Boston Properties Inc. Q4 2008 Earnings Call Transcript

| About: Boston Properties, (BXP)

Boston Properties Inc. (NYSE:BXP)

Q4 2008 Earnings Call

January 29, 2009 10:00 am ET


Edward Linde – President

Michael LaBelle – CFO, Sr. VP

Mortimer Zuckerman – Co-Founder, Chairman

Doug Linde – President

Bryan Koop – Regional Manager

Ray Ritchey – Executive Vice President and National Director of Acquisitions and Development

Arista Joyner – Investor Relations Manager


Jonathan Habermann – Goldman Sachs

Mark Biffert – Oppenheimer & Co

Louis Taylor – Deutsche Bank Securities

Jordan Sadler – Keybank Capital

Michael Bilerman - Citigroup

Ian Wiseman - Merrill Lynch

John Guinee - Stifel

Michael Knott – Green Street Advisors

Jamie Feldman - UBS

Wilkes Graham - Friedman, Billings, Ramsey & Co.


Welcome to Boston Properties fourth quarter 2008 conference call. (Operator Instructions) I would like to turn the conference over to Mr. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead, Ma’am.

Arista Joyner

Good morning, and welcome to Boston Properties fourth quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg. G requirements.

If you did not receive a copy, these documents are available in the Investor Relations section of our website at An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.

Factors and risks that could cause actual results to differ materially from those expressed or implied by forward looking statements were detailed in Wednesday’s press release, and from time to time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements.

Having said that, I'd like to welcome Mort Zuckerman, Chairman of the Board; Ed Linde, Chief Executive Officer; Doug Linde, President, Ray Ritchey, Executive Vice President and National Director of Acquisitions and Development, and Mike LaBelle, Chief Financial Officer. Also during the call, a question-and-answer portion will be available, our regional management team will be available to answer questions as well.

I’d now like to turn the call over to Doug Linde for his formal remarks.

Doug Linde

Good morning everybody, and thanks for joining for our fourth quarter call. It may feel late but happy New Year to everybody we haven’t spoken with. For many of us, the close of 2008 probably didn’t come too soon.

The continuation of the unwinding of the excessive leverage in the financial system along with what is clearly a deep lack of confidence among consumers across the world certainly had a profound and a very negative impact on financial performance as measured by either stock price or bonds spreads over 2008.

Unfortunately, neither the duration nor the depth of the economic challenges across the globe is still fully understood. The continuous announcement of revenue shortfalls, spending cuts from public officials and bankruptcies from retailers and of layoffs from business leaders like Microsoft Steve Ballmer who even announced for the first time that Microsoft was going to experience job cuts is a clear reminder that the current recession has a very, very wide reach.

And yet, as Mike Labelle is going to talk about in a few minutes, if you pull out a non-cash impairment charge due to the application of that fair value accountings to our equity increased in our unconsolidated joint ventures, that’s in itself is a mouthful. Our 2008 results were ahead of our guidance, a 3% increase over 2007.

The fourth quarter leasing statistics still show us 39% net increase in rents, with the majority of the increase coming from New York City which was over 60% and clearly the news from New York City is about as bad as it has been anywhere.

But lest we be accused of being Pollyanas, leasing activity with few exceptions has been largely non-existent in our markets during the fourth quarter and into the New Year. And I would say that in the face of having signed a 356,000 square feet of lease of Biogen and a 195,000 square feet of lease with Hunton and Williams in the fourth quarter in the late November early December.

That being said, CBRE reported that transaction volume in New York City was at its lowest quarterly level since they began tracking activity. And while we completed a number of transactions that were in the works from earlier in the year, with so little current activity, we have a really difficult time still with any certainty where market rents are today.

In the short term, the reality of where leases are actually getting cut is probably driven more by the psychology or expectation of tenants and landlords. But depending upon the market has tendency to shed space into the sublet market or default and go away. Availabilities then arise and rents are going to soften.

Unfortunately, this doesn’t relieve us in our obligation to give you our best estimates of market rents so you can get a feel for the marked to market of our portfolio. And if anything, we probably expect that the views that I’m going to give you may be a little bit more conservative than we may actually transact leases but I’m going to give you a sense of where we think market rents are in our market today.

Let’s start with New York City. In New York City, we think gross rents are in the low end $55 a square foot at the bottom of some our buildings like Two Grand Central Station, to over a $115 a square foot at the top of buildings like Citigroup Center. And at the GM Building, while the demand is nonexistent, we still think if tenants were looking for space, they will be prepared to pay an excess of $175 for certain suites in that building.

In Boston, rents are between $50 and $80 on a gross basis. In Washington D.C., rents are quartered on a net basis on the CBD and are between $30 and $60 and then the San Francisco CBD, gross rents are still between $45 and $75 a square foot. The Greater Waltham suburban market which is our Boston area suburban market gross rents are between $33 and $45 a square foot. In Reston Town Center on a gross basis, rents are between $32 and $42.

Although for our new build to suit called Democracy Tower, rents are approaching $50 gross. In Suburban Maryland, rents are in the low 30s in Rockville to the mid-50s in Chevy Chase and in Princeton, rents are still right around the low 30s. This leads to a mark-to-market including our share of RJV have about $4.29 per square foot so it’s still a pretty healthy mark-to-market even with the sort of rather conservative view where rents are.

In 2009, our average expiring rent is $38.58 and that’s versus a market rent on that same set of space of $42.83. In 2010, the average expiring rent is $37.22 versus an expiring rent for market on that space at $41.75. So again, we still have that market-to-market that’s going to likely come through our portfolio on a consistent basis even as we head into this downturn.

As we discussed in our last call, we are not immune from the significant disruption caused by exogenous events. And while we fully expect Lehman Brothers to vacate its lease at 399 Park Avenue which is going to reduce our occupancy by somewhere between 120 and 130 basis point in 2009, to date we’ve received $14.8 million in rent since they made their bankruptcy filing.

And last quarter, we spoke about the dissolution of Heller Ehrman and everybody probably read more than they care to on the Wall Street Journal two days ago. They were 134,000 square feet at 7 Times Square and as we predicted, we did release 71% of that space at its starting rent that was 90% greater than the in-place net rent though we did provide eight months of free rent and we had to pay a leasing commission. This provides some evidence of our long-held belief that highly marketable space in the highest quality buildings has the best change to be successful even in a difficult market.

Now our concerns around tenants have not abated at all and just to reiterate what we said last quarter, this will give you a sense of our revenue makeup. Our portfolio’s made up of about 1200 tenants. Our annualized gross revenues from rental income and this includes our share of RJV based upon our fourth quarter revenue is about $1.8 billion.

Our largest gross rent comes from Citibank $77 million, the US government is second at $60 million and then followed by Lockheed Martin at $33 million. We have 5 other tenants who are paying more than $20 million per year and 17 who pay in excess of $10 million and they include Proctor & Gamble, Estée Lauder, Genentech, Biogen, MIT, Bank of America, Bank Capital, the Smithsonian, Ann Taylor, Parametric Technology and a group of national law firms.

Our total annual direct hedge fund exposure is $63 million and it’s made up 54 tenants. Citadel Investment is the largest by a factor of more than two and they pay gross annual revenues of just under $10 million. Investment management companies account for $49 million of our revenue.

There are 51 of those tenants and private equity firms account for $35 million, there are 48 of those. Now we don’t know who they’re going to be, we don’t know when it’s going to happen but we do know that we are going to have to (inaudible) in 2009. And when we get to our guidance, we’ve assumed a level of default, effectively a reduction in our earnings estimate from these defaults.

Under Mike LaBelle’s leadership, we’ve put a significant effort into underwriting credit before we commit to a lease. And then in the case of law firms which are on everyone’s mind today, we try to lease the partnerships that had diverse business practices, which lack concentration in any one industry group, in any one practice area and in any one client. We review annual projection and we do maintain significant security deposits.

When the lease commences, we walk the space periodically and we have frequent conversations with management regarding their business. But quite frankly, as private businesses, law firms’ financial results are stale when we get them and the unfortunate fact is that once we have a signed lease, when we’re in a down market, we have very limited financial leverage to do much other than take our security deposit.

We have no clarity today on where cap rates are or where values are. There have been virtually no private transactions completed over the past few months. In this market, there are two types of sellers. There are those who are motivated and those who have no choice. Unless the pricing is satisfactory, only the involuntary sellers will complete transactions.

Over the last week, our stock prices ranged between $41 and $48 per share. If you strip out our land holdings and all of our development assets including our construction in process at cost, and use cash NOI from our properties and our share of our joint ventures, we come up with a range in cap rates based upon our stock price valuation of between 8.3% and 7.7% or between $385 a square foot and $417 per square foot.

