Apr 28, 2011
Executives
Gerry Sweeney – President & CEO George Johnstone – SVP, Operations & Asset Management Howard Sipzner – EVP and CFO Gabe Mainardi – Vice President and Chief Accounting Officer Tom Wirth – EVP, Portfolio Management and Investments
Analysts
Jordan Sadler – KeyBanc Capital Markets Michael Bilerman –Citigroup Anthony Paolone – JP Morgan Jamie Feldman – Bank of America/Merrill Lynch Brendan Maiorana – Wells Fargo Securities Dave Rodgers – RBC Capital Markets Richard Anderson – BMO Capital Market Mitchell Germain – JMP Securities Daniel Donlan – Janney Capital Markets David Anderson – Green Street Advisors Ross Nussbaum – UBS
Operator
Good morning. My name is Latangie, and I will 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 speakers' remarks, there will be a question-and-answer session. (Operator instructions).
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
Latangie, thank you very much. Good morning, and thank you all for joining us for our first quarter 2011 earnings call.
Participating on today's call with me are Gabe Mainardi, our Vice President and Chief Accounting Officer; George Johnstone, Senior Vice President of Operations; Tom Wirth, Executive Vice President, Portfolio Management and Investments; and Howard Sipzner, our Executive Vice President and Chief Financial Officer. Prior to beginning, 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 that 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.
As our first quarter results indicate, our 2011 business plan remains very much on track. Market conditions continue to improve and we are seeing increased activity levels through most of our markets.
The pace of tenant contraction has slowed. This dynamic coupled with increased tenant activity levels, reflects the steady state of recovery.
While business outlook remains positive, economic uncertainty does remain an ongoing concern. Macro issues such as job creation, the federal deficient, the divide on public policy, state and municipal budgetary constraints are all keeping uncertainty at the forefront of many business leaders’ thinking.
However, bottom line consistent with our long held view, we expect a real estate recovery for suburban office space to continue to be steady but remain slow. Looking out over the next several quarters, we anticipate the following within the Brandywine portfolio.
With the market still in the recovery phase, we will generate leasing results primarily by increasing market share, rather than through our markets operating at historical absorption levels. Leasing activity levels will remain constant and in some markets continue to increase.
Most of our markets will continue to have a tenant-driven pricing dynamic but we are also seeing encouraging signs of rental rate growth in some of our core suburban markets where vacancy rates and Class A products have continued to decrease. The flight up the quality curve by customers will continue and will directly benefit our portfolio.
This benefit will be additional absorption, not necessarily across-the-board-upward-pricing pressure, as many tenants are looking to move to higher quality buildings, at lower price points because they anticipate a longer term rental-rate recovery. In looking at our plan, we are 82% complete on our 2011 speculative revenue targets, and 46% completed on our 2011 renewals.
Pages 29 and 30 of our supplemental package summarizes our progress on these various business metrics. George will review in more detail, but all operating metric were in line with our business plan projections and we saw continued acceleration of our 2011 revenue targets.
Looking at the balance of the year, we expect stable to-improving occupancies, consistent same-store numbers, and a declining negative mark-to-market, all reflective of a continued improvement in market conditions. Our concession packages have remained fairly steady and where we are seeing capital cost increase, we’re getting more lease term.
So with those overview comments highlights for the first quarter results are, we exceeded the first quarter consensus by a penny, and posted FFO of $0.33 per-share. As such, even with our debt issuance acceleration, we raised the bottom end of our 2011 FFO guidance up a penny, for a new guidance range of 1.27 to 1.34 per share.
Howard will review our financial performance and related implications in more detail in a few moments. We also posted other quarter of leasing activity in access of 1 million square feet.
That strong performance was further reinforced by a tenant-retention rate of over 68%. The overall tone of the market continues to be positive.
Our new leasing pipeline stands at 3.2 million square feet of which 482,000 is in active negotiations. Our conversion rate also continues to improve.
For the first quarter that conversion rate was 40% and we executed 37% of our first quarter leasing transactions on a direct basis. Four out of seven of our primary market experienced positive absorption for the quarter led by Austin, Texas, Richmond, Virginia, Philadelphia CBD, and our New Jersey/Delaware region.
Leasing activity levels were up in all but one of our markets for the first quarter compared to the same quarter last year. Another signature of improving market conditions is that traffic throughout portfolio was up 40% from Q4 and up 30% year over year.
All of our operations reported much higher levels of leasing activities in Q1 versus 2010, in some cases by very wide margins. These activity levels are fairly broad based with no one particular industry leading the way.
As we’ve talked before, market share remains key and on that front our plan continues to progress well. By way of example in Southern New Jersey, our leasing teams did 53% of all deals in the market compared to a 20% ownership stake.
That was accompanied by a strong performance in our Pennsylvania suburbs where we captured 32% of the market share for new leasing activity versus a 14% ownership stake. The markets in which we expect to continue performing well in 2011 are the Pennsylvania suburbs, Philadelphia CBD, Richmond, Virginia, and Austin, Texas.
We continue to expect to face continued leasing challenges in our New Jersey/Delaware operations as well as the Dulles Toll Road Corridor in Northern Virginia. Both of these operations have been impacted by a fairly high number of known tenant contractions, and move-outs.
These markets remain competitive, but traffic through our portfolio in New Jersey was up 78% quarter over quarter and 16% year over year, and activity in our toll road properties was up 33% quarter over quarter and 18% year over year. So we’re seeing an increasing number of activities through our portfolio basis in those markets.
Looking at our overall business plan, consistent with prior calls, our 2011 plan business priority is leasing vacant space. That’s clearly our biggest growth opportunity.
Our plan projects our year-end 2011 forward leasing percentage to be 88%, but our stretch objectives anticipate exceeding that. There is no single bigger contributor to our growth profile than simply leasing our existing vacant space.
