波士頓物產 (BXP) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Boston Properties fourth quarter 2008 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, January 29, 2009. I would now like to turn the conference over to Ms. Arista Joyner, Investor Relations Manager for Boston Properties. Please go ahead, ma'am.

Good morning, and welcome to Boston Properties fourth quarter earnings conference call. The press release and supplemental package were distributed last night, as well as furnished on Form 8K. 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 its expectations will be obtained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Wednesday's press release, and from time to time in the Company's filings with the SEC.

The Company does not undertake a duty to update any forward-looking statements. Having said that, I 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 call a question and answer portion will be available, a 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 fourth quarter call. It may feel late to say this, but Happy New Year to everybody we haven't spoken with. For many of us the close of 2008 probably didn't come too soon. The continuation of the unwinding of the excessive leverage in the financial system, along with what is clearly a deep lack of confidence among consumers across the world certainly had a profound and a very negative impact on financial performance as measured by either stock price or bond spreads over 2008. Unfortunately, neither the duration nor the depth of the economic challenges across the globe is still fully understood. The continuous announcements of revenue shortfalls, spending cuts from public officials, of bankruptcies from retailers and of layoffs from business leaders like Microsoft's Steve Ballmer, who even announced for the first time that Microsoft was going to experience job cuts, is a clear reminder that the current recession has a very, very wide reach. And yet, as Mike LaBelle is going to talk about in a few minutes, if you pull out the non-cash impairment charge due to the application of that fair value accounting to our equity interests and our unconsolidated joint ventures, that within itself is a mouthful, our 2008 results were ahead of our guidance, a 3% increase over 2007.

The fourth quarter leasing statistics still show a 39% net increase in rents with the majority of the increase coming from NYC, which was over 60%, and clearly the news from NYC is about as bad as it has been anywhere. But lest we be accused of being Pollyannas, leasing activity with few exceptions has been largely nonexistent in our markets during the fourth quarter and into the New Year. Now, I say that in the face of having signed a 356,000 square foot lease with Biogen, and a 195,000 square foot lease with Hunton and Williams in the fourth quarter in late November and early December. That being said, CBR re-reported the transaction volume in NYC was at its lowest quarterly level since they began tracking activity. While we completed a number of transactions that were in the works from earlier in the year, with so little current activity, we have a really difficult time stating with any certainty where market rents are today.

In the short-term, the reality of where leases are actually getting cut is probably driven more by the psychology or expectation of tenants and landlords, but depending upon the market, as tendency to shed space into the sublet market or default and go away, availability is going to rise and rents are going to soften. Unfortunately, this doesn't relieve us of our obligation to give you our best estimates of market rents so you can get a feel for the mark-to-market of our portfolio. If anything, we probably expect that the views that I am going to give you may be a little bit more conservative than we may actually transact leases, but I will give you a sense of where we think market rents are in our markets today. Let's start with New York City. In New York City we think gross rents are in the low end $55 a square foot at the bottom of some of our buildings, like Two Grand Central Tower, to over $115 a square-foot at the tops of buildings like Citigroup Center. At the GM building, while the demand is nonexistent, we still think if tenants were looking for space they would be prepared to pay in excess of $175 for certain suites in that building. In Boston rents are between $50 and $80 on a gross basis. In Washington, DC rents are quoted on a note basis in the CBD, and are between $30 and $60, and in the San Francisco CBD gross rents are still between $45 and $75 a square-foot.

The greater Waltham suburban market, which is our Boston area suburban market, gross rents are between $33 and $45 a square foot, in Reston Town Center on a gross basis rents are between $32 and $42, although for our new build-to-suit called Democracy Tower rents are approaching $50 gross. In suburban Maryland rents are in the low $30 in Rockville to the mid $50 in Chevy Chase, and in Princeton rents are still right around the low $30. This leads to a mark-to-market, including our share of our JV's, of about $4.29 per square foot, so it is still a pretty healthy mark-to-market even with the sort of rather conservative view of where rents are. In 2009, our average expiring rent is $38.58, and that's versus a market rent on that same set of space of $42.83, and in 2010 the average expiring rent is $37.22 versus an expiring rent from market on that space of $41.75, so again we still have that mark-to-market that's going to likely come through our portfolio on a consistent basis even as we head into the downturn. As we discussed on our last call, we are not immune from the significant disruption caused by exogenous events, and while we fully expect Lehman Brothers to vacate its lease at 399 Park Avenue, which will reduce our occupancy by between 120 and 130 basis points in 2009, to date we have received $14.8 million in rent since they made their bankruptcy filing. Last quarter we spoke about the dissolution of Heller Ehrman, and everybody probably read more than they care to in the Wall Street Journal two days ago, they were a 134,000 square-foot tenant at 7 Times Square, and as we predicted we did release 71% of that space at a starting rent that was 90% greater than the in place net rent.

Though we did provide eight months of free rent, and we had to pay a leasing commission. This provides some evidence of our long held belief that highly marketable space in the highest quality buildings has the best chance to be successful even in a difficult market. Now, our concerns around tenants have not abated at all. Just to reiterate what we said last quarter, just to give you a sense of our revenue makeup, our portfolio is made up of about 1,200 tenants. Our annualized gross revenues from rental income, and this includes a share of our JV's, based on fourth quarter revenue is about $1.8 billion. Our largest gross rent comes from Citibank, $77 million. The U.S. government is second at $60 million, and then followed by Lockheed Martin at $33 million. We have five other tenants who are paying more than $20 million per year, and 17 who pay in excess of $10 million, and they include Procter and Gamble, Estee Lauder, Genentec, Biogen, MIT, Bank of America, Bain Capital, the Smithsonian, Ann Taylor, Parametric Technology and a group of national law firms. Our total annual direct hedge fund exposure is $63 million, and it is made up of 54 tenants. Citadel Investment is the largest by a factor of more than 2, and they pay gross annual revenues of just under $10 million. Investment management companies account for $49 million of our revenue, there are 51 of those tenants, and private equity firms account for $35 million, there are 48 of those tenants.

We don't know who they're going to be, we don't know when it is going to happen, but we do know we're going to have tenant defaults in 2009, and when we get to our guidance we've assumed a level of default, effectively a reduction in our earnings estimate, from these defaults. Under Mike LaBelle's leadership we put a significant effort into underwriting credit before we commit to a lease. In the case of law firms, which are on everyone's mind today, we try to lease to partnerships that have diverse business practices, which lack concentration in any one industry group, any one practice area, and any one client. We review annual projections, and we do maintain significant security deposits. When the lease commences, we walk the space periodically, and we have frequent conversations with management regarding the business. Quite frankly, as private businesses, law firm financial results are stale when we get them, and the unfortunate fact is that once we have a signed lease, when we're in a down market, we have very limited financial leverage to do much other than take our security deposit. We have no clarity today on where cap rates are, or where values are. There have been virtually no private transactions completed over the past few months. In this market there are two types of sellers, there are those who are motivated and those who have no choice. Unless the pricing is satisfactory, only the involuntary sellers will complete transactions. Over the last week our stock prices ranged between $41 and $48 per share.

