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CapLease, Inc. (NYSE:LSE)

Q4 2008 Earnings Call

February 26, 2009 10:00 a.m. ET

Executives

Paul H. McDowell – Chairman of the Board and Chief Executive Officer

Shawn P. Seale – Senior Vice President, CFO

Brad Cohen – VP, Investor Relations

Analysts

Greg Schwartz – Citi

Michael Bilerman – Citi

David Fick – Stifel Nicolaus

Jordan Sadler – Keybanc Capital Markets

Gabe Poggi – FBR

Jeff Donnelly – Wachovia Capital Markets

Anthony Dawson – [Selkirk]

Operator

Good morning, and welcome to the CapLease Incorporated fourth quarter 2008 earnings conference call. As a reminder, this call is being recorded. At this time, all participants have been placed into a listen only mode, and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Brad Cohen. Please go ahead, sir.

Brad Cohen

Thanks very much, Martin. Today I would like to remind everyone that part of our discussion this morning will include guidance and other forward looking statements, and these statements are not guaranteed to future performance, and therefore, undue reliance should not be placed on them. We refer all of you to CapLease's fourth quarter 2008 earnings release and filings with the SEC for a more detailed discussion of important factors that could cause actual results to differ materially from those contained in the company's forward looking statements. The company disclaims any obligation to update its forward looking statement.

Also during the call today, the company will be discussing funds from operation, or FFO, and cash available for distribution, or CAD, which are non-GAAP financial measures. Please view the company's press release for a reconciliation of FFO and CAD to net income, the most directly comparable GAAP measure.

It is now my pleasure to turn the call over to CapLease's Chairman and Chief Executive Officer, Mr. Paul McDowell. Paul?

Paul H. McDowell

Thank you very much, Brad, and good morning, everyone. With me on the call today, as always, is my partner Shawn Seale, who is our Chief Financial Officer.

Today we reported FFO for 2008 of $29.3 million, or $0.64 per share, inclusive of the net impact of non recurring gains and charges. Without the various one-time items incurred during the year, FFO came out to $1.10 per share, which is at the top end of the guidance range we announced in February of last year.

Despite the economic turmoil, CapLease was able to meaningfully improve its balance sheet in 2008, and remains a solidly profitable company on both and FFO and CAD basis. That profitability is supported by a stable portfolio of high quality assets with long term in place cash flows.

Shortly after we spoke in early November on our last call, a terrible credit and economic environment turned catastrophic for the nation's financial system. While our portfolio was, and remains largely unaffected, CapLease was severely impact as the chaos in the financial markets turned our basic interest rate hedge into a significant liability as treasury rates plummeted to historic levels. While we cannot control external market events, we can control how we react to them. And so, rather than speculate on when markets would return to normality, we decided to close out our interest rate hedge, and this generated a significant loss for the company in the quarter.

Although we acted quickly and decisively, preventing the company from suffering even greater potential losses, as shareholders too, none of us are pleased with recording such a large negative impact to earnings.

The fourth quarter also contained a number of other modest unusual one-time charges. These charges aggregated $2.6 million and were largely offset by $2 million in gains we recorded on the buyback of approximately $3.2 million of our convertible notes in late December.

In looking at the year overall, we made solid progress on a number of fronts to lower leverage, improve ongoing liquidity, lengthen maturities, and otherwise further strengthen the balance sheet.

The portfolio remains largely unchanged from a year ago, and continues to perform as expected, generating consistent returns. It has long lease durations that average over eight years, backed by primarily investment grade, transparent, corporate credit.

We raised $20 million of common equity in 2008 at a price approaching $8 per share, and used much of that capital, along with cash from operations, to lower our debt by $64 million, including reducing the outstanding balance on our term facility, by about 20 percent, or close to $44 million.

And, as previously disclosed, we shifted our short-term borrowings to the term facility which may be extended until April of 2011, giving us no significant near-term maturities.

We expect more of the same in 2009 as we remain very focused on enhancing long-term shareholder value, by preserving liquidity, reducing debt, and enhancing balance sheet flexibility. By far the best use of capital at the moment, from both a risk and return standpoint, is in the area of our own liability.

The prudent dividend decision we announced in the fourth quarter of 2008, reducing our expected 2009 cash dividend to $0.20 per share, will allow us to retain approximately $30 million of cash in 2009, which will be applied primarily to continue to reduce level and further strengthen the balance sheet.

In addition, we have identified some assets for potential sale and cash generated from those sales will also be utilized primarily to lower our nearer-term corporate level obligations, consisting of the term facility and our convertible notes to 2012.

Although we have just begun the sales effort in earnest, we have some visibility on sales and expect to have some success over the next quarter or so. The stability of the company during this uncertain period in the commercial real-estate industry is derived from the high credit quality of our in place finance portfolio.

