波士頓物產 (BXP) 2008 Q3 法說會逐字稿

Good morning, and welcome to Boston Properties third quarter earnings call. This call is being recorded. All audience lines are currently a listen-only mode. Our speakers will address your questions at the end of the presentation during the question-and-answer session. (OPERATOR INSTRUCTIONS). At this time, I would like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead.

Good morning, and welcome to Boston Properties third quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8-K. In the supplemental package the Company has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg. G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.Bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Although Boston Properties believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that it's expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday's press release and from time to time in the Company's filings with the SEC. The Company does not undertake a duty to update any forward-looking statements.

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

Good morning everybody, and thanks for joining us for our third quarter conference call. Many of you were visiting with us in Boston last month for our Investor Conference, or some of you may have listened to the webcast and you had the opportunity to hear Mort give a pretty in-depth and frank assessment of the issues that are facing our financial system, as well as what he referred to as the adverse feedback that will be felt as the real economy contracts over the foreseeable future. In a few moments Mort is going to be on the phone to continue with that discussion.

We at Boston Properties had our regularly scheduled Board meeting last week. And one of our Board members asked the question at the beginning of that meeting, so what keeps you all up at night. And I thought that this would be a pretty good place to begin my comments this morning. Last month we saw Lehman Brothers who pays us $43 million a year in annual rent, file for bankruptcy, and Heller Ehrman, which pays us about $7.7 million, vote to dissolve. These events clearly came as a shock to us, and it made it clear at the moment you can't take anything for granted, and no organization is immune from significant disruption. So what keeps me up at night are concerns about the stress our tenants are feeling, and how their individual predicaments might affect our monthly receipt of rents.

Now I've gained some comfort from the following facts. Our largest gross rent comes from Citibank who pays us $77 million a year, the US Government that pays us $60 million, Lehman is third at $42 million and Lockheed Martin is fourth, at $33 million. In our portfolio of almost 1200 tenants, we have only five other tenants paying us more than $20 million per year, and 17 more paying in excess of $10 million. These larger tenants include consumer products companies Procter & Gamble and Estee Lauder; biotech companies, Genentec and Biogen; the Massachusetts Institute of Technology, Bank of America, Bain Capital, The Smithsonian, Ann Taylor, Parametric Technology, and a pretty diverse group of law firms.

Our annualized gross revenues from rental income, including our share of our JV's, based on our third quarter run rate, about $1.7 billion. Our total direct hedge fund exposure is $57 million, and it's made up of 48 different tenants. Citadel Investments is the largest, by a factor of more than two, and they pay just under $10 million a year in rent. Investment management companies account for about $49 million, that's made up of 51 tenants, and private equity firms are about $35 million of revenues, and they make up 48 tenants. These tenants are all occupying highly marketable space, in the highest quality buildings in their respective markets.

No doubt we will see a short-term reduction in income if space is vacated, but we will be able to release this space at the top of the prevailing market. While some markets have gotten softer, in many cases we are still releasing with upside. As a case in point, we have received a proposal for 75% of the Heller Ehrman space, that rents on an as-is basis, well above the in-place rent of $65.00 per square foot. And in fact, we looked at our law firm exposure, and the mark-to-market on our law firm exposure is about 70% of market rents. In New York City, we're talking about average in-place rents in the mid-60s, with market rents that are probably closer to $100 a square foot.

We ended the third quarter with an occupancy rate of 95%, and with only 6.8% of our office space, or 2.1 million square feet, rolling in 2009. So we have relatively little exposure. Of that, 550,000 square feet is leased directly or indirectly through contracts with the GSA in our D.C. regions, where we are in active renewal negotiation. In addition, we're negotiating another 350,000 square feet of our 2009 expirations right now with either new or renewing tenants.

There isn't much we can do today to protect ourselves from these extra events that could occur, but the strategy we have relentlessly pursued over the past 40 years really does put us in the best position to weather these times. At the risk of being repetitious, Boston Properties has developed and acquired a portfolio of the highest quality, iconic buildings, in supply constrained markets. We have leased those buildings to the highest quality tenants on long-term basises, regardless of market conditions at any one time, which means that in many cases our leases are below prevailing market.

My second greatest worry is the freeze up of the credit markets, particularly in the medium to long-term financing. A year ago, we were talking about the reduced availability of secured financing from disruptions in the CMBS market. 60 days ago, the investment-grade bond market was still functioning, although at a very unattractive risk premium, and the convertible debt markets and equity markets were open, though perhaps with some size limitations.

Since the Lehman Brothers bankruptcy and the emergency actions by the Government regulators, including the short-term prohibition on short selling, the new issue market for virtually all of these products has gone to a wait and see mode and secondary trading is thin and at very confused levels. A convertible bond market, for example, is really in disarray. Our two and seven eighths convertible bond, due in 2012, traded last week at a yield to put, assume no value to the auctionality of the equity piece of it, to 15%. I will leave it to you to determine whether that represents an appropriate risk premium.

We were fortunate to have gone into the market on August 19th, and we executed our $747 million convertible deal, with a coupon of 3.625% and an all-in cost, including the cost of the cap call, which we probably wouldn't have done in retrospect today, at 5.3%. We also signed an application in early September with a group of life insurance companies to finance a $375 million secured mortgage on Four Embarcadero Center for eight years. This financing is expected to close in early November.

At the moment, many of the life insurance company lenders have moved to the sidelines, when they are presented with new, secured financing opportunities. They just can't understand or rationalize pricing. So the real estate industry finds itself with very limited access to long-term funding, though this is clearly not just a real estate related industry problem.

The short term credit markets are beginning to function for solid issuers, though the lending environment has clearly changed. We are moving into the documentation stage on our Russia Wharf construction loan with a consortium of banks, and anticipate a closing of that facility before the year is over. As you can imagine, we have had a significant number of conversations with the banks, large and small, domestic and international.

The banks are making smaller commitments, they're take absolutely no underwriting risk, they're requiring much higher credit spreads, they're requiring structure, and they're focusing their time and capital on long-term relationships with solid sponsors. The banks that are lending are now, more than ever, the same institutions that will be advising companies like ours on accessing the long-term capital markets when they are available. They clearly understand the current situation facing borrowers, and they know when they provide credit, the permanent takeout is unclear.

Government intervention to this date has been geared toward getting the short-term markets back to normalcy, and clearly the solution to the financial crisis needs to start there. But much of my concern relates to what will replace active based securitized markets over the next few years. I expect that bank revolvers are going to get smaller, and in any event, they were never intended as permanent capital facilities. In the short-term, relying on the bank market for a significant portion of our capital may be necessary, but we do not want to be reliant on any one capital market,and certainly not a short-term market.

Office buildings leased on a long-term basis are clearly suited to long-term, fixed rate financing. Boston Properties is very well positioned in the short-term to weather this crisis. After the closing of the Embarcadero Center loan, we will have $900 million of availability on our credit facility, which expires in August of 2010, with an extension to 2011, and we will have cash balances of about $100 million. Overall, our leverage position using our stock market valuation during the month of October, has ranged from between 36% and 48%, and we have an interest coverage ratio, including our capitalized interest of almost three times.

