Feb 25, 2010
Executives
Gerard Sweeney – President and CEO Howard Sipzner – EVP and CFO George Johnstone – SVP, Operations and Asset Management Tom Wirth - EVP, Portfolio Management and Investments
Analysts
Jordan Sadler – Keybanc Capital Markets Craig [ph] – Keybanc Capital Markets Michael Bilerman – Citi James Feldman – Bank of America Brendan Maiorana – Wells Fargo John Guinee – Stifel Mitch Germain – JMP Securities John Stewart – Green Street Advisors Dan Donlan – Janney Montgomery Scott Rich Anderson – BMO Capital Markets
Operator
Good morning. My name is Lantagi and I will be your conference operator today.
At this time, I would like to welcome everyone to the Brandywine Realty Trust fourth quarter earnings conference call. (Operator instructions) I would now like to turn the conference over to Mr.
Gerry Sweeney. Please go ahead sir.
Gerard Sweeney
Lantagi, thank you, and good morning everyone and thank you all for joining us on what appears to be another snowy morning here in Philadelphia as we go through our fourth-quarter earnings call. Participating on today's call with me are Howard Sipzner, our Chief Financial Officer; Tom Wirth, our Executive Vice President, Portfolio Management and Investments; George Johnstone, our Senior Vice President of Operations; and Gabe Mainardi, our Vice President and Chief Accounting Officer.
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. With that being said, 2009 was characterized by a series of capital market activities and good leasing performance.
Those accomplishments are outlined in our press release, and encompass several mortgage financings and equity offerings and unsecured note issuance, asset sales and debt repurchases that all combine to significantly improve our balance sheet and liquidity position as the year progressed. We were very pleased to have successfully executed the liquidity plan we chartered out at the beginning of 2009 and several key accomplishments are as follows.
During the year, we reduced net debt by about $259 million or 9.5%, and since the third quarter of 2007, we reduced our overall leverage by approximately 800 basis points. Our $600 million line of credit, which has extensions that go through 2012 had only $92 million or 15% drawn at the end of 2009, and provides us, as Howard will outline, with ample liquidity.
The long-term financing on our IRS project will provide $162.5 million net source of cash to the company during 2010. All of our financial covenants remain in a strong position.
We closed during the year $130 million of asset sales in an average cap rate of 8.5%. We raised $242.5 million of net equity and $6.30 a share.
Also during the year, we began funding of our $77 million of gross tax credit financings with up to $34 million remaining to fund during 2010. We have reaccessed the unsecured debt market in September, by issuing a $250 million unsecured note at a rate of 7.5%.
During the year we also retained $90 million of cash flow after recovering CapEx and dividends, which further advanced our liquidity objectives. Through our $444 million debt repurchasing program, we significantly reduced our 2010, 2011 and 2012 debt maturities and from an operational standpoint we commenced leases during the year on 3.8 million square feet, consisting of 1.5 million square feet of new leases and 23 million square feet of renewals.
With our new dividend rate of $0.15 per quarter, which was recently increased from $0.10 per quarter, our FFO and CAD payout ratios are among the lowest in the sector providing a strong cushion for challenging economic times and ample room for upside as market conditions improve. Based upon the midpoint of our new 2010 FFO guidance, our FFO payout ratio was 46% and our CAD payout ratio is 67%.
Furthermore, our 2010 business plan contemplates that we will generate free cash flow of between $40 million to $50 million. From an operational standpoint during 2009, we exceeded our spec revenue targets.
As you may recall we had budgeted $38.5 million of total spec revenue for the year. We actually achieved $39.3 million or 102% of our target.
Our tenant retention rate for the year was 78% excluding early terminations and 67% after factoring in those early terminations. We ended the year with same-store occupancy of 88.5%.
On the last call we indicated that would be between 87% and 88%. So we ended slightly better than where we thought we would.
In addition, our capital costs were within our targets of 15% of gross revenues for new leases and 7% of gross revenues for renewals. Although overall market conditions remain challenging, we are seeing increased activity in some of our markets.
As we discussed in the last call, 2010 is the year of the shrinking pie with generally negative or lower levels of overall absorption. Our objective in this type of climate is to be singularly focused on leasing office space and be as aggressive as we need to be to maintain portfolio occupancy levels.
While we will discuss different markets in more detail during the G&A, the following metrics guide our perspective on overall market conditions. Traffic through our portfolio is up 23% year-over-year.
Traffic activity levels increased in Metro D.C. by 39%, while inspection levels decline slightly in Pennsylvania and in Richmond.
In New Jersey and Delaware, Austin, and California our activity levels remain unchanged. The pipeline of transactions is strong with 2.4 million square feet of new prospects of which 392,000 square feet are in lease negotiations.
This compares very favorably to our pipeline last quarter of 1.5 million square feet. Regarding average deal time which is another key metric, that decreased during the fourth quarter to 93 days, which was down from 106 days in the previous quarter, and down from 129 day average in 2008.
So tenants are fortunately beginning to get into their cars, look at space, and when they make a decision, make that decision a little bit quicker. Despite this there is no question that generally speaking there continues to be downward pressure on rents due to higher vacancy levels, tenant consolidations and generally lower leasing activity.
The core market most seriously impacted by this trend is New Jersey. Despite having positive absorption in South Jersey during Q4, we anticipate continued challenges in that market for at least the balance of 2010.
However, from an overall standpoint we are increasingly encouraged by the level of activity and more importantly by our leasing team's ability to maximize our competitive advantages in all the markets in which we do business. During the fourth quarter, we leased over 641,000 square feet in 119 separate transactions, 458,000 square feet of which generated forward leasing activity, which will help to offset any further early terminations or tenant departures.
Despite these strong leasing activities, we still continue to face a higher than historical run rate of tenant move outs and early terminations. That activity has been factored into our 2010 plan, and hopefully a lot of that is in the rearview mirror.
2010 will definitely present a window of separation between landlords that have financial flexibility and those that do not. We see this evidence every day on the leasing front, and to further solidify our advantage, we're proactively investing capital to refurbish some of our key existing properties to improve their competitive position and to send a clear positive message to the tenant and the brokerage marketplaces.