During the period we were growing the portfolio, after our 2004 IPO, we consistently heard the call that we were not growing fast enough, and that quicker growth could come by sacrificing credit and underwriting quality. We resisted those calls and continued the very conservative investment philosophy we have had in place since the company was founded over 14 years ago.

And while we never forecasted the severity of the current market downturn in our business plan, our portfolio was prepared for it, and we are very, very glad, we remained true to our roots in the investment grade sector.

Credit quality matters now more than ever, and our focus on well located high quality properties with long-term leases to tenants like the United States government, Nestle Holdings, and TJX Companies, our three largest tenants by investment value, provide us with a stable and predictable source of revenue, earnings, and cash flow, that will see this company through to the other side of the credit crisis.

We believe that our earnings and credit risk transparency are excellent given our tenant based and long-dated leases. While we are not growing the portfolio at the moment, our team is fully deployed in asset and liability management, and we are working very hard to maximize the value of our in-place portfolio.

In connection with that effort, we were able to negotiate 10 new end-renewal leases totalling 370,000 square feet in 2008.

Looking beyond the balance sheet, we continue to work with a variety of market participants on a range of strategic possibilities. We have a powerful market franchise at CapLease and we continue to remain in very close contact with key market participants as we constantly work to maintain our leadership presence in the net lease sector.

Before I turn the call over to Shawn, I would like to provide a brief update on our property in Johnston, Rhode Island, leased to the large insurance FM Global. As a reminder, this property's investment represents about 5% of our current portfolio on a revenue basis.

As we have disclosed previously our tenant FM Global is building a new corporate headquarters, and has elected not to renew their existing lease in our building, which expires this summer. At this point, we do not yet know whether FM Global will have their new building completed in time for them to move out of our facility as scheduled.

To the extent they need to, we have indicated to FM Global that we will work with them on negotiating a holdover in our building. Also, in connection with their move out, there will be a number of end-of-lease term maintenance and compliance issues, that will need to be worked out before we accept possession of the property, back from the tenant.

We have open discussions with FM Global and those talks are continuing in a constructive manner. I am personally involved in those discussions.

Finally, our architect and engineers have examined the building as part of our efforts to address end of lease obligations, as well as to re-tenant and/or possibly sell the building at the conclusion of FM Global's occupancy.

Obviously, we would prefer that the leasing markets were better and that we could announce that we have a new tenant already lined up. We don't. Since FM Global pays rent in arrears, we will receive a full year's rent on a cash basis in 2009. We believe that this asset has several attractive features, and we continue to believe there remain a range of possible outcomes in this matter, including a possible holdover in the building by FM Global.

Like everyone, we don't like the economic calamity that the country finds itself in. As managers, we recognize the fundamental shifts taking place in our industry, and we are responsible, and as always, we will be accountable for the decisions we make, as we try to anticipate these shifts and to take appropriate action.

We don't know, and cannot predict better than anyone else, how long and how deep the economic downturn will be, but we are managing the firm as if it will be a protracted one. Obviously, commercial real estate is under stress at the moment and we are glad that we are not investors in assets with short-term leases and inferior credit quality tenants.

To the extent we are happy about anything, we are happy to be invested in our sector of the commercial real estate world. Our tenants are strong and likely to remain so. Our rent cash flows are fixed for the long term, and generally at market. Our properties are in geographic locations where rents remained reasonable throughout the recent real-estate boom, and our underwriting never depended on rising rent or occupancy assumptions.

The financing structure we have to support that portfolio is fixed, stable, amortizing, and largely non recourse.

I will now turn the call over to Shawn. Shawn?

Shawn P. Seale

Thank you, Paul. Today we reported FFO for 2008 of 29.3 million or $0.64 per share. Our FFO included 21.2 million or $0.46 per share of net charges, both cash and non cash. Backing out various one-time charges we incurred during the year, FFO comes out to $1.10 per share. The net loss to common shareholders for 2008 was 24.6 million or $0.54 per share.

Total revenues for 2008 were a record 185.1 million, an increase of 7% over 2007. For 2008 fourth quarter, we reported FFO of -6.1 million, or -$0.13 per share. Our FFO included an 18.7 million, or about $0.39 per share of net charges, both cash and non cash.

The net loss to common shareholders for the fourth quarter of 2008 was 19.5 million or $0.41. Total revenues for the quarter were 46.2 million. As of today, we have approximately 18 million of cash and cash equivalents. Undepreciated book value stands at $8.93 per share.

At quarter end, our overall portfolio had 2.1 billion in investment assets, about 79% of which are owned properties. Our diverse own property portfolio includes 63 properties across 26 states, leased to 34 different tenants and exceeds 10 million square feet.

The weighted average underlying Standard & Poor's tenant credit rating on our entire portfolio is single A-, and on our own properties is single A. Our top ten tenant exposures aggregating about 50% of the total portfolio are all rated investment grade with an average credit rating of single A+. Our occupancy stands at a steady 99%.

