Brandywine Realty Trust (BDN) Q2 2011 Earnings Report, Transcript and Summary

Good morning. My name is Angie and I will be your conference operator today. At this time, I would like to welcome everyone to the Brandywine Realty Trust’s Second 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.

Well, Angie, thank you very much. Good morning, and thank you for participating in our second quarter 2011 earnings call. On today’s call with me are Gabe Mainardi, our Vice President and Chief Accounting Officer; George Johnstone, Senior Vice President of Operations; Howard Sipzner, our Executive Vice President and Chief Financial Officer and Tom Wirth, our Executive Vice President Portfolio Management and Investments. 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 releases as well as our most recent annual and quarterly reports filed with the SEC. Moving in to the presentation, our actual results are progressing well ahead of our 2011 business plan and we are very pleased to report solid progress during the second quarter. Market conditions range from stable to improving and we continue to see strong tenant activity levels. Certainly the return of strong real estate fundamentals generally is subject to macroeconomics events such as the federal deficit to divide on public policy which appears to be ongoing, steady municipal budgetary constraints and private sector employment growth. Essentially, however, we continue to see a steady recovery. This recovery top with our tactic of aggressively pursuing occupancy has created a solid platform for Brandywine to exceed our original 2011 business forecast. We will continue this market driving leasing strategy and this approach will vary by submarket. In some we have been pushing rents and in others we will continue to buy occupancy. In those weaker submarkets we will…

Thank you, Gerry. Leasing activity for the quarter was strong with positive net absorption of 138,000 square feet and continued progress on the business plan. During the quarter, we commenced 1.1 million square feet of leases, including 614,000 square feet of new leases and tenant expansions. We had 120,000 square feet of contractions by tenants who did renew a portion of their space, 58,000 square feet of which related to computer associates in our Northern Virginia portfolio as discussed on previous calls. An additional 230,000 square feet of tenant fee simply vacated at the end of their lease term due to office closures and company downsizings, relocations to other submarkets and a few who purchased their own buildings. In terms of early terminations for the quarter, 80,000 square feet were negotiated to accommodate existing tenant expansion, the remaining 45,000 square feet were the result of bankruptcies and affections. Traffic for the quarter was up 9.4% over last year with all but Metro D.C. in California posting increased levels of inspections. Despite inspections being down over last quarter, the pipeline remains strong at 3.7 million square feet, 3.2 million of new deals and 528,000 square feet or renewal deals. We currently have 521,000 square feet of deals in leased negotiations with the balance all entertaining proposals. In order to achieve the open leasing assumptions and our plan for new leases we need to convert 12% of today’s active pipeline. Our conversion rate during the first half of 2011 was 39%. So we are very confident of achieving our realized forecast. Several of our core markets continue to perform well and we’re seeing the ability to push rents and leased term. To illustrate is 100% leased in gap rents on leases commencing in 2011 are up 8.4%. Radnor is now 97% leased…

George and Gerry, thank you. For the second quarter of 2011, we reported FFO available to common shares and units of $47.5 million, at $0.32 per diluted share we exceeded analyst consensus by $0.01 per share. It is once again a high quality FFO figure in that second quarter termination revenue, other income; management fees, interest income, and JV income totaled just $6.8 million gross or $5.3 million after management expenses, in line with our 2011 guidance range for these other items. The FFO payout ratio in the second quarter of 2011 came in at 46.9% on the $0.15 dividend we paid in April 2011. A few other observations on the components of our second quarter performance. Cash rent of $114.3 million was up $5.4 million versus second quarter of 2010. Straight line rent of 4.7 million was up 2.2 million versus second quarter 2010 and is flat sequentially versus the first quarter of 2011. The quarter-over-quarter increases are primarily attributable to the Post Office and Garage completions and the Three Logan acquisition in the third quarter of 2010 as well as the Overlook acquisition in the first quarter of 2011. Recovery income of 19 million and our recovery ratio of 34.4% reflected typical expense and expense recovery conditions and are inline our expectations. Property operating expenses were down $5.4 sequentially due to snow cost in Q1 2011 as George mentioned while real estate taxes were flat sequentially. Interest expense of 34.7 million increased 2.3 million sequentially due to the closing of our $325 million on secured issuance on April 5th and lower floating rate balances in the current quarter, G&A 5.9 million was in line with our expectations for this item. In the second quarter of 2011, we had net bad debt expense of $322,000 in line with expectations…

