Veris Residential Inc (VRE) 2002 Q2 法說會逐字稿

This is [indiscernible], please standby. Good day everyone and welcome to the Mack-Cali Realty Corporation's Second Quarter 2002 Conference Call. Today's call is being recorded. At this time I would like to turn the call over to the Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead sir.

Thank you and good morning. Thank you all for joining Mack Cali's Second Quarter 2002 Earnings Conference Call. With me today are Tim Jones, President; 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 the statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the company. First I would like to briefly review some of the activities during the quarter then give a few observations on what we are seeing in the markets. Barry will follow with a discussion of our financial results and Tim and Mike will give you an update on our markets and leasing activities.

In the second quarter, Mack-Cali had another successful quarter with FFO of $1 per share an increase of 7.5 percent over the second quarter 2001. Approximately 4 cents per share was attributable to positive mark-to-market valuation on the company's [CNBS] investment through [RCAP]; 2 cents per share to the recovery on Grand Union's surety bond and 1 penny on the gain from a land sale at Horizon Center. We made significant progress in our dispositions program of selling assets in non-core markets. In the quarter we sold eight properties totaling over 1 million square feet for more than $82 million. The property sales included four office buildings in Dallas, three in Houston, and one in Denver. In the second quarter we also sold three joint venture buildings in Roseville, California for $31.7 million. And in July we sold our sole asset in Tampa, Florida for $23.7 million. The [indiscernible] properties that were sold in the second quarter had a combined occupancy rate of 88 percent, well below the overall portfolio rate of 93.9 percent leased. In the quarter we announced that our contract to sell our Denver portfolio was terminated due to the difficulty the buyer had in financing this portfolio within that strained market. We planned to continue to own and operate these properties until the market conditions improved and then sell at the appropriate time. In general though, we are finding the favorable financing environment helpful to us in terms of executing our sales program, but frankly its been much more challenging to find properties to acquire at reasonable pricing levels in better markets, such as in Mack-Cali's core northeast markets. On the development side the Hyatt Regency Hotel at Harborside, a joint venture project with the Hyatt Corporation was recently completed and opened in early July. We view this full-service hotel as a very valuable amenity for our tenants at Harborside as well as the Jersey City Business Community.