As a consequence, we anticipate investing about $16 million during 2010. Those numbers are built into our business plan, and those dollars will be spent on everything ranging from roof replacements, energy savings and sustainability initiatives, mechanical system upgrades, public area improvements and building renovations.
All of this investment is designed to take advantage of this market trough to reposition our well located properties, so that as economic conditions improve, we have a higher quality tenant base with better NOI growth potential. With that overview let me spend just a few moments reviewing our 2010 business plan assumptions.
The major objective for 2010 is to lease office space, frankly nothing more complicated than that. Our current business plan incorporates $28 million in speculative revenue, broken down between $12 million of new leasing and $16 million of renewals.
We're pleased to report that year-to-date we have already executed 12.4 million or 45% of that spec revenue target. Our original business plan also contemplated a 46% tenant retention rate.
Based on results thus far and what we expect to happen, we believe our retention rate will actually approach 55%. Our overall occupancy was just north of 88%.
We anticipate we will close out 2010 about 200 basis points below that level, and as I mentioned in the last call we expect those occupancy levels to drop down into the 85% to 86% range in the third quarter, primarily due to several known and planned for tenant move outs. We continue to effectively manage upward pressure on concession packages, particularly on the capital side.
While our 2010 plan does anticipate that 38% of our leases will have a free rent component versus 27% of transactions in 2009, reflecting continued pressure and our aggressive stance to both meet the market and beat our competition. On our IRS Philadelphia campus also known as the Post Office, we expect occupancy and NOI to commence in September of 2010.
This event will trigger funding of $256 million forward financing. That loan as you may recall fully amortizes over the 20 year term of the GSA lease, and has an interest rate of 5.93%.
From a balance sheet standpoint, several points of emphasis. We remain fully committed to our objective of moving up the investment grade ratings curve one notch.
We understand this is a several year process, and will require us to continue to reduce our leverage below current levels. We plan to achieve that through a combination of NOI growth, occupancy improvement as the market conditions recover, as well as to the extent that we pursue any acquisitions financing those on an all equity basis.
The combination of these three items we believe will have the effect of achieving our overall deleveraging objective. During the year we also predict having moderate usage on $600 million revolving credit facility.
As indicated earlier with extensions this facility has a June 2012 maturity. We anticipate that we will utilize less than 35% of the committed amount at any point during the course of the year.
We have not programmed any acquisition or joint-venture activity into our business plan. We are projecting about $80 million in property sales.
We have already closed an $11 million sale in January leaving $69 million to accomplish this objective. How will walk through our source and use schedule for our business plan does not contemplate any new financing activity other than utilizing our credit facility to pay of our 199 million of 2010 bonds during December, and paying off our $42 million secured mortgage on Plymouth Meeting executive campus also in December.
While there are other components as a major source of cash to do this or the anticipated $34 million remaining funding of the tax credit proceeds, the loan repayment from CIM of $40 million and the net recovery of $128.5 million from the funding of the IRS Campus $256 million mortgage loan. We also during the year plan on exercising the first of two one-year extensions on our $183 million term loan, ultimately pushing that maturity to 2012.
So in summary we made good progress during 2009, particularly on leasing and our capital plan execution. We were also very mindful, however, of the fact that we have a lot more work to do, particularly in an economic landscape that remains volatile.
Our 2010 leasing plan reflects our viewpoint on the market bottoming, accompanied by rental rate stability in some of our markets with continued downward pressure in several others. We are pleased with our progress on achieving our spec revenue target year-to-date.
As a result of this success, renewals to date as well and most importantly visibility on some forward leasing activity; we are increasing the bottom end of our guidance by $0.02 to a new range of $1.25 to $1.34. This operation does incorporate the seemingly endless impact of this heavy snow season, where we have thus far this year, 2010; we spent $4.3 million versus a budget of $1.4 million per net overage of $2.9 million.
Given our lease structures we will recover 66% or $1.9 million leaving a net uncovered landlord expense of approximately $1 million. Looking ahead, one of our key objectives is to remove non-core or non-growth properties from our portfolio via either outright sales or contributions through joint ventures.
Our track record on this front has been fairly good in that since 2007 we have sold $1.25 billion of non-core assets that an overall cap rate of 7.6%. Over the next several years, we anticipate that we will continue to cull out [ph] slow growth assets and focus on key sub market concentrations.
By way of illustration, upon completion of the Post Office project, the Federal Government will become our largest single tenant comprising 7.2% of our annual base rents, and our percentage of NOI contribution from Philadelphia's CBD will rise from 12% to about 19%. Therefore by year-end 2010, our top three submarkets, Philadelphia CBD, the Dallas toll road [ph] corridor, which generates about 17% of our NOI, and our premier Radnor sub market in the PA suburbs with comprise almost 45% of our overall company net operating income.
As we look at our business plan for the next several years, identifying attractive investment opportunities, whether they be on a wholly owned or joint venture basis is returning as a point of focus. We have been spending an increasing amount of time looking at new investment opportunities.
While as I mentioned previously, the execution of any of these opportunities will be part of our balance sheet strengthening, and not be done through releveraing the company. On that point you can certainly be sure.
(inaudible) significant dilution through our June equity raise. So our plan going forward is to manage further dilution primarily through match funding stock issuances and any acquisition activity.
Looking at acquisitions, certainly nothing of great consequence has presented itself. While we are currently evaluating a number of transactions, there are primarily private development company in smaller portfolio recaps, working with some banks and financial institutions on restructuring some existing loans, looking at the overall state of the investment market, we don't anticipate that in our markets with the possible exception of Metro D.C.
there will be a high volume of retail auction sales pipes of activity for at least the first half of the year. What we have seen thus far at least in Metro D.C.
is that there have been profits from the market, there has been a fairly active bidding pool, and no signs that sellers (inaudible) disadvantageous spot versus what the expectations of long-term value. So we really view our investment activity efforts during 2010 as doing machinery [ph] work, and engaging in a number of discussions on private development recaps, massive financing structures, and direct talk and investment opportunities all of which would be in our existing core markets.
With that overview, Howard will now review our fourth quarter results and update you on our 2010 financial plan.
Howard Sipzner
Thank you Jerry. FFO available to common shares and units totaled $58.2 million in Q4 2009.
