Thomas Properties Group Inc. Q4 2008 Earnings Call Transcript

Thomas Properties Group Inc. (TPGI)

Q4 2008 Earnings Call

February 26, 2009; 01:00 pm ET

Executives

Jim Thomas - President & Chief Executive Officer

Diana Laing - Chief Financial Officer

Analysts

David Loeb - Robert W. Baird

Jon Peterson - UBS

Presentation

Operator

Good day ladies and gentlemen and welcome to the Thomas Properties Group, fourth quarter 2008 earnings conference call. My name is Michelle and I will be you coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s conference, Ms. Diana Laing, Chief Financial Officer; please proceed.

Diana Laing

Thanks. Good morning everyone and thanks for joining Jim Thomas and me for our earnings conference call for the fourth quarter of 2008 and the year ended December 31.

Certain statements made by the company during this call that are not historical facts are forward-looking statements. These statements include management’s expectations with respect to future events and trends that may affect the company’s business and results of operations and are subject to risks and uncertainties. Actual results may differ materially from those expected in the forward-looking statements.

Persons participating on this call are advised to review the reports filed by Thomas Properties Group with the Securities and Exchange Commission for additional information regarding some of the factors that may affect the company’s business and results of operations.

Now Jim Thomas will discuss our business environment and initiative.

Jim Thomas

Thank you, Diana and good morning. With respect to our business overview, our operating property fundamentals generally continue to be relatively strong, particularly in downtown Austin, downtown Los Angeles, Houston and Philadelphia. We have high occupancies in most properties, some rent increase and modest lease expirations over the upcoming year. I’ll talk about each of these markets in detail in a moment.

However, the credit crunch and economic meltdown continues to adversely impact our three other businesses, acquisitions and dispositions, development and investment advisory businesses; and I’ll address each of these later.

First our main focus now and our number priority until the global economic picture becomes clear is capital preservation and creation. While we are always careful to consider our cash expenditures, we decided to put in place a contingency plan to reduce the company’s cash expenditures design to take us through year end 2011.

Most importantly, the plan calls for differing elective capital expenditures, reducing development activity and reducing capital required for new investments. This will substantially reduce our cash burn rate. This effort is led by Randy Scott, Executive Vice President and his team, who are carefully reviewing every purpose CapEx expenditures. We will continue however, to aggressively lease our properties which we expect to require TI’s and leasing commissions.

As part of the plan, we trend our overhead structure to personnel reductions, freezing salaries, reducing bonuses and cutting our budget for other overhead line items. Diana, will talk about our expectations for the 2009 overhead. We’ve also decided to cut our dividend by over 80% from $0.26 per annum to $0.05 per annum. Since we’re not a REIT, but a C-Corporation only, we do not have the issues REITs have in cutting dividends, because their required to distribute 90% of their earnings and we’re not required to make any distributions.

With the three periods, within that time period we expect the market will return to somewhat of a normal stage that will allows us to sell assets, we were ready to market or about ready to market when the market collapsed. We have a number of assets that are ready to marketed, in accordance with our Fix and Sell strategy and we will pursue that strategy again as soon as the market permits.

The reason I refer to our plan as a contingent plan is that if the market returns before the three year period, we will return to our normal strategy. Importantly, the plan is based upon the assumption that we will be able to extent all of our maturities during the three year period. In the event we’re unable to extent a significant maturity and not be able to sell assets, we could be forced to raise capital or take other actions.

Debt maturity: let me speak about our debt maturities and Diana will speak about them in more detail later. In general we think we have good handle on our debt maturities for the next three years. We have extension options on all of our 209 maturities with the exception of a 3.9 unsecured loan, which we expect to pay later this year; the supplemental package on pages 19 and 20 show the debt maturities including our extension options.

Our three year contingency plan anticipates, as I said earlier that we will exercise all of our extension options for the properties which we have the extension options and that we will be able to extent debt maturities on the properties were we don’t have extension options. John Sischo’s team is focused on the debt maturities in working closely with our lenders to exercise our extension options and/or to obtain new or additional renewal options.

Incidentally, Sischo’s team led our TPG/CalSTRS joint venture in buying a piece of our Brookhollow debt recently and is in negotiations to buy another piece of our debt. Fortunately, most of our debt is non-recourse both at the property level and at the company level. The only recourse debt of our company is the $3.9 million loan on El Segundo that I referred to, which we intend to be paying off. Also we have the Wells Fargo construction loans on El Segundo in four points.

Importantly none of our debt has crossed default provisions, expect three of these suburban Austin properties are secured by the term loan made by Lehman, and that loan is also secured by an equity pledge on the other seven Austin buildings, which I will cover later when I complete the Lehman update and there is a $44 million first mortgage loan that is secured by both Oak and Walnut Hill and a second that partially encumbers the same to parcel. The fourth falls loan is also partially crossed to the Oak and Walnut Hill properties.

