Veris Residential Inc (VRE) 2008 Q4 法說會逐字稿

Good day, everyone and welcome to the Mack-Cali Realty Corporation fourth quarter 2008 conference call. Today's call is being recorded. At this time I would like to turn the call over to President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead sir.

Thank you. Good morning everyone and thank you for joining Mack-Cali's fourth quarter 2008 earnings conference call. With me today are Barry Lefkowitz, Executive Vice President and Chief Financial Officer and Michael Grossman, Executive Vice President.

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

First, I would like to review some of our results and activities for the quarter and what we are seeing in our markets. Then Barry will review our financial results and Mike will give you an update on our leasing results.

FFO for the quarter excluding certain non-cash items was $1 per diluted share. This compares to FFO of $0.89 per share for the same period last year.

In the fourth quarter, there were a couple of notable non-cash items. We recognized non-cash impairment charges included in equity and earnings from unconsolidated joint ventures of $0.48 per share. Also in the quarter, was $0.11 per share of a non-cash gain resulting from the reduction of certain other obligations. The non-cash impairment charges result from our seven building joint venture with SL Green which we affectionately refer to as the B properties. And the suspension of construction on the Boston Filene's project. FFO for the quarter after taking the non-cash impairment charges and non-cash gain into effect was $0.63 per diluted share.

We did have some solid leasing activity during the quarter with a total of approximately 568,000 square feet of lease transactions. Our portfolio ended the quarter at 91.3% leased, slightly down from last quarter's 91.8%. Rents rolled down this quarter by approximately 1.6% compare to last quarter's 1.8% roll down. In our core markets in Northern and Central New Jersey, we had roll ups of 2.4% and 1.3% respectively. And for the year we had a rent roll up portfolio wide of 1.5%.

Our leasing costs decreased during the quarter with tenant improvement allowances and commissions for the quarter totaling $2.64 per square foot per year compared with last quarter's $3.46. And so our out of pocket costs have been manageable.

For 2009, remaining rollovers are just 6.8% of our base rent or approximately $40 million. Our portfolio continues to outperform most of the markets where we operate, with our leased rates exceeding market averages in Northern and Central New Jersey, in Westchester, and in Washington DC. And we are pleased that even in these challenging markets we have maintained our competitive advantage and our market leadership.

Nevertheless, despite our outperformance there is a great deal of uncertainty in the business sector. This lack of clarity has caused some paralysis on the part of tenant decision making with respect to employment levels and corresponding office space needs. And frankly, we don't believe we have seen the worst of this economic downturn. So we expect the markets to remain challenging and the economics of lease transactions to remain very competitive, at least over the near term.

While the quarterly retention rate was a bit lower at 56.7% than our customary rate of some 60% to 70%. This was due to several important strategic transactions, particularly with Shaw engineering and Daiichi Sankyo which effectively extended out long term leases in other facilities and resulted in additional space and strategic relationship driven transactions with these fine tenants. Of course we will continue to concentrate our efforts on keeping our properties well leased into the future.

This past quarter the Company closed on a $240 million mortgage financing from the Northwestern Mutual Life Insurance Company and New York Life Insurance Company on our Harborside Financial Center, Plaza 5 property in Jersey City. The proceeds from this loan were used to pay down outstanding borrowings on our unsecured revolving credit facility. You may recall that back in November the Company purchased $100.3 million in principle amount of its 7.25% senior unsecured notes which are due to mature March 15th, 2009 just a few weeks from now. And thus we completed a successful tender offer.

I am also pleased to mention that Mack-Cali recently obtained a $64.5 million mortgage financing from Guardian Life Insurance Company of America, two separate mortgage financings with the same lender. These properties included 100 Walnut Avenue in Clark, New Jersey, and our three building complex, 1 River Center on Newman Springs Road in Red Bank at exit 109 on the Garden State Parkway.

Some of our notable leasing transactions during the quarter included Thomson a provider of video solutions for the media industry. Thomson signed transactions in several components, totaling 67,000 square feet at 2 Independence Way in Princeton, New Jersey. Thomson now leases the entire office building in our Princeton Corporate Center.

In Cranford, Paragon Computer Professionals, a provider of management consulting and information technology solutions signed a variety of transactions for renewals, totaling over 22,000 square feet at 25 Commerce Drive. And thus, this 67,750 square foot building is now approximately 89% leased.

The Daily Record, a daily newspaper serving Morris County, New Jersey signed a brand new five year and two month lease term for over 17,000 square feet at 6 Century Drive in Parsippany in our business campus. This 100,000 square foot office building is now almost 95% leased.

This year, we have already completed some notable lease transactions in 2009. Harsco Corporation a long term tenant in Paramus, New Jersey who is a worldwide industrial services company, signed a 10 year renewal for 22,000 square feet at Mack-Cali Center II. This 348,000 square feet class A office building along the Garden State Parkway is now 89% leased.

Palisade Capital Management, another long term tenant and relationship. Palisade is an investment management services firm, renewed its lease for almost 17,000 square feet for a five year term at 1 Bridge Plaza in Fort Lee, New Jersey. This 200,000 square feet class A office billing at the foot of the George Washington Bridge is now about 82% leased.

