Mack-Cali Realty Corp. Q4 2009 Earnings Call Transcript

Mack-Cali Realty Corp. (CLI) Q4 2009 Earnings Call February 11, 2010 10:00 AM ET

Executives

Mitchell Hersh - President & CEO
Barry Lefkowitz - EVP and CFO
Michael Grossman - EVP

Analysts

Sheila McGrath - KBW
Craig Mailman - Keybanc Capital
Michael Knott - Green Street Advisors

Operator

Good day everyone and welcome to the Mack-Cali Realty Corporation fourth quarter 2009 conference call. Today’s call is being recorded. At this time I would like to turn the call over to the President and Chief Executive Officer Mr. Mitchell Hersh; please go ahead sir.

Mitchell Hersh

Thank you Operator and good morning everyone. Thank you for joining Mack-Cali’s fourth quarter 2009 and year-end 2009 earnings conference call.

With me today are Barry Lefkowitz, Executive Vice President and Chief Financial Officer and Michael Grossman, Executive Vice President.

On a legal note I must remind everyone that certain information discussed on this call may constitute forward-looking statement within the meaning of the Federal Securities Law. Although we believe the estimates reflected in these statements are based on reasonable assumptions we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the company.

First I’d like to review some of our results and activities for the quarter and what we’re seeing in our markets. And then Barry will review our financial results and Mike will then give you an update of our leasing results.

FFO for the quarter was $0.78 per diluted share excluding non-recurring, non-cash items primarily reflecting the 105 Challenger Samsung situation that we’ve discussed previously and for the year ending December 31, 2009 FFO was $3.32 per share. We had some significant leasing activity last quarter with a total of 901,468 square feet of lease transactions. These transactions enabled us to end the year at 90.1% lease up in fact slightly from the last quarters 90%. Rents did roll down in quarter by approximately 10.5% or 6.8% on a GAAP basis compared to last quarters 13.7% cash roll down.

For the year 2009, we had a rent roll down on a cash basis of 9.3% and on a GAAP basis of approximately 5.9%. Our leasing cost for the quarter were at $3.69 per square foot per year up from last quarters $2.40 per square foot per year reflecting continued pressure on the fundamentals in the leasing environment.

For 2010, we face rollovers of approximately 8.7% of our base rent were about $55.5 million. Despite our challenging environment, our portfolio continues to outperform most of the markets where we operate with our least rates exceeding market averages in Northern and Central New Jersey, West Chester, Suburban Philadelphia and Washington D.C. Our fourth quarter leasing activity is a testament to our commitment to the highest levels of service for our tenants in our premier properties.

Additionally, because of our scale and the scale of our portfolio were able to offer tenants a great deal of flexibility with respect to location product type and leasing flexibility and our size allows us to take advantage of economies of scale and pass those savings right through to our tenants.

Some of the notable leasing transactions occurring during the quarter included the following; we signed a new 16 year lease with the PBA of the city of New York for just under 40,000 square feet of 125 Broad Street in Downtown Manhattan. The Patrolman Benevolent Association will be locating its executive offices in our premier down town asset.

A&E Distribution, a subsidiary of A&E stores signed a five year lease renewal for about 63,500 square feet at Mack-Cali Airport, 200 Riser Road in Little Ferry, New Jersey. This 286,000 square foot building is a 100% leased.

The law firm Budd Larner signed a 13-year, two-month renewal for just under 55,000 square feet at our Mack-Cali Short Hills building, at 150 JFK Parkway in Short Hills, New Jersey. This 248,000 square-foot office building as well is a 100% leased.

In a very interesting transaction, three Subsidiaries of the Interpublic Group, the global marketing communications and marketing services company signed leased renewals totaling just under 125,000 square feet at three of our properties in Parsippany, New Jersey in Mars County. These renewals which have extended the leases for 2022 consists of the following. Integrated Communication signed a 43,000 square foot lease renewal at 5 Sylvan Way in our Mack-Cali business campus. Pace signed a lease renewal for just under 20,000 square feet at 35 Waterview Boulevard in Waterview Corporate Center. And Torre Lazur Healthcare Group signed a lease renewal for 62,000 square feet plus or minus at 20 Waterview Boulevard also in Waterview Corporate Center in Parsippany.