Great. Thank you very much, Howard and thank you George. The second quarter was a very good one for us. We exceeded our leasing targets posted over 1 million square feet of leasing activity for the third quarter in a row. Lengthened our lease terms, reduced the negative spreads in our mark-to-market and same-store forecast and produce good expense management. Moving our year-end targeted occupancy level of 90 basis points reflects our high level of production that stat combined with our continued strong pipeline as George outlined, clearly indicates that we are well on the path to continued occupancy improvement. With that, we’ll open the floor for questions. We would ask that in the interest of time, you limit yourself to one question and a follow-up.

(Operator Instructions). Your first question comes from the line of Jordan Sadler with KeyBanc Capital. Jordan Sadler – KeyBanc Capital: Thanks, and good morning. I wanted to get a little bit of clarification on the leasing guidance update. The incremental $2 million spec revenue, which is up from last quarter’s guidance. That is now 94% complete, so I’m just curious based on sort of your historical hit ratio or close ratio of 39% in the pipeline, which is materially better than you are projecting for the back half, are you still being pretty conservative here on the spec revenue. And if you were to hit the 39% close ratio on that pipeline that you’ve got in a negotiation, what would the spec revenue number be then?

George, why don’t you take that?

Yeah. Sure. I don’t think that we are conservative at this point. I mean a couple of observations. One, the window of contribution towards 2011 is closing. So, one, we will have to get that pipeline converted, negotiate the lease, build out the space, so we’re really kind of looking at for the most part our fourth quarter and potentially a late fourth quarter commencement to drive that spec target up even further. The $2 million that we increased this most recent reforecast most of that revenue will be recognized over the second half of the year. Jordan Sadler – KeyBanc Capital: Okay. That’s helpful and then just as a follow up, you disclosed 731,000 feet of executed leases that are schedule to commence, could you give us a little bit of color on the timing and maybe the average rent on that pipeline?

Well I think our most recent press release addressed some of that and that we had 400,000 – I am sorry 97,000 square feet of new deals commencing after 2011, not included in that press release but in our subsequent press release was the 146,000 square feet with Jannie but the lease is in the 731 of forward leasing at the end of this quarter. We’ve got 197,000 square feet commencing in the third quarter, 284,000 square feet of new deals commencing in the fourth quarter. Jordan Sadler – KeyBanc Capital: (Inaudible).

Yeah I don’t have the average rental rates but I think as we kind of outline in some of sub markets even with the trends we saw in the second quarter, we are seeing that on our new leases we are starting to a positive mark to market on the gap rent. Jordan Sadler – KeyBanc Capital: My last one is just on the Jannie deal closing, where are we relative to original underwriting on (inaudible) and maybe can you just talk about the prospects?

We are in very good share relative to your underwriting, we have right now after the Janney lease execution, roughly 200,000 square feet of current vacancy. We have about 1 billion plus square feet of active prospects for that. About 800,000 of that million is large use where the balance stands small users in a range in size from five to 25,000 square feet. We still are in very good shape from that standpoint. We also as you know there is a component of that doing, has leases in that and leases have expire, mid-year 2012 and that’s about another 250,000 square feet or so. So live at leasing pipeline is also directed towards that forward roll. The leases that we’ve executed and the leases that we are in discussions with all have economics or very much in line with our original pro forma. Jordan Sadler – KeyBanc Capital: Okay. I’ll hop back in the queue. Thank you.

Your next question comes from the line of Jamie Feldman with Bank of America. Jamie Feldman – Bank of America: Thank you and good morning. I was hoping you can talk off – it sounds like you are pretty comfortable with the way, the back half of 2011 is going to shapeup, can you talk a little bit about your explorations in 2012? And where you think there is risk and then along those lines, if you could talk about, different regions, kind of what’s the different sentiment given everything we’re seeing on the economic side?