From a balance sheet standpoint, we are also in good shape. 86% of our portfolio is financed with amortizing long-term secured fixed-rate non callable test, and we have no near-term refinance risk. During 2009, we have only routine principle amortization on our debt, which is covered by the company's operating cash flows. It is also important to remember that most of our financing is on an asset by asset basis without recourse to the reed (ph).

Our bank term-loan facility is the only floating rate debt we have, and that's priced at between 200 to 250 basis points over 30 day LIBOR and has a maximum allowable balance of 250 million. The facility can be extended from the spring of 2010 for an additional 12 months until 2011, if we meet certain conditions, including reducing the balance to 135 million by the maturity date in 2010.

The amount outstanding on the facility on December 31 was 189.3 million, which is down about 20% from 232.8 million outstanding at December 31, 2007.

Assuming only routine amortization and other scheduled pay downs, we expect the outstanding balance to decline further to roughly 165 million by the end of the year. We are assuming that we'll need to have the balance to 135 million to receive an extension and we expect to be able to do so.

The biggest financial impact on the quarter was a previously disclosed significant loss we incurred in unwinding our single swap position that we had in place as a hedge against the future debt issuance. As we've discussed in the past, our hedge activity has intended to manage our interest rate exposure on long-term debt we expect to issue on the assets currently financed on the term-loan facility.

The swap we used as a hedge was of the type we've used for many years, like other reeds, and was not an exotic derivative in any way.

In late November, as credit markets entered a period of unprecedented turmoil, we recognize that our swap position was not acting as an effective hedge, and we made the financially painful, but necessary, decision to remove it. The one-time cost of closing out the hedge was 18.1 million, and was disclosed and recorded in the fourth quarter. We currently have no open swap positions, and therefore the potential volatility to our earnings, in cash, from carrying such a position has been removed.

With respect to our generally very seasoned securities portfolio, except for a modest non cash write down of $1 million on one junior class of bonds, largely as a result of the Circuit City liquidation, we continue to believe that the value declines we have seen on the portfolio, due to changes in market credit spreads, are temporary, as both the collateral continues to perform well and we intend to hold the assets for a sufficient time to allow for a full recovery in value.

We have a robust valuation methodology at the collateral level, which takes into consideration such factors as underlying loan amortizations, real-estate values, and tenant-credit quality.

Other charges to the quarter were a $1.1 million write down of our investment in a startup asset management company that has struggled to gain traction in this environment. We've also instituted a general reserve against the loan portfolio with a balance of 500,000.

Offsetting these charges was roughly $2 million in gains we took in the fourth quarter, relating to repurchases of our convertible notes. Our convertible notes present a particular value for dollars deployed, as evidenced by the 8.7 million of face amount of notes we repurchased for 3.3 million in cash at the end of the fourth quarter and beginning of the first quarter. The remaining gain from that note purchase will be posted in the first quarter.

CapLease's purchase price represents an average discount of 62.6% of the face amount of the notes, and a yield to maturity in excess of 40%. We expect to continue to opportunistically repurchase our debt during 2009.

On the dividend, the decision we made at the end of the fourth quarter was driven primarily by current economic conditions. We recognize that many investors invest in reeds for dividend return, but we would be failing our duties as steward for our stockholders, by not retaining cash in these uncertain times. The cash we would otherwise pay in the form of dividends can be used accretively to pay down debt and raise book value.

While our dividend policy will be set by the board based on current and expected economic conditions and their relationship to our financing needs, at this point we expect to pay a $0.20 per share cash dividend in 2009, which has a payout ratio of about 21% as against our expected 2009 FFO at the midpoint of our guidance.

We also expect the dividend will be paid quarterly. Now let me discuss our guidance. For the full year 2009, we estimate FFO to be in the range of $0.91 to $0.96 per share, and earnings per share to be in the range of -$0.16 to -$0.11. We estimate CAD will be in the range of $0.96 to $1.01 per share.

Our annual guidance includes the impact of the newly required accounting treatment for the interest expense associated with our convertible debt, which is expected to add approximately 1.2 million or $0.02 per share in non-cash interest expense to 2009.

Our annual guidance reflects no expected asset investment or disposition activity for 2009, but does include the assumption that FM Global does not hold over, but vacates in July, at the end of their lease. Annual guidance also excludes any gains or losses associated with the early extinguishment of debt, other than the convertible debt we retired in early January, and any gains or losses from the sale of any of our assets or other one-time non-recurring items.

Our annual guidance also includes a variety of other assumptions discussed in today's press release.

Finally, a word on our G&A expense. Given that we're running with a largely static portfolio, expense control is even more important than it is during periods of rapid growth. We've always focused hard on expenses, and we run CapLease very leanly from both an absolute number of employees and from an expense control standpoint.