In addition to the leasing news, we have other positive news relating to our properties. Mack-Cali continues to be recognized, not only for our financial performance, but for our expertise in property management. 8 Campus Drive, a superb asset located in our Mack-Cali business campus in Parsippany has earned the United States Environmental Protection Agency's prestigious Energy Star award, the national symbol for superior energy efficiency and environmental protection. Our property management teams are currently working to achieve this important designation for a number of additional buildings throughout our portfolio.

I would also like to comment on our debt maturities over the next few years. I already mentioned the fact that we have a senior unsecured bond that matures next month, March 15th. The tender offer redeemed approximately one third of that and so $200 million matures with the remainder of $200 million on March 15th.

In 2010, we have two senior unsecured notes, one at $150 million and another at $15 million totaling $165 million in senior unsecured. And $150 million pooled life insurance company mortgage that we have every expectation of extending. In 2011 we have approximately $300 million in senior unsecured.

And, so without additional liquidity support, which of course we firmly believe will begin to become available through various mechanisms and means, as the economy improves, as the credit markets thaw, and as free cash avails itself, we are comfortable in managing these maturities through our free cash flow and our line of credit which with our extension option doesn't mature until mid-2012.

With respect to guidance, we have left the previously stated range of $3.25 to $3.45. Clearly, while the business climate remains under pressure, we have benefited from our conservative approach and we have also benefited from interest savings. And so fortunately, we feel that we have strong credit underlying our income stream and at this juncture comfortable with the previously stated guidance.

With respect to the dividend, dividend policy will be adopted at our Board meeting in March. Obviously we are clearly studying dividend policy in light of all of the worlds events. And we will address that at our Board meeting in March.

So now with all of that I will turn the call over to Barry who will review in detail our financial results for the

Thanks, Mitchell. On account of a couple of items that I will discuss in a minute, we had a net loss for the fourth quarter of $4.1 million or $0.06 a share versus net income of $15.8 million or $0.24 a share for the same quarter last year. For the year, net income amounted to $51.7 million or $0.79 a share as compared to $108.5 million or $1.61 per share for last year.

FFO for the quarter amounted to $50.9 million or $0.63 a share versus $73 million or $0.89 a share in 2007. For the year, FFO was $279.1 million or $3.46 a share versus $293.9 million or $3.56 a share for '07.

Included in net income and FFO for fourth quarter was $38.9 million or $0.48 a share of non-cash impairment charges as well as a non-cash gain of $9.1 million or $0.11 per share. FFO for the quarter excluding these non-cash items was $1 per share, this compares to the $0.89 for same quarter last year. Net income excluding these items was $0.31 a share as compared to $0.24 a share for the same quarter last year. The $0.48 in impairment charges resulted from write downs on two of our joint ventures -- $0.33 per share on our Mack-Green-Gale joint venture and $0.15 a share related to our Boston Downtown Crossing venture. These amounts are included in equity and earnings of unconsolidated joint ventures for the period.

As to the non-cash gain, you may recall that back in 2004, we acquired a couple of assets from AT&T for cash and the assumption of some leases AT&T had with third parties. At the time we estimated the costs associated with satisfying these leases and recorded the amount as other obligations on our balance sheet. The majority of the assumed lease obligations have now matured and the final ones mature through May of this year. Based on our current estimate we anticipate that all of the obligations will be satisfied for $9.1 million less than we originally recorded. As a result, we recognized a non-cash gain of $9.1 million or $0.11 a share in the fourth quarter.

Other income in the quarter included approximately $334,000 in lease termination fees. The fourth quarter last year had lease termination fees of $570,000. For the year, termination fees totaled $9.4 million as compared to $10.1 million in '07.

Same-store net operating income which excludes lease termination fees increased by 0.5% for both the fourth quarter and the full year of '08 on a GAAP basis. On a cash basis, same-store net operating income decreased by 1.3% for the fourth quarter, and increased [0.7%] for the full year. Our same-store portfolio for the fourth quarter was 29.2 million square feet and our same-store portfolio for the year was 28.8 million square feet. Our unencumbered portfolio at year end totalled 238 properties aggregating 24.8 million square feet of space which represents 84.9% of our portfolio.

In late October we closed on a 10 year $240 million mortgage with Northwestern Mutual and New York Life. The loan is secured by our Harborside Plaza 5 property and bears interest at 6.8%.

Later in the quarter we repurchased through a tender offer just over $100 million of our $300 million 7.25% senior unsecured notes. The remainder of these notes mature next month.

More recently we completed a $64.5 million mortgage financing with Guardian Life. The ten year loan bears interest at 7.25% and is interest only for the first year with 30 year amortization thereafter.

At year end, Mack-Cali's total undepreciated book assets equaled $5.5 billion and our debt to undepreciated asset ratio was 40.6%. The Company had interest coverage of 3.2 times and fixed charge coverage of 2.5 times for 2008. We ended the year with approximately $2.2 billion of debt which had a weighted average interest rate of 5.87%.

Currently, we have $208 million drawn on our $775 million revolver and approximately $103 million of cash on hand. We are reaffirming our previous 2009 FFO guidance of between $3.25 and $3.45 per share.

Please note that under SEC Regulation G concerning non-GAAP financial measures such as FFO we are required to provide an explanation of why we believe such financial measures are relevant and reconcile them to net income. Available on our web site at www.mack-cali.com are our supplemental package and earnings release which include the information required by Regulation G as well as our 10-K.