In the second quarter we placed into service 125, Clear Brookroad, a 100 percent leased office/flex property at our Cross Westchester Executive Park in Westchester County in New York and Pacific Plaza Phase II a 100 percent retail and entertainment component at Pacific Plaza that adjoins the phase I office development. Pacific Plaza, which is located in Daly City, California, is a joint venture development with Highridge Partners. We also began construction of a 95,000 square feet built-to-suit office property for Horizon, New Jersey, which has leased the entire building for 10 years at our Horizon Center Business Park in Hamilton Township, New Jersey. This project is scheduled for completion in the fourth quarter. At Harbor side Financial Center both development properties are proceeding on time and on budget with fourth quarters scheduled completions for both. Plaza 5 is 58 percent pre-leased and Plaza 10 is 100 percent pre-leased. Regarding Plaza 5 leasing there are still several large space requirements in the market, but the decision making process has been slow and its been compounded by sublet space within the market. This sublet base however is diminishing. Across the portfolio in general, businesses are still very reluctant to make any long-term decisions about capital spending, adding employment, and adding office space. In most markets, demand is relatively weak and vacancies are still increasing in large measure due to sublets and rents are flat or in some instances declining. In the quarter, we reduced our 2003 rental exposure by more than $8 million from $62.6 million previously to $54.4 million dollars currently. Our rollovers for the second half of this year 2002 are just 3.6 percent of our portfolio's base rent or $17.2 million, which is down from $28 million last quarter. So we do in fact have very manageable rollover risks within the company. Rents this quarter actually rolled down by 3.2 percent. This however was actually due to some very positive leasing momentum. We completed an early renewal of a 75,000 square foot lease with GAB at 9 Campus Drive in Parsippany, New Jersey. This [showed] up our portfolio. GAB's rents had been well above market. So on this deal the rent actually rolled down by 29 percent without factoring in this lease rents would have actually rolled up 3.9 percent in the northeast and 0.3 percent portfolio wide when adding in the southwest properties. [TI's] and commissions increased from $1.83 last quarter to $2.68 per square foot per year this quarter. Again doing large measures to the GAB lease, which alone accounted for 30 cents of this increase. However, in general, costs have increased due to increased competition to attract and maintain high quality tenants. We were, however, able to maintain the same overall occupancies we had last quarter at 93.9 percent leased. We accomplished this in large part due to our proactive early lease renewal program initiated several years ago as well as by shedding some of our assets in the under performing southwestern markets pursuant to our strategic plan. While leasing transactions by square footage totaled 1.2 million square feet, the same as last quarter, retention dropped to 55.2 percent on expiring square footage. Much of this declined in retention was due to one large lease that was not renewed. Merrill Lynch's lease for 77,000 square feet at 3, Independence [Way] in Princeton, New Jersey. However, we made up for this loss with an increase in new leases from 200,000 square feet last quarter to 500,000 square feet, which is particularly noteworthy in this difficult economy. In our core Northeast mid-atlantic markets which make up 88 percent of our base rent, our occupancies are still quite strong at 94.8 percent lease and we continue to outperform the markets that we operate in by a range of 350 to 860 basis points. Over the next few quarters we do expect occupancies to decline slightly due to continued weakness in the markets and the economy in general. We believe however that our Northeast markets are generally outperforming most markets throughout the nation because of their high barriers to entry limited new inventory and diverse macroeconomic base. We continued to have strong credit quality tenants within our portfolio so our exposure to credit loss has been quite minimal to date. In the second quarter, losses to bankruptcies were negligible at 17,600 square feet constituting an annual base rent of $426,000. We do have, however 160,000 square feet lease to MCI Worldcom in five different properties with the most rent exposure in New Jersey. Worldcom annual rent exposure aggregating all of those properties is $2.65 million. Quest also leases total of 30,000 square feet at two of our properties with annual rent exposure of approximately $763,000. As we discussed last quarter Author Anderson our 110,000 square feet tenant in one of our Rose Land buildings has vacated its space, but continues to pay its rent, and Superior Bank a 150,000 square feet tenant in a 50:50 joint venture property in [Orangeburg], New York has been declared insolvent, and has vacated its space. Obviously, we are actively marketing both of these spaces. In this environment with so many unforeseen events like Enron, WorldCom, and others it remains difficulty to predict when there will be a recovery in job growth, which will positively impact the real estate markets. But I believe we were looking at a slow recovery for the economy beginning later this year that will result in an improved real estate climate through 2003. Regarding corporate governance issues, I have signed the chief executive officer certification of our periodic reports and financial statements pursuing to the Sarbanes-Oxley Act of 2002. And Barry left with signing similar certification as Chief Financial Officer. In addition, our company policy going forward will be to expense stock options. Now Barry will review our financial activity for the second quarter.