We have $250 million of maturities in 2009. The largest at $177 million has two one-year extensions at LIBOR plus 100. The other two loans are with life insurance companies, with loan to values between 25% and 47%, using our line covenant definitions of value, which use a 7% cap rate for CBD properties and 8.25 cap rate for suburban properties.

Our 2010 maturities total about $875 million. The majority of our joint venture assets, our shares of those $572 million, and all financed with life insurance companies, and the leverage levels are extremely low. We took a look at all of our maturities through 2010 to give you a sense of the leverage on our rolling secured mortgages. So again, using our line definitions for value, a 60% loan to value and initial coverage ratio of 1.6, and an 8% coupon, we could raise an additional $225 million of proceeds, and more than 25% than the existing loan balances. Another way to say this is that these assets have significantly less than 50% leverage today.

We are planning for the worst, while at the same time hoping that the freeze in the asset based lending market melts. How are we doing this? First and foremost ,we are maintaining excess liquidity. As good as opportunities may be in the short term, we're passing. As an example, we're not buying our 2012 convertible debt at $0.68 on the dollar.

Aside from our existing pipeline, we are being extremely cautious when considering new acquisitions or developments. Thoughts of growth must rank behind keeping our portfolio well leased, and financing or refinancing our existing commitments. We are examining every request for capital, whether it is a lease related TI, leased building or corporate, and we are being very stingy about making expenditures. Mike will describe our results and our 2009 guidance, and the particular assumptions we're using around leasing in a few minutes, but based on those estimates, we expect to retain about $100 million of cash in 2009.

And finally, we are engaged actively with our contacts from around the globe exploring additional partnership opportunities and capital investments.

Before I turn the call over to Mike, I have two final comments regarding asset values and rents. The first in regard to individual asset valuations. We just don't have any clarity on where cap rates are today. Over the last month, our stock price ranged between $57.63 and $92.00 per share. If you strip out our land and our development assets at cost, as well as our hotel, and you use cash NOI, including our share of joint venture properties, we come up with a range in cap rates for our portfolio, based on the stock market valuation, of between 7.5% and 5.6%, or between $465 per square foot, and $622 per square foot. Since there are no willing buyer/seller transactions, we just don't have a basis for knowing how far below intrinsic NAV we have been trading, but believe you need to consider the location, the quality, the replacement cost, the tenant roster, and the lease rollover schedule of our portfolio.

Mike is going to provide some details on our mark-to-market on leases. Since September, the vast majority of transactions have either been put on hold or re-traded, so we can't tell you with precision today where market rents might even be. When we went through our mark-to-market this quarter, we took a meaningful haircut to our overall rents in anticipation of a prolonged economic slowdown, so our ranges are as follows, and these are really ranges, and I can't give you specifics on any one building or another.

In New York City, rents are between $70.00 and $140.00, and well over $200.00 at the General Motors building. In Boston, CBD rents range between $50.00 and $80.00, in Washington, D.C., between $30.00 and $60.00, those are on a triple net basis; in San Francisco, between $45.00 and $75.00. The greater Waltham sub market still has rents between $33.00 and $45.00 a square foot, and in Reston Town Center, between $35.00 and $45.00.

Until there's further clarity we're going to refrain from commenting on how much rents may decline in any particular market, on where we think they will end up. And with that I'm going to turn the call over to Mike.

Thanks, Doug. Good morning, everyone. I want to start by discussing the leasing activity that we experienced this quarter. There has been a dramatic deceleration of decision making exhibited by tenants in the market since early September, when the financial crisis really entered an elevated state. Despite the pause in activity, we were successful with over 600,000 square feet of new leases commencing during the quarter. On average these leases have rents that are 75% higher on a net basis than the prior leases. These rent increases were spread across, Boston, New York, and San Francisco.

Our weighted average transaction costs were $29.57 per square foot, in line with our projections, but higher than our prior quarters, due to 40% of our leasing being in New York City at strong rents, but with commensurately high leasing commissions. While the terms of most of these leases were negotiated several months ago, it does point to the widespread between in-place rents and new transactions. Even if rents decline, we still expect a healthy mark-to-market across the portfolio.

As Doug mentioned, we have not yet seen empirical evidence of widespread declines in taking rents, but we're expecting downward pressure, and have reduced our market rents for analytic purposes. Even with our adjustments, the current mark-to-market on the portfolio remains significant at $8.69 per square foot, which includes our economic share of our joint ventures.

Speaking of our joint ventures, in August we closed on the remaining assets from the Macklowe Organization, including 540 Madison Avenue, 125 West 55th Street, and 2 Grand Central Tower, as outlined in our press release. The accounting for these joint ventures, in which we own 60%, is identical to the GM acquisition, and these assets will be treated as unconsolidated joint ventures. These buildings have stable rent rolls, and lease rollover through the end of 2009 is only 80,000 square feet. The rents are below market and we will be reporting significant FASB 141 income, marking the rents to market. We project that our share of the fair value rent component of income for these buildings will be $13.2 million in 2009.

At the end of September, we also acquired National Public Radio's corporate headquarters, located in the east end of Washington, D.C, just a block East of our highly successful 901 New York Avenue project, for $120 million. We have leased this building back to NPR for a five-year term, on a quadruple net basis, at a 5% unleveraged cash-on-cash return. In addition we will be providing development management services for NPR's development of a new headquarters, and will generate approximately $5.3 million in fee income over the next several years. Upon completion of the development, NPR will vacate our building, and we plan to redevelop it in to a Class A office development for delivery some time after 2014. The site is currently approved for 450,000 square feet.

Our third quarter results were impacted by the turmoil in the financial sector and the slowdown in the economy, as we experienced two significant tenant defaults that Doug pointed out. We have taken a reserve against our accrued straight-line rent balance of $21 million, or $0.15 per share. This is the result of a $13.2 million non-cash charge for our entire accrued rent balance from Lehman Brothers, who leases 436,000 square feet in 399 Park Avenue, and a $7.8 million non-cash charge, also the entire accrued rent balance, relating to the law firm of Heller Ehrman, a tenant at Times Square Tower.

Lehman Brothers continues to pay rent and occupy a portion of the space at 399 Park, but given they are in bankruptcy, we assume the lease will be rejected, and the space will be down until 2010. Heller Ehrman is a San Francisco based law firm that voted to dissolve in late September. They lease 134,000 square feet, a portion of the 3rd and 38th floors, and floors 39 through 42 in Times Square Tower, and we are negotiating a termination of the lease. As with the majority of our law firms, we hold a substantial security deposit. This space is attractively built out, and less than four years old. It is located primarily in the high rise, and is readily marketable as move-in condition space. As Doug mentioned, we are seeing good activity.

This one-time reserve had an adverse impact on our operating margins and our same-store statistics that we reported in our supplemental report, lowering our operating margin by 215 basis points, and resulting in a decrease in our combined same-store GAAP NOI by 950 basis points, from 5.6% to negative 3.9%. With the non-cash reserve associated with these two tenant defaults, we're reporting third quarter FFO of $1.13 per share, which is $0.09 below our prior guidance. Excluding these two items the cost $0.15 per share our results would have exceeded our guidance by $0.06 per share.

