Apr 29, 2010
Executives
Gerry Sweeney – President and CEO Howard Sipzner – EVP and CFO Tom Wirth – EVP, Portfolio Management and Investments George Johnstone – SVP, Operations and Asset Management
Analysts
Josh Attie – Citi Michael Bilerman – Citi Craig Mailman – KeyBanc Capital Markets Jamin Callon – Bank of America/Merrill Lynch Yanku [ph] – Wells Fargo Mitch Germain – JMP Securities Rich Anderson – BMO Capital Markets Stephen Mead – Anchor Capital Advisors Dave Rogers – RBC Capital Markets Dan Donlan – Janney Capital Market John Stewart – Green Street Advisors
Operator
Good morning. My name is Tangie and I will be your conference operator today.
At this time, I would like to welcome everyone to the Brandywine Realty Trust first quarter earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
I would now like to turn the conference over to Mr. Gerry Sweeney, President and CEO of Brandywine Realty Trust.
Please go ahead, sir.
Gerry Sweeney
Tangie, thank you and thank you all very much for joining us for our first quarter 2010 earnings call. Participating on today’s call with me today, are Gabe Mainardi, our Vice President and Chief Accounting Office, George Johnstone, our Senior Vice President of Operations, Tom Wirth, our Executive Vice President, Portfolio Management Investments, and Howard Sipzner, our Executive Vice President and Chief Financial Officer.
Before we begin, I would like to remind everyone that certain information discussed during our call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give 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. Onto the agenda, during the first quarter, we continue our capital market activities and strong leasing performance.
As you look at this past quarter and more importantly, the balance of the year, several overall observations to note. First, leasing activity remains strong, leasing velocity was up significantly and we do expect fundamentals to continue firming.
While most markets will have negative absorption for the year, thereby continuing the existing tenant’s market, some markets are in fact addressing faster than others. Run rate declines have moved out and tenant contractions are factored into our business plan and we believe the worst is generally behind us.
As such, our 2010 plan reflects our view on the market bottoming, a company by run rates fidelity in some markets with continued downward pressure in several others. As shown by our first quarter results, negative operating trends will persist in the near term.
During the quarter, we leased over a million square feet, have about 75% of our annual spec revenue targets executed. We still experience negative absorption during the quarter along with the resultant decline in occupancy.
This transition period, our activity levels are increasing but not at a pace of fully offset known contractions and terminations as our current dilemma and one of the more frustrating aspects of being at this point in the cycle. Our business plan anticipates these negative trends continuing for the rest of the year with hopefully positive trends developing by Q4 in 2011.
Our tenant retention rate for the first quarter was 77.2%, excluding early terminations and 65% with early terminations. Same-store occupancy for the quarter was 87.8% and our capital costs were 14.5% of gross revenues for new leases and 8% of gross revenues for renewals, all of these very much in line with our expectations.
During the quarter, we commenced occupancy on 788,000 square feet including 571,000 square feet of renewals, 93,000 square feet of new leases and 124,000 square feet of tenant expansions. We currently have over 1.8 million square feet of executive leasing in place, scarcely commenced subsequence in March 31, 2010.
And as previously announced, subsequent to the quarter end, we did execute a 334,000 square foot seven year renewal with Wells Fargo Bank at our Concord Airport Plaza, a two building complex in Concord, California, keeping that complex at 99% occupied. During the quarter, traffic through the portfolio was up 34% quarter-over-quarter and 36% year-over-year.
Every region but one was up and we had a solid increases in showings in Pennsylvania DC and our New Jersey and Delaware operations. The pipeline of transactions remain strong with 2.4 million square feet of new prospects of which 640,000 square feet on active lease negotiations.
Our strongest performing markets are Philadelphia's CBD, the Radner Plymouth Meeting Carter in Suburban Philadelphia, the Toll Road Carter in DC, Austin and Richmond, Virginia. We continue to face leasing challenges in New Jersey, Delaware and Maryland.
During the quarter, as we announced, we leased over 1 million square feet in 124 separate transactions and 831,000 square feet of which generated forward-leasing activity which will help offset any further early terminations or tenant departures. Despite these strong leasing levels as I mentioned we continue to face higher then normal rate of tenant move out and terminations which are negatively impacting our portfolio statistics.
That activity has clearly been factored into our 2000 plan as I mentioned hopefully a lot of that is in the rearview mirror. As outlined in our last call, our 2010 operating and business plan assumptions are a major objectives for 2010, simply the lease space and controller operating margins, really nothing more complicated than that.
That’s the primary focus of the entire organization. The original business plan contemplated a 46% tenant retention rate, based on results thus far.
We believe that our actual retention rate will approach 55%. Core portfolio occupancy which is our same-store plus, our recently completed developments stand at 87.2%.
The primary drivers of the occupancy decline from last quarter is 88.4% was a 168,000 square feet of early terminations, a 124,000 square feet of bankruptcies are least of alls, 102,000 square feet of tenant contractions upon lease renewal and 147,000 square feet of tenants simply shutting down their offices. These negative drivers were partially offset by 124,000 square feet of expansion and our new leasing activity.
As mentioned on the last call, we expect our occupancy levels to drop the 85% range in the third quarter, primarily due to several known tenant move outs which are outpacing our new leasing commencements. On our IRS Philadelphia campus, also knows as the Post Office, we expect occupancy and NOI to commence in September of 2010.
This event will trigger the funding of the $256.5 million forward financing. That development yield will remain steady around 8.5% although we do enter space some cost savings that we’d factoring in as a project construction cycle in the third quarter.
Upon completion, the GSA will become our largest single tenant comprising 7.2% of our annual based rents and our percentage of revenue contribution on an NOI basis from Philadelphia, CBD will rise to about 19%. During the quarter, we closed in $11 million of sale, which we booked a gain of $6.3 million.
