Veris Residential Inc (VRE) 2002 Q4 法說會逐字稿

Thank you for holding. You are holding for today's Mack-Cali Realty Corporation fourth quarter earnings call. We are still admitting additional participants and we will be starting shortly. Thank you for your patience, and please continue holding. Good day, everyone. And welcome to the Mack-Cali Realty Corporation fourth quarter 2002 conference call. Today's call is being recorded. At this time, I would like to turn the call over to your moderator, Chief Executive Officer Mr. Mitchell Hersh. Please go ahead, sir.

Thank you. And good morning. Thank you for joining Mack-Cali’s Realty Corporation's fourth quarter 2002 earnings conference call. With me today are Tim Jones, President, Barry Lefkowitz, Chief Financial Officer, and Executive Vice President, 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 recent activities, then give you an overview of what we're seeing in our markets. Barry will then follow with a discussion of our financial results, and Tim and Mike will give you an update on our markets and our leasing activities.

During the fourth quarter, we made significant progress in enhancing our presence in our core Northeast markets. In line with our strategy of redeploying capital in these markets, we sold our last three assets in Arizona for $43 million. We used the proceeds from this sale and prior sales of our Southwest properties to acquire five class A office properties in our core markets, totaling 600,000 square feet for $104.7 million. These properties consisted of the Triad Building and 16 and 18 Sentry Park West all in suburban Philadelphia, 1633 Littleton road in Parsippany, New Jersey, and Soundview Plaza in Stamford, Connecticut.

On the development side, we completed a 95,000 square foot build-to-suit office property for Verizon, New Jersey, at our horizon center business park in Hamilton Township, New Jersey.

While we continue to outperform each of our core markets by up to 850 basis points, our overall occupancy declined 70 basis points from the previous quarter to 92.3% leased. Our FFO per share declined by 4.3% from the same quarter last year from 93 cents to 89 cents per share. However, we did end the year with an increase in FFO per share by 3.8%, from $3.66 to $ $3.80 per share.

Since the beginning of 2003, we've made a few important announcements that I wanted to mention. Earlier this month, the proposal that we submitted along with the Mills Corporation to redevelop the Continental Arena site in East Rutherford, New Jersey, was indeed selected by the New Jersey Sports and Exposition Authority. The project our team proposed, Meadowlands Xanadu, will be a 4.76 million square foot mixed use development, a fabulous development, consisting of family entertainment, recreation, and commercial components. Mack-Cali will be responsible for developing the 2.2 million square foot office and hotel component for the project. No definitive documentation has -- been entered into between Mills and Mack-Cali with respect to the Xanadu project. However, it is the current understanding between us that the family entertainment component will be shared 80% to Mills and 20% to Mack-Cali and the office and hotel component will be 80% to Mack-Cali and 20% to Mills. This is subject to any arrangements with third parties, such as the New York Giants, and I should point out that the final economic terms are fluid at this point. The Xanadu project is subject to extensive negotiation with the Sports and Exposition Authority. A work in progress. We do expect that the commercial development will be built toward the end of the project when market conditions warrant.

This month, we also announced two very significant leases that helped reduce our rollover in 2004. A ten-year 180,000 square foot lease renewal with U.S. Life, a division of AIG, for an entire building in Neptune, New Jersey, and a 12-year 90,000 square foot lease with Barr Labs for an entire building in Woodcliff Lake, New Jersey. Barr Labs will relocate its executive offices to this property from Rockland County, New York. The US Life lease was a very good demonstration of our proactive early lease renewal program since we started negotiating with them well over a year ago, well in advance of their lease expiration. The Barr Labs lease was an example of our entrepreneurialism as we were able to move out a non-renewing tenant whose lease was expiring in June of 2004 in order to accommodate a new growing long-term tenant. And as well, we negotiated to receive a substantial amount of rent from the current tenant as a termination fee.

Now I would like to make a few comments about current market conditions and how Mack-Cali is positioned to address them. Unfortunately, demand is still weak in many markets due to the economic and political uncertainties our country continues to face. In general, leasing decisions have been excruciatingly slow with many businesses, especially large companies, still reluctant to make any long-term decisions about employment, capital spending, and, ultimately, office space. The Jersey City waterfront market has also been soft, impacted by the contraction in financial services, which has slowed our leasing progress in our new development, Harborside Financial Center Plaza 5. Our joint development project at Harborside, the Hyatt hotel, has had a very strong quarter in both occupancy and in catering and meeting room facilities. Because of the increased choices available to tenants in today's markets, we are working much harder to get new tenants and to retain the tenants we have. Although we have managed to keep leasing costs low this quarter, at $1.70 per square foot per year, sublease space is beginning to abate, but in many markets it does continue to put downward pressure on rents.

