Veris Residential Inc (VRE) 2002 Q3 法說會逐字稿

Please stand by. Good day, everyone and welcome to the Mack-Cali realty corporation third-quarter 2002 conference call. As a reminder, today's call is being recorded. And at this time, I would like to turn the conference over to Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, Mr. Hersh.

Good morning. Thank you for joining Mack-Cali's third-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 these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the company.

First, I'd like to review some of our results for the quarter. Then I'll spend some time giving you an overview of what we're seeing in our markets and review our quarterly activities. Barry will follow with a discussion of our financial results, and Tim and Mike will give you an update on our markets and our leasing activities.

Mack-Cali had another solid quarter, with FFO increasing 7.7% over third quarter 2001 to 98 cents per share. These results came despite a moderate decline in occupancy from 93.9% to 93%. Our FFO this quarter includes lease termination fees of $5 million and $2 million of positive mark-to-market valuation on our CMBS investment. We have signed a contract to sell this CMBS investment for $20.2 million, providing an internal rate of return of 11.61%.

Our same-store growth for the quarter increased slightly by 0.1%, and by 2.3% for the nine months ending September 30th 2002. We were also pleased to announce in the quarter that for the eighth consecutive year we increased our dividend from $2.48 to $2.52 per share on an annualized basis. During the quarter, we continued to sell assets in non-core markets and to redeploy proceeds into our core markets in the northeast. Selling our Tampa property for $23.7 million and purchasing two northeast properties in the quarter for $16.6 million.

I'd like to make a few comments about current market conditions and how we are positioned to weather this kind of an economy. Demand is still quite weak in many markets. With vacancies continuing to increase and rents either staying flat or declining. In general, many businesses continue to be reluctant to make any long-term decisions about employment, capital spending, and ultimately office space. We are definitely working harder to get new tenants and to retain the tenants we have, since tenants today have many more choices. Subleased space is abating, but in many markets it continues to put downward pressure on rents, since it really has no asking price.

At this time, we see no catalyst to begin job growth and encourage capital spending, and with no increase in demand, there will obviously be no decline in vacancies and pressure on rents will continue into 2003. There are, however, some encouraging signs. Leasing activity has picked up. We've seen an increase in space showings since Labor Day, particularly in suburban markets in New Jersey, such as Essex and Morris counties. There are also pockets of strong demand among pharmaceutical and professional service companies, as well as smaller users under 20,000 square feet.

Let me give you a little color on our leasing activity in the quarter to demonstrate this. Of 1.338 million square feet leased in the quarter, over 66% or 127 transactions were in the less than 5,000 square foot range. 19%, or 36 transactions, were in the 5 to 10,000 square foot range. That gives you an indication of the kind of activity we're seeing in the marketplace.

Our northeast and Mid Atlantic markets, which now make up 89% of our base rent, up from 83% just a year ago, are generally outperforming most other markets throughout the country because of their high barriers to entry, limited new inventory, and diverse macro-economies. Mack-Cali also continues to outperform these markets, and in the third quarter we did so by a range of anywhere from 350 to over 900 basis points. Because of our strong position in these markets, as well as our top-quality assets, high credit quality tenants, and strong occupancies, we believe Mack-Cali remains well positioned for any improvement in the regional or national economy.

Now I'll briefly review the leasing, development, and disposition highlights during the quarter. As I mentioned before, our overall occupancy declined by 90 basis points from the previous quarter to now 93.0% leased. In northern New Jersey, we experienced a 2.2% decline, largely due to credit losses, the largest being Arthur Andersen that leased 110,000 square feet at 105 Eisenhower Parkway in Roseland. In the third quarter, we signed a lease termination agreement with Arthur Andersen and received a lease termination payment of approximately $2.9 million, plus certain furniture and fixtures remaining in the tenant's space.

Other losses due to bankruptcies in New Jersey, both in Parsippany, included Zario networks, a network solutions provider, for just under 35,000 square feet and Exec-you-Train of New Jersey, an IT training firm, for 10,500 square feet. In Colorado, the software provider ESI surrendered 71,681 square feet of its space, retaining approximately 30,000 square feet.