Thanks Mitchell. Funds from operations for the second quarter of 2002 amounted to 72.1 million or $1 per diluted share. This represents an increase of 7.5 percent over the second quarter last year. I would like to take a minute to explain some of the second quarter highlights, which Mitchell just spoke off. You may recall last quarter we recorded $2.2 million equity loss from our investment in [Archa] of which 2.7 million was as a result of market-to-market valuation adjustment. During the second quarter, we recognized 3.5 million of equity and earning in Archa of which 3 million was evaluation gain essentially offsetting the first quarter's loss. The valuation gain was the result of the decline treasure yields and narrowing mortgage spreads during the quarter. Also during the quarter the company recovered $1.3 million of lease obligations under surety bond relating to bankrupt tenant formally at our River Brook property in [Wayne], New Jersey. Included in the second quarter G and A is an $800,000 tax approval for the recently enacted New Jersey Tax legislation, which is retroactive to January 1, 2002. Also included in G and A is $200,000 of cost related to the terminated Denver contract. As the result of this decision not to sell the Denver portfolio we reclassed these properties out of [health] for sale. We marked the properties to market and recorded evaluation [indiscernible] of $3 million and catch-up depreciation amortization of $4.3 million. Our [Same Store] portfolio now includes 25.2 million square feet of space, which represents over 90 percent of our portfolio. Same Store net operating income increased by slightly more than 2 percent for the three-month period end of June 30th, and about 4 percent for the six-month period. Both versus comparable periods in 2001. For the recent three-month period Same Store revenues were up 1.5 percent and expenses were up only 0.3 percent. At the end of the quarter Mack-Cali's total undepreciated book assets equal $4.2 billion and our debt to undepreciated assets ratio was 40.9 percent. The company had interest coverage of 3.9 times and fixed charge coverage of 2.7 times for the second quarter. At the end of the quarter we had total debt of approximately $1.7 billion, which had a weighted average interest rate of 7.11 percent. We ended the quarter in a sound financial position clearly demonstrated by our strong balance sheet and healthy financial ratios. Currently, we have less than $95 million drawn on our $800 million unsecured credit facility. Our unencumbered portfolio at quarter end totaled 227 properties aggregating 19.8 million square feet of space, which represents 76 percent of the portfolio. I am pleased with the financial stability Mack-Cali continues to enjoy. Lastly, I want to remind you that our 10-Q supplemental package and CEO and CFO certifications are available on our website at WWW.Mac-Cali.com. Now Timothy will cover our leasing activity. Tim.

Thanks Barry. I will review the company's leasing results for the quarter and then give you an update of condition of our markets. Michael will provide market information on Westchester County, New York and Fairfield County in Connecticut. At June 30th our consolidated portfolio was 93.9 percent leased, unchanged from March 31st. During the second quarter we signed 183 transactions totally in almost 1.2 million square feet. These transactions produced retention of 55.2 percent of expiring space and growth rental rates for the first year decreased to an average of 3.2 percent over the expiring rental rate including all escalations. GIs plus leasing commissions average to $2.68 per square feet per year of lease. Further details about leasing activity can be found in the supplemental package on our website. For look at our markets will be using information provided by [indiscernible] Lakefield and unless otherwise noted will be discussing over all class A availability rates and class A direct weighted average asking rents. Even though we don't own property in Manhattan, the proximity of our New Jersey and Westchester county buildings dictates that we watch these markets. At June 30th Downtown availability was 15.5 percent, Midtown's 8.9 percent, and Midtown South 6.3 percent. Midtown and Midtown South rates were essentially unchanged since first quarter, but Downtown vacancy rate increased by 3 percent. Average asking rent in the city fell slightly, but are a still healthy $42 to $61 making Northern New Jersey and Westchester county locations an attractive alternative. Now I will turn over to the Michael, who will take us through markets conditions in Westchester and Fairfield county. Mike.

