Maguire Properties Inc. Q3 2008 Earnings Call Transcript

Maguire Properties Inc. (MPG) Q3 2008 Earnings Call October 28, 2008 11:00 AM ET

Executives

Peggy Malady
Nelson C. Rising – Chief Executive Officer, President
Doug Gardner – Executive VP of Operations
Mark T. Lammas – Executive VP of Investments
Shant Koumriqian – Senior VP, Chief Accounting Officer

Analysts

[Sloan Vaughn] – Goldman Sachs
Jonathan Habermann – Goldman Sachs
Jordan Sadler – Keybanc Capital Markets
Lou Taylor – Deutsche Bank
[Michael Idleman] – Citi Group
Leon Cooperman – Omega Advisors Inc
Ian Wiseman – Merrill Lynch
John Guinee – Stifel Nicholas & Company, Inc.
Mitchell Germain – Banc Of America Securities
Jordan Sadler – Keybanc Capital Markets
Michael Knot – Green Street Advisors
[Lyle Bro] – Invesco

Operator

Welcome to the Maguire Properties conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Peggy Malady of Maguire Properties.

Peggy Malady

Thanks for joining us for our third quarter 2008 earnings conference call. With us today are Nelson Rising President and CEO, Doug Gardner Executive Vice President of Operations, Mark Lammas Executive Vice President of Investments and Shant Koumriquian Senior Vice President and Chief Accounting Officer.

During the course of today's call management will make forward looking statements regarding, among other things, projected 2008 results of operations, leasing, competitive conditions, financing and acquisitions.

The company's projections are affected by many factors outside of its control. For a discussion of such factors please refer to the company's most recent annual report on Form 10-K under the caption Risk Factors. Our supplemental package, along with information required under SEC Regulation G, may be accessed in the Investor Relations section of the Maguire Properties website at www.maguireproperties.com, and now I'd like to turn the call over to Nelson Rising our President and Chief Executive Officer.

Nelson Rising

These have been very, very challenging times for all of us for our economy in general and our sector in specific. But we've tried to remain very focused on several important initiatives we started when I became CEO of Maguire in May and these include the following disposition of selected assets in Orange County, our liquidity, our debt maturities, leasing activities and potential exposure from disruption in financial markets.

Today, I'd like to report on the progress we have made.

During the third quarter we completed the disposition of two assets in Orange County, Main Plaza generating $48 million in cash proceeds and eliminating $161 million in debt, and City Plaza an office building in central Orange County that had leasing under 50%. We received no net proceeds from the sale but were released from $101 million mortgage obligation and eliminated an annualized negative FFO of approximately $0.07 per share.

Discussions are underway on a selected number of other Orange County assets. We have entered into a nonbinding letter of intent for one building in the airport market and are having encouraging discussions on another asset.

Discussions are progressing with a qualified buyer on Park Place, the 105 acre campus adjacent to 500 acres of permanent open space reserve in Irvin. This is located at the intersection of 405 and Jamboree one of the premiere locations in the county.

At the same time we are very encouraged by our leasing activity for all office components of the campus. During the third quarter we leased approximately 97,000 square feet in 3151 Michelson to Hyundai Motor Finance Company. That brings leasing in the building to 52%. We also have deals in the works for 75,000 square feet and if we're successful it would bring occupancy to 65%.

3161 is one of the premiere buildings in Orange County and the rents we are achieving is a reflection of the markets reaction. With respect to the Atrium at Park Place, we are in advanced negotiations for renewal of several hundred thousand square feet and have significant interest from several new tenants.

With respect to the 150,000 square foot 3121 building, we are in active negotiations for 65,000 square feet. While the conventional wisdom is that the Orange County office market continues to struggle, our recent experience indicates that large stable tenants are coming back into the market is a very encouraging sign.

In the very challenging lending market of late September we completed $100 million financing with Eurohypo and Wells Fargo Bank secured by Plaza Las Fuentes and the Westin Pasadena Hotel. In connection with this financing, we paid down and extended the construction loan on 3161 Michelson and proceeds were also used to pay down and extend the construction loans on 17885 on Carmen and 2385 North Side both of which construction loans were extended for 18 months.

By extending these maturities we have successfully addressed our maturities for the remainder of 2008. We are now proactively attempting to address our maturities for 2009, which include City Parkways $97 million mortgage, Brea campus $109 million mortgage, and Lantana East and West $73.3 million construction loan. All three of these loans have extension provisions and we're now in the process of trying to conclude those extension agreements.

With respect to our liquidity, as of September 30, 2008 we had total cash of $351 million comprised of $141 million of unrestricted cash and $210 million of restricted cash held by our various lenders. Of the $141 million of unrestricted cash, we hold approximately $45 million at the property level for working capital purposes leaving $96 million available cash in our operating partnership.