At this time, we see no catalyst to begin job growth and encourage capital spending, not at least until the situation with Iraq has been resolved. If there is no increase in demand and employment, vacancies will not decline and pressure on rents will continue throughout the year. We do expect some additional losses in occupancy throughout the year, with losses possible by as much as 100 to possibly 200 basis points by year end. Despite this environment, our core Northeast markets, which made up 90% of our base rent in the fourth quarter, are generally outperforming most other markets throughout the country because of their limited new inventory and diverse macro economies. This is demonstrated in our quarterly results as well as our Northeast occupancies and rents held their own while the weaker Southwest markets showed significant declines. While objecting occupancies in our Northeast markets remained relatively flat at 93.6% compared to last quarter's 93.8%, occupancies in our non-core Southwest markets declined 5 percentage points from 87.5% to 82.5%.

Rents rolled up 3% in our core Northeast markets in the fourth quarter, but, unfortunately, this was offset by a 14.6% rolldown in our non-core Southwestern markets. The end result was a portfolio-wide rolldown of one-tenth of one percentage point in the quarter. At the end of the quarter, our rollovers for 2003 were only 7.6% of our portfolio's base rent or $37.4 million, and for 2004, 9.6% of base rent or $47.3 million. So our rollover risks continue to be manageable.

Losses due to defaulting tenants were minimal in the quarter. We believe our strong credit-quality tenant base has helped us maintain relative stability within our portfolio. In our core Northeast markets, Mack-Cali continues to outperform the competition, with our leased percentages higher than the market average by a range of 400 to, as I said before, 850 basis points. Because of our strong position in these markets as well as our top quality assets, high credit quality tenants, strong occupancies and financial flexibility, we believe Mack-Cali remains well-positioned for any improvement in the regional or national economy. Now Barry will review our financial activity for the fourth quarter. Barry?

Thanks, Mitchell. Funds from operations for the fourth quarter of 2002 amounted to $63.8 million or $.89 cents per diluted share as compared to $66.3 million or $.93 cents per share for the same period last year. This represents a per-share decrease of 4.3% from the fourth quarter last year. FFO for the full year 2002 amounted to $272.3 million or $3.80 per diluted share, an increase of 3.8% over 2001 on a per-share basis.

Net income for the fourth quarter was $29.8 million or 52 cents per diluted share versus $33.2 million or 58 cents per share for the same quarter last year. This represents a decrease of 10.3% on a per-share basis. For the year net income increased to $139.7 million or $2.43 per share from $131.7 million or $2.32 per share for 2001, representing a per-share increase of 4.7%. Same store net operating income decreased by 2.9% for the fourth quarter of 2002 from the same period in 2001, and increased 1.3% for the full-year 2002 over 2001.

For the fourth quarter 2002, same store revenues decreased by .4%, with expenses up 5.5%, mainly due to store removal costs in 2002 from inclement weather in the Northeast. For the quarter, our same store portfolio includes 25.1 million square feet of space which represents about 92.6% of our portfolio. Under our stock buy back program during the fourth quarter, we purchased 356,600 shares for a total cost of approximately $10.7 million, representing an average stock price of $30.10. At the end of the year, Mack-Cali's total undepreciated book assets equaled $4.2 billion and our debt to undepreciated assets ratio was 41.3%. The company interest coverage of 3.3 times and fixed charge coverage of 2.7 times for the fourth quarter. For the full-year 2002, the company had interest coverage of 3.6 times and fixed charge coverage of 2.7 times. At the end of the year, we had total debt of approximately $1.8 billion which had a weighted average interest rate of 7.03%.

During the quarter, the company exchanged $90 million of existing 7.18% senior unsecured notes due in December 2003 with interest payable monthly for $94.9 million of 6.15% senior unsecured notes due in December 2012. With interest payable semiannually. The exchange was completed with Teachers Insurance Annuity Association. The company completed two property mortgage transactions with Teachers, a $19.1 million mortgage loan secured by a newly acquired 2200 Renaissance Boulevard which bears interest at a fixed rate of 5.84% and matures in December 2012, and a $19.5 million a mortgage loan secured by the newly acquired Soundview Plaza which bears interest at a fixed rate of 6% and matures in January 2013. Proceeds for the mortgage financings were used to pay down outstanding borrowings on the company's outstanding credibility facility. Currently we have just under $105 million drawn ourselves $600 million unsecured credit facility. Our unencumbered portfolio at year end totaled 231 properties aggregating 20.8 million square feet of space which represents 77% of the portfolio.

I am pleased with the financial stability Mack-Cali continues to enjoy. Lastly, I want to remind you that available ourselves web site at www.mack-cali.com are our 10-K, supplemental package and earnings release which contain reconciliations of our non-GAAP financial measures to comparable GAAP earnings measures and the reason the company believes these non-GAAP financial measures are relevant performance measures. Now Tim will cover our leasing activity. Tim?