Thanks Tim. The ongoing economic uncertainty continues to limit leasing activity in the Westchester county, New York and Fairfield County [indiscernible] office markets. Many companies continue to postpone space decisions while others reduce overhead by downsizing offering unneeded space on the sublease market. Westchester county experienced an increase in overall class A availability from 19.2 percent in the first quarter to 19.7 percent at the end of June. Direct availability actually decreased by 198,000 square feet to [positive] absorption. However, sublet space in market increased by 316,000 square feet yielding a small increase in overall availability. Total sublet availability increased from 924,000 square feet in the first quarter to 1.24 million square feet at the end of June approximately 72 percent of available space is direct and 28 percent is on the sublease market. Even with this increase, overall availability in Westchester is still below yearend 2001 20.5 percent. Mack-Cali's New York Connecticut suburban portfolio increased to [indiscernible] space leased over the quarter from 97.2 percent to 97.4 percent. Consistent with our reports over the last year nearly half of the overall class A availability in Westchester is contained in relatively few noncompetitive large blocks, its configuration is not suited to our market's average tenant size of 8 to 10,000 square feet. There has been no further absorption in the spaces which has historically inflated the county's availability. Sublease transaction at discounted rate dragged down the overall average venture in the quarter in Westchester county from $29.96 per square foot to $26.59 per square foot. However the average direct rental rate held nearly constant at $29.58 a square foot down only 38 cents from the first quarter. Worldcom's problems may also affect Westchester since the company occupies 350,000 square feet in the eastern sub market, while the company's inability to occupy the space would have a great impact the county's vacancy rate it would not directly compete with Mack-Cali's properties, which are concentrated in the western sub markets and White Plains central business district. Positive news to the county includes the recent approval of a 384,000 square foot cancer treatment and biomedical research center at White Plains to be developed and occupied by New York Presbyterian hospital. The $250 million facility will add to Westchester's growing biomedical presence and help maintain the region's strong employment base. There is virtually no other new commercial office construction underway in Westchester and relatively little in Fairfield. Overall Class A availability increased more significantly in Fairfield county during the second quarter moving from 17.6 percent to 19 percent. Direct absorption totaled a negative 236,000 square feet. Space on the sublease market totaled 2.4 million square feet 43 percent of Fairfield's overall availability up from 2.1 million square feet and 41 percent in the first quarter. Despite the increase in the amount of space been marketed asking rents is only slightly from $33.60 to $33.41 per square foot. Mack-Cali has limited exposure in Fairfield with about 14 percent of New York Connecticut region square footage located within that market. Our product is a diversified mix of office space [indiscernible]to commit more tenants and office flex space within [indiscernible] Executive Park that has limited competition. Significantly transactions in the regions for the second quarter included [indiscernible] which took 90,700 square feet in New York Connecticut, Mercedez Benz Creditcorp, which leased 63,700 square feet also in Norwalk. [Smart's] a network management provider, which signed a sublease for 42,000 square feet in White Plains New York, [indiscernible] consultants, which took 36,600 square feet in Stafford Connecticut and [indiscernible] cooperation which signed a lease for 29,500 square feet in White Plains Eastern sub market. Significant Mack-Cali transactions in the region included great Spring Waters of America which renewed its lease of 36,200 square in Elmsford New York, [indiscernible] which renewed in 24,700 square in the cross Westchester Park also in Elmsford and publisher circulation [indiscernible] a distributor and customer service center for the New York Times which signed a new lease for 18,400 square feet also in Westchester. The region shows some signs of economic recovery. Westchester's 4 percent May unemployment rate down from February's high of 4.6 percent and Fairfield's 3.7 percent down from 4 percent for the same period compared with the national average of 5.8 percent in May, the latest information available at a county level. The area continues to entertain New York City businesses, search for potential sites for disbursing back office and recovers central locations, although few major relocations have been announced. Smaller regionally based companies continue to operate and expand within the area providing most of the smaller states demand. We believe this activity will increase as the National economy covers waiting to improve performance and positive absorption. Tim.