Now Mike will cover our leasing activity. Mike?

Thanks, Barry. In 2008 our consolidated portfolio produced 499 transactions totaling 3.8 million square feet. This compares with our 2007 totals of 519 deals for 4.3 million square feet.

Our leasing velocity slowed in the second half of the year particularly in the fourth quarter. The number of deals completed each quarter remain steady throughout 2008. The fall-off in square footage leased is related more to the size of the transactions than to how many deals we completed. On average we signed smaller deals for shorter terms than in the recent past.

For the full year, the average term of our transactions was 5.6 years. In the fourth quarter, the average was 3.8 years. There were also fewer new deals in the market, and based on volume, our 160,000 square feet of initial transactions is about 60% below our eight quarter average. 30 basis points of the 50 basis point drop in our percentage leased and our lower than normal tenor attention percentage was the result of several strategic transactions from previous quarters. As an example, 18,000 square feet was contractually surrendered by a global engineering firm which expanded by almost 100,000 square feet and renewed another 40,000 long term at three properties in Central New Jersey and Suburban Philadelphia.

By the end of 2008, we managed our 2009 rollover down to 6.5% of space leased which is not heavily weighted in any one quarter. In the fourth quarter, we saw a 20% fewer new prospects in the market in the same period last year. And first quarter lead activity for new deals is equally slow.

In our markets, some of the largest increases in availability last year were recorded in the regions that had the lowest numbers to start with, namely Manhattan and Washington DC. Availability rates in these markets are around 10%. New Jersey has demonstrated some resilience but vacancy is still around 20% and asking rents fell by about $2 per square foot during 2008. Suburban Philadelphia, Westchester county, New York and Fairfield county, Connecticut have vacancy rates in the mid to high teens.

Sublease space is playing an increasing roll in the office based markets. Our own portfolio remains stable in this regard where we've consistently had anywhere from 4% to 5% of our inventory available for sublet for several years. In some of our suburban markets, sublease space increased by 25% to 45% in 2008. The exception was Central New Jersey where the space available for sublease decreased by 40% during the year.

Whether we are competing with direct or sublease space we are finding that attributes such as our stability, reputation and ability to find tenant improvements for credit quality tenants distinguish us from the competition and are more important than ever in this economic climate. From leasing teams of talented professionals many of whom have experience in leasing our properties through recessionary cycles are working diligently to accomplish our objectives. Mitch?

Thank you, Mike. In closing, I'd just like to offer a few additional words.

I certainly don't in any respect minimize the severity of the economic downturn that we are all experiencing on a global basis. Whether it is good or bad I have lived through a variety of cycles including the 70s and see a lot of parallels and some sorts of events that are unparalleled and unprecedented. The frozen credit markets continue to plague the economy. There's a lack of confidence on the part of businesses and investing new capital and new employment. And thus it is impacting every business throughout the land.

With respect to our business that being commercial office real estate, I can tell you that clearly tenants would generally prefer to stay in place. They want fair transactions. But if you can accommodate their needs and you have the strength and stability of a Mack-Cali, they're very happy to remain with you.

Our size coupled with our extensive land bank, our campus-type developments that offer huge amenities, offer tenants flexibility, provide these needs for our tenants. We are seeing a flight to quality not just in buildings but also clearly in upgrade in landlord quality as I mentioned a moment ago.

We are hoping to continue to be the beneficiary of the trends that are evolving, with respected tenants wanting to make sure that their landlords are equality if not stronger than they are in terms of financial flexibility. We are well positioned with superior properties. Our portfolio has higher occupancies than most of our peers, many of our peers within our markets. And we offer comfortable lease terms.

We remain committed to investing capital in our properties. We have the wherewithal and the commitment and the human capital and talent to do that. And the fact is that we own the bulk of our properties unencumbered. So we have a variety of forms of access to capital if the credit markets remain as paralyzed as they have been.

At some point we will see a rise in consumer and corporate confidence. At some point we will see job growth again. And at that point, Mack-Cali will be well poised to take advantage of growth opportunities.

But until then, we will do our best to keep our portfolio as fully leased with the highest grade tenants that we can. We will be careful and cautious with respect to our balance sheet and we will see what opportunities emerge and evolve as the economy improves. And with that we will now take your questions. Operator?

(Operator Instructions) We will take our first question from Jordan Sadler from KeyBanc Capital Markets.

Hi, it's Craig Mailman here for Jordan. Can you give an update on the Mack-Green-Gale jv and given the impairment and the upcoming debt maturity, whether we can expect some assets to be handed back?

Well, we have taken an impairment charge as we have talked about and as we have reported. That's based on a determination that the estimate of the future cash flows generated by the properties are less than the book values of the total properties. Clearly, there is a mortgage coming due in May. I believe it is May 9th through Gramercy Capital of slightly in excess of $90 million.

And while I am in some level of discussion with Gramercy concerning the potential of extending that loan, on its face and by its terms, based on debt service coverage, -- we, the joint venture which obviously includes SL Green as an equal partner -- is not entitled by its -- by right to extend the mortgage.

The properties as you may recall, we invested and that's part of the impairment charge that we have taken. Capital for building improvements, for tenant installations and leasing commissions. And our partner has elected, which is within its purview not to further invest capital in the properties for the installation of tenants and commissions and various leasing expenses.