If you strip out our land holdings and all of our development assets, including our construction and process at cost, and use cash NOI from our properties and our share of our joint ventures, we come up with a range in cap rates, based upon our stock price valuation of between 8.3% and 7.7%, or between $385 a square foot and $417 a square foot. Since there are no willing buyers and no willing sellers, we don't really have a basis for knowing how far below intrinsic NAV we are today. We do have to believe, when you consider the locations, the quality, and the tenant roster as well as the lease roll over schedule, and replacement costs that our portfolio is significantly under valued. We came to market for sale with a building lease to the GSA in Washington, DC about two weeks ago. This is going to give us an indication of how the private market is valuing our types of real estate. The transaction size is in the range of $115 million, and while we are motivated to sell, we're not a force seller, and unless we achieve pricing that meets our financial objectives we're not going to sell the asset. One of the challenges in this property, like the majority of our assets, is that it is unencumbered, and many buyers are actually confronted with the challenge of arranging debt, even for an asset with very secure government cash flow. The credit markets continue to be extremely constrained in the real estate space. Short-term capital continues to be dominated by the commercial banking market. The trouble is that the number of banks prepared to entertain new loans is extremely low, and a significant portion of the industry is grappling with the current exposure to commercial real estate brought on by the recent merger activity.

In the face of this, we are documenting now our $320 million Russia Wharf construction loan and are moving to a closing hopefully in February. The banks are making smaller commitments, they're taking virtually no underwriting risk, they're requiring higher credit spreads and structure and they're focusing their time and capital on long-term relationships with solid sponsors, a definition fortunately that Boston Property fits. Unsecured markets have shown little interest in real estate bonds. Secondary trades have been scarce, and hypothetical price guidance for new issuance are in excess of 10%. The long-term secured Capital Market is providing access to high quality assets at very, very low loan to values. Debt underwriting constants in excess of 13% are typical, and that basically drives coverage ratios to two times, or almost two times, on new interest rates of between 7.25% and 8.5% based upon where you are in your leverage position. While the public market has clearly over shot the decline in real estate values, there is no question that values have declined and more importantly, there has been a corresponding increase in real estate leverage. The real estate industry is going to delever over the next few years. After the closing of our Embarcadero Center loan last quarter we had $900 million of availability on our credit facility, which expires in 2010 and has an automatic extension until 2011, and we had cash and marketable securities at the end of the year of $250 million.

Overall, our leverage position, including our share of our joint ventures, using even our stock market valuation of $45 per share is about 55%, and we have an interest coverage ratio including capitalized interest of almost three times. We have $250 million of maturities in 2009. The largest is $183 million, and we have two one-year extension options and that loan is priced at LIBOR plus 100. The other two loans are with Life companies, and the loan to values are between 25% and 50% using our line covenant definitions of 7% cap rates for CBD properties and 8.25% for suburbans. 2010 maturities total about $875 million, and they are all secured mortgages. A number of these maturities are from our joint ventures, so our share of the $875 million of debt is actually only $572 million. The two largest assets are part of our Manhattan joint ventures and we do anticipate a reduced loan amount as part of the refinancing of these assets. The remaining assets are in Washington DC joint ventures and they have long-term stable leases. We're not waiting for the various maturity dates to arrive, and instead we're actively requesting bids on other stable assets and these and anticipate completing additional financings during 2009. This may leave us with significant cash balances, but this is a time to cover as many risks as possible. The remainder of our capital commitments over the next few years will lead to our development program.

Fortunately, none of these projects are based on speculative leasing and going forward we believe these developments will enhance our NAV. We have signed leases with Wellington at Russia Wharf, Biogen in Weston, Microsoft in Chevy Chase, The College Board in Reston, Hunton & Williams in DC and Princeton University in Princeton. We continue negotiations on our 480,000 square foot lease with a law firm in New York City that if signed would bring 250 West 55th to 70% leased. In total our remaining capital requirements net of interest to complete these developments is $1.14 billion, and that goes through the end of 2011. With the completion of our Russia work construction loan, our cash, availability under our line of credit, and the cash flow generated by the operating portfolio, we have more than sufficient capacity to fund the entire program. In addition, we do expect to arrange supplementary construction facilities on a number of these projects as we move through 2009 to create extra unallocated excess liquidity. One additional source of capital under our control is our dividend. At the moment, our quarterly dividend rate at $0.68 per share is in excess of our anticipated 2009 taxable income, which we expect to range between $2.30 and $2.50.

In addition, we can apply a portion or all of our 2008 fourth quarter dividend to meeting our payout requirements for taxable income purposes for 2009. We have the ability to retain about $100 million through dividend reductions in 2009, while maintaining a cushion to pay out 100% of our taxable income. We're also spending the time necessary to understand the various implications of issuing stock in lieu of a portion of our regular dividend. While this certainly is another way to retain cash and increase liquidity, it does entail issuing stock at current valuations. Cutting the dividend is a very, very significant step for us to take. We are facing unprecedented times, and increasing the equity in the Company regardless of the nominal amount will improve our liquidity position and allow us even more flexibility going forward. These are not decisions to be taken lightly at a time of capital constraint and we are monitoring with great interest and care the steps taken by the new administration to deal with these problems, especially as they impact commercial real estate. Our first quarter dividend is declared in the middle of March. At the moment, it is our intention to preserve our flexibility and withhold our decision regarding the size and the form of the dividend for 2009 until that time. When we look at the current operating landscape we do not anticipate an abundance of new opportunities over the next year.

If we see opportunities, we believe the only prudent way to pursue them would be with significant new equity, be it with a joint venture partner or on our own. First and foremost, we are intent on maintaining excess liquidity to fund our near term maturities and our development commitments. In the current operating market many landlords are starved for capital. We are in the enviable position of having the ability to invest in leasing transactions that make sense, but even we continue to scrutinize every request for capital whether it is lease related, base building or corporate. Mike is going to describe our results in our 2009 guidance, and in particular our assumptions around leasing.

We believe we've been very realistic about the challenge of picking up occupancy in markets where new demand is all but absent. Based on those estimates, we expect the portfolio to still create about $100 million of operating cash flow in 2009 which we will use to service our capital requirements. 2009 and 2010 are going to be challenging years and we are simply going to have to run harder and faster to stay in place. I am going to stop here and let Mike discuss our fourth quarter results and our 2009 earnings.

Thanks, Doug. Good morning, everyone. Before I go into detail about our fourth quarter, including a discussion about the impairment charges that we detailed in our press release, I wanted to start by discussing the leasing activity that we experienced this quarter. We had another successful quarter with 675,000 square feet of new leases commencing. On average these leases have rents that are 39% high other a net basis than our prior leases. New York City posted a 61% increase with multiple leases at 599 Lexington Avenue and Times Square Tower, including the releasing in December of the former Heller Ehrman space at Times Square Tower with a net-to-net rental increase of 19%.

In Boston our roll-up of just 11% would have been even higher at 31% if not for one large 70,000 square foot lease in one of our R&D properties in suburban Boston that experienced a 34% decline. Our other markets had only modest activity with Princeton showing a 10% rent decline based on just one transaction this quarter. Our weighted average transaction costs were down this quarter at $28.84 per square foot. The transaction costs are in line with our projections and they were impacted by the significant amount of New York City leasing, which was 36% of our total leasing, that had strong rents but also high leasing commission. The terms of most of those leases were negotiated several months ago and as Doug discussed, with the lack of recent activity there is the perception of a pretty dramatic decline in rents, particularly in New York City, even though there have been very few actual transactions.