Thanks Michael. In Northern New Jersey, availability fell slightly from 13.9 percent to 13.7 percent and direct vacancy per class A space decreased from 8 percent to 7.7 percent. Asking rents remained stable at $30. Looking at some of the major sub markets in this region. [Morris] county's availability dropped from 24.6 percent to 22.3 percent, although direct vacancy rose from 13.5 percent to 14.2 percent. Asking rents remained unchanged at $31.48. Our two and half million square feet in Morris County is 96 percent leased. I was pleased that a 146,000 square feet of sub leased space at our Mack-Cali Business Campus has not only been rented, but we have entered into a direct lease with the subtenant descendant commencing upon the expiration of that deal and running through 2011. Availability in [Burring] County grew from 14.4 percent to 15.1 percent to the second quarter and direct asking rents dropped to $29 a foot. Our 3.8 million square feet Burring County inventory is 98.4 percent leased. [Hudson] County's availability grew from 5.6 percent to 7.2 percent, but direct class A vacancy rate is still only 1 percent. Rents alone, the Hudson Waterfront have dropped to the mid 30s, but there is still good activity in the sub markets. Our 2.1 million square feet of in service office space along Hudson County's waterfront is fully leased. Together our holdings in the Morris, Burring, and Hudson County markets constitute more than 31 percent of our company's square footage and 37 percent of our annualized base rents. Even in this difficult climate our properties in these counties average 98 percent leased. [indiscernible] availability rate is up to 21.5 percent from 20 percent. This area continues to be impacted by the addition of sub-lease space as demonstrated by the fact that the direct class A vacancy rate remained flat at 10.5 percent. Asking rents bumped up slightly to 29.57. Our [indiscernible] presence is 2.8 million square feet which is 92.3 percent leased. On June 30, there were approximately 6.3 million square feet of space under construction in Northern and central New Jersey, primarily, along the Hudson Waterfront. The total represents just 3.8 percent [audio gap] square foot inventory. Approximately 78 percent of this space is pre-leased and will provide minimal supply burden to the market as it is delivered. In our other northeast markets suburban Philadelphia's availability rate was 18.6 percent up from 17.6 percent at the end of the previous quarter and asking rents increased to $26.44. Our properties in this market include 1.7 million square feet of office space in both Southern New Jersey and suburban Philadelphia and 1.4 million square feet of office [indiscernible] in Burlington County, New Jersey. We were 89.4 percent leased in this market at the end of the second quarter. The Washington DC market remains stable although availability is up to 10.7 percent from last quarter is 9.6 percent. Direct vacancy is only 7.5 percent. The area continues to command high asking rents with the current average at almost $45. Our 328,000 square feet in Washington is fully leased. In Texas, Dallas's suburban vacancy rate increased to 22.2 percent from 20.5 percent and asking rents averaged $23.17 per square foot. Eastern suburban vacancy rate increased to 13.7 percent with asking rents dropping to $22.35 per square foot. Denver's suburban availability rate is up to 25.3 percent and asking rents have dropped to low 20s. The San Francisco market continues to weaken with vacancy increasing from 18.3 percent to 20.4 percent and asking rents falling from $34 to $32. While conditions in some of our markets have improved slightly, we don't expect to see a real recovery until 2003, and we anticipate that vacancy rates will rise further. Like everyone else in the market, we have experienced downward pressure on rents and increased cost of leasing space. In the phase of these challenges, we are still committed to making the best deals possible and we think that the quality of our portfolio, the talent and experience of our leasing team and our capital position will frequently give us a competitive advantage enabling us to maintain good occupancy and cash flow. Mitch.

Thanks, Tim. I just like to reiterate that while we have certainly not been immune to the downturn in the economy, we do believe that Mack-Cali is well positioned because of our strong occupancies in markets, class A assets, high credit quality tenant base, and financial flexibility. I thank you all for listening today, and now will be happy to take your questions. Operator.

+++ q-and-a

Thank you, the question and answer session will be conducted electronically. If you would like to ask a question, please press star followed by the digit 1. We will proceed in order that [indiscernible] and will take as many questions as time permits. Again, if you would like to ask a question please press star 1 and we will pause for a moment to assemble the roster. And we will take up this question from [Stewart Ackgerard] with Lehman Brothers.

Hi, guys. First Barry, could you just clarify in the Q you mentioned evaluation allowing for $27 million relating to the Colorado properties is that a new write-down or is that a total aggregate?

The number, the $27 number is a total aggregate, Stewart, that includes the 3 million that was taken in the current quarter and the 24 million, which was taken in prior periods.

Okay and how did you arrive at the number?

Basically what you do is you look at the properties and you have to mark them for lower across the market in the periods, when you carried them itself for sale, and essentially if you sense that they

the carrying cost was above market you have to put up evaluation obviously to getting down to a number that would be market.

Okay and the total at the overall portfolio market based on the current rent?

Stewart, this is first Mitch. First of all, just trying to clarify that the commentary that Barry just had with you, I think it's important to remember that while we were marking these assets to market when they are held for sale or removed from being held for sale based on a proposed fair market evaluation and those numbers don't reflect potential gains on assets. So it's merely a singular impairment and not a reflection of potential gains on assets that may be sold for higher values than they are held on the books for. Relative to marked market, I would still tell you as you can see from the performance of our North Eastern Mid-Atlantic portfolio which is doing quite well even in the face of a difficult economy, but I would still submit that there would be a vast lease of somewhere probably in the 8 to 10 percent range depending on particular sub markets. But I feel strongly that we are probably in that range of 8,9,10 percent.