And, given that fact, we have elected not to invest further capital in those properties which total about 880,000 square feet in seven properties in a variety of different sub-markets. And so that is what I can tell you factually.

Okay.

And we will see what we will see.

What do you think the joint venture may look like going forward, just in terms of the residual stabilized returns?

I'm at a bit of a loss to respond to that question. I've -- again not at the risk of being redundant, it is a troubled --

You're just not sure --

And I can't answer that right now.

Okay.

There's a lot of moving parts.

Understood. Appreciate that. Can you just moving on to leasing, can you give an update on the Lehman situation and maybe how the progress is going to go back onto [Citi space]?

Yes. The -- let's address Lehman first. Lehman obviously filed and they have sought extensions on acting on a number of their -- I guess on all of their executory contracts or most of their retained contracts. The name on the door of the space at 101 Hudson says Barclays.

A large component of the space that Lehman had actually retained which was only half as you may recall, it was they had leased about 207,000 feet. And they had already sublet to other viable creditworthy tenants who all executed a [tornman] agreement, so they at some point will likely become our direct tenants. And Lehman retained about 100,000 square feet, about one third of that was a -- is a data center which is fully operational and supported by personnel. And so at the moment, Lehman/Barclays, the actual funds have come through Barclays -- are whole with respect to all of their obligations and -- to Mack-Cali and it is a little premature to determine and it's certainly outside our control to determine what ultimately they will do with that lease other than again it is a full deck data center that was recently renovated after the bankruptcy.

So, they have invested capital, that being Barclays and it is fully operational. That's what I can tell you about 101. And with respect to -- I think you asked about the Citi space?

Yes.

Yes. When we shortly after we acquired the asset, I had a variety of discussions with the global head of real estate and the facility staff at the corporate level to talk about their on going expectations with regard to 125. That was in the face of -- that was March of a '07. So that was in the face of what I would call the first contraction in terms of employment, that Citi publicly announced. As a matter of fact it happened to coincide contemporaneously with the meeting.

It was at that point that our expectation for the Citi renewal notwithstanding the economic efficacy of that facility was unlikely and we began to softly market the space. Last October, 31st or at some point this past October the option that Citi had to renew their lease officially expired and it was at that point that we could only for the first time publicly begin to market the space because they had effectively declined their extension or renewal.

So we are actively doing that. We have had a considerable number of showings from midtown tenants and from downtown tenants. The space is extremely efficient, well done. It is pretty much occupied but for two floors out of their 330,000 feet. The lease expires in about a year, just under a year. And the property given our basis is pretty affordable.

So I am encouraged frankly notwithstanding the pretty significant downdraft that's occurring in Manhattan, I am occurring -- I am encouraged by the level of showings and interest for large lots of space. And I will keep you posted on it beyond that.

Okay. Just going back to Lehman, are you still expecting the $3 million reserve in '09? Is that still in the guidance?

We have been very careful with respect to our assessment of that situation and we have reserved for the -- certain events in the lease and I think the number is about right. And we hope to be -- we hope to be surprised the to the upside on that. But until we have absolute certainty on the plans for the ongoing entity, presumably Barclays, we are going to keep that reserve in place.

And then lastly, JPMorgan has an expiration this year? Any update on that?

You are talking about in Harborside?

Yes.

No update other than Jersey City in general while -- while all markets have quieted down considerably, the affordability issue is still something -- aside from anything else that's very attractive in Jersey City. So we've had a pretty good level -- and we are talking to a couple of Harborside tenants now in -- in space that is adjacent about expansion into that space. So, hopefully by, in the next couple of months we will have a much better outlook for that space.

Great. Thanks, guys.

You're welcome.

Moving on we will take our next question from Michael Bilerman from Citi.

Good morning.

Morning.

Mitch, just going back to the Mack-Green joint venture -- when you talked about SL Green halting all capital commitments and leasing costs -- that was just in relation to the assets secured by the $90 million Gramercy note?

That's right.

You share -- this is sort of equal power or equal decision making, you sort of both have to agree to do everything?

Yes. It is a -- that's correct. It is sort of a unanimity.

You had said they decided and then you decided. Was there a difference of opinion on relating to the assets?

As part of the acquisition of the Belle Meade portfolio, these properties were bifurcated for the very specific reason that the occupancy or rollover potential within the properties was somewhat more challenged than what I will call our wholly-owned remaining properties throughout the portfolio.

And so what we did was we bifurcated these properties -- we entered into a 50/50 joint venture with SL Greene and Gramercy placed this $90 plus or minus million dollar mortgage and we -- meaning Mack-Cali -- provided a facility, up to $10 million to the venture to fund and remember this was back in May of 2006, to fund tenant improvements and leasing costs.

And we expended that and were benefiting from cash flow in the joint venture. We got to the point where in connection with any further or perspective leasing, we needed additional capital in the joint venture.

And SL Green elected -- which was their right -- and obviously joint venture partnerships and limited partnerships provide for very squeezed down rights but they elected not to fund. And which was within their rights and purview. And given the fact that they did that, given the fact that there's a looming mortgage that's maturing through Gramercy Capital, I elected on behalf of our partnership not to fund.

And the value, book value of the assets related to the mortgage is coming due is what?

Well, we have written down the -- to basically the mortgage amount.

And then the other assets that are remaining in the venture?