On a diluted basis FFO per share was $0.34. We met analyst consensus and actually felt pretty good about the $0.34 result in that we note the quarter was at the low end on termination, management income, and JV income featured a $548,000 loss on bond repurchases, balanced out by $906,000 hedge gain.
So, again we are generally pleased with both the Q4 and the 2009 results. Our payout ratio on a $0.10 dividend paid in October was 29.4%.
Few observations on the components of our Q4 2009 performance. Rental revenue was down nominally, both sequentially and versus a year ago.
Straight-line rent as a component of that was down versus a year ago and sequentially versus Q3, reflecting lower levels of free rent and a greater moment to cash in the rental stream. Recovery income was up substantially sequentially and nominally versus last year, reflecting the Q4 true up phenomenon, especially this year where we had a more substantial increase in operating expenses.
About 1.4 million of that is snow related in the fourth quarter, while the balance is accelerated repairs and maintenance activity. Term fees, other income, interest income, and gross to net management income was at 4.7 million on a net basis or 6.4 million gross, and were light as noted above.
Our management income declined, and will remain at these lower levels due to the scheduled exploration of a large management contract in October 2009 as expected. In Q4 2009, we had net bad debt expense of approximately $800,000 in line with recent activity and reflective of an appropriate level of reserves and good credit quality.
Interest expense increased sequentially due to the unsecured note issuance, but decreased year-over-year due to lower debt balances from our debt reduction program on account of the buybacks. Our interest expense included $725,000 of non-cash APB 14-1 cost on our exchangeable notes.
We recognized $906,000 in connection with the ineffectiveness and mark-to-market related to forward starting swaps that we entered into as a hedge, bringing the year-to-date figure on this process to $906,000 net expense. G&A, though in line with prior levels actually included $800,000 attributable to the write off of an abandoned land option and therefore came in lower than recent levels.
We incurred $548,000 of losses on $43.6 million of aggregate debt repurchases. And lastly deferred financing costs declined to $1.1 million in the fourth quarter, reflecting the prior period acceleration of deferred amounts as a result of larger debt repurchases in those periods.
On a same-store basis, cash rents were down $4.4 million, reflecting lower occupancies and rent levels with non-cash rent items declining $1 million within there, as we continue to improve the cash quality of our income stream. Termination fees and other items increased by $670,000.
Expenses increased by $4.6 million with a resulting recovery rate of 37%, again reflecting lower occupancy. The expense ramp was attributable to $760,000 increase in real estate taxes as we trued up in this fourth quarter and compared ourselves to certain true ups in the fourth quarter of 2008.
And lastly, our regular operating expenses jumped $3.9 million due to $1.4 million of extra costs for snow removal, and $3 million of year-end R&M projects to fill expense budgets and maximize recovery income, offset by certain minor janitorial savings. So, for the quarter same-store NOI declined 11.4% on a GAAP basis and 10.8% on a cash basis.
Both these figures are elevated versus the prior run rate, but did bring our full-year 2009 level in as expected and a 4.3 decline on GAAP and a 2.2% decline on cash. In terms of our 2010 guidance and we're raising the bottom end of our $1.23 to $1.34 range to now be in the $1.25 to $1.34, reflecting as Jerry said the accomplishment of certain components of our leasing and operating plan.
This FFO level essentially equates to a quarterly current rate of between $0.32 and $0.34, and is in line with current levels. Key assumptions include the following, we are projecting and modeling for about a 5% GAAP same-store NOI decline, excluding termination and other revenues, and for a 6% cash same-store NOI decline again without termination and other items.
We expect our rents to be down on a GAAP basis about 4% to 6% and cash to be down 7% to 9% in line with the prior quarter’s guidance as well. Year-end occupancy should be between 86% and 87%, and will be down about 100 to 200 basis points for the year, by the end of 2010.
The renewal retention assumption is now 55% based on our latest reforecast and our 2010 plan calls for about 3.1 million square feet of aggregate leasing revenue to produce $28 million of speculative revenue in 2010, against which we are about 45% completed. We are modeling about 25 million to 30 million gross or 20 million to 25 million net for all other income items, including termination revenues, other income, management revenues, interest income, JV income, and bond repurchase activities, which of late have actually represented moderate losses.
We see 2009 G&A of 21 million to 22 million or about 5.5 million a quarter. Our interest expense should run at about $140 million for the year or about $35 million a quarter roughly in line with the Q4 level.
And as a result of about 40 million of revenue maintaining capital, we see our CAD coming in in a range of $0.85 to $0.95. Our payout ratios will be just under 50% on an FFO basis, and in the mid 60s on a CAD basis.
And our plan as Jerry outlined produces $40 million to $45 million of free cash flow. We will spend a few minutes on our capital plan as well.
For 2010, we have total capital needs of about $601 million. 218 million of that represents investment activity, incorporating 128 million for the Post Office and Garage completion, 23 million related to recently completed development and redevelopment of lease up programs and other ongoing projects, about 40 million budgeted for revenue maintaining CapEx, and 27 million of new leasing and other CapEx incorporating some of the items Jerry mentioned earlier.
We will require about $295 million for debt repayments, $198 million for the 2010 note, $46 million spent quarter-to-date on buybacks and $51 million for mortgages including amortization during the year. And we are projecting right now the current level of the dividend and the preferred dividends to acquire about $88 million of cash, which we're assuming will be paid in cash.
To raise this $601 million, we see $160 million of cash flow from operations and cash on hand, $34 million from the historic tax credit financing, 256 million from the escrow funds on the Garage and Post Office loan, 40 million on the CIM Oakland note repayment, and 80 million of sales of which about 11 have already been done. This leaves just $31 million to be borrowed on our line, taking its balance up to a projected year-end 2010 level of $123 million or about 20%.
We think we have very balanced and conservative capital plan which emphasizes low usage on the credit facility, keeping it available for opportunities and other situations. Looking at a moment at our account receivables, our reserves at 12/31/09 total $16.4 million, $4.2 million on $15.1 million of operating receivables or about 28% and $12.2 million on $99 million of straight-line rent receivables or about 12% with our overall reserve percentage of 14.3%.
Our reserves declined from the September 30 level reflecting the increase of $800,000 that we noted earlier, offset by the use of $1.9 million that was used to cover write-offs of previously reserved AR. So again we believe our reserves and receivable situations are in a very balanced and conservative posture.