Our restricted cash of $210 million includes approximately $99 million in cash leasing reserves, $11 million in cash interest reserves and $37 million held in cash collateral accounts that will be available to us in future periods. With the remaining $63 million comprised primarily of funds for the payment of taxes and insurance and prepaid rents received from tenants as of September 30, 2008.

As of the end of the quarter, we had total leasing reserves available to us of $150 million comprised of $99 million in restricted cash, previously discussed, and $51 million under mortgage and construction loans available for future draw. In addition, we have funds available under our Lantana and 207 Good construction loans to fund leasing costs at those projects.

Our $150 millions available for leasing reserves at the end of the quarter is sufficient to fund approximately $45 million of existing leasing obligations under signed leases, which will be funded in the future, leaving approximately $105 million to fund leasing costs on future lease deals which can pay for approximately 2.1 million rentable square feet of new leases at $50 a square foot and 1.7 million square feet of new leases at $60 per square foot.

With respect to downtown Los Angeles, the third and fourth quarter leasing activity has been light. Direct vacancy for premiere space is up slightly from 12% to 12.5% and total vacancy is 14.8%. The good news is that there is little lease rollover in the market through the end of 2009 and there are currently 300,000 square feet of out-of-market tenants recently looking at downtown.

Transportation the downtown residents and quality buildings continue to draw. We are specifically focused on the vacancy now at US Bank Tower, Latham Watkins having moved over to KPMG Tower, but we are in discussions with prospects for over 240,000 square feet.

We have had many questions asked of us regarding the potential exposure to our tenants in the financial service and insurance industries. I am pleased to report that our three largest banking tenants, Wells Fargo with almost 400,000 square feet, Bank of America with 190,000 square feet and US Bank with 162,000 square feet, have all weathered the financial storm quite well.

We have four other tenants in excess of 100,000 square feet. AIG is a tenant for 126,000 square feet in the 777 tower in downtown Los Angeles and the entity on the lease is American Home Insurance, a subsidiary of AIG commercial insurance which is well capitalized and appears to be financially secure.

Washington Mutual, we have exposure to Washington Mutual of approximately 126,000 square feet. This is in three separate locations. One is the WaMu campus. The total campus is 360,000 square feet of their occupancy but we own 20% of that, so our exposure is the 72,000 square feet at that location, 28,000 square feet at Pac Arts in Orange County in 26,000 square feet at Cal Plaza II.

In addition to that, we have 130,000 square feet with GMAC Mortgage at Pac Arts in Orange County. They have consolidated into 90,000 square feet, have subleased 20,000 square feet, 20,000 square feet is vacant and they're current on their lease obligations.

In addition, we have 150,000 square feet with Accredited Home Lenders. The space is vacant. They have subleased three floors but they are current on their rent. So, while we do have a variety of tenants in the financial services and insurance sector, we feel quite comfortable with our position with respect to these tenants.

With those brief comments, I would be pleased now to open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jay Habermann – Goldman Sachs

[Sloan Vaughn] – Goldman Sachs

Good morning guys. It's actually [Sloan Vaughn] online with Jay, just a quick question about the 2009 debt maturities. I wonder if you could give us some color on what conditions you guys may need to I guess reach in order to extend those maturities out by a year.

Nelson Rising

Well, as I mentioned all three of these obligations have extension rights. The conditions vary. Mark, would you –

Mark T. Lammas

Yes, I would be happy to give you a little bit more on that. So there's three loans that we refer to. The first of them is the Lantana construction loan. That has in addition to your standard extension conditions like there not being an event for default and giving off for certificates [inaudible] reps and warranties. Of the three loans I'm going to mention to you it is the only loan to the extent in 2009 that have debt service coverage cap, have a one two coverage on actual and a one four coverage on Proforma, but you know the Lantana media cap on this is 82% pre-lease. We've been in early conversations with the construction lender there, Casey Morgan, on doing early forecast of the in place rent based on that pre-leasing and we're confident we're going to need both those debt service coverage cap.

As an aside we have the right to do an incremental buy down of the outstanding mortgage to satisfy those coverage cap should it come to that, but we feel that given the in place revenue from the pre-leasing we'll satisfy those caps, so we expect to see that loan extended to 2009.

The other two loans, one is on the Brea campus. The other one is on City Parkway. Both of them have affectively automatic extension rights. Neither of them have any debt service coverage attached to them for the extension to 2009. It is simply required that the loan not be in default and that we extend the interest rate cap. We are in the process of exercising both those extension rights.

Jonathan Habermann – Goldman Sachs

Nelson, this is actually Jay Habermann. I had a quick question. You sort of provided an outlook based on your capital availability and you mentioned that leasing is starting to pick up a little bit, or it sounds like there's some interest in downtown, but I'm just wondering given the sort of still uncertain outlook broadly for financials. Are you looking at other sources of raising capital? What are your plans, I guess, in case you actually do see a dip in occupancy over the next six months? Have you looked at whether it's rating preferred capital or again raising the level of active dispositions?