We’re making strong progress on that front, and that remains the number one priority focus for the company for the balance of the year. Looking at the broader investment market, the investment market clearly remains bifurcated between the gateway and the non-gateway markets.
During the quarter we continue to pursue a number of transactions in the Metro DC marketplace, but no opportunities at our entry point pricing and future growth objectives. Given the tremendous investment demand in pricing in that marketplace, we are exploring a joint venture program on several of our Northern Virginia assets to harvest both existing value and to form a co-investment vehicle to acquire additional properties.
This process is going well and we would expect that if it is successful, a transaction would close by the end of this year. Additionally, we continue to evaluate the sale of several other non-core assets in Northern Virginia, in response to the very strong investor demand in that marketplace.
While this near-term tactic runs counter to our overall strategy of increasing our revenue contributions from the Metro DC region, it does reflect our approach of defining core versus non-core properties and taking advantage of pricing windows to optimize value on non-core assets. Outside of Metro DC, the investment market is still only in the [inaudible] stage of its recovery.
However, pricing levels in those gateway markets are driving increased amounts of capital to look at some of our existing markets outside of DC. We’re beginning to see this and we do expect that to demand in other markets will pick up significantly as the year progresses, and we have identified a number of non-core assets for sale.
The plan is currently structured. It incorporates the sale of about $80 million of properties in 2011, and the business model has those sales occurring with a more heavy weighting towards the second half of the year.
During the quarter, we completed the acquisition of Overlook 1 and 2, which are two fully-leased buildings in Richmond, Virginia, aggregating 126,000 square feet for a purchase price of $12.5 million. The price per square foot was $99 with a going in cash cap rate of about 11%.
We don’t have any additional acquisitions built into our 2011 plan. We will continue to seek quality additions to our portfolio, both directly and through joint venture opportunities and would anticipate that those investments would continue to be financed primarily on an all-equity basis.
During the quarter we issued about 200,000 shares of common stock under our continuous equity program realizing $2.2 million of net proceeds. Subsequent to quarter end we issued an additional 500,000 shares under the program realizing just shy of $6 million of proceeds.
We have 8.6 million shares remaining under this program. We remain fully committed to moving up the investment-grade ratings curve.
As we discussed before, this is a multiple-year plan that we will achieve through a combination of NOI growth, occupancy improvements, disposing of slower growth assets and funding acquisitions on a balance sheet improving basis. While reducing overall debt levels, we’ll continue as part of our plan.
The largest driver in reducing our EBITDA multiple to our targeted level in the mid-6s, is simply achieving our leasing objectives. As mentioned on our last call, our 2011 capital plan originally anticipated a $300 million 7-or-10 year unsecured note issuance in the fourth quarter of 2011.
As we previously announced, we took advantage of a favorable debt margin to complete the early execution of a $325 million, 7-year unsecured financing at a coupon of 4.9% with a yield of maturity of 5.137% and realized $319 million of net proceeds. We used the net proceeds of this note issuance to repay the full outstanding balance of our unsecured revolving credit facility and established cash balances for both general corporate purposes that include the future repayment of maturing indebtedness.
At this point, let me turn the presentation over to George Johnstone, he’ll provide an overview of first quarter operational metrics. George will then turn it over to Howard for financial review.
George Johnstone
Thank you, Gerry. Leasing activity for the quarter was solid resulting in significant progress on the business plan.
During the quarter, we commenced 1.1 million square feet of leases including 443,000 square feet of new leases and tenant expansions. We had 232,000 square feet of contractions by tenants who did renew a portion of their lease; 200,000 square feet of which, was in our Northern Virginia portfolio.
An additional 173,000 square feet of tenancy, simply vacated at the end of their lease term; 75% of which, were office closures and/or company downsizings. This activity resulted in absorption before early terminations of 38,000 square feet.
In terms of early terminations for the quarter, several of these were negotiated to accommodate existing tenant expansion. Only 20,000 square feet of the 138,000 square feet that terminated is left to lease.
Occupancy at March 31, was 85.3% down 30 basis points from last quarter but in line with expectation. As a result of our leasing efforts this quarter, we have again increased the amount of speculative revenue on our plan.
Our revised target for the year is now $32.4 million, up $1.7 million or 5.5% from previous guidance. As of today, we have achieved $26.6 million or 82% of that spec revenue.
As the graph on Page 30 of our supplemental package portrays, only our Austin operation has yet to reach the home turn. However, the pipeline of activity is strong, including several leases currently being negotiated that would bring this region into the 70th percentile of achievement.
Expectation on tenant retention remains unchanged at 56%. We’re still estimating a decline of same-store GAAP NOI between 4 and 6%.
Rental rate declines have improved, now down 1.5 to 3% on a GAAP basis and down 6 to 9% on a cash basis. Our actual rental rate declines on the 82% of the plan achieved to date have been a decline of 2.1% on a GAAP basis, and down 9.5% on a cash basis.
As we assess the open assumptions in the plan for 2011, for new leases there’s an active pipeline of prospects; 482,000 square feet of which are under negotiation and 2.7 million who are in receipt of a proposal. In order to achieve the open leasing assumptions in our plan for new leasing, we will need to convert 32% of today’s active pipeline.
As Gerry mentioned in his commentary, our conversion rate during Q1 was 40%. In terms of projected occupancy, we now expect the troth to be 84.8% during the third quarter.
This is a 60 basis point improvement over our last update. Occupancy will improve 90 basis points in the fourth quarter to close the year at 85.7%.
Two regions worth highlighting. Austin, as mentioned earlier has several deals and negotiations that will backfill the known move outs in the second quarter, restoring occupancy to 96.2% at year end.
Richmond also has a strong pipeline of activity in advanced stages to offset its second and third quarter move outs, restoring occupancy to 91.6% at year end. We’re pleased with the level of achievements to date on our plans, and with that, I’ll now turn it over to Howard for the financial review.