The other assets that -- there are no other assets -- well there's one building in the venture that's not, that is not part of the mortgage. But the remainder of the assets we call them wholly-owned.

There is a limited partnership interest of 3.5 percentage points that SL Green happens to have an interest in along with a lot of other limited partners - that's the way Belle Meade was formed originally -- and when SL Green took the majority equity interest in the Belle Meade portfolio/Gale -- so a number of years prior to our acquisition, they retained that residual interest it's mostly for partnership reasons, tax reasons, et cetera.

Those are fine. I mean those are part of our core portfolio and the occupancies are relatively strong. A few of the assets have secured financing on them. And some don't.

But this particular venture was formed for the very reason that it was our expectation that we would have some leasing challenges given a variety of factor -- given lease maturities at the time we bought the properties or formed the venture, given some sub-market issues, et cetera. So, the fact that there were, they were more challenged than what I am calling the wholly-owned assets was known to all at the time.

Are these assets you want if you can figure out --

I am happy to own them going forward, if it is under the appropriate economic terms period.

Right. You mentioned the dividend policy in terms of discussion with the board. You obviously right now are effectively covering the dividend from cash flow plus or minus a little bit but effectively covering it. Can you just share with us the most recent board discussions? It sounds like you have another one coming up but where the mindset is - where your mindset is in relation to the dividend?

I would tell you that I and the board, the remainder of balance of the board are concerned the lack of liquidity. The fact that the access to capital is limited and notwithstanding all of the bank CEOs appearing in Washington, there doesn't appear to be a lot going on in terms of commercial real estate lending.

We have been successful in both due to relationships and due to superior properties in being able to do some secured mortgage financing at 50% loan to value. And that -- at reasonable cost of money. I think the good -- the good thing is that given our franchise and stability et cetera we can do those -- and our unencumbered asset pool -- we can do those types of financings. I think they bode well for reflecting on the value of some of our assets. If you look at 50% loan to value and then you look at the mortgage amounts, like Harborside at $240 million in proceeds -- 50% means it is a pretty valuable asset.

So, all of that is good but we are, we are concerned that there's a general lack of liquidity in the marketplace. And so part of our thinking and discussions relative to dividend policy are that in this unprecedented period of uncertainty, capital preservation is something that is very high on our list of items of focus.

And with regard to, and beyond that, obviously there have, there is the IRS ruling. There have been some, several companies that have availed themselves of utilizing the mechanisms pursuant to the IRS ruling. And that is another topic of discussion. But I would tell you that any determination of the dividend beyond what I have just said is premature.

Right. Maybe just the last one on guidance, without the impairments you were at about $1 and I think you mentioned there was some real estate tax --

Right. Credits and some tax -- real estate tax credits and successful appeals and there were a few other sundry issues that comprise that $0.11.

$0.11 out of the -- it takes it down to about 89 --

Right.

For and that would obviously if you don't do anything it sort of takes you over your high end and effectively within your guidance you are just staying relatively conservative --

Yes.

Given everything that has happened.

That's right. Like I sad before, we have been the beneficiary of interest rates that have been favorable -- first of all -- of course we did the tender so we were able to save some money back in the fourth quarter on our bonds. And that is something that is -- we are always going to continue to look at.

And LIBOR was a lot lower than our earlier estimates and modeling. But right now we are trying to be conservative because we don't know where LIBOR is going to go and we don't know what our cost of funds in general are going to be.

Thank you.

You're welcome.

We'll take our next question from Jay Habermann from Goldman Sachs.

Good morning.

Morning.

A question for you following up on Michael's last questionnaire of guidance but can you talk about where you stand on the debt rolls - sorry, the lease rollovers for 2009, 2010 because 6.8% rolls in 2009 and it sounds at this point, roughly $40 million -- but you are saying tenants will likely put. So just trying to get some thoughts there because it sounds like retention may actually bump up a bit versus where you were in Q4?

Part of that -- Let me go through the numbers first just to restate them.

The '09 rollover is about 6.8%. That's $40.1 million. And the '10 rollover as we sit today or actually as of 1231/08, it is slightly less than 11.6% or $68 million and change.

Some of the, some of the retention reduction if you will -- was due to those strategic transactions that I talked about. We have pretty good idea certainly for the remainder of 2009 as to what tenants are doing, tenants with maturing or expiring leases. So we think our modeling is pretty conservative and reflecting that about half of our maturing or expiring leases for the remainder of '09 are move outs. That has nothing to do with the landlord. It has to do with changing business plans,it has to do with -- in one case we built a new building for a tenant. It was all part of the strategic plan that they had. So, that will be a '09 event. And things of that nature.

So we have a pretty good sense, we think given the marketplace and sort of erring more to the downside than the upside because there aren't too many upside surprises these days that our guidance and our modeling is reasonable and conservative given the expirations I have just talked about for the -- certainly for '09 and what we know at this point -- or what we think we know.

So to get to sort of that lower end, that 3.25 range, obviously you have the impact of refinancings but can you walk us through occupancies same-store and rents?

Well, I would say that same-store is going to be about flat, in general. And occupancy, we expect to be very frank, that we are going to lose a little because of what I have just said about expiring leases with known move outs.

There is not a lot of activity going on in most of our markets. And I would tell you, Jay I know that the New Jersey marketplace has gotten particularly -- has been focused on because of its guilt by association if you will -- to the financial and securities markets or securities industry. But I do think that we have a pretty diversified pool of tenants supporting our income stream.