During the quarter, we continued our 1 Jefferson Road joint venture project in Parsippany with our new tenant Day Pitney now moving into the tenant improvement phase. And our built to suit for Sanofi-Aventis in Bridgewater continues on schedule and frankly below budget. Just last month Mack-Cali announced that we've refinanced the $150 million secured mortgage loan with the Prudential Insurance Company of America and VPCM a wholly owned subsidiary of the Virginia Retirement System. The loan which matures on January 15, 2017 carries an interest rate of 6.25% and is secured by seven properties in Bergen County.

Year-after-year Mack-Cali is recognized for our expertise and property management as well as our energy conservation efforts. For 2010, we've already received the energy start designation for 200 White Plains Road in Talleyrand in Tarrytown, New York. This award given the U.S. EPA and the U.S. Department of Energy is given for excellence in the buildings, energy, performance and efficiency. We also just recently received that designation for our 125 Road Street building in downtown New York.

Finally, I'd like to comment on the 2010 FFO guidance reduction by $0.10, now at 270 to 290, this 280 mid-point range. This reduction was primarily driven by the Prudential mortgage its about $9.5. You may recall that on the last earnings call when questioned about this mortgage, I indicated that we were inquiring not to refinance the loan. However, at the behest of Prudential and in the interest of expanding our exemplary relationship with Prudential and now with their co-lending participant Virginia Retirement System. We decided to move forward with the loan. The interest rate was in fact reduced by 95 basis points from that previously discussed with them. And so we're very delighted to move forward with this mortgage financing at a very favorable interest rate of 6.25% and expand our relationship with a premier company such as prudential.

I would also like to review just a few factoids and metrics particularly given the fact that this is also a 2009 year end call. Today, we have cash on hand on our balance sheet of over $291 million. Today we are undrawn on our $775 million revolving credit facility which as you know has a borrowing rate of LIBOR plus 55 basis points with a June 2012 maturity if we exercise the one-year extension.

And while we did have pressure on our NOI in the quarter, again, on a cash basis down 2% to the year on a cash basis through 2009 up actually 0.2%. We finished the quarter with a free cash flow of approximately $7 million and the year of 2009 free cash flow on a CAD calculation basis of over $56 million. And so in fact we have a great deal of liquidity and a very strong balance sheet moving into the future. And with that all I will now turn the call over to Barry Lefkowitz who will review and expand upon the financial results for the quarter. Barry.

Barry Lefkowitz

Thanks, Mitchell. I will briefly review some of the financial results and some other things. FFO before items for the fourth quarter of 2009 amounted to $71.8 million or $0.78 a share. For the full year of ’09 FFO before items was $293.1 million or $3.32 a share. In the fourth quarter we recorded an impairment charge of $16.6 million or $0.18 per share on our property at 105 Challenger Road in Richfield Park, New Jersey. For the year we had net items of $18.3 million or $0.21 per share. For the fourth quarter of 2009 net income available common shareholders was $1 million or $0.01 a share, and for the full year of 2009 net income available common shareholder was $52.6 million or $0.71 a share.

Other income in the quarter included a $195,000 in lease termination fees as compared to $334,000 for the same quarter last year. For the full year lease termination fees were $2 million as compared to $9.4 million last year. Same store net operating income which excludes lease termination fees decreased by 2.7% on a GAAP basis for the fourth quarter of ’09 and for the full year decreased by 0.8%. On a cash basis same store net operating income decreased by 2% for the fourth quarter and increased by 0.2% for the full year.

Our same store portfolio for the quarter and full year was 29.2 million square feet. At year end we had $291 million in cash and no drawings on our $775 million revolver. At 12/31, Mack-Cali’s total undepreciated booked assets equaled $5.9 billion and our debt to undepreciated asset ratio was 39.8%. Excluding the effects of non-cash items previously discussed, the company had interest coverage of 2.9 times and fixed charge coverage of 2.8 times for the fourth quarter of '09 and interest coverage of 3.1 times and fixed charge coverage of 2.8 times for the full-year.

We ended the quarter with approximately $2.3 billion in debt, which had a weighted average interest rate of 6.61%. Our unencumbered portfolio at quarter-end totaled 236 properties aggregating 24.3 million square feet of space which represents around 79% of our portfolio.