The $0.06 of outperformance is primarily due to the impact of our new acquisitions in New York City. We recognized $5 million of property-level FFO, and $300,000 of management fee income from these assets, and we also earned $2 million of one-time acquisition fees related to the successful completion of the joint ventures. These three items total $0.05 per share.

The portfolio itself came in above budget by about $1.2 million, with a combination of operating expense savings, due to the deferral of some repairs and lower than projected utilities, and rental revenue being slightly off budget, including the hotel which came in $250,000 below our expectations. Third-party fee income was up $700,000, with higher work order income in New York City, and higher construction management fees throughout the portfolio.

G&A expense was $750,000 above plan, due a few one-time items, including higher legal and accounting expenses, associated with the activity in New York City, and the write-off of some abandoned project costs. We expect the full year to come in on budget at $74 million.

As we discussed last quarter, we took a charge related to our hedges in the quarter for $6.3 million. The charge was budgeted in our prior guidance at $7 million, and is related to our pending Embarcadero Center financing. Since we elected to structure an eight-year financing, there is a mismatch with our hedges that were designed for 10-year debt. The charge relates to two years worth of hedged interest payments that we won't be using. In summary we ended up the quarter with FFO of $1.13 per share, with our core operations exceeding budget, but being outweighed by the impact of the non-cash charge related to our Lehman Brothers and Heller Ehrman exposure.

Looking at the rest of the year, we expect our fourth quarter FFO results will be $1.34 to $1.38 per share, resulting in full year FFO of $4.77 to $4.81 per share. Fourth quarter results may be impacted by the projected loss of Lehman, starting in December of 2008. The uncertainty of receipt of Lehman's rent at $3.5 million per month is responsible for the majority of our fourth quarter guidance range. With regard to Heller, we are negotiating a termination agreement and have assumed that we book rental and termination income of approximately $6 million in the fourth quarter.

The remainder of the portfolio will be relatively flat from quarter-to-quarter. Straight-line rents are projected to be $9 million to $10 million. For the full year, we anticipate same-store NOI to be 1.0% to 1.5% on a GAAP basis, due to the $21 million non-cash reserve; excluding this it would be 3% to 3.5%. On a cash basis, we expect full year same-store NOI of 4.5% to 5.0%.

We project the fourth quarter contribution from the hotel of between 3.5 million and 3.8 million, this is down from our prior projection, as the hotel started to see signs of a slowdown in the third quarter. The weakness to date has been solely due to the lower room rates and occupancy rates are holding firm.

The FFO contribution from unconsolidated joint ventures, will be up and is projected to be between $35 million and $37 million, due to a full quarter run rate of the new acquisitions. And for the fourth quarter, we are projecting FAS 141 revenue of $27 million, and FAS 141 interest expense of $2 million, which is primarily emanating from these joint ventures. We project fee income for the quarter of $8.5 million to $9 million, our G&A expense will be approximately $18.5 million, and net interest expense will range from $71 million to $72 million.

This is the time of year we start discussing our expectations for 2009. Given the challenges facing the economy today, which are putting pressure on decision making and lease economics, we are understandably cautious. We have completed a property by property review, and have modified our rents and pushed out the lease up of spaces that are either vacant, or where we expect tenants to vacate. We still anticipate completing a substantial amount of new leasing in 2009, roughly 2 million square feet with much of it already committed or in negotiation.

As Doug stated, our rollover exposure is modest at just 6.8% of square footage. Nearly 65% of this rollover is in Boston and Washington, and only 10% is in the New York City market. Further nearly 50% is not expiring until the fourth quarter. Of course we're actively working on all of this space. The anticipated downtime associated with the Lehman and Heller spaces will reduce 2009 income by more than $50 million. We have budgeted both of these spaces down for the full year.

Despite the expected loss of revenue, we expect that our in-service portfolio will generate $127 million of cash flow from operations. This is after the funding of all of our projected portfolio capital costs, including tenant improvements, leasing commissions, and capital expenditures, plus our dividend. It is before principal amortization. As an example, this quarter, we generated $35 million of operating cash flow, after funding $25 million of capital expenditures, tenant improvements, and leasing commissions, plus our dividend of $97 million. The portfolio has historically, and is projected, to continue to produce substantial excess cash flow that we can retain as additional liquidity.

On the positive side for 2009, we will get the benefit of a full year of our roll-up to market rents from our 2008 leasing, as well as a more modest benefit from our projected 2009 leasing. We're budgeting a decline in occupancy from 95% currently, to an average of 92.5% in 2009. Lehman and Heller make up 1.6% of the decline, and the remainder is just under 300,000 square feet of new vacancy, due to our more conservative leasing projections.

2009, same-store NOI, which excludes over $50 million of rent and termination income generated from these two tenants in 2008, is expected to be down 2% to up 1% on a GAAP basis, and down 2.5% to up 0.5% on a cash basis. We project straight line rents of $28 million to $30 million. We are budgeting the hotel to suffer with the slowdown of the economy in 2009, and are projecting between $8.5 million and $9.5 million of NOI, down approximately 10%. We do expect to see strong increases in income from our development pipeline.

We delivered our South of Market , 77 CityPoint, and One Preserve Parkway projects in 2008, and although we expect One Preserve to continue a slow lease-up of trajectory, we should see strong growth from both South of Market and 77 CityPoint, both of which will be stabilized for the entire year. Additionally, we will deliver our Wisconsin Place office development and it is projected to be fully leased in mid-2009. Our Democracy Tower and Princeton University developments are 100% leased, and will deliver in the third and fourth quarters.

Lastly our Annapolis Junction property was accredited by the NSA this month, and we have commenced the leasing process. In fact we have our first tenant in the building in November. We expect to have our first tenant in the building in November, and expect a consistent lease-up during 2009.

In summary, we placed in service $320 million of development in 2008 with $95 million coming in the fourth quarter, and we expect an additional $250 million of development deliveries during 2009 weighted towards the last half of the year. We're budgeting strong growth from our JV portfolio as well, as we will experience a full year of contribution from the acquisitions we made this summer. Our FFO contribution from unconsolidated joint ventures, will be $145 million to $150 million. The FASB 141 revenue from these properties will be $94 million.

With regard to third-party fee income, we expect an increase from a full year of managing the joint ventures and from NPR. This will be partially offset, as some of our joint venture developments have been completed, plus we're projecting lower work order profit in New York City, the result of the anticipated reduction of tenant services as companies manage down expenses in 2009. In total we expect third-party fees of between $28 million and $30 million. We are also projecting general termination fee income of $1 million a quarter.

We're budgeting our G&A to be flat in 2009, with the only real increase coming from the vesting of long-term stock compensation. Our G&A is projected to range from $74 million to $77 million. Net interest expense will be between $330 million and $340 million. Interest expense will be up, due to the additional debt raised in 2008 to fund our acquisition activity, as well as the impact of APB 14-1 on our accounting for convertible debt. We expect to record non-cash interest expense associated with our convertible debt of approximately $30 million in 2009.

Our capitalized interest should run between $40 million and $50 million. Also, our estimates assume we will be accessing the capital markets and raising $300 million to $500 million of fixed-rate term debt at approximately 7.5% over the next six to nine months, to add to our liquidity. $150 million of this debt may carry the additional burden of roughly 50 basis points of hedge amortization, as we still have $7.2 million of hedge liability remaining on our balance sheet after the closing of the Embarcadero financing. We could write off the full amount of this hedge loss in 2009, in the event this financing activity is deferred until later in the year.