While we continue to pride ourselves on our strong credit-quality tenant base, we, too, have not been immune to losses, considering the difficult state of the economy. In 2003, we expect to lose a 121,000 square foot lease later in the year at Taxter corporate park in Elmsford, New York, since the tenant, Fuji film, has announced its plans to move to a new location ^. We anticipate additional losses in occupancies into next year, with losses possibly by as much as 150 basis points by the end of the year in 2003.

Leasing activity, however, was strong in the third quarter, with over 1.3 million square feet of leases signed, up from 1.2 million square feet last quarter. The largest lease of the quarter was a 385,000 square foot lease renewal signed by bankers trust, part of Deutsche Banc, at Harborside Financial Center, Plaza 1. I must admit the size of this lease did skew some of the numbers somewhat for the quarter.

Rents this quarter rolled up by 5.6%, compared to a 3.2% roll-down last quarter. And in the quarter, we reduced our 2003-rental exposure by $7 million from previously $54.4 million to now $47.4 million, or from 11-1/2% to 10% of our base rent rollover exposure for 2003.

Our rollovers for the remainder of 2002 are just 1.5% of our portfolio's base rent, or $6.8 million. This is down from 3.6% in the second quarter, or $17.2 million, so we continue to make progress on bringing down the rollover exposure in our portfolio and we do have very manageable rollover risks.

TI's and commissions decreased from an unusually high $2.68 per square foot per year last quarter to $1.78 per square foot per year this quarter. But I must tell you there continues to be increased competition to attract and maintain high-quality tenants and this is costing more in general. Tenant retention increased from 55.2% to 60.3% on expiring square footage. I again credit our proactive early lease renewal program for helping us maintain a well-leased portfolio, and I again stress manageable lease rollovers.

On the development side, three major development projects commenced operations in the quarter. Each done on time and on budget. The Hyatt Regency Jersey City on the Hudson, a joint venture project with the Hyatt corporation, a 350-room world-class hotel on Harborside's South Pier which, by the way, has mid-60% occupancy already, Harborside Plaza 10, a 100% leased 19-story, 575,000 square foot property, and Harborside Plaza 5, a 34-story, 980,000 square foot property that is 58% leased. Regrettably, one of our tenants at Harborside Plaza 5 that leased 68,000 square feet or 6.9% of the building, a financial service company, is encountering financial difficulties and has failed to pay the rent. We obviously have not built out this space, and do maintain a security with this tenant.

Like in other markets, the decision-making process continues to be slow in Jersey City, which has slowed progress in leasing Plaza 5. However, there are still several large space requirements in that market, and Plaza 5 is under consideration for most of these. These requirements generally are in financial services and in the insurance industry. The office building we're developing for Verizon, New Jersey, at our Horizon Center Business Park in Hamilton Township New Jersey is on schedule for fourth quarter completion.

As I mentioned earlier in the call, we continue to make progress in our dispositions program of selling assets in non-core markets. In the quarter, we sold our sole asset in Tampa, Florida for $23.7 million, and in October we sold our three-building Arizona portfolio for $43 million. We redeployed proceeds from our asset sales to acquire two northeast properties in the quarter, and further enhance our geographic focus in the northeast. We acquired 25 Commerce Drive in Cranford, New Jersey, our headquarters location, for $7.3 million, and an interest in Three Skyline Drive in Hawthorne, New York, for $9.26 million, thereby expanding our presence in the vibrant Westchester marketplace. Yesterday, we announced the acquisition of 1633 Littleton Road, a 57,000 square foot building adjacent to our Mack-Cali Business Campus in Parsippany, New Jersey, for $11.35 million, thereby increasing our holdings at this popular campus to now 12 buildings totaling over 1.7 million square feet.