Now, since there are no willing buyers and there are no willing sellers, we don't really have a basis for knowing how far below intrinsic NAV we are today. But you do have to believe when you consider the locations, the quality, and the tenant roster as well as the lease rollover schedule and replacement cost that our portfolio is significantly under value.

We came to market per sale with a building lease to the GSA in Washington, D.C. about two weeks ago. This is going to give us an indication of how the private market is valuing our types of real estates. The transaction sizes in the range of $115 million and while we are motivated to sell, we are not a fore seller and unless we achieve pricing that meets our financial objectives, we're not going to sell the asset. One of the challenges in this property, like the majority of our assets, is that it's unencumbered and many buyers are actually confronted with the challenge of arranging debt even for assets with very secure government cash flow.

The credit markets continue to be extremely constrained in the real estate space. Short-term capital continues to be dominated by the commercial banking market. The trouble is that the number of banks prepared to entertain new loans is extremely low, and its significant portion of the industry is grappling with the current exposure to commercial real estate brought on by the recent merger activity. In the face of this, we are documenting now our $320 million Russia Wharf construction loan and we are moving towards closing hopefully in February.

The banks are making small commitments. They're taking virtually no underwriting risk. They're requiring higher credit spreads and structure, and they're focusing their time and capital on long-term relationships with solid sponsors have a definition, fortunately, the Boston Property’s debt.

Our unsecured markets have shown a little interest in real estate bonds. Secondary trades have been scarce and hypothetical price guidance for new issuance are in excess of 10%. The long-term secured capital market is providing access to high-quality assets at very, very low loan-to-values. Debt underwriting constants in excess of 13% are typical and that basically drives coverage ratios to two times or almost two times on new interest rates between 7.25 and a 8.5% based upon where you are on your leverage position.

While the public market has clearly overshot the decline in real estate values, there is no question that values have declined and more importantly, there has been a corresponding increase in real estate leverage. The real estate industry is going to de-lever over the next few years.

After the closing of our Embarcadero Center on the last quarter, we had $900 million of availability on our credit facility which expires in 2010 and has an automatic extension until 2011 and we had cash and marketable securities at the end of the year of $250 million. Overall, our leverage position, including our share of our joint ventures, using even our stock market valuation of $45 per share, is about 55% and we have an interest coverage ratio including capitalized interest of almost three times.

We have $250 million of maturities in 2009. The largest is $183 million and we have two one-year extension options and that loan is priced at LIBOR plus 100. The other two loans are lubed with life companies and the loan-to-values are between 25 and 50%, using our line covenant definitions of 7% cap rate for CBD properties, and an 8.25 for suburbans.

2010 maturities total about $875 million and they are all secured mortgages. A number of these maturities are from our joint ventures, so our share of that $875 million of debt is actually only $572 million. The two largest assets are part of our Manhattan joint ventures and we do anticipate a reduced loan amount as part of the refinancing of these assets.

The remaining assets are in Washington, DC joint ventures, and they have long-term stable leases. We are not waiting for the various maturity dates to arrive and instead, we're actively requesting bids on other stable assets in these and anticipate completing additional financing during 2009. This may leave us with significant cash balances, but this is the time to cover as many risks as possible.

The remainder of our capital commitments over the next few years relates to our development program. Fortunately, none of these projects are based on speculative leasing and going forward, we believe that these developments will enhance our NAV. We've signed leases with Wellington at Russia Wharf, Biogen in Weston, Microsoft in Chevy Chase, the college board in Reston, Hunton & Williams in D.C., and Princeton University in Princeton, and we continue negotiations on our 480,000 square feet lease with a law firm in New York City that if signed would bring 250 plus 56 to 70% lease.

In total, our remaining capital requirements, net of interest, to complete these developments is $1.14 billion and that goes through the end of 2011. With the completion of our Russia Wharf construction loan, our cash availability under our line of credit and the cash loan generated by the operating portfolio, we have more than sufficient capacity to fund the entire program. In addition, we do expect to arrange supplementary construction facilities on a number of these projects as we move through 2009 to create extra, unallocated, excess liquidity.

One additional source of capital under our control is our dividend. At the moment, our quarterly dividend rate at $0.68 per share is in excess of our anticipated 2009 taxable income, which we expect to range between $2.30 and $2.50. In addition, we can apply a portion or all of our 2008 fourth quarter dividends and meeting apparent requirements for taxable income purposes for 2009.

We have the ability to retain about $100 million through dividend reductions in 2009 while maintaining a cushion to pay out a 100% of our taxable income. We're also spending the time necessary to (inaudible) various implications of issuing stock in little of a portion of our regular dividend. While this certainly is another way to retain cash and increase liquidity, it does entail issuing stock at current valuations.

Cutting the dividend is a very, very is a very, very significant step for us to take. We are facing unprecedented times and increasing the equity in the company regardless of the nominal amount, we'll improve our liquidity position and allow us even more flexibility going forward, but these are not decisions to be taken lightly at a time of capital constraint and we are monitoring with great interest and care the steps taken by the new administration to deal with these problems especially if they impact commercial real estate.

Our first quarter dividend is declared in the middle of March. At the moment, it’s our intention to preserve our flexibility and withhold our decision regarding the size and the form of the dividend for 2009 until that time. When we look at the current operating landscape we do not anticipate in abundance of new opportunities over the next year. If we see opportunities, we believe the only prudent way to pursue them would be with significant new equity be it with a joint venture partner or on our own. First and foremost, we are intent on maintaining excess liquidity to fund our new term maturities and our development commitments.

In the current operating market, many landlords start for capital. We are in an enviable position of having the ability to invest in leasing transactions that make sense, but even we continue to scrutinize every request for capital whether it's lease related, lease building or corporate. Mike's going to describe our results in our 2009 guidance and in particular our assumptions around leasing. We believe we’ve been very realistic about the challenge of picking up occupancy in markets where new demand is all but absent.

Based on those estimates, we expect the portfolio to create about $100 million of operating cash flow in 2009 which we will use to service our capital requirements. 2009 and 2010 are going to be challenging years and we are simply going to have to run harder and faster to stay in place.

I’m going to stop here and let Mike discuss our fourth quarter results and our 2009 earnings.

Mike LaBelle

Thanks, Doug. Good morning everyone. Before I go into details about our fourth quarter including a discussion about the impairment charges that we detailed in our press release, I wanted to start by discussing the leasing activity that we experienced this quarter.

We had another successful quarter with 675,000 square feet of new leases commencing. On average, these leases have rents that are 39% higher on a net basis that are prior leases. New York City posted a 61% increase with multiple leases at 599 Lexington Avenue and Times Square Tower including the real leasing in December of the former Heller Ehrman space at Times Square Tower at a net-to-net rental increase of 19%.

In Boston, a roll-up of just 11% would have been even higher at 31% if not for one large 70,000 square foot lease in one of our RND properties in suburban Boston that experienced a 34% decline. Our other market had only modest activity with Princeton showing a 10% rent decline based on just one transaction this quarter. Our weighted average transaction costs were down this quarter at $28.84 per square foot. The transaction costs are in line with our projection and they were impacted by the significant amount of New York City leasing which was 36% of our total leasing that had strong rents but also high leasing commission.

The terms of most of these leases were negotiated several months ago and as Doug discussed, with the lack of recent activity, there is the perception of a pretty dramatic decline in rent particularly in New York City even though there have been very few actual transactions. As always, it is important to bear in mind that only a small percentage of our portfolio is subject to repricing annually due to our practice of signing long-term leases. We only have 6.7% of the square footage in our portfolio expiring in 2009 and 9.3% in 2010. From an occupancy perspective, our same-store portfolio is consistent at 95% occupied from last quarter.

Overall, our occupancy declined by 50 basis points to 94.5% due to the bringing in the service of three new development projects, two of which are still in their lease updates. Our 77 CityPoint project in Waltham is a 100% leased and South of Market in Reston is 85% leased. Annapolis Junction, which is being developed specifically for NSA-related government contractors was unable to accept leases until receiving accreditation from the NSA.

We received the accreditation in the fourth quarter and while it was vacant at the end of the quarter, we signed our first lease in December for approximately 15% of the space. We have several additional letters of intent and hope to be roughly 30% leased in the very near term. As I would discuss in the minute, we do expect occupancy to go down in 2009 to the anticipated vacancy of 436,000 square feet that is leased to Lehman Brothers at 399 Park Avenue.