I’m going to move now to our existing office properties. Our overall occupancy rate decreased from 86.7% at the end of the third quarter to 85.3% at the end of the fourth quarter. Of our 25 properties, 11 increased occupancies, seven remain unchanged and seven decreased. The details are on page 15 of our supplemental package.

First I’m going to talk about Houston, where our portfolio continues to out performed the underwriting for the purchase over year ago. In the CBD year ended 2008, the market vacancy was 13.6, while our portfolio finished the year at 10.8%, outperforming the market by almost three percentage points. In downtown, the market had positive absorption of 232,000 feet, which represents the highest level of absorption in the CBD in the past 10 years.

In our portfolio, we leased a record amount of space in 2008, finishing the year with 242,000 square feet of gross leasing and $33,000 of net absorption. Since our acquisition in June of 2007, we’ve leased about 440,000 square feet.

Rental rates in the CBD, ended the year averaging $23.42 Triple Net, while our average rate was $25.20. In addition, we captured the highest rental rate ever achieved in the Austin CBD history, when we completed two leases that exceeded $30 Triple Net in Frost where these over the term will average $34.50 Triple Net.

In the fourth quarter, we did see leasing activities begin to slow despite a vacancy decline from 14.2% to 13.6%, but rates in the fourth quarter were flat staying at the $23.42 numbers that I mentioned before. Concessions were mainly in the form of free rent, two to three months with tenant improvement allowances remaining unchanged.

The CBD is yet to be overwhelmed by subleased space. While it is increasing in the CBD, it’s not reached a level that would create concern. The most recent sublease offering to hit the market was Google’s 25,000 feet that was in a Class B building.

As I talked about Frost Bank Tower a moment ago, we finished the fourth quarter at 89% lease, up from 84.7% at the beginning of the year. We lease 444s in 2008, including two in the fourth quarter. The two fourth quarter deals were with the international law firm of King & Spalding, were about 18,000 feet and Premier Global at about 17,000 feet; Both of these leases that I spoke of earlier that set records for foisted.

At 300 West 6^th Street, our occupancy increase to 89% in 2008, up from 85%. We didn’t sign any new lease in the fourth quarter, but we continue to have good activity. We’re currently closing $28 Triple Net with $1 annual bumps and we have no significant roll overs either in Frost Tower or West 6^th Street in 2009.

One American Center occupancy increased to 85% from 80% a year ago. We completed the small expansion, but activity was steady in the fourth quarter and we have a pipeline featuring several promising transaction, including a replacement for WaMu who will be vacating at the end of the first quarter. Asking rents in this project are $24; Triple Net was $1 annual increases. At One Commerce Plaza, we completed 47,000 fleet of lease during 2008 and finished the year at about a little over 89% of lease.

Fourth quarter activity was slow, but in-part due to the limited amount of space that was available. Our asking rents are $25 Triple Net, with $1 annual increases. The only significant roll over is in January of 2010. Wells Fargo currently release 53,000 feet, but they’ve exercised their renewal option and we anticipate completing a long term lease that would includes as much as 15,000 feet of expansion.

In San Jacinto Center, we finished the year at 99%, up 700 basis points from the beginning of 2008 and we completed about 32,000 feet of leasing in the fourth quarter, during the year. Activity trailed off in the fourth quarter because there was a space available. We’re closing $25 Triple Net with $1 annual bumps and we will be getting 40,000 feet of space back in the third quarter of 2009 as Charles Schwab Affiliate moves from this project to our research part in the Northwest suburbs.

In the Northwest suburbs of Austin, overall occupancy was about 78% down from 82% at the under the third quarter. The increase is due primarily to new spec office space coming onto the market and in addition we had about 1.4 million feet of new product and we had sublease space coming onto market. There was negative absorption of about 218,000 feet. Our portfolio is currently 83% occupied and we did about 317,000 feet of gross leasing in 2008.

Asking rates in the fourth quarter fell by 3% to 5% and are averaging about $17 in quarter Triple Net in the Class A market. In our portfolio, our average rental rates are $18.44. In the overall market concessions have increased more mainly in the form of abatement and we’ve seen rent concessions of 12 months to 18 months offered by new spec office buildings that are 100% vacant.

Activity was slow in the fourth quarter as tenants are taking a wait-and-see attitude. We’re seeing an increase for shorter term renewals, tenants that are currently in the North West market, with leases about to expire or shopping, but at the end of the day are mostly renewing at their existing location.

With respect to out Stonebridge Plaza II, we’re currently 99% leased. Recent deal was the renewal of the Alamo Title of 13,000 feet and a 5,000 foot expansion renewal. These deals were at $20 Triple Net, with $0.50 annual bump and nominal tenant improvements of about nine bucks per share. We’re holing firm at our rates to $21 Triple Net, since we only have one small suite available and we have no significant rollovers in 2009.