If you look through our filings you can see that. I mean in a, in almost every aspect of the economy and we have pretty good distribution through MSAs and so forth. But I would also tell you we do business and have portfolios and part of our franchise exists from Washington DC to Boston at this point. And most markets are pretty much the same.

You mentioned Central New Jersey, you had rent rolloffs but I noticed occupancy was down 100 basis points. Any thoughts there on the market? It sounded like it was one of your stronger markets but looking through the numbers it looks a bit weaker.

I would say it is probably not, it is one of the stronger markets. The reality was that in our Horizon Business Center in Hamilton township we lost some occupancy because one of our tenants who I think might -- and this is my speculation -- might ultimately be in a very strong growth position because their infrastructure engineers and that's part of the stimulus plan that has been passed by Congress for roads and bridges et cetera.

They needed to consolidate and expand their operations closer to the Philadelphia area. We were able to accommodate them basically by them giving up a little bit of space in Horizon, some 38,000 feet, I think. We were able to have them enter into a long-term lease in Strawbridge in two buildings totaling about 100,000 feet and remaining 18,000 feet in Hamilton. So it is not as black and white as it would seem, Jay.

But my comment to you was that and I think it is important to reflect this -- that again most of our markets -- and you may want to characterize them as primarily suburban versus urban or New York versus non- New York City. Most of our markets are operating the same. That is they're generally traffic is off.

Generally even in the Washington Metroplex right now, notwithstanding all of the talk about economic stimulus and everything else that's being discussed in Washington, the GSA hasn't been out in the marketplace for space. Many of the consulting firms that ordinarily benefit from these programs in NASA and national health and FDA and all of the others haven't been out looking at space. And so most of the markets have remained pretty soft pretty quiet in terms of tenant demand right now. And that is almost universe.

You had mentioned obviously that the [TIs] have remained fairly static at this point. Can you give us a sense of with your competition is doing? I would say especially the private owners I would imagine they're not putting a lot of CapEx in at this point.

I think clearly you -- that you are going to see a lot of capital constrained ownership particularly given the fact that a lot of the secure [ties] loans don't really begin to mature until the latter part of '09 into the ensuing year, '09 '10 and '11 but more on the -- in 2010. It is going to -- I believe it is going to be extreme pressure in terms of refinancing because there has been a devaluation of real estate both emotionally, psychologically and pragmatically in terms of diminished income streams. That by its very nature raises leverage levels. And in the face of underwriting standards being increased and more disciplined on the part of capital providers -- leverage just by this devaluation has risen.

So, I believe that there's going to be a lot of pressure in the marketplace which is also going to result in this flight to quality that I referred to before in terms of who your landlord is. We have the empirical evidence of that being on the sort of forefront of tenants concerns, they want to know when they enter into a lease they can in a fluid, comfortable way that the landlords only gags to them both in term -- obligations to them nothing terms of concessions whether it is free rent or tenant improvement dollars can get funded.

The brokers want to know they can get paid and particularly those landlords or owners who are primarily secured debt borrowers with all of this looming in front of them, to get [FNDAs] now approved through financial institutions through lenders that are satisfactory to tenants where tenants know that if at the end of the day there is some level of transition -- to use a delicate word -- in the property that they're fully protected.

Very difficult today and in CMBS world it is almost impossible because you have special servicers on all of these loans and with all due respect to any of your or our friends who might be special services, they only punch computers. They don't talk to you, they have no forbearance rights. They cannot help you. They can only tell you what the document says and what you have to do.

And I will give you an example of that. We have -- we had one asset that we -- that was part of our Belle Meade portfolio, this is the wholly-owned not the B properties that we when we bought it we assumed the mortgage. The mortgage was a CMBS mortgage, entered into by the former owners, we had nothing to do with it. It was a balance sheet bank that sold the loan into cyberspace and the CMBS world and we were in a position to do an extension with a sub-tenant for virtually the entire building just call it over 100,000 foot building. And the special servicer under the formulas that they had in the mortgage determined that the sub-tenant who would become our direct tenant in three years -- that the sub-tenant's credit was not as strong as the over tenant which we didn't necessarily agree to.

So the only way -- they denied approval of the lease unless we posted additional collateral in the form of a letter of credit behind that lease. Now, we worked very hard, our leasing team -- to get that extension that brings that lease way out into the '20 teens with what we believe to be a very strong credit. It is a non-recourse loan, but the mortgagee -- or the servicer to the mortgagee exercised it rights to protect the collateral by requiring this. I would tell you that you are going to probably see a lot more of that kind of thing and unless you have the wherewithal as the owner to be able to post the letter of credit, you are going to have to let the deal go down.

That's a short term view in my opinion to operating real estate. So there's all kinds of events that are going to occur as a result of this liquidity crisis that we are in. And we haven't even touched the surface of it.

Thanks.

But that's a realtime thing that happened over the last couple of weeks.

That's helpful. Just last question on G&A, is that the run rate going forward.

We are expecting in our model about $11 million a quarter or $44 million for the year of G&A roughly.

Great. Thank you both.

You're welcome.

Moving on, we will take our next question from John Guinee from Stifel Nicolaus.