When we put all of these assumptions together, it results in projected 2009 FFO of between $4.65 and $4.90 per share. Despite the loss of $0.35 of FFO in New York City, and our more conservative assumptions with respect to the lease-up our vacancy and rollover, our FFO is expected to be flat from year to year, assuming the midpoint of the range. Excluding the implementation of APB 14-1, which materially increases our GAAP interest expense, our FFO midpoint would be $4.98, up approximately $0.20 per share from 2008.

The unexpected vacancy in our New York portfolio is unfortunate and will cause a temporary loss of revenue, and materially affect our same-store results from 2008 to 2009. But 399 Park Avenue, and Times Square Tower, are two of the top buildings in midtown Manhattan. We believe that our strategy of investing in these types of high quality building will pay off over the long term. You've heard Mort and Ed say it time and time again, but in challenging times, the best buildings dramatically outperform the market, as tenants take the opportunity to upgrade their space. I will end there, and I would like to turn the call over to

Hi, everybody. This is Mort Zuckerman speaking. Well, we have been in a period of extraordinary turmoil, really unprecedented in anybody's lifetime on this telephone call, and probably the most dramatic financial collapse, or at least collapse of wealth the history of this country. I would say that the financial collapse in this period of time is and will be greater than what happened during the Great Depression, but the actual decline in the real economy, the Main Street part of the economy in my judgment will be considerably less, for all kinds of reasons. I'll just mention a couple of them. One is that, we forget in that 1929 when the market crashed, nothing really happened until the beginning of 1933, when in March FDR became the President, and things like Federal Deposit insurance and Social Security all happened in 1934 and 1935, and that's what began to improve the economy, but in that interim period 40% of America's banks failed and we had a 1/3 decline in the money supply, which turned to what could have been a serious recession into a major depression.

Obviously the speed with which the Federal authorities have reacted, both on the monetary side and on the fiscal side, has been quite dramatically different this time around. Nor have we the same kind of fiscal situation in that, number one, the percentage of GDP in 1929 that the Federal Government made up was 3%, today it's 21%, and we have a huge educational and medical complex that are more or less decoupled from the normal business community, and finally, world trade which dropped by 2/3rds as a response to the rest of the world to the Smoot Hawley Act in 1930, this time has been one of the strengths of the economy.

Having said all of that, it does seem to me that we have not yet fully experienced what the decline will be in the Main Street or in the real economy, as a result of what has happened in the world of finance, because we did not have the kind of total freeze-up of the credit system any time since the end of World War II that is comparable to what has been going on today and continues. As you heard Doug and Mike describe, we were really very cautious in our financing, and we're fortunate to have decided to take advantage of the real estate values in the commercial side in the first six months of 2007 and the last six months of 2006, and to do some refinancing, and to do this wonderful financing on August 19 of this year, frankly because we had made a policy that we would try and raise money when we could raise it and not when we needed it.

And who knew in September the entire financial world would freeze up,. But we have had an extraordinary freeze in the credit system, and what is going to take considerable time to recover in that world, and in the business world in general, is a breakdown of confidence, which has really been extraordinary. There is a wonderful story that was told of an economist who was walking by and he sees a $100.00 bill on the ground, and his friend said to him as he walked by, he said why don't you pick it up, he said, well, if it was still there, it probably wasn't worth anything since nobody else picked it up. All of that goes to the point that credit comes out of the latin word [cridare], which means to believe, and people have stopped believing.

And this is going to take a while to turn around. Once you had the credit freeze that was accompanying the major strategic error of this administration, which was to allow Lehman to go under, it will take some considerable period of time to rebuild that, and nobody quite knows what that is going to be like. I mean, nobody who thinks they know either has no knowledge or little knowledge, or has a self-interest. It's impossible to know. It's impossible to know whether or not millions of Americans will walk away from their home mortgages, when we have 15 million mortgages within the next nine months that exceed the value of their homes; about one third of them, frankly exceeding the value of homes by probably a third.

Nobody knows what people are going to do. Nobody knows how bad the loan portfolios are in many of our financial institutions or their books. Nobody knows what the leverage factor is in the Shadow Banking System, which is unregulated, which, whether it be hedge funds or money market funds or what have you, nobody knows what they are going to do. So we're still in a never-never land. And we have as Doug indicated taken a very conservative posture in terms of our projections, in terms of our financing, and we will continue to do that until we test the market.

We believe we are as relatively invulnerable as any company of our kind could be for several reasons. One is, we made a point in the number of occasions, to renew leases, perhaps at slightly lower rents that we might have gotten if we had waited until the end of the lease, but we decided to do some advanced renewals. We certainly did it in the Washington market and to some extent in the New York market. We always had a longer average lease term than most other companies of our category, and it is one of the reasons why these two issues - - or one of the reasons why we have relatively little space rolling over.

And of course, the fundamental advantage that we have we believe embedded in our strategy has been repeated so many times, is we do believe that having the highest quality buildings in the markets that we are in really is a help. These are all supply constrained markets. If you look in New York alone, it is amazing and really stunning how the supply constraint is going to be demonstrated. Because in Midtown, basically you virtually have no space coming out over the next four years. At the most there will be two buildings, one of which will be ours, and we're looking at, therefore, a situation which there is not going to be a lot of additional supply coming on the markets, particularly at the highest end of the markets.

So we are not happy with our sort of financial environment in which we have to work. It's bound to affect, particularly in confidence terms, the decision-making of tenants into this world, a number of them are standing by. We had one tenant who we had reached an agreement with. It was not for our space. It was actually sublet space, and we had gotten to the point where we literally had a final agreement on the lease, and they just decided to stand back and see how everything evolved. And I think of course, that's natural, when you think about the extraordinary shock of a complete freeze up in the financial system, which nobody has had to deal with since the end of World War II.

I do think that it will slowly repair itself. Pardon me. As a business activity at the very least stabilizes sometimes over the next year, and then begins to grow again, you will see a re-energizing of the tenant market, particularly as we have indicated in the higher end of the office building market. That is really quite remarkably narrow in terms of its supply in almost every one of the markets we are in, and therefore, we have done relatively well in these, what we call, challenging times, but which, of course is a euphemism for times when things are going south rather than going north. Nevertheless we do think we will come out of this period some time in the next 12 to 18 months, and move on.

The stocks, our stock price goes up and down with a great deal of volatility, simply because a lot of people don't know what is going to happen. And we're perfectly comfortable with that. But I would just point out that we are extraordinarily well positioned in supply constrained markets with outstanding real estate in these markets, with a number of developments that are substantially preleased, that will add to our earnings over the next several years, and probably in the remarkable financial condition, I might say, I think almost in the best financial condition we have ever been in, because of both the financing that we did this year and last year, and the sales that we did last year, and in the second half of the year before. So we really are I think positioned to deal with whatever may come up with, and to take advantages of whatever we'll come up with.