We are also evaluating a sale of a number of additional non-core properties and our 2010 business plan contemplates an additional $69 million of sales. Looking ahead, over the next several years, one of our objective is to remove non-core or slow growth properties from our portfolio.
They are either outright sales or contributions of joint ventures. Dulles rate is focused on our longer term objective and to keying on our top-performing submarkets.
By year end 2010, our top three strong submarkets, Philadelphia CBD, the Toll Road Carter and the Radner submarket in the PA suburbs will comprise almost 45% of our overall company NOI. So a good progress on that front.
Looking at investments, we’re definitely seeing more activity within our existing markets. We’ve also been actively talking to a number of private capital sources to clearly reinforce that there is a lot of capital waiting to move into real estate.
Our recent experience has been on high quality stabilized “core properties” the debtless [ph] are increasingly wrong with well-capitalized bidders, bidding pricing up and cap rates down. We’re seeing that in particular in the Metro DC area which would then a scope of our geographic footprint is leading the way in cap rate compression.
Given this very quick and aggressive pricing climate in our market, our view on newer terms rents and our cost of capital, our focus is really spend on transaction that require some capital stack reconfiguration were ones that we would term as value-added situations. There are some emerging opportunities to purchase vacancy at very good risk-adjusted prices, at an investment base well below replacement cost that will position those assets for significant growth as market conditions continue to firm.
The execution at any of this opportunities will be part of our balance sheets strengthening program. As we talked in our last call, we already encouraged significant dilution through our previous equity rates.
So our plan is to manage further dilution through funding any acquisition activity through stock issuance but bottom line, we continue to view these investment efforts doing machinery work and we'll remain engaged in number of discussion with private development recapitalizations, mezzanine financing structures and smaller investment opportunities. While the pipeline of activity is increasingly larger, we have not program any acquisition activity or join venture activity into our 2010 plan.
This quarter, we did initiate our continuous equity offering program that is designed to strengthen our balance sheet, assisting and moving our debt to JAV [ph] towards our 40% target range, position us for rating upgrade and create additional financial capacity for any potential future investments. We have issued 2.7 million share of common stock thus far with total net proceeds of $33.5 million.
During the first quarter issue of $1.3 million shares, realizing $16.1 million of net proceeds. Net proceeds that we generated were used primarily to repay down under our unsecured revolving credit facility.
We have 12.3 shares remaining and anticipated continuation of this program, assuming equity market conditions remained stable. During the first quarter, we also repurchase $48 million of our 2010 notes, 2011 unsecured senior exchangeable notes and 2012 unsecured senior notes, generating aggregate loss of $1.2 million on the early extinguishment of this debt.
With the debt market continuing to firm and moving a positive direction, positive on our buyback volume will continue to diminish and our business plan doesn't really contemplate any further purchases, but we will continue to track the market or remain opportunistic. We are fully committed to our objective of moving up the investment grades rating curve one notch [ph].
We plan to achieve that through a combination of future NOI growth, occupancy improvements and as I mentioned funding any acquisition on primarily in equity basis. The combination of these three items will have the effect of achieving our overall de-leveraging objective.
Our 2010 business plan does not contemplate any new financing activity other than utilizing our credit facility to power for $198 million of 2010 bonds during December, paying off our 42 million secured mortgage on Plymouth Meeting Executive Campus in December 2010 or possibly earlier. While there are other components, the major source of cash include the anticipated CIM loan repayment of $40 million in August.
The $30 million remaining funding on our tax credit proceed and the net recovery of $182 million against the remaining cost to complete on the IRS project in garage. We also plan and exercise in the first expansion option on a $183 million term loan pushing that maturity to 2Q in 2011 and we are projecting a year end 2010 line of credit balance of less then a $120 million.
We did indicate our press release for advise up the bottom end of our 2010 guidance range to a new range of $1.27 client to a $34 versus our prior range of 125 to 134. Based on a mid point of our new 2010 FFO guidance, our FFO account ratio is 46% and our CAD payout ratio for the quarter was 60%.
Our 2010 business plan further contemplates that we will generate free cash flow of between $30 and $40 million with that overview, Harvard, will now review our first quarter results.
Howard Sipzner
Thank you, Gerry. Please note in the financial statements that effective January 1, 2010, we deconsolidated three previously consolidated variable interest entities or JVs in accordance with FAS 167.
This deconsolidation is applied prospectively, so quarters prior to this one will still reflect the results of these three entities while the current quarter and future quarters will not. For Q1 and forward, the net impact of our pro rata share will be reflected on the equity and income of unconsolidated entities.
To facilitate period-to-period comparisons, we have added two page 9 and 10 to our quarterly supplemental package describing the impact of these changes. Our form 10-Q for the first quarter will also provide additional information on this accounting change.
In terms of the results that were available to common shares and units totaled $45.6 million in the first quarter or $0.34 per diluted share. We beat the $0.33 analyst consensus even after the incurrence of about $0.01 of unanticipated losses on early debt extinguishment.
Note that termination revenue, other income items, management income and JV income in the first quarter totaled $7.1 million gross or $5.7 million net after management expenses and was inline with our annual guidance with these components. And our FFO payout ratio on the $0.15 dividend, we paid in January 2010 was 44%.
A few observations on the components of our Q1 2010 performance. Cash rental revenue was down normally, sequentially and a bit more versus a year ago after adjusting for the effects of deconsolidating the three JVs.
Street line rent was up versus a year ago and sequentially versus Q4 reflecting increased levels of free rent in our leasing. Recovery income of $21.5 million and the associated ratio of 36.9% overall were inline with recent quarters.