On January 15, 2010, we extended our $150 million mortgage with through to January 15, 2017. The loan bear's interest at 6.25% is interest only payments for the first 30 month with 30 year amortization thereafter.

We revise our 2010, FFO guidance to a range of 270 to 290 per share reflecting the loan expansion. Please note that under SEC Regulation G concerning non-GAAP financial measures such as FFO, we're required to provide an explanation of why we believe such financial measures are relevant and reconcile them to net income available to our website at www.mack-cali.com on our supplemental package in earnings release which includes the information required by Regulation G as well as our 10-K. Now Mike will cover our leasing activity.

Mike Grossman

Thanks Barry. At December 31, our consolidated portfolio was 90.1% leased up to 10 basis points from September 30, the 900,000 square feet of leasing activity, we signed during the quarter is the highest leasing volume we generated into third quarter of 2008, but it is still below our historical average.

A third of the transactions were represented by new leases, which is slightly above the two-year average. For the full year we signed just under 500 transactions for a total of 3.2 million square feet and retained 58% of our out going space. Rents rolled down 9.3% on the cash basis and 5.9% on a GAAP basis and leasing cost for the full year average $3.13 per square foot per year of the lease term.

Our overall new lead activity in the fourth quarter was up 15% on number of leased and 40% for square footage versus the same period last year. For the full year the activity comparison to full year 2008 varied among our regions. Demand for space in sub markets adjacent to Manhattan was of last years totals, while our central New Jersey and Suburban Philadelphia offices experienced a moderate up taking space increase. In total, throughout the year the number of new lease is on par with last year but those lease represented less square footage than in 2008.

Our 2010 rollover is the highest at the end of each year at the end of each year with roughly 710,000 square feet expiring in both the first and fourth quarters. Exploration is in the second and third quarters total 415,000 square feet and 538,000 square feet respectively.

In many cases, tenants are delaying commitments as long as possible taking the time to extensively evaluate their needs and options. We continue to aggressively pursue those companies where we have to commit and make a decision about their space requirements.

In our markets leasing activity continues to lag behind the pace of previous years. The North East markets in which we operate generated deals for 22% less space than in 2008. However, leasing volume during the second half of the year exceeded that of the first half in most of our markets by a range of 35% in Manhattan to 150% in Washington D. C.

During 2009, vacancy rates increased in all of our markets. New Jersey produced split results with northern New Jersey experiencing only a 30 basis points increase in vacancy compared to central New Jersey’s 210 basis points. Vacancy rates in our Westchester and suburban Philadelphia markets increased a 140 to 150 basis points respectively. Certain some markets such Bergen, Passaic and Union Counties and New Jersey and Elmsford, New York were able to reduce vacancy slightly during the year. The asking rate declined in all markets except Washington D.C. and sublease space continues to average approximately 20% of overall vacancy. Mitch.

Mitchell Hersh

Thank you. In closing I would just like to say that there is no question that the markets remain challenging, you don’t lose 8.5 million jobs in the work force and the nation and have a structural unemployment as high as we do without it having an impact on every sector of the economy including office space utilization. As has been stated in some of the prepared remarks, we continue to face a reluctance on the part of tenants to make long-term decisions on their office space needs given the lack of visibility and lack of certainty in the general economy, although, we have seen certain sectors of the economy exhibit some signs of improvement particularly in health care and pharmaceuticals.

But generally, we see an environment where deals are taking longer to close. We certainly hope that the government and some of the programs and initiatives that have been announced out of the administration and Congress can be effective in helping the small business sector, return to relative stability in the wake of a severe economic downturn and credit freeze, we hope that liquidity returns to small businesses, so they can add employment and finance their own needs going forward. And it's certainly critical given the fact that small business represents 70% of the employment in the nation for us to begin to see this, so that we can begin to see light at the end of this very long tunnel.

And while we anticipate a period of continued economic uncertainty for some perhaps protracted period of time. We've certainly positioned Mack-Cali well as the landlord of choice in all of the regions in which we operate, and given our balance sheet strength and the strength of our team and our human capital we're well poised to take advantage of opportunities as they emerge.

You've probably all seen just today the congressional over site panel announcing its concern about debt maturities in the commercial real estate sector and the impact that that might have on regional and community banks going forward. And so there will be a lot to do in the future, and companies like Mack-Cali given our strength, our liquidity and our resolve will hopefully be part of the solution going forward.

