H. Sweeney
Well, look, I mean, as we've talked on our calls and all of our investor meetings one of our overriding objectives to continue to improve our balance sheet and move up the ratings curve. We did hold the size of the equity offering given where the pricing of the equity was back in the second quarter.
We've also had some very good success in achieving some of our other goals, the equity deal being a key piece of that. I mean that trade, as painful as it was, along with the other sales, the mortgages and thankfully the buying market opening back up has put us in a very positive cash and strong position, as Howard articulated, in terms of our sources and uses.
As such and with very little additional activity, we have full capital capacity for the next several years. So while leverage is higher than we ultimately want it to be and we're determined to remove leverage as a value blocker to our stock, we also want to make sure that we are very pragmatic and disciplined in terms of how we go through assessing our deleveraging options.
We have the flexibility to sequence a number of steps over the next couple quarters. I mean, clearly we'll do everything we can to continue to improve our NOI.
That will be clearly a challenge, but that's a key focus of ours. We'll look at accessing the sale the joint venture marketplace.
And then certainly as we look at the plan going forward, look to the equity market to circumstances warranted and whether that be a standalone transaction or another event where we can demonstrate value creation as opposed to just dilution, we'll make that decision when we get there. But the umbrella goal remains unquestioned and at the top of the board and management's priority, which is to continue to delever the company, continue to strengthen our current metrics.
I think we want to make sure that we sequence our activities properly and make sure that we preserve the highest level of value we can for the shareholder base.
[Josh Addie] with Michael Bilerman - Citi
Second question I have is I think you have about close to $75 million of seller financing loans outstanding now. What are you booking from an FFO perspective?
And also what are you booking from a cash perspective? And are any of those loans accruing or pick instruments?
And also maybe just give us some color on the loan book in general.
Howard Sipzner
As far as our notes receivable outstanding, we currently have about I think you had said $75 million. I think it's actually around $50 million currently and we're at around $300,000 a quarter of interest income associated with those notes.
[Josh Addie] with Michael Bilerman - Citi
And is that the same on a cash basis?
Howard Sipzner
On a cash basis, we recall that the Oakland note the $40 million is interest free and we're accruing up from a discounted balance to the $40 million maturity at a 4% rate. So that accrual does run through the income statement, but there is no cash associated with it.
On the new Trenton note, the $22.5 million, it's got a nominal 6% cash pay, but there will be periods where on account of amortization to the first, that cash pay will reduce. Be that as it may, we'll ultimately earn up to the 764 overall rate and I think we stipulated that was worth, if memory serves me, about $5 million and change by the end of the seven year maturity.
So it'll be an additional, I guess you call that a pay in kind if that's what you mean by that type of note. That will grow in size.
Howard Sipzner
Yes. We are at $50 million as of 9/30 but will be in the $70 million neighborhood after Trenton closes.
[Josh Addie] with Michael Bilerman - Citi
So effectively what is the current FFO that will be generated from that $70 million is significantly in excess than the cash that you'll be generating. You're backing that out for your CAD calculations?
Howard Sipzner
I don't think we back out anything related to those notes for CAD purposes currently.
[Josh Addie] with Michael Bilerman - Citi
So, you had said that it's basically from and FFO yield perspective, these notes are probably yielding, what? On the 75 you're accruing a 7% yield effectively?
Howard Sipzner
No, not on the whole because that would be a 1.64% accrual related to the new note and you also have to take into account that the installment sale accounting treatment that will be in place for the Trenton sale will limit our recognition of income on a go forward basis, not quite but on an almost basis to cash received. It's going to more closely be related as cash and you'll see in the fourth quarter we will book a large gain on sale from that transaction because we have to defer that until we ultimately receive the final cash balances with the payment of the note.
[Josh Addie] with Michael Bilerman - Citi
Howard, is any other type of security, I don't know if there's anything with post office or anything else that you're doing where you're effectively booking income, but there's not the cash flow there?
Howard Sipzner
As we said, there was a question earlier the nature of almost the entire tax credit transaction has an element of cash received up front during the development period. We've talked about those various payments.
The ultimate deferral of that cash received are incurring of costs on the other sides of that transaction, ultimately during a five-year period once we begin operations will recognize an amortization of those amounts, because we do expect in both transactions that via the put-call structure there will be – that part will exit that transaction for a variety of economic reasons. So the whole corpus of that transaction has been cash upfront, which Gerry and the rest of us have often couched in the context of effectively reduction of the development costs, but ultimately the GAAP accounting dictates that we recognize that income during the later in-service period.