On the balance sheet, we had a 60.1% debt-to-total market cap and a 45% debt-to-gross real estate cost. These are our best ratios in two years, and reflect that continued deleveraging of the company, and along with our overall credit objectives we are keeping secure debt low at just 10.2% of assets and floating rate debt at a low level at just 6.1% of total debt, and keeping our credit line very available.
As Jerry mentioned we are 100% compliant on all of our credit facility and indenture covenants, and with that I will turn it back to Jerry.
Gerard Sweeney
Great. Howard thank you very much.
To wrap up the prepared comments portion of the call, 2010 will be challenging year operationally. The economy is still recovering, and we are certainly very mindful of still some of the negative news that tends to hit us on an every week basis.
And we also recognize we made very good progress, but more importantly realize we have a lot more to do. Having 45% of our spec revenue (inaudible) it is great this time.
That means we still have 55% more to do. So we recognize the mission for the year.
And anecdotally what we are seeing however is reflective of a higher level of confidence by the majority of our tenants, and economic conditions are increasingly stable, and office space is once again becoming a point of discussion around corporate conference tables. We do think that is a good early cycle message, and we are seeing that with increasing frequency.
I mean from activity will obviously come absorption and with absorption will come some positive movement in rent. That is still way off, but it starts with activity, which is why we measure that in our ability to capture market share of activity as a real barometer of our health of the markets.
In the capital market, (inaudible) 2009 put us in a very good position to take advantage of opportunities in 2010, both on the leasing and the investment front. The capital position will continue to improve, and at a leasing level clearly created a competitive advantage for us against many of our private market counterparts.
We anticipate using our leasing teams in capital investment programs to ensure that we maximize that advantage during the course of the year. And while I spoke a little bit about pursuing future opportunities, and they are important, our primary focus remains on leasing office space, retaining tenants, optimizing our own portfolio performance, and making sure that we met all of our leasing goals, occupancy targets and capital requirements.
With that, we will be delighted to open up the floor for questions. We would ask that in the interests of time you limit yourself to one question and a follow-up.
Thank you very much. Lantagi, at this point we will open up the mike to questions.
Operator
(Operator instructions) Your first question comes from the line of Jordan Sadler with Keybanc Capital.
Jordan Sadler - Keybanc Capital Markets
Hi guys. Good morning.
Gerard Sweeney
Hi Jim.
Jordan Sadler - Keybanc Capital Markets
First question is just about the -- I don't want to say aggressive, but definitely more the greater posture, that considers being a little bit more offensive. You plan to sort of refit the portfolio, somewhat repositioning some of these properties opportunistically seemingly ahead of an upturn as you said at the market trough.
You have hired Tom and George, maybe you could just provide some color around maybe these two sort of sets of things that you are going, while now it is the right time to spend the money on the portfolio, and separately the types of opportunities that Tom and George are looking at. Is it M&A or one-off around the hedges, like that?
Thank you.
Gerard Sweeney
Great. Jordan, let me take those in some sequence.
I think that the message we would like to drive home at a somatic [ph] level for the company is while as you touched on, we've started to retool the infrastructure here to look at growth opportunities, we are not by any way or any stretch of imagination taking our eye off the leasing ball. So a tremendous amount of all of our senior executive time is being spent on making sure we maximize our entire leasing advantage.
And recall that at a big piece of Tom and George’s response is also really focusing on efforts with our regional managing directors on our portfolio management strategy. So we actually fine-tune our multiple year plan on a number of assets through our portfolio.
So mission critical for us is making sure that we focus on existing market conditions and making sure that we perform very well. In terms of looking beyond the existing inventory base, we did view that it was important to send a very strong message to the marketplace that we have the capacity and the desire to continually upgrade and invest money in our existing stock.
So as we look around through all of our different regions you know, there is a number of lines, which don't have the ability to upgrade stock have some level of financial distress, not the ability to really generate internal capital to meet leasing requirements. You know, part of the message we want to send to the tenants who are controlling our portfolio or brokers who control those tenants is that we have the wherewithal and the desire to continue to upgrade our existing stock, and we've been very surgical in where we are investing that money, the properties are well located in core markets based upon the recommendations of the managing directors.
We focused on those properties where we thought we could either accelerate absorption, change the historical trend line of that property’s NOI or increase overall rental rates as market conditions improve by investing dollars in those properties today. So I think psychologically and economically, we create the right landscape to get a desired result.
In looking broader and Tom you can jump in and certainly talk about some of the things, but the objective was to basically get out there and start having a meaningful dialogue with as many people as we could both institutional investors, pension funds, advisors, lots of the banks in which we do business, a lot of our private market counterparts to really start to throw it out, where we thought there might be some opportunities for us to add to our submarket positioning. At this point, we don't really anticipate any big M&A or strategic work, but in talking to a lot of private development companies on small portfolios there seem to be some good opportunities there.
I don’t know Tom if you have anything to add there.
Tom Wirth
Not much to add but we are, one of our key objective is seeing all the transactions that are going on, and here you're seeing a wide variety of marketing transactions, which are getting a lot of interest in DC market, but you're also seeing some more opportunistic items coming up and we're just going to at this point assess all of them and make sure that we are in the market to see these transactions as they occur, and if any of them meet with our criteria on a risk-adjusted basis we will take a look at them.
Jordan Sadler - Keybanc Capital Markets
Okay. I think Craig [ph] has a quick follow-up.
Craig - Keybanc Capital Markets
Good morning. Howard, is the opportunity still there to continue to buyback the securities that come due at the end of the year, maybe on the spread between the coupon and the line, or is that market getting a little too thin?
Howard Sipzner
That's exactly what it's limited to. I mean typically we are buying back at money market type rates incurring small losses on occasion on the buyback, but getting a fair trade in terms of using the lower cost line.
So we'll continue to do that. We like that it brings down those future maturities as it's already done, because it creates more optionality in terms of what we do in 2011 and 2012.
As Jerry said 2010 is really already taken care of by the excess on the Post Office financing.
Craig - Keybanc Capital Markets
Great. Thank you.
Operator
Your next question comes from the line of Michael Bilerman with Citi.
Michael Bilerman - Citi
Hi, good morning. Just a question between the lease and the occupied.