Nelson Rising

We have not been exploring any raise of capital to meet the cash shortfalls. Our focus will be on trying to monetize assets. We have, as I said, several discussions underway and that's where we think we will be able to build up financial resources in the event that lease up is slower than anticipated.

Operator

Your next question comes from Jordan Sadler - Keybanc

Jordan Sadler – Keybanc Capital Markets

Could you maybe just expand a little bit on the process at Park Place and what type of buyers are still kicking around there and sort of how you're feeling about that sale at this point?

Nelson Rising

We are in discussions now with one buyer and a very qualified buyer. And as one could imagine this is a very complicated project with lots of moving parts. Those discussions are moving along positively and, as I said in the brief comment I made in my opening remarks, what is really encouraging about Park Place is the level of leasing activity we're having. That underscores going against the conventional wisdom of what's happening in Orange County and we’re quite frankly delighted by that. But the conversations are proceeding at pace and nothing else to add to that today either with respect to who the potential buyer is or what issues we're negotiating on. I don't think that would be productive.

Jordan Sadler – Keybanc Capital Markets

This buyer is not a debt holder, right, as in sort of the previous transactions.

Nelson Rising

No, this is a very qualified developer buyer.

Jordan Sadler – Keybanc Capital Markets

Just on the other assets that you're having. You said one the airport market as well as I think another one that you're in discussions with. The nature of those types of transactions would be helpful.

Nelson Rising

Yes, one of them is a larger building, one is a smaller building. I don't want to identify them for obvious reasons, but they will both have the advantage of eliminating debt and ongoing obligations and one of the things that we're trying to do is to as we try to eliminate the drain on our cash resources from carrying buildings that have a negative financial impact.

Each step is a very important one. And the reason I mention those two is again a conventional wisdom is things are pretty much silent on the real estate transaction front. And our experience does not support that.

Jordan Sadler – Keybanc Capital Markets

And lastly I think Shant I think last time gave us a sense of what the cash burn rate of the company was. Shant do you have an update on that?

Shant Koumriqian

Yes well during the quarter, first off the properties at this point are generating marginally positive cash flow after debt service. And what’s driving our burn at this point is the payment of G&A the payment of our preferred dividend and the payment of CapEx, TI’s, lease commissions and building improvements. A lot of the leasing costs are being reimbursed to us by reserves.

So but on a gross cash basis our burn up was approximately $25 million $26 million this quarter. If you look at our supplemental I think we showed about a $20 million burn some of the difference was leasing costs paid from reserves which you’ll see in the footnotes in the supplemental.

Looking in to the next couple of quarters I think you’re going to continue to see that type of a trend. The property will start to produce a little more cash as leases that we’ve executed will commence and we’ll start generating rent, cash rents on those leases.

And then we’ll have additional interest expense from the PLF refinancing, as well to offset that partially. And then from a leasing cost perspective I think the trends are going to be consistent for the next number of quarters as we lease up space.

Operator

Our next question comes from Lou Taylor – Deutsche Bank

Lou Taylor – Deutsche Bank

Maybe Nelson just another cut at the leasing reserves in terms of how much of it is available for first generation space versus second generation space?

Nelson Rising

Well the total number, the first generation space would be the buildings under construction. And under those, there’s what $51 million that is available under, un-drawn loan proceeds for those three buildings, four buildings. Shant?

Shant Koumriqian

Yes there’s $51 million available under future draws on the loan proceeds. About $39 million of it is associated with the three projects that we recently expended, 3161, WaMu [inaudible] and we believe now there is more than enough debt proceeds in each of those loans to fully lease the building to 95% to 100%.

In addition we have another $12 million approximately of mortgage proceeds available under a couple of our existing projects. Primarily one project in Orange County which is an EOP offset that has future debt proceeds available. And then we have another $3.4 million available under the KPMG Tower Mortgage. And then the rest of the cash is the rest of the reserves are restrict to cash and the reserves are available for first and second generation tenant improvement.

Lou Taylor – Deutsche Bank

And just a follow up in terms of the cash burn rate, based on the available cash balance, it looks you got basically four to five quarters to go before that’s exhausted. I mean what are the things beyond just the kind of leasing efforts that may reduce that. I know Nelson last quarter you talked about the Park Place sale. But can you just help us see what are the other events besides leasing which would diminish that rate?

Nelson Rising

Well there’s a couple of things that are important, one obviously the continued sale of assets. It’s our hope that we will be successful with not only the two sales that we just mentioned and discussions with Park Place, but the other transactions which we are in the process of moving along. That certainly is one.

The stopping the burn rate that we have on certain assets which are underperforming, we have in the past had conversations with lenders, we continue to have those. Where we can deal with loans that have that they’re not, they’re performing but that the loan value is in excess of the building value.