Thank you. Very quickly, just if we are looking at the Mack=Gale-Green financial statements correctly, is it basically a $277 million of total liabilities on about 880,000 square feet of assets.

That's the blend. That's because as I said before there's a small residual interest that was carried for tax reasons on the part of the prior owners into this new entity. That does not reflect a bifurcation or an isolation -- the B asset properties that we've been discussing. It doesn't reflect the properties in isolation we took the impairment on. That's a blend of all of the properties we bought from SL Greene, what we call the Belle Meade portfolio, and the Gale company.

That total portfolio in aggregate is about 880,000 square feet?

It is 880,000 feet, seven assets in total.

Sounds like a lender is in trouble, doesn't it?

Oh, I render no opinion on that. I just -- presenting the facts, John.

All right. Thanks. Have a good quarter.

Thank you very much.

Moving on, we will take our next question from Jamie Feldman from UBS.

Thank you very much. I guess just bigger picture. I was hoping you can comment on your view of just the health of the businesses in your core markets. And I don't know the best way to ask it. I guess if you can say what inning do you think we are are in in terms of business closures and bankruptcies?

Right. That is an excellent question. The -- we monitor this in a variety of different ways, Jamie.

We have of course our traditional accounts receivable which we're extremely active on and we kind of know where we stand. We also adopted policies over the last year where when I looked at the overall situation and we are a pretty big entity here -- where we were funding a lot of improvement work and extras and acting as the bank. I'm not questioning the credit that was behind it on the tenants but we -- we changed or I modified policy about a year ago where deposits have to be placed on any large construction projects, interior construction projects, that sort of thing. So we monitor that but we also have a number of other different databases to get to the question you are asking.

One is an e-mail sort of all inclusive to the people that need to see, to be part of this discussion of tenant notice, tenant all notice e-mail which identifies changes in behavior on the part of either -- through direct discussion between property managers and office managers or facilities managers. It monitors parking lots, whether we see deviations in the number of cars, for any extended period. And that, so that kind of gets us aware of a potential issue or problem.

And then we have another list which are tenants of concern, another database where tenants have either actually asked us for some relief or we anticipate that they will. And then, we have our sublet area, but most of the sublet which is a little over a million feet throughout our portfolio is credit tenants that have for some period of time have for strategic reasons excess space. It doesn't really involve in the large measure these smaller to mid size businesses that have experienced problems.

So if I look at the tenants seeking relief, I would tell you and we constantly are very vigilant about about making sure that we know everybody within our portfolio and that is a multi-tiered responsibility on the part of the leasing reps and the property managers -- that that in total represents less than -- significantly less than 1% of our income stream or our revenue stream in the Company. And we expect a lot of these tenants -- and I personally have been involved in some as recently as yesterday -- have come and said I have this business I think it is viable, I'm a 10,000-foot tenant or I'm a 2,000-foot tenant in Westchester -- the one yesterday.

They have been on this list for some time and through communications, we knew there were some issues. They have a viable business model. They have liquidity issues. Their credit lines were pulled by the banks because they're a small business. They provide vital care to the community. And the owner of the business met with -- contacted me directly -- and says that I believe needs to come from the top in your organization. And here is my circumstances, can you help me?

We are going to help this person -- this entity -- because they're a valued long-term tenant. They're experiencing difficulty now, and I believe that when things and if things get better and hopefully they will -- they be pay us back whatever relief we give them now to help them get their business through this period of crisis.

So this list, this goes, sort of throughout the entire portfolio that we have this tenant seeking relief and lease obligations. But as I said quantifying it, it is less than 1% of our revenue stream.

The tenant notice that's more exigent circumstances -- where one day let's say a satellite office, a sales office -- and I am just going to use a hypothetical -- that's a 7500-foot tenant of a national insurance company -- will the facilities manager will notify property management -- onsite premises property management that they would like to speak to them -- and they tell them that it is a Tuesday and on Friday they're shutting down the office. And they are laying off all of their employees -- or all but one or two.

And that has happened in a number of circumstances and it is horrific to watch these, but these generally are good credits where the tenants -- and they even reiterated not that they have to because the documents, lease documents speak for themselves -- that they intend to honor the lease in every aspect -- including but not limited to the financial aspects -- but because of business pressure they're closing down operations and they're laying people off.

That is as I said -- it's more exigent. It is -- it happens maybe in since those -- the last I would say month of 2008 into this month, it is happening frequently. But by and large it is with pretty good credits. So we are more concerned about of course the people that are being laid off and how that is going to impact their lives, how that is going to impact the community, and of course how that is going to ultimately impact us -- because it certainly lessens the probability that that office gets re-opened and that whenever that lease expires it will be renewed.

So we try to build all of this into our modeling and thinking but the truth is that there's a lot happening everyday in reaction to this economic downturn that is very difficult to plan for.

That was very helpful. Thank you. So based on your experience in the market, I mean how long do you think it is -- it sounds like these events are accelerating. How long do you think before we stabilize and get a feeling for the floor that businesses have finally adjusted themselves and are kind of prepared for the new world?

Yes. I think it is -- the reason I punt on any assessment is I remember back in other cycles and as I said, I have been there, done that and I have seen the differences in the 70s when we are going to have -- I think as a result of this stimulus, we're going to have some thawing of credit. It is going to go to the consumer first in the form of some stabilizing of housing which can needs to happen.