Just looking at the supplements, page 27, you got a spread of about 70 basis points at your end, which obviously is much lower than the historic range. I guess as more of the lease space took occupancy, that must have been 88.2 and 88.9.
I was just trying to determine on page 23, you have the percent of lease at 89.6, does that reflect increased leasing that you have done so far this year, and I guess when you look at those statistics, if it is right, where it has now gone back to historical spread. I'm trying to figure out what is really driving that, and I guess you are still sticking to this -- that occupancy is going to dip down to the 85%, 86% level and stay that way through year-end.
Maybe you can just sort of reconcile both?
Gerard Sweeney
Sure. George, you want to take that?
George Johnstone
Yes, the previous percentage is actually, the 89.6. It looks like we may have a typo on page 27, but 89.6 is currently where we are.
You know, we've got forward leasing in the company, about 323,000 square feet in the core portfolio and about 1.5 million in the development and redevelopments.
Michael Bilerman - Citi
And you still feel that trending towards the level of scheduled move outs, maybe just go over, I guess given the fact that you are almost 90% leased today, how are you going to lose 400 basis points of occupancy through year-end?
George Johnstone
Well, I mean we've got about 4.2 million square feet rolling in 2010 at a 55% retention. You know, that's going to be about 1.9 million square feet of move outs and we've got about 1.1 million of new spec leasing still to achieve in addition to you know, completing the balance of the renewals that are not done to date.
So I mean that's kind of the roll forward of how we expect to get from the 88.5 and you know, in 2010 down about 200 basis points.
Gerard Sweeney
And we certainly, we know that there is a number of tenants moving out later in 2010, which is why we’ve projected that we are in trough down, in that 85% or 86% range. We're not really losing any of those tenants to any competitors or basically they are downsizing or in the case of one large tenant buying their own building.
So that the plan has that space being vacated, I think in almost every case, we are not really showing that space thing and ready to lease this year once they vacate. So there might be an opportunity to shoe horn a tenant in here, before the end of the year and to change that dynamic.
That's one of the conundrums we see in the market. They were, you know -- we've had very strong pipeline activity.
We are very pleased with the level of leasing activity we've had but confounding our ability to make progress is what a lot of other companies is with this trend towards consolidation, downsizing, move outs et cetera, which are far beyond what we had previously experienced in particularly a number of our core markets. South Jersey being a key example of a portfolio where we’ve historically run that asset base you know, into the mid-90% range, you know, between 92% and 94%.
We are currently in the mid-80s and that's going to drop down even further as some of these tenants move out.
Michael Bilerman - Citi
And just as a follow-up, I think in your prepared remarks you said something about $800,000 write-offs for land option, and you just…
Gerard Sweeney
Right.
Michael Bilerman - Citi
Is it -- I want to make sure I heard you are right, and where is that sort of in the P&L and then also what exactly were you spending almost a million bucks on for land?
Gerard Sweeney
Well, this was a -- it was an option that we had in existence for about three years on a piece of property in Austin, Texas, and the money that we spent was around $800,000 or so and that was partially nonrefundable deposit, but also engineering and planning and design cost spent on the land in preparation for getting that piece of property through the approval process. We made good progress on getting it through the approval process, but with the change in the economy and the -- certainly the change in the rental rate profile in Austin, we made a decision that the price at which we had the property under option for was well above what we thought the true value was, and the buyer, I'm sorry the seller was content to hold their pricing and we were not content to proceed.
So we decided to not pursue that project and as a consequence of taking the right off and I think Howard you mentioned it is in our G&A number.
Howard Sipzner
Correct.
Michael Bilerman - Citi
That full 800 is in the G&A?
Howard Sipzner
That's correct.
Gerard Sweeney
Yes.
Michael Bilerman - Citi
Okay. I thought you said auction, not option.
Gerard Sweeney
It must be the snow down here but it was actually an option we had on a piece of land in Austin, not often.
Michael Bilerman - Citi
All right. Goodbye.
Thank you.
Operator
Your next question comes from the line of James Feldman with Bank of America.
James Feldman - Bank of America
Thank you very much. So as you think about your largest markets, like the Philly [ph] region and then Metro D.C.
Can you talk a little bit about potential leases that will really move that market, whether it is you know, tenants that you know are in the market looking to downsize, and I guess my point is I'm just trying to figure out how far we are away from these markets really firming. So what would be the driver to the upside or the downside?
Gerard Sweeney
Great question Jamie. I mean I think you know, we have our largest asset base in the PA suburb, it is almost 40% of our annual base rents, and, you know, what we've seen is very good levels of activity in Radnor, (inaudible) and Newtown Square, the 202 corridor on Plymouth Meeting where we have the bulk of our portfolio.
The market, however, still has been generating negative absorption, and there has not been one single tenant who I think I could point to you and say that was really driving the trend. I mean for the fourth quarter, you know, the PA suburbs had about 300,000 square feet of total positive absorption, which is good, but year-to-date they were down about 300.
In the CBD, there was a positive absorption in the fourth quarter, but again year-to-date are down significantly so. What we're seeing in this market is that you know, a lot of the tenants move fairly rapidly to downsize their, to downsize their space based upon feedback from our leasing teams and our managing director in charge of PA.
You know, the tenant downsizing has clearly slowed. There are good levels of activity and we are clearly seeing a trend line towards quality stable landlords, and a movement away from those landlords who don't have I guess the financial flexibility.
What was interesting in Pennsylvania is that a lot of the negative absorption was in, in fact about 90% of the negatives was in B and C quality inventory. So people are actually moving up the quality curve, which from an occupancy standpoint should help us.
But until the market tightens overall with some actual new job growth, I think rental rates will remain fairly flat. You know, we have recently signed a couple of good-sized leases in the 40,000 to 60,000 square foot range, which should help us out for leasing in Pennsylvania.
You know, as we look at the Dallas toll road corridor activity down there, again it was up year-over-year with a lot of the activities with a lot of smaller tenants, who are coming back into the marketplace. I think if the economic conditions stabilize, there is a big focus on renewals, a clear flight to quality in that market, but some of the big tenants are still consolidating.
I know it's Northrop Grumman or CA [ph] are certainly looking to do continue consolidations. A lot of brokers in that market are trying to get tenants to forward think about their 2012 explorations, and I mean at the top 10 deals that were done in the marketplace, 80% were signed by -- that were tenants of either the US government or government contractors.