For example, we believe CapLease is one of the most efficient reeds when measured on an FFO per employee basis. Looking at it from the revenue side, G&A, inclusive of stock-based compensation, was approximately 7.4% of revenue, which we believe compares favorably to some of our peers who are in double digits.

We expect that cash G&A will decline by roughly 8% in 2009 and we are examining our expenses line by line. Further, we reduced headcount in 2008 by two people to 20 overall, which is two less than we had at our initial public offering.

I'll now turn the call back over to Paul for some final comments, before we open it up to questions.

Paul H. McDowell

Thanks, Shawn. 2008 was a solid year for CapLease. As we made good progress on managing the balance sheet and lowering leverage on our recourse obligations and we expect 2009 to be no different.

Our portfolio of high credit quality, non-cancellable lease properties, continues to produce positive cash flow, and our results ex charges were at the top end of our guidance, expectations, and the budget that we set early in 2008.

We do not know when the market will begin to improve. And while we do not know when we will be able to start to grow again, we do know what to do in the meantime. We will continue to focus inward on protecting and enhancing shareholder value through continued balance sheet improvement, further debt reduction, asset sales, and intensive asset management activities around the existing portfolio.

We will focus outward by constantly being in the market, speaking with a wide variety of participants and examining strategic and other opportunities that may arise.

The team at CapLease remains committed to the enterprise and I firmly believe that this is the strongest asset we have both today and when conditions inevitably improve. While we are pretty pessimistic about the economy in the near term, we remain optimistic in the longer term and believe CapLease has the assets, business strategy and expertise to be a long-term performer. I will now open it up to questions. Operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you very much, sir. (Operator Instructions) And we will pause for a moment while we assemble the queue. Our first question comes from Michael Bilerman with Citi. Please, go ahead.

Greg Schwartz Citi

Good morning. It's Greg Schwartz here with Michael. Paul, you said you had some more assets on the market and with some visibility into those sales. Could you provide a bit more detail, please?

Paul H. McDowell

Yes, I mean I can provide some detail. We've got about $50 million or so of loans that we could potentially sell in the market and we also have about $250 million of property that we could sell. The primary criteria we're looking at is not only do the properties have in place assumable debt which makes them attractive in the market place, but that the properties we are looking to sell will have some component of their debt financed on the term facility with Wachovia-Wells Fargo, so by selling that property we would help to pay down that debt. We've gotten some traction on the sale of both loans and properties, but beyond that I don't want to comment at the moment, but we have some visibility and we're making some progress.

Greg Schwartz Citi

Is the Lowe's assets in California still on the market?

Paul H. McDowell

It is indeed.

Michael Bilerman – Citi

Does that include the Rhode Island asset in terms of your 250 million or that is—

Paul H. McDowell

It does not.

Michael Bilerman – Citi

That would be something separate?

Paul H. McDowell

Yes.

Greg Schwartz Citi

And what sort of debt is on the 250 in terms of the amount?

Paul H. McDowell

Yes. I don't have that right in front of me. I have to give you that offline.

Greg Schwartz Citi

Well, for the loans and for the property, you are expecting some level of proceeds (ph). Do you have some expectation there that you could share?

Paul H. McDowell

I don't that I want to share at this moment.

Greg Schwartz Citi

And then just on FM Global, it's obviously a very fluid situation, you said that guidance assumes that they vacate—

Paul H. McDowell

Yes.

Greg Schwartz Citi

—in the summer?

Paul H. McDowell

Yes.

Greg Schwartz Citi

I'm assuming that you're assuming that the building remains vacant at the same time?

Paul H. McDowell

That's right, we've taken a conservative approach. So we assume they move out on time and that the building is vacant and that we will begin to bear the expense associated with maintaining an empty building.

Michael Bilerman – Citi

Is there any additional cost that you would have when the lease ends that we should be mindful of in guidance?

Paul H. McDowell

No, we have included within the guidance our expected cost of maintaining an empty building. We have not included in guidance any proceeds we may receive from FM Global either from holdover or associated with end of lease term obligations.

Michael Bilerman – Citi

Now, is there any other CapEx that you would need to put in the building or I guess you would only put that in if you were able to lease it out?

Paul H. McDowell

That's right. We would put in CapEx as we come to the conclusion that we'd lease out the building to the extent that there are deferred maintenance items at the property or CapEx that FM Global was supposed to have paid for. We will insist that they pay for it and return the property to us as required under the lease.

Michael Bilerman – Citi

And did you spell out exactly— I mean we know the revenue drop is, but what is sort of your ongoing expense for managing the vacant building? We know the revenues go away, but I'm just wondering what the expense load is on—

Paul H. McDowell

Yes, it's probably more than $1 million per year, but we won't see much impact of that in 2009. That impact would arrive in 2010 assuming the building remains vacant throughout 2010.

Greg Schwartz Citi

And then just one more, Shawn, could you perhaps provide with more insight into the investment loss that you had?