Snow removal cost in Q1 were more then $3 million above expectations but our ultimate recovery of these tends to higher due to specific lease provisions. In Q1 2010, we had net bad debt expense of $1.3 million inline with expectation and reflecting various write-offs recoveries and adjustments to reserves.
The net effect in Q1 was about a $730,000 decrease in our overall reserve balances. Interest expense decrease sequentially by $1.4 million and by $3.3 million year-over-year due to lower debt balances from our debt reduction program.
Interest expense in Q1 includes $524,000 of non-cash APB 41 costs associated with our exchangeable notes. G&A in Q1 at $6.1 million was somewhat above our expected $5.5 million run rate due to a variety of minor items.
We incurred $1.2 million of losses as Gerry said on $48 million of aggregate debt repurchases. And lastly our debt financing, our deferred financing cost declined to $1 million reflecting the prior period of acceleration of deferred amounts as a results of debt repurchase activities.
On a same store basis, cash rents were down $3 million, reflecting lower occupancies and rent levels with non-cash rent items increasing $1.1 million as we provided greater levels of free rent. Termination fees and other items increased by $1.5 million year-over-year as we saw increased levels of early move outs and associated termination payments.
Property operating expenses increased by $4.7 million with over $3 million of that attributable to snow cost. Real estate taxes decreased by $1.7 million reflecting more favorable valuations and our recovery rate ended up at 36.2% in the same store portfolio in line with expectations in the prior quarter.
So for the quarter same store NOI declined 4.9% on a GAAP basis and 6.2% on a cash basis, both excluding termination fees and other income items and largely as a result of lower occupancy in the same store portfolio. Our first quarter cash available for distribution increased sequentially to $33.9 million from $32.6 million and measured $0.25 per share, as a result we achieved a 60% CAD payout ratio on the $0.15 dividend in the first quarter.
Our EBITDA coverage ratios were solid at 2.5 times interest, 2.3 times debt service and 2.2 times fixed charges and our margins are stable and inline with recent quarters for both NOI and EBITDA. As Gerry noted, we are raising the bottom end of our $25 to $34 2010 FFO guidance to now be at a $27 to $34 range.
This is our second consecutive quarterly increase to our guidance. In this level of guidance going forward, accommodates quarterly FFO to be in a range of $0.31 to $0.34 in any given quarter for the balance of 2010.
Key assumptions include the following; a 4% to 5% decline on a GAAP basis in same store NOI excluding termination and other revenue and a 5% to 6% decline in cash NOI on a similar basis. Mark downs in rent of 4% to 6% on a GAAP basis and 79% on a cash basis, all of these assumptions are unchanged from the last quarter.
Year end occupancy is now expected to be in the 85% to 86% range, down perhaps as much as 300 basis points for the year and a bit lower than previously expected. Renewal attention of 55% is inline with our expectation of a quarter ago.
Our aggregate 2010 leasing of $2.8 million square feet, reflecting $1.2 million new and $1.6 million of renewal square footage will produce $27.3 million of speculate revenue which as Gerry said we are now 75% completed on it. For all other income items including termination revenues, other income, management revenues both gross and net, plus interest income, JV income and the effective any bond repurchases, we're expecting $25 to $30 million gross or $20 to $25 million net without predicting any individual one of these items.
Our G&A should continue to run about $5.5 million per quarter and our total interest expense for the year, should be about a $130 to $133 million with the next two quarters inline with Q1 and Q4 2010, rising due to the draw down of the MPO of the post office and garage financing. The interest figures are below last quarter figures due to lower debt balances, the deconsolidation of the three variable entities and the proceeds from the CEO equity program reducing our debt level.
And lastly, we're projecting between $0.88 and $0.95 of CAD per diluted share reflecting a total of $40 million on additional 30 of revenue maintaining capital expenditures. As a result, our plan produces $30 to $40 million of free cash flow.
Very quickly, we'll look at our capital plan for the balance of 2010. From the end of Q1 forward, we have total capital needs of about $488 million.
This includes $174 million of investment activity, $104 of that for the post office and garage, $30 million of revenue maintaining CapEx and $40 million for remaining redevelopment completion cost, lease up a recently completed projects and other vacant space in capital projects. In addition, we'll utilize or spend $248 million for debt repayments, $198 million for the 2010 note, $1 million spend quarter a date on buybacks and $49 million for amortization and remaining balances on mortgages.
And we expect to maintain the current dividend levels and payout approximately $66 million of aggregate dividends all in cash. To raise this $488 million, we are projecting the following, approximately 120 million of cash flow from operations for the rest of 2010, $3 million of proceeds around store tax credit financing.
This is down from an earlier expectation of $34 million due to lower qualified expenditures on the post office project reflecting as Gerry noted anticipated savings in construction cost. The $256.5 million post office and garage loan is expected to fund by the end of third quarter.
We expect in August of 2010 to receive repayment of a $40 million first mortgage loan that we had extended two year ago. We see $69 million of potential sales from the portfolio and as a result of all of these activities will be able to pay down our 331 line of credit balance from a $160 million by $44 million to a projected year-end balance of about a $160 million.
Capital plan is very achievable and most of, not all of the items are already arranged or contracted for. In terms of balance sheet, we have a fairly conservative debt profile with a 58% debt-to-total market cap and a 45.3% debt to gross real estate cost, and these are among our best ratios in the past two to three year.
Our secured debt remains low as thus our floating rate debt and we are 100% compliant on all of our credit facility and indenture governance. And with that I'll turn it back to Gerry.
Gerry Sweeney
Thank you very much Howard. Excuse me – to wrap up Howard’s fair comment, the balance of 2010 will present continued operating challenges.