And those conversations will continue much like we did with City Plaza. And I’m hopeful that that will also lighten the burden. But it’s a variety of things that we’re doing from leasing as you mentioned to the sales to removing cash flow burdens on non performing assets.

Operator

The next question comes from [Michael Idleman] – Citi Group

[Michael Idleman] – Citi Group

Nelson, your former CEO put out a letter to all the Maguire shareholders a couple of weeks ago, reflecting on where the stock was and relative to what the underlying value was. And in it he talked about a potential 40% increase in NLI for the next three years as resumption of the dividend.

I guess a little bit in contrast to where you’re sitting today. Can you just talk a little bit about how you see this evolving and the relationship with [Rob] where it is today and how you think about where the company goes?

Nelson Rising

Well I did not see that letter before it was distributed. And I have not talked to [Rob] since it was distributed. It obviously reflects what he believed. It doesn’t necessarily reflect what I believe. I don’t care to go through it item by item, and say which parts I didn’t.

But it’s not reflective of our view of the company, it is his view. Obviously [Rob] was very interested in the wellbeing of the company because he is a significant shareholder and I respect that. But basically he is not involved in the management of the company and so he was expressing his own views.

[Michael Idleman] – Citi Group

And just a follow up on the cash burn and thinking about the loans being extended. Clearly the loans that you have refi'ed. You had to pay down some principle, how much, if you think about the 2009 maturities what sort of cash contribution do you think you’re going to need to have and where are you going to be able to tap that from, to be able to refi those loans?

Nelson Rising

I don’t think the extensions are going to require cash. The one case Lantana is going to require performance if we meet the tests that Mark outlined, there should be no cash requirements to extend those maturities.

And one of the things that if you take a look at globally where we are, we’re in a situation where by extending the maturities to the end of 2009, I don’t know anyone who has visibility as to how long the current economic situation is going to continue.

But I know it’s going to be a lot better at the end of 2009, likely to be, than it is at the end of 2008. By extending those maturities, and as I mentioned earlier, the fact that we have very few leases, rollovers in the downtown Los Angeles market, gives me a comfort level that we do have breathing room, that might otherwise not be the case.

So we just, we are going to keep on blocking and tackling and doing the incremental things that make the difference. But I think that from just from an overview standpoint, it’s comforting to have the maturities under control at the end of 2009. And then have limited lease rollovers in the downtown market at the same time.

[Michael Idleman] – Citi Group

Nelson can you quantify the dollar volume of the leases you’ve achieved that isn’t yet rent paying outside of what you have previous at Lantana development?

Nelson Rising

I’m sorry I missed that.

[Michael Idleman] – Citi Group

Can you quantify the dollar volume of the leasing that you’ve achieved in the portfolio that hasn’t started paying rent yet, excluding the development asset?

Nelson Rising

Shant has got a better handle on that.

Shant Koumriqian

Yes what we have is one of our big tenants, Latham, started paying rent end of September so in the quarter you only have one month of rent on a 300,000 square foot lease. So you get some positive cash there.

Beyond that approximately 3% of our existing leases have not yet commenced yet. Those will commence over the next number of quarters, so towards the end of 2009 we’ll probably have $5 million to $6 million more of cash, in addition to Latham on a quarterly basis than we have today for in place leases.

And then going into 2010 again there are some rent commencements in place on in place leases that start in 2010 as well. So looking forward to next year, next four quarters, five quarters from now you’re looking at maybe $6 million of cash revenue increase compared to this quarter, increasing again further in 2010.

[Michael Idleman] – Citi Group

And that’s with no new leasing.

Shant Koumriqian

No new leasing.

Operator

Your next question comes from the line of Leon Cooperman – Omega

Leon Cooperman – Omega Advisors Inc.

I guess two questions. If the Park Place transaction proceeded ahead along the lines that you are discussing I’m not asking who, I’m not asking how much. Did that provide you with any discretionary cash flow that you would be able to use to manage the capital structure?

Because there’s some publically trade securities that have very high cost if you can buy them where they trade. I'm wondering if that would be part of a package that you could pursue after the Park Place transaction went through.

And secondly I noticed that there was a 13-D as opposed to G filer, I guess the difference between D and G is D tends to talk with the company etc. etc. it was 9.7% of the company is between looks like $5.85, $5.90 a share. Have we been contacted by them, is there anything you can tell us about their intentions and anything along those lines?

Nelson Rising

I’ll take the second question first and we have been in contact with that shareholder, which we’ve tried to do with every one of our larger shareholders. And at this, he’s very excited about the company and very excited about the prices which he purchased his shares. And other than that I don’t have a lot to add. His statement in the filing, I think accurately reflects what his state of mind was in our last conversation.

Leon Cooperman – Omega Advisors Inc.

And the other question?