Okay. And could you just elaborate on the [indiscernible] related to New Jersey like up to it was down around 50 basis points. Is that the result for sublet competition?

Yeah. I am sorry. We are having a bit of an audio difficulty here. As far - you are referring to the Northern and Central New Jersey numbers.

Yup.

Right. I would say that's probably true that in fact obviously we have had situations that impinged in with Merrill Lynch that affected occupancy down in the Central Jersey portfolio that was a 77,000 for deal, you know, there is no question that sublet market has put undue pressure within the market place even to some extent artificially by being competition, but recognizing that tenants would much prefer to have [indiscernible] with landlords for their own flexibility and their own long-term occupancy security. But the fact of the matter is

that I would attribute much of this to downsizing vis-a-vis the Merrill Lynch situation and sublet pressure.

Okay. [indiscernible] and you did note that sublet pressure was diminishing on the Harborside market. Could you elaborate that?

Yeah. There are a couple of transactions as first of all as you know there have been a variety of different sublets offered to the market place. You had a couple in the [Harts] complex between, here on from Lehman Brothers and American Express. You had situation of a new port with UBS [PayneWeber] that's offering about 430,000 feet for sublet you had the [Night Timemark Space], which I think at this juncture is done and then of course Schwab sublet at Plaza 10. So in the aggregate you had a couple of million square feet of sublet pressure within the market place. There has been, however, some very positive leasing velocity occurring within that market place. Several insurance companies had been in the market have actually been completing deals, AIG is one and there are others. So the sublet space is diminishing and there is very little inventory at the end of the day along the waterfront to satisfy demands going forward. We are today seeing couple of transactions that are seriously considering the waterfront at Harborside. One is a major banking institution, that's working in the range of the variety of units that can or cannot go to the waterfront anywhere from 150,000 to 300,000 feet. There is an investment bank that's actively considering Jersey City, we are seeing internal growth within our own portfolio, even though, we haven't open the doors of Plaza 5, we have tenants within that building that have signed leases that all are, in fact, already expanding.

The result of expanding the businesses one in the case was recently reported to have acquired another company. So, we have seen some reasonable activity within the market place and that's diminished the [sublet] space in its beginning to give us a sense of confidence that won't be too long before we see some positive leasing velocity in Plaza 5, which is our only vacancy within the complex. At the end of this year, if we would opened the doors as we, of Plaza 5 and Plaza 10 as we exist today we would have a portfolio of approximately 3.6 million square feet at Harborside Financial Center of just the Class A office space, forgetting the hotel of course and the retail components and we would have vacancy of only about 11 per cent within that portfolio. So, we are doing a real well down there, notwithstanding the most turbulent economic environment we have seen in over a decade.

And leverage just on [ICAP] update in terms of selling

Yeah. We have been its taken longer in terms of the process that we had anticipated, we have at least one very serious and interested party in acquiring our interest, they have been going through diligence they sent a team down to ICAP about two weeks ago and I am waiting actually at this point for them to get back to us as you can see as a result of the dramatic change in treasuries and at the compression on rates as well as the compression on spreads the portfolio on a market-to-market basis and that is really what we are talking about securities in a market-to-market basis, has it, not only regained what it was last quarter but actually exceeded that loss. So, it is our goal clearly to dispose of the, our interests in ICAP and you know hopefully this time next quarter we will have some more information or may be have [done the trade].

Great. Thanks.

You are welcome Stewart.

And we will take a next question from [Kerry Boston] from [Solomon Smith Barney].

Good morning, Mitchell, maybe if you can just give us an update I may have missed this early in your comments on additional volume of dispositions that you are expecting in the second half?

The volume of activity in the second half will be fairly (indiscernible) quite frankly. It is [full] in contrast to, you know, what has occurred in the first half of the year. I think that the number is somewhere in the $40-$50 million range in terms of assets that are held for sale right now. But I think clearly Denver was the largest component and I don't expect that to trade anytime soon, that has been removed from held for sale.