And it will improve sentiment and improve the lot of the consumer which will ultimately infiltrate into the economy. The lending institutions and there are many fewer than there were previously because you had these companies, financial companies -- G Capital and General Motors, GMAC and Ford Motor Credit and all of these lending agencies in the past that have either cut back on lending to the consumer or have stopped lending.

And so credit is going to remain tight for a period of time no matter what the Government does but they have to get it back to the hands of the consumer and in businesses. The circumstance I talked about yesterday -- that this small business in Westchester -- this small business had $200,000 in lines, and aside from all of the other financing that they hypothecated -- everything they had to try to, to try to not have to make that contact because they are honorable people about some rent relief -- the lines were pulled. The banks -- small regional bank, up in Westchester pulled their lines. Obviously they had a right to do it based on the, the agreements.

So I think that, there's a lot going on now that is different than prior cycles. So my best estimate is that this is going to be a long period of adjustment. The markets will thaw -- probably not until much later in the year. There will be a lot less leverage.

This is a huge deleveraging of the global economy's balance sheet. And there will be some resuscitation at some level that probably will only begin at the latter part of the year. I am not confident necessarily that the job growth we are going to see is going to result in much demand for office outside of -- the fortune effect that we have some of these infrastructure tenants et cetera, et cetera.

We have pharmaceutical tenants that are expecting -- particularly the Asian companies. And so we will see some of that from a Company perspective.

But the other thing we are going to see at some point and it is probably two or three years away is hyperinflation that will result from the quant economics theorem that has been espoused and provided to the economy. So I think also as a landlord and a real estate operator, you need to be pretty careful about protecting yourself so that you can deal with that inflation when the economy comes back and when liquidity comes back into the market and take advantage of it. Because if you can take advantage of it, it will greatly enhance property value.

And so we are kind of looking at lots of macro events that will impact us and -- but I think the fact that you, that we, that -- without necessarily any help -- a company can get through the next three years, two, three, four years without having to access capital outside of what is controllable is a good place to be.

Thank you very much for that. And then finally, an update on where Downtown Crossing stands? I know you took your write down in the quarter. What does it look like going forward?

We have a -- a couple of things have happened, we have designed a couple of scenarios for the project. I should say redesigned where we can do things like eliminate the residential component and the -- and Gale International and [Bornado] have had a number of meetings with the municipality -- with Boston -- and I think that generally they support all of those goals because they want to see -- while they would like to see all aspects of the previously designed project proceed, they understand the realities of the marketplace right now. But given the fact that there was virtually no construction financing available for the project -- the partnership, did what it -- chose to do what it did as reflected in our filing today. The site is basically mothballed.

The writedown basically brings it down to a land value that is supportable by appraisals et cetera -- on a reasonable basis. And the expectation is that at some point hopefully it will be reactivated as that's not an accounting statement, that's a reflection of optimism that when the credit begins to thaw and we can -- the issue, wasn't so much the fact that -- the issue was using your capital.

We were confident of the project. We actually had the hotel pre-sold. We had a variety of retail leases and it looked like we were driving in the direction of some major office leases. But in the face of the fact that the lending community shut down, because they still viewed the project as highly speculative -- we obviously did not want to use precious capital to build the project without absolute certainty of the final result and without knowing that for every dollar expended we would have a dollar behind it from the capital marks.

So that is why we took the action we took and right now, it is -- it was foundation work -- some level of foundation work -- there was some, these are two historic buildings they needed to be cleaned up a little bit. And demolition work done. That was all done and there's a nice clean fence around the site right now.

All right. Thank you very much.

You're welcome.

We will take our last question from Nick [Pearsos] from [Aquari].

Good morning. Thank you. Quick question for Mike I think you mentioned in your remarks you saw a 20% fewer prospects in the quarter. How does that track versus prior downturns both in magnitude and duration?

I will answer it can if I can. I have to tell you, one of the ironies of this whole situation is that there was never a bubble in the suburbs. And the markets have always reflected almost, I would say almost -- never less than a double digit vacancy from a statistical perspective. It would hover at what I would call equilibrium when particularly when the dotcom and the internet explosion occurred.

Some of the suburban markets hovered around 10%, 11% statistically and when it imploded they slowly and gradually have risen and now they're back to high teens into the 20% mark. So I guess the point I am making is that in this, the predominant suburban markets we never experienced the bubble and thus never -- hopefully will experience a complete bubble bursting if you will and a serious compression in rents.

Rent have moved in the suburban markets for the last 20 to 25 years no more than 20% to 30%. They're back to their historical, the lower quadrant given the vacancies in the marketplace. The good thing is there hasn't been a lot of new supply. So inventory has remained stable and again, I believe that those properties that are held in the hands of strength -- in terms of financially flexible landlords will be -- that have strong franchises will be the beneficiaries.

But the answer to your question is it tracks -- it is on the higher end of historical performance but it is not unusual in the suburban markets.

Great. Thank you.

You're welcome.

That will conclude the Q&A session for today. I will turn the conference back over to Mr. Hersh for closing or final remarks.

Well, thank you. Operator. I would like to thank all of you for joining us on today's call. I hope it was helpful and insightful and we look forward to reporting to you again next quarter. Have a good day, everyone.

Thank you. That will conclude today's conference. We thank everyone for their participation. Have a wonderful day.