As always, it is important to bare in mind that only a small percentage of our portfolio is subject to repricing annually due to our practice of signing long-term leases. We only have 6.7% of the square footage in our portfolio expiring in 2009 and 9.3% in 2010. From an occupancy perspective, our same store portfolio is consistent at 95% occupied from last quarter. Overall, our occupancy declined by 50 basis points to 94.5% due to the bringing in the service of three new development projects, two of which are still in the lease-up phase. Our 77 city point project in Waltham is 100% leased and South of Market in Reston is 85% leased. Annapolis Junction, which is being developed specifically for NSA related government contractors, was unable to accept leases until receiving accreditation from the NSA. We received accreditation in the fourth quarter, and while it was vacant at the end of the quarter, we signed our first lease in December for approximately 15% of the space. We have several additional letters of intent and hope to be roughly 30% leased in the very near term. As I will discuss in a minute, we do expect occupancy to go down in 2009 due to the anticipated vacancy of 436,000 square feet that is leased to Lehman Brothers at 399 Park Avenue.

Now I would like to spend a few minutes on the fourth quarter results. As outlined in our press release, we have booked a non-cash charge related to our equity investments in unconsolidated joint ventures of $1.33 per share, or $188 million. This charge represents the difference between our current book value and theoretically what a third party purchaser would pay for the equity interest in the property today. With no recent arm's length market trades, we were left with an analytic discounted cash flow exercise based on our best views of current market rents, future conditions, exit cap rates and assumed discount rates. These values have no relation to the price at which we would sell these buildings, nor their long-term intrinsic value. We review all of our assets quarterly, and book an impairment should the carrying value exceed the current value. The valuation methodology used for unconsolidated joint ventures is a fair value or discounted cash flow method and differs from the GAAP method used for our consolidated real estate assets, which is a cost recovery method or an undiscounted cash flow. GAAP dictates this inconsistency in methodology despite the fact that these properties held in joint venture may have similar characteristics to those that are consolidated.

For example, both asset classes may be intended to be held for the long-term through various economic cycles. In this case the decline in rental rates, particularly in New York City, and the perceived widening of investment yields used for real estate has resulted in a mathematical derived decline in the current fair value of some of our joint venture properties. As spelled out in our supplemental report, the majority of the impairment charges related to our equity interest in three of the New York City office building that we acquired last summer, we are not taking a charge related to the GM building. A portion of the charge also relates to our development site on 46th Street and 8th Avenue in New York City where we were in the design and permitting stages and have elected to suspend development activities. As I said earlier, we review all of our assets quarterly and if the markets decline further than we have projected, we may be required to take additional non-cash impairment charges in the future. We are also taking a non-cash charge of $7.2 million or $0.05 per share related to writing off the remaining liability from our 2007 hedging program. Our hedging program was designed to fix the Treasury rate and swap rate components associated with $525 million of planned financing to be completed by December 31, 2008. A portion of the hedges are effective and are being amortized into the interest expense of our $375 million financing on Embarcadero Center Four that we closed in November. This adds 88 basis points of non-cash interest expense to the 6.1% loan coupon.

The other major financing we completed in 2008 are $750 million exchangeable debt offering that close in August did not qualify for hedge accounting. We're writing off the remainder of the hedge liability in accordance with GAAP requirements, and this should be the last time you have to hear about our 2007 hedging program. With these two non-cash charges that total $1.38 per share, we are reporting fourth quarter FFO of $0.05 per share and full year 2008 FFO of $3.49 per share. If you exclude these two items our results for the quarter would have exceeded the midpoint of our guidance range by $0.06. The $0.06 of out performance is due to the receipt of $3.7 million of unanticipated funds from Lehman Brothers, where we now expect Lehman to continue to pay rent through the end of March 2009. We also recognize $2 million of additional termination income associated with the Heller Ehrman termination at Times Square Tower, which is the value of the personal property that they left behind, and we booked $2.3 million of straight line rent adjustments for two of our northern Virginia properties. These three items totaled $0.055. The remaining improvement emanated from better than expected third party fee income of $900,000 most of which is related to our new joint venture properties. We experienced lower net interest expense of $1.2 million due to the decline in LIBOR during the quarter, and offsetting this is our hotel which failed to meet its budget by $560,000 dollars. Our G&A came in at $16.5 million benefiting from a $1.6 million drop in the value of our deferred compensation plan in the fourth quarter. The decline in G&A expense from the deferred comp plan was directly offset in losses and investment securities.

Looking forward to 2009, we have taken a more conservative look at our leasing plan and are projecting slower absorption of available space. We only have 6.7% of the portfolio rolling over in 2009 which will soften the impact, but we are projecting a decline in overall occupancy by year end of 300 basis points to 91.5%. The vacancy created by Lehman Brothers comprises 130 of the 300 basis point decline, the remainder comes from the elongated lease-up of our Maryland Developments, 35 basis points, and the more conservative lease-up of our vacant space and space where we know tenants are vacating. We now expect to complete 1.5 million square feet of new leasing in 2009, just 30% of our 2008 total, with a substantial amount that is renewals and new lease that are already committed or under negotiation. Our 2.3 million square feet of 2009 lease roll over exposure is primarily focused in Washington DC, 40%, and Boston, 33%. With San Francisco and New York City both comprising 10%, and Princeton 6%. A substantial chunk of the Washington DC roll over is expected to renew, including 190,000 square foot lease with the GSA expiring in the first quarter and a 265,000 square foot suburban lease that expires in the fourth quarter. Our Boston exposure is primarily in the suburbs, and we expect to lose approximately 150,000 square feet of occupancy at 200 West Street in the second quarter.

As Doug mentioned, we have budgeted a decline in revenue of $10 million associated with anticipated tenant defaults during the year. We're not certain when or where these will occur, but given the economic environment, we expect credit problems to surface in the portfolio. We are monitoring our portfolio closely, and have had discussions with many of our major law firms, and financial services tenants. Even with our consistent review of tenant financials, and periodic discussions with management, it is difficult to forecast the real default risk associated with these tenants. We do take reserves in our projections for situations where it is evident that a tenant is having difficulty. Our 2009 same store NOI is expected to be down 0.5% to down 1.5% on a GAAP basis, and down 2.5% to 3.5% on a cash basis. The same store projections are impacted significantly by the net loss of $40 million of rental revenue from Lehman Brothers and Heller Ehrman after netting the anticipated revenue from Lehman's occupancy through the first quarter, and as Doug mentioned the releasing of a significant portion of the Heller Ehrman space in Times Square Tower. Same store projections are also influenced by our leasing projections which result in higher vacancy. We are projecting straight line rents from the same store portfolio of $28 million to $30 million, and $1 million per quarter in lease termination fee income. We anticipate a substantial incremental increase in our income from development properties in 2009. We will see a full year of income from South of Market and from 77 CityPoint. Coming on line midway through 2009 will be our Wisconsin Place development, which is now 91% leased, Democracy Tower in Reston and our build-to-suit for Princeton University, both of which are 100% leased, will come into service in the third and fourth quarters. Our estimated FFO return on these projects is approximately 10.5% on a GAAP basis and 10% on a cash basis.