And therefore, we - - you know, there was a wonderful statement made by a political figure in England, he was the Chairman of the Conservative Party, and his party by 11 o'clock had lost 60 seats in the election to the House of Commons and it looked as if there were going to lose another 60 seats, and he was asked by a television commentator how he viewed the election results at that point. He said, " I view the election results with cautious pessimism". Well, I think that's probably a good enough phrase for us. We're going to take that view and take advantage of whatever we can, but be prepared for the possibility that we'll have a number of shocks in the next 12 to 18 months as well.

Why don't I stop there and move on with the rest of our report. Doug?

I think we'll open up to questions now, Operator please.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Jay Haberman with Goldman Sachs, please go ahead.

Hey, good morning. Here with Sloan, as well. Doug and Mike you gave pretty elaborate details on your 2009 guidance, and obviously assume the Lehman space and Heller Ehrman does remain vacant for the full the year. And you also talked about perhaps some interest for the Heller Ehrman thus far. Can you give us updates in terms of where the Lehman space might stand in terms of tenant potential interest, and then have you even had conversations yet with potentially the private equity firms looking at that sort of project management business?

Let me give you the context of why we think this space may be down during 2009. I'll use the space at Times Square Tower as the starting point. If you are a 100,000 square foot tenant, and you are looking to make a commitment, you are probably not looking to make a commitment in two months because you've had to be much further out in front of your space requirements. So the tenants we're talking to are tenants who are looking to take space at the end of 2009 or the beginning of 2010, which is why, even though we may have great activity and we may actually be in a position where we can have a lease signed and have a commitment, we may not actually see rent commencement until some time in 2010.

With regards to the 399 space in Lehman Brothers, we do not believe that the space that is currently being utilized by the, effectively, their asset management groups, is long-term space because quite frankly most of their users are out of the building, and these are relatively small compared to the whole, so we do anticipate that we're going to get the space back. It's possible that we are may actually receive some income in 2009 from Lehman Brothers, because until they get our of all the space, they don't have an ability to reject the lease, and the good news is when they went into bankruptcy, we did not have any past-due rent, so they are current on their obligations with us, and they are required to remain current on a going forward basis. As long as they are in the space, we are going to receive rent. And we really just don't have any clarity on how long that is going to be.

And with regard to - - I'm sorry the Lehman space now have you seen any interest at this point?

One of the floors has already been sublet. And that was being done prior to the bankruptcy. We know there was other interest in some of the space, but quite frankly, Barclays and Lehman Brothers are no longer sort of working cooperatively, and it's Lehman Brothers' holding, which is the tenant under the lease, and Barclays, which is really, let's assume the Lehman Brothers' people, is sort of doing their own thing. So we are sort of in a bit of a vortex of decision making with regard to the entities.

Okay. Maybe just a broader question either for Doug or Mort. Given that the credit market freeze continues, have you given further thought to potentially even selling additional assets and raising your cash to deal with maturities in 2010 or 2011?

I think if we do anything at all, we'll probably think of the possibility of bringing in a partner in one of the buildings, but that too is something that we would do very reluctantly. We really don't see that we're going to be in a position where we have to do it. We might if we do it on the basis of terms that are satisfactory us to, but I think there's going to be a general, sort of wariness about this sort of partnership or sale on our part.

We really, we sold a lot of buildings, as you know, almost $4.3 billion worth the last half of 2006, first half of 2007. There isn't a building that we own at this stage of the game that we really sort of wouldn't want to hold for the longer term. So we're going to look to whatever it takes to maintain the ownership of these buildings. We think, unless we get a very, very attractive offer, which we certainly would be open to, at least on a partnership basis, I don't think we want to sell any of our buildings, I think we're just going to work with that assumption.

I mean, I cannot tell you what is going to happen over the next 18 months, but we're not going to have any financial problems in our judgment over that period of time at all in what we want to do. So I think we're just going to play it by ear at this stage of the game.

Any additional updates on West 55th? I know it's only been a few weeks since Boston.

Yes, nothing that we can sort of formally announce, but we are still in serious conversations with various users, and the construction is well underway. We have gotten through all of our major civic requirements now, and we're just going full speed ahead.

Okay. Thank you.

Thank you. Our next question comes from the line of Michael Bilerman with Citi. Please go ahead.

Good morning Irwin Guzman is on the phone with me as well. Doug, in your opening comments, and Mort you just referenced it as well, you talked about partnership opportunities and sort of expanding your discussions with your worldwide contacts. Can you just expand a little bit in terms of leveraging those discussions and sort of how you think of that in terms of raising capital, and it sounded like you are not going to move forward on doing joint ventures, but I was trying to put those two comments together.

You know, it's what it was saying before, look, we don't have any hard and fast ideology on this. We would be completely pragmatic. A lot would depend on what our various options are, and what the market looks like. We are happy that we have no pressure whatever on us to do anything. A lot will depend on whether the banks ever get back into construction financing on a reasonable basis, or whether there is normal financing available. We have a lot of mortgages on our property that are very, very low in relation to value, which we would be in a position to refinance if that market is available from our point of view. That's probably the best way to raise additional capital, which is secured financing, on existing assets.

We have very, very low ratios in almost - - in any number of buildings that under normal circumstances would be very easy to finance on reasonable terms. We don't know where the market is going to be, and that would be, at least from our point of view, the easiest way to raise additional capital if we need it. Right now we don't see that we're necessarily going to need it, but we have a lot of time in which to look at all of these various options.

The good news is that you can take a number of major buildings that we have, where the financing is in very low percentages in relation to value, and when I say low, I'm talking about 25%, 30%, 35%. So you have all kinds of chances if that is the easiest and most cost efficient way to raise additional money, we would look at that. We would prefer to do that it that way quite frankly. We don't want to dilute the equity in the Company, we don't want to dilute the equity in our buildings, because we think we have a fabulous portfolio of assets, that over time are going to show us tremendous profits over and above where they are doing now, and we want to be able to maintain these.

Our whole philosophy has always been frankly to take a longer term view in terms of the real estate we are going to hold. Because we do think the quality of the billings we have, the replacement costs, in particular, are going to go up dramatically no matter what, in part because we're basically in markets where you have union construction, in say, New York, and Boston. And whatever you want to say about union construction, the construction costs are going to go up no matter what the balance is in supply and demand. So that always means that your replacement costs will go up, and that always means that if you have the right buildings in the right locations over time you going to do very well in terms of the your rental income. This has been something we have experienced now for decades and we think it is going to continue going forward.

We don't know what is going to happen over the next year or two in terms of what sourcing in terms of money and funding and financing will be available. If you can tell us that we would be very happy to respond it to, but I don't think anybody really can know. We're in the very first innings of what has been an extraordinarily tumultuous and unprecedented time in the world of finance, so we are where we are, and we'll just have to wait and see. It's a going to settle down. It will take, in my judgment, a few more months before it settles down, and then we'll see what the best option.

So, it's really keeping all your options open, making sure that you keep your capital sources for anything that you want to do.

Right. Right. Exactly.

You know, Mort, you have talked a little bit about tenants wanting to trade up when they have the opportunity to trade up in challenging market. You know, given the fact that this is unprecedented what we're in, and there is a significant pressure on trying to maintain cost, I mean, do you still think that's going to be the same in this sort of environment, relative to other environments?