And as that happens, we'll obviously spend some time talking about it. It's projected to be a late 2011 event as currently contemplated, but it will be talked about fully disclosed so everyone will understand it's got an income statement effect but not a cash effect.
[Josh Addie] with Michael Bilerman - Citi
And there's no difference today between income and cash?
Howard Sipzner
Well, we're not recognizing any income related to those transactions today.
Operator
Your next question comes from John Guinee – Stifel Nicolaus.
John Guinee – Stifel Nicolaus & Company, Inc.
A couple quick questions. First, I think what you're basically saying, Gerry or Howard, is there's reverse amortization on the Trenton deal and there's reverse amortization or accrual on the Oakland deal too?
Howard Sipzner
They are slightly different. The Oakland deal was a $40 million zero coupon seller financing that was booked on our balance sheet at a discount and then accretes up to the final cash payment amount.
And it was booked at the time in its low loan-to-value at a 4% accrual rate.
John Guinee – Stifel Nicolaus & Company, Inc.
Do they have the ability to repay that or is there a hard asset security to that loan?
Gerard H. Sweeney
Yes, that's a first mortgage position on two buildings, so that's about from a real estate standpoint were talking about a 25% loan-to-value.
John Guinee – Stifel Nicolaus & Company, Inc.
What's Jupiter Street, 220 car redevelopment?
Gerard H. Sweeney
Jupiter Street is a garage that we're rehabbing right off of Broad Street in Philadelphia CBD, right off the Avenue of the Arts. It's a rehab of an obsolete automated parking structure that we're going to modernize and place in service in the spring of 2010.
It's right off the Avenue of the Arts section of Broad Street in Philadelphia CBD and we have that underway right now.
John Guinee – Stifel Nicolaus & Company, Inc.
And that's for 1 and 2 Logan?
Gerard H. Sweeney
Actually 1 and 2 Logan have their own garages. It would be a standalone facility located right off of the Avenue of the Art.
Operator
Your next question comes from Dan Donlan – Janney Montgomery Scott.
Daniel P. Donlan - Janney Montgomery Scott
You guys mentioned that your 2010 dividend should recognize about 70% of CAD. Is that a level you guys are going to maintain going forward or is that something you are going to revisit if the credit markets and space markets improve?
Howard Sipzner
Well, that is actually inside of the level we've previously articulated, which was an 85% target, so we are doing better than that from a cash retention standpoint. But we are sticking to the notion that we're going to try to match the dividend payments to taxable income.
And as we best see 2010 best shaping up, that level ought to do it, but we'll be evaluating it. The board will be evaluating that as the year goes on, and certainly if conditions are better than expected, there's always the possibility of higher dividends.
Operator
Your next question comes from John Stewart – Green Street Advisors
John Stewart - Green Street Advisors
Howard, I'm a little bit confused by the hedge accounting, in particular on the unsecured note offering. It looks like in the press release you say that hedging costs add another eight to the cost of the security, but this is obviously fixed.
Are you swapping into floating?
Howard Sipzner
No. What we, and Gabe will no doubt jump in and help me here, but what we did I guess a couple of quarters ago, we booked a forward starting ten-year swap and ultimately we did not execute a transaction exactly in the timeframe contemplated or in the format contemplated.
So the combination of those two effects means we expense a portion of the hedge and you see that running through the income statement, both in Q2 and more so in Q3. But another portion of that hedge, a substantial portion gets attributed to the financing we did and that adds about an eighth of a point to the cost, because the underlying treasury and swap rate was higher, in fact, than the treasury at which we executed the financing.
John Stewart - Green Street Advisors
So it allocates that instrument even though it really wasn't related to the transaction?
Howard Sipzner
Well, yes, it's deemed that it does relate even though it's not for the full ten year period. The expectation is that between that financing and ones that follow it will absorb the amount that we hedged – the amount that's been deferred to other comprehensive income.
Operator
At this time there are no further questions. Gentlemen, do you have any closing remarks?
Gerard H. Sweeney
Only to thank everyone for participating. I know its been a long day with a lot of earnings calls, so we appreciate your participation and look forward to updating you on our next quarterly call.
Thank you.
Operator
Thank you. This concludes today's conference call, you may now disconnect.