Shawn Seale

Sure, I mean we've looked at, as we do every quarter, the securities that we have and primarily because of the Circuit City liquidation, we have a first loss bond where we think that the exposure there due to what we think again as pretty conservative assumptions on recovery and so on from the real estate led us to record a $1 million charge against that security. So that's the only security that we felt was exposed from a kind of economic standpoint to Circuit City liquidation. We do have other exposures in two other securities, but those securities have pretty good subordination underneath them and we think that the subordination is adequate to absorb the expected losses that will be incurred by the underlying trust with respect to Circuit City. We will have very full sum (ph) disclosure in our 10K around this including loan by loan, kind of loan balances that are in the underlying trust as well their respective subordination levels and so on. So I'd encourage you to look at that and we expect to file the 10K early next week.

Greg Schwartz Citi

Okay, great. Thank you.

Operator

And we take our next question from David Fick with Stifel Nicolaus. Please, go ahead.

David Fick – Stifel Nicolaus

Good morning. Paul, I know you're hesitant. You've been hesitant to predict anything other than negative forward economic view, but isn't there just tremendous opportunity out there in terms of opportunistic (ph) investment today and at some point, you have to have a business plan. It's now been probably five or six quarters since you had a real business plan other than playing defense. What is your vision?

Paul H. McDowell

That's a good question, David. At the moment like much of the economy, you sort of feel like you're in a submarine under death charge (ph) attack, so while that's occurring, it's a little hard to sort of execute on forward-going business model. We've been in business since 1994 and the business plan has sort of largely been the same, although it's changed from time to time as market conditions have changed. We think that the net lease commercial real estate investment class will remain an attractive investment sector. We have deep expertise and deep penetration in this marketplace and as we come through what we hope will be the other side of this, we will begin to hopefully see a recover in our share price as well as the ability to attract capital to continue on the investment basis (ph) which is building a portfolio of high credit quality investment grade assets. There is tremendous opportunity in the current dislocation of the market on the debt side of the business. That said even though there are such large opportunities there, that opportunity comes with some risk and probably the best opportunity for us is still to play defense and to pay down our converts. And we always sort of think it's better to be a little late to the recovery party than too early. So I think that's as much as I can possibly say at the moment.

David Fick – Stifel Nicolaus

Okay, thanks.

Operator

And our next question comes from Jordan Sadler with Keybanc Capital Markets. Please, go ahead.

Jordan Sadler – Keybanc Capital Markets

Thanks. Good morning. Could you guys walk me through the sources and uses through, let's say, 2010?

Shawn Seale

Jordan, we've included in our reporting, including the press release, the forward-looking FFO and CAD number which hopefully speaks for itself. And then in our 10K, I guess you could look back at the 10Q as well 'cause the numbers really haven't changed.

Jordan Sadler – Keybanc Capital Markets

Here's the numbers that I'm coming up with. I see $269 million of amortization and debt maturities through 2010. And then I see you guys are going to try and extend 135 which is the Wachovia term facility. So net I'm coming up with 134. You said you have $30 million of free cash flow above the dividend. So for two years just extrapolating roughly that 60 million of cash flow leaves you with a $74 million gap. Now you said you had $18 million in cash on hand, call it 20, so you have $54 million gap and I'm just curious is that expected to be funded with asset sales? Is there amortization on the CMBS that we should anticipate or otherwise?

Shawn Seale

Yes, both. I mean we do expect as we just talked about to have some modest asset sales and we think that those will be adequate to pay down at least our term facility with Wachovia, so that we can hopefully renew it with them, but we are going to be dependent to some degree on—if the capital markets don't recover, the cash flow is limited and we will have to continue to sell assets or otherwise raise some form of capital to replace that.

Paul H. McDowell

In 2011 or 2012.

Jordan Sadler – Keybanc Capital Markets

Right.

Paul H. McDowell

I mean the gap I think that we focus on is that natural amortization, natural pay-downs on the Wachovia term facility brings it to about $165 million. So we need to get from 165 to 135 at December 31st to 135 in mid April of 2010.

Jordan Sadler – Keybanc Capital Markets

Is there any nonperforming, either loan investments or CMBS?

Paul H. McDowell

We have no non-performing loan investments of any type.

Jordan Sadler – Keybanc Capital Markets

And the full 2.6 million of investment losses, I know, Shawn, you mentioned 1 million from Circuit City, then you mentioned that general loan loss reserve of 500,000, the fund with that full 500,000 this quarter?

Shawn Seale

It was. Despite the fact that we haven't had any losses on our mortgage loan portfolio historically, it's something we've talked about for a while in terms of instituting a general reserve against that portfolio and we felt that given the kind of severely distressed economic environment we find ourselves in that it was appropriate now to go ahead and do that. We did a loan-by-loan analysis in the portfolio. There's no single loan that gave rise to that loss provision. It was more of a statistical analysis which employed credit-by-credit default assumptions using historical default statistics from S&P and Moody's. And against the $277 million loan portfolio, we've now got a $0.5 million reserve which is modest, but again we thought it was appropriate to go ahead and institute something given the economic climate we're in.