So you know, the job growth in that market for 2009, which is at 40,000 jobs, about 32,000 of those were government sector employees. So I think the expectation in DC is that hopefully the growth in government employment will start to offset some of the private market consolidations, and in fact there is about 25,000 jobs, job growth projected for the Metro D.C.
region. You know, on the Maryland side in the 270 corridor [ph], a bit slow, more smaller tenants again in the marketplace, which I think is a good early cycle sign, but really not a lot of larger tenant activity.
James Feldman - Bank of America
Okay, thanks. And I guess you had a factory at Philadelphia for one second, are there any large tenants that the market is kind of waiting on to see what they decide to do or is it…
Gerard Sweeney
I guess there is a couple of ones, George, any comment. There is a couple of big RFPs out there from some of the hospitals and insurance companies, but I think a lot of, when the a lot of these tenants come into the market Jamie, I think you know, we all run after it but in many cases they decide to kind of stay where they are.
So I wouldn’t say that there is anybody out there that we are banking on moving the market during the next couple of quarters.
George Johnstone
Yes, little bit of a focus I guess on Verizon down in Philadelphia CBD.
Gerard Sweeney
Right.
George Johnstone
But not in the suburbs. No, I don't think there is not one tenant kind of driving.
Gerard Sweeney
We are riding ten up [ph]. We're looking for that tenant, but we just haven't seen them yet.
James Feldman - Bank of America
All right. Thank you very much.
Operator
Your next question comes from the line of Brendan Maiorana with Wells Fargo.
Brendan Maiorana - Wells Fargo Securities
Hi, thanks. Good morning.
Gerard Sweeney
Good morning.
Brendan Maiorana - Wells Fargo Securities
Jerry, you talked about 45% of your pro forma NOI coming from the Philly CBD, Dallas, and the Radnor submarkets. How do you think that those numbers, as you kind of think about capital recycling out of some of your submarkets where you have less of a concentration.
You have maybe, the acquisitions that you do into the submarkets where you have got more scale. How do you think that number sort of trends over the next couple of years, and what is your mindset in terms of dealing some of your non-core assets that you would like to get out of in terms of selling now versus waiting until the market recovers, where you may be able to get hopefully a little bit of a better price if you waited?
Gerard Sweeney
Right. Brendan, a couple of things.
Right now we have about 25% or so of our revenues coming from the Metro D.C. region.
As we talked on previous calls, we would like to do you know, again in a pragmatic program ways increase that level of contribution. That contribution coming from either acquisitions and you know, increasing that contribution coming from looking to do new things in that marketplace, particularly in the toll road corridor and in the district to recycling out of some of the non-core assets in kind of the Metro, Philadelphia region.
You know, when we look at our core asset bases in the Greater Philadelphia area, you know, Philadelphia CBD has, if you're in the right class of inventory, has shown a surprising level of resilience and stability, not necessarily accelerated growth, but certainly a high level of stability. So I think to the extent that we view anything as an addition in the Philadelphia CBD, it would remain in that trophy class category that where we have kind of directed our investment focus over the last few years, but certainly that would be an area of continued focus for the company.
When we look at the suburban counties, I think we have a nice mix of assets in some core submarkets. I mean certainly we view Radnor as one of the strongest performing submarkets in the region over a long period of time.
(inaudible) where we have both direct investments and investments toward the joint venture with the power [ph] organization, Plymouth Meeting where we control a significant amount of the inventory and control remaining land parcels, and in the Northern 202 King of Prussia corridor. So I think anything beyond that those markets in Pennsylvania, we've kind of viewed longer-term as markets that we will probably exit out of, and I think the same thing would hold true for Southern and Central New Jersey where the focus really on the 295 and the Route 38 corridor versus some of the -- where we have some of our other inventory.
You raise a great question in terms of non-core asset sales, and we certainly face that thought process with our you know, small operation, small residual operation in California. I think what we have done after staying a long, long time with those assets with our local management team have made the decision that we will work those assets through this tough point in the cycle, improve our occupancy levels, hope for a return to a more rational levels of pricing and some positive absorption, particularly Southern California and at that point look to exit those properties at whatever price the market will bear, but to do that now seems to be a little bit shortsighted in that the market is so dramatically underperformed, particularly in Rancho, Bernardo, where we are in a couple of the submarkets that we've made the decision look at that on a multiple year basis versus liquidating that base today.
Brendan Maiorana - Wells Fargo Securities
And just related to that in terms of the opportunities or acquisitions that you are thinking about and funding those with equity. Do you feel like you or going to need to do acquisitions over time to reduce your leverage to target levels or do you think you could get there if you just kind of sold out of the markets or sold the properties that you got on the target disposition list?
Gerard Sweeney
It's an interesting math and -- you know, to simply rely on NOI growth and occupancy increases coupled with asset sales, you know, may in fact not get us to where I think we need to be because certainly as we sell assets we're losing that NOI and we need to replace it in some manner. So I think we're certainly going to rely on asset sales as providing financial fuel for us to look at new acquisition opportunities, but my expectation would be that over the next few years we will need to look at issuing equity to fully finance on an equity basis any viable acquisition opportunities we identify, or looking as we have done in the past, property for stock swaps, which have the benefit to us of creating a current income stream and deleveraging the balance sheet immediately and doing that on a much less dilutive basis than simply paying down our line of credit at 1% rate.
Brendan Maiorana - Wells Fargo Securities
Sure. Okay.
Thank you.
Gerard Sweeney
You're welcome.
Operator
Your next question comes from the line of John Guinee with Stifel.
John Guinee – Stifel
Hi, thank you. A couple of questions, I'm not really sure who this should go to, but your base building capital for the last couple of years has averaged about $6 million a year, and I think here you mentioned it would go up to about 16 million next year in 2010, you are woefully lacking in 2008 and 2009 $0.25 per square foot is a really light number, which is what you averaged in 2008 and 2009, how much of this $16 million is just catch up?
Gerard Sweeney
Well, we have done John you know, between that $5 million and $6 million range in terms of what we call base building capital. That number this year is closer to $9 million with the balance between the $9 million and $16 million being spent on renovation projects, but maybe George you can amplify some of the thought process you are going through on that.