We have made very good progress and we're pleased with the progress we made, but we still have more to do. And Howard and I both touched on, we have 75% of our spec revenue which we defined is new leasing and renewal revenues already achieved but that's 25% we don't have done and we're still working on those.
So we recognize we still more to do and in the near term markets, we'll still present ongoing challenges for us. However, even within this smaller universe of perspective tenants, we think our capital position ending toward quality and strong submarket positioning, providing clear competitive advantage for us.
I think as you can see the evidence for our year-to-date leasing velocity on our strong pipeline. We do anticipate continued use of our leasing teams and capital flexibility to ensure that we maximize those advantages and achieve all of our 2010 business plan objectives.
With that, Tangie would be delighted to open up the floor for questions. We would ask everyone in the interest of time, you limit yourself to one question and a follow-up.
Thank you very much.
Operator
(Operator Instructions) Your first question comes from the line of Michael Bilerman with Citi.
Josh Attie – Citi
Hi. Good morning, guys.
This is Josh Attie [ph] with Michael. Strategically, have you guys think about raise in equity with respect to the transaction market getting better and with your new ATM program, kind of long-term?
Howard Sipzner
Well, I think in terms of the – it’s older than that time text of making sure that we focus on to continue to improve our balance sheet. The equity market has been fairly stable for our stock although some days it’s not, some day it is.
But we certainly look at number one, our primary objective is to manage our own portfolio secondarily to the extent that we can identify opportunities that we think generate some future growth for us. We would plan to finance though primarily through utilization of the CEO program or other equity issuances.
Michael Bilerman – Citi
And this could follow-up with respect to the transaction market. Can you just give us some color on your pipeline today as a sales kind of what phase they’re in, anything like those?
Gerry Sweeney
Well, through the assets sales as I mentioned, we close the one transaction. We have several small transactions, a various levels of under contract in due diligence et cetera.
And then our expectation that we would be putting in number of properties on the market in the early part of the third quarter trying to gear up for a fourth quarter close possible. But certainly, that’s very much tight into the portfolio management program we have underway, which is what we are identifying some of these lower growth assets.
And anecdotally we are also tracking what appears to be a number of other intriguing suburban office portfolio sales in other parts of the country to see where pricing settles in and certainly, doing a lot of investment to work on some core market transactions typically in the Metro DC area at some kind of hard venture [ph] what we think cap rates have been move in the kind of tri-state [ph] area. It’s been surprising to see I think the length of the buyers lining up for high quality core assets particularly in DC and the repetitive with which some of the cap rates have come down on some of the properties, as well as from our standpoint the fairly aggressive view on your rental rate growth.
So while we continue to track a lot of activity. We are certainly very much as I touched on focused on those situations that we review the kind of special situations that may require co-investment vehicles purchasing vacancy of the big discount, things that we really thinking to add value to our pipeline going forward and don’t necessarily generate very low going in cap rates on a stabilized asset.
Josh Attie – Citi
Thanks, Gerry and Howard. This is Josh.
Can you one more question, did your occupancy guidance for the year include the post office being delivered in a 100%?
Gerry Sweeney
Yes. It does.
Josh Attie – Citi
Okay. Thank you.
Operator
Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.
Craig Mailman – KeyBanc Capital Markets
Hi, it’s Craig Mailman here for Jordan. Just to follow-up on the investments a little bit more, Gerry, need some detail on sort of the debt and bidding in DC but maybe you could just touch on some of the other core markets.
What you are seeing in terms of value add opportunities and maybe just how your underwriting them in terms of rent growth expectations?
Gerard Sweeney
Sure. Tom and I tag team is and I think we are seeing again as I touched on them and kind of the Metro DC area is a very throttling bidding process.
And certainly a lot of wires having near-term expectations of rental rate acceleration. We’re much more cautious in our view point in those markets in terms of where we see rents going whether be in Toll Road Carter, some of the other so much looking at D.C.
So we’ve not really been, I think the two qualified a bidder for some of those assets. When we look at some of other markets, they really has not been a lot of product on the market in Concord and Philadelphia through Washington – north of the Washington, Concord including Jersey, Delaware, Pennsylvania.
And the things where we are beginning to see in our discussions, our options are coming as discussions with private landlords, banks, the kind of institutional offside owners who are, I think getting a bit more realistic on spot pricing and immediate term pricing and taking a look at where they see rental rates going. I think as we underwrite rents, we are assuming a fairly benign rate environment in all of our markets for the next couple of years.
Certainly, expense management to key issues to short underwrites in acquisitions, but I think the probably sweet spot for us as there is a sweet spot on any acquisitions, we focus much more on looking at high quality assets that has some element of this location whether it’s a capital stack issue, maturing debt or near-term maturities of tenancies or existing current vacancy. So Tom, if you want to add anything to that…
Tom Wirth
Well, I agree. That we are seeing some opportunities and we are looking at opportunities that they do have some vacancy.
There has been not that much product add on the market in any of our markets you are starting to see some movement in the special servicing more assets going that way and we are certainly monitoring that. And seeing there is any opportunities that may come out of that.
Craig Mailman – KeyBanc Capital Markets
And then just on the leverage. What are put you guys here in the asset leverage target?
Would you be in the 40 range or would you be in the higher?
Howard Sipzner
I’m sorry. I missed the first part of the question.
Craig Mailman – KeyBanc Capital Markets
Just on the in asset specific leverage target on any new investments kind of where you guys would shake out?
Howard Sipzner
Well, I think we are under – we are under – all of our underwritings being done on a kind of unlevered IOR basis and again I think one of the drivers of this whole investment program is to continue to move our overall leverage target down. That’s how we are touched almost sitting at 45% debt to GAD, our objective is to get our ratings upgraded in the industry become more positively biased towards both commercial real estate and us.