And with that now I'll take your questions. Thank you. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question today from Sheila McGrath with KBW.

Sheila McGrath - KBW

Good morning. Mitch, you were sitting on about $300 million of cash, is your thought or strategy to remain liquid for acquisitions and if so are you seeing any activity picking up?

Mitchell Hersh

Well, let me just say that’s first of all part of the cash that we have on our balance sheet will probably be used to retire piece of unsecured debt, all things being equal we have a $150 million tranche that matures in April. But having said that with respect to your second question about opportunities I would say this, that generally speaking transactional activity is virtually silent in the markets. But there are certainly many discussions going on that are more strategic relative to as I said before being part of the solution for credible portfolios, credible ownership and an opportunity for us to potentially expand in the markets that we have chosen to operate and that being the DC card or up through Fairfield County, Connecticut and maybe once again in the Boston market depending on opportunity and doing so on a strategic way where we can assist existing owners with some of their needs and build on our platform.

And those are the nature of the discussions that certainly I have been immersed in for the last couple of months. But your typical plain vanilla traditional, wrap it up pretty and buy a broker and send it to every owner out there looking to sell assets is the virtually non existent and I suspect you know as long as we are in this malaise relative to the expressions of kick the can and the banks not knowing whether they are going to take the marks, the owners who are meeting debt service right now although that’s under continued severe pressure as a result of the declining rent environment that we are in. Right now there hasn’t been a lot of activity but I suspect that as the Fed intervenes as we saw again today with the congressional oversight panel in some of the commercial lending environment and you know insist that some of these assets be mark-to-market that they'd be better solutions from maturing debt perhaps we will see more opportunity but everything that we are doing at this moment in time looks from our perspective to be more of a strategic platform builder for us going forward. Not one off type asset acquisitions.

Operator

Next we hear from [Chris Kattan] with Morgan Stanley.

Unidentified Analyst

Last time spend quite a bit of time talking about guidance effectively after the adjustment for the debt its unchanged I am wondering economies has come a long way in the last three months I wonder how the market is building now versus what you're expecting three months ago, what's your outlook for 2010 on occupancies now, that sort of thing?

Mitchell Hersh

First of all, we've modeled in an occupancy loss over the course of the year and that reflected and has been reflected in our guidance, so again restating what you've just said the principle change in guidance was a reflection of $0.096 for the Prudential refinancing. I would say that while we want to be optimistic and look to a brightening economy and a growing economy, the evidence that in fact there is traction in the economy is somewhat anecdotal and while there was a GDP expansion in the fourth quarter, a lot of that was driven by inventory rebuilding and not in any way associated with traction in the jobs market, and until we see drivers of employment, I suspect that the economy and the business that we're in and many of our peers and bread winner in are going a face of challenging market place, so our view is that while we'd like to see flat to positive absorption in our portfolio, we've modeled in slight diminution.

We've modeled in what we think a very realistic economics with respect to lease transactions. And we were hoping to see more positive signs emerge as you listen this morning, the Obama administration said that they expect that job growth will occur this year and that will be adding a 100,000 jobs in month. And claim which is not new that there were 2 million jobs created or preserved as a result of the federal stimulus package.

But having lost 8.5 million jobs and again that’s not all related to the office used by any means its lots of other forms of construction and development and it effects retail and housing and the residential area clearly. We have a long way to go. So we are conservative in our modeling, we keep our heads down and do the business at hand and again have the liquidity and the power and the balance sheet to hopefully as a result of what’s happening out there now take advantage of being part of strategic solutions for some owners that will benefit our platform going forward by no means that we've seen the stress in the market place on anything other than an anecdotal basis. So getting back to your point I hope you are right that the economy is improving but we are taking a very conservative view at this juncture.

Operator

Next we hear from Jordan Sadler with Keybanc Capital.

Craig Mailman - Keybanc Capital

Hi its Craig Mailman here for Jordan. One of your peers recently said on their earnings call this quarter that they effectively call the bottom on the leasing environment and their markets and we are just curious to see what are your thought on where your markets around the cycle?