Jordan Sadler – Keybanc Capital Markets

Okay.

Shawn Seale

The rest of the losses recorded during the year were again the loss that we recorded on the (inaudible) investment and we also had some small impairments on two other loans.

Jordan Sadler – Keybanc Capital Markets

Okay. And then you discussed the criteria of the properties that are for sale, what are the criteria of the loans are for sale?

Paul H. McDowell

They are the same.

Jordan Sadler – Keybanc Capital Markets

Okay.

Paul H. McDowell

They are loans that are on the Wachovia term facility.

Jordan Sadler – Keybanc Capital Markets

Okay. Good. And just as it relates to tenant leases and leasing, this is still a little bit of a ways off, but is there any update on Quest's intentions in 2010?

Paul H. McDowell

Yes, that's a good question. We expect that Quest will likely not renew their lease in those properties. We're currently in negotiations with Quest around sort of the end of their lease term. Both of the properties in Omaha have significant numbers of subtenants in place. Some of those have subtenants have leases that extend beyond the Quest lease and others are in active discussions with us about extending their leases beyond the Quest lease. So we're very comfortable with those assets and the likelihood of getting them leased up by the time Quest lease falls away in 2010.

Jordan Sadler – Keybanc Capital Markets

And if you were to handicap it, you think you'll be able to re-lease 75% of it without—

Paul H. McDowell

Oh, it's already 75% subleased.

Jordan Sadler – Keybanc Capital Markets

Okay.

Paul H. McDowell

So I guess maybe I should say the answer is yes and we think we can do significantly better than that.

Jordan Sadler – Keybanc Capital Markets

Okay, great. That's helpful. And then just anybody else in terms of tenants on the watch list?

Paul H. McDowell

Well, I mean we're paying attention to a couple of tenants particularly closely. We're paying close attention to AmeriCredit which owns a building that we own outside of Dallas, Texas. That's the primary one. We do have exposure in the insurance industry, so we watch those tenants although most of them are in very, very strong shape. We also have exposure to Capital One who again also continues to be from a relative perspective in good shape, but with our investment grade tenant base and you can see them in the 10K when it’s filed and you can run through them yourself. I mean they're for the most part very high credit quality tenants that seem to be withstanding the storm quite well.

Jordan Sadler – Keybanc Capital Markets

Thank you.

Operator

And we'll take our next question comes from Gabe Poggi with FBR. Please, go ahead.

Gabe Poggi – FBR

Hey, guys. How are you doing?

Paul H. McDowell

Hey, Gabe.

Shawn Seale

Hey, Gabe.

Gabe Poggi – FBR

Quick question to kind of piggyback on David's question earlier about opportunities and then you guys said there's significant debt opportunities out there, I just wanted to get your guys' thoughts, I don't know if you mentioned this earlier in the call or not, I got in late, but thoughts on CMBS inclusion in the (inaudible) program, just how you guys think about that generally on a bigger scale and the benefits to CRE world.

Paul H. McDowell

Well, I mean I think that it is critical that the federal government starts to support the commercial real estate mortgage industry so that the coming fears about a lot of these debt refinancings as conduit loans start to come due starts to go away. I mean my personal view is that we need an active securitization market for commercial real estate for financing. Now, we have been active in the structure finance business for many years. In fact, our founding was in that sector. And so we would always obviously look to— so we understand it well and we look to opportunity that might present itself from government support in the commercial real estate structure finance so—

Gabe Poggi – FBR

Right.

Paul H. McDowell

—you're right that we will proceed as we always have extremely cautiously.

Gabe Poggi – FBR

Sure, sure.

Paul H. McDowell

And so we're going to take a look at it. We're encouraged that it's been included and we'll just have to see how it plays out.

Gabe Poggi – FBR

Got you. Okay.

Operator

(Operator Instructions) We take our next question from Jeff Donnelly from Wachovia. Please, go ahead.

Jeff Donnelly – Wachovia

Good morning, guys. Just a few questions, you might have addressed this 'cause I got on late, but what's your thinking on paying some component of the reduced dividend in stock versus cash?

Paul H. McDowell

I think for the moment this is again sort of with the caveat that dividend questions are for the board and will be informed of course by current economic conditions, but we think it's important to pay a cash dividend. A lot of investors depend upon cash dividend. It produces sort of a stated yield as against our share price. We lowered our dividend as you might recall by 75%. So we lowered it very significantly and that dividend, that is well covered, but from an FFO and a CAD perspective. So we think that for the moment the best thing for us to do would be to pay that dividend in cash on a quarterly basis beginning with the first quarter and to the extent that the board feels otherwise or some market conditions change radically, I suppose that could change, but that's our current intention.