We placed our Annapolis Junction development and service in the fourth quarter and expect to place into service the remainder of our One Preserve Parkway project early in 2009. Both of these suburban Maryland properties will be in the lease-up phase during the year and we do not expect them to contribute materially to our occupancy or earnings in 2009. We expect a significantly larger contribution from our joint venture properties with the full year impact of the GM building and other New York City acquisitions. The FFO contribution from joint ventures is estimated to be between $140 million and $150 million inclusive of FASB 141 income of approximately $100 million. We expect our hotel to struggle with the downturn in the economy, as has been evidenced over the past two quarters with consistent room rate pressure resulting in declining RevPAR. For 2009 we're projecting the hotel to generate $7 million to $7.5 million, a 20% decline from 2008. Fee income is expected to be down modestly due to the completion of much of our joint venture development activity in 2008. The expected reduction in tenant services income with companies likely to be managing down their expenses, and requesting less overtime services, and a decline in leasing and tenant improvement fees due to the fewer expected lease transactions.

We're currently projecting third party fee income of between $28 million and $30 million. Our payroll expense is projected to be flat for 2009 other than the non-cash increase associated with the vesting of long-term stock compensation. Overall G&A is expected to range between $76 million and $78 million. This is an increase over 2008 of $3.5 million to $5.5 million. The increase emanates from $3.1 million of the incremental non-cash vesting of long-term stock compensation, and also from a $4 million of expense associated with our deferred comp plan. The deferred comp plan lost $3.2 million in 2008 and we are projecting a begin of $800,000 in 2009. This is a $4 million swing in G&A from year to year. We expect our cash G&A expense, excluding the deferred comp, to be $52 million to $54 million in 2009, down from $55.5 million in 2008. Net interest expense is projected to be between $320 million and $330 million, a substantial increase from 2008. APB 14-1, which is the accounting for convertible debt instruments, adds $32 million of non-cash interest expense to 2009 net of capitalized interest. We also have an increase in overall interest expense due to the financing of our 2008 acquisition activity, as well as a reduction in interest income as we expect to carry lower cash balances in 2009. Capitalized interest should be between $45 million and $50 million.

With respect to the Capital Markets, we plan to be active in the market this year and expect to raise $300 million to $350 million of incremental fixed rate term debt over the next twelve months to supplement our liquidity. Our budget assumes this debt has a coupon of approximately 8%, although we are hopeful that the actual expense will be lower. Our portfolio provides strong flexibility with a diverse group of nearly 100 properties comprising over 50% of our NOI that are not encumbered by debt. We will keep the majority of these properties unencumbered to support our unsecured debt, but the portfolio provides numerous options for us to offer a property that meets the criteria that mortgage lenders are seeking in today's market. We're currently in the market for a $200 million loan on one of our CBD buildings, and although the environment is challenging with many lenders on the side lines, we've received multiple offers and expect to close this loan during the first or second quarter. We've also identified another asset with a stable rent roll of primarily government related tenants which we believe will be very attractive to our lenders. As we experienced with our $375 million Embarcadero Center Four financing last quarter, we expect these financings will take substantial time and effort to negotiate and close. This capital activity, along with the completion of our planned construction loan for the Russia Wharf development, should allow us to keep our $1 billion line of credit fully available to fund our development projects in 2010 and 2011.

I do want to briefly reiterate what Doug mentioned about the challenges in accessing new capital in the bank market. We are in a constant dialogue with the bank market, and it is clear that the availability of credit is continuing to tighten. The banks today are wholly focused on their own credit issues and turmoil, and new lending has become much more difficult to achieve. Banks are not taking any underwriting risk, their hold positions are down, the underwriting standards that they're employing have become bullet proof, and across the board lenders are only willing to provide capital to existing clients. It has never been more important to have a strong core of relationship banks that you've treated well with ancillary business over the years. This trend has been evident in the domestic bank market for some time, and more recently the foreign banks have followed suit with several major players exiting the market. Despite all of these challenges, we continue to be well-positioned to access the moderate amount of capital available from the banks due to our strong relationships, high quality assets, and stable financial condition.

I would like to conclude by updating you on our 2009 guidance. We have put all of our assumptions together and the result is a slight increase to our 2009 guidance range to $4.75 to $4.95 per share. Even operating in this tough economic environment and dealing with the loss of $40 million of revenue from Lehman and Heller, the midpoint of our 2009 FFO guidance is basically flat to 2008, before the impact of the impairment charge. For the first quarter we're projecting FFO of between $1.28 and $1.30 per share. The first quarter benefits from the Lehman Brothers rental stream of $0.07 per quarter, which we expect to lose starting in the second quarter. I would now like to turn the call over to Ed.

Thanks, Mike. Hi, everybody. I am just going to spend a minute or two providing somewhat more color on the 250 West 55th Street leasing status. We've told you in successive quarters that we've been working on a lease, and a transaction that would bring the amount of space leased to 250 West 55th Street to above 70%, and that remains true as I speak to you today. It has probably been some question on people's minds, as it would have been on mine, as to what's taken so long to get this transaction done. Let me just give you a couple of facts.

First of all, in addition to the need to reach an agreement between us and the prospective tenant, the tenant also had to reach an agreement with its existing landlord on various items, and so that -- and those were not simple items, and as a consequence introduced a certain amount of complexity into the whole negotiation. That being said, we had reached what everybody believed was a reasonable transaction, and we're moving forward into documentation when the very dramatic changes that have occurred in the New York City office market came to the fore over the last let's say four or five months. The result of that was a rather lengthy -- I won't characterize it, but a lengthy renegotiation. Suffice it to say that at this point we and the tenant have agreed upon terms which are satisfactory to both sides. I have every reason to believe that the transaction will in fact go to completion and execution. Once again, the documentation still remains in front of us, and as you know from listening to our calls in the past, we don't put anything in the win column until the fat lady sings to mix metaphors, so there could be something that occurs between now and the time that the documents get executed that would make the transaction -- that would cause the transaction to come undone. I don't expect it, but it is a possibility. If that occurred we of course would have to reevaluate our plans for 250 West 55th Street, but we would -- I am not going to cross that bridge until I have to, and hopefully we never will have to.

So with that, I just wanted to add that, and I really -- given the lateness of the hour here, I will turn it over to Mort to see if he has any comments and then we'll open this up to Q&A. Mort?

Yes. Good morning, everybody. I think one could spend quite a bit of time on various interpretations of where the economy is going. The real question is we all know where it is going. The question is does it -- when does it come out and what point of the tail spin that it currently is in. To a degree, I think that's going to be a function of both the government stimulus program which I have to say is more upsetting than I thought it would be, and the government program which is going to be announced by Tim Geithner, the new Treasury Secretary, which I think will be even more important than the stimulus program as to how to unlock the credit system and to release the pressure on the financial system from what has become known as toxic assets. These are all going to be resolved I suspect within the next 60 to 90 days, and we'll just have to wait until then.

It doesn't mean that the economy is going to stop declining. It does mean, however, that if those are effective programs, and I hope that the Treasury Secretary's program is more effective than the stimulus program, and I think it is also more important because this is an economy that rests and relies on credit and that credit has become more or less frozen, perhaps not entirely, but dramatically more frozen than at any time since the end of World War II. I think we are just going to have to wait and see how it goes. I believe that that will begin to at least relieve the problems in the credit markets, not totally, but over time. I hope that is going to take place within the next 30 to 60 days in terms of a legislative program and a policy program, and just hints of it as you saw yesterday really had a fairly significant impact on the shares of financial firms and indeed on REIT stocks well. That's basically all I have to say.