Thanks, Barry. Mike and I will update ourselves leasing activity and the picture in our markets at year end. At December 31st, our consolidated portfolio is 92.3% leased compared to 93% at September 30th. During the quarter we signed 125 transactions total willing 600,000 square feet. These transactions produced retention of 56.3% of expiring space and gross rental rates for the first year decreased an average of .1% over the expiring rental rate, including all escalations. TIs plus leasing commissions averaged $1.70 per square foot per year of lease. During calendar 2002 we signed 680 transactions totaling 4.3 million square feet resulting in retention of 63.2% of expiring space. Leasing cost average $2.06 per square feet per year and rents rolled up an average of 3%. Further details on our leasing activity can be found in the supplemental package ourselves web site. Market information is provided by Cushman and Wakefield and unless otherwise denoted will discuss class A vacancy rates. Now I'll turn you over to Mike.

Thanks, Tim. Economic and political uncertainty continues to weigh on the region's commercial real estate market. However, Westchester county showed some strength in 2002, and recent events indicate this positive activity will likely continue into 2003. Most significant is the recent announcement that New York Life plans to purchase a 383,000 square foot former IBM facility in Mount Pleasant. The company plans to relocate about 1,000 employees from Manhattan to this vacant property. This follows last year's purchase of the 725,000 square foot former Texaco headquarters by Morgan Stanley and further indicates the anticipated trend of relocations from Manhattan. The absorption of another large block of space along with the establishment of many smaller satellite offices by New York City companies throughout 2002 have offset the corporate downsizing and sublet offerings that threaten a major increase in available space. We believe this dispersion strategy will continue to provide steady demand for office space in the region. The statistics from the last quarter of 2002 illustrate the improved market in Westchester but reveal sharply increased availability in Fairfield. In Westchester county, the overall class A availability decreased from 19.5% in the third quarter to 18.9% at the end of the year. It consists of 81% direct availability and 19% sublet space, with the sublet share down from 23% in the third quarter.

Mack-Cali's Westchester properties which include 2.1 million square feet of office space, 2.3 million square feet of office flex space, and 387,000 of industrial space were 96.6% leased at year end. Leases expiring in 2003 comprised 8.8% of our total Westchester inventory.

Fairfield county was influenced in the fourth quarter by general economic conditions. Returns of space to the market significantly exceeded demand with overall class A availability increasing from 19.5% to 20.9 %. Sublet availability decreased by 228,000 square feet during the quarter. However, 2.3 million square feet of Fairfield availability was sublet space representing 37% of overall availability.

Mack-Cali's Fairfield properties comprising 579,000 square feet of office space and 273,000 square feet of office flex space ended the year 96.2% leased. Leases representing 9% of our total inventory expire in 2003.

Net absorption for the quarter totaled a negative 620,000 square feet in Fairfield, more than offsetting the positive absorption achieved through the third quarter. Net absorption for Westchester was a positive 46,000 square feet. For the year, absorption in Fairfield was negative 370,000 square feet, and in Westchester a positive 418,000 square feet. For Westchester, this represents a dramatic turn-around from the prior year's negative absorption of over 1 million square feet. In Fairfield County, class A asking rents declined from $32.53 per square foot in the third quarter to $31.76 in the fourth, down from $35.61 per square foot at the end of 2001. In Westchester county, class, A rents held steady at $29.64 per square foot versus $29.60 per square foot in the third quarter. This compares favorably with $30.15 per square foot average at the end of 2001, despite the discount rents associated with 2002's significant sublet activity.

Noteworthy transactions in the market for the fourth quarter included the town of Greenberg which purchased a 50,000 square foot office building for its new town hall, for General [ph] pharmaceuticals which leased in Terry town, A town Pharma which took 39,000 square feet also in Terry town, and Viking Global Investment which leased 36,000 square feet in Greenwich, Connecticut.

Significant Mack-Cali transactions for the quarter included the lease renewal of United Parcel Service in 77,000 square feet in Elmsford, a MMO Music Group which renewed 25,000 square feet also in Elmsford, and American Home Insurance with renewed in 14,000 square feet in Terry town town. Mack-Cali's Westchester and Fairfield portfolios are well positioned to accommodate the smaller transactions that characterize the region's mainstream market requirements. Our office properties are constructed with floor sizes that allow sufficient division from multi-tenant occupancy, broad diversity in office and office flex product ensures we have suitable space for the regions increasingly varied industry base. Little construction in either county resulted in almost no addition to the available inventory in Westchester during 2002 and relatively moderate addition in Fairfield. A continuation of a dispersion strategy by Manhattan based corporations should supplement demand which will underpin the northern suburban market and increase the likelihood of positive absorption should improvement in the economy cause business to expand. A year ago we were cautiously optimistic for the region as we looked forward to 2002, and Westchester's results bore out our expectations and recent activities indicate a similar prospect for 2003. Tim?