Yes. I mean on one level I could say I don't know. But here is the situation, for example, and we see this right now as we speak, and we're negotiating with tenants on this basis. There are tenants that are growing, and they are in buildings that are fully occupied. They have no expansion space in that building. Therefore, they have to move. There are very few options available if you want to move into good space, and so this is what makes our developments that are, you know, three years or 3.5 years, or even four years out, an attractive opportunity.

The market in general may be tough, but the ability to find 300,000, or 400,000, or 500,000 square feet is very limited, and you cannot if you are going to have to move in three or four years when your lease is up and you have 300,000 feet now, and you know you probably need 350,000 feet, you think you're going to need 450,000 feet, you're going to go into a new building, or at least into another building. That space, at this point, say for example in New York City in prime building, it is just unavailable. And that's is being typical, and that is why you have the opportunity if you want to look at our 55th Street development, that's what we really are experiencing, and we have experienced it.

We have been very cautious, we have the opportunity, and this is the other side of the thing, if these financial sources begin to ease up, we think we'll be in a position to take advantage of them a lot sooner than everybody else, and there are tremendous acquisition opportunities available to us. We haven't factored any of that in, because frankly we just don't know where the bottom is yet, and therefore we're not going to take any chances with all of the liquidity and the capital and equity that we have. But you can't be as bullish as we were a year ago, but we're still, you know, moderately bullish going forward.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Mark Biffert with Oppenheimer & Company. Please go ahead.

Good morning, guys. I guess my question, Doug, relates to the statement you made about taking a meaningful haircut to rents during the quarter. And I'm just wondering, how long would it take for market rents to fall closer to in place rentings if this is an extended downturn, say a year or two, and if you have any estimates of what you have been hearing from tenants in terms of layoffs in each of your markets, and how much of that is built into your guidance for next year?

I wish I was clairvoyant and could answer that question. I, unfortunately just don't have the ability, and quite frankly, I think it would be in our worst interest to sort of try to predict the most dire circumstances associated with what is going on in the markets we're in. I can tell you that a market like suburban Boston, rents haven't dropped one iota. In fact, there are transactions that are being discussed today, that are rents that are at all-time highs. And in Washington, D.C., the rents that we are talking about for 2200 Pennsylvania Avenue are probably 10% to 15% higher than the rents we achieved when we built 505 9th Street, which opened up earlier this year. Now in Manhattan, things are obviously going in the other direction, although the range of differences is dramatic. And the difference between what the change in value might be on a building on Park Avenue, or a building like the General Motors building, I think are going to be very different than the range of what is going to happen on the building on 3rd avenue or a building that doesn't have a kind of capital behind it from an ability to do transactions and maintain building infrastructure like our buildings. And I think the weak and the strong are going to clearly be differentiated, I can't answer the question in terms of how long or what the numbers might be.

Let me mention one other thing in addition to that. Tenants do not easily shop around from building to building. Why? Because there are huge tenant improvement costs that are affiliated with any move. And tenants don't want to take on those additional costs. So what you have is a situation where, even when your space comes up, you have an advantage when a tenant is in place, and has already spent all of his TI costs, to renew it and to renew at a rent that in a sense takes in to account that the tenant doesn't have to say, who knows $75, to $100, to $125 a foot of additional improvement costs. So you always have that advantage, and all of those moving costs, really, are able to be reflected in a higher renewal rate.

Secondly, you look at the Heller Ehrman space. That lease was done quite a number of years ago, the rents have moved up dramatically since then. the difference between what the rent was then, and even what any kind of reduced rent may be now, it is still a positive number for us. It doesn't mean that every time we have space that comes on that the rents are going to go down. Very often in fact, the rents will go up. They may not go up as much as they would have otherwise gone up, but they will go up, I think, in buildings like that, which were completed seven or eight years ago, there's no question but that they will go up.

So the picture is always a little bit different in the reality of it, than it sounds when you look at it on an overall basis. The specifics of a building and the specifics of a rent and where the space is in the building, really make a huge difference. You know, the Lehman Brothers space, for example, is basically a space that is below $100 a foot in 399 Park, and 399 Park is one of the best buildings in the City of New York. So we have the chance to really be competitive in the Lehman space.

As I say we're not counting on it for the next year, but we have the chance to be competitive in the leasing space simply because of where the rentals are, and those are the kinds of things that in a sense, on one level it sounds worse than it really is. It doesn't mean that we're going to find a tenant. But it does mean that we're going to get the advantage of where the Lehman rent was originally done, which was quite a number of years ago.

Okay. Thanks. And then regarding development, I'm just wondering what your expectations are in terms of yields looking ahead, given the expectation for higher interest costs and also the slower lease-up expectations?

I'll answer the question in a bit of a KGB manner, which is, the yields are a lot higher than they were a year and a half ago, when cap rates on existing assets were between, call it 4.5% and 6%, development yields of 7.5% to 8% were probably acceptable foregoing in returns. We don't know where cap rates are going to go, and we don't know where existing high-quality assets are going to trade, but the development returns are going to need to be in excess of that in order for us to make sense of doing something else.

Okay. Thanks.

Thank you. Our next question comes from the line of Steve Sakwa with Merrill Lynch. Please go ahead.

Thanks. Just a couple of quick questions. Doug, I think you gave a mark-to-market number of $8.69 this quarter. Do you remember what that number was last quarter?

Mike gave it.

Okay. We'll put it on Mike.

Last quarter, I don't remember the exact number, but last quarter we did not break out the joint ventures for our share, and I think that we indicated that it was in the mid-to high 9's for just our portfolio, and it was, like 13 for the GM building.

Okay. Thanks. Secondly, could you just talk about the cost of 250 West 55th? I think it went up $70 million from the last supplemental. I was wondering if you had any comments on that.

This is Ed. Yes, it came from re-budgeting the job, but also from taking - - and some of this is lease related, but taking a look at what we needed to do to meet certain tenant requirements, and also there were some delays that were caused because of having to get certain approvals from the city, et cetera, and work out some arrangements with adjoining property owners, and all of that had to be baked in to the budget, and that's what we have done.

So, I guess in terms of the cost is some of that effectively going to be captured through higher rent, or is that just effectively a reduction in yield?

I that it's little of both.

Okay and then can you just talk about you pushed the stabilization date out about a year there. Is that sort of city-approval related, is that just problems landing the large tenant? Any thoughts there would be helpful.

Sure. It's pretty sample actually. In order to start the hole, which is now underway, we needed to deal with the litigation that was brought upon us by the fact that the [butter] was not allowing us rights to get into his property to quote unquote stabilize it as we were doing our excavation, and then the amazing amount of construction accidents across the City of New York put a very rigorous and much lengthier approval process on our ability to underpin existing buildings and do the work that we were doing, and effectively we lost six months of time. And so that six months sort of pushed out in terms of our schedule for the construction. Now, are we going to have a chance to make some of that up, we hope we do, but as we always are, we tend to try to give you the facts as we know them today, and as things change, we will update.

Let me make two comments on that. One of the delays was caused by somebody with whom we had a prior legal agreement, and we had to go to court to enforce it, and we were completely successful in court, but frankly this was somebody who was trying to force us through this delay to buy his property, so we would not do that, of course, and we had to go to court, and we lost several months in that.