Regarding the acquisitions environment, it continues to be challenging to find top-quality properties to acquire at reasonable pricing levels in our northeast markets, but I will tell you that we do have several properties in our pipeline and, frankly, we do expect to announce an acquisition in Stamford, Connecticut today. With that, now Barry will review our financial activity for the third quarter. Barry?

Thanks, Mitchell. Funds from operations for the third quarter of 2002 amounted to $70.5 million, or 98 cents per diluted share. This represented an increase of 7.7% over the third quarter of last year. FFO this quarter included lease termination fees of approximately $4 million greater than our recent quarterly average of a million dollars. In addition, we had about $2 million of mark-to-market income from our CMBS investment included in this quarter's FFO.

Our same-store portfolio now includes 25.4 million square feet of space, which represents 88% of our current portfolio. Same-store net operating income was relatively flat for the three-month period ended September 30th, and was up about 2.3% for the nine-month period. Both versus comparable periods in 2001. For the recent three-month period, same-store revenues were up 1.5%, and expenses were up 4.7%.

Under our stock buyback program during the third quarter, we have purchased 54,000 shares for a total cost of about $1.7 million, representing an average price of $30.97 per share. And 127,700 shares in October for a total cost of about $3.9 million, an average price of $30.75 a share. At quarter-end, Mack-Cali's total undepreciated book assets equaled $4.2 billion and our debt to undepreciated assets ratio was 41.5%. The company had interest coverage of 3.8 times and fixed charge coverage of 2.7 times for the third quarter.

At the end of the quarter, we had total debt of approximately $1.8 billion, which had a weighted average interest rate of 6.96%. On September 27th, 2002, the company obtained a new unsecured revolving credit facility with a current borrowing capacity of $600 million from a group of 14 lenders. The interest rate on outstanding borrowings under the new facility is currently LIBOR plus 70 basis points, 10 basis points below the old facility.

The facility has an accordion feature that allows the company to expand the facility by $200 million to a total capacity of $800 million. The facility matures in September 2005, with an extension option of one year upon the payment of 25 basis points of the then-outstanding borrowing capacity.

Upon obtaining this new facility, the company repaid in full and terminated its previous $800 million facility. Also during the third quarter, Moody's investor services reaffirmed the company's senior unsecured debt rating at B AA 3, and revised the out look from stable to positive. We ended the quarter in sound financial position, clearly demonstrated by our strong balance sheet and healthy financial ratios. Currently, we have about $145 million drawn on our $600 million unsecured credit facility. Our unencumbered portfolio at quarter end totaled 230 properties, aggregating 20 million square feet of space, which represents 77% of the portfolio.

I am pleased with the financial stability Mack-Cali continues to enjoy. Lastly, to remind you that our 10-Q and supplemental package are available on our website at www.Mack-Cali.com. Now Tim will cover our leasing activity. Tim?

Thanks, Barry. I'll review the company's leasing results for the quarter and then give you an update on the condition of our markets. Mike Grossman will provide the market information in Westchester County in New York and Fairfield County in Connecticut. At September 30th, our consolidated portfolio was 93% leased, compared to 93.9% at June 30th. During the quarter, we signed 190 transactions totaling over 1.3 million square feet. These transactions produced retention of 60.3% of expiring space and gross rental rates for the first year increased an average of 5.6% over the expiring rental rate, including all escalations. TI's plus leasing commissions averaged $1.78 per square foot per year of lease. Further details on our leasing activity can be found in the supplemental package on our website. For a look at our markets, we'll be using information provided by Cushman and Wakefield, and unless otherwise noted, we'll be discussing overall class A availability rates and class A direct weighted average asking rents.

In Manhattan, which is adjacent to our northern New Jersey and Westchester properties, downtown's third-quarter availability was 15.9%, midtown's 9.5%, and midtown south's 7.4%. This reflected increased vacancy in all three sub-markets. Average asking rents in the city are still in the 40 to 60-dollar range, making comparable properties in our northern New Jersey and Westchester county assets an economical option.

Now I'll turn you over to Mike, who will take us through market conditions in Westchester and Fairfield counties. Mike?