Howard Sipzner
Thank you, George and Gerry. In the first quarter, FFO available to common shares and units totaled 48.2 million, or $0.33 of FFO per diluted share, which beat the analyst concession by $0.01 per-share.
It’s a high quality FFO figure, in that our first quarter termination revenue, other income, management fees, interest income, and JV income, totaled just $6.1 million on a gross basis, or $4.6 million net of associated expenses, in line with our 2011 guidance range, for these other revenue components and below 2010 levels. The FFO payout ratio in Q1 2011 is 45.5% on the $0.15 dividend we paid in January 2011 for each common share.
A few other observations on the components of our Q1 2011 results; cash rent at $115 million was up 5.1 million versus Q1 2010. Straight-line rent of 4.7 million was up 1.8 million versus Q1 2010 and up $200,000 sequentially versus Q4 2010.
The quarter-over-quarter increases are primarily attributable to the Post Office and garage completions related to the IRS campus, and the Three Logan acquisition, all in Q3 2010. Recovery income at 23.1 million and our recovery ratio of 38.2% reflected typical expense recovery conditions along with higher snow recoveries and are in line with our expectations.
Property operating expenses and real estate taxes were essentially flat sequentially as higher snow cost in Q1 were offset by lower expenses in several other operating categories. Interest expense of 32.4 million decreased sequentially by a full $3 million as we temporarily benefited from a higher level of floating rate debt and the accumulated benefits of 2010 bond repurchase activity.
Interest expense in Q1 includes 272,000 of non-cash APB14-1 cost related to our remaining exchangeable notes and just $380,000 of capitalized interest or 540,000 less than we had in Q4 2010, and 2.8 million less than in Q1 2010, reflecting the lower development activities. G&A at 6.2 million was in line with our expectations.
In Q1 2011, we had benign credit conditions with net bad debt expense of just $366,000, in line with expectations. For the quarter, same-store NOI declined 5% on a GAAP basis and 5.3% 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, all in line with expectations.
2011 first quarter CAD decreased sequentially to 25.4 million from 26.5 million and measured $0.18 per-share. We achieved a 83.3% CAD payout ratio for the first quarter.
Revenue maintaining capital expenditures were elevated due to timing of disbursements on previously executed leases. In terms of 2011 guidance, as Gerry noted, we are increasing our previously issued 2011 guidance range from $1.26 to $1.34 per diluted share by $0.01 on the lower end to now be 1.27 to 1.34.
Notwithstanding, the approximately $0.05 diluted impact of the early bond financing. Following our $0.33 per-share Q1 result, this translates to a quarterly rate of 29 to $0.31 if we exclude the $0.07 historical tax credit transaction impact that we’ll recognize in Q3 2011.
George mentioned many of the portfolio metrics that we expect to see going forward, so I’ll just touch on a few other elements of our guidance plan. We are still projecting 20 to $25 million of gross or 13 to $18 million of net all other income items such as termination revenues, other income, management revenues, less management expenses if net, plus interest income and JV income.
And in that case, including the Thomas Properties investment as a preferred return on our investment, and any bond repurchases losses to the extent we move forward on that front. At the mid-point, this bucket is about $6.8 million or $0.05 per-share below our $28.3 million gross, $22.5 million net 2010 figure.
G&A should remain flat at about 6 million a quarter. Interest expense will rise now for 2011 and we see in a range of 136 to 140 million, increasing slightly as move through 2011 quarter over quarter, and up $6 million from prior guidance due to the impact of the early 2011 bond issuance.
As I mentioned previously, the net historic tax credit recognition impact will be about $0.07 per share and we’ll recognize that in the third quarter of 2011 as $0.08 in a new revenue line item, and an extra $0.01 of interest expense. These are essentially non-cash and will be excluded for our CAD calculation and they reflect the per-share impact of 20% each year over five years of the net proceeds to be realized in connection with the historic tax credit financing on the Post Office project.
We still project $80 million of 2011 sales activity up to a 10% cap rate, but as Gerry mentioned, these are now more weighted to year end with approximately a $1.8 million income loss included in our model for these sales. We don’t anticipate any addition issuance under our continuous equity program in our guidance, nor any additional debt buyback activity.
And our assumed share count for FFO purposes, is therefore 147 million shares. On the capital plan, we really are in great shape.
We have total capital needs of 350 million over the last nine months of 2011. This would include 100 million of investment activity including incorporating up to 5 million to finish up any remaining billings on the Post Office and Garage, 50 million of revenue maintaining capital expenditures over the next nine months, 30 million for remaining redevelopment outlays and lease up of recently completed or acquired projects.
And we still expect to fund $15 million in 2011 for commerce, JV contributions. We see 179 million of debt repayments, $60 million for the 2011 exchangeable notes, 6 million for interim debt repurchases, and 113 million for mortgage repayments.
I will point out that we extended our $183 million funded bank term loan, and $600 million unsecured revolving credit facility, both to June 29, 2012. We also will distribute about $71 million of aggregate dividends on our common and preferred shares.
To raise this $350 million, we are projecting or have already completed the following; $119 million of cash flow before financings and investment, we’ll still fund an additional $3 million most likely in the second quarter, the final installment on the historic tax credit financing, the 80 million of sales, and the now-completed 325 million unsecured note issuance. The result of these capital activities will be an effective $170 million credit facility pay down through year end 2011, and a projected year-end balance of 27 million versus 197 million that we had at quarter end of March 31.
We actually now have about 70 million of excess cash on hand, and zero outstanding on our credit facility following all of these activities. Our receivables at 3-31, were $15.3 million – reserves, I’m sorry, at 3-31, were $15.3 million.
3.7 million on 22 million of operating and other receivables and 11.6 million on 111 million of straight-line rent receivables. All of these percentages and aggregate amounts are in line with historical levels.