Research Park Plaza we’re 100% leased since the second quarter of 2008. When we completed the Charles Schwab for 165,000 feet, we do have two tenants expiring in 2009 and we’re in the midst of renewal discussions with both of the tenant and we think that we have a good chance of renewing at least the larger one. We have asking rates here of 18 Triple Net with $0.50 increases.

At our Park Center, property was 88% leased and quoting $18 Triple Net with $0.50 annual increases and we have expiration of about a 30,000 feet tenant. At Great Hills Plaza, we have current occupancy of 74%, but we’ve completed a major renewal in the fourth quarter for a rate of $17 Triple Net with $0.50 bumps and we are quoting $17 Triple Net with $0.50 bumps for the additional stake.

Westech 360 is currently occupied at 55% and represents one of our largest leasing challenges. We’ve completed several renewals in the fourth quarter in the first part of 2009 and we are quoting $18 Triple Net with $0.50 annual increases. While I’m talking about Austin, I should talk about the Lehman situation.

As I’ve reported at our last earnings call, the Lehman credit agreement included both the $192.5 million term loan and an additional $100 million revolving line of credit. The term loan encumbers the 10 Austin properties as I’ve mentioned above. Great Hill Plaza Park 22 and Westech 360 are encumbered directly by one mortgage securing the term loan and the equity in the other seven buildings are secured by the same term loan.

Shortly before, Lehman Commercial Credit filed for bankruptcy, we demanded the full $100 million under the revolving line, which was our right to do so. When that money was not funded, we filed a motion in the bankruptcy court, seeking an order to have Lehman either perform under the revolver or to commit the partnership to obtain a new loan to replace the revolver, which would have priority over the $192 million term loan. The motion has not yet been heard by the court, but is currently scheduled for March 11, 2009.

During January the Austin partnership paid about $19 million of property tax, including about $6 million from a reserve account that was released by Lehman. In January the Austin partnership also started offsetting the interest on the term loan, as a result of Lehman’s failure to fund the $100 million revolving loan, saving about $800,000 a month.

TPG believes that Austin is a good market to be in and that the dominant position of the Austin partnership in downtown is very valuable. We are cautiously optimistic that we will reach a deal that will meet the capital needs of the Austin partnership for the next three years.

In Houston, we previously reported that our rents have basically doubled since our acquisition. We are in three sub markets and the absorption rate has been positive in all three markets. Three of the four Houston properties are basically fully leased and the other is about 87% leased, not including Brookhollow Central I, which we intent to do major capital improvements.

More broadly, the Houston Market remains competitively strong on the basis of supply-demand fundamentals, although we are seeing softening tenant demand due to general economic weakness and corresponding declines in the energy market. That CityWestPlace, we’re 100% leased and we had in this Westech submarket that was 390,000 feet of net absorption in 2008.

In San Felipe Plaza, at the end of the fourth quarter we were 96% leased, with asking rents ranging from $25 to $27, depending on the location and the building, with 3% annual bumps. This property is in the gallery of submarket, which had a 103,000 rentable square feet of absorption in 2008. We leased about 3,000 feet in the fourth quarter for $23 and $3 net annual bumps.

2,500 City West in the Westech submarket, 97% lease with asking rental rates of $25. We signed a 22,000 feet lease in the fourth quarter for $26 with 3% annual bumps. At Brookhollow Central II and III we are 90% leased and 81% leased in Brookhollow II and III respectively.

In the fourth quarter, we signed two leases for 14 net and Brookhollow I, as I mentioned earlier, we attempted to do major capital improvements and we are remarketing at this building to major tenants before completing any additional capital improvement. We do not have any major leases expiring at 2500 City West or City West Place or Brookhollow in 2009. San Felipe Plaza, we have a lease of about 20,000 feet expiring in February.

In Los Angeles, the City National Plaza, we’re about 230,000 feet, a shy of reaching stabilization. There are several major prospects in the market that we are actively pursuing. The current vacancy rate in the market is about 12% and the average asking rent is about $24 to $26 net.

In the fourth quarter we leased about 11,500 feet at $25 net. In this quarter, first quarter of 2009, we leased over 27,000 feet at $25 net with 4% annual increases. We do not have any lease expirations in 2009. Philadelphia CBD, the Class A vacancy rate remains steady at 9.8%, which is very healthy, with rental rates flattening due to the general economic slowdown.

There’s no new construction on the horizon and so we don’t expect significant increases in vacancies in 2009. This market had net absorption in 2008 of about 380,000 feet, with the average asking rate of $28 gross, which is about a 5% increase over the fourth quarter of 2007.

At One Commerce, we are 93% leased with asking rates of 14 to 16 net and we leased about 380,000 feet in 2008 of which 23,000 was in the fourth quarter at a starting rate of $16.50 and annual bumps. We have one minor lease expiration in 2009.