I think we are still in a testing and trying time for the economy, but as you heard before we do believe that the basic strategy that we have followed now for virtually 40 years is to stay in supply constrained markets and this is certainly the case in virtually every one of our markets, and stay and both build and own buildings through purchase at the highest end of those markets, because there are always tenants who want to move into those buildings, and there are always tenants who can afford to move into those buildings. So we are still relatively well situated, and I expect that that will be well demonstrated over the next year in terms of the performance of whatever leasing we have to do -- that's really all I have to say. Why don't we move on from here.

Okay. Operator, will you please open to to questions?

Yes, sir. 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.

Good morning, everyone. Here with Sloan as well. I guess, Doug, just to start with your comments on the dividend, it seems as though the market would appreciate, obviously, conserving cash in this capital constrained environment, so I'm just curious, I know you said it's a very difficult decision, but what would be the argument for keeping the dividend as is?

Mort, do you want to start with that one?

Yes. I am not sure that we agree with your assessment of the market, and I think we will make this decision based on our own assessment of how we should properly treat our shareholders. A lot of our shareholders, I think, are assuming that we're going to continue with the cash payment, and we feel that we work for them as well, and if we do not have any particular pressing need for additional cash and think we can afford based on our operating profitability and our financing of the capital costs that we expect to incur, and the availability of capital costs if the credit markets free up, we think we would rather make these judgments over time and only under the conditions that we feel we cannot comfortably finance the things that we have in mind going forward, would we feel that we should change the structure of our dividend.

I think a lot of companies may be in a different position than we are, but I would point out to you that we sold a lot of buildings at what turned out to be the peak of the market. We did a lot of good financing, including a $747 million financing for the Company on August the 19th of last year, so we are on fairly strong financial condition, and Mike and Doug have done a great job in terms of ranging for corporate credit lines. So we are -- we will make the decision as to what we do probably sometime in the next six months when we see how the credit markets have reacted and what our own credit needs or cash needs may be.

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

Here is our prospective. Our perspective is that they're not using all the space they're in, that they are out in the marketplace looking for a two to three year sublet or direct lease depending upon whether or not a landlord has the existing space or a subtenant does. We have been told that they are looking for as inexpensive as a transaction as they possibly can, and that the real question is whether or not we're prepared to forego the opportunity to lease that space to somebody else over the next two to three years to keep them at a very, very low rent or whether or not we're simply just going to be chasing ourselves down, and our expectation is that we are not going to be the least expensive choice for Lehman Brothers legacy company to fulfill that obligation or that requirement for the next couple of years. I can't tell if you they're going to move out on March 31st or April 12th or May 3rd, but I think the two leads are suggesting that they're going to move out at some point relatively soon.

Okay. With regard to Citigroup.

Let me add one thing. They are in 399 Park, which is one of the best buildings in New York, and has long been seen as such and in fact is to this day one of the best buildings in New York, mid-town New York, and on Park Avenue, and the Lehman space has been substantially fixed up and is very attractive space, and we do not want to tie it up at really uncomfortable rent. If that's Lehman's choice, we wish them well, but we are talking to a number of other tenants as well. There are always tenants in the market, and the only question is whether or not we can agree on price, so I just want to put that out as the background of this thing.

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

We've been having conversations for two-and-a-half years with Citibank, and it has been very clear to us that for the right economic transaction they would move out of virtually any space in midtown Manhattan that they have, and we have been -- I think we talked on previous calls, in conversations with a number of larger tenants to have them move out of a significant portion of their space at Citigroup Center. They are currently using that space, and so it will cost them something to move out of that space, but I think they are fully engaged in trying to reduce their operating expenses as quickly as possible, and that really isn't a change from our perspective pre-the new administration or leadership at Citibank. This has really been going on the last two or three years.

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

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

Thank you.

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

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

I don't remember the context of the 1.5. It doesn't. It is a lease up in the portfolio, in service portfolio today.

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

It doesn't. That $300 million to $350 million is more long-term fixed rate financing that we would raise to supplement our liquidity. We also expect to be refinancing some of the maturities that Doug spoke of. He spoke of $70 million worth of maturities in 2009, and then the extension of a $200 million loan we have. In addition to that we expect to close Russia Wharf, and we anticipate to enter the market to look for construction financing on some of the other developments including Biogen that we are doing.

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

Our goal is to at a minimum have a cash on cash basis be in double-digits.

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

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

OK. Lastly, related to the impairments that you took, can you provide a little bit of color on why the GM building in terms of where rents would have to go in the GM building for you to have to record an impairment on that?

I would be honest with you. We didn't do the analysis that way. We didn't look and see where rents would drop to. What we did is we said here is where we think rents are in our best estimation, here is where we think terminal cap rates are, here is what we think the great discount rates are and we threw all that stuff into the sausage maker and we came up with our valuation, and the valuation was well in excess of what our book value was for GM, and we stopped there.

Okay. Thanks.

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

Thanks. Good morning, Ed. Just along the similar lines maybe Doug or Mike, can you just share with us some of the assumptions that you used in doing that JV analysis as we're trying to determine whether you might have another impairment in future quarters, whether it is terminal values or discount rates, et cetera, but can you give us comfort that we may not see this charge again maybe for the rest of the year, if ever?

Sure. Let me try and put the context of this. We took a rather conservative perspective, and the question that we were answering was what would someone pay for an equity interest in this property today, and given that nobody has paid anything for any property today, you can obviously recognize the difficulty we had coming up with that. So I think fundamentally the decision model calculations that were the most important were what are market rents, and I gave you sort of our views where market rents were, and I would say we have assumed that rents were not going to be improving any time soon, and in fact they may be going in the wrong direction in our discounted cash flow model. We assume that unlevered IRR expectations for real estate were hundreds of bases points in excess of where they were a year ago. And we assumed that cap rates on the terminal side were significantly higher than where people were underwriting them, you know, six months or a year ago, and so I would hope that the probability of us having to deal with this again on these assets is highly unlikely.

If the things get really, really bad, you never know what could happen. I would say we took an exceedingly conservative perspective when coming up with these valuations so that the question you asked was is the right one and one that we hope we do not have to deal with again. Also to remind you this is just on our JVs, and we looked at all of our JVs, and all of our other JVs were way, way, way above book value, and remember that part of this is accounting mumbo jumbo, so to the extent that a property was put in service a number of years ago, it has been depreciated, the book value has gone down for GAAP purposes, so the measurement that you're looking at gets wider and wider from what the market value is.

Great, thank you.

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

Good morning. Just a quick follow-up on the impairment. Is that, from an accounting perspective, a write-down of the real estate investment and -- the investment of real estate or is is the intangible, the FASB 141 investment also written down?

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

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

Correct.

That stays the same?

Yes. It should have no impact ongoing forward P&L issues.

Okay. And then as it relates to the Russia Wharf loan, can you give us color on terms.