Mitchell Hersh

Well I guess calling the bottom has been a big mistake for those who have done it over the last three or four years as you have seen and the decline and valuations and asset pricing so I don’t make predictions but I have pretty good feel of the market. I would reiterate that the markets are under continued pressure. The fundamentals are under continued pressure. I know very specifically that a number of landlords, particularly; in the private side of the spectrum have difficulty today even if they are fortunate enough to do leasing and having the ability to fund the leasing cost, the TI and the commissions.

So I am not sure that we are at the bottom. We may be in a trough right now that might be protracted and until we have clear signs of job growth in the knowledge base than service component of the economy I would be reluctant to say that we are at a bottom. As I said we might be in a trough. This might be an extended period of inflection but frankly from Washington which is supposed to be benefiting from the Federal dollars I guess if they reopen the federal offices again we'll may be see better activity. Right up through Boston in almost every market we continue to see a challenging environment with no signs at least in the office sector that there is necessarily a rapidly improving environment.

Craig Mailman - Keybanc Capital

Okay that’s helpful and I just wanted to circle back to your comments on the strategic opportunities may be a little more color on whether those would be just more joint ventures or whether you would look to invest in debt and may be what your return requirements would be

Mitchell Hersh

I would say that we're looking at both the goal for us really as having a long-term view of being a significant part of the commercial real estate business in the public sector going forward is more oriented to the platform building in a strategic way, and so that might fact involve joint ventures. As a part of that we're looking at a couple of debt situations, although it's such an enormous amount capital that's trying to chase that part of the spectrum, sort of non-strategic just return on investment opportunities get into the capital stack and with perhaps the notion that at some point you can take control of the asset although that's probably remote.

I would say in that area, you're looking for returns that are low to mid-teens preferably mid-teens on an IRR basis to get into the capital stack and be able to know where you are in that stack, so that you don't end up with a subordinated tranche of debt that can get wiped out as so many people or investors have seen over the last two years also where billions of dollars have been lost in the form of mezzanine financing gone bad. So our preference is an asset-based model. We're not opposed to doing joint ventures where we know, where governance is carefully articulated and we know where we stand.

Craig Mailman - Keybanc Capital

And in the past you guys, I've noted that you might look at other public leases opportunities is that still the case, are you looking more to private opportunities?

Mitchell Hersh

I would say that it appears that the private opportunities are more realistic in the public markets and while I would rule that out there appears to be little sentiment on the part of either management teams or boards to look at consolidation frankly given the volatility and stocks, every bad day is followed by maybe a good day so those that might think that on one day they might have a better opportunity to benefit their shareholders and build their platform by doing something in the form of some level of consolidation.

That comes off the table, the next day if the stock goes up or dying. So we have seen that volatility by the same talk and we have also seen the IPO market and some of the blind pools, face challenges coming to market as a result of less appetite on the part of public investors to not know how the money is going to be spent and that’s kind of foreclosed some options that at least in some entities that had the notion of doing public executions.

But you know, in more definitively responding to your query I would say it’s the private sector that probably is a more realistic opportunity set in this environment.

Operator

(inaudible) with Bank of America Merrill Lynch has our next question.

Unidentified Analyst

Hi, just following up on your comments on the small business tranches. Can you discus what your tenant watch list looks like right now and any kind of adjustments and reserves?

Mitchell Hersh

Yes, we have basically a reserve of approximately $2 million a quarter and our watch list frankly is a lot smaller than that. We had as we have discussed on this call in the last two years similar calls you know dodged some major bullets in terms of the companies and the institutions that you never thought would be imperiled as that ended up to be imperiled but fortunately the government intervention resolved those issues for us but out of 2100 tenants we have lots of small businesses, some of them you know again this is more anecdotal, it's come to us for some level of assistance over the last year and a half or so because of the fact that their access to credit was frozen and paralyzed and it hasn’t yet returned to a liquid form, it hasn’t thought out yet and so we have a careful watch list but we think that the reserve that I have just stated to you more than adequately covers all elements of the tenant watch list.

We have some situations, frankly, where as a result of downsizing in certain industries you know companies have closed offices, we don’t, they are certainly not credit risks in a number of instances have years remaining on their lease and might be what you would refer to a shadow space in terms of a competitive set but they are paying their rent in full and are not part of any credit reserves.

Operator

We will now hear from Michael Knott with Green Street Advisors.

Michael Knott - Green Street Advisors

I was just wondering if you can comment on the up tick in this quarter.