So we certainly see ourselves moving towards that 40% target as time progresses.
Craig Mailman – KeyBanc Capital Markets
Great. That’s helpful.
And then just a quick one on leasing, looks like contractions kind of kicked up this quarter. Just kind to get a sense is how much of those contractions are from leases that have been signed a while back versus kind of what you are seeing in the 19 square feet of leasing that you just did how much contraction activity was involved in those?
George Johnstone
This is George. I mean, contractions were up but we continue to see expansions exceed those contractions.
Most of the contractions that commenced during the first quarter or from leases we have done third quarter and early fourth quarter of last year. We do continue to see and expect contractions to continue on the balance of the renewals that we have to do.
Craig Mailman – KeyBanc Capital Markets
Great. That’s helpful.
Thanks, guys.
Operator
Your next question comes from the line of Jamin Callon [ph] of Bank of America/Merrill Lynch [ph].
Jamin Callon – Bank of America/Merrill Lynch
Hi, I’m (inaudible) can you please discuss your weaker markets in more detail and kind of what sign post do you watching indicated they might sit framing up maybe in terms of the New Jersey, Delaware and Maryland you mentioned which is doing better than the other?
Gerry Sweeney
Well, I think you mentioned that three weaker market during so George and I will take this. I don’t know, I think we really do when we talk about on every earnings call is we really do track our pipeline of activity and the number of prospects coming through our portfolio.
So this quarter with New Jersey for example, we were fairly pleased to see that quarter-over-quarter, our traffic volume and both in New Jersey and Delaware operations is up about 31% that seems to be a good benchmark for us in terms of net measuring for leasing philosophy. In the New Jersey market, we frankly have a very good team, and very well positioned assets, more so than any other market we have been involved in the last couple of years.
That market has had more than its fair share of any contractions and market move out. Now, with that, George maybe you can talk about what we have just stick to same story decline in New Jersey which really broaden that.
George Johnstone
Yeah. I mean I think we’ve got most of our larger known vacates that are going occur second, third, fourth quarter are all coming out of that New Jersey portfolio.
Just looking at tenants and access of 20,000 square feet there are nine from in that New Jersey dollar portfolio they aggregate about 360,000 square feet that we know they are going to move out. And we currently see our New Jersey portfolio tracking occupancy wise, down to about a level of 73% by year-end.
You know the currently about just shy of 85% but again there is a pipeline of some new deals but just not most of the pipeline to overcome this non-vacates and many of those known vacates are the result of some of those tenants closing operations and the largest in the mix is company that actually purchase their own buildings so.
Gerry Sweeney
So our expectation for New Jersey and Delaware and we have a fairly small footprint in Maryland and expectation in Maryland for their Rockfield. This can be a tough slot for the foreseeable future.
I mean, the vacancy rates in New Jersey are hovering in the midteens. Our major objective there is to capture more than our fair share of whatever leasing activity is out there and our team has done a good job of accounts in that.
There are few larger tenants in the marketplace now for space. The good news is the (inaudible) in the marketplace for space and that we have for better, for worse, some large blocks of high quality vacancy.
So our hope is we can get some of those larger blocks of space put away over the next 12 months or so. But we really do forecasted that those two market particularly, New Jersey and Delaware will remain soft with a downward bias for at least the next four quarters.
Jamin Callon – Bank of America/Merrill Lynch
Thank you. And are you coming across any other interesting kind of build to your opportunities in any of your market?
Gerry Sweeney
We are actually – I mean there has been a surprising uptick in the number of build the suit presentations we are making. And that’s almost been across all of our regions.
Interestingly, though I think that most of those are tenants benchmark in new one of the efficiency driven, one of the consolidation driven, environmentally both in terms of lease certification. So lot of those tends to be testing the owners tax retain, what the rental rates would be to occupying a newly constructive building today.
Our experience has been that most of those – in most of those situations, those tenants will decide. They probably is – now is not the time to buy up rental rate and in fact, they will either renew at their existing location or use the construction cost numbers at the benchmark to negotiate at least with an existing piece of inventory.
That being said, there are some interesting opportunities out there. That we are aggressively pursuing and everyone know lightening does strike and these tenants for variety of internal corporate priorities will make a decision to move into a new building.
So but it’s a very good question because there has been a perceptible uptick in a number of build to suit that we have been responding to in the last quarter.
Jamin Callon – Bank of America/Merrill Lynch
Thank you very much.
Operator
Your next question comes from the line of Brendan Maiorana with Wells Fargo.
Yanku – Wells Fargo
Hi, Yes. Good morning.
This is Yanku [ph] here for Brendan. I just wanted to ask about potential acquisition opportunities out there.
Gerry, I think you talked about how for core asset, there number of bidders out there but in terms I like to see more opportunities at varied space, but since it seems like all the management teams have agreed that they can achieve this days, what gives you the confidence that you might be able to take advantage of that versus others and are you seeing an uptick bidders for those terms?
Gerry Sweeney
Well, I think the general buying population is still a bit risk at worse to current vacancy. I think there still is a fairly good balance between our current income and run rates ability for at least in the next couple of years.
And a lot of the bidders are focused on five and 10 years IRS that, do show renal rate growth accelerating but also have been existing base of tenancies. We still do view the investor pool for – as I turn and going to the changing or special situation has been fairly limited, it does not mean that it’s exclusively ours by any stretch.
But certainly, we’re trying to use all of our market context with other owners both institution and private with all of our banking relationships to try and fevered out those opportunities that we might be able to review before broad based option process commences. And then because of these opportunities are within our existing footprint, we typically know these properties very well.