In Two Commerce, we are 86% leased with asking rents of 14 to 16 net with annual bumps. We’d leased in 2008 about 320,000 feet, none in the fourth quarter, the reason being that the building was basically fully leased until the expiration of the CFX lease in June of 2008.

Now, this has given us a block of about 130,000 feet and we expect to have another lease expiration of about 35,000 feet that will give us a block of about 185,000 feet. There are prospects, large users in the market and so they are prospects for making some large deals. There is only one other building that has 100,000 feet or more in the market. So, our prospects are good for landing one of the larger blocks of tenant users.

In the Philadelphia suburbs, the vacancy rates have increased slightly in the overall market, while the rental rates have began to moderate. The market had approximately 400,000 feet of absorption in 2008. We expect positive absorption to continue in 2009, driven mainly by the pharmaceutical industry.

At Four Falls were 82% leased, we have asking $19 rent rates and in the fourth quarter we leased 9,000 feet and 10,000 feet in the first quarter of this year and those deals ranged from 17.50 to 20 net. We have one 2009 expiration of about 10,000 feet, which we expect to renew.

At Oak Hill, we’re over 98% lease, with asking rents of $11 net and we had absorption of about 13,000 feet in 2008 and we have no 2009 expirations either at Oak Hill or at Walnut Hill at. At Walnut Hill we’re about 48% leased with asking rates of $13 net. That is about 23,000 feet of absorption in 2008. We think that the prospect activity has increased noticeably over the last 60 days in this continuing pressured sub market.

In Northern Virginia, we offer rate in two sub markets the West and Dallas, Tollway and Fairfax Center. We saw market demand begin to slowdown in 2008 and we expect it to continue in 2009. Current occupancy in the market is almost 86%, with the gross rents of $32 which is a decline of about 2.5% from the fourth quarter of 2007.

While the news on rates absorption and demand is not positive, the market dynamics for Northern Virginia is acceptable to quickly change due to the diverse of the users; in fact there were three major relocations into the market recently. New construction is holding in the markets historic ten year annual average of 4 million feet is expected to continue to resume due to the expanding presence of the federal government activity of government related contractors.

Fair Oaks Plaza, we are 86% lease with net asking rents of $24 and we leased about 40,000 feet in 2008, of which 8,000 was in the fourth quarter. We have net asking rents of $21 and this building continues to experience one of the highest occupancy rates in the sub market.

In Centerpointe II, we’re 81% occupied with asking net rents of $24. We had a little leasing in the fourth quarter at a net rent of $23. We have one expiration in the middle of the year of about a little over 5,000 feet we expect to renew.

Centerpointe I, this property was occupied by single tenants that has announced its intention to move prior to the time we acquired the building. Currently, we are 24% leased, with asking rents of $24 and we absorbed a 50,000 feet in 2008, all of which occurred in the fourth quarter at a starting rate of $28. We have no lease rollovers in 2009 and we are actively pursuing some large blocks of space that is in the market now.

Reflections I, is a small property on the Dallas, Tollway. It’s currently or fully occupied with a lease expected to expire at the end of 2009 and we expect that tenant to move out. We also have Reflections II which is occupied by the U.S. Department of Interior and the Bureau of Indian Affairs. Their lease also expires in 2010 and we are making preparations to try to extent them, not only Reflections II, but Reflections I to fully lease both of those of projects.

Now, I’ll move onto development. We do not anticipate commencing any new developments in 2009. Given the economic situation, tenants are reluctant to commit to new construction rental rates. Our pre-leasing requirements would be 80% to 100%, which would also be required for financing. Once a development project is pre-leased, it would be placed in our Green Fund, if we did have development occur.

The big news in our development business is that TPG has won another competition and been selected as the developer for a major mixed-use office and hotel projects for which we will be paid a substantial fee during the entitlement process. We will have no out of pocket costs associated with this project, since the owner of the property will pay for all third party consulting cost during the entitlement process, which we expect to take about 18 months or so.

We’ve completed construction of two buildings in four points for a total of about 192,000 feet in this project in the Northwest of Austin and as I spoke earlier, this is a very overbuild submarket at the moment. We’ve substantially completed construction of the Murano condominium project in Philadelphia which is next to our One and Two Commerce square project.

We’ve sold 126 units and closed 111. We had some subcontract damage deferrals which has prevented the closing of some units and we are in the process of resolving that problem with the construction with Turner Construction. We sold only one unit in the fourth quarter, but we do continue to have very heavy traffic of perspective buyer.

For example, we registered and qualified 375 potential buyers in 2008 of which 68 were in the fourth quarter, but the market froze and buyers are waiting to see the bottom of the market. We think, we are stating to see signs of life in the first quarter of 2009.