Mitchell Hersh

Sure. A lot of hard work appreciated. We had some good leasing volume. We are either I sighted a number of the transactions we had a whole host of 10,000 or 12,000 to 15,000 foot transactions and that effectively were absorption against some of the losses in a variety of different sectors of both technology in Jersey City, a company called [Ghum] who has some significant financial backing. We've seen I would say particular strength in the former bioscience and healthcare area, where those gains have offset some of the expirations. We were able to do some of these major extensions that doesn’t naturally resulted in slight diminishing of space like the Interpublic. We took back a little space early, and we were however able to extend that lease out to 20, 22. And with regards to the markets, Westchester and Suburban Philadelphia demonstrated a little more strength in the quarter, although that varies quarter-to -quarter. So it's still a lot of transactional work and a lot of hard work.

Michael Knott - Green Street Advisors

And do you have any update on the mix of new versus renewal leasing?

Mitchell Hersh

Yes I do. Actually out of 900 and 2000 call it, of activity 308,000 was new and the other was about 594,000 of retained and for the year 2009 approximately 3.2 million square feet of activity of which 1.1 million square feet was new and the balance 2.1 and changed retained. So we are seeing new businesses we are seeing flight to quality in to our portfolio as indicated by the new transactions.

Michael Knott - Green Street Advisors

And then I have a couple quick questions on downtown. I know you commented on Broad a little bit and I see some activity there. Leasing-wise in the supplemental, can you give us a snapshot of where you're at on that, where you expect to be by the end of the year? My second question on downtown is just if you have any comments or observations about the process of the Port Authority looking for a partner at World Trade Center and if that's something that you've thought about? Thanks.

Mitchell Hersh

Well the answer to the last question is no we haven’t considered nor will we consider partnering on the trade center project I think that well might at some point that environment might be magnificent it will be a decade away and it will be a construction zone over there for that at least the decade and our view sort of difficult place to do business from that perspective at least. That. What we see mostly in terms of the space showings and the activity set down town or small to mid size businesses and almost every sector that you can imagine we see, we’ve got technology companies, we’ve got, not for profits and the insurance companies and the list goes on and on.

There is pressure on the economics downtown I think you know what we had hoped for frankly was more activity as a result of the mid-town overflow but mid-town pricing has come off so substantially in some cases 40%, 50% from the highs so the tenants that are located in mid town and might have been priced out of the market are staying there and so statistically you see that there’s more activity in mid town but primarily that’s sort of lateral movement not a lot of organic growth, flight to quality to better space at much more affordable rents and so that didn’t put the positive pressure on the downtown market that we had seen signs of. But we do continue to see a fair amount of activity, its slower than we had hoped the rents will be lower than we had hoped for but not dramatically different than the expiring rents that we’ve seen from the Citigroup expiration which is the first quarter 2010 event as you know.

Most of the tenants that we see are at least a full floor 37,500 feet or more and we are working seriously with at least two that are approximately 150,000 feet so in the order of magnitude of five floors in the asset although we haven’t reached the finished lines, good news is in both of those instances they are existing tenants of ours these are more divisional headquarter locations and in one case they are located downtown and several locations, o it's a natural consolidation.

So we're hoping to take advantage of a premier asset with very high quality space and build on the relationship we have with these tenants, but we need to be competitive. And so the gross rent range in that average $40 number over the lease term is probably where we're going to end up, so that's kind of a snapshot of what we're seeing downtown right now.

Michael Knott - Green Street Advisors

Okay, thanks for that. I just have one quick follow up to that. If I look on page 36 of the supplemental under the leasing statistics, I see the gross rent for a 40,000 foot lease there was about 33 bucks and then there's about six bucks per foot per year of leasing costs. And then I imagine the operating and taxes are fairly high there, so I assume the net effective rent is pretty skinny. Do you think about those types of deals as you make money on the bumps over, say in this case, a 16-year term? I decided to think about weighing low net effectives today versus filling the space?