I guess what I can tell you is that we are in the process of putting a syndicate of banks together, and we believe that we have sufficient banks that are telling us that they are interested in the deal to close the transaction. The majority of those banks have already approved the transaction. They're still remains a couple of them that are going through their approval process, but all of them have agreed on terms and a term sheet, and based upon that we are moving forward through the documentation phase with our lead bank to try to close this loan in the next 30 to 60 days. I really don't want to quote on specific terms. I can tell you that the construction loan market today is generally three-year terms with two-year extension, so you get five years in total. Pricing is generally somewhere from $300 to $400 over LIBOR today. There is up front fees of somewhere between 75 basis points and 150 basis points maybe, something like that depending on the transaction of the pre-leasing that is involved, the location, and the quality and the quality of the sponsor, all of those things go into how the banks are assessing the pricing involved in these transactions.

That's helpful. Just on the Biogen deal, can you maybe elaborate on sort of -- what sort of return expectations you would have for a build to suit in this environment?

Going forward again?

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

As I said our anticipated cash on cash return is a double-digit return. The rent obviously goes up. We viewed the environment in which we were going to be buying this building as one that would be hospitable to developers, and so the opportunities for good things to happen on the cost side to enhance that return were significant, and so as I said, I am not going to tell you how far above double-digit is, but it is going to be double-digit return.

And that's on a going in cash basis?

That's a going in cash basis.

And will you lose Biogen at all occupancy in Cambridge?

I think, just to reiterate what I said, the Biogen is in three of our buildings. One of them is a manufacturing building, one of them is a corporate headquarters like building and one of them is just an office and administration building, and we expect that there is -- we have a lease that is expiring sometime at the end of 2010 for about 100,000 square feet and that's the only lease that we will lose with regards to our occupancy of Biogen in Cambridge. I think it is fair to say we would have lost that in any event, right? They were looking to relocate to quote less expensive space closed quotes.

We also, this is Bryan Koop, Regional Manager. We also had the blessing of the low vacancy in Cambridge at this time, so we're (indiscernible) market at this time with their vacancy when it does come.

Thank you. That's helpful.

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

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

You know, can I just comment on that? For the longest time as managers of REIT, I think we were indoctrinated with the idea that a REIT was in fact a dividend paying stock, and that REIT shareholders liked the idea of a steady increasing flow of dividends. We still think that that notion has not been totally discredited by the fact that capital has been so difficult to access in the REIT field -- or in any field really. To the extent that we feel it important to free up capital by changing our dividend policy, we fully expect that we would do that. We just are not at the point today where that seems to be a necessity, and there is nothing that we're going to do in the short-term that's going to prevent us from making that judgment a little bit further down the calendar than now, or maybe even when we declare this first quarter dividend. That's how we're looking at it. We're not suggesting changing our dividend payout policy to just meet what is necessary for meeting the REIT regulars in terms of taxable income, or paying it out in part and stock and part in cash are not viable and valuable tools at our disposal, it is just a question of not being forced to decide which of those tools we to want use at this particular point in time, and also not wanting to give up what we were taught as being important in the REIT field.

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

Uh-huh.

Okay. Doug, I want to go back to one of your comments. You were talking about where your stock price was and effectively your implied cap rate being in the 7.7% to 8.3% range. Not having much clarity or any clarity on cap rates or values today, but you made a couple of comments about the public markets over shooting today and also that you're effectively trading at a discount to NAV, but don't know how wide of a discount. I am just trying to determine where your mindset is about justifying where your implied cap is versus where you perceive market to be.

Sure. I will give you a couple of data points. The first is that from our perspective when we went to market with our building in Washington DC and we asked the brokers community where they thought this thing would trade, they sort of said, well, we think this thing could trade somewhere in the high 6 low 7 on a quote, unquote going in basis, and this is a building that's basically effectively market rent.

So I say to myself GSA building in Washington DC is -- I think was a $450 to $500 square foot type of cost would trade at a somewhere between high 6, low 7 going in return, and I am saying my whole company which has predominance of assets in Manhattan, predominantly below market rents, the highest quality CBD assets in a portfolio in the country is trading at a 8.3 to 7.7, I don't know, I think the market is over shot. When I hear that the Bertelsmann Building is going to be trading for $400 plus or minus a square foot, and it is going to be at a sixish type of cap rate with 190,000 square-feet of vacancy, and I think of my portfolio at $370 to $400 a square-foot -- I say, geez, I kind of feel like I have a better set of buildings than the Bertelsmann Building at 1540 Broadway, and I get better leases and better credits, and I kind of feel like the market is over shot. That's where my -- I guess my predilection to saying that I think the private market has not quite caught up with the public market.

And then just the last --

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

Right. Lastly on the valuation of the unconsolidated JV's. When you think about your exit cap, and I assume a lot of the value in terms of what you were looking at has to come in your terminal value because you will use your market rents going forward, in the buildings, what was sort of the differential between the GM building relative to the other three macro assets that would have caused, on one hand at least a mathematical write-down on the equity versus not on the GM building?

There was not -- there wasn't a number, okay, so we did a whole bunch of ranges when we did this. The terminal cap rate ranges were 200 basis points, and we sort of looked at the various what that sort of whole grouping of valuations came out to be. I think the thing about the GM building is that the GM building doesn't have any lease roll over through effectively 2020, 2021 period of time, and one would hope that between now and 15 years from now that the market rents would have at least started to recover. So when you get to the valuations and the terminal cap rates that you have on a building like that, you don't get, hopefully you're not too too far off of where you would have otherwise been.

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

Ok, thank you.

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

Yes, good morning. Just a follow-up question on the West 55th Street development. I think a year ago you said that the return -- stabilized return was about 8.5%. Clearly the market changed. You said it's been renegotiated. What is an acceptable return hurdle to continue with that project today?

Let me answer the question in the following way. We have put in a certain number, amount of capital in the building into the land, and we have two choices at this point. We have the choice of postponing the project theoretically, and waiting for a better day, or we have the choice of putting incremental capital into the building, and to be honest with you, we are looking at it on an incremental capital basis, and we're saying to ourselves, okay, knowing where we are today, how can we do on that incremental capital and the return on that incremental capital is, you know, significantly in excess of 10%. It is a significant double-digit type of return. That's how we're looking at the return on the asset. Now, what that implies for the overall return is is going to depend on a whole bunch of things, but you can obviously assume that it is not an acceptable return vis-a-vis how we're looking at what the overall project is, but on an incremental basis it is an acceptable way of allocating our capital.

Assuming the 77% or so of the building is technically leased at this point, what is the projections for the return on that development right now?

You know, I don't think we're going to -- we will answer the question in the total. I think what Doug just answered as far as our incremental capital, the return is going to be a very attractive two-digit number, and the decision that we have to make is are we better off simply moth balling things and waiting until the market improves or are we better off going ahead? I think you all know us well enough to know that we believe that we do not make the market. We believe that we do what is appropriate at any point in time rather than saying, well, you know, we'll speculate on the future, and so with leasing, if leasing goes forward as we expect, it makes very, very good sense to proceed with the building, and we will get a very acceptable return on the capital that we have to put into it.

Does Gibson Dunn have an out or an ability to renegotiate its lease with you guys, since they signed at the peak?

No.

Ok, thank you.