We know exactly what the effect of rates can be and we factored all into our underwriting assumptions now. In many cases that present a scenario, we're not aggressive enough to get the deal and we have lost a number of transactions because we have not been aggressive in some of our renal rate growth assumptions, but that what we see on that place out there.
That’s our objective is to continue underwriting. As the price vacancy really based on what we think rents are today effectively or we think we're going to in the near term with that discount is versus replacement cost and what type of operating or marketing synergies we can create by bringing that property into our portfolio.
Yanku – Wells Fargo
Okay. Thank you for that.
And maybe this question is for, Howard. You guys have completed about 75% of your spec revenue target to-date.
Your commentary is saying that the fundamentals are forming up a little bit but the occupancy range – occupancy assumption was down and then the total leasing volume assumption was down for the year. Just trying to figure out whether this is connected and what has to happen for you to get to the bottom end of your guidance is actually?
Howard Sipzner
Well, the disconnect or the explanation is that we’ve had a little bit of changed in the mix and we have got more square footage on the renewal side, a little bit less on the new leasing side. Most of that by our forward planning is due to slippage that deals we thought might happened in the third or fourth quarter and now slipping a quarter of two.
And clearly, the timing of the deal is that we get some done earlier in the year, they are more productive on an overall revenue basis. Since the overall revenue spec of the revenue figure really hasn’t changed it’s going to hover for the past quarter or two in the 27 to $28 million number.
I would say we will take a dramatic jump in that amount of speculated revenue or some other factor to enable us to move the upper hand of the guidance higher and it would take significant deterioration in the remaining leasing assumptions to push us to the lower end of the range. That level of production tends to put us somewhere around the mid point in conjunction with many other factors as well.
Yanku – Wells Fargo
Thank you.
Operator
Your next question comes from the line of Mitch Germain with JMP Securities.
Mitch Germain – JMP Securities
Hey, guys. Did you motioned the terms of the Wells Fargo lease.
Are that consistent with what you are seeing in your average portfolio trends?
Gerry Sweeney
They are. We had the seven year renewal and the terms of which we can settle on we have projected for our business plan and the mark-to-market was very consistent with on the GAAP and cash basis, very consistent with what we are seeing in the rest of the portfolio.
Mitch Germain – JMP Securities
And Gerry, you talked about some co-investment discussions. Is that specific investment or are you possibly looking to establish your fund?
Gerry Sweeney
No. It’s certainly going to be more specific investments.
We have not constantly equating our fund at this point.
Mitch Germain – JMP Securities
Great. Thanks.
Operator
Your next question comes from the line of Rich Anderson with BMO Capital Market.
Rich Anderson – BMO Capital Markets
Thanks. Good morning, folks.
I guess my question is on dispositions and it seems like you kind of hit up concord a little bit, the Oakland area in terms of the ultimate fail about portfolio and I know you kind of looking at California is not maybe or maybe you said that it’s going to be larger amount but not a long-term hold for the company. And if that’s true then why we – is there like a delay tax going on and also this is right time to be accelerate out there or what is the strategy in California overall?
Gerry Sweeney
Well, I think in California, you are absolutely on harder work. We do not utilize this long-term hold market for us.
And I think as we talked on the last call or two, our focus out there right now is stabilizing the portfolio base in both Northern and Southern California which is both pieces which are fairly small components of the overall company. Why we are doing that continue to invest at ATN investment sales climate decline whether it’s appropriate point for us to pull a trigger.
And I think certainly more activity occurs, those markets move more towards a positive bias then they have very, very well maybe the right moment for us to actually execute to trade but during that window with the time, we’re certainly continue to keep all of our options open.
Rich Anderson – BMO Capital Markets
And so with California and its entirety or a big chunk is the part of that portfolio that listed that you might start putting up for sale in the third quarter?
Gerry Sweeney
Certainly, piece of that maybe very well be. We’re kind of finalizing that list right now and – but again I think the marketplace understands that we are not a long-term player in this California markets.
So certainly, we react in bounce on a fairly regularly basis. We did have ongoing discussions with the investment sales brokers in those markets just to make sure that we have complete market re-kind of work values are, very much that we don’t want a number on another assets, frankly in some of our mid-Atlantic market places.
And I think we're really going through the process now of understanding where we think price will be setting the growth potential of very asset in the portfolio and using those to data points to finalize that, ultimate to that sale is.
Rich Anderson – BMO Capital Markets
And I think it will be great for the company to get out of California in my view. And then to you Howard, small question.
Why you guys have assumed for the recover of the snow removal cost for the remainder of the year. Is that all in your guidance?
Howard Sipzner
Well, if the recovery coverage is high as 70% or so within that bucket. So when you blend that in with the fact that our expenses were down, snow was up in the mix of the different components.
We don’t see any dramatic shifts in our 35% to 37% expected recovery range.
Rich Anderson – BMO Capital Markets
Okay. Thank you.
Operator
(Operator Instructions) Your next question comes from the line of Stephen Mead with Anchor Capital Advisors.
Stephen Mead – Anchor Capital Advisors
Gerry, hi.
Gerry Sweeney
Hi.
Stephen Mead – Anchor Capital Advisors
When you are talking about the leasing number in terms of 2.8 million was that what is remaining for the rest of the year or is that what the total of 210 looks like?
Gerry Sweeney
Total. That was total.
Stephen Mead – Anchor Capital Advisors
Yes. That’s total for 2010 and we have completed 75% of that.
Howard Sipzner
In the square foot basis we have done about 60% in change and for the revenue basis, about 75%.
Gerry Sweeney
Yeah. We’ve got about 1.1 million square feet last to go which pretty much is split right down the middle between new deals and renewals?