Now, we’d like to spend a few minutes on the fourth quarter results. As outlined in our press release, we’ve booked a non-cash charge related to our equity investments and unconsolidated joint ventures of a $1.33 per share or $188 million. This charge represents the difference between our current book value and theoretically what a third-party purchaser would pay for the equity interest in the property today. With no recent arms link market trades, we were left with an analytic discounting cash flow exercise based on our best views of current market rents, future conditions, exit cap rates, and assumed discount rates.

These values have no relation to the price that which we would sell these buildings nor their long-term intrinsic value. We review all of our assets quarterly and book an impairment should the carrying value would see the current value. The valuation methodology used for unconsolidated joint ventures is a fair value or discounted flow method and differs from the GAAP method used for our consolidated real estate assets which is a cost for covering method or undiscounted cash flow.

GAAP dictates this inconsistency in methodology despite the fact that these properties held joint venture may have similar characteristics to those that are consolidated.

For example, both asset classes maybe intended to be held for the long term through various economic cycles. In this case, the decline in rental rates particularly in New York City and the perceived widening of investment yield used for real estate has resulted in a mathematical derived decline in the current fare value of some of our joint venture properties.

I spelled out in our supplemental report the majority of the impairment charges related to our equity interest in three of the New York City office buildings that we acquired last summer. We are not taking a charge related to the GM building.

A portion of the charge also relates to our development site on 46th Street and 8th Avenue in New York City where we were in the design and permitting stages and have elected to suspend development activities. As I said earlier, we review all of our assets quarterly and if the markets decline further than we have projected, we may be required to take additional noncash impairment charges in the future.

We are also taking a non-cash charge of $7.2 million or $0.05 cents per share related to writing off the remaining liability from our 2007 hedging program. Our hedging program was designed to fix the treasury rate and to operate components associated with $525 million of plan financing to be completed by December 31st 2008. A portion of the hedges are effective and are being amortized into the interest expense of our $375 million financing on Embarcadero Center that we closed in November. This adds 88 basis point of non-cash interest expense to the 6.1% loan coupon.

The other major financing we completed in 2008 are $750 million exchangeable debt offering that closed in August did not qualify for hedge accounting. We writing off the remainder of the hedge liability in accordance with GAAP requirements and this should be the last time you have to hear about our 2007 hedging program.

With these two non-cash charges that total $1.38 per share, we are reporting fourth quarter FFO of $0.05 per share and full year of 2008’s FFO of $3.49 per share. If you would exclude these two items, our results for the quarter would have exceeded the midpoint of our guidance range by $0.06. The $0.06 of our performance is due to the receipt of $3.7 million of unanticipated funds from Lehman Brothers where we now expect Lehman to continue to pay rent through the end of March 2009.

We also recognize $2 million of additional termination income associated with the Heller Ehrman termination at Times Square Tower, which is the value of the personal property that they left behind and we booked $2.3 million at straight line rate adjustments for two of our Northern Virginia properties. These three items totaled $5.50.

The remaining improvement emanated from better than expected third party fee income of $900,000 most of which is related to our new joint venture properties. We experienced lower net interest expense of $1.2 million due to the decline in LIBOR during the quarter and offsetting this is our hotel which failed to meet its budget by $560,000.

Our G&A came in at $16.5 million benefiting from a $1.6-million drop in the value of our deferred compensation plan in the fourth quarter. The declining G&A expense from the deferred comp plan was directly offset in losses and investment securities.

Looking forward to 2009, we have taken a more conservative look at our leasing plan and are projecting slower absorption of available space. We only have 6.7% of the portfolio rolling over in 2009, which will soften the impact but we are projecting a decline in overall occupancy by yearend of 300 basis points to 91.5%. The vacancy created by Lehman Brothers comprises 130 of the 300 basis-point decline. The remainder comes from the elongated lease-up of our Maryland developments, 35 basis points, and the more conservative lease-up of our vacant space and spaces we will know tenants are vacating.

We now expect to complete 1.5 million square feet of new leasing in 2009, just 30% of our 2008 total with a substantial amount that is renewals and new leases that are already committed or under negotiation.

Our 2.3 million square feet of 2009 lease roll over exposures primarily focused in Washington D.C. 40%, and Boston 33%. With San Francisco and New York City both comprising 10% and Princeton 6%. A substantial chunk of the Washington D.C. roll over is expected to renew including 190,000 square feet lease with the GSA expiring in the first quarter and a 265,000 square feet suburban lease that expires in the fourth quarter.

Our Boston exposures are primarily in the suburbs and we expected to lose approximately 150,000 square feet of occupancy at 200 West Street in the second quarter. As Doug mentioned, we have budgeted a decline in revenue of $10 million associated with anticipated tenant defaults during the year.

We are not certain when or where this will occur, but given the economic environment we expect credit problems to servicing the portfolio. We are monitoring our portfolio closely and has had discussions with many of our major law firms and financial services tenants. Even with our consistent review of tenant financials and periodic discussions with management, it is difficult to forecast the real default risk associated with these tenants.

We do take reserves in our projections for situations where it's evident that a tenant is having difficulty. Our 2009 same-store NOIs expected to be down 0.5% to down 1.5% on a GAAP basis and down 2.5% – 2.5% to 3.5% on a cash basis.

The same store projections are impacted significantly by the net loss of $40 million of rental revenue from Lehman Brothers and Heller Ehrman after netting the anticipated revenue from Lehman’s occupancy through the first quarter and as Doug mentioned, the releasing of a significant portion of the Heller Ehrman space in Times Square Tower.

Same store projections are also influenced by our leasing projections which result in higher vacancy. We’re projecting such a great line rents from the same store portfolio of $28 million to $30 million and $1 million per quarter in lease termination fee incomes.

We anticipate a substantial incremental increase in our income from development properties in 2009. We will see a full year of income from South of Market and from 77 CityPoint. Coming on line midway through 2009 will be our Wisconsin Place development which is now 91% leased. Democracy Tower in Reston and our build-to-suit for Princeton University, both of which are 100% leased will come into service in the third and fourth quarters.

Our estimated FFO return on these projects is approximately 10.5% on a GAAP basis and 10% on a cash basis. We placed our Annapolis Junction development in service in the fourth quarter and expect to place in the service the remainder of our One Preserve Parkway project early in 2009. Both of these suburban Maryland properties will be in the lease updates during the year and we do not accept them to contribute materially to our occupancy or earnings in 2009.

We expect a significantly larger contribution from our joint venture properties with a full year impact of the GM building and other New York City acquisitions. The FFO contribution from joint ventures is estimated to be between $140 million and $150 million inclusive of FASB141 income of approximately $100 million. We expect our hotel to struggle with the downturn in the economy as it has been evidenced over the past two quarters with consistent room-rate pressure resulting in declining RevPAR.

For 2009, we’re projecting the hotel to generate $7 million to $7.5 million, a 20% decline from 2008. Fee income is expected to be down modestly due to the completion of much of our joint venture development activity in 2008.

The expected reduction in tenant services income with companies likely to be managing down their expenses and requesting less overtime services and a decline in leasing and intended improvement fees to the fewer expected lease transactions. We’re currently projecting third-party fee income of between $28 million and $30 million.

Our payroll expense is projected to be flat for 2009, other than the non-cash increase associated with investing of long-term stock compensation. Overall, G&A is expected to range between $76 million and $78 million.

Now this is an increase over 2008 of $3.5 million to $5.5 million. The increase emanates from $3.1 million of the incremental non-cash vesting of the long-term stock compensation and also from a $4 million of expense associated with our deferred comp plan. The deferred comp plan lost $3.2 million in 2008 and we are projecting a gain of $800,000 in 2009. This is a $4-million swing in G&A from year-to-year.

We expect our cash G&A, excluding the deferred comp, to be 52 to 54 million in 2009, down from 55.5 million in 2008. Net interest expense is projected to be between $320 and $330 million, a substantial increase from 2008.

APB14-1 which is the accounting for convertible debt instruments adds $32 million of non-cash interest expense to 2009 net of capitalized interest. We also have an increase in overall interest expense due to the financing of our 2008 acquisition activity, as well as, an reduction in interest income as we expect to carry lower cash balances in 2009.

Capitalized interest should be between $45 and $50 million. With respect to the capital markets we plan to be active in the market this year and expect to raise $300 to $350 million of incremental fixed rate term debt over the next 12 months to supplement our liquidity.

Our budget assumes this debt has a coupon of approximately 8% although we are hopeful that the actual expense will be lower. Our portfolio provides strong flexibility with a diverse group of nearly 100 properties comprising over 50% of our NOI that are not encumbered by debt.

We will keep the majority of these properties unencumbered to support our unsecured debt but the portfolio provides numerous options for us to offer a property that meets the criteria that mortgage lenders are seeking in today's market.