Our balance sheet and credit metric remains strong with debt levels in line with expectations, our balance of fix and floating rate debt at a comfortable level, and our overall unencumbered portfolio running at very high levels. We are 100% compliant on all of our credit facility and adventure conveyances.
And with that, I’ll it back to Gerry.
Gerry Sweeney
Great, Howard, thank you very much. George, thank you as well.
To wrap up our prepared part of the presentation, fundamentally we’re very pleased with first quarter results and the progress made towards executing our 2011 business plan. During the quarter solid leasing activity, a very strong tenant retention rate, good control on capital cost, coupled with our investment program and bond offering solidified our frame work for success in executing our overall 2011 plan.
With that, we’re delighted to open the floor up for questions. We would ask that in the interest of time, you limit yourself to one question and a follow-up.
Thank you.
Operator
(Operator Instructions). Your first question comes from the line of Jordan Sadler with KeyBanc Capital Market.
Jordan Sadler – KeyBanc Capital Markets
Thanks, good morning. Gerry, I’m curious about the joint-venture plan.
It sounds like you are in the process – I know you might not want to be too detailed here, but any addition color you could provide on the strategy and the thinking, maybe the scope of such a sale and what kind of ownership you are looking to retain or the strategy on the assets longer term. That would be helpful.
Gerry Sweeny
I’d be happy to do it Jordan, and Tom, please weigh in. I think the structure that we are looking to achieve – really, there are the two goals we have mentioned, which is harvesting some value from some existing properties, and then coupling that with an equity commitment from our institutional partner going forward to enable us to acquire some very high-quality assets that we bring in to our portfolio on a joint-venture basis.
We have identified about $150 million of properties that we would contribute to that joint-venture. Tom is running that program for us, we’ve just simply entered the mark within the last week or so in terms of contacting institutions.
The objective would be to spend the next quarter or so working with some of those potential partners on both underwriting our existing assets and developing a frame work for investing going forward. If we can reach an agreement on those terms and consummate a venture, the targeted investment area would be metro DC with primary emphasis on inside the beltway and inside the district.
Jordan Sadler – KeyBanc Capital Markets
So, you basically feed the JV with 150 of your assets and then there is an equity commitment from an institutional partner and the objective is to basically increase the exposure to metro DC and maybe in the CBD, within the JV.
Gerry Sweeny
Within the JV, yes.
Jordan Sadler – KeyBanc Capital Markets
Okay, and have you identified assets for acquisition for the JV?
Gerry Sweeny
Well, the good thing about metro DC is there is no shortage of assets entering the market on a daily basis for target investment opportunities. We have identified the Brandywine assets we would contribute.
We have a solid pipeline of potential investments that we are reviewing as part of that discussion with joint-venture partners, but no one specific asset has been identified, simply given the uncertainty of both the execution and the timing of this joint-venture effort.
Tom Wirth
Jordan, this is Tom. We’ve been looking at assets as you know throughout the year, so we have identified certain assets that we feel would be assets we underwrote so far this year, that are recent transactions, and we have planned those out as transactions we would target with the committed equity.
So, we are showing a profile of assets that we would like to see in the targeted market, which we believe should be inside the beltway, and potentially including the district.
Jordan Sadler – KeyBanc Capital Markets
I assume the assets you’d seed with would be stabilized assets?
Tom Wirth
We’ve looked at a mix of assets; one stabilized and one that may have a little more role of leasing and a little more vacancy. So, we’re blending it to be a little bit of growth as well stable.
Jordan Sadler-KeyBanc Capital Markets
Okay. I’m just curious why the joint-venture structure for that new investment?
Gerry Sweeny
As we’ve been pointing out every quarter, we’ve been looking at the assets and we feel strongly that the best growth is for asset inside the Beltway. As we take a look at some of the transactions that have been occurring inside the Beltway, the yields have been fairly low, pricing has been high.
We feel that at least if we have a partner, we can take advantage of the mortgage financings that are very strong for these assets. We’ll be able to increase our footprint by bringing in an institutional partner.
Jordan Sadler-KeyBanc Capital Markets
Okay, thank you. I’ll get back in the cue.
Operator
Your next question comes from the line of Michael Bilerman with Citi.
Michael Bilerman –Citigroup
I’m just calling on the joint-venture from a size state perspective, how much equity are you looking to raise above and beyond contributing your assets? Is this a billion-dollar joint venture, or this 715 million?
Tom, to your point, yields are very low in the district, I guess how do you think about that relative to your cost of capital on an equity side, which is higher? I would assume that the assets you contribute in the JV are going to be higher yielding.
If you have to raise equity your stock’s trading at a lower multiple higher-implied cap rate, it become difficult to make the deals accretive.
Tom Wirth
To answer your question on equity, we are looking to raise about 200 million of committed equity from an institutional partner. The size of the platform will depend on a couple of factors, including what interest we maintain in it.
Different investment partners are going to have different parameters on that, as well as how much leverage we put on the asset. It could range anywhere from 40-60%.
In terms of our yields, I think when you put our equity position below 50%, it could be as low as 25%, and then you couple that with a modest mortgage in the 40-60% range, the returns begin to not look as dilutive, as long as we also maintain management leasing of the properties.
Unidentified Analyst
Hey guys, it’s David here. Just turning to your guidance, it looks like your year-end occupancy hasn’t really changed from around 86 %, but at the same time, you are effectively increasing your FFO guidance by $0.06 in part due to better leasing, so I was just wondering if you could explain that.
Tom Wirth
Yeah, I think part of that is just the same level of leasing, just earlier than anticipated, is really the primary driver. Some deals that we thought were going to commence third or fourth quarter, we have actually been able to accelerate the timing on those.
Unidentified Analyst
Okay, thanks.
Operator
Your next question comes from the line of Anthony Paolone with JP Morgan.