Nelson Rising

And the other question, that there will be, again I can’t get, specific as to what the price will be. If we complete the transaction at Park Place, because I don’t know, we’re negotiating that. But several things will happen if we’re able to close that. One we will liberate cash, secondly at the minimum the cash we expended to pay down the loan of $51 as a letter of credit And other things that we advanced in order to facilitate that extension of pay down.

Obviously we expect there will be additional cash as well over the outstanding debt. Perhaps the most important thing it does, Lee, is that it relieves us of the burden of the ongoing negative cash requirements on that property. So the combination of the two will enhance our liquidity.

Operator

Your next question comes from the line of Ian Wiseman – Merrill Lynch

Ian Wiseman – Merrill Lynch

When you took the helm of the company you talked about asset disposition programs, talking about five or six assets in Orange County. If you just talk a little bit more about the landscape of asset sales today number one. And number two I think last quarter you said that you were going to have a bidding process for Park Place with bids to August 8^th. How many people actually showed up to the table with real bids?

Nelson Rising

We had, well again real bids are all in the eye of the beholder. We had a number of prospective buyers who looked at it and we had narrowed it down, to three. Now that doesn’t mean there weren’t other bids that were credible but the other three were superior. So it was the narrowing down process that we that led us to where we are now. And then we’ve gone one step further in that narrowing down process.

The interest level was high, but going back to the boarder question I think you’re asking is what’s happening with overall asset sales and I think that the transaction we were able to conclude with the Shorenstein Group on Main Plaza is indicative.

We have other conversations on assets smaller in size that also reflect that there is an interest, it’s not like you would expect it to be three years ago, but it isn't as if we're in the doldrums either. And as I mentioned specifically, we have a letter of intent on one, and we're in the process of negotiating a letter of intent on another. And we're in very serious discussions on three other assets

Ian Wiseman – Merrill Lynch

The world has certainly changed since that Shorenstein acquisition was first executed and it seems to change almost every single day. Where have the bids that came in on Park Place come in relative to expectations? Are we down 10%, 20%, 30%, I mean, to what magnitude do you think pricing has fallen in Orange County?

Nelson Rising

Well those are two separate questions because Park Place is a very complicated asset. And the number of buyers for a complicated asset that's that large may not be reflective of what individual buyers would be doing on one-off acquisitions.

At this point, until we complete our negotiations on Park Place, I'd rather not try to quantify what's transpired. But again I would say that clearly the world has changed, and the world has changed in many, many ways.

The most significant, I think, from a standpoint of our sector, is the lack of credit. And I think what is great about the assets we have in Orange County is that we have very, very good loans, attractive interest rates, relatively high loan-to-value on those buildings with seven to eight years term.

So the fact that we have the financing on those buildings, somebody would take much less equity than it would otherwise require. That I think gives us an advantage in marketing. But the biggest stress on our sector is the lack of lending and lack of credit. And I think, as I said, our existing loans give us an advantage in that regard.

Ian Wiseman – Merrill Lynch

And final question – you just talked about demand picking up a little bit in Orange County. Is there a specific sector of that's driving that demand, or is it just general leasing?

Nelson Rising

Well what we see is professional firms, very prominent ones that are in the marketplace. Hyundai is an example of a major player in the Orange County market. But it's hard to generalize, and again, what we're seeing is something that was based on what the conventional wisdom was, was surprising.

But I think it's kind of across the board. The phrase I used in my opening comments was large and stable tenants, and that's encouraging. In other words the contraction may be just about completed. I can't say it is, but it's certainly an encouraging sign.

Operator

Your next question comes from John Guinee – Stifel Nicholas & Company, Inc.

John Guinee – Stifel Nicholas & Company, Inc.

Maguire is essentially almost a holding company, a limited liability corporation, in that each asset stands alone. You have limited and defined recourse on some assets. You have full non-recourse on others. And I think everyone understands that when the debt is greater than the value it's relatively complicated to address, but one thing jumps out to me.

And that's on Von Karman and Northside, you had about $49 million of construction loans, which I think had about $7 million or $8 million of recourse, and you chose to pay those down by $11 million to reduce your balance from $49 million to $38 million, while keeping to 100% vacant assets on the books. Can you walk through the thought process there?

Nelson Rising

Sure. That's a good question and I appreciate it. The thought process is involved. With respect to the San Diego assets we have very encouraging leasing activity, and what we did we paid down the loan balance in order to extend both of those loans.

And again, with respect to the asset in San Diego, with leasing activity, we think that there is – it's the fourth part of a three-phase project, three-building project rather, which is producing positive cash flow in the other three buildings.

And with the leasing activity that we are seeing we are encouraged that it will be a very wise decision to have kept that loan and to have extended it. With respect to the Orange County assets, obviously, it is adjacent to, if you recall and I know you do, the WaMu campus, but it's a different building, a different quality building than the WaMu campus.