Sure. We’ve not provided 2012 guidance and we don’t expect to do so till later this year. We are at the early stages of our 2012 budget and reforecasting process. So we are in the middle of trying to answer Ken, the renewal probabilities of tenants were up for 2012 renewals. So that process is still underway we can certainly provide better cloud in that in the year. In terms of overall sentiment, I think we are seeing that sentiment reflected in some of the numbers that you would should outlined earlier. Generally, the sentiment, the power and that we absent the dialogue on the federal debts of the last couple of weeks has been generally progressing and be more positive. But the pipeline of deals has remained very encouraging I mean we are at 3.7 million square feet. Our expectations to tenants, the square feet that comprise that pipeline is real. Tenants looking for requirements, not just price checking for stay puts as it was some time ago. So that both velocity and the intent have allow that tenant activity is by us towards moving up the quality curve and seeking to go longer in terms of the length of leases. So a fairly good prescription we think for the next couple of quarters and leading our upward leasing trajectory and continue to improve our occupancies. We have a number of tenants who are clearly up in 2012, again the focus right now is to – for us to really answer Ken what their probably of renewal is, some we know we are going to standing, some we know we are going to leave, the vast majority are still in the middle not having provided us with any real clear clarity. And as a consequence really can’t provide a lot of detail on that. Jamie Feldman – Bank of America: Thanks. I guess if I guess another way, like we think about Northern Virginia versus Philadelphia verses Texas, which you feel like are most concerned about what’s happening in the government, which are more concerned and which have the best job growth prospects? It sounds like everyone is trading up, but I’m trying to get a sense of which have real kind of long-term demand growth prospects here.

I think the sentiment that we are seeing does vary by those regions. Look, Philadelphia suburbs, particularly are crash at markets as we call them continue to perform very well. Sentiment is very positive that’s reflected in the higher levels of absorption as well as the upward pressure on rents. Philadelphia CBD in the trophy class inventory we are in, we believe continues to have a very positive bias. We’ve been very pleased with the level of activity in generally in the Austin, Texas market and the ability of our team to maintain very high levels of occupancy and upward rental pressure. Richmond has performed well and in line with our plan this year. Things have slowed there a bit, but we continue to be very much on track for 2011 business plan, circling in on the metro D.C. activity levels are down quarter-over-quarter. There is clearly a pause in that marketplace by both, federal agencies, but more importantly, private sector employers who rely on the government in terms of coming to large blocks of space, and we would expect that that situation would stay in place until there’s a lot more clarity on the federal spending programs. We were very pleased to announce the other day a major lease that moves on a very seamless base with a vacancy coming up in 2012, so our team continue to do a very good job down there. The pipeline, well not as robust as maybe some of other markets certainly have some large users in that queue, that are for successful in negotiating transaction with them could change the profile trendy – trajectory of our occupancy ramp up in that market considerably. Jamie Feldman – Bank of America: Okay and then when you talk to your tenants in D.C. area do you, are they concerned that leases won’t get signed or they are just concerned that it’s going to be on hold for a while, are they, there is a real concern about downsizing actually making the demand go away?

Look it either depends of what the hell line of the paper is that Dave but I think the reality is there is the primary sentiment we haven’t reported back to us is that it’s on hold. The demand will remain there. The demand maybe more muted than original expectations based upon how this federal spending program works its way through the system but that is a market that’s historically generated fairly decent job growth in broad base. So long term we believe the prospects that market are solid, but it would be unrealistic for us to be overly aggressive and assuming accelerated absorption there, until there is a lot clearer picture on the federal spending programs. Jamie Feldman – Bank of America: Okay. Thank you.

Your next question comes from the line Brendan Maiorana with Wells Fargo. Brendan Maiorana – Wells Fargo: Thanks. Good morning. Question on the leasing strategy is the I guess other – kind of buying occupancy what you guys are doing and moving the occupancy up pretty nicely that the CapEx costs are relatively high, is that driven more by your portfolio level occupancy or is that something where if your market start to firm up a little bit, you will back off kind of being aggressive in terms of getting those tenants in and if it is more portfolio driven specific to Brandywine, what kind of level do you think you need to get to you before you maybe a little bit less aggressively on that concession levels?