We're currently in the market for a $200 million loan on one of our CBD buildings. And although the environment is challenging with many lenders on the sidelines we've received multiple offers and expect to close this loan during the first or second quarter.

We've also identified another asset with a stable rent roll of primarily government related tenants which we believe will be very attractive to our lenders. As we experienced with our $375 million (inaudible) financing last quarter we expect these financings will take substantial time and effort to negotiate and close.

This capital activity along with the completion of our planned construction loan for the (inaudible) development should allow us to keep our billion dollar line of credit fully available to fund our development projects in 2010 and 2011.

I do want to briefly reiterate what Doug mentioned about the challenged in accessing new capital in the bank market. We are in a constant dialogue with the bank market and it's clear that the availability of credit is continuing to tighten.

The banks today are wholly focused on their own credit issues and other turmoil and new lending has become much more difficult to achieve. Banks are not taking any underwriting risks. Their hold positions are down, the underwriting standards that they're employing have become bullet proof and across the board lenders are only willing to provide capital to existing clients.

It has never been more important to have a strong core of relationship banks that you've treated well with ancillary business over the years. This trend has been evident in the domestic bank market for some time. And more recently the foreign banks have followed suit with several major players exiting the market.

Despite all these challenges we continue to be well positioned to access the moderate amount of capital available from the banks due to our strong relationships, high quality assets, and stable financial condition. I'd like to conclude by updating you on our 2009 guidance.

We've put all of our assumptions together and the result is a slight increase to our 2009 guidance range to $4.75 to $4.95 per share. Even operating in this tough economic environment and dealing with the loss of $40 million of revenue from Lehman and Heller the mid-point of our 2009 FFO guidance is basically flat to 2008 before the impact of the impairment charge.

For the first quarter we're projecting FFO of between $1.28 and $1.30 per share. The first quarter benefits from the Lehman Brothers rental stream of $0.07 per quarter which we expect to lose starting in the second quarter. I'd now like to turn the call over to Ed.

Edward Linde

Thanks, Mike, hi everybody. I'm just going to spend a minute or two providing somewhat more color on the 250 West 55th Street leasing status. We've told you in successive quarters that we’ve been working on a lease. And a transaction that would bring the amount of space leased at 250 West 55th Street to about 70% and that remains true as I speak to you today.

There has probably been some question on people's minds as it would have been on mine as to what's taking so long to get this transaction done? Let me just give you a couple of facts, first of all, in addition to the need to reach an agreement between us and the perspective tenant the tenant also had to reach an agreement with its existing landlord on various items.

And so that – and those were not simple items and as a consequence introduced a certain amount of complexity into the whole negotiation. That being said we had reached what everybody believed was a reasonable transactions and were moving forward into documentation when the very dramatic changes that have occurred in the New York City office market came to the floor over the last let's say four or five months.

And the result of that was a rather lengthy, I won't characterize it, but a lengthy re-negotiation. Suffice it to say that at this point we and the tenant have agreed upon terms which are satisfactory to both sides. And so I have every reason to believe that this transaction will, in fact, go to completion and execution.

But once again the documentation still remains in front of us and as you know from listening to our calls in the past we don’t put anything in the win column until the fat lady sings to mix metaphors. So there could be something that occurs between now and the time that the documents get executed.

That would make the transaction – that would cause the transaction to come undone. I don’t expect it but it's a possibility. If that occurred we, of course, would have to re-evaluate our plans for 250 West 55th Street.

But we would – I'm not going to cross that bridge until I have to and hopefully we never will have to. So with that I just wanted to add that and I really given the lateness of the hour I will turn it over to Mort to see if he has any comments and then we'll open this up to Q&A. Mort?

Mortimer Zuckerman

Yes, good morning, everybody. I think one could spend quite a bit of time on various interpretations of where the economy is going. But the real question is we all know where it's going the question is when does it come out and at what point of the tailspin that it currently is in.

And to a degree I think that that's going to be a function of both the government stimulus program which I have to say is more upsetting than I thought it would be. And the government program which is going to announced by Tim Geithner, the new treasury secretary, which I think will be even more important than the stimulus program as to how to unlock the credit system and to release the pressure on the financial system from what has become known as toxic assets.

These are all going to be resolved I suspect within the next 60 to 90 days and we'll just have to wait until then. It doesn't mean that the economy is going to stop declining. It does mean, however, that if those are effective programs and I hope that the treasury secretary's program is more effective than the stimulus program.

And I think it's also more important because this is an economy that rests and relies on credit and that credit has just become more or less frozen, perhaps not entirely but dramatically more frozen than in any time since the end of World War II.

I think we are just going to have to wait and see how that goes. I believe that that will begin to at least relieve the problems in the credit markets. Not totally but over time. So that I hope is going to take place within the next 30 to 60 days in terms of a legislative program and a policy program.

And just hints of it, if you saw yesterday, really have a fairly significant impact on the shares of financial firms and indeed on REIT's stocks, as well. That's basically all I have to say. I think we are still in a very testing and trying time for the economy.

But as you have heard before we do believe that the basic strategy that we have followed now for virtually 40 years is to stay and supply constrained markets and this is certainly the same in virtually every one of the markets.

And stay – and build and own buildings to purchase at the highest end of those markets because there are always tenants who want to move into those buildings. And there are always tenants who can afford to move into those buildings. So we are, I think, still relatively well situated and I expect that that will be demonstrated over the next year in terms of the performance of whatever leasing we have to do. That's really all I have to say and why don’t we move on from here.

Unidentified Company Representative

Okay operator would you please open up to questions.

Question-and-Answer Session


(Operator instructions) Our first question comes from the line of J. Habermann with Goldman Sachs. Please go ahead.

Jonathan Habermann – Goldman Sachs

Hey, good morning everyone. (Inaudible) as well. I guess just to start with your comments on the dividend. It seems as though the market would appreciate obviously conserving cash in this capital constrained environment. So I'm just curious I know you said it's a very difficult decision but you know what would the argument for keeping this dividend as is?

Unidentified Company Representative

Mort, do you want to start with that one?

Mortimer Zuckerman

Yes, I am not sure that we agree with your assessment of the market and I think we will make this decision based on our own assessment of how we should properly treat our shareholders. A lot of our shareholders, I think, are assuming that we are going to continue with the cash payment and we feel that we work for them, as well.

And if we do not have any particular pressing need for additional cash and think we can afford based on our operating profitability and our financing of the capital costs that we expect to incur and the availability of capital costs and the credit market free up we think we would rather make these judgments over time and only under the conditions that we feel we cannot comfortably finance the things that we have in mind going forward would we feel that we should change the structure of our dividend.

I think a lot of companies may be in a different position than we are but I would point out to you that we sold a lot of buildings at what turned out to be the peak of the market. We did a lot of good financing including a $747 million financing for the company on August the 19th of last year.

So we are in fairly strong financial condition and Mike and Doug have done a great job in terms of arranging for corporate credit lines. So we are – we will make the decision as to what we do probably sometime in the next six months when we see how the credit markets have reacted and what our own credit needs or cash needs may be.

Jonathan Habermann – Goldman Sachs

Great, thanks for the commentary then. And then with regard to Lehman at this point I mean do you have any confirmation that they will stop paying rent after March or is that an assumption that you've made?

Unidentified Company Representative

Here's our perspective. Our perspective is that you know they're not using all the space they're in, that they are out in the marketplace looking for a two to three year sublet or you know direct lease depending on whether not a landlord has the existing space or a subtenant does.

We have been told that they are looking for as inexpensive a transaction as they possibly can. And that they real question is whether or not we're prepared to forego the opportunity to lease to space to somebody else over the next two to three years to keep them at a very, very low rent or whether or not we're simply just going to be you know chasing ourself down.

And our expectation is that we're not going to be the least expensive choice for Lehman Brothers legacy company to you know fulfill that obligation and that requirement for the next couple of years. I can't tell you if they're going to move out March 31st or April 12th or May 3rd. But I think the team leads are suggesting that they're having to move out at some point relatively soon.

Jonathan Habermann – Goldman Sachs

Okay with regard to CitiGroup…

Mortimer Zuckerman

Let me just add one thing to that, okay. They are in 399 Park which is one of the best buildings in New York and as long been seen as such and in fact is to this day one of the best properties in New York – in Midtown New York, on Park Avenue and the Lehman Space has been substantially fixed up and is a very attractive space.

And we do not want to tie it up at a really uncomfortable rent. If that's Lehman's choice we wish them well but we are talking to a number of other tenants, as well. There are always tenants in the market and the only question is whether or not we can agree on price. So I just want to put that out there as the background of this thing.