There is also tenant activity and we've had some buyer activity. So it was our view that by extending those two construction loans we would have had the opportunity to get us out of this terrible market that we're in, I mean the overall economic climate.

And we're just basically thinking that 18 months from now it would be better than it is now in order to commoditize those assets. But the leasing activity we face with the San Diego asset and our perception of the value of that building for a single user persuaded us to do it.

Operator

Your next question comes from Mitchell Germain – Banc Of America Securities.

Mitchell Germain – Banc Of America Securities

Just curious on how much sublease spaces currently exists within your portfolio?

Nelson Rising

How much sublease? How much space that we've leased to primary tenants who then subleased it?

Mitchell Germain – Banc Of America Securities

Exactly.

Nelson Rising

I don't have that number at the tip of my fingers. I just don't have that, but we'll have to try to provide that. We have some, I believe it's a couple of tenants who are in the financial services sector, where they have subleased, but I just don't have an aggregate total for you.

Mitchell Germain – Banc Of America Securities

You think it's mostly centered on the financial service tenants?

Nelson Rising

No. I think we have, for an example, Southern California Gas Company, they have 547,000 square feet under lease, and I believe about 250,000 square feet of that is for sublease over the past several years. And it's just simply a question of the changes in their industry. I made that lease back in 1989 or '90.

I negotiated that lease with them and their business model changed. But they were paying rent and they subleased it, so that's one example. But there, I'm sure, there are others but they're – we'll get you the number.

Mitchell Germain – Banc Of America Securities

And just last question, how would you characterize tenant concession packages in downtown in Orange County today?

Nelson Rising

Well are we talking about renewals or new space?

Mitchell Germain – Banc Of America Securities

Either or both.

Nelson Rising

Well renewals, $25 to $30 a square foot usually will be able to handle that. If you're talking about in the downtown market, new tenancy, $60, $65 would be on the high end, and probably closer to $50, the $40 to $50 range.

Mitchell Germain – Banc Of America Securities

And free rent?

Nelson Rising

Well I'm not as big an advocate on free rent as my predecessor was. So I'm focused more on FFO and so that – well yes, free rent sometimes is necessary in the competitive market. But in the long run I'd rather deal with it with a face rent because gas is going to equalize it anyway. And so I think that there is free rent, there are lease takeovers in the marketplace.

But what we've tried to do in the period of time I've been here is to start to focus our leasing activities more on the FFO implications because we are a REIT; we're not a private developer.

Operator

Your next question comes from Jordan Sadler – Keybanc Capital Markets.

Jordan Sadler – Keybanc Capital Markets

Just on the leasing activity, I'm not sure if I didn't catch this, but on 2009 role, can you maybe give us a sense of where you stand with tenants, and maybe expectations for ability to renew?

Nelson Rising

You're talking about the tenants we have that are rolling [inaudible]?

Jordan Sadler – Keybanc Capital Markets

You have 1 million square feet rolling next year across the portfolio, and I'm curious as to how you're dealing with that. Are you in front of those yet, and what you're sense is in terms of renewal rate would be?

Nelson Rising

Yes. All of the tenants whose leases are rolling next year, we are in front of. And I would say at this point we feel fairly optimistic of a least 50% renewal, now that's nice to say, hard to prove. But that's kind of what we're looking at. So, Doug, or, Shant, any comments?

Shant Koumriqian

Yes, that's about right.

Jordan Sadler – Keybanc Capital Markets

Expectations on what would – do you have leases out yet or it's just still too early?

Nelson Rising

In some cases we do.

Shant Koumriqian

In some cases we've got signed leases so we have that. In some cases we have early renewals. We're in discussions and negotiations on various – and we've got proposals. We basically reach out to all of our tenants in the upcoming year.

Jordan Sadler – Keybanc Capital Markets

And then, Nelson, I was just curious if there would be a second round of cost cuts that you'd expect here? I mean is there any additional cost cutting that would be going on?

Nelson Rising

Well this last, Shant, the drop in GA reflected in this last quarter was about, what, $500,000?

Shant Koumriqian

About $500,000.

Nelson Rising

And we're always looking for ways to operate more efficiently. At this point we're pretty lean given all the things we're doing, and so I would not look for dramatic cost cuts in the next couple of quarters.

Jordan Sadler – Keybanc Capital Markets

One other question, just on the preferred dividend, I know you said next year you expect things to be a lot better than they are today, at least it sounds like it from a Capital Markets perspective, but just thoughts on continuing to pay the preferred dividend, I mean, represents about a $20 million dividend I know you're burning north of $20 million a quarter at this rate. Have you thought about belt tightening there a little bit?

Nelson Rising

Well obviously people have made that suggestion to us. I look at it from a standpoint – first of all the overall obligation doesn't go away, it's deferred if you don't pay it. And so that always comes back to roost at most of these choices we have in the comments. But what we're trying to do is establish a level of investor and financial community confidence in our stewardship of the company.