But let me also say to you that the number that you have seen, again, to some extent it's based on the following, the parts of the job that we have not bought out yet why are now going to be bought out in an improving, shall we say construction market, and any possible improvements in that, frankly we have not yet baked in to it. But I know there was one contract or subcontract where we really did bring it in, you know, just the last couple of days, $3 million under our estimates, so I believe that the $70 million will be at the outside range of our what our possible cost overrun might be.

And lastly, I don't know if Ray or somebody else wants to comment, I guess the re-leasing spreads in Washington were down about 10%. It was I guess the weakest market this quarter. Any comments there would be helpful.

I'll commented on that, on two things. One is there was a mathematical mistake in one of the numbers, which we actually caught last night after the supplemental went out. The number is still negative, though. But it's negative 3% or negative 4%, and the sole responsibility in terms of that decline is some leases that we did in Montgomery County properties. It has nothing do with this Northern Virginia or our Springfield assets, and it was still down 3% or 4%.

Okay. Thanks.

Thank you. Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Thank you. I'm trying to reconcile your overall collective view of the world, which is, pretty sober, with your overall liquidity, and what your plans are in terms of shoring up additional liquidity in terms of, not only the maturities that you discussed, but also the development spending that lies ahead of you over the next few years. Be it through asset sales or additional financing, some of your peers have been - - maybe their accounts of the economy has not been as Draconian, but they have drawn down on their lines and horded cash. You guys don't seem to be doing that, but where do you stand in your thinking in terms of liquidity?

Well, I'll answer the question in a couple of different ways. First of all, I have to be honest with you, I don't believe that the banks in this country are going to renege on their commitments with regards to lines of credit and other types of facilities. with which they have contractual agreements. Now if a company is unable to maintain its bond covenants or is in default, and therefore can't pull down, what those facilities might be, clearly, you would obviously draw before that occurred, and that's a general statement. So we are comfortable with not maintaining a $900 million cash balance, and having the availability of $900 million revolving line of credit, which goes out to 2011.

That being said, we are going to aggressively try to finance as appropriately as we possibly can, additional assets between now and the end of 2010, and we are in discussions and we are in the market right now with a number of assets as Mike described, to raise additional liquidity, so that that we can have even more capital associated with what we might find as opportunities, at some point in the future, although I will tell you that we are very, very, very cautious about doing anything other than what we have to do to live up to our existing commitments with regards to our development pipeline.

So, we feel like we're in a really good place right now from a liquidity perspective. We're going to try to enhance that as much as possible. We will do it through secured financing, if that's the most auspicious way of doing it, but if the unsecured bond market were to normalize, rationalize, become open, it's certainly another market we have access to given our ratings, and we would take advantage of that as well. So we're not going to limit ourselves to anything, we're going to pursue everything, and we're going to be judicious about making these kinds of decisions that we should make to increase our liquidity as it is appropriate.

That's helpful. The $300 million to $500 million in Mike's guidance for next year, is that additive to the Embarcadero financing that is expected to close later this year?

Yes, that would be. I mean the Embarcadero financing is $375 million that we are very, very close to closing in the next few weeks, so that would be in addition to that financing, where we would put those in place, plan for next year. In addition, in our development pipeline that we do have in place, and Doug mentioned this, the Russia Wharf, we're in the process of putting together a construction loan on that, that will fund all of the remaining costs associated with that project. And we also have, as we mentioned, cash flow in excess of $100 million a year coming off of the portfolio.

What is the expected rate on the Russia Wharf deal?

We have been pleasantly surprised with the reaction from the banks that are in our line of credit, and these are the banks that have been our partners and our team players for years with respect to their - - the availability of the credit and their desire to participate in it. The pricing for construction financing has increased from in the low 100s to the high 200s, even potentially 300 basis points over LIBOR for that financing, as Doug mentioned the terms have become tighter too, so the level of recourse and things like that has also increased, but the credit from the banks is available, and they are consistently saying that they want to be there for their existing strong clients.

Okay. So the Company will probably guarantee that facility?

I wouldn't suggest that we would guarantee the entire facility, but as is typical with our construction financings, we guarantee a portion of it, and the amount of the guarantee is, commensurate with the amount of speculative market risk that is associated with the project. Now this project is primarily leased with the Wellington lease, so we would typically see a guarantee that would be 25% or less, and it would likely be more than that because of the environment today.

Okay. That's helpful. And just separately, Doug, I think in your commentary, I think you said the majority of the deals post September 30, basically came to a halt, or were put on hold, maybe you said, and I was just curious if that meant leasing in general overall has really seized?

I think that's it's an accurate and fair statement to say that unless a tenant had a lease expiration, they basically said time out, we have to get our feet under us, we need to understand the context of the market we're in, and we're just not prepared to go forward with a lease that we were otherwise prepared to go forward with a day before. And things haven't really changed much. I think there's been a recognition that the volatility that we have all experienced over the past month isn't going to change, probably any time soon, and so that you can only put your decision on hold for so long, because if you need the space, you are going to have to do something about it. Things seem to be slowly melting, but, I would say it's not going to be a rapid, you know, swing back to normalcy.

Thank you.

Thank you. Our next question comes from the line of Mitch Germain with Banc of America please go ahead.

Doug, just back to your comments on lower credit facilities, do you think this is going to be more on a select basis or more widespread in the industry?

I think it is going to be widespread in the industry. I'm not speaking for all of the banks, but in general, I think most institutions have been given the mandate to reduce their leverage and one of the ways you reduce your leverage is to overall reduce the amount of credit that you are providing to all of your customers, and I think there are two things that are going to go on. There are a number of customers of these institutions who will no longer get any credit, and then the really good customers will get their credit reduced over time. You know, until such time as the balance sheets of these institutions get big enough so they can start thinking about growing their loan balances, but right now I think that we're going in the other direction.

Great. That's helpful. Any way I can get an update on some of the discussions with Citi. Seems like, previously, they were shedding space at Citi Center, then I have read some published reports that they are consolidating some space. So any update on the discussions you have had with them?

You are talking about Citigroup Center?

Yes.

Citibank, and Citigroup Center is still net-net looking to reduce their commitment from a financial perspective, and they are in discussions with tenants to sublet space and as those discussions get closer and closer to happening, they come to us, because generally, Citi has I think eight years left on their lease, generally these tenants want to make 15 to 20-year commitments so they come to us and say okay, can we negotiate a stub. That is one of the things that Mort was referring to in his comments where we had a company that was going to take a couple of hundred thousand square feet of Citibank space, and we were going to give them a stub on top of that. So I don't think those circumstances have changed.

Thank you.

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

Hypothetically, if you had not done the GM deal earlier in the year and it was on the market now, A, would you be considering it, and B, would you bid a cap rate that is probably 100 basis points higher 150? Any comments there would be helpful, thanks.

Well, again, I think the General Motors building from the analysis that we did was at a cap rate which was already considerably higher than what it would have been the year before. We think that there was a 20% difference in the price that we paid, compared to what it would have been a year earlier, from $3.5 billion down to say $2.8 billion. But the important thing in the General Motor's building is, A, we had very little space that's rolling over the next few years, and B, the space that is rolling over, in fact the space on average in the building, is somewhere around 50% of where we think the market is to this day, I mean we're doing, there is just literally very little space. It's interesting.