Thanks, Mike. The Manhattan sub markets are adjacent to our northern New Jersey and Westchester properties, and although we don't own any buildings there we monitor the market activity for impact ourselves portfolio. At year end, downtown's vacancy was 17%, Midtown's 10.1%, and Midtown South, 8%, representing increased vacancy in all three sub markets. Although class A are down, they range from $38 to $57 which makes our comparable properties in northern New Jersey and Westchester county suburbs an economical option. In northern New Jersey market increased from 16.7% to 17.8%, the highest it's been since 1995. Leasing activity for the year declined 43% from 2001. Many of the region's companies have consolidated operations in an effort to reduce real estate costs, and sublease space is still a key factor. In comparison to the 17.8% overall vacancy rate, class A is 10.2 at December 31st, representing a fairly modest increase from 18.1% direct vacancy reported at the end of 2001.

Looking at some of the major northern New Jersey sub markets, Morris County vacancy rate dropped slightly from 24% to 23.7%. Our 2.6 million square feet in Morris county is almost 91% leased with 4.5% rolling in 2003. Availability in Bergen county, 19% to 20.1% in the third quarter. Our 3.8 million square foot Bergen county inventory is 98.3% leased, with approximately 3% of that space rolling between now and year end 2003. Hudson County's vacancy rate grew from 11.3% to 14.5% in the fourth quarter. Our 2.1 million square feet of stabilized in service office space along waterfront is fully leased with virtually no 2003 rollover.

Together our holdings in the Morris, Bergen, and Hudson County markets represent more than 32% of our company's square footage and 44% of our annualized base rent. Even in this difficult climate our stabilized properties in these counties averaged over 96% leased. It's been difficult for central New Jersey where vacancy is up to 25.5%. This is an increase from 23.6% last quarter and 17.2% at the end of 2001. Direct class A vacancy rate also went up but at 13.8% there is more than a 10-point gap between over all and direct vacancy. The proposed merger of Pfizer and Pharmacia as well as the downturn in the telecommunications industry may exacerbate conditions with additional sublease space. Mack-Cali's central New Jersey presence is 2.8 million square feet which is 93.1% leased.

At December 31st, there were approximately 3.7 million square feet of space under construction in northern and central New Jersey primarily along the Hudson waterfront. This total represents just 2.2% of the 168 million square foot inventory. Over 85% of this space is preleased and it should provide minimal supply burden to the markets as it is delivered. In our other northeast markets, suburban Philadelphia's rate increased 20.6% percent in the fourth quarter as compared to 19% in the third quarter and 16.2% at year end '01. Although the Philadelphia CBD weathered the year relatively well, the suburban markets experienced a supply imbalance which contributed to negative absorption of almost half a million square feet. The region has 1.1million square feet or roughly 2% of the 55 million square foot market under construction and scheduled for 2003 delivery, with only 35% of that space preleased.

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. These properties were 88.9% leased at the end of the year. In Washington, D.C. the vacancy rate is the lowest of any major C.B.D. in the country ending the year at 9.1%. Direct vacancy is only 6.1% percent percent. 2002 represents the fifth consecutive year the district has recorded positive absorption with legal and government use accounting for over half of the new leasing volume. At 12/31/02 our 328,000 square feet in Washington was fully leased.

Looking in major market outside the northeast, Denver suburban vacancy rate is 27.3% as compared to year end '01 rate of 24.2%. New supply is minimal as only one third of the 558,000 square feet under construction is still available. San Francisco's vacancy rate remained essentially flat this quarter, increasing from 19.7% to 19.8%. During 2002, vacancy increased from 15.9% at the end of '01.

Although we still face challenges in almost all of our markets, we believe our portfolio of quality well-managed properties will continue to provide the location of choice for companies in the marketplace. Going into 2003, rollover is the lowest it's been in seven years and our leasing teams are doing a great job of working with tenants to make Mack-Cali buildings the premiere alternative for their space needs. Mitch?

Thanks, Tim. In conclusion, while this economic downturn has put considerable pressure on our industry as well as every other industry, we do believe Mack-Cali remains well positioned because of our strategy and our strengths, our geographic concentration in stronger Northeast markets, class A properties, credit- credit-quality tenants, strong occupancies and financial flexibility. I thank you all for listening today and now I'd be happy to entertain any of your questions. Thank you. Operator?

Today's question and answer session will be conducted electronically. If you would like to ask a question press star then 1. Please make sure your meet is off to allow us to receive your questions. We will take as many questions as time permits. Once again that is star 1 to ask a question and we will pause for just a moment. Our first question will come from Gregory Whyte, Morgan Stanley.