Thanks, Tim. Office market conditions within the region during the third quarter reflected the continuing hesitation by businesses to make decisions on future space needs. This prolonged period of soft demand has affected the makeup of the available space. While in prior quarters much of the new availability consisted of sublease space, expirations of leases during the third quarter caused direct availability to climb.

Overall class A availability in Westchester decreased slightly from 19.7% in the second quarter to 19.5% at the end of September. Relatively strong absorption in the sublease market of 215,000 square feet was unfortunately offset by a return of 192,000 square feet of direct space. Approximately 77% of the county's available was direct space, and 23% was on the sublease market.

On a positive note, overall leasing activity increased significantly from 240,000 square feet in the second quarter to 625,000 square feet in the third. Direct asking rents remained nearly level at $29.60 per square foot. Smaller tenants continue to characterize Westchester leasing activity, with nearly all transactions for the quarter under 50,000 square feet. A positive trend seems to be emerging in the White Plains CBD relating to the increasing space demand among law practices. Skadden Arps, Craven Swain, and Davis Polk, among New York City's most prestigious firms absorbed a total of 75,000 square feet. We believe the presence of these leading law firms will likely influence additional New York City practices to establish offices in Westchester.

Within Mack-Cali buildings in White Plains, new leases, renewals, and expansion agreements, among seven law firms within the quarter, totaled 56,000 square feet. The first of the new multiunit residential developments in downtown White Plains is scheduled for completion next spring. Located across the street from Mack-Cali's Westchester financial center and connecting with the Metro North train station, the 250-unit tower will be joined by a second 250-unit tower within 12 months.

Several other projects currently under construction will add over 1,000 more rental units in the central business district over the next several years. We believe the pending increase in the residential population and the resulting expansion of restaurant, retail and service enterprises will greatly increase White Plains' appeal as an office location.

In Fairfield County, overall class A availability increased again this quarter, rising from 19 to 19.5%, with negative absorption in both direct and subleased space. Direct absorption totaled a negative 58,000 square feet, and sublease absorption, a negative 134,000 square feet. Sublet space represented 44% of the total Fairfield availability.

Leasing activity totaled 645,000 square feet in Fairfield, up from 605,000 square feet in the prior quarter. Reacting to pressure from the sublet market, direct asking rents decreased moderately from $33.71 per square foot in the second quarter to $32.53 per square foot in the third.

Major leases within the New York-Connecticut region for the quarter included Fiji photo film USA, which leased 163,000 square feet in value Hal en, New York, Berkley related companies which took 78,500 square feet in Greenwich, Connecticut, Skadden Arps, Slate, Meagher, and Flom, which signed a lease for 48,800 square feet in White Plains, New York; M-scar, which leased 32,500 square feet in Norwalk, Connecticut and Commerce Bank which took 31,500 square feet in Rybrook, New York. Within the region, Mack-Cali continued to outperform the market, with 97.2% of our properties under lease.

Major Mack-Cali transactions for the quarter included Nestle Waters North America, which renewed and expanded to a total of 55,200 square feet in Elmsford, New York; X-AN Corporation, which renewed 46,000 square feet in Hawthorne, New York; Fabrication Enterprises, which signed a new lease for 20,500 square feet, also in Elmsford; and McCarthy Finger, Donovan, Et al, which renewed 20,000 square feet at the Westchester financial center in White Plains.

We anticipate leasing activity in the region will remain sluggish until a change in economic trends begins to encourage business to move forward. The market is relatively well positioned to respond to an improving business environment, compared to previous downturns with no new office construction and a more converse base of smaller tenant companies.

Finally, we are encouraged by the increased leasing activity over the second quarter, and the continuing inquiry from New York City-based enterprises looking to distribute portions of their operations. Tim?