And that as we try to extend loans, to get access to financing, as we try to do the other things that will build credibility for the company, I'm not anxious to do things that would play against that overall goal. Everything is a balance, and I think at this point there are investors who believe in us and invested in us and expect that the dividend be paid and that's what we intend to do.

Operator

Your next question comes from Michael Knot – Green Street Advisors.

Michael Knot – Green Street Advisors

Nelson, first question, what gives you confidence that '09 will be a better environment than today given the [CNBF] problems that may come down the pipe, even all the way out through 2012?

Nelson Rising

Well, I don't think I said '09, I said the end of '09. Clearly there's a lot of dark clouds out there for our sector. There's no question about that. And if one looks at the macro-economic situation, Krugman said the other night that he thought we might have a recession similar to the 1982 as a result of all these activities.

And in 1982 we had an employment of 10.7%. So, I mean if there’s one Nobel Prize winner who thinks that we may have some very difficult times so I’m not suggesting that ’09 is going to be better. I am suggesting that because we do have some breathing room to get through ’09 that’s where I was headed with it.

I wish I could say I didn’t, I felt that things would be better in ’09, they won’t be and in your right the [CNBF] situation is something we’re all looking at. We have several securitized loans that we’re going to be dealing with there have been very few.

I think there is one that I am aware of, securitized loan, that has been a problem asset. But we know they’re out there and so that’s a black cloud and I won’t deny that.

Nelson Rising

It sounds like you’re being pro-active and looking at with, to get rid of under performing assets but why not be more aggressive and maybe sending keys back to lenders on some assets. Like why continue to own the 500, 600 thousand Park Way building in Central Orange County, can you just help us understand your though process on that? Thanks.

Nelson Rising

Well, just specifically of the Park Way assets we are in discussions as we speak on that property with the lender and it’s the phrase giving back keys implies that there is the ability to do so. That we have a variety of our loans where there are obligations where whether it’s going to be whether it’s in the form of master leases or masters leases of parking some were more complicated assets, straight out corporate guarantee so those are difficult.

What we’re trying to do is have intelligent conversations with the lenders of our assets we’re trying to get both parties to the point where we recognize where we are. If their loan is at a level that is above the value of the building in today’s world they have to write that down.

And, what we want to do is be able to work with lenders to accomplish that and to, like we did at city plaza, like we’re working on with park way. We have several other loans in the portfolio where if the direct discussion with the lender.

We have however many loans in the portfolio where we have to deal with the servicer and the [CNBF] or securitized situation. So they’re all different but we are working very, very diligently in trying to do this and in some loans the pain is not yet there for us because we have interest reserves and that in many cases letting those interest reserves be utilized makes the lender more likely to settle with us on an attractive basis.

So it’s not that we are trying to take a balanced approach to get to the same end and I don’t think it, we have a flexibility to say to somebody here is the keys and then they come back and say well where’s the $50 million you owe us, or $30 million in some cases, and so it’s a balance and I hope that our shareholders would agree that we are trying to strike that balance.

Operator

Our next question comes from the line of [Lyle Bro] with Invesco.

[Lyle Bro] – Invesco

Nelson, this is for you. I’ve got four questions but I want to preface it that we’re highly intrigued with the enormous leverage that you’ve gotten in this situation. I know of no other on our scan where we have as much potential upside as we see in this situation at the present time. Questions are for what’s the overall vacancy down town versus the company vacancy?

Nelson C. Rising

The overall vacancy downtown is 14.5, that’s the overall vacancy. The Gulf, the direct space vacancy is close to [inaudible].

[Lyle Bro] – Invesco

It’s what?

Nelson C. Rising

12.5, I’m sorry.

[Lyle Bro] – Invesco

Yes, yours is 12.5. Have you looked into any possible exotic financing which I understand the market very well. But, there are some more exotic areas such as sale of the underlying fee on a lease back basis to a European trust.

There are some brokers out there that specialize in that stuff. There are a couple of trophy properties that had, seems to me, might be very intriguing for the Europeans like to get there hands on an underlying fee regardless of whether there’s a debt on top of it, take a subordinate position, do a lease back on the thing.

I recognize you want to hold on to your trophy properties as long as possible. But it may be that just by disposing of one of the underlying fees on the trophy properties it would oh, by you another, until 2010 rather than the under 2009, give us a little bit more comfort. So the question is have you looked into anything that’s really exotic.

Nelson C. Rising

Well no nothing really exotic. We’ve been in more conventional thoughts about how we’re going to solve our issues. One of the things about some exotic methods like you described which I’m familiar with has to do with the overall debt on the building and the value of the building and just how much somebody would pay for the underlying fee.

We do have very good debt from the from the standpoint of this term and in all, most cases [inaudible] but in today’s market I am not sure how much room there is between that debt and the underlying fee and [inaudible]. We haven’t looked at it but it’s an interesting idea and I’d like to discuss it with you further.