Good morning, guys. A couple of questions. I think, Barry, you mentioned the higher snow removal costs as contributing to expenses in fourth quarter. Can you give us any sense of -- have you included an increase in costs in your guidance for '03?

Yes. We've taken into account the most recent costs for snow removal, increased costs as a result of the weather for the first quarter.

Greg, let me just add to that. That while our costs have certainly increased due to the volume of snow we've had, certainly more than 70% of those costs are pass-throughs to our tenants.

Okay. And then there was a decent increase in the contribution from the staff from American Financial and All-cap in the fourth quarter. Can you tell us what your expectations are for those businesses in '03 and how much you have included in the guidance?

Let me just sort of make a global comment on that. Obviously our joint ventures are somewhat limited at this point. We've sold the majority of our assets in the HPMC, which is the Highridge entities in California, so those will be a lesser contributing factor to joint venture income as we go forward. The AFE joint venture, which is the Schwab Building, is stabilizing at this point, so the revenue should be consistent from that asset, and of course our cap we exited quite recently with a very acceptable return. So I think you'll see the consistency will evolve from AFE and will continue to diminish from our other joint ventures.

and then just on the harbor Harborside Plaza 5, can you give us an update on what's going on there right now and what efforts you're doing to raise occupancy? I assume it's sort of a primary focus of you guys.

Oh, it certainly is. And the efforts are endless to raise occupancy. On the good-news front, one of our substantial tenants within the building is in the process of acquiring another company, and we do have a lease in progress or a lease amendment in progress for an additional approximately 20 to 25,000 square feet. That particular acquisition, however, is subject to United States government review, Justice Department review because of a variety of issues that affect their business, and so I qualify my statements by suggesting that they still need to go through that review. But I believe that we will make some additional positive absorption progress as a result of that situation. We do have a problem tenant that represents approximately 68,000 feet in the building. I don't expect that that tenant will continue within the building over a period of time. We're trying to, you know, rationalize that situation right now. But I can tell you that the market has been very soft, that there's a lot of tenuousness to the activity in the marketplace. While we continue to have space showings of very substantial tenants, some of them include State Street Bank and these are sort of common knowledge, AIG is in the marketplace for an additional large space requirement. There is not a lot of decision-making going on. Sublet pressure has, in many instances along the waterfront, diminished. But notwithstanding that fact, there's just not been a lot of deal-making. And so I expect that we're going to have a rather difficult 2003 in terms of additional leasing activity within that facility, and hopefully, as we approach the latter part of this year, we'll begin to see positive signs on the employment front that, in my view, will quickly sap the existing amount of inventory that exists down along the waterfront. But right now, it's soft, Greg.

Okay. And, Mitch, can you on the Meadowlands, the Xanadu development, can you give more specificity on the timing for the office staff? Obviously we realize it's the back end of the project.

Well, we have certainly made it very clear that the office component, while clearly the objective is to build out the family entertainment portion, of course the first step is the infrastructure, naturally, and then the family entertainment portion, and then possibly the hotel component. I think all parties clearly understand, and it's been qualified, that the office elements or the office component will be built in accordance with demand. And right now, there isn't a lot of that. Although there is not much overhang in that particular sub market, and it depends how you cut it up, but that sub market in and of itself is approximately 5 or 6 million square feet, but it is really contiguous with a 25 or 30 million sub market. That's always performed very well. The location is superb. It is at the confluence of all the major highways and transportation hubs. The expectation is that at some point in the future, and this will really be in large measure predicated on the proactivity on the part of the State and Federal Government, but hopefully there will be rail service at some point directly to the site. But there will be massive roadway and infrastructure improvements that will draw people to this site, and we believe completely that the world-class opportunity that exists down in the Meadowlands, in connection with the creation of Xanadu, will in fact be a magnet that will draw new commerce, new activity, and create new job growth at that complex. And we're delighted to be a part of that, Greg.

Just one last question. Barry, Trim the upper end of the estimates in about one and a half percent. Is that just a reflection of sort of continued erosion in the overall conditions, or is it related to one or two specific expectation changes?

Quite frankly, it's really related somewhat to -- we're not sure what the weather's going to look like between now and the end of the winter. And what the clean-up costs might cost us if we get hit with a storm or two.

Thanks a lot, guys.

And we will now move to Stuart Axelrod, Lehman Brothers.

Hey, guys. Any budgetary issues forcing a reduction in terms of incentives you can offer at Harborside in terms of competing with downtown downtown?

I'm not sure that I understand your question. Can you kind of tell me what you're referring to?

I mean, we're hearing about State cuts from the New Jersey state in terms of the incentive that we're willing to give (indiscernible).