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

Hi. Thank you. Two questions. I think one for Doug and one for Ray Ritchey. First Doug, for private owner operators in general, they don't have much in the way of dollars for TI's and leasing commissions. Can you comment on the ability of your TI and leasing commission dollars to come down over the next couple of years, and then the question for Ray is the college board lease at Reston Town Center I think is very interesting. You might want to elaborate on why they chose to move.

John, on your question on TI's, I think two things are going to happen. I think that there are a number of landlords who are going to be very undisciplined about their ability to control their nervousness associated with having vacant space, and the first thing they're going to do is offer free rent and a lot of free rent, and the question is are the tenants that are going to be looking at that space going to be comfortable with out of pocket for the capital associated with doing those transactions. And then there are landlords who may just say we're better off putting $40 or $50 or $60 or $70 or $80 a square foot depending on the market into the space because there are no alternatives. And with that sort of set of pressures, I think I am not sure we're going to see tenant improvement dollars going down. On the other hand, I think as you said there are going to be a number of landlords who physically are incapable of raising the capital to put into their assets unless they're effectively giving ownership over to some financial institution in order to obtain those new dollars.

I think we will be very well served competing with those types of landlords, and we are obviously trying to be as prudent and as thoughtful about existing improvements and doing renewals with tenants and using the advantage associated with the lack of capital that would have to be put into a transaction by both parties to keep our rental rates at a modest increase relative to where we might otherwise have thought what we could get, and to therefore reduce our TI's, but if you said to me in 2010 if you look at you're average TI's across the marketplace, will they be higher or lower than they are today, I am afraid that I would have to tell you that I think they're going to be higher.

If history is any guide, our ability to, prudently, but our ability to do tenant improvement costs for tenants has enabled us to do deals that to be very competitive and in fact to win deals that other landlords couldn't win because they had an inability to do that, so another way of answering the question is TI's historically didn't come down in the market like this, but our ability to keep our buildings at a lower vacancy rate is really where we're well served by having the capital that we have at our disposal. Peter, do you want to comment on the Democracy Tower?

Yes.

Go ahead, Peter.

I was just going to say I think there were probably three principle reasons. One was that the college board by the time that lease was going to roll and they're going to move into our building, that's third generation space that building would be twenty years old. The principle reason I think had to do with the efficiency of the layout as well, and at the time they were looking, that deal was done probably eighteen months ago, their existing land was probably taking a more aggressive approach, and the other would be the image and visibility they were going to get in the new building.

I would just add also they were on the original tenants in Reston Town Center, 15, 20 years ago, and they went out and looked at the market, and in spite of the fact they could get substantially less expensive options outside of Town Center, not only are they going to continue to occupy space, but they're looking at major expansion including relocations in the Town Center from other markets in the United States, so it is just a continued valuation -- validation of Reston Town Center's market superiority of other options.

Ray, any comment on the current landlord's ability to actually write a check for TI's, et cetera?

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

Great, thanks.

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

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

This is Mort. Why don't I respond to that. There is no doubt in the short-term there will be pressure on a lot of what we call -- or still call the shadow banking system. Nevertheless I think that if you get past this current crisis I still think that New York is going to be a very strong office market for two reasons. One is there is very little new space coming on the market. In fact, in the next three years or four years in mid-town New York, I am not talking downtown because that's a very different market, we're not in downtown, we're in all -- all of our buildings are in midtown New York, and all of our buildings are at the upper end of that market, there is very, very -- really only two buildings, and we're one of them, and on 8th Avenue coming on in the next four years, and what does that tell you? It tells you that the increments to new supply are going to be extraordinarily limited in relation to the entire market. One of the advantages of New York is while there will be a contraction, there are always firms that are growing and expanding. This isn't probably going to be the case in the year 2009, but I suspect once some of the federal programs become viable within the next twelve months you will see again some modest growth starting in 2010.

The other thing is the best part of Manhattan and the reason why it is such a unique market is because it has, for years now, attracted the kind of people that a lot of these firms want to hire. They are in Manhattan. When Goldman Sachs, for example, built a building in on the other side of the Hudson river in New Jersey, there was an extraordinary reluctance on a part of the people, a lot of the people to move there. They still want to stay in Manhattan. They to want live in Manhattan. The kind of people that these firms are going to want to attract over the long-term still come to Manhattan because Manhattan recognizes talent, nourishes talent, rewards talent, and celebrates talent, and therefore attracts talent, and this is something which I didn't just say this morning. I gave a speech at the request after 9/11, and President Clinton and I were the two speakers, and he basically his message was get the $20 billion or million or whatever it was, out of the federal government, get the cash. That was his move. I said this is not just a city about real estate.

It is city primarily about people who are very talented who want to come here and live here and the companies that really need to use high level brain power for their success, therefore almost have to locate here. That is not going to change. This is still the most extraordinarily attractive city, Manhattan is, and therefore I am very bullish about the longer term opportunities in New York and particularly for the best buildings in New York.

Mort, it sounds like you don't ascribe any probability to sort of the paralysis causing the city to return to the state of the 70's?

No, I don't think that will happen. Don't get me wrong. I think there is going to be a short-term pressures on the city, but there is literally virtually no growth in the city's office space for three or four years, so you do have to operate within that context. I do think there is going to be great pressure in the short-term. This is what we're trying to contemplate in relation to the rents we're expecting. We happen to have fairly low level of turnover, and as I said and as we have said many times, our experience has been that the buildings at the higher end of the quality of spectrum of quality always generally tend to do better in challenging times, people like to move into them, and frankly when we add the experience with Heller Ehrman space, you have to understand that a lot of these leases are six, seven, eight years old, and they are therefore at much lower rents than what we can get even in today's market, and secondly a lot of the tenants, particularly the high quality financial tenants have spent an enormous amount of money fixing up their space.

When they leave the space they leave that fix up if they do leave the space. It is a great incentive for them to remain in that space, because otherwise they'll have to put in $100 to $150 a foot in tenant improvements in any new space they go to. They need to have this kind of attractive environment for the kind of people that they're going to be employing. There is no doubt that we're going to go through a very difficult time in the next couple of years, and as any of you have heard me speak on this subject, I have been pessimistic a lot earlier than most people, and I'm still more pessimistic than most people. I do still think Manhattan, and I said this many times, the long-term viability of Manhattan I think is still going to be the best office market in New York -- in the United States.

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

I guess let me answer the question a couple of ways. Our view is that the office space that is going to be, assuming we complete all of our permits, to be replacing the residential and what is referred to as the tough graphic arts building, will be high quality, relatively efficiently priced space because of its location in the building because at the base of the building, and also happen to have terrific views on the water. We believe that that is going to be high quality, well thought about, and well -- very marketable space.

For us, the issue was more a question of the type of residential property that was going to need to be built on that space, and whether or not we would be able to effectively market those units, either to ourselves, by ourselves if we were going to end up owning it or through a development partner, and having talked to a bunch of potential development partners in the marketplace I think there was a concern not about the location, not about the number of units but just about the size of the floors and the shape of the units and the inefficiency associated with the space we would have to devote to potential atriums and things like that that made is less attractive, quite frankly, to residential owner operators. There will still be a residential component, but it is going to be in the Russia building only, and the Russia building is about a 90,000 square foot building and it sits on the Greenway and it is an eight story building and it's going to have terrific -- it's got high ceilings and going to have terrific exposure on this new Greenway that's been created, and it is a relatively small number of units, so there will be more of a scarcity factor associated with it.