Thanks, Mike. In the northern New Jersey market, availability increased from 13.7% to 16.7%, as supply increased and demand remained slow. Direct vacancies also increased but are still only 10.1%. Asking rents are $30.67. Looking at some of the major sub-markets in this region, Morris County's availability increased from 22.3% to 24% with asking rents in the low 30s. Our two-and-a-half million square feet in Morris County is almost 91% leased. Availability in Bergen County grew from 15.1% to 19% in the third quarter, and asking rents are $28.50 a foot. Our 3.8 million square foot Bergen County inventory is 98.4% leased, with less than 5% of that space rolling between now and year-end 2003.

Hudson County's availability grew from 7.2% to 11.3%, with asking rents of $39 a foot. Our 2.1 million square feet of stabilized in-service office space along Hudson County's waterfront is fully leased. Together, our holdings in the Morris, Bergen, and Hudson County markets constitute more than 32% of our company's square footage, and 37% of our annualized base rents. Even in this difficult climate, our stabilized properties in these counties average over 96% leased.

Central New Jersey's availability rate is up to 23.6% from 21.5% last quarter. Direct class A vacancy rose also but is more than 10 points lower at 11.6%, indicating the continued impact of the sublease market. Asking rents are just under $29. Mack-Cali's central New Jersey presence is 2.8 million square feet, which is 92.6% leased. At September 30th, there were approximately 4-and-a-half million square feet of space under construction in northern and central New Jersey, primarily block the Hudson waterfront. The total represents just 2.7% of the 168 million square foot inventory. Approximately 80% of this space is pre-leased, and it will provide minimal supply burden to the market as it is delivered.

In our other northeast markets, suburban Philadelphia's availability rate increased from 18.6% to 19%, and asking rents are $26.54. 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 flex space in Burlington County, New Jersey. We were 89.8% leased at the end of the third quarter.

The Washington, D.C. market continues to be probably the healthiest in the country. In the third quarter, overall availability dropped from 10.7% to 8.2%, and direct vacancies fell from 71/2% to 51/2%. There continues to command asking rents in the mid-40s. Our 328,000 square feet in Washington are fully leased.

In Texas, Dallas' suburban availability rate increased slightly to 22.8% and asking rents are $22.27 per square foot. Houston's suburban availability rate increased to 14.7%, with asking rents just over $22 per square foot. Denver's suburban availability is up to 27.8%, with asking rents at $19.70. San Francisco's vacancy rate improved slightly this quarter, falling from 20.4% to 19.7%, but it's anticipated there will be further downward pressure on this occupancy. Asking rents are $33.

With the exception of Washington, D.C., all of our markets weakened in the third quarter, and we do not see any immediate positive changes. In spite of this, our leasing activity has remained strong, with year-to-date transactions almost 770,000 square feet ahead of what we saw by this point in 2001. Due to the quality of our assets, the experience and talent of our personnel, and our strong financial position, we expect to continue to capture more than our share of the transactions, which are completed, and to continue to outperform our markets in general. Mitch?

Thank you, Tim. In closing, I'd just like to reiterate that while Mack-Cali has not been immune to the downturn in the economy, we do believe that we're well positioned for several reasons. Our strong occupancies, our geographic concentration in high-barrier-to-entry markets, premier properties, credit-quality tenants, and our financial flexibility. I thank you all for listening today, and we'd now be happy to take your questions. Operator?

Thank you very much, sir. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you're using a speakerphone, please make sure your mute function is turned off, to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star 1 on your touch-tone telephone to ask a question, and we'll pause for just a moment to give everyone an opportunity to signal for questions.

And our first question today comes from Stuart Axelrod with Lehman Brothers.

Yes. Just a question. How much of the variability to the '03 guidance relates to Harborside lease-up?

At this point in time, whatever we've put in for Harborside lease-up, which has been very minimal, has really been back-ended to the end of '03.

Okay. And what's the timing on your ability to get back up to 57,000 square feet of space if you need to release that?

I'm sorry. Can you repeat that question, Stuart?

The 667,000 square foot tenant.

Right.

What is the timing on your ability to get back that space?