Very good question, I think the overall strategy has always been driven by your later point of emphasis which is very much focused on how we are leading the markets. And the best examples we are having on our portfolio is what we’ve seen frankly with our submarket concentrations and New Town Square, Radnor, Contrahawk and (inaudible) to some degree where those markets were 18 months ago kind of were New Jersey and Delaware and a couple of other submarkets are today where we were very aggressive in attracting absorption to the portfolio, paid for, but the market tightened up significantly, so now we are in a position of dramatically exceeding our occupancy centers in those markets. And New Jersey and Delaware may be slower to recover, but I think as we’ll read in the team lease there the overall objective tactically is to gather significant amount of market share in a market where we own about 20% of the inventory. So the market to our leasing team is to generate tremendous activity both directly and through the brokers community, fully that every prospect, analyze each deals economics both from an absolute and from a relative standpoint and then to the extent we think it’s a fair transaction move forward and absorb that occupancy, cover our some cost, minimize our capital cost to the extent we can lengthen our lease terms and we’re fully confident that in every market we are in that as the suburban market recovers to where it was in numbers of usual we will return to a 70 to 80% average annual retention. So certain we have a high degree of expectation some of those tenants were bring in to the portfolio today will be able to retain when their leases come up for renewal. Brendan Maiorana – Wells Fargo: Thank. That’s helpful. And then just in terms of the next investment activity are the dispositions are is it new investment. If you sell 80 million of non-core assets and then it sounds like proceeds from the JV could be I guess around the 120 million or so and you’re selling 75% of that. Where do you think you reinvest that at this just day pay down of debt or there are investment opportunities that are available?

They will be a combination of both Brandon I mean and it’s going to be determined based upon the velocity of those dollars we get in the door. As Tom can touch on we continue to look in a variety of good quality acquisitions. And we certainly want to continue that effort but we also very much have the priority focus on continue to improve the balance sheet as well. So I think the – with those possible uses of proceeds will make game time decision based upon the timing and the size of the proceeds we actually realize. One of the interested things of that our investment efforts as we touched on, we are very much doing a lot of price discovery across the board to try and find what we adopt to the investment market is right now in some of our submarkets. Brendan Maiorana – Wells Fargo: And just a follow-up quickly. Is – has there been any movement on the land parcel that you guys have 20th in market downtown, because you did mention that you are seeing pretty good activity in the CBD market in Philly and any potential that you guys could do something there?

Certainly, a lot of potential on what we can do there. We are undergoing right now the planning process for mixed use development, talking to a variety of other development companies and financing sources to pull together and overall development program that we would anticipate starting the formal approval process on that site sometime in early 2012. Brendan Maiorana – Wells Fargo: Okay. Great. Thank you.

Your next question comes from the line of David Rodgers with RBC Capital Markets. David Rodgers – RBC Capital Markets: Good morning, Gerry, Howard. A question on your decision to raise the guidance perhaps relative to taking down leverage a little bit more during the second half of the year. Can you just give us some thoughts around maybe I guess the hint points to your decision making around that and I guess if timing is the big answer for the second half of this year, maybe what we can think about is key points for moving into next year from a deleveraging versus earnings performance perspective?

Well, Dave, good morning. It’s Howard. The guidance increase really flows almost directly from a combination of our performance on the plan, some slightly higher retention, a little bit more lease activity coupled with the net result of all the balance sheet transaction and aggressively paying down debt where we could. But having said that, I will point out that that pay-down of debt is not a leverage reduction, so it’s just a substitution of one type of debt for another. So, what we found out as we were able to put the $325 million that we raised early to work ultimately in a better way then we might have initially expected. We paid off a number of mortgages brought down some forward maturities and in general just put the balance sheet in better shape. On a go forward basis to the extent some of the disposition activity and the JV activity that Tom is involved in produces called a surplus of proceeds to address the earlier question, we would then have the opportunity to look at those dollars and say do we use the proceeds to bring down overall leverage levels that’s the best use to capital or do we have investment opportunities that would ineffective more accretive than eliminating that debt. No way to know that at this point. But that would be the decision process we go through.

Yeah its part of a nature if you look at in terms of key driver in our overall leverage firm is absolutely showing more EBITDA and that’s the most powerful driver in terms of improving all of our financial metrics. We overlay that strategy with the point Howard touched on which is really a point in time the valuation of the best use of proceeds. The overall objective of this company as we talked about is to put ourselves in a position for that investment ratings upgrade. So we understand that’s part that’s going to involve operating performance improvements, effective capital deployment and recycling as well as overall leverage reduction. David Rodgers – RBC Capital Markets: Thank you.