Anthony Paolone – JP Morgan
Thanks, good morning. On the $80 million of asset sales you had outlined, I guess I was a little confused, does that include the contribution of assets in to the joint-venture, or is that other stuff?
I couldn’t tell if that also incorporated potentially going further out in to the non-core stuff outside of northern Virginia that you might sell.
Howard Sipzner
Tony, it’s Howard. Those are two different initiatives.
The 80 million is sort of our baseline property disposition capital recycling program, part of the capital plan, part of the asset plan. The JV that Gerry and Tom talked about is really a focused initiative on how to increase presence ultimately in the metro DC area.
Anthony Pallone-JP Morgan
So, that 80 million then, does that include the non-core stuff in northern Virginia that you said the bid looked strong enough that you are willing to cut those assets loose?
Howard Sipzner
It could. At this point, a lot of that assumption is generic without specific assets identified until later in the year.
Tom Wirth
With those assets, Tony, it would be in the cue that we are evaluating for meeting that target.
Anthony Pallone-JP Morgan
Okay, got it. Then, could you give us an update on your leasing progress at Three Logan, both in terms of addressing the tenants that come to end I think next year, and then also requirements for large states that you might be pitching for vacancy of that building?
Gerry Sweeny
Sure. We continue to be very pleased with the activity and the tone and the stage of the discussions we are having, with both some of the existing sub-tenants and the new tenants on the vacant space.
You may recall, we have about 400,000 square feet to lease in that building in the lower half of the project. We are operating under a letter of intent – executive letter of intent, and advance lease negotiations with one tenant for about 150,000 square feet.
We are also in very advanced discussions about another 350,000 square feet of tenants for that bottom half of the building. The rental rates are very much in line with our projections, capital is line on a couple of the deals.
It’s a little bit higher on a per-square-foot basis, but we are picking up an additional 5-10 year lease term. So, when we look at it, it’s a much more effective deployment of capital than even our pro forma contemplated.
On the upper half of the building, we have made very good progress with extending a number of these subtenant leases. We have frankly put a little bit of that on hold given the accelerated activity we are seeing on the bottom half of the building.
Once those activities achieve more clarity and we get some of that bottom level space put a way, then we will reinvigorate some of the discussions on the upper banks. So, all in all, great level of activity on the existing space.
The existing subtenants who we have not renewed continues to clamor for renewals, so we expect to meet all of our targets on the upper half as well.
Anthony Pallone-JP Morgan
Great. Thank you.
Operator
Your next question comes from the line of Jamie Feldman with Bank of America.
Jamie Feldman – Bank of America/Merrill Lynch
Thank you and good morning. I’m hoping you guys can just talk a little bit more about sentiment among tenants across your major markets.
How things feel this quarter versus last quarter, especially given some of the macro headwinds we’re seeing, and even with the removal of QE2, what people think may happen to their businesses.
Tom Wirth
I’ll start off with that, George maybe can fill in based upon what you are hearing from field folks. I think generally the best stale weather for us, are the activity levels and the amount of activity that is actually converting to leases.
That tells us people are actually doing some forward planning, perspective customers are assessing their options and actually making capital decisions on how they run their business. Jamie, there’s really been no change significantly, up or down, since we had this conversation in the last quarterly call.
I think even with the positive buys, I do think some of those points we talked about at the beginning of the call in terms of the federal deficit, the continued emergence of state budget crisis in almost every state we do business in, including some of the major municipalities, that’s crazy. They have an overhang on where tenants look to relocate their businesses, but generally speaking, I think we are very confident with what we’ve seen.
Our customer base, both existing and perspective, have really shifted from kind of an expense controlled margin maintenance mentality and how they run their business, to one that is much more focused on revenue creation. When that shift occurs, that tends to pertain good things for the office business because they look at what they need to do in terms of creating a platform to accomplish those revenue volts over the next few years.
Okay, George, maybe you can add some additional color.
George Johnstone
Yeah, Jamie, I think we continue to see good levels of activity and we also see that we are still signing over a million square feet of leases per quarter, and we have been able to maintain approximately a half-a-million square feet of forward leasing, and a half-a-million square feet kind of in that advanced negotiation state. So even with the success of converting proposals in to leases, we are then also converting other proposals and inspections in to active lease negotiations.
The pipeline remains strong. All of our regions reported increased traffic levels, and as we alluded to in our prepared commentary, inspections were up 40 % over last quarter.
Jamie Feldman – Bank of America/Merrill Lynch
Okay, thank you.
Gerry Sweeney
Does that answer your question, Jamie?
Jamie Feldman – Bank of America/Merrill Lynch
Yes. Thank you.
If I could just ask a quick follow-up. Gerry, could you talk a little bit about the decision to invest further in Richmond given it sounds like you want to stay in some of the better growth markets like northern Virginia or inside the Beltway, that just seems a little bit off.
Gerry Sweeny
Yes, it’s actually not too off in terms of how we assess things. The property is located in Brook section of the Richmond suburban market.
The buildings were actually built by our team down there. The buildings are fully leased with no real significant rollover for the next several years.
Rents are pretty much tight to where existing market levels are today. From our standpoint, it is really an opportunity to buy a property at a very attractive price per square feet, very good going in return with good growth objectives coming off that specific asset base.
So, that thought process we go through is very much in line with what we typically evaluate on any acquisition, which is kind of entry-point pricing, both in terms of price per square feet, specific rollover characteristics and what we think we can actually realize from a growth standpoint off that one asset. We looked at Overlook one and two, the quality asset was very good, so it was a very positive quality addition to our Richmond portfolio.
It was, from an occupancy margin mixed standpoint, it was positive for our market position in that marketplace, and we take a look at the entry point pricing, and the rental levels currently being paid, we thought it had the ability to be the up rent of the performance curb of our existing Richmond portfolio.
Jamie Feldman – Bank of America/Merrill Lynch
Okay, thank you.