Mitchell Hersh

The first of all, the operating expense is about $16, maybe $16.25 all in including taxes and we have the taxes that under appeal, so that could be a benefit to us. So frankly, compared to mid-town, the operating expenses are half and that's important to know. The reality is yes. We will be getting bumps roughly $3 increases every five years in the PBA deal, and I think it's a signature transaction for us. It's a pre-eminent organization the executive offices of the Patrolmen's Benevolent Association moving to the building and again reflects on a sort of going in rent as you state within operating package of about $16. so, it does make economic sense for us to do the transaction. Some of the issues downtown in addition to give you full knowledge of what's occurring down there in addition to the mid town situation as I described it is the fact that Goldman Sachs has some space in the down town market.

Goldman Sachs will be moving to their new headquarters at some point and one of the buildings that they had under lease 77 water had been a significant competitor because of the concession packages that have continued to be offering the building but they have larger floor space, whole competitive set that we think we have an advantage as well as the ability frankly to have tenants moving more quickly because of the plug and play nature of the former Citigroup space. So the variety of things affecting the market, we would like the rents to be higher, we will meet the market however in terms of trying to fill the Citigroup space.

Operator

We have a question from Private Investor towards [Stuart Sperling].

Unidentified Analyst

Good morning and let me the first to wish a happy and a healthy New Year.

Mitchell Hersh

Thank you. Let me wish you the same.

Unidentified Analyst

Thank you very much. I'm going to try and have one. My question is about dividends. The last major move you made regarding dividends was a cut. Is there any percentage that you will not allow, what shall I say, the dividend to pass before cutting it or erasing it? For example, it's roughly, you said, the cash your funds from operations would be around, between 270 and 290. You're paying out 180, that's about 60%, somewhere in that area. Do you have a ballpark figure that you say, well; it's gotten down to this point? We want to make sure we have enough cash available; we're going to cut the dividend? Or, on the other hand, if the cash flow gets better, we can raise the dividend a little?

Mitchell Hersh

I think it’s a great question and you know we are very proud the fact that we had a modest dividend only a modest dividend cut in comparison to many others in our business in the public markets and we’ve continued to pay out our dividend in cash and so we are very proud of that fact. The way we see the world right now is we finished the year 2009 with roughly a 73% payout ratio on cash available for distribution that’s the CAD calculation that’s done and that just by way of information reflected in a 54.2% payout ratio on funds from operations FFO. But CAD for the purposes of dividend coverage is sort of the important metric.

With our estimate of the year 2010 again nobody has a crystal ball and we hope that things improve more quickly than we currently anticipate and certainly, we hope that they don't decline beyond what the current environment is.

And having said that we believe that with our current dividend payout of $0.45 quarter in cash, $80 a year annualized. We will comfortably get through 2010 on a cash flow basis and have a positive cash flow at the end of the year. And that's after spending some $65 million in tenant improvements and leasing cost if all things are equal, and again we've to continue to look at that as we do quite forensically and carefully throughout the course of the year. So I would say that right now there are certainly no discussion on the table concerning further dividend cuts. There is absolutely no discussion in changing the manner in which we pay the dividends that being all in cash, and we'll continue to monitor the situation as we move through the year and then see what the environment is and that's what I can tell you right now.

Unidentified Analyst

That's okay. Now I have one trivia question. I've listened to a number of conference calls, of course, not as many as most of the analysts have, but I know you like to save money, but this is the only Company so far that didn't have a toll-free number. Is there any reason for that? Or is it just to heck with it today, every plan covers the United States, so it doesn't matter?

Mitchell Hersh

Are you talking about toll free number for the earnings call?

Unidentified Analyst

Yeah. I'm sorry. I wish I made myself clear.

Mitchell Hersh

That's quite right. We certainly can look into that, we find that we do of course monitor all of the call participants that the majority today given technology or web participants and use the internet. So I guess frankly we don’t think too much about using a toll free calling but we'll certainly look into it and be prepared to address it in the next earnings call.

Unidentified Analyst

Well it didn’t bother me. I was just curious I thought I had the wrong numbers.

Mitchell Hersh

That’s all.

Unidentified Analyst

Well you guys continue doing what you are doing and again have a wonderful year.

Mitchell Hersh

Thank wish the best to you as well.

Operator

There are no further questions. I’ll turn the conference over to Mr. Hersh for any additional or closing remarks.

Mitchell Hersh

Okay well, Thank you all for joining us on today’s call we think that 2009 was a good year given all of the circumstances surrounding the economy and we look forward to reporting to you again next quarter; thank you again. Good day.

Operator

That does conclude today’s conference; thank you for your participation