Jonathan Habermann – Goldman Sachs

Okay and then also it was mentioned on an earlier call this week that CitiGroup will be consolidating in two of their buildings, you know 388 Greenwich, as well as, Long Island City are you seeing any of that in your conversations with the company?

Ed Linde

We've been having conversations for two and a half years with Citi Bank and it's been very clear to us that for the (inaudible) transaction they would move out of virtually any space in mid-town Manhattan that (inaudible). And we have been as you know I think we've talked on previous calls in conversations with you know a number of larger tenants who have them move out of a significant portion space at the CitiGroup center.

They are currently using that space and so you know it will cost them something to move out of that space. But I think they are fully engaged in trying to reduce their operating expenses as quickly as possible. And that really isn't a change from our perspective, you know pre the new administration or leadership at Citi Bank.

I mean this has really been going on for the last two or three years.

Jonathan Habermann – Goldman Sachs

Right, and just last question, the law firm that's considering the West 55th site in terms of the space needs there and the requirement is that going to be an expansion. And I guess what other sort of options are they considering you know obviously staying put, as well.

Ed Linde

There are other options open to them but as I said to you -- as I said in my remarks at this point they are – we have reached agreement for them to come to 250 West 55th. So I don’t – they are not considering other options at this point.

Jonathan Habermann – Goldman Sachs

Okay, thank you.


Thank you our next question comes from of Mark Biffert with Oppenheimer, please go ahead.

Mark Biffert – Oppenheimer & Co

Ed, just added to that the 1.5 million square feet of new leasing that you guys talked about does that include the West 55th Street expected lease?

Ed Linde

I don’t remember the contents of the 1.5 million…

Mortimer Zuckerman

No, that's lease up in the portfolio, the in-service portfolio today.

Mark Biffert – Oppenheimer & Co

Okay. And then regards to the $300 to $350 million of debt that you expect to raise you know in 2009 does that include the Rush to Work construction financing or the construction financing that you might have to raise for the Biogen project?

Ed Linde

It doesn't, that $300 to $350 million is you know more long term you know fixed rate financing that we would raise to supplement our liquidity. You know we also expect to be re-financing some of the maturities that Doug spoke of. He spoke of $70 million worth of maturities in 2009.

And then the extension of a $200 million loan that we have. In addition to that we expect to close (inaudible) and we anticipate to enter the market to look for construction financing on some of the other developments including Biogen that we are doing.

Mark Biffert – Oppenheimer & Co

Okay and regards to the Biogen project what type of yield have you targeted on that?

Ed Linde

We are – you know our goal is to at a minimum have a kind of cash-on-cash basis be in double digits.

Mark Biffert – Oppenheimer & Co

Okay and in regards to the rest of the space that Biogen has in Cambridge are they planning on moving out of any of that space and moving into the Cambridge site?

Ed Linde

Yes, there is a portion of space that they have with us in what is referred to as 4 Cambridge Center and that 's a multi-tenanted building and right now it appears that a portion of that lease which is I think about 100,000 square foot would be vacated towards the end of the 2010.

Mark Biffert – Oppenheimer & Co

Okay and then lastly related to the impairments that you took can you provide a little bit of color on why the GM building in terms of you know where rents would have to go in the GM building for you to have to record an impairment on that?

Ed Linde

You know I'll be honest with you we didn’t do that analysis that way. We didn’t look and see where rents would drop to. What we did is we said here is where we think rents are in our best estimation, here's what we think terminal cap rates, here's what we think the right discount rates and we threw all that stuff into the sausage maker and we came up with our evaluation.

And the valuation was well in excess of what our book value is for GM and we stocked it.

Mark Biffert – Oppenheimer & Co

Okay, thanks.


Thank you. Our next question comes from the line of Lou Taylor with Deutsche Bank. Please go ahead.

Louis Taylor – Deutsche Bank Securities

Thanks, good morning, Ed, just along similar lines, maybe Doug or Mike can you just share us some of the assumptions that you used in doing that JV analysis as you know we're trying to determine whether you know you might have another impairment in future quarters.

Whether it's you know terminal value or discount rates but can you give us some comfort that you know this may not – we may not see this charge again maybe for the rest of the year if ever.

Ed Linde

Sure. I will – let me try to put the context to this. We took a rather conservative perspective and the question that we were answering was what would someone pay for an equity interest in this property today? And given that nobody has paid anything for any property today you can obviously recognize the difficulty we had coming up with that.

And so I think fundamentally the decision model calculations that were the most important were what are market rents and I gave you some of our views on what the market rents were. And I would say were – we assumed that rents were not going to be improving anytime soon.

In fact they may be going in the wrong direction in our (inaudible) discounted cash flow model. We assumed that you know unlevered IRR expectations for real estate were hundreds of basis points in excess of where they were a year ago.

And we assumed that cap rates on the terminal side were significantly higher than where people were underwriting them you know six months or a year ago. And we – and so I would hope that the probability of us having to deal with this again on the assets is highly unlikely.

But you know if the things get really, really bad you never know what could happen. But I would say we took an exceedingly conservative perspective when coming up with these valuations so that the question you asked is the right one and one that we hope we do not have to answer again.

Louis Taylor – Deutsche Bank Securities


Ed Linde

Just to also remind you this is just on our JVs and we looked at all of our JVs and all of our other JVs were way, way, way above book value and remember that part of this is you know this is accounting mumbo jumbo. So to the extent that a property was put – in service a number of years ago and it's been depreciated the book value has gone down for GAAP purposes and so the measurement that you're looking at gets wider and wider from what the market value is.

Louis Taylor – Deutsche Bank Securities

Great, thank you.


Thank you, our next question comes from the line of Jordan Sadler with Keybank Capital. Please go ahead.

Jordan Sadler – Keybank Capital

Good morning, just a quick follow-up on the impairment Doug. The – is that from an accounting perspective a write down of the real estate investment – the investment in real estate or is the intangible the FAS41 adjustment also written down?

Doug Linde

I believe it's the equity carry value that is written down.

Jordan Sadler – Keybank Capital

Okay and so it won't affect the amount of the accrual going forward?

Doug Linde


Jordan Sadler – Keybank Captial

Okay so that stays the same.

Doug Linde

Yes, it should have no impact on going forward P&L issues.

Jordan Sadler – Keybank Capital

Okay and then as it relates to the (inaudible) can you give us any color on terms?

Doug Linde

I guess what I can tell you is that you know we are in the process of you know putting a syndicate of things together. And we believe that we have sufficient banks that are telling us that they are interested in the deal to close the transaction.

The majority of those banks have already approved the transaction. There still remains a couple of them that are going through their approval process. But all of them have agreed on you know terms and a term sheet and based upon that we are moving forward through the documentation phase with our lead bank to try to close this loan in the next you know 30 to 60 days.

I really don’t want to quote on specific terms, I mean I can tell you that the construction loan market today you know is generally you know three year terms with a two years extension so they get five years in total.

You know pricing is generally somewhere from 300 to 400 over LIBOR today. You know there is upfront fees of somewhere between you know 75 basis points and 150 basis points maybe, something like that depending on the transaction of the you know the pre-leasing that is involved, the location, and the quality and the quality of the sponsor.

All of those things go into how the banks are assessing you know the pricing involved in these transactions.

Jordan Sadler – Keybank Capital

That's helpful. And then just on the Biogenetic deal can you maybe elaborate on sort of the – what sort of return expectations you would have for a build to suit in this environment?

Doug Linde

Going forward again?

Jordan Sadler – Keybank Capital

When you did that deal you signed that lease I think in November, December.

Doug Linde

Yes, as I said, you know our anticipated cash on cash return is a double digit return. And you know the rent obviously goes up. We've viewed the environment in which we were going to be buying this building as one that would be hospitable to developers and so the opportunities for good things to happen on the cost side to enhance that return were you know significant.

And so you know as I said I am not going to tell you if they're you know how far above you know double digit is but it's going to be a double digit return.

Jordan Sadler – Keybank Capital

Okay and that's on a going in cash basis?

Doug Linde

That's a going in cash basis.

Jordan Sadler – Keybank Capital

And will you lose Biogenetic at all occupancy in Cambridge?

Doug Linde

Yes, just to reiterate what I said the Biogenetic is in three of our buildings. One of the them is a manufacturing building, one of them is a corporate headquarters like building and one of them is just an office and administration building.

And we expect that there is a – we have a lease that is expiring sometime at the end of 2010 for about 100,000 square feet and that's the only lease that we will lose with regards to our occupancy of Biogenetic in Cambridge.

Mortimer Zuckerman

But I think it's fair to say we would have lost that in any event, right? (Inaudible) but they were looking to relocate to "less expensive space."