We think we have a very attractive product, the most attractive product in the market and that when residential prices cease to decline generally, we will be able to tap into turn up demand for our units. We are holding our prices because we do not think price is the basic issue. We are making other concessions such as buying down mortgage loans by 50 basis points, which in some cases results in a sub 4% loan.

On a case by case basis, we will consider other concession. Basically, we need to sell 74 units to pay off our Corus loan of our construction lender. We have two, six month extension options that could extend the loan to August 2010. We’re in negotiations with Corus to obtain additional extensions. The construction loan is about $300 a square foot and we’re selling units at about $675 a square foot.

In our El Segundo project, we continued our efforts to pre-release the Phase I portion of the project totaling about 250,000 feet. In order to commence construction we would have to have the first phase of the project substantially lease with construction and permanent financing in place. As I said earlier, if we were able to get a start, the equity funding for this project would be provided by the Green Fund and would not be drain on our cash reserves. We’re not actively marketing any of our other entitled sites due to the market conditions.

The Metro Studio transit oriented mixed use office development and the Universal Studio backlog residential community master plan, are still working their way through the entitlement and regulatory approval process. With respect to acquisitions and dispositions, you’ll recall that owned our last earnings call I reported that we have place the partial interest in City National Plaza and Huston in the market.

After the market collapsed, we withdrew both projects and we do not currently have any projects in the market. We are waiting and watching the market conditions closely and should market conditions improve, we would definitely place selective projects in the market.

I would note that in Los Angeles, there are several prosperities that have been placed in the market recently, including Cal Plaza I, 801 Figueroa in downtown Los Angeles, Westwood Plaza and Lantana on the West side and 10 UCP in Universal City. We are following closely to see what happens with respect to those properties. We’ve heard that the Westwood Plaza has received offers in the 6% cap rate range.

As far as we can tell, there’s not been any major sale of office building in the markets; we have properties since September 2008. We understand that a couple of properties may test the market in Houston soon. Neither we nor CalSTRS are interested in making a distress sale and we’re prepared to wait for a more normal market.

Few words about our investment advisory business; generally, our investment advisory bushiness has been impacted by the fact that the economic crisis has brought a hope to our acquisitions and dispositions, therefore eliminating acquisition fees for 2008.

As you can see on page 14 of the supplemental package, for the nine months ending September, 30 we had gross fees before accounting eliminations of $8.5 million for the fourth quarter down from $8.9 million for the same period in 2007. For all of 2008, the amount was $36.4 million compared to $30.3 million in 2007.

Our joint venture agreement with UBS Wealth Management Fund is fully activated and making offers, but has not been successful to-date in tying up a property. This fund is set up to invest up to $250 million under the initial funding. In the current market, the joint venture is focused on acquiring stabilized core and core plus property that are distressed from being over leveraged.

Our vision plan, in which we have a consultant development roll at NBC Universal backlog, continues to make progresses and we expect to commence the public portion of the ER process in the second quarter for 3000 residential units. The high performance Green Fund has been activated with $180 million in commitment and we have extended the investment period for an additional six month period.

We are in the process of transferring the first space of the El Segundo project into the fund. In addition, we are actively seeking acquisitions for the fund, but as you noted with our other acquisition business, the market is basically frozen at this point.

Our TPG/CalSTRS joint venture continues as our main investment been heckled. Currently, the joint venture is focused primarily on completing the value-add project and looking for opportunities to acquire portions of its outstanding debt from lenders willing to sell at a discount.

We have the Austin joint venture with Lehman Brothers and a Mid East Southern fund that generates the management fees that I spoke about earlier and finally we are actively seeking to generate development service fees from third parties and I spoke of our recent success in this regard earlier.

Now I’ll turn it back over to Diana.

Diana Laing

Thanks, Jim. I’ll talk briefly about our results for the year and for fourth quarter of 2008 I’d refer you to the supplemental financial information that we make available on our website and as usual I’ll also refer you to the non-GAAP pro rata financial statement that start on a page seven of the supplemental package. These pro rata statements are presented as thought unconsolidated operations were consolidated at our ownership interest.

One other net point to note is that we calculate after tax cash flow which starts on page 12 of the supplemental information. We consider this to be a meaningful metric of performance and it’s basically calculated by adding back non-cash charges, such as depreciation and amortization, straight line and other GAAP rent adjustment, impairment charges and deferred income tax to our net income numbers.

Just to talk briefly about the fourth quarter of 2008, comparing that with the third quarter of 2008 on a pro rata basis, revenues and net operating income from our operating properties were basically flat. Our NOI from our fee business increased by about $2 million over the third quarter, primarily as a result of expense reductions, and about a $200,000 increase in revenue.

Interest expense increased over the third quarter by $2 million, because we’ve now stopped capitalizing all interest on our development projects and our G&A expense dropped by $1.3 million in the fourth quarter compared to the third quarter, due to expense reductions as Jim’s discussed. Included in that drop in the fourth quarter is some reversal of accruals from earlier quarters as we reduced bonuses that had been accrued earlier.