Well, we're going through a process now. We have an irrevocable security that, you know, we can draw on at any point in time, and as I mentioned before, we have not invested in tenant improvements in that space, which is a material situation. We are going through a process with that tenant. We're in discussions to see how we can settle this situation, and perhaps capture a larger termination fee. And then we'll move forward with the space. It's not my expectation that this tenant will occupy any of that space, given their current state of fragility.

Okay. And the hotel joint venture at Harborside, it was a negative 1-and-a-half million for the quarter. Is that a unique onetime issue or is that a run rate?

No, it's not a run rate at all. A large portion of that is due to startup costs in the hotel. We're actually quite pleased with both the occupancy and the ability to move room rates or ADR's in that hotel. The traffic at the dining and conference facilities has been very strong. We really do believe that we have a captive market and a destination hotel, so we would expect continued progress in the earnings stream at the hotel.

Okay.

I also think it's just worthy to note that there's $600,000 of depreciation also in that number.

Okay. And in terms of the 10% explorations for '03, you were able to get positive 5% spreads this quarter. How much of that do you think is related to the fact the bulk of that was renewals as opposed to new leases and what do you think, you know, the spreads would be on the -- on the 10% expirations?

Well, to be very frank, I think, you know, certainly a large part of the positive momentum in this past quarter was due to a very favorable lease renewal with bankers trust. I think generally, we're seeing rents flat in many instances declining, so, you know, in my view to kind of tread water and maintain occupancies in the low 90% range in this kind of environment is a great accomplishment.

Okay. And what would the spreads be, I guess, if you would take out the Deutsche Banc for the quarter?

The spread would actually be a decline, a slight decline, taking out Deutsche Banc. Rents would have rolled down by about slightly in excess of 2.3%.

Okay. And lastly, just in terms of the buyback, it seems like you accelerated the program a little bit in October. What are the plans going forward?

Well, we did accelerate it in October. We bought 127,200 shares back in October. We continue to be fairly nimble, but we find our stock to be a very attractive investment and will continue to be very opportunistic in buying back stock. As you can see, just in the month of October alone, we out-purchased the entire repurchase throughout the third quarter.

Okay. Great. Thanks.

You're welcome, Stuart.

And our next question today comes from Gary Boston with Salomon Smith Barney.

Good afternoon, or good morning. Mitchell, in terms of the acquisitions, dispositions during the quarter, can you give us some sense on, you know, what sort of cap rates those -- those deals were being done at?

The dispositions have been done in the range of 10 to 11%, depending on the specific instance. We have been acquiring properties in our core markets in the northeast for anywhere as a low of roughly 9 and 3/8ths% to as much as 11% on a cash flow basis because of the fact that these properties, in large measure, are stabilized. So we have done a very credible job of reinvesting and redeploying part of our capital recycling program into much higher-quality assets and much higher-quality markets with generally much higher-quality credit behind the leases at a fairly neutral to possibly a slight negative arbitrage.

Okay. And Barry, in terms of the guidance for '03, what -- what, if any, are you assuming in terms of acquisitions and disposition activities, stock buyback, any sort of investment program?

Well, you know, when we look at kind of the base case or midpoint, we don't assume any acquisition above what we need to really -- to finish out the 1031 program. Our 1031 monies that we have to reinvest today, you know, before this acquisition that Mitchell talked about today, were roughly about in the $80 million range that we're looking to reinvest. In terms of stock buyback, there's nothing, again, in the base case that we looked nothing in there for those things.

Okay. And nothing in terms --

So those could be positive surprises going forward.

Nothing in terms of continuing sort of non-core dispositions, finishing up Texas? I know Denver's probably on hold, but any -- any of that stuff in there?

No. Actually not. We continue to be very entrepreneurial in our thinking. We are doing some leasing both in Denver and in Texas in, in the few remaining assets in Texas. You know, we'll re-stabilize those, but I think at this point in time, the prudent alternative is to wait for a better day in some of those southwestern markets to see suburban asset pricing rise, and then we'll rethink the capital recycling in those markets.