Bryan Koop

We also – this is Bryan Koop, Regional Manager, we also had the (inaudible) low vacancy in Cambridge at this time. So (inaudible) at this time with their vacancy when it does come.

Jordan Sadler – Keybank Capital

Thank you, that's helpful.


Thank you, our next question comes from the line of Michael Bilerman with Citi, please go ahead.

Michael Bilerman – Citigroup

Mike, good morning. (Inaudible) on the phone with me, as well. I wanted to come back to the dividend question. And it sounds like you're taking it very seriously in terms of any potential reduction and any potential payment of that dividend in stock and it sounds like your preference it to continue to pay that dividend given what you see today, is that correct?

Doug Linde

You know, can I just comment on that? For the longest time as managers of REIT I think we were indoctrinated with the idea that a REIT was impacted dividend paying stock. And that the REIT shareholders liked the idea of a steady increasing flow of dividends.

You know we still think that that notion has not been totally discredited by the fact that capital has been so difficult to access in the REIT field and so or in any field, really. To the extent that we feel it important to free up capital by changing our dividend policy we fully expect that we will – that we would do that.

We just are not at the point today where that seems to be a necessity. And there is nothing you know we're going to do in the short term that's going to prevent us from making that judgment a little bit further down the calendar than now or maybe even when we declare this first quarter dividend.

So that's how we're looking at. I mean we're not – we not suggesting that changing our dividend payout based on a policy (inaudible) is necessary for meeting the REIT regs in terms of the taxable income or paying it out part in stock and part in cash are not viable and valuable tools at our disposable.

It's just a question of not being forced to decide which of those tools we want to use at this particular point in time and also not wanting to sort of give up what we were – what were taught as being important in the REIT field.

Michael Bilerman – Citigroup

Right, and I guess from a magnitude perspective you're paying out almost $400 million of annual dividends, it sounds like $100 million just going down to the minimum payout would be one step and then you would have to decide if you pay it out in stock you would be able to conserve or effectively raise equity for you know 90% of it or $360 million if you didn't cut it.

Doug, I just wanted to go back to one of your comments, you were talking about where you stock price was and effectively your implied cap rate being in the 7.8 to 8.3% range. And that not having much clarity or any clarity or values today. But you made a couple of comments about the public markets overshooting today and also that you're effectively trading at a discount to NAV but just don’t know how wide of a discount.

I am just trying to determine sort of where your mindset is about justifying where your implied cap is versus where you perceive market to be.

Mike LaBelle

Sure, well, I mean, I will give you a couple just sort of data points, the first is that, from our perspective, when we went to market with our building in Washington DC and we ask to brokers community where he thought this thing would trade, they sort of said, well, we think this could trade somewhere in the high sixes low seven on a quote, unquote going in basis, and this is a building, that’s you know basically effectively market rent.

So I said to myself okay so GSA building in Washington DC is a -- I think it was $450 to $500 square foot that was of our cost we traded at a somewhere between high sixes low seven going in return. And I am saying my whole company which has predominance of assets in Manhattan, it’s a predominantly got the low market trend the highest quality CBD assets in a portfolio in the country just trading at a 83 to 77 I don’t know I think that’s the market is overstocked when I hear that the Bertelsmann Building is going to be trading for $400 plus or minus per square foot and its going to be at a 6 type of cap rate with 190,000 square feet of vacancy.

And I think in my portfolio at $370 to $400 square foot I would say, this is kind of feel like I better set of building than the Bertelsmann Building 1540 Broadway and I get better leases and I have got better credits, its kind of feel like the market is over shot. So that sort of where am I guess my predication to saying that I think the private market has not quite caught up with the public market.

Mort Zuckerman

I would say one other thing, in that context it also affects our views as to whether or not we wanted strategic stock at a considerably below value, below NAV in lieu of paying out the cash dividend, its another one of the things that I think is a relevant factor for us to keep in mind.

Michael Bilerman – Citigroup

Right, and just lastly just on the evaluation of the unconsolidated JVs, when you think about your exit cap, and I assume a lot of the value in terms of what you are looking at has to come in your terminal value, you could see market trends going forward in a building. What was sort of the differential between the GM building relative to the other three macro assets that would because one hand at least medical write down on the equity versus none on the GM building?

Mike LaBelle

There was not – there wasn't a number okay, so we did a whole bunch of ranges when we did in the business, you know the terminal cap rates ranges were couple of hundred basis points, and then we sort of look at the various what that sort of whole grouping valuations came out to be.

I think the thing about the GM building, is that the GM building doesn't have any lease roll over through that effectively being on 2020, 2010 period of time and one would hope that between now and 15 years from now market rents will have at least started to recover. And so when you get to the valuations in the terminal cap rates that you have on a building like that, you don’t get hopefully you are not too far off where you would have otherwise been and just recall following which is when, when we bought that property.

We made the comment that if rents didn't move at all, operating expenses continued to grow at 3% a year at that unlevered return on that investment at a terminal cap rate 6 to 6.5% was in the 12 to 14% range and so its hard to put ourselves in a position where we think that there is going to be any requirement to consider that building value is going to down to a point where at a much lower discount rate than 14% or 12% that you would have any type of –

Michael Bilerman – Citigroup

Okay. Thank you.


Thank you our next question comes from the line of Ian Wiseman with Merrill Lynch. Please go ahead.

Ian Wiseman - Merrill Lynch

Yes, good morning, just a follow up question on the West 55th Street development. I think a year ago you said that the returns -- stabilized return was about 8.5%. Clearly the markets change you said its been renegotiate what is an acceptable return hurdle to continue with that project today.

Doug Linde

Let me answer the question in a following way, we have put in starting amount of capital in the building into the land, and we have two choices at this point. We have the choice of postponing the project theoretically, and waiting for a better day or we have the choice of putting incremental capital into the building. And to be honest with you, we are looking at an incremental capital basis. And we are saying to ourselves okay, no ones where we are today how can we do on that incremental capital and return on incremental capital is significantly in excess of 10% at years, it's a significant double digit type return and that’s how we're looking at the return on the asset.

Now, what that implies or the overall return is going to depend on budget things but you can obviously assume that its not an acceptable return vis-à-vis how we're looking at what overall project is but an incremental basis it is an acceptable way of allocating a capital.

Ian Wiseman - Merrill Lynch

So, with assuming the 77% or so the building is technically leased at this point what do you, what are the projections for the return on that development right now.

Unidentified Company Speaker

I don’t think we are going to, we will answer the question in total I think Doug, just answered as far as our incremental capital and for the return is in a very attractive two digit number and the decision that we have to make is, are we better off simply moth balling things and waiting until the market improves are we better off going ahead.

I think you all know us well enough to know that we believe in -- that we believe that we do not make the market. And we believe that, we do what is appropriate at any point in time rather than well, we'll speculate on the future, and so with leasing if leasing goes as we expect, in makes very, very good sense to proceed with the building and we will get very acceptable return on the capital we putting to it.

Ian Wiseman - Merrill Lynch

Does Gibson Dunn have an out or an ability to renegotiate its lease with you guys and say assume sign that the peak?

Mort Zuckerman


Ian Wiseman - Merrill Lynch

Okay. Thank you.


Thank you our next question comes from the line of John Guinee with Stifel. Please go ahead.

John Guinee - Stifel

Hi, thank you. Two questions I think one for Doug and one for a Ray Ritchey. First, Doug in for private owner operators in general they don't have much in the way of dollars or TI leasing commissions. Can you comment on the ability of your TI and leasing commission dollars to come down over the next couple of years. And then the question for Ray, is the college board lease at Reston Town Center I think saw may even want to elaborate on why they choose to move?

Doug Linde

John, on your question on TI. I think two things are going to happen, I think that there are number of landlords who are going to be very undisciplined about their ability to control their nervousness associated with having vacant space. And the first thing they are going to do is offer free rent and a lot of free rent.

And the question is are the tenants that are going to be looking at that space may be comfortable with out of pocket for the capital associated with doing those transactions. And then there are landlords who may just say while we're better off putting 40 to 50 or 60 or 70 or $80 square foot depending upon the market.

In to the space that we think the credit because we know there are no alternatives. And with that sort of set of pressures I think I am not sure I am, we are going to see tenant improvement dollars going down.

On the other hand I think as you said there are going to be a number of landlords who physically are in capable of raising the capital to put into their assets unless they are effectively given ownership over to financial institution, in order to obtain those new dollars.

And I think we will be very well served competing with those type of landlords and we are obviously trying to be as prudent and as thoughtful about existing improvements and doing renewals with tenants and being using the advantages associated with the lack of capital would have to be put into transaction by both parties to keep our rental rates at a modest increase relative to where we might have otherwise have thought, what we would get and to therefore reduce our TI's.