George Johnstone
Yes, I think part of the increase from the 5 to 6 run rates and 9 is a little bit of catch up, and then the thought process, we got to get hold of all the managing directors and really looked at every building in the portfolio and assess those where we thought you know, an investment of additional capital dollars could reposition that asset in the marketplace, and I think as we mentioned earlier, you know, that would hopefully either accelerate absorption, improve NOI and possibly even -- and grow rental rates there. So you know, a little bit of a -- more of a focus on kind of you know, core base selling systems, roofs, HVAC, parking lots, and then a little bit of you know, repositioning strategy went into this year's plan.
John Guinee – Stifel
Okay, and then along that same subject, I was actually reading your definition of CAD, what it says is that you are including capital to maintain revenues, but excluding capital to attract tenants. And then also you are excluding capital cost is the space has been vacant for greater than 12 months.
If we look at the TI dollars as being a little higher than reported, if I am reading this correctly?
Howard Sipzner
Look John, it's Howard. I mean, they always are and we always speak of that in the capital plan for 2010.
We’ve got $40 million of revenue maintaining, which will encompass some of these base building costs as we categorize them, as well as leasing and commissions, and then we've got $50 million of for lack of a better phrase revenue creating now little more than half of that or about half of that is to finish up existing projects quite naturally. And the balance will be either to lease that space than in fact has not created revenue for some period of time or in a number of limited instances to reposition buildings for higher rental streams.
So we are going through a fairly granular process on every capital expenditure and test it and classify it for those different buckets.
John Guinee – Stifel
Great. Thank you.
Gerard Sweeney
Thank you John.
Operator
Your next question comes from the line of Mitch Germain with JMP Securities.
Mitch Germain - JMP Securities
Good afternoon. Jerry, the New Jersey region is about 35% of your mix this year.
Can you just give us some color as to your tenancy, who is in the market there, and how much of that prospect activity that you referenced earlier relates to that region?
Gerard Sweeney
I'm sorry Mitch, the beginning of your question cut out. So I heard 35%, but I didn't hear --
Mitch Germain - JMP Securities
I was talking about New Jersey. I'm sorry.
It's about 35%. So, I just wanted to look for some color on the tenants, who is in the market for space, and how much of that prospect activity that you referenced relates to that region?
Gerard Sweeney
Yes, look. I mean as I've indicated, New Jersey is -- and we're really in, and when we talk about New Jersey it's really central and southern New Jersey, central being defined as the Princeton corridor.
George can walk you through some of the numbers on the pipeline. I think it is, you know, we view it from a team standpoint there, you know, activity levels have been up in the last quarter but that's the lot of share shuffling.
That is not a lot of new net demand in the marketplace. I think what we're seeing more often than not in that market is tenants who are in 30,000 square feet, who need 25,000 square feet and they are moving.
They are in the marketplace to find a new home. Now contrary to what we're seeing earlier in 2009, where there was a real -- where there seem to be a slide down the quality curve, the last several years that has reversed itself as we hope there would be where tenants are moving up the quality curve, and given the quality of inventory we have in that marketplace, we think that that's one of the reasons why we're seeing increased activity to our portfolio.
I think in New Jersey there are you know, very few blocks of very large space and most of that market is characterized by a lot of small vacancies. I mean the southern New Jersey in particular was us is a small tenant market, and unfortunately that's where a lot of the vacancy is throughout the market in these small tenancies.
So I think from our viewpoint and from certainly some of the key brokers in the market based on their market forecasts, you know, rents are going to continue to decline for the next couple of quarters. There'll be very low levels of absorption.
I was frankly surprised positively by the positive absorption in southern New Jersey in Q4, and that was a good process, but people are expecting things to pick up as the year progresses, whether that's hope versus expectation, I think remains to be seen. But George what are we have been seeing in terms of the pipeline?
George Johnstone
Yes, I mean our pipeline today is about 900,000 square feet of prospects looking you know, for new leases, 100,000 square feet of that are currently in lease negotiations and the other 800,000 are still in the kind of the you know, RFP process. A couple of large users in that pipeline, but again you know, our average suite in New Jersey you know, was kind of that 4000 square foot to 6000 square foot user.
We've -- you know, our vacancy breaks down over there, we've got 46 suites that are less than 2500 square feet in size. We've got another 53 suites that are less than 5000 square feet in size.
So you know, smaller users I think some of that also is indicative of companies’ kind of scaling back and downsizing over the last you know, call it six quarters, but lot of transactions to do. We've got, I guess about $8 million of spec revenue assumed for New Jersey, and they've achieved 40% of that to date.
So, you know, a large portion of the remaining spec revenue over there quite frankly is associated with lease renewals versus new activity.
Mitch Germain - JMP Securities
Great, thanks. And Howard did I hear you mention additional debt repurchase subsequent to year-end?
Howard Sipzner
Yes, we’ve repurchased about $46 million quarter-to-date in January and February. So wherever we can we're continuing to nibble at the near-term maturities to bring down their levels and you know, pick up a little bit of arbitrage on the short-term interest-rate versus those note costs.
But there is typically a repurchase cost associated with that, and built into our 2010 numbers is the accommodation of some loss for that as well.
Mitch Germain - JMP Securities
Great. Thanks guys.
Operator
Your next question comes from the line of John Stewart with Green Street.
John Stewart - Green Street Advisors
Thank you. Maybe Howard just to follow up on that, what is the rationale for I presume the loss is related to buying or paying a price slightly above par, what is the rationale for doing that?
Howard Sipzner
It's a favorable trade. As we look out at interest-rate projections out on the streets, we think we'll incrementally gain revenue for the company over a year to two-year period versus those costs.
John Stewart - Green Street Advisors
Just comparing the top tenant roster from quarter-to-quarter, it looks like you may have done a blend-and-extend with KPMG, is that a fair characterization and if so what market and what was the timing on that?
Gerard Sweeney
Well, KPMG was really -- the tenant there was really Bearing Point with leases with KPMG guarantees. So we have them really in two primary markets.