Jeff Donnelly – Wachovia

Thanks. And I'm not sure this is the best way to think about how to call it build up to your 2009 FFO guidance, but I guess if you start by taking the $0.26 share dividend (ph) in Q4 before charges and you annualize it, call it a $1.04 and that's before the $0.06 or $0.07 gain in January I think from debt extinguishment, that's going to be offset by some loss of income from FM Global, but your guidance is still call them in the low to mid 90s. I guess what gets you there from that delta or is that just not the right way to think about it?

Shawn Seale

Well, a big piece of the difference Jeff is the impact of the FM global rolling off. We get seven months of income from IM (ph) in 2009, so on an annualized basis that's probably $0.20 a share or close to that anyway, so you're essentially losing $0.08 or $0.09 just from that IM alone and we do have some assumptions trying to be somewhat conservative in terms of what happens with foreign interest rates. We also have the impact of non-cash interest expense on the converts that kicks in for 2009 which didn't show up for 2008, that's about 1.2 million (ph), so you're going to call it $0.025 a share. Those are kind of the big components that are driving the number.

Jeff Donnelly – Wachovia

Yes, I think part of it I'm circling on I guess is on the interest side. What specifically is in your guidance for interest expense?

Shawn Seale

Well, the interest expense is largely fixed. The exception is our Wachovia-Wells facility and we've used a forward curve for which is arguably the best assumption there. And then we've tried to build in some increase versus a forward curve to even take— things never go quite perfectly right, so we've made some assumptions if the curve increases even versus what the forward curve says it's going to do.

Jeff Donnelly – Wachovia

Okay, actually my last question ironically is probably about my own firm which I guess speaks to Chinese walls (ph), but I'm just curious, I mean there's been so much turnover across Wall Street, investment banks and banks as they've combined and certainly you've seen personnel turnover, but I think that's been a catalyst and this I've been hearing elsewhere. just all banks are revisiting their relationships, so I know it's ironic I'm asking about my own firm, have you guys had a change in the personnel at Wells-Wachovia who are spending credit to capital use and I guess are they as receptive as they've been in the past? I mean are you finding any challenges here or frankly with other firms?

Paul H. McDowell

Jeff, we're very, very lucky that the team that has been working with us on the term facility and before that, the repo facility that we have with Wachovia remains in place and they are expected to remain in place for the long-term under the new Wells umbrella and we think that team is excellent. They treat us well. They continue to be extremely constructive with us as we continue to speak with them. I was recently down in Charlotte for a new Wells event and we're starting to get to know the Wells people to which our current team reports. So I would say that I am encouraged by the acquisition of Wachovia by Wells. It has strengthened Wachovia and we're nice (ph) that we're pleased that the team we've been working with on a day-to-day basis is still in place. As you know obviously as you might suspect we got other banking relationships. We talk to other banks. We've had other lending relationships over the past several years and we continue to talk to those people as well. Some are the same people and some are new people, but in general with respect to your company we're pleasantly surprised that your team, our team remains in place and Well's willingness to have us as a client.

Jeff Donnelly – Wachovia

Thanks. I wasn't looking for an advertisement, but just one last question, I mean what's your thinking I guess with the FM Global space, I know it's early on and you don’t have control over it necessarily right now, but do you currently contemplate delaying I guess call it capital investment to prep that space for releasing until you've got some demand?

Paul H. McDowell

Yes, I mean I think what we're going to look at, there's a few— there's a bunch of moving parts, Jeff, one is does FM Global need any holdover in the building and if so, how long? We don't know and we're going to be cooperative with them on that. And then we have our engineers, have been in the building, and our architects, they're currently putting together sort of a plan that will show us what we'll need to do if you have a single user, what if you have more than one user. And so we'll have those numbers and start to get that plan in place and then we'll get a feel for where the re-leasing is before we start to invest a significant amount of capital.

Jeff Donnelly – Wachovia

Thanks, guys.

Paul H. McDowell

Thanks.

Operator

And we'll take our next question comes from Jordan Sadler with Keybanc Capital Markets. Please, go ahead.

Jordan Sadler – Keybanc Capital Markets

Hi guys, just a couple of quick follow-ups. Is there any cash left within the CDO and do you guys have ability to utilize that?

Shawn Seale

Yes, we do, it builds every month. And the reinvestment period closes in September, October this coming year. We expect that through the third quarter we'll have another $8 or $8.5 million of reinvestment of CDO.

Jordan Sadler – Keybanc Capital Markets

Okay, is that on top of availability that's in there? Is that the aggregate?

Shawn Seale

Yes, that's the aggregate.

Jordan Sadler – Keybanc Capital Markets

Okay.

Shawn Seale

And we haven't asked that (ph) we've identified that we expect to put in there, so—

Jordan Sadler – Keybanc Capital Markets

Okay. And then—

Shawn Seale

Yes.