Stephen Mead – Anchor Capital Advisors
Okay. I was just struck by the difference between the stronger markets and the weaker in the environment and just a big question about is you look in the 2011 in terms of square footage that you face in terms of running off, what market is in generally and what are the prospects for 2011 looks like going down?
Gerry Sweeney
Well, again, as we touch on management the biggest run off is going to occur in our New Jersey/Delaware portfolio. I think the opportunities we have there for 2011 are well situated buildings, good local management teams and some larger blocks of space that quite frankly don’t exist in any of our competing buildings.
So ideally we’ll get some large consumers of office space coming to that New Jersey operation and we’ll get the opportunity to backfill the space. You know, kind of Maryland is a similar story.
We’ve got some larger blocks there particularly in our Rockledge redevelopment asset. And on the ’11 rollover, really I guess the New Jersey does have quite a bit of 2011 rollover over the past deal with next year as well.
Stephen Mead – Anchor Capital Advisors
Right. Okay.
The New Jersey, is really at the Bugaboo?
Gerry Sweeney
Well, New Jersey, I think it’s Bugaboo from the standpoint that more sort of the any other market, I think from the front of the recession whereas some many and that tend to be original office market in so many companies either rapidly downsize turn backspace or both buildings they consolidated or not to me. So the leasing activity in that market is actually been fairly good.
The problem is there has been a touch in large negative absorbing and has created significant down pressure on rents and given our strong position in that market we have taken more than fair share front is kind of move out. Historically, that’s been a fairly good performing market for us.
So we are certainly expecting over the next couple of years as that market will return to some level of normalcy. As George touched on, we're already seeing a couple of large tenant's kind of reentering the marketplace.
But no question here, I think New Jersey will be kind of the soft underbelly for the next, at least the next year and I want suburban dollar or when we can see be day and night category as well. We have run that as one operation.
Stephen Mead – Anchor Capital Advisors
There is large exposure in New Jersey to the restructuring and it has to go on in the CNBS market what's your sense?
Gerry Sweeney
Well, I mean New Jersey is one of those marketplace and again, we define New Jersey. We are really fringe and fast.
So we are kind of central inside the New Jersey. Those markets tend to be characterized strictly to Southern New Jersey markets by a lot of private landlords.
A lot of those private landlords have in fact run into valuation issues, capital capacity issues, loan maturity issues, et cetera. So our team there has been very, very true in identifying all the other ownership in that marketplace and focusing on attracting tenants from those buildings and have some problems into our inventory.
So I think as why our leasing levels in New Jersey have been fairly good despite the fact that it’s been adversely effected by some of these contractions. So very much in very one of our market stay to look at the financer and every one of our competitive projects.
So we have a very good flavor for exactly what’s happening from a financial standpoint on that project. That really is a talent signs to that landlord can do relative to run rates, capital investment and just as importantly, sometimes the length that time it will take them to execute a lease transaction because there many to get lender approvable.
If we think those three things have – are kind of red warning signs for that property, we're frankly all over those tenants based to try and track them one of our properties.
Stephen Mead – Anchor Capital Advisors
Thanks.
Operator
Your next question comes from the line of Dave Rodgers with RBC Capital Markets.
Dave Rogers – RBC Capital Markets
Gerry. Just a question I'm following, I guess on Richard's question earlier, but broader than just California.
Do you think it is been too conservative on the asset sale side? You think they have room on the dividend.
You've got the equity program to help the fixed charge coverage. And I guess why I'm asking is, it seems like there is a big difference in what you expect, in terms of growth and what the buyers expect?
Capital seems to be very aggressive out there. You have a large number of cash flowing assets in markets that you don't really want to be in, outside of California, even, but on your target markets.
Why not offer those up? I'm assuming that you are expecting, your estimates to be right on growth and appears to be wrong, in which case it would seems that differential today is only going to narrow into the future.
If you give a little more color on that, that will be great. Thank you.
Gerry Sweeney
That's a great question. I think that's why I mentioned earlier that Tom and his team are carefully tracking what we are seeing on the entire investment fund throughout the country.
There was certainly a lot of the active, aggressive buyers right now who are targeting, frankly, kind of New York, Washington DC and some of the coast markets, like a San Francisco versus Concord, California. We are doing a lot of work, make sure we understand what we think, pricing, is how people are underwriting and as those data points become more clear, we would be in a position to potentially put more properties on the market for joint venture or for sales.
That date is not completed at this point, yet. You go back a couple of years, we did a very good transaction with the pension fund advisor on about 2 million square feet of stable, yet slower growing assets, is performing very well.
I would not preclude that – we have not built that into our business plan, but a lot of work is been done behind the scenes and make sure that we are in a position – the investment markets, should mid-Atlantic area gets more clarity to fully test the market on moving some more assets.
Dave Rogers – RBC Capital Markets
Okay. And then follow-up to that is, is the full ATM issuance and the guidance, it's not a big number but and then also would you do more or would you, only consider more of your predicated more acquisitions, in deployment of capital are you going to really pursue that program, when it falls?
Gerry Sweeney
I think the two issues related to the execution in the ATM program is, where we think the stock prices, as well as what we think the near-term opportunities are, is how we have outlined in our capital plan? We are pretty well booked in on our capital requirements.
Really, through the end of 2011, without much – much booked at all, we have very good visibility in all those different components. So I think that the thought process we are always going through is, the trade-off between improving our balance sheet by through de-leveraging and showing dilutive equity, versus where we think the growth opportunities in the portfolio will come from and external growth opportunities, so.
We did execute the program in the first quarter, and did some subsequent to the end of the quarter. And I think we will continue to monitor the market as the circumstances present themselves during the balance of the year.
Dave Rogers – RBC Capital Markets
All right. Thank you.