But if you say to me, in 2010 if you look at average TI's across the marketplace will they be higher or lower then they are today, I am afraid that I have to tell you that I think they are going to be higher.

History is any guide, our ability to prudently but our ability to do tenant improvement cost for tenants. Have enabled us to do deals rather than to be very competitive and in fact to win deals that other landlords couldn't win, because they had inability to that.

So another way of answering the question is TI's historically didn't come down in a market like this, but our ability to keep our buildings at a lower vacancy rate is really where we are well served by having a capital that we have at our disposal.

Peter, do you want to comment on them, remarks you have?

John Guinee - Stifel

Yeah. Go ahead, Peter?

Peter Johnston

Well, I was just going to say, I think there were probably three principle reasons. One was that the college board by the time that lease was going to roll and they are going to move in to our building that’s third generations place that building will be 20 year’s old.

The principle reason I think had to do with the efficiency to layout as well. And at a time they were looking that deal was done probably 18 months ago. Their existing landlords probably taking a more aggressively approach. And the other would be the image and visibility they were going to get in the new buildings.

Ed Linde

I would just add also they weren't the original tenants in Reston Town Center, 15, 20 years ago when they went out and looked at the market. And in spite of the fact they could get substantially less expensive options outside the Town center.

Not only are they going to continue to occupy space, but they are looking at major expansion including relocations in the Town center from other markets in United State. So it’s just a continued validation of Reston Town Centers' market superiority of other options.

John Guinee - Stifel

Ray any comment on the current landlords' ability to actually write a check to TI’s etcetera?

Ray Ritchey

I best left to the current landlord to make comment on that other than us speculating.

John Guinee - Stifel

Okay, thanks.


Thank you. Our next question comes from the line of Michael Knott with Room Street Advisors. Please go ahead.

Michael Knott – Green Street Advisors

Hey, guys I am just wondering if you can give us your updated thoughts on sort of the future of New York given the drastic reduction and what appears to be the financial sector slice of the domestic economy and sort of the long-term outlook for New York in your portfolio there?

Mort Zuckerman

Well, Mort why don't I respond to that. Look there is no doubt that in the short-term there would be pressure on lot of what used to call the, or still call the shadow banking system. Nevertheless, I think that if you get past this current crisis, I still think that New York is going to be a very strong office market for two reasons.

One is there is very little new space coming on the market, in fact in the next three years or four years in Midtown New York, I am not talking about Downtown New York, because that's a very different market, we are not in downtown, all of our buildings are in Midtown New York. All of our buildings are at the upper end of that market, there is very, very, there really only two buildings, and we are one of them on 8th Avenue coming on the next four years.

And what does that tell you? It tells you that the increments to the new supplier are going to be extraordinarily limited in relation to the entire markets. So one of the advantages of New York is while there will be a contraction, there were always firms that are growing and expanding.

This isn't probably going to be case in the year 2009, but I suspect once some of the federal programs become liable within the next 12 months you’ll see again some modest growth starting in 2010.

The other thing is the best part of Manhattan and the reason why it is such a unique market is, because it has for years now attracted the kind of people that a lot of these firms want to hire.

And they are in Manhattan to win Goldman Sachs for example built a building, and on the other side of Hudson River and New Jersey. There was an extraordinary reluctance on a part of the people, a lot of the people may want to move there. They still want to stay in Manhattan and they want to live in Manhattan.

And they are kind of that these firms are going to want to attract over the long-term, still come to Manhattan, because Manhattan recognizes talent, nourishes talent, just rewards talent, celebrates talent and therefore attract talent.

And these is something which I didn’t just say this morning, I gave a speech at after 9/11 and President Clinton and I were the two speakers. He basically, his message was to get that $20 billion or $20 million to whatever it was, out of the federal government get the that was his move.

And I said this is not just a city about real estate. This city is primarily about people who are very talented who want to come here and live here. And the companies that really need to use high level brain power for their success.

Therefore almost have to locate here, that is not going to change. This is still the most extraordinarily attractive city, Manhattan is. And therefore I am very bullish about the longer-term opportunities in New York in particularly for the best buildings in New York.

Michael Knott – Green Street Advisors

So Mort it sounds like you don't describe any probability to sort of the paralysis causing the city to return to the state of the seventies?

Mort Zuckerman

No, I don’t think that will happen. Don't get me wrong. I think there is going to be short-term pressures on the city, but there is literally, virtually no growth in the city's office space for three or four years. And so you do have to operate within that context. I do think there is going to be great pressure in the short-term.

And this is what we are trying to contemplate in relation to the rents we are expecting. We happen to have fairly low level of turnout over that phase and as I said. And as we have said many times, our experience has been that the buildings at the higher end of a quality of spectrum of quality always generally tend to do better in challenging times. People like to move in to them.

And frankly when you, we had the experience with Heller Ehrman space. You have to understand that a lot of these leases are six, seven, eight years old and they are therefore at much lower rents than what we can get even in today’s market.

Secondly, a lot of tenants particularly the high quality financial tenants have spent an enormous amount of money fixing up their space. So when they leave their space they leave that fix up. If that’s, if they do leave the space, but it’s a great incentive for them to remain in that space, because otherwise they’ll have to put in a $150 a foot in tenant improvement improvements in any new space they go to.

And they need to have this kind of attractive environment for the kind of people that they are going to be employing. So there is no doubt that we are going to go through a very difficult time in the next couple of years. And if any of have heard me speak on this subject, I have been pessimistic a lot earlier than most people and I am still more pessimist than most people.

But I do still think that Manhattan, and I’ve said this many times. I think the long-term viability of Manhattan I think it's still going to be the best office market in New York, in the United States.

Michael Knott - Green Street Advisors

Okay, and then my last question is regards to Russia Wharf. Can you just comment on how the change to reduce the size of the residential component affects the strategy there, and also on the return profile?

Mort Zuckerman

Right well I guess, let me answer the question in a couple of ways. Our view is that the office space that is going to be assuming we complete all of our permits to be replacing the residential and what is referred as the tough Graphic Arts building will be high-quality relatively an efficiently bright space, because of its location in the base at the building.

And also happen to have terrific views on the water. And we believe that, that is going to be high quality well thought about and well, very marketable space. For us the issue was more a question of the type of residential property that was going to need to be built on that space and whether or not we would be able to effectively market those units either to ourselves and if we can provide ourselves and we were going to end up only at work through a development partner.

And having talked to a bunch of potential development partners in the marketplace, I think there was a concern not about the location, not about the number of units but just about the styles of the floors and the shape of the units and the inefficiency associated with the space that we would have to devote to potential atriums and things like that that made it less attractive quite frankly to our residential owner operators.

There will still be in the residential component, but it's going to be in the Russia building to 90,000 with the building and it sits on the Greenway and it’s an eight story building and it's going to have terrific -- high ceilings and going to have terrific exposure on this new Greenway that's been created and it is a relatively small number of units, so there will be more of a scarcity factor associated with it.

Net-net, it's going to improve the project. I can't tell you if it's going to improve the project by 25 basis point or a 100 basis points, because I'm not sure we are going to know that until we get to the market and it really is effectively based upon what our assumptions would have been on the residential side, and those assumption were hopefully it going to glad we don’t have to worry about.

Michael Knott - Green Street Advisors

And what are the prospects for leasing the balance of the increased office space?

Mort Zuckerman

The prospects are good. I think Doug hit on the main point, which is we haven't had, we're still finishing up a up a few of the minor permitting so it's really relatively new news to us in terms of our ability to go out and market.

We haven't not taken it to market, we had several inquiries about it because as Doug mentioned you are right on the waterfront and it's very similar to as reference points, for a building further down, a boo teak that is occupied by Goulston and Stuarts as an example.

And then you have the additional component of this right by South Station so the transportation is just really excellent. So, we're really excited about the opportunity to take it to market, but we haven't formulated our marketing pitch etcetera, but we've had several inquiries.


Thank you. Our next question comes from the line of Jamie Feldman with UBS. Please go ahead.

Jamie Feldman - UBS

Thank you very much. Doug or Mike, can you just walk us through what you think occupancy would be if you included space that's leased but not occupied?

Doug Linde

You are asking what's the shadow vacancy in our portfolio?

Jamie Feldman - UBS


Doug Linde

I am going to be honest with you Jamie, what we have done today is we have spent a lot of time walking through our private law firm tenant spaces and to sort of determine the use of that space from a productivity perspective and there have been virtually no situations where we have seen the spacing.

As I said to you before, the trouble with the larger firms is that their space is really transferable so for example, if you were to walk into Citigroup Center and you were to walk on to the 16 floor, as an example, you with see lots of people on that floor.