But, you know, we continue to look at the possibility, even in some of our core markets, at the possibility of taking advantage of the dichotomy that exists between pricing and some of the fundamentals, in terms of the possibility of sale of one or two of our assets.

Okay. And finally, just in terms of, again, on the '03 numbers, what sort of assumptions are you making on the lease termination front?

Well, we're -- we've kind of to the best of our knowledge, and we think we've covered certainly whatever has the remote possibility of being a difficult situation. We have also contemplated, as I indicated before, the loss of another 150 basis points in occupancy, although certainly we're going to do everything possible to avoid that circumstance, and so we think that, you know, we've been fairly conservative in projecting our guidance.

Well, in terms of -- I mean, specifically -- I mean, there's the move-out situation and the occupancy hit, but in terms of the actual lease termination fees, are you using the current quarter as a run rate or do you think you'll move back down to something that's, you know, been -- I think you said a million-and-a-half dollars a quarter? Is that a pretty good number to assume?

Yeah, I think the number is a low number, at this juncture. It's probably, you know, in the million dollar range. We had extraordinary events occur this past quarter. Obviously, you know, or newer Andersen, who one would never have imagined would have presented difficulty, resulted in, you know, almost a $3 million termination fee to us. $2.9 million plus furniture. So we certainly don't envision that circumstance going forward on a run rate basis.

Okay. And then finally, on the sale of the CMBS portfolio, what's -- you said you had a contract. What's the timing on the close there?

It's my expectation that the timing will be within two weeks. There was a very short formal approval process that the purchaser needs to go through with its investors, but all of the due diligence has been done and I have every expectation that the transaction will close.

Great. Thanks a lot.

You're welcome, Gary.

And as a reminder to our audience today, if you have a question or if you have a follow-up question, please press star 1. And moving on, we'll hear from Jim Sullivan with Prudential Securities.

Good morning. Just to follow up on the questions on the termination fees, does your guidance for the -- for the fourth quarter assume termination fees, or additional termination fees from the tenant that is currently in default in the harborfront property?

No. Jim, we -- again, with respect to that tenant, we haven't -- we haven't assumed taking in the income from the letter of credit, and so that actually would be a positive element relative to -- to the fourth quarter, even though, obviously, we're distressed over that situation.

Sure. Okay. A question for Barry. In terms of -- do you have available what the lease termination fees were for the third quarter of '01?

I don't have it handy but I would imagine it was somewhat -- you know, million dollars or less. And I can get you that number later. I don't have it handy.

Okay. And the same-store NOI growth comparison that was given during the call, that includes the impact of the termination fees?

No. The termination fees are exclude from the same-store numbers.

Oh, okay. Can you tell us, outside of the share buyback that you've detailed in the release, does your guidance going forward include further share buyback.

No, it does not contemplate any further share buybacks.

Okay. And then in terms of the waterfront leasing, Mitch, you had talked generally about an increase in activity and showings in the third quarter, and that you're somewhat encouraged by that, but obviously from our standpoint, from what we're seeing in the financial service industry's continued announcements of layoffs, that would seem to be -- that would seem to be, you know, counterintuitive. Can you please characterize the apparent interest in the harborfront space, how it's changed, perhaps might be the best way to do this, how it's changed over the last quarter from financial service firms which I guess, in addition to the insurance industry are the major sources of demand?

Well, let me kind of give you a capsule of the demand we're seeing at the waterfront. First of all, in a very positive way, we're seeing internal growth. And by that, I mean that we have several tenants within Plaza 5 that have just begun to take occupancy in that building that have already expressed a strong indication that they will be expanding. One is a major Pharmaceutical company who already leases just under 150,000 square feet in that building, and another is a broker-dealer in the bond trading business. So that's certainly a positive sign to see the fact that both the pharmaceutical industry and elements of financial services are continuing to grow.

As far as some of the other requirements that we're seeing in the marketplace, they are generally either insurance company type requirements, major consolidations of some of the larger insurance companies that are frankly doing business in lower Manhattan, as well as some banks, State Street bank for example, who has acquired or is in the process of acquiring certain parts of Deutsche Banc has a major requirement and they've indicated that there's a very strong probability that a large part of that requirement will, in fact, go outside of lower Manhattan.