Your next question comes from the line of John Guinee from Stifel. John Guinee – Stifel: Hi guys nice quarter, congratulations. Drill down a little bit Jerry or George, basically you got a 25 million square foot portfolio, you have 3 million square feet that comes with lease expiry every year, at the 60% tenant retention, we get 1.8 million, you can renew, which means you lease about 1.2 million square feet every year knew to breakeven on occupancy and then you take it one step further each occupancy point is about 250,000 square feet for you guys. So to get from say 86% to 92% occupancy is a gain of about 1.5 million square feet, above the annual 1.2 million square feet of new leasing, is this a one year process or a three year process or a five year process to get up to stabilization?

John, it’s a great question. We are focused on making that timeframe is compressed as possible. The (inaudible) portfolio always ran in that 92% to 94%. Clearly it’s been subject to last few years to a much higher level of tenant vacations and downsizings. As we’ve talked on previous calls, we think the vast bulk of that is behind us. Our pipeline is returning to historically high level for the activity, both from – primarily for new leasing activity. And that our convergence rate on that pipeline hasn’t proved historically has been as George touched on just shy 40%. It’s a very hard question to answer, I’ll say through the year and our, we are determining not to make a five years. So given the three options, we got the absence of making a formal forecast, it’s hard to be three years, but the reality is that we are exercising every effort we can in the company to both absorb space and tell that leasing campaign with our investment program to move from the portfolio assets that we believe we’ll not be effective rent contributors from either NOI or capital consumption standpoint.

Hey John, its Howard, I just want to have one point on that. If you look at page 29, of our supplemental package you’ll see that you may have over stated the 3 million square feet per year. First of all it tends to be lower in some years and may be more importantly we have done a lot of blending and extending the past of years to take down those forward maturities and put away longer term occupancy. So when you go through the math, I’m sure you’ll do, you’ll see we don’t need quite that million to stay even and it will be less number one and number two with an expected higher retention rate it will be that much less even more. So the number they are going to start working more in our favor just on an overall basis as we move forward.

And we also handicapped kind of where we have that vacancy. So if you take a look in a big blocks of vacancy in our company now, Three Logan remain a nice piece of upside for us as we execute some of these additional leases. We have been occupancy impacted in D.C. but as you well know there is some marketplace it has the ability to absorb a larger space and a fairly sure period of time I think we have good inventory to present in the marketplace. And in New Jersey we are going to rely on the higher end quality of our portfolio versus a competitive set to get that portfolio back towards historic 93 to 95% leasing levels. John Guinee – Stifel: Perfect. Thank you.

Your next question comes from the line of Michael Bilerman with Citi. Josh Attie – Citi: Hi, thanks. It’s Josh Attie with Michael. In any of your markets, are you seeing positive absorption on a market-wide basis? And can you talk about how rent economics on a market-wide basis were trending?

Yeah. I mean, we’re certainly seeing decent levels of activity. On an absorption basis, we’re seeing positive absorption that we’ve seen in the CBD Philadelphia and Richmond, in the PA suburbs, in Austin, where we’ve also seen some positive absorption. Now, all those absorption numbers though, Josh, are well below the 10-year historical average. I mean, Richmond, Q2 there was about 40,000 square feet of absorption versus historic 10-year average about 167,000 square feet. So, the absorption numbers are kind of working their way back, and that’s certainly a real benchmark that we look at in terms of our ability to move rents. In terms of our ability to absorb space, we are very keen on the activity levels that we see in the various markets and those numbers continue to be fairly good with very few exceptions. Certainly the activity levels in the metro D.C. market in the second quarter were down, but we also saw nice numbers of activity in the PA suburbs, CBD Philadelphia, Richmond and frankly in several of New Jersey markets as well. Josh Attie – Citi: And are rent economics starting to improve in those markets that are seeing positive absorption?

I don’t think there is any question. As George touched on and maybe, George, you can amplify. We are seeing good rental rate increases on a gap basis and in some cases on a cash basis in some of those key sub markets. I think George outlined several of them but we probably have 10 or 15 other sub marks we were getting positive gap rents. Now – probably 15 we’re getting positive gap rents. But that’s certainly something that we’re seeing that list of positive gap rent sub markets grow quarter over quarter which is a good sign.