But given the choice of getting out of 150,000 square feet place of Citigroup Center and reducing their rent, which is $65 a square foot, and being able to move those people to Long Island city where they are paying $45 per square foot. They do that in a minute, and so there is probably more shadow space in our portfolio that we know, but it's also at least for long-term to credit clients hopefully.

At rents that are significantly below we think we can release that space. And so I just can't give a number within our portfolio whether or not if our vacancy is [7.5% 3:31], the vacancy is really 6.9% or 7.3% based upon that "vacant space".

And there is very little space in our portfolio where we don’t know tenant is actually leaving as an example. Michael talked about (inaudible), which is the tenant that's going to be leaving from 200 West Street. It's moving into a building across the street we've leased him already and they are moving some people to a lower cost of space to the north, and we know that is 150,000 square feet that will be vacant in August 2009. Mike's comment that we are going to see our vacancy go down to or increase to call it 91%, 91.5% over the years, we see those sorts of things happening.

Jamie Feldman - UBS


Mort Zuckerman

I think there is very little in a way of space, purely vacant and lease by somebody, because we talked to our regional people consistently and whenever there are situations where that occurs of the red flag raised up and we have start to analysis on the quality of that company and whether there going to be a continue to pay their rent.

And the instances where those cases have risen have been typically very small space and I can't put the exact square footage but it's now like it something in hundreds and thousands of square feet. It's moderate amount here and there in the portfolio.

Jamie Feldman - UBS

And do you know the amount of square feet there actually on the market for sublease? Is that a better way to ask it?

Mort Zuckerman

In our portfolio?

Jamie Feldman - UBS


Doug Linde

I mean, because as I said, you just don't know. I can give you an example, capital source, okay? Is the new tenant that's going into the space in Chevy Chase, and they have probably the entire suite other than one floor on the sublet market.

But if they don’t sublet it, they're going to move into it, and they have a lease expire in some place else, so, its as I said these are intangible decision that are being made based upon the opportunities that might come to them and they desired that reduce the cost of occupancy across their "operating base" and whether or not our space fits into that from an actual feasible use perspective is hard to determine.

Mort Zuckerman

I also picked out on this time around it has been difference in say the 2001, 2002 market where people took not only their space, but took incremental growth thinking that thkey would continue to expand.

I think the tenants has been much more prudent this time around in there space consumption, so that there isn’t a lot of excess space sitting around just marginal space is very hard to sublet anyways.

Jamie Feldman - UBS

Okay, and then just one for the follow-up on that. What's your typical right in blocking the sublease? Or how do you get involved in the negotiations?

Mort Zuckerman

It varies by lease and it varies by market. As an example, I'll give you the most stringent is that there are situations where if a tenant is in a multi-tenant building, then they have no ability to lease to any tenant that's otherwise looking at space in our portfolio in that building.

So if you know someone has 5,000 square feet as an example, on a a sublet market and a tenant comes to market and looks at another suite of ours in that building and the sublet tenant has no ability to lease it. It's prohibit it from their lease.

Okay, that’s where the one extremes. The other extreme is you have a tenant who is in a building that’s a fully leased building and it may compete with other buildings in our marketplace, but if they that whole building they have very liberal sublet rights in terms of their ability depending upon where they are in lease to lease it for an extended period of time.

Jamie Feldman - UBS

Okay. And then another issue, and this maybe a very short to answer. I know you spent a lot of time talking to Foreign Capital Partners for the GM Building. How would you characterize for the mood is for both foreign and domestic opportunistic buyers for real estate today given the evaluation seems to have gone insular?

Mort Zuckerman


Jamie Feldman - UBS

That’s the answer?

Mort Zuckerman

That's my answer.

Jamie Feldman - UBS

All right, fair enough.


Thank you. Our next question comes from the line of Wilkes Graham with FBR. Please go ahead.

Wilkes Graham - Friedman, Billings, Ramsey & Co.

Hey, guys. Doug you want a role a bit before where you see secured coupons in this environment. I think you said 8%. Can you just go over that again and where do you see debt coverage ratios and I know you talked about it, but just go over that again and how sustainable you think those underwriting standards are, given more hopefulness that some of these federal programs will work and do you think we have ever shot on any of those terms. I'll start with that.

Doug Linde

Well, what I said was that we're seeing is that on the best assets, the high quality buildings and Mike sort of described it as bullet proof underwritings, the secured lenders on a long-term basis are taking a perspective that there a few of them and they have the leverage, no pun intended, and so what they are doing is that they are saying we're going to use the 12% or 13% debt constant, and the interest rate is between 7% to 8%, probably closer to 7.25% to 8.5% in terms of where they according things to that least.

You use a 13% constant on a cash flow that sort of size the loan that you're getting the coverage ratio of 175 to two times, which from our perspective is exceedingly conservative. And probably get to you based upon a loan to value perspective, 45 maybe at the high end, maybe 50% depending upon where the building is located.

That’s sort of where the levels are today, which effectively is I assume what they are doing is they are comparing it to what the people refer as super senior AAA CNBS securities. And we've ask the question as many probably people have asked, if we can get AAA super CNBS or 1,100 basis points over, why would you even been thinking about quoting a loan at, 7.5% to 8%. And they say, well, because we can't have a 100% of our real estate assets in AAA CNBS, we have to diversify.

And relative to the other alternative, which are corporate bonds and TARP bonds and other credits spread, we think the risk premium associated with an underwriting like that on a highly quality piece of real estate in the CBD market or suburban market of our choosing, which the building places where you happen to have those efforts is a pretty attractive risk adjusted return hurdle for us to be able to invest our capital for 5, 7, 10, 12 year to fund our insurance.

So overtime and that's sort of (inaudible). The question is with the TARP money whether or not they will be seeing a situation where underwriters will be able to put loans on their books which they will be then be able to effectively put forward to some Fed window effectively that will allow them to underwrite those.

Those are very, very attractive levels from a log-term interest perspective so that we effectually as commercial real estate owners are getting the benefit of now that's the same benefit that Morgan Stanly and Goldman Sachs and JPMorgan are doing with regards to their "FDIC" guaranteed obligation in terms of bringing rates down on a fix rate side.

And if that happens for loans similarly leveraged, we think that will be a very, very significant improvement in the cost of financing, but it looks like it's only going be for new loans starting, not going to be for existing mortgages, so it's going to help in the refinancing side. It’s not going help in terms of the valuation of existing securities.

Mike LaBelle

I might add, if this remains the conditions of the credit markets, the addition of new supply anywhere is going to be dramatically needed for quite a long period of time and at some point when the market turns, it's going to make existing real estate. Shall we say relatively more attractive than it would otherwise be.

Wilkes Graham - Friedman, Billings, Ramsey & Co.

Okay. That’s great and then Ray, just here in D.C., if there are general level of hope out there that these TARP programs are going to work and there is going to be increased regulation and the treasury is going to take part in some of it's recovery and there is going to be increased spending over the Obama administration. Are you guys seeing any tangible evidence of any of that translating over to improving office fundamentals, and if not, what you are expectations?

Ray Ritchey

I think we do. First of all there will be expanded GSA consumption, which really will not affect the trophy market, but they are really good for the secondary markets. Again, we don’t operate in like Crystal City or the ballpark district or Noma. I think where what we've seen in Washington and Canada is that really haven't softened that much, but its more optics.

We’re chasing that after user for our 2010 Penn Building, a very solid stable users, head of modes way of and we approached them as timing is perfect for the delivery of the building and we approached to about coming over to 2010 and he basically said to both, Mort and myself that it's not about coming to building.

In fact we would probably reduce our cost coming 2010, but just the optics of making a move at this point of time of the economic cycle, will not be good his investors, or not be good for his employees or just would not be due to the positive thing go.

Here in Washington at least, while we have had taken a little bit of breath here and having just concluded the Hunt and Williams deal, which kicked off almost 40% pre-lease to 2010 and signed Microsoft up Chevy Chase. We are feeling still fairly good about the market here.

Wilkes Graham - Friedman, Billings, Ramsey & Co.

Okay thanks.


Thank you. And at this time I am sorry, no further questions in the queue. I will like to turn the call back over to management. Please continue.

Mike LaBelle

Okay, we will wrap up there. Thank you for your attention. Sure you will be hearing more news from us overtime, and we’ll be getting back to you, when have important things to say and have a good quarter. Thanks, bye, bye.


Ladies and gentlemen, this thus concludes the Boston Properties fourth quarter 2008 conference call. If you like to listen to a replay today's conference, please dial 303 590 3000 or 800 405 2236 with the access code of 111 24 985 pound. Thank you for your participation and you may now disconnect.

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