Let me try to put some color on that. Clearly the Governor came out with a budget about a week and a half ago. New Jersey, not unlike many jurisdictions throughout the nation, is facing a severe budget deficit, I believe it's in the order of magnitude of $5 billion in New Jersey, and all programs, all baskets, if you will, have been kind of lumped together to be at least looked at by the legislature to see where revenues can be created to help alleviate the budget deficit. As far as the BEIG program is concerned, the Business Employment Incentive Program, I think it's a critically important program for the state. I suspect that there will be a moderation of the proposal set forth in the Governor's budget. But that, of course, is uncertain at this point. Notwithstanding that fact, the comparison of operating costs and base rent between the waterfront in Jersey City and lower Manhattan is still a significant disparity. The cost of occupancy and the continuing cost of operating in Manhattan is significantly higher than it is in New Jersey. The costs of real estate taxes is much less in New Jersey, the cost of utilities is much less in New Jersey, and so even eliminating consideration of the BEIG program still provides an economic advantage to New Jersey.

Okay. Great. Relating to the leasing volume in the quarter, it seems half of the Q3 volumes, does that mean tenants are taking longer in the '03 expirations?

I think that the leasing volume is a function of, to some extent, you know, just the transaction environment and the number of deals that are in the marketplace. I think at the end of the day what's important is the occupancy of the portfolio which, while I'm not happy with anything less than 100%, 92.3% in this kind of an environment is still a highly satisfactory and very acceptable kind of number, and of equal importance, we've really done a yeoman's job in throttling down exposure to the portfolio in the next couple of years, which I think we all agree will probably be the most volatile, and then we'll hopefully be in a much more positive tone as far as the economy is concerned. So all in all we've I think done a remarkable job.

Okay. And any guidance in terms of the upfront costs in terms of the predevelopment at Xanadu?

No, it's really too early to tell. We've kind of collectively quantified the infrastructure costs for the initial roadway and the structured parking that needs to be created to mitigate against some of the issues surrounding Giant Stadium, but it's really a work in progress, and the financial arrangements as between the Mills Corporation and Mack-Cali are evolving at this point. It's premature to really comment any further.

Guys, it's David Shulman. Could you tell us what percent of the portfolio was occupied as opposed to leased?

Yeah, it's occupied is 91.6% and 92.3% is leased.

and a question for Barry. Barry, could you tell us what re-taxable income you estimate to be for last year?

I don't have those numbers in front of me but I can tell you that we distributed enough to meet the re-qualifications so, you know, we do have that number number. All of our dividends were taxable for last year. There was a slight component of capital gain, but it was a very small number.

Can you tell us the difference between book depreciation and tax depreciation?

Again, I don't have those numbers in front of us.

Okay. Could we get them?

You know, I guess we'd have to put those out in a separate disclosure somewhere. I don't know that those numbers have all been fully computed until we file the tax returns, which won't be until sometime in September.

Okay. Thank you.

Moving on to Gary Boston, Salomon Smith Barney.

Hello, guys. It's Jonathan Litt with Gary Boston, I think you had said in your opening comments that you expected occupancies to be down 100 to 200 basis points in the year. I wonder where you expect to see that coming from, specific markets or specific tenants you expect to see that come back from?

I think to a certain extent it's across the board. Not to be too redundant, there's a lot of tenuousness out there in terms of tenants making commitments, and we have had minimal impacts from credit issues. Certainly I think manageable, but they still hit the bottom line. We have a situation evolving in Denver where 44,000 square foot tenant in the -- who is a medical health care provider is liquidating. That came out of the blue. And it's a regulated industry. But it's 44,000 square feet. And so there are unknowns that exist out there today. And we're just trying to, you know, be reasonably conservative in assessing where our portfolio is going to be. Hopefully we won't lose any of that.

the reason I'm asking is, you have seven and a half percent of our portfolio rolling this year, 2 million square feet. You're doing 600,000 square feet of leasing a quarter, at least based on the fourth quarter results. You know, if you keep that pace up for the full year, I'm not sure why occupancy is going to fall 100 to 200 basis points. You don't have that much space rolling. So I'm trying to figure out, you know, how you're coming up with that assumption. To me, it looks like you're going to be able to hold occupancy, not lose 200 basis points.

You know, John, I absolutely hope that that's the case, but it's still 2 million square feet, give or take. There's a lot of fluid activity out there. There are tenants that are indecisive at this point. And, you know, we have future rollover considerations, so, again, we're being conservative, and I think that, you know, it's our responsibility to kind of provide an assessment of what risk factors we see to the company, and I think that that 100 to 200 basis points is sort of, you know, the outside limit of what I see as the potential impact to the portfolio with all known factors today. Again --

You have no specific reason to think you can get there. You think it's just a conservative assumption.