[Lyle Bro] – Invesco

Well in my experience there are some families in Europe, in Germany, and also in England that continuously buys this stuff. They do, have done it for hundreds of years, the Duke of Buckingham is an example. They’ve owned properties here in Los Angeles before they understand it. They just want to own the land, they gave you a lease back for 99 years.

They recognized that you’ve got a first on the property and they don’t pay any taxes. It may go on to a Lichtenstein Trust, it may go wherever they’ve got money. But they have hundreds of, all these pots of money are looking for places to put it out even at this time.

When it’s a trophy property, they salivate over a trophy property even if they're in a subordinate position. So I am just leaving that with you. Next question is on the shareholding. Who is the new buyer that bought the 9.9% that’s registered in the Cook Islands? Who are they?

Nelson C. Rising

The name of the entity is…

[Lyle Bro] – Invesco

Yes, I know that, I saw that in the filing. But its in the Cook Islands, it’s a tax haven, who represents them or who do they purport to be? Have you talked to them?

Nelson C. Rising

Yes. Yes. I’ve talked to them.

[Lyle Bro] – Invesco

Well do they–

Nelson C. Rising

They’re extremely credible people.

[Lyle Bro] – Invesco

Okay so they’re credible people but they are operating out of a very obscure tax saver and they probably see this as a great opportunity too, so?

Nelson C. Rising

They certainly do, based on my conversations.

[Lyle Bro] – Invesco

If you don’t want to go any farther it’s okay on that. How much does [Rob] control or have some control over at the present time or purport to?

Nelson C. Rising

My understanding is that, well, let me break it down and Shant will get the exact number. Rob has a certain amount of shares and the balance of his interest is in OP units. My understanding is the aggregate of that is about 15% of the total 55 million shares.

[Lyle Bro] – Invesco

Is that all common or is some of it preferred?

Nelson C. Rising

No, none of it is preferred. What he has is the outright shares and the OP units and Shant is trying to get the exact number. But from the standpoint of voting power, I think he has about 3%.

[Lyle Bro] – Invesco

Yes.

Shant Koumriqian

He has approximately just under 7 million OP units and the rest of it would be in shares.

[Lyle Bro] – Invesco

Is any of that coming into the market on loans that he has pledged or having to dispose of it in the last month or so?

Nelson C. Rising

I'm not aware of that.

[Lyle Bro] – Invesco

So there does not appear to be any forced dumping coming out of Rob.

Nelson C. Rising

Not to my knowledge. I do not think so. And just to go back there was an earlier question about Rob. I know that he is very, very interested in the company being successful. He has a tremendous financial stake in that, and so we consider him to be very supportive.

[Lyle Bro] – Invesco

Well, I'm sure he is, but knowing that he has got so much of his net worth tied up in this. But at the same time, I'm also concerned that he is having to dump it or it is leaking into the market at this late juncture.

Nelson C. Rising

I see no evidence of that.

[Lyle Bro] – Invesco

And then lastly, it is just my comment on our end that you guys have got to be more aggressive. What's coming through here in this phone call from two different phones and people on the line, one is you're doing a great job.

But from my standpoint it looks like you're still a little too timid. There's nothing wrong with attacking the preferred dividend at this point. There is nothing wrong with dumping properties back on the lenders. As far as the deficiencies are concerned, if you're concerned about those, it takes years to collect a deficiency here in California.

So, I would not worry about that. I would shore up cash, I think that's what we're all concerned about. Shore it up for as long as possible. As far as the preferred dividend and dumping properties back if they're experiencing any cash flow, dump them back and circle the wagons and retreat to your core that you've got which is your great trophy properties.

And we're all going to make a huge amount of money on this deal at this point if you can just do that.

Nelson C. Rising

I appreciate the comment, and just understand that because of the way so many of these loans are structured, we do have either master lease obligations, master parking revenue obligations, or in some cases, guarantees.

That's the point of it that goes beyond deficiencies. We have been here for five or six months working very diligently on a number of fronts, and we have begun discussions on a vast majority of these assets.

Again, remember that a significant number of the loans are securitized and anybody who has tried to deal with the servicer of a securitized loan has had a great difficulty in doing that. To my knowledge that I mentioned there has only been one CMBF in the last period of years where there has been a breakup of it.

So we will be breaking new ground on those loans, the ones where we have direct lending relationships, we are in conversations with all.

Operator

I will now turn the call to the McGuire Properties Management team for any closing comments they might have.

Nelson C. Rising

Well thank you so much for being with us today. As I mentioned in my opening comments, these are challenging times. We wake up in the morning and we have no idea what the financial news with bring us.

We think we have a game plan that makes sense. The most important part is that we are focused on a direction. I tried to outline that today. We look forward to the rest of the year and keeping you all informed as we progress. Thank you very much.