Okay. Barry, in terms of development cost, can just give us a [sense] of what the capitalized interest and capitalized G and A for the quarter were?.

In terms of capitalized interest, I am just going through the (indiscernible) to get you that exact number. Hold on one second, I believe it is around $6 million, but I want to get the exact number, it was exactly, for the six months it was $11,0647,000 and about $6 million during the last quarter.

Okay. And the capitalized G and A was?

We are that significant. I don't have that number handy, right now.

Okay. Great. I appreciate it. Thanks.

Moving now to [Timothy Goldburg] with [Deutsche Bank].

Timothy Goldburg: Hello gentleman, I wanted to ask on the [JVS]. To what extent is any of these ongoing or recurring income?

In terms of JVS, during the quarter we have [realized] about $8 million of equity in earning from joint ventures. The bulk of that was really from our ICAP and also from HPMC. In terms of ICAP I think we have explained what that was, that essentially was the market to market - $3 million of mark-to-market adjustments, so we recognized there about $3.5 million and on HPMC which is our joint venture in California with Highridge. There we recognize in equity earnings $4,705,000, of that $4,705,000, about low of $3 million was attributable to gain on the sale of a property that we had there. We sold a property at Roseville, California for about $31 million that translated with us receiving a gain of about a little over $3 million. Now in that partnership was down to two assets, [Pacific Plaza] and also [Stadium Gateway] both of which are just, you know, getting into stabilization and we would expect that quite frankly that income from those are on a go forward basis would be, you know, $100 million, you know, for the rest of the year.

Okay. So the gain on sale is in [FFO]?

No, it's out of FFO, if you look at the schedule that we have referred for you. See that number coming out.

Okay, great. And it [indiscernible] the sequential change from the negative 1.2 million to break even. How does that can you walk to had a [worth] despite you are continuing to reserve?

Sure, let me tell you in the first quarter of this year, we wrote down cost, we wrote off [straight line] rent as well as deferred leasing cost related to that tenant when it became obvious to us that the tenant was not going to continue his occupancy over the full term in their lease and I guess we went into some detail about that last call, and its also explained I think in the foot note to the financial statements on that investment the exact numbers. Now, basically the project was on a break even basis for the last quarter and we would expect quite frankly that there will be some small equity losses that we would get principally from depreciation and debt service on a go forward basis from there until we find another replacement tenant.

Okay, so essentially all those revenues are dropping out?

Correct.

Okay, great. Okay, thanks very much. One another question from me is [with] the new leasing in the quarter? We didn't look on the new tenants with those, could you give us some color on that?

Yeah, we were able to get quite a few new tenants. You saw that the retention was at 55 percent but we moved from 200,000 feet last quarter to 500,000 feet this quarter. So we have had a variety of new tenants Washington Mutual is a new tenant down in Wal-Mart, in [Clark], we have done a variety of renewals as you know with [Meridian Healthcare], [Radial] for Europe, then in Washington We have Yamazaki of Tokyo. So we have had a combination of new tenancies and very credible are these tenancies as well as retain the existing tenants.

Okay, but the primary new tenant was Washington Mutual?

Well, I mean Washington Mutual, we have done a number of transactions for example [indiscernible] which is a new [indiscernible] and existing tenant within our portfolio, which, I think new tenant with respect to 146,000 square foot assets. So, you know, it depends on how you look at that statistic, but it clearly been a combination of both.

Okay, thanks very much.

Thank you [indiscernible].

And we will take our next question from [Norman Cramer] with Cramer Investments Management. Mr. Cramer, your line is open.

Hi, I have no [indiscernible] questions, thank you.

And there are no further questions at this time, Mr. Hersh I would like to turn the conference back over to you.

Thank you very much. Well again I would like to thank all of you for joining us today on our earning's call. We look forward to continued progress within the portfolio and to rejoining you again at the end of this quarter. Thank you again, good day.

That does conclude today's conference. Thank you for your participation and you may now disconnect.