No specific reason we have. We continue, as you can see, by managing down the rollover, be extremely proactive. We've done a tremendous job against 2004 as a result of the AIG or the U.S. Life lease and the Barr Lab situation. But, you know, as I said before, you know, we have Community Health liquidating in Denver for almost 45,000 square feet to mitigate against some of that, and the Southwestern markets in particular, and Denver and, you know, the few remaining Texas markets that we're in, are extraordinarily difficult markets right now.

I'm not sure if you covered this. How is leasing -- or how much leasing you've done already in '03 to work down that number? Is it reflected in the 7.6% roll-in or is it not in that number yet?

the 7.6% number is as of 12/31. So the leasing that we've been able to accomplish, and in fact we have accomplished some leasing, some renewals and rollovers and positive absorption against 2003 rollover, it is not reflected in that number.

Do you have that number?

No, we don't, at this point. Anything I would tell you would just be sort of -- you know, my guestimate. But I've been involved in meaningful negotiations where I believe we have transactions, meaningful, and I'm not sure I could go much further than that, that affect '03 rollovers right now.

One of the things that was covered in the presentation was the rollover exposure by market and it is something that I think is very useful for us to be able to look at and try to model. I wasn't able to get all the numbers down. I'm not sure if there's some sort of way to --

I can give you a sense of that --

I mean, the goal would be to get it in a supplemental or something in the future because, you know, these markets are all quite different.

Okay. Let me give you a sense of, you know, one of the reasons, John, that I talk about, you know, these estimates of -- these parameters of 100 to 200 basis points. In '03, I'll just give you a sense of exposure to rollover by quarter of 20,000 square foot or larger tenants. In the second quarter it's three tenants aggregating about 101,000 square feet. Of those, one tenant is a tenant that announced a few weeks ago, it's a Philadelphia suburban tenant, 42,000 square feet, they announced that they're laying off 3,000 people. A financial service tenant. And they're in our building in Media. So we have to assume the worst there since they made a -- you know, it's a fairly substantial company. If you think back a couple of weeks that made that announcement. So those are sort of the situations that come out of the woodwork today that are hard to predict, and that's why we are being conservative. In the third quarter, we have rollover of 278,000 feet. 82,000 feet of that is a single building in Dallas that MCI WorldCom occupies. Their lease expires at the end of March. I have to assume that they're not going to stay with us, given MCI's difficult situation. The fourth quarter totals almost 400,000 square feet. Again, of that total, several of those tenants I have personally been involved in negotiations. We've god got handshakes on renewals. We're documenting those renewals now. So that level of imprecise unpredictability causes us to want to give conservative views of the marketplace in terms of risk factors to the company.

Mitch, this is Gary. I wonder if you could give an update on any disposition plans, timing of potential dispositions that are sort of baked into the new guidance?

Yeah. We have no dispositions baked into the guidance at this point. As far as, you know, my view completely that we have made significant progress towards accomplishing the strategic vision for the company by repositioning and reshaping the portfolio. At this point, in Denver, we have a strong team on the ground. We're managing that portfolio. There's no view towards any sale of all or part of it. In Texas, we only have a smattering of assets at this juncture and, you know, we'll stabilize everything. We have occasionally an offer will come in on one or two buildings and we certainly examine it, but it's not enough to be meaningful. So in general, I think you won't see much difference in the shape of our non-core portfolio throughout the course of this year. That's not to say, of course, that we won't continue to look for opportunities in our core markets to expand our presence.

Great. Thanks a lot.

You're very welcome.

And Lawrence Raiman, Credit Suisse First Boston has the next question.

Nice on the Barr Labs. A quick question, Mitch, on Xanadu. You have been doing a great job in the recent past in refocusing the company on core geographic markets. Why at this point would the company agree with Mills to jointly own the retail and office product? Why wouldn't you, in a focused manner, just own the office, and Mills focus for its part just on the retail?

Well, first of all, let me clarify that it's not retail. It's family entertainment. The retail quotient is a very small percentage of the total, and it's a very high-end fashion retail. We believe that this is an opportunity that doesn't come along very often, to participate in a modest way, 20% participation. The transaction, you know, will be financed and there will be very conservative measures taken throughout the entire process, but we worked very hard with Mills, and you being somewhat local saw the process that evolved over a period of many, many months to win the designation from the Sports Authority, and I believe that a modest position in something that probably cannot be created certainly nowhere along the East Coast that I'm aware of, in terms of the population density within a small radius to support the activity of this development in conjunction with all the sporting activities of the track and Giant Stadium and whatever happens with Continental Arena in terms of the teams. It's a chance of a lifetime in many respects. And for us to take a very modest position in that I think is prudent and I think it will it will create value for the shareholders of this company, and that's why we're doing it, Larry.