Gerry Sweeny
You’re welcome.
Operator
Your next question comes from the line of Brendan Maiorana with Wells Fargo.
Brendan Maiorana – Wells Fargo Securities
Thanks, good morning. Gerry, or Tom, could you give us a sense of how big the pool of assets is-the non-core assets?
I guess the 80 million that you are planning to sell this year, how big is that pool overall and what we might expect as we look out over the next several years, what those dispositions of non-core assets may look like.
Gerry Sweeney
As we look at it what we’ve done over the last several years in terms of selling non-core assets, we really define what is core and what is not core through a collaborative process with our field personnel and our investment team here at corporate, where we take a look at the property’s ability to generate additional tenant activity for us, operating efficiencies, cost to maintain that asset at a high leasing level, and what we think the ultimate quality issues are compared to the rest of the portfolio. So, with that as a framework, we’ve identified $80 million of sales as a target for this year, and we would expect probably in 2012 to be in that level as well, and we certainly look at being able to spin off some of these non-core assets in a fairly programmatic way as the investment market recovers.
The exceptions to that are obviously, as we’ve announced publicly that one of our plans is to exit the California markets over the next couple of years. So, while those assets are good quality assets, just from a market positioning standpoint, they are not deemed to be core, so we would expect that that $80 million might be accelerated beyond that level due to getting something done in California over the next couple of years.
Brendan Maiorana – Wells Fargo Securities
And with the holdback in terms of increasing that target from this year, or over the next couple of quarters just be on the flip side what you could invest in? Is that what the difference is in terms of if you accelerated 80 million up to say 150 or something like that?
Gerry Sweeney
That’s a great question, Brendan, and it’s really the reinvestment lag time, so to speak, is not really a primary determinant on how we set our sales targets. It is certainly something we’re mindful of in terms of the impact on our guidance, but the fundamental reality we do on all of these properties that we target for sale, is we track the investment market very closely.
As we alluded to in my comments, the investment market is really just starting to take hold in some of these non-gateway markets. Pricing pressures in to DC and New York and some of the other real cache markets, have now reached an inflection point where capitals begin to look beyond those key markets, in to markets like a Philadelphia etcetera.
To the extent that that accelerates, and we think there is an opportunity to sell some more assets, at what we think is optimal best value pricing, and define that as price exceeds the MPV of a hold, then I think you could see that sales number accelerate. We are not operating under any governor that says until we can find a re-investment solution, we won’t optimize value on a non-core asset.
Brendan Maiorana – Wells Fargo Securities
Sure. Just a quick follow-up to earlier commentary on the 350,000 square feet of tenants that you are in advanced discussions with at Three Logan.
Are any of those tenants that would come out of your existing portfolio, or is all of that organic growth for BDN?
Gerry Sweeney
They would be new additions to our inventory.
Brendan Maiorana – Wells Fargo Securities
Great. Thank you.
Operator
Your next question comes from the line of David Rodgers with RBC Capital Markets.
Dave Rodgers – RBC Capital Markets
Good morning, guys. Howard, with regard to the proposed asset sales, the joint-venture, and potentially investing in new, whether it be value ad, or core building in and around metro DC, what is your outlook for fixed charge coverage?
Particularly this year as occupancy is relatively flat from the beginning to the end of the year, and how do you feel that these changes to the disposition plans or accelerations would impact that number this year?
Howard Sipzner
Well, the most significant impact to the coverage this year are going to be the early execution of the unsecured financing. So, as I mentioned earlier, they will boost interest expense over the course of the year, and put a little bit of downward pressure on those coverages until we see greater recovery in the overall occupancy levels.
Nothing outside of what we can tolerate, given the rating, but certainly putting a little bit of downward pressure on those numbers.
Dave Rodgers – RBC Capital Markets
The transactions that you talked about in the guidance that you gave for the NOI at reduction from the asset sales in your prior comment, what type of impact does that have if meaningful to the coverage going in to the early part of 2012?
Howard Sipzner
Going in to 2012, those sales would be fully annualized and would have impact as it picks up through the first quarter, but still a bit early to match up with that, what we expect to have happened either on the leasing side, or potentially on the investment side, so either of those could be a meaningful offset to that phenomena.
Dave Rodgers – RBC Capital Markets
Okay, great. Thank you.
Operator
Your next question comes from the line of Rich Anderson, with BMO Capital Market.
Richard Anderson – BMO Capital Market
Hey, good morning everybody. Just on secular revenue, I was looking back at our notes from third quarter of 2010, and you had targeted secular revenue 25 million for 2011, and it’s now close to 33 million.
Can you bifurcate what’s driving those increases? Is it just a conservative posture to begin with, or could you comment maybe where it is coming from from a new leases or renewals?
If you could just break it down a little bit.
Gerry Sweeney
Sure. I think when we put the $25 million target out, that was based on the original roll up of our 2011 business plan, which I think in some ways was conservative.
I think the field took the appropriate approach, where if they didn’t have a live prospect, or were not in active negotiations with an existing tenant, then they kind of either left the space vacant, or assumed that the renewal would not occur and wrote them out of the plan. We have seen new leasing go from 13 million and that original 25 now up to 18 million, and some of that as I alluded to earlier is the fact that some of that leasing has occurred earlier in 2011 than once forecasted.
Then, we’ve also seen an increase in renewals from 12 million and the original 25 to where we’re not at 14.5 million in our current 32.4 million target.
Richard Anderson – BMO Capital Market
Great. That’s great color.
Thanks. Then, a follow-up question on New Jersey.
Obviously, that had been a thorn in your side over the recent past. You have had some good progress recently.
Did that change your strategy at all as related to what you might end up doing in New Jersey?
George Johnstone
In terms for whether we are going to be selling assets there or not? No, I don’t think so.