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

What are the prospects for leasing the balance of the increased office space?

The prospects are good. I think Doug hit on the main point which is we haven't had, we're still finishing up a few of the minor permitting so it's really relatively new news to us in terms of our ability to go out and market. We have not taken it per se to market. We've had several inquiries about it because as Doug mentioned you're right on the waterfront and it's very similar to, as reference points, rose more for a building further down, a boutique building that is occupied by Goulston & Storrs as an example, and then you have the additional component of it's right by South Station so the transportation is just really excellent. So we're really excited about the opportunity to take it to market but we haven't formulated our marketing pitch, et cetera, but we've had several inquiries.

Thank you.

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

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

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

Exactly.

I'm going to be honest with you, Jamie. What we have done to date is we have spent a lot of time walking through our private law firm tenant spaces and to sort of determine the use of that space from a productivity perspective and there have been virtually no situations where we have seen the spacing. As I said to you before, the trouble with the larger firms is that their space is really transferable. So for example, if you were to walk into Citigroup Center and you were to walk on to the 16th floor, as an example, you would see lots of people on that floor, but given the choice of getting out of 150,000 square feet space at Citigroup Center and reducing their rent which is $65 a square foot, and being able to move those people to Long Island City where they are paying I don't know, $45 a square foot, they would do that in a minute, and so there's probably more shadow space in our portfolio than we know about but it's also leased for long term to credit tenants, hopefully, at rents that are significantly below what we think we could release that space at and so I just can't give you a number within our portfolio of whether or not if our vacancy is 5.5%, the vacancy is really 6.9% or 7.3% based upon that quote, unquote, vacant space.

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

I think that there's very little in the way of space that is purely vacant, and leased by somebody because we talk to our regional people consistently and whenever there's situations where that occurs, the red flag is raised up and we start to do an analysis on the quality of that Company and whether they are going to be able to continue to pay the rent, and the instances where those cases have arisen have been typically very small suites, and I can't put the exact square footage but it's not like it's something in the hundreds of thousands of square feet. It's moderate amounts here and there within the portfolio.

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

In our portfolio?

Yes.

Because as I said you just don't know. As an example, Capital Source, is the new tenant that's going into the space in Chevy Chase, and they have probably, their entire suite other than one floor on the sublet market but if they don't sublet it, they are going to move into it and they have a lease expiring someplace else so as I said these are intangible decisions that are being made based upon the opportunities that might come to them and their desire to reduce their cost of occupancy across their quote, unquote, Operating base and whether or not our space fits into that from an actual physical use perspective is hard to determine.

I also think, Doug, this time around it's been different than say the 2001, 2002 market where people took not only their space they needed but took incremental growth thinking that those who needed to expand I think the tenants have been much more prudent this time around in their space consumption so that there isn't a lot of excess spaces sitting around just marginal space is very hard to sublet anyways.

And then just one quick follow-up on that. What's your typical right in blocking a sublease? Or how do you get involved in the negotiations?

It varies by lease and it varies by market. As an example I'll give you the most stringent is that there are situations where if a tenant is in a multi-tenanted building, then they have no ability to lease to any tenant that's otherwise looking at space in our portfolio in that building, so if someone has 5,000 square feet as an example, (inaudible) on center is on a sublet market and a tenant comes to market and looks at another suiter of ours in that building then the sublet tenant has no ability to lease it. It's prohibited from their lease. That's the one extreme and the other extreme is you have a tenant who is in a building that's a fully leased building and it may compete with other buildings in our marketplace but if they have that whole building they have very liberal sublet rights in terms of their ability depending on where they are in the lease to lease it for an extended period of time.

And then on another issue, and this may be a very short answer. I know you spent a lot of time talking to Foreign Capital Partners for the GM Building. How would you characterize for the mood is for both foreign and domestic buyers of real Estate today given where valuation seem to have gone?

Insular.

That's the answer.

That's my answer.

All right, fair enough.

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

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

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

You use a 13% constant on a cash flow to sort of size the loan and you're getting the coverage ratio of 1.75 to 2 times which from our perspective is exceedingly conservative and probably get to you based upon a loan to value perspective 45 maybe at the high end, maybe 50% depending upon where the building is located. That's sort of the way the levels are today, which effectively is, I assume what they are doing is they're comparing it to what people refer to as Super Senior AAA CMBS Securities, and we've asked the question as many people probably have and said if you can get AAA Super CMBS for 1100 basis points over, why would you even be thinking about quoting a loan at 7.5, 8% and they say well because we can't have 100% of our real estate assets in AAA CMBS assets. We have to diversify and relative to the other alternatives which are corporate bonds and TARP bonds, and other credit spreads, we think the risk premium associated with an underwriting like that on high quality piece of real estate in CBD market or a suburban market of our choosing which is a building, places where you happen to have those assets is a pretty attractive risk adjusted return hurdle for us to be able to invest our capital at today for 5, 7, 10, 12 years to fund our insurance pay outs over time. And that's sort of where things are.

And the question is with the TARP money, whether or not we'll be seeing a situation where underwriters will be able to put loans on their books which they will then be able to effectively put forward to some Fed window effectively, that will allow them to underwrite those at very very attractive levels from a long term interest rate perspective so that we effectively as commercial real estate owners are getting the benefit of the same benefit that Morgan Stanley and Goldman Sachs and JPMorgan are doing with regards to their quote, unquote, FDIC guaranteed obligations, in terms of bringing rates down on the fixed rate side. And if that happens for loans similarly leveraged we think there will be a very very significant improvement in the cost of financing but it looks like it's only going to be for new loans, it's not going to be for existing mortgages. So it's going to help in the refinancing side. It's not going to help in terms of the valuation of existing securities.

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

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

Well, I think we do. First of all there will be expanded GSA consumption which really will not affect the trophy market but be really good for the secondary markets that again we don't operate in like a Crystal City or the Ballpark District or Noma. I think where we -- what we're seeing in Washington candidly is it really hasn't softened that much but it's more optics. We're chasing after a user for our 2200 Penn building, a very solid stable user, had a modest lay off and we approached them as timing is perfect for delivery of the building and we approached him about coming over to 2200 Penn and he basically said to both Mort and myself that it's not about not wanting to come to the building. In fact we would probably reduce our cost coming to 2200 Penn, but just the optics of making a move at this point in time of the economic cycle would not be good for his investors or not be good for his employees or just would not be viewed as a positive thing. So here in Washington at least while we have had some let's say, taken a little bit of a breath here, having just concluded the Hunt and Williams deal, which kicked off almost 40% pre-lease to 2200 Penn and signed Microsoft up at the Chevy Chase, we're feeling still fairly good about the market here.

Okay, thanks.

Thank you. At this time I'm showing no further questions in the queue. I'd like to turn the call back over to management. Please continue.

Okay, we will wrap up there. Thank you for your attention. I'm sure you'll be hearing in more news from us over time and we'll be getting back to you when we have important things to say and have a good quarter. Thanks.

Bye-bye.

Ladies and gentlemen, this does conclude the Boston Properties fourth quarter 2008 conference call. If you'd like to listen to a replay of today's conference please dial 303-590-3000 or 800-405-2236 with the access code of 11124985 pound. Thank you for your participation and you may now disconnect.