We are definitely a target location for that. And we've seen other requirements such as society general, who has requirements in the hundred to hundred and fifty thousand foot range. The State Street requirement is about a quarter of a million square feet. These particular tenants are doing their work, they're doing it somewhat slowly, they are actually spending funds on space planning and the like, so they appear to be very real requirements, but the deliberative process today, Jim, is very long and it's slow.

Final question from me regarding the harborfront property. What's your understanding of the condition for the amount of subleased space that's available and how has that changed over the last 90 days?

Well, actually the sublet space within the waterfront has diminished quite dramatically. I mean, the largest volume of sublet space that was available on the marketplace was that leased by AIG down at 70 and 90 Hudson. In speaking with representatives of Goldman Sachs last week, while their building is probably a year away from completion, it's their expectation of moving at least 3,000 people they've identified into that facility, but again, that's you know, a year away at least, and hopefully we'll be in a much stronger economy at or the emergence of a much stronger economy.

And a couple of the requirements at or the users, I should say, at Newport have indicated and restated their commitment to occupy their space there. I guess the -- the one space, UBS Paine Webber, is still somewhat unclear as to how much of that they will, in fact, occupy, but my understanding, for example, of J. P. Morgan Chase is that all of the job attrition and sublet space probability will not be New Jersey waterfront based. So we've seen the sublet space kind of diminish along the waterfront. And most of what's available there is direct vacancy at this point.

And just one final follow-up on this. In terms of the Goldman Sachs space, the -- the 3,000 people that you say they've identified, what percentage of the building would that -- would that take care of, in your view?

About half the building.

Okay. Good. Thanks for that.

You're welcome, Jim.

Jim, just before you go, I wanted to get you that number from last year in terms of lease termination fees. It was $837,000.

Mr. Sullivan, did you have any further questions?

No. That's it for me. Thank you.

Absolutely, sir. And for those of you who are queued up today, please if you're using a speakerphone, would you would you pick up the handset to ensure better audio quality. And moving on, we'll here from Joshua Swalbe from CS First Boston.

Hi. Good morning. A couple of quick questions. What is your assumption for 2003 same-store NOI growth? or a range?

I would say, Josh, that the range is flat to slightly positive. We have certainly been managing utility costs very carefully.

Uh-huh.

And I think that's a very significant part of the operating expense. So that would be my estimate.

Okay. Great. Thanks.

You're welcome.

And what is the stabilized yield for Harborside 5 and for Harborside 10?

Well, Harborside 10, which is fully pre-leased on a 15-year credit lease, is in excess of 10%. It's about 10-and-a-half percent on an un-leveraged basis. And the projections for Plaza 5 exceeded 11% free and clear. Remember, now, we built in a stabilization period of a year following initial occupancy of that building, so, you know, at this point while we've had some, let's say, difficulty in completing the lease-up, you know, it's -- we still have a full year plus --

Right.

-- to deal with that.

Okay. And I'm sorry. What was the number you said in terms of what you expect? I know you said it would be back-ended toward the end of '03 -- in terms of what you expect the occupancy at Harborside 5? Do you have some sort of projection?

Well, again, I mean I think we're through the worst of it.

Uh-huh.

In terms of seeing the conflicting interests of sublet space, and I think that provided we get some momentum in the economy, we will certainly have, you know, more progression on the lease-up of Plaza #- 5 through 2003. But it probably won't occur until the end of the year.

Okay. Great. Thank you very much.

You're welcome.

And there are no additional questions at this time, gentlemen. I'll turn the call back over to you for any additional or closing remarks.

Yes. Thank you. I just again want to thank everybody for joining us today in our third-quarter earnings call. We look forward to, again, coming together to report on our fourth-quarter and year-end results. Thank you very much.

And that does conclude today's conference. We thank everyone for joining and please have a wonderful day.