I think that the strategy we have laid out for Jersey is pretty clear. Mission critical for us was to recover from some of those large tenant contractions we had experienced in late 2009-2010 in to 2011, so we have some wood to chop there to stabilize some of those assets.
Conversely, I think George and his team have done a very good job in terms of really outpacing what we thought our market share would be in the last couple of quarters, both in terms of new and existing tenants, but more importantly bringing new tenants in to our portfolio. The other piece of color on that is the larger blocks of vacancy we have in South Jersey are literally in the best buildings in the marketplace.
I know that’s somewhat faint praise, but you have to have vacancy wanted in good buildings so you can lease up at a pretty accelerated pace versus buildings that aren’t as good, so I think that is part of the reason we are seeing some of the activity. We have a very strong market position, good leasing team there, and good quality inventory that is available in fairly large blocks of space, which is really not the driver in that market.
There are a lot of smaller blocks of space available, not a lot of larger blocks. We did achieve some sales at the end of last year in south Jersey, and we have certainly programmed some additional sales in New Jersey, this year.
We would expect that to continue to progress. Certainly, one of the things that we have followed with great interest is the potential sale that BST announced on the Carnegie asset earlier this week, with that pricing per square feet, and the projected cap rate we think is very attractive, and we hope that that will be a harbinger of more investors looking at New Jersey as viable place to invest capital on a risk adjusted basis.
If that trend line continues, we would certainly anticipate accelerating our efforts in New Jersey to achieve some of those sales.
Richard Anderson – BMO Capital Market
Just a related quick one, the 88 % target occupancy, what is the timeframe to get there, portfolio wise?
George Sweeney
88 % is our targeting leasing percentage at the end of this year.
George Johnstone
We’re happy, and we talked about it in the last call. We are actually getting back to where we have historically been, which is about a 200 basis point spread between occupancy and forward leasing, and the game plan is to maintain that, and hopefully accelerate it with some of the work that George and the operating teams are doing.
Richard Anderson – BMO Capital Market
Thanks, very much.
Operator
Your next question comes from the line of Mitch Germain with JMP Securities.
Mitchell Germain – JMP Securities
Hey, Gerry. The leasing pipeline came down from 3.8 to 3.2 million square feet.
Factoring in with your discussions about activity levels, is that just based on execution?
Gerry Sweeny
Yes, I think we are actually able to take a lot of activity in the pipeline, and are waiting to rebuild the tool back up, but we have been able to maintain a pretty good percentage of the pipeline and active lease negotiations. You have to remember, the numbers that George cites really defines our pipeline as tenants who have received a proposal through lease negotiations, not tenant that were [inaudible], we have done space showing-they’re more of [inaudible], so there are really two data points that you need to look at in terms of measuring the thru put in our portfolio.
One is the activity level-the actual number of customers that come through our portfolio, as we talked, is up nicely across the board. Particularly as we talked about in New Jersey, and then Dulles Toll Road carter.
The leasing pipeline, as we cite proposals forward is down a bit from last quarter, but that I think is just a function more of where some of those customer’s discussions stand versus anything other than an uptake in traffic.
George Johnstone
Yeah, Mitch, the other thing is, the 3.2 is new leasing only. There is another 750,000 square feet of renewal proposals that are in the pipeline.
I’d have to go back and double check if the 3.8 was exclusively new, but the 3.2 that we referenced in our commentary today was strictly new leasing and tenant expansion activity.
Mitchell Germain – JMP Securities
All right, thanks guys, good quarter.
Operator
Your next question comes from the line of Dan Donlan with Janney capital Markets.
Daniel Donlan – Janney Capital Markets
Thanks. Just a quick question, I didn’t hear you give a yield on the Richmond acquisitions.
Gerry Sweeney
We did. It was a going in cash yield of about 11 %.
Dan Donlan – Janney Capital Markets
Okay, and as we think about your developments in Philadelphia going forward, how do you look at the Navy yard versus what you have at University City, and where do you think that shakes out in the next three or four years, how do you look at that?
Gerry Sweeney
Well, I think the Navy yard as well as University City, where we have a large presence, I think are two very strong attraction points to continue to bring businesses in the city. The ultimate goal, obviously, is to continue to expand the amount of job growth and tenants who are [inaudible] within the city of Philadelphia, and I think the good work that is being done at the Navy yard as long as some of the recent announcements, coupled with the continued progression of tenant demand in the University City section, all are additive to the overall health of the market place.
So, I think what you will see going forward is the emergence, really of some additional markets within the city of Philadelphia, whereas if you go back a long time, Philadelphia CBD was really, from an office standpoint, was really defined as South Broad Street, East Market, and West Market. As time has progressed, the premier office corridor in the CBD has really focused on the West Market Street corridor, and I think within the last five years, what you have really seen in the emergence of two new, very vibrant submarkets.
One is the University City sub-market, the second one is the work being done at the Navy yard. So, as we look at it, it is an incredibly attractive selling point that brings businesses in to the city of Philadelphia, and we would hope that both growth at University City and the Navy yard and the Market Street corridor would continue.
Dan Donlan – Janney Capital Markets
Do you feel like the Navy yard is coined more from New Jersey, than it is from necessary suburban Philadelphia, even though they have announced some tenants moving out to that way from CBD Philadelphia?
Gerry Sweeney
Look, I think the underlying premise of the planning process behind the Navy Yard was given its proximity to interstate 95, and close proximity to both the Benjamin Franklin and [inaudible] bridges, that it would provide an attractive location for a company that had to draw either employees or customers from New Jersey or southern Delaware county, or even up through Buxton Montgomery county. I think you are seeing that happen with what’s happened in the Navy Yard in the last five years.
I think that is why you are seeing a lot of the buildings that are typically more suburban in nature, versus urban high rise, and that again I think would be a trend line that we continue.
Dan Donlan – Janney Capital Markets
Okay, thanks.