One is an occupied space in one of our Radnor Corporate Center buildings, and secondly they occupied a several hundred thousand square feet down in our 1676 International Drive Building in Tysons Corner. They have vacated the space that they occupied in Radnor, and we have backfilled that with the VWR transaction, which we announced back in sometime in the summer, and then Bob Wiberg, Janet Davis [ph] and the team down there did a wonderful job of working through a new lease structure with KPMG, not Bearing Point but actually KPMG in taking a lot of square footage in 16 76 International Drive.
John Stewart - Green Street Advisors
Okay, so I guess when during the quarter would that have been effective, was it as of October 1 or…?
Gerard Sweeney
John, I don't know. Do you guys know?
Howard Sipzner
The Radnor downsizing was a Q4 event. We went directly to the couple of their subtenants and then VWR will commence in third quarter of 2010.
John Stewart - Green Street Advisors
Okay, you have referenced a couple of known move outs in the 3Q ’10, is there anything specific you can point us to there?
Gerard Sweeney
3Q ‘10, yes I mean the biggest driver there is a company called Automotive Rentals over in New Jersey which you know, is in a 160,000 square feet, 67,000 square feet of that in a single building and just shy of a 100,000 square feet and 200,000 square foot you know, two tower building across the street. That's really the biggest one in the quarter.
John Stewart - Green Street Advisors
Okay, thank you.
Gerard Sweeney
Thank you John.
Operator
Your next question comes from the line of Dan Donlan with Janney Montgomery Scott.
Dan Donlan - Janney Montgomery Scott
Good afternoon.
Gerard Sweeney
Good afternoon.
Dan Donlan - Janney Montgomery Scott
You guys mentioned some deal activity in D.C. could you maybe talk about pricing, what you are seeing there?
Gerard Sweeney
Well, when I am talking about D.C. it is really the toll road corridors as we define, which is where we have our major -- I mean, I think there continues to be downward pressure on pricing there, you know, where that market was in the you know, mid-30s, a couple of years ago.
I think you're saying deals happening certainly South of 30s, and some cases in the mid-20s depending upon the location certainly in the Dallas corner area, a number of our transactions are being done in the very low 30s. You move further down into Westfield, you're looking at transactions in the -- we don't have a presence there, but it's clearly created some downward competitive pressure on the toll road.
You're seeing transactions being done in the mid-20s. So our read is that rents in that market have continued to erode.
I think we're seeing some level of stability in rents in the very high quality end of it of the inventory curve, but there is still a lot of vacant space in that market. I think that market is early in the queue waiting for some of these major government contractors or the federal government themselves take down a lot of square footage.
Dan Donlan - Janney Montgomery Scott
Okay, and then you talked about investment in the CBD Philly area, you guys earned a lot of the Class A stuff, delivery [ph] as well, I mean, what else is there left to acquire and end, do you think there is enough demand to move ahead maybe with Cira Centre 2, sometime this year or next year, or what do you -- how do you look at that?
Gerard Sweeney
Well, I will answer each part of that question. I think when we look at CBD Philly, our focus is on kind of the trophy quality class.
So there was a trade of a building a month or so ago in the 2000 market, which was, is an example of a building that we would not be interested and it is older, I mean much older as some significant issues and it was something that we would not have been a player for, but certainly to the extent that you know, one of the higher quality trophy properties in the city would come on the market. We might look at that, but again it has got to be a function of where we view pricing versus where we view rental rates are going.
Philadelphia has enjoyed a fairly good level of rental rate stability. The vacancy rate in the trophy class is fairly low.
As we track that market we don't really view that there is the potential for a lot of tenant fallout. We view that is a fairly stable tenant base, and in the CBD there is certainly rental rate levels are far off where they would be to justify new construction any kind of acceptable yield.
As we look at our University City developments, you know, we continue to engage in dialogues with several large potential prospects, but would not be in a position to start either the Walnut or the Chestnut Street Tower without having a significant pre-lease commitment.
Dan Donlan - Janney Montgomery Scott
Okay, thank you.
Operator
Your next question comes from the line of Rich Anderson with BMO Capital Markets.
Rich Anderson - BMO Capital Markets
Thanks. Good afternoon.
Gerard Sweeney
Good afternoon.
Rich Anderson - BMO Capital Markets
Can you remind me how high can retention possibly go in 2010, in a perfect situation?
Gerard Sweeney
Yes, I think in a perfect situation it could probably get into the, you know, mid to upper 60s.
Rich Anderson - BMO Capital Markets
Okay, so you -- then it's the 35% is what you know is a goner?
Gerard Sweeney
Well 55 is what we have in the plan.
Rich Anderson - BMO Capital Markets
Right. You said -- so you're saying it could get as high as 65.
I mean, I guess, I just doing the math 35% would be stuff that is absolutely no vacancy.
Gerard Sweeney
Yes, you're absolutely right. Sure.
Rich Anderson - BMO Capital Markets
Yes, I just want to make sure I understood.
Gerard Sweeney
Yes.
Rich Anderson - BMO Capital Markets
Okay. And then just on disposition of the $80 million, can you talk about how far along you are with the remaining that you haven’t done yet, I guess $69 million.
Is anything other -- under contract or anything like that at this point, and where would you be focusing the dispositions for 2010?
Tom Wirth
Yes, Rich this is Tom Wirth. We are looking at some sales as we noted earlier, you know, there is going sort of non-core assets in some of our markets.
There is some activity on some property, but I think our disposition of that balance on the 69 is going to be more singles and doubles. I don't think you're going to see a large property go out, but we will look at properties that are smaller in size, and then maybe over the course of the year those smaller ones getting culled out.
Rich Anderson - BMO Capital Markets
So nothing like is eminent at this point. It's kind of…
Tom Wirth
No, I don't think we have anything significant or eminent, and they will probably be smaller transactions one-off that we will announce.
Rich Anderson - BMO Capital Markets
Okay, thank you.
Operator
Your final question comes from the line of Jordan Sadler with Keybanc Capital.
Jordan Sadler - Keybanc Capital
My questions have been answered. Thank you.
Gerard Sweeney
Right. Thank you.
Operator
At this time there are no further questions. Gentlemen, do you have any closing remarks?
Gerard Sweeney
Just to thank everyone for their active participation in the call. We appreciate it, and we look forward to updating you on our first quarter earnings conference call later this year.
Thank you.
Operator
Thank you. This concludes today's Brandywine Realty Trust fourth quarter earnings conference call.
You may now disconnect.