Comparing the fourth quarter of ’08 with the fourth quarter of ’07, our NOI from the operating properties declined by 14% and this is primarily because of increased marketing and other expenses related to development properties that came online in 2008, but aren’t generating significant revenue yet.

Our NOI from the fee business increased by 27% over the fourth quarter of 2007, primarily again because of a reduction in expenses. Interest expense remained flat with the fourth quarter of ’07 and G&A decreased by $1.5 million.

Now to compare the results of operations for the full year 2008 with 2007, the revenues from our operating properties increased by $5 million, roughly 4.5%, NOI decreased by $1.7 million or 3%, again due to increased expenses from completed development property.

The NOI from the fee business declined by $6.8 million which was entirely attributable to acquisition and disposition fees that we earned in 2007 but that weren’t repeated in 2008. Interest expense in 2008 increased by 2.7% and G&A expense went down by around $900,000 or roughly 5% from 2007.

In 2008, we recognized gains from sales of units at Murano of about $16.7 million and majority of the cash from these sales was used to pay down the construction loan and during the fourth quarter of 2008, we took an impairment charge on the Murano of $12.2 million which reduces our basis in the remaining unit to $101 million.

As of December 31, 2008, we have sold 111 units; we had 14 units under contract to close and we had 177 units remaining for sale. Our construction loan balance was $63.9 million or approximately 335,000 per unit yet to be closed. We also recorded an impairment charge of $1.2 million on joint venture investments during the fourth quarter of ’08.

Our total overhead cost, which includes both G&A and the expenses allocated to the investment management business for 2008 were $31.5 million. Because of the expenses cuts we’ve discussed we expect these overhead costs to be about $28 million in 2009, a roughly $3 million decrease or 10% reduction from 2008.

To turn to liquidity, Jim has discussed our capital preservation plan. At December 31, 2008 we had $69 million in unrestricted cash. If I could refer you to pages 19 and 20 of the supplemental financial information, we disclosed our debt balances and maturity date and extension option information for each property. I’d like to note here that there are only four loans within a recourse whatsoever to the company, and those recourse obligations total $38.3 million.

On page 19 these recourse loans are shown. There is the Campus El Segundo, mortgage loans for $17 million; part of the Four Points Centre construction loans and that part is $13.3 million of the total $28.5 million loan. The unsecured debt of $3.9 million and the mortgage on 2121 Market Street, which is on the next page, page 20 has a $3.3 million bottom dollar guarantee from the operating partnership.

The Campus El Segundo and Four Points loans are with Wells Fargo. We’re in discussions with them to extend the maturity dates on these loans and we plan to payoff the $3.9 million unsecured loan which is a total of $4.7 million including accrued interest; its due in October and the 2121 Market Street loans matures in 2033. All the other mortgage debt on both, pages 19 and 20 is non-recourse to the company.

Throughout the supplemental financial information, we provide information about our portfolio and other aspects of our business and this is partially to assist you in annualizing the value of our company. The components of our net asset value and how it could be calculated are as follows:

On page 15 of the supplemental we show information related to our existing portfolio. You might assume a cap rate and calculate the value of those assets as stabilized, where we have the estimated stabilized net operating income and they reduce that value by the amount of capital expenditures that we expect to spend to achieve that stabilization.

On page 17 of the supplemental, we show relevant information about our development assets, which includes the potential square footage or residential units that could be built with our entitlement and we also show our book value involved in these assets on that page.

To value our investment management platform, we would recommend applying a multiple to annualized net revenues. On page 14 of the supplement, we show you what those net revenues were in 2008, that’s the $21.6 million; and the fourth component of our net asset value are our net current assets; short-term assets, less short-term liability. We show this on page nine of the supplemental on both the consolidated and a pro rata basis.

So, if you take these four pieces and calculate the value and reduce that total value by the amount of our mortgage debt, which is also shown on page nine and divide the number by the number of OP units and shares outstanding or $39.1 million shown on 21, you would have an assessment of the value per share.

At this point, I’m going to turn it back over to Jim for concluding remarks before we open up for questions.

Jim Thomas

Thank you, Diana. Let me just conclude by saying a few thing. Last November, when I announced our three year contingency plan to our employees, I stated that we were in a financial storm that we did not know how much damage it would do or how long it would last, but our goal was not only to survive this storm, but to come out of it stronger and bigger. I think there are good reasons to believe we can achieve this.

First, we have an exceptionally talented group of employees led by a deep and wide management group that has experienced in every phase of the real estate cycle going back as far as 1974. These are times that call for real pros, which gives TPG a competitive advantage over most other real estate firms.

Secondly, we have financially strong partners, such as CalSTRS, UBS and Private Investment Fund and TIAA-CREF that hold TPG in high regard and we have good relationships with many financial institutions such as Wells Fargo, UBS and Bank of America.