Operator
Your next question comes from the line of Dan Donlan with Janney Capital Market.
Dan Donlan – Janney Capital Market
Hi. Good morning.
Gerry Sweeney
Good morning.
Dan Donlan – Janney Capital Market
Gerry, I just want to know if you could comment on what you are seeing from the GSA and the government contractors in D.C. And if you think there could be some increase in leasing in the second half of the year?
Gerry Sweeney
Well, we are one of the largest historic rehab projects underway today, with the GSA as our client and tenant. So our expectations, when we deliver that building on time, on budget with a very strong relationship with region three, we would certainly be in a position to look at other opportunities.
Along those lines we are certainly looking at some opportunities right now, from a GSA standpoint. If you believe the numbers, the GSA could be a huge consumer of office base over the next several years.
And having now accomplished or being to close to accomplishing, we think of – a tremendously successful project for the GSA. We think that, that will be very adequate to our reputation.
That reputation advantage, plus the skills of our more existing team, I think will positions us very well to pursue other GSA opportunities.
Dan Donlan – Janney Capital Market
Okay. Thank you.
And then this is a follow-up. Your suburban – Excuse me, your CBD Philadelphia, is well leased, most Class-A space in Philadelphia is well leased.
I'm just curious if you could comment on what you think cap rates suffer, for that high quality Class-A space in CBD Philadelphia and maybe where that spread is to, some of the suburban office that you guys have.
Gerry Sweeney
A good question. I think generally from a market standpoint, we continue to be very, very pleased with how strong, Philadelphia CBD is doing, particular in the trophy class assets, our willing to logan and properties of experiences is tremendous success in both leasing of our near-term expirations, as well as being able to move runaway, so.
Rental rates in trophy class space had continued in upward trend. They really have not been, Dan, any really trades in the Philadelphia CBD at this point, with the exception of 2000 market which was clearly not a trophy class asset and had it in some special set of circumstances.
We are continuing to talk to investors about the CBD marketplace. We have a keen interest and we have a large presence between the logans and our property, the University City.
So our expectation again was kind of touches on one the previous question. I think as they get to a more transactional clarity, in kind of the top special line market in New York, D.C.
et cetera, some of those buyers who target those markets initially will start to refocus here on investment pension, on markets like Philadelphia and our closing suburban markets. And if you look in our cap rate profile over the last 10 years when Philadelphia is typically traded, depending upon the asset quality and location, 100 to 200 basis points wide off what you see in the district in the New York City, so.
We get to see that trend line evidence itself, because there is a transaction but our expectation is as the year progresses, there will be some traces occur and we would expect that trend line of cap rates spread between Philadelphia and those other markets I mentioned would remain intact.
Dan Donlan – Janney Capital Market
Thank you.
Operator
Your final question comes from the line of John Stewart with Green Street Advisors.
John Stewart – Green Street Advisors
Thank you. Gerry, you referenced I guess near-term growth, NOI growth that some of the competitors on this bidding practice, particularly NBC and other's assumptions are more aggressive than yours.
Maybe I could put this to Tom and ask you to quantify the difference between the winning bidders and what Brandywine is underwriting?
Tom Wirth
Hey, John. This is Tom.
I think that what we are seeing is that the cap rates on these assets, in the Washington Metro are basically in the seven range. We are seeing some, actually, dipping below that.
And from our standpoint, we are not feeling that – at a level of cap rate that we would feel is accretive or good for the company. We would look at some of those transactions, potentially on a JV basis and we are talking to some potential capital to do that.
But our bids would be – couple of 100 basis points, 150 above that.
John Stewart – Green Street Advisors
Okay. I guess I was also specifically curious in terms of the rental rate growth assumptions.
Tom Wirth
Well, I think on that side we were seeing rental rates, pretty flat for the next couple of years. There is still a lot of occupancy.
There is still a lot of consolidation. We are seeing some larger tenants, consolidating space.
There is a couple properties that were put on the market where there was a concern over consolidation of space that were very large, usually that had two buildings. And so that property sale which was aggressively priced was pulled for the market, just for those reasons, so.
We are still not feeling that there is – we feel that there is an ample supply of space out there that we are not underwriting significant rent growth right now.
John Stewart – Green Street Advisors
Okay. And again, any sense for what the winning bidders are underwriting?
Tom Wirth
No. I don't have an idea of how they are underwriting, is in terms of rental growth?
John Stewart – Green Street Advisors
Yes.
Tom Wirth
Well, again, as looking at some of the assets we have seen, we don't feel that those rental rates were significantly below market. So we assume that to get to those – unless they are very comfortable with the yield they are seeing in the six to seven range, we would have to anticipate that they have got to increase steep rental of growth over the next couple of years.
John Stewart – Green Street Advisors
All right. Okay.
And then lastly, could you touch on – and I apologize if missed this, but cap rates that Brandywine is expecting to achieve on the dispositions that you expect to take to market?
Tom Wirth
Well, I think we end up doing – our last year was in kind of that 8.5% range, if I remember correctly.
John Stewart – Green Street Advisors
Right. And what do you expect on the next crop?
Tom Wirth
We would expect those cap rates pretty much whole steady, we have – in number of crops, we have under agreement or significant under leased. So the cap rates become some other relevant.
But certainly, we would expect that cap rates, they kind of circle on that 8 to 9% range.
John Stewart – Green Street Advisors
Okay. Thank you.
Operator
At this time there are no further questions. Gentleman, do you have any closing remarks?
Gerry Sweeney
No. I just wanted to thank everyone for their active participation in the call, and we look forward to updating you on our next second quarter forecast.
Thank you.
Operator
Thank you. This concludes today's conference call.
You may now disconnect.