Right I mean just for the second quarter we saw gap rent growth on new deals in our Pennsylvania suburbs of 7.5% in Metro D.C. 11.8% and on the deals that new deals that we commenced in New Jersey Delaware for the quarter we saw rent growth of 2.4%. Josh Attie – Citi: Thanks. And just one more question, on external growth can you just talk about what you are seeing in terms of acquisition and development opportunities, so that as some of this cash comes back to you throughout that sales and the D.C. joint venture we can think about the prospects are for putting that capital to work through investment as oppose to just debt we pay down?

Sure Tom.

Talking about the investment activity we have seeing increases in some of our markets Austin, Washington and Philadelphia, and in terms of what we are looking at I mean the pricing in D.C. continues to be tight, so deep full of investors looking at assets inside the Broadway the district and even outside the Broadway in some occasions, and we still see pricing been tight. We although seeing maybe because of the GSA maybe taking let’s face from the government point of view you may see slower projects on rent growth when people are taking a look at investments in those markets but other than slower rent projection growth, whether some people that we’re projecting spikes that may be tempered a bit and I think the mortgage market relative to some of those investments us about the same as it’s been very strong. When it comes to looking at Austin for example, we think that that market is showing some tick up. There is been a few transactions occurring in the southwest and then in the northwest, some well-located assets. And we think there is a few more portfolios coming out on the market there. In terms of we’re looking at we have about 4 million square feet in our pipeline that we’re looking at. About half of it is of market transactions and then as it relates to the joint venture to the extent we have that done and we have a forward equity commitment, will try to deploy that money in our targeted markets primarily inside the both way for Washington. Josh Attie – Citi: Thank you.

Your next question comes from the line of Richard Anderson with BMO Capital Markets. Richard Anderson – BMO Capital Markets: Thanks. Good morning everyone. Question is on the guidance of FFO going up a bit, but what does that say about if you were to issue guidance on AFFO basis, would that have been flat or down considering the use of CapEx to kind of buy occupancy?

Well Richard. It’s Howard. I mean unfortunately we did bring that down a little bit because the capital spend is higher now. As George eluded some of that is forward based. We’re at one of the highest forward leasing spreads we’ve been in the long time, close to 300 basis points, the brokerage commissions and some of the early spend of those, end up showing up in our financial reporting before the actual leases commence. So I think you can expect to see over the next couple of quarters as we continue aggressively lease is a little bit of an allocation in the capital we spend. But the expectation is certainly with longer leases that we are going to level that off and bring it back down that coupled with higher overall retention which will be a natural by-product of a stronger market should create a lot of acceleration in our category FFO in 6, 12, 18 months. But little bit far out to really know for sure but that’s the longer term expectation how to play out. Richard Anderson – BMO Capital Markets: Fair enough. And then just the follow-up question is on dispositions, I guess that kind of two fold question on that. And first of all the 80 million – as this time you are able to do more than 80 million, do you anticipate that will have any impact on your guidance or do you think it will be kind of late in the year. So no real impact? And the second is, the target for sale in New Jersey, PA and Virginia, when I think of you guys – my – what I am kind of waiting for is for you to get back to sweets sport and what you are really good at and that’s admitted land I can really focusing on that and I’m curious is to why you don’t have California and Austin included in that list of targeted markets for sale?

Let me take each question in order. Certainly, to the extent that we would have a disposition execution level that was greater than the 80 million we do believe that timing of that would be so late near the impact on 2011 numbers would be minimal. So... Richard Anderson – BMO Capital Markets: Okay.

I think that’s, that’s pretty clear from just a timing stand point. Richard Anderson – BMO Capital Markets: Okay.

On the broader question you touched on I think would have being overly specific, we are undertaking and we use a term price discovery twice now. We are undertaking price discovery on a whole variety of assets through the portfolio. And our expectations in the next 30, 60 days we’ll be getting some feedback on a variety of single assets and small portfolios, we’ll be able to make a determination on the optimal time to sell. And certainly, the California market as you touched on are not due to the long-term for us. We’ve talked about that on previous calls, so we continue to very actively monitor that marketplace from an investment standpoint to identify the right time for us to implement our program. Richard Anderson – BMO Capital Markets: Okay. Thank you very much.