Third, we have a portfolio of institutional quality product properties that will fair better than lesser quality product properties during the storm and we’ll recover quicker when the storm passes. Fourth, we have an outstanding development pipeline with a relatively low cost basis that will not burn up a lot of cash during the storm and we’ll be ready to go as the storm lifts.

Fifth, we have a strong asset management business that produces significant cash flow, which is very important in a down market. Sixth, we are one of the best, if not the best rounded real estate firms with expertise in every major face of real estate; from entitlements, to development and construction, to sustainable green development and management, to financing, to property management and leasing, to asset management and acquisitions and development.

In every part of the real estate cycle, some or all of our expertise is very important. Especially, important right now is our expertise in property management and leasing, financing including expertise in acquiring distress debt and the generation of fee income.

Finally, the fact that TPG was selected by a large international conglomerate in a competition to be the developer of a new mixed use hotel and office building at a terrific development site in a major West Coast CBD is just the latest evidence of TPG’s best-in-class standing.

I will leave you with the thought that I am very optimistic about TPG’s future for the reasons stated and with that I’ll turn it over to Diana and we will accept questions.

Diana Laing

I believe the operator will announce the procedure for the queuing up for questions.

Operator

Thank you. (Operator Instructions) Your first question comes from the line of David Loeb; please proceed.

David Loeb - Robert W. Baird

Good morning guys, good afternoon for me.

Jim Thomas

Good morning David.

David Loeb - Robert W. Baird

I have a few if we have time for this and I don’t monopolies the Q-and-A, but I really want to focus in on value and to get there can we just start with the advisory business? Jim can you tell us specifically where that development side is; it sounds in also lot like this entry Plaza site in West LA?

Jim Thomas

No, it’s not that site and we’re scheduled to have a press conference later in March and so I don’t want to steal all of our thunder.

David Loeb - Robert W. Baird

But it does seem like it’s emblematic of the fact that you have an advisory business that even under the worst case scenario has several years of these coming in.

Jim Thomas

Exactly; and as I indicated in my remarks, we are making a bigger effort to market our building services and we are seeing an increased demand for this kind of thing with the economic turndown and you have institutions getting properties back, some of which are in an incomplete stage. So, we think that could well be a source of additional fee revenue for us.

David Loeb - Robert W. Baird

I guess when I listen to Diana talk about the cash, $69 million of unrestricted cash, only $38.3 million of recourse on any of the financing, so you’re left with approximately $0.79 per share in unit of cash.

You’ve got an advisory business that’s pulling in the mid teens millions, with no sign of that necessary shirking granted that you haven’t had a lot of acquisition disposition fees in the last year, but you’ve got more and more advisory work that’s generating fees and that’s an EBITDA number. Even if that only goes on for a few years, its present value alone is worth more than where the stock price is, with no obligation to against that since there is additional $0.79 of cash that’s net of the recourse debt; am I missing something?

Jim Thomas

No, I don’t think you are missing anything. You’re right on the money.

Diana Laing

Dave if I could just add, what we consider the components of net asset value, you hit on the investment management business, you’ve hit on the net assets and actually in addition to unrestricted cash, there is some restricted cash and other current assets net of current liabilities that would exceed just the unrestricted cash balance.

So, the net assets, the investment management business, the operating properties hit home with it again, the debt here is non-recourse, so it’s really not possible for the value those operating properties to put it bluntly to be below zero. I mean we obviously believe there is a fair amount of equity value there, but it can’t go below zero because we can turn the keys over if in the case where we have all the non-recourse debt.

Then finally the development pipeline; we show you the book value in the supplemental. Realize that we’ve been through an audit; we’ve done significant valuation work in terms of impairment analysis and to the extent where we believe they have been impairment, we’ve written the book values down to our estimated values. So, we truly do believe there is value in the development portfolio as well.

David Loeb - Robert W. Baird

A couple of details on that; in terms of the 14 units under contract at the Milano and presumably -- but first off can you give us an idea about when those are expected to close and am I correct that the bulk of those proceeds will go to decrease the loan course?

Jim Thomas

The hold up, I think I touched on this briefly, is that we have some floor damaged by subcontractors that delayed the closing of those units and we are working out that issue with Turner. Now the building is basically complete, except for punch up and these damage force are and assigning responsibility and payment and so we expect to clear up; that would turn it very quickly and put us in a position to close those units.

David Loeb - Robert W. Baird

So, first quarter or second quarter basically

Jim Thomas

Yes.

David Loeb - Robert W. Baird

Okay. In terms of Austin, I appreciate all the detail you gave Jim, although it maybe more than a lot of us who are focused on it right now, but at the end of the day your total exposure to that, your total equity investment in Austin is less than $20 million, right?