We had one tenant there that we read about in the newspaper might be having difficulty with taking a floor, but when we looked at the rent and the improvements to the space, and we looked at the security deposit, we were relaxed about it. If it happens it happens, and if it doesn't happen it doesn't happen. Who knows what it would have been sold for. I can't tell you that we could still, in my judgment, sell the building today for a higher price than we paid for it.

Okay. On the development pipeline, you touched on this in a few different ways today, but it looks like you have about $1.4 billion left to invest in the current pipeline, can you just summarize for us your thoughts on how you'll fund that over the next few years, between development, construction loans, et cetera?

The simple answer, Michael is everything is going to have a construction loan if it doesn't already have one, other than 250 W. 55th Street, which is the one entity that we're really funding off of our available cash and our line of credit.

Thank you.

Thank you. Our next question comes from the line of Wilkes Graham with Friedman, Billings, Ramsey. Please go ahead.

Can you give a little more color on the 200,000 square feet that rolls over next year, and maybe even the 600,000 square feet that rolls over in 2010 I know you can't comment and nobody can predict where the market rents will be, but the expiring rents are $70 to $75 in that 800,000 square feet space or so, can you give any color on where market rents are today in those specific spaces? And I don't know if you can break them down, but I just mean in general, given where though those leases are, and maybe what buildings they are in, can you talk at all what rents are today, and where they've gone this year?

I missed the first part of your question. Are you talk about your New York City exposure?

Yes.

Okay. The vast majority of our expiring rents in 2009 are in 599 Lexington Avenue, and a significant portion of that is under negotiation, so rents are going to be, as I said, in the upper end of that $70 to $140 a square foot range, so I'm not going to sort of try to tighten it anymore than that.

And then in 2010, there are some leases that expire at Citigroup Center, the largest of which, there's a tenant right now who, as of November 1, has to notify us as to whether or not they want the expansion rights to that space, and our sense is they are going to take the vast majority of it. And then the other space is at the GM building, and it's in the lower floors of the General Motors building, and it is actually General Motors who is moving out of that building in 2010 to move over to Citigroup Center. That space again is well in excess of what the current market rent on that space is, and, again, it's between $140 and $200 a square foot.

And we just signed a lease at Citigroup Center for $140 a foot, closer to the - - that's in the topside of the building, but still $140 a foot, so that again, that's kind of the market that exists for that space, and I don't think that's going to change very much. We don't have very much to lease, but I don't think it's going to change very much.

Okay. I guess just another question, you guys mentioned it and we have heard it from brokers as well that the only deals going on today and recently are just lease renewals. Does that give you guys greater comfort, and Mort, you had said that as well, does that give you greater comfort that you are not going to have material issues resigning your renewals over the next couple of years if we stay in this environment?

We don't think so, as I said in part for the reasons that I mentioned, which is that someone you lose one way or another is going to have a big cost of moving. And they just as soon stay in their existing space and re-up in that space. What the rents will be, I don't want to predict that, but I must say we haven't seen any dramatic drop-off in those rents, the only issue is how much an improvement over the existing rents will we get? And maybe that improvement is slightly reduced from what we would have thought six months ago, but it is still going to be an improvement.

So it's hard to predict where the real estate market will be in a year or two, because if you have some continued activity in the financial world, I mean, a lot of the financial tenants, bare in mind are downtown, I think downtown is very different from midtown. Midtown on the east side is very different from Midtown on the west side. We're basically in Midtown on the east side, which is the most desirable location, and frankly, people will be cautious of their costs, but a lot of these firms still want to move in to good space because they want to hire good people. And that is a part of the work environment for a lot of these people, so I don't want to say that we're not worried, but we don't lose sleep over the worry, I'll put that it way. And we think we're going to come out in reasonably good shape.

But as I tried to say before, in one sense we're in an unprecedented kind of financial meltdown, how quickly it can be restored given the equally unprecedented responses on the part of the government is anybody's guess, and we have all kinds of problems in New York City and New York State. You know, with the big tax revenue issues that they are each going to face, and there will be budget cuts and everything like that. But I know New York City, the Mayor has been pardon me, through this once before, and one of the things he understood was you don't really cut city services, if you want to, you can raise taxes a little bit, but you don't cut city services, because that's key to the long-term health of the city. And New York City is still the place for a lot of people in the tenant worlds that we work within, that they would rather be in. That is the great advantage of New York City, particularly in Midtown and particularly in the upper east side of Midtown. There's basically - - we do not feel that we have a single competitive new building coming on the market over the next four years that would for example compete with our building on 8th avenue.

Let me just add one last thing, Wilkes, on your comment, which is I don't believe that where we're going to experience bad news is on our existing rollover of space. As I said before, sort of where I started which is I think where - - and everyone has the potential as the blow-ups associated with a tenant that for whatever reason has gotten itself into a challenging predicament. The dissolution of a law firm is something that sort of hasn't been talked about since the mid-'80s, and low and behold Heller dissolved, and if you read the Wall Street Journal today, there is a another law firm called Thelen, Reid and Priest, which is also apparently going to dissolve.

Now, you know, the good news is that there will be winners and losers, so when a firm like Thelen, Reid and Priest or Heller Ehrman dissolves, those partners are not simply going to evaporate, and walk out of the work force. They are going to work for other larger, more thriving law firms. For example, it was reported that Nixon Peabody was going to be a beneficiary of a number of partners from Thelen, well Nixon Peabody happens to be a tenant of Boston Properties in San Francisco, as well as in Washington, D.C., and to the extent that we have available space in those properties where Nixon has leases that go through 2019 or 2020, chances are we may be the beneficiaries of some of the positives that come out of some of these bad situations, and you just don't know how all of that is going to work itself out, but I think that's where there is going to be the friction in our portfolio for the good or for the bad over the next year or so.

Thanks, I appreciate it.

Our next question comes from the line of Nick Pirsos with Macquarie. Good morning.

Given the current cautious environment, of your four key markets, and you can define concern however you wish, which of your markets are you most and least concerned with for the foreseeable future, and why?

I'll try and do this as quickly as I possibly can. So, if you define our four markets as Boston, Washington, D.C., New York City, and San Francisco, and you're defining them as CBD's, I would say that the strongest market is Boston, followed by Washington, D.C., followed by San Francisco, and followed by New York. If you're talking about the suburban markets, the Boston markets are clearly the strongest, Cambridge and the Waltham market, followed by northern Virginia in the Reston marketplace, not the overall market, and then followed by the greater Peninsula. Just because we haven't talked about it, we've actually signed 70,000 square feet of new leases in our Mountain View properties down in Silicon Valley in the last two or three days. So, there is activity in the suburban markets that people really aren't talking about and people aren't reading about. So, that would be my quick and dirty viewpoint.

Great, thank you.

Is that it Operator?

Yes, at this time there are no additional questions, and I'll turn it back to management for closing remarks.

Okay, thank you everyone, and we will see many of you I'm sure at NAREIT in San Diego in a couple of weeks. Have a good day.

Thank you ladies and gentlemen, that does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 1-800-405-2236, or 303-590-3000, using the access code of 11120266, followed by the pound key. BCC would like to thank you for your participation.