Jordan Sadler – Keybanc Capital Markets

Off the line, off the line?

Shawn Seale

Yes. That was the essence currently in the Wachovia facility.

Jordan Sadler – Keybanc Capital Markets

Perfect, okay. That would be dollar for dollar basically the 8 million?

Paul H. McDowell

Yes.

Shawn Seale

Yes, maybe a little higher.

Jordan Sadler – Keybanc Capital Markets

Okay. And then as it relates to just availability of capital, back to the last question was just asked, is there any money available out there and I know this is a tough one, but to maybe assist you guys in repurchasing some of your debts, is there anybody like a Wachovia or an existing relationship out there willing to make a small loan to you guys so that you can go out and be opportunistic?

Paul H. McDowell

Yes, we think we have the cash flow to do it without that, but the answer is yes, we have been approached from time to time with some offers to assist us in that if we need it.

Jordan Sadler – Keybanc Capital Markets

Is that something that you think you'll do this year? Or you'll probably just rely on your own cash flow?

Paul H. McDowell

Well, we'll probably rely on cash flow to do it, unless we have some type of transaction that we can do very quickly might use up a little bit more cash than we want to do and so we react in that fashion with the idea that to the extent that we borrowed money to pay back debt, we'd want to repay that borrowed money quickly from cash flow.

Jordan Sadler – Keybanc Capital Markets

Then I was just looking at the CMBS securities and other securities, you have a maturity this year, I think two of them, they amount in aggregate to a little over $20 million. Can you give us any color on the underlying assets there?

Paul H. McDowell

Sure that is some loans on a New York City office building located on 180 Maiden Lane. Our exposure is at around $200 a square foot, so even with the significant potential declines in New York commercial real estate values, we think that the likelihood is that that loan is money good (ph). The key question will, of course, be does the loan pay off on time or does it extend?

Jordan Sadler – Keybanc Capital Markets

And do you happen to know the status of that building, is it a redevelopment or—

Paul H. McDowell

No, yes, we do know the status. It's 180 Maiden Lane in downtown New York. It is leased on a long-term basis to Goldman Sachs who has subleased the property to AIG, which I guess based on today's news may be the United States government. So the property's got in place a long-term lease with two tenants on the hook, Goldman Sachs and AIG.

Jordan Sadler – Keybanc Capital Markets

And last question was just from— were you guys considering or what’s the expectation in terms of the mark-to-market on the CMBS portfolio? Do you guys have to take a charge there at some point are you thinking or are your auditors okay with sort of—

Shawn Seale

Yes, we don't expect to take a charge except that is things like where we have specific credit problems which showed up in the fourth quarter. But otherwise, the securities are performing, the cash flows are as expected and we have the intent and ability to hold those for the long-term.

Jordan Sadler – Keybanc Capital Markets

Thank you.

Operator

And our next question comes from Anthony Dawson with Selkirk (ph). Please, go ahead.

Anthony Dawson – [Selkirk]

Hi there, guys, I just had a quick question about your tenants basically. In the last few (ph) years have you guys had anybody default or back out early from a lease in any way?

Paul H. McDowell

No, we have not. Most of our leases average eight years in duration and the leases themselves do not permit early termination, so in the own (ph) property portfolio, we've had no tenants either default and we've had no tenants pull out.

Shawn Seale

Right, the only way a tenant is able to terminate early is through a bankruptcy filing.

Anthony Dawson – [Selkirk]

Okay, great, I understand. You haven't had that happen obviously.

Paul H. McDowell

That's right.

Shawn Seale

No.

Anthony Dawson – [Selkirk]

Okay, one other thing I was going to ask about the Wachovia joining with Wells Fargo and how that's affected you, but I think you covered it pretty well unless there's anything left to say.

Paul H. McDowell

No, we think we've covered it well. We're obviously still getting to know Wells Fargo, but we're optimistic.

Anthony Dawson – [Selkirk]

Alright, thanks a lot guys.

Paul H. McDowell

Thank you.

Operator

And our next question comes from Michael Bilerman with Citi. Please, go ahead.

Greg Schwartz Citi

Hi, just a follow-up on the model. What's your straightline range (ph) adjustment expectation for the year?

Shawn Seale

For the coming year? 2009 would be a negative 1.7 million.

Greg Schwartz Citi

And how does that break up quarterly, but I know it swings (ph).

Shawn Seale

Well, it does swing, I don't have each of the quarters in front of me, but the result for the year is pretty (inaudible).

Paul H. McDowell

And we can get you the quarterly offline.

Greg Schwartz Citi

Thanks.

Operator

And at this time there are no further questions. I'd like to turn the call back over to you, Mr. Cohen for any additional remarks.

Paul H. McDowell

This is Paul McDowell. Thank you very much for joining us on the call. We look forward to talking to you again at our next conference call. Thank you.

Operator

And that does conclude today's conference call. Have a wonderful day.

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