Jim Thomas

Yes, we have only 6% in the quarter, interest in that portfolio and it generates substantial fee and income for us.

David Loeb - Robert W. Baird

But the worst that could happen in Austin is that you impair your equity, not that it costs you any cash?

Jim Thomas

That’s true.

David Loeb - Robert W. Baird

And it also seems really ironic that your issue with Lehman funding is with an entity related to the 50% owner of that property; are there conflicts of interest in the resolution of this because of the fact that you’re going after one Lehman entity on behalf of an ownership group that’s 50% another Lehman entity?

Jim Thomas

Well, I don’t want to get into any comments about our partner having conflicts. They are our partner and as I indicated, we have continued to extend the hearing date to reach a deal and so given the fact that this matter is still pending before the court and we are optimistic about a good outcome, I don’t want a get into saying anything about our partner.

David Loeb - Robert W. Baird

Okay, I have to say from an outside perspective it seems a little decency and it seems like it’s getting results about as quickly as (Inaudible). So, I hope it actually does give results soon.

Jim Thomas

Hey, but David just let me comment that you have to keep in mind that this is a monstrous bankruptcy filing and I think that the quick action that we took has moved us very close to the head of the line. So, I think we have made a lot more progress than most projects who had situations with Lehman and there are a number of them. So, I think that John and his team is to be commended for the action that they’ve taken in getting this in front of Lehman and getting Lehman’s attention.

David Loeb - Robert W. Baird

Right and that’s I think, particularly true given that you had a valid draw request, pre-bankruptcy that they ignored. So, you had a pre-bankruptcy contractual obligation that this pre-bankruptcy company did not live up to, that’s pretty significant.

Okay, one more if you don’t mind. My take away from the operational discussion, is that things are fine and from what Diana said about looking at the residual value in real estate, your share of that, it sounds like your substantial value. The one think that I guess I want to hear from you is about tenant credit; would you have any concerns about major tenants in properties that you’re concerned about? I’ll be particularly interested in financial services, City National for example or any others that you think are notable?

Jim Thomas

Well, just two comments, David. I took the time I know it was long and laboratory to go through each of the projects, but I wanted to make the point that you just made and that when you look at each of these projects, for the most part we are in very, very strong positions with high occupancies and strong rent and so I apologize for taking so much time, but I did want to emphasize that when you look at the properties on a property-by-property basis, we wanted to show you how strong we are and where we have weaknesses to bring that. So, that’s why it took so much time and I know it could be a lot to digest.

With respect to your specific question about tenant weaknesses, this is a subject that I’m very concerned about, get reports on from our people. I did mention that, we did have WaMu in one location that was acquired of course by Wells Fargo and so we’re loosing the WaMu space, but Wells Fargo is increasing their space. So, the net effect of that is that we come out of the WaMu situation pretty strongly.

In my quizzing of our people and looking at our accounts receivables, we are not having any major tenants that we’re worrying about. You ask specifically about City National Bank; I think if you check you will see that City National Bank is a very, very strong bank. It’s our largest local bank in Los Angeles and they have a very strong balance sheet. So, we were very comfortable with City National Bank.

David Loeb - Robert W. Baird

That’s great. It’s all very helpful. I really do appreciate your canter on all of this and your point about the property-by-property detail is certainly well taken. Thank you.

Jim Thomas

Thank you. You’re welcome.

Operator

(Operator Instructions) and your next question comes from the line of Jamie Feldman. Please proceed.

Jon Peterson - UBS

Hi, this is Jon Peterson being for Jamie today.

Jim Thomas

Hi, Jon.

Jon Peterson – UBS

Hey, how are you? I was hopping that you could walk through how you guys are looking at leasing costs these days, and being part of your contingency plan, how you view doing free rent versus putting up the tenant improvement?

Jim Thomas

Well for the most part, we’ve not had to do free rent. In some markets as I indicated, when I was walking through, there has been free rent in some markets. In markets that are very weak, obviously you are going to have concessions.

For example, in the Northwest of Austin, where we have the two buildings recently completed, that’s a very oversupplied market and you’re having new developments that are 100% vacant, who are being very aggressive and you have to buy deal, but as we speak, free rent has not been a major issue in most of our markets other than the ones that I indicated where we have a lot of vacancy.

Jon Peterson - UBS

Okay, I appreciate that. That’s all I got.

Jim Thomas

Okay.

Operator

We have no further questions at this time.

Jim Thomas

Okay. We’ll wait a minute or so just to see if someone thinks of an additional question. We’re always anxious to have questions to make sure that we gave everyone an opportunity to raise anything they think they would like to ask about.

Operator

(Operator Instructions) So, we appear to have no further questions.

Jim Thomas

Okay. Having no further questions, we will thank everyone for joining in and that will conclude this call.

Diana Laing

Thank you.

Operator

Ladies and gentlemen, thank you for you participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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