Certainly it was a hard-fought and wonderful project. I was just curious as to -- was that kind of a requirement in order to help get the deal done, a kind of co-investment in each of the different sides of the project by each of the parties?

No, I think that -- I, along with Larry Segal, CEO of Mills, thought that the synergies between our organizations and our depth were enormous, and that we both wanted to participate in each other's sort of segment of this project. There was really no science to it beyond that, and we both felt that a 20% participation sort of outside of our core, as you put it, was a modest level that we each felt comfortable with.

Great. Thanks, Mitch. Good luck.

You're welcome. Thanks, Larry.

We will now hear from Louis Taylor, Deutsche Banc Securities, Inc.

This is Chris Cappalago [ph] with Lou. I'm wondering about the joint venture page, page 17. I was wondering, you get a net loss on R cap of $21 million and you have a pickup of $400,000. Could you reconcile that for me?

You're on page 17 of the supplemental?

Supplemental, yeah.

What's the question?

the question pertains to Rand a net loss of $20 million. And the net pickup is. I wonder how you get that.

Lou, we sold RCAP during the period and we sold it for an amount a little over $20 million. And what the $420,000 essentially represents is the distribution that we received from RCAP sometime in January of this year, and basically we got our investment up to the amount of the sale price.

Let me add to that, if I may, Chris. The RCAP transaction from its inception yielded approximately 11.61% total return to Mack-Cali. We found it to be a very acceptable investment, but there was a mark-to-market component of the securities that comprised RCAP, the bonds, if you will, which is very volatile. It reacted to fluctuations in treasuries. And so we felt that because of that volatility and the lack of predictability, and since it wasn't a particularly large investment for the company, it made sense to sort of take our profits out of that, if you will, and exit the investment. So that's why we did that.

And with the American financial exchange -- are there any details on the preferred return on that investment? The preferred component? Because --

the entire investment return at this point is preferred.

Okay. How long will that, I guess, go on for? Like, when will it kick in as 50%? I guess --

There has been accumulated preferred returns that have grown over the years in that project, and it will be some time before we burn through those.

Okay. All right. It was August 2004?

It's very difficult to hear you, by the way, Chris. It really depends. To some extent the investment is Mack-Cali's investment in the equity component of that project, and so we at this point haven't done any financing or other capital strategies, and so we need to, you know, look at that in the future.

Okay. I just want to understand a little bit better any sublease space that's on the market within your portfolio, if there is any.

Yeah. There is some. Right now, there's about 6.7% of our portfolio is available for sublet, it's about 1.7 million square feet.

Okay.

Throughout the portfolio.

and mostly located -- I guess where is it mostly located?

Well, I think it corresponds pretty much to our positions geographically. I would say that if I were just to kind of look at, you know, from our little small perspective of the world, clearly the -- our non-core markets are faring the worst, Denver in particular, San Francisco, Dallas -- I mean, those markets are under a fair amount of strain. Here in northern New Jersey, we've got about 700,000 feet out of our portfolio available for sublet. In central jersey, about 150,000 square feet, throughout Westchester, 338,000 square feet. You know, so that's sort of some color on it.

Okay. Thank you. So the State Street, what states were they looking at? Was it 5 Harborside?

No, no, no. State Street is looking at Plaza 5 and it's about 150,000-foot requirements. Actually, it's about 200 and change, but part of it has been identified as a Manhattan requirement and part of it as a New Jersey requirement. But -- we're moving through the process, but it's been very, very slow.

I just have a couple more little picky questions. The cap ex rose a bit this quarter. Was there something specific that was driving that or -- maybe it was a seasonal?

Well, I don't know that it's seasonal. I think it's transactional. I think capital is a function of the kind of transactions. A year ago, we were doing some large renewals in Harborside that were more capital intensive. They were longer-term leases. This past quarter was $1.70 per square foot per annum, which is fairly low. But I will point out to you that we're extremely focused on the cash position of the company and the sort of money out the door, if you will. You know, so we're very much focused on that.

Okay. I was wondering if -- did you mention the cap rates on the acquisitions? You know, what does that market look like? It is still very competitive, I assume?

The average -- the cap rates range in the 9s, you know, 9 to 10, in that range.

Mm-hmm. Just one last one. You mentioned the termination fee in the first quarter. I’m just wondering how much that was. The termination fee for the Barr.

You're talking about the Barr Labs deal?

Yeah.

They're going to pay us about 50 cents on the dollar for the remaining obligation, plus or minus, plus they have restoration obligations in the building.

Okay. All right. Thank you.

You're very welcome.

And it appears there are no further questions at this time. Mr. Hersh, I will turn it back to you for any closing remarks.

Thank you all for joining us today, and we certainly look forward to visiting with you again at the end of this quarter. Thank you again. Have a good day.

And that will conclude today's conference. We do thank you for your participation. You may disconnect at this time.