Operator
Your next question comes from the line of David Anderson with Green Street Advisors.
David Anderson – Green Street Advisors
Good morning, guys. Two quick questions.
For the JV, I’m just trying to get a sense of where you see that on a growth asset value. Coming out, I know you had mentioned about the $200 million equity investment from the institutional partners.
Could you give us a ball park of where on a growth asset basis, you see that JV ending up?
George Sweeney
Depending on where the ownership interests align, I think the growth asset basis will be over 600 million.
David Anderson – Green Street Advisors
I guess the ownership interest, that is still in flux, but 25 or 50/50, are there a couple of goal posts that you can set in terms of where that might pan out?
George Sweeney
Yeah. We are early in the stages of investigating this as a potential option for the company, but the joint-ventures we have typically done, Brandywine has retained a 20-25 percent stake.
That is clearly a function of entry level pricing. We have a couple of dynamics taking place here: One, we have identified some assets to seed this venture.
As we continue this discussion with some of these potential partners, how they are pricing that contribution will be a key determinant of whether we sell those assets outright, or joint-venture them. If we opt to joint-venture them, the pricing will to a great degree determine what percentage of ownership we remain holding.
Another factor in our ownership stake going forward will be the appetite of that potential partner to invest equity to expand the platform. We are going to be very mindful of our cost of capital being used to acquire assets that are clearly priced at or below our cost of capital.
The objective is to through financial investment structure, to achieve a result where we can have very good returns for our invested equity dollars.
David Anderson – Green Street Advisors
Okay, great. Thank you for that color.
Just one other kind of small follow-up. I am just trying to reconcile something here.
I know on your capital per square feet per lease year you mentioned, it seems like it was at its highest level since 2Q ’09, that is not a meaningful jump, but I am just trying to reconcile that with some of the comments earlier about our CapEx going in but we’re getting greater lease term for it. Was this just a case of one lead with the PI’s requirements doing the numbers in the quarter, or is that kind of broad based?
Gerry Sweeney
I think it is a little bit broad based, but keep in mind also that what is in the supplemental are for deals that commence during the quarter, some of which were signed earlier going back in to 2010. I think some of our commentary is more that we made during the call was kind of more based on the deals that we are signing today, where we have seen a little bit of an increase in term, and would expect going forward that those numbers would return back to where they used to be on a per square feet per lease year basis.
Dan Donlan – Janney Capital Markets
Thank you, guys.
Operator
Your final question comes from the line of Ross Nussbaum with UBS.
Ross Nussbaum – UBS
Thank you, good morning. Two questions.
One, operationally, are there any markets that you are in that rents are still declining, or do you think they have bottomed out everywhere at this point?
Gerry Sweeney
We think they have bottomed out, with the exception of potentially some of the larger deals in the Toll Road carter, and in southern and central New Jersey.
Ross Nussbaum – UBS
The opposite of that question, are there any markets where you have seen a noticeable upward kick that you think is sustainable over the rest of the year?
Gerry Sweeney
We have. The markets where we are seeing very good landlord pricing come back in to vogue is a couple of the core markets in the PA suburbs here, primarily Radnor, [inaudible], some our top product in Plymouth Meeting, CBD Philadelphia we continue to be pleased with the levels of rent stability, but also some increase we are getting in prospects down there.
George, is there anywhere else you think? I think some of our assets in Richmond we are starting to see some of the class A mid-rise product.
Ross Nussbaum – UBS
Okay. Then, lastly, on the joint-venture, just to flush out another question or two, how many assets, and what square footage are we talking about relative to that ballpark 600 million number that you just threw out to us?
Gerry Sweeney
Look, I think the $600 million number assumes a lot of things. It assumes around a 50 % loan value on the portfolio going forward, it assumes about a $200 million equity commitment from the perspective partner, as well as the contributive value from our existing assets, so it is hard to really put a number of square feet or a number of buildings on that, because that would be the ultimate “bill data” of venture.
Once we make the asset contribution, Brandywine commits some of its capital, the partner commits their capital share, and then we go out and acquire additional properties on roughly a 50 % LTVs.
Ross Nussbaum – UBS
What stage are you at here? Are you down to a final couple of partners, or are you really just dealing with one?
Gerry Sweeney
No, as I indicated, and Tom reinforced, we just really started that process. We are in the market, and we have identified about a dozen different perspective partners that our team is having discussions with.
Those discussions will ultimately winnow down that number to a few, and then one or two advanced negotiations with a handful to see what the best results for the company is.
Ross Nussbaum – UBS
From a timing perspective would your goal be to have a transaction close by the end of Q3 or Q4?
Gerry Sweeney
Well, as I mentioned in my comments, our objective would be if it is successful, we will get it done by the end the year.
Ross Nussbaum – UBS
Obviously, I’m assuming this is not in your guidance, so the near term dilution that would occur from selling the stake and a portfolio of this size, that is not contemplative in the numbers at this point?
Gerry Sweeney
It is not in our numbers right now, and the reason it is not factored there is we are not sure of the exact structure yet. We just wanted to make sure that our investor base new what we were doing.
Secondly, it is too pre-mature to identify what the dilutive aspect may be, because we have not yet identified either the pace of investing those proceeds and new assets, and the attendant returns we get from those assets, plus the fee income that we’d achieve through the venture, or identified what we would do with those proceeds in the interim, whether that be other investment opportunities, reduced debt or whatever it might be. We would certainly anticipate it as if things got more in focused we would be able to quantify what the impact of those various points would be.
Ross Nussbaum – UBS
Appreciate it, thank you.
Operator
There are no further questions at this time. Gentlemen, do you have any closing remarks?
Gerry Sweeney
Only to think everyone for their participation and we look forward to making continued progress in the plan, and updating you on our next call. Thank you very much.
Operator
Thank you for participating in today’s conference call, you may now disconnect.