Your next question comes from the line of John Stewart with Green Street Advisors. John Stewart – Green Street Advisors: Thank you. Gerry, I wonder if you can address, particularly given the slower rent projects that a mention investors are underwriting in D.C. I know that you’ve said that you expect pricing to be tight and attractive, but are you seeing – has it been impacted by the pause that you’ve described in D.C. in terms of what you expect to realize on JV?

Hi, John. No, I think that the pricing that we were expecting are circling is where we expected to be. I was basically just referring to I think that as we talk to brokers and we see investments, I think the people may start to take a – I think there were some – if you look at a lot of the reports and where we thought underwriting was relative to some pricing, you heard a lot of talk about rent growth of 6%, 7%, 8% over the next several years, and a lot of that being generate by demand both on the private and government side and what we are hearing a little bit more besides not just this week but in the past month has been with the idea the government maybe not taking as much space, not shrinking but taking less and therefore those growth rates that people are using to value some of the assets and get to the returns they are expecting maybe muted, but still growing. John Stewart – Green Street Advisors: Can you kind of put some brackets around what pricing you think you might achieve?

Actually at this point we’re going to just give you dollar range and hopefully be in a position to talk about particular cap rates and prices per square foot on the next call. John Stewart – Green Street Advisors: Okay. Jerry, wondered if your - I guess take first of all in terms of whether there is a market for vacancy I presume that kind of buying occupancy you are really referencing some of the weaker markets where presumably you have non-core assets held for sale and I wonder whether you are better off just taking the pain today and selling vacancy rather than trying to put in the capital and sell leased up asset?

Look John I think the sales transaction I referenced earlier in the call is perfect reflection of how we view it. That was an asset in Southern New Jersey about 70,000 square feet were 14% leased. We did our sitting around round table talking about the real the absorption pace, the effective realize, the capital costs, we made a determination that was better for us to see that property in its vacant condition, because the net present value of that sale from our standpoint, we’re in a number of different financial scenarios was better the lease up in whole strategy. So that is a – that’s an approach we are taking on every single asset we review as part of our portfolio management program. Last year we did sell a number of significant inter lease properties. Frankly for prices per square foot were optimal, but they represent the best financial decision for the company, so I would certainly expect with this wave of assets that we’re currently testing the market on as well as any subsequent ways we continue to follow that same discipline. John Stewart – Green Street Advisors: What was the total dollar volume be everything that you are kind of testing the market on?

We haven’t disclosed that. John Stewart – Green Street Advisors: I mean I realize that it’s not all likely to hit, but in broad brush terms?

Yeah, broad brush terms are broad brush – really well. It’s greater than the $80 million target we have on our plan. John Stewart – Green Street Advisors: Okay. Lastly for Howard, Howard you’d reference the rating agency upgrade strategy and I wondered if you could share with us what specifically the agency set communicated there, looking forward from you and when you expect to get there?

Well I think number one, they never specifically communicate what the goal is, so it remains a bit elusive, but from conversations we continue to have and more importantly monitoring the peer group, what we think we’ll do it for us is mostly on the debt to EBITDA side. And that gets improved primarily by lease up, improving EBITDA, but also at the margin if there is some excess sales activity it could ship in to the debt side of it. So that becomes really a natural evolution of executing the business plan. In addition, I think it follows and suite from that would be somewhat better but not a great deal, better coverage ratios than we have. I think our coverage ratios, right now are probably between bottom investment grade BBBs and mid BBBs or BAA3 and BAA2. So I think as we do that leased up that’s going to improve well through where we need to be. And that assumes that rate stay plus or minus a 100 basis points around where they are. We have been pleasingly surprised that where we have been able to execute fixed rate financings as far. John Stewart – Green Street Advisors: And you timeframe for (inaudible) when you get there?

You know it becomes really an answer when we think we are going to hit those higher occupancy levels. I think we are encouraged by the turn in this current quarter. We still see some ups and downs over the next couple of quarters. But the strength to look forward plan and the strength of the regional teams suggest that we could have some pretty good results going in to 2012. And then began to accelerate those conversations toward the end of next year. John Stewart – Green Street Advisors: Okay. Thank you.

At this time there are no further questions. Do you have closing remarks?

Just to thank everyone for their participation and we look forward to updating you on our next quarterly call. Thank you very much.

Thank you. This concludes today’s conference call. You may now disconnect.