Veris Residential Inc (VRE) 2003 Q1 法說會逐字稿

Good day, everyone. Welcome to the Mack-Cali Realty Corporation first quarter 2003 conference call. Today's call is being recorded. At this time, I would like to turn the call over to the CEO, Mr. Mitchell Hersh. Please go ahead, sir.

Good morning. Thank you for joining Mack-Cali's first quarter 2003 earnings conference call. With me today are Tim Jones, President, Barry Lefkowitz, CFO and EVP, and Michael Grossman, EVP.

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 give you an overview of our results and what we're seeing in our markets, then review some of the quarter's activities. Barry will then follow with a discussion of our financial results, and Tim and Mike will give you an update on the markets and our leasing results.

Our first quarter can be categorized as a quarter in which we continued to block and tackle and certainly more than hold our own. In what is still a very difficult economy, our FFO per share came in at 92 cents per share, the same as last year's first quarter. Our occupancies inched up very slightly from 92.3% to 92.4% leased, but almost as importantly, they did not decline. This was a result of a strong quarter of leasing activity in which we completed over a million square feet in transactions in 155 lease transactions.

Since most businesses are still very reluctant to make long-term decisions about employment and office space, we continue to have to work harder and generally spend more money to make these deals. Our tenant improvement and commission costs increased from $1.70 per square foot per year of lease last quarter to $2.75 this quarter.

Our rents rolled down this quarter by 7.4% portfolio-wide. Rents in our core Northeast markets declined by 2.3%. Rents in our much weaker, non-core, non-strategic southwest and west markets where we have less exposure due to our dispositions program fell by 25.3%.

We have yet to see any real signs of economic recovery. But while markets may not be improving, we have begun to see some market stabilization. In markets such as Northern New Jersey, for example, rents and vacancies are holding steady, and sublease space has, in fact, been abating.

Space showings and leasing activity have increased in several markets. Many of the deals are with smaller and mid-size firms looking to trade up to better-quality Class A product in a flight to quality. While we maintained occupancies this quarter, we still do expect to experience some considerable losses throughout the remainder of this year. Some of the more sizeable leases not being renewed as of this point in time include Reuters in Norris town, Pennsylvania, over 42,000 square feet. That will happen in the second quarter. Sun Microsystems in Denver was 37,000 feet in the second quarter. We recently signed an 11,000-foot deal in that building with Classic Sports. Bombardier Capital in Denver and Colorado Springs, 60,000 feet in the third quarter. Fuji Photo in Westchester county, 121,000 square feet in the fourth quarter.

In addition, we do not expect to renew leases expiring in the third quarter with MCI Worldcom in Dallas, 82,000 square feet, and Beckett Corporation in Moorestown, New Jersey at almost 65,000 square feet. These and other anticipated rollovers are expected to contribute up to as much as 220 basis points in vacancies before the end of the year.

In addition, in the third quarter, Harborside Plaza 5 will be brought out of lease-up and added to our space lease statistics. Assuming no significant new leases by that point in time, the addition of this property could add another 130 basis points to our vacancies. In total then, we might experience drops in leased rates of up to approximately 350 basis points before the end of the year.

At the end of the first quarter, our rollovers for 2003 were approximately 6.3% of our portfolio's base rent, or $31 million. And for 2004, 8.5% of base rent or only $42 million. So our rollover risks continue to be quite manageable.

Despite the challenging economy, our core Northeast markets, which now make up over 91% of our base rent, are generally outperforming most other markets throughout the United States because of their limited new inventory and diverse macro-economies. In our core Northeast markets, Mack-Cali continues to outperform our competition with our lease rates higher than the market average by a range of 120 to 980 basis points depending on submarket. Our strong position in these markets keeps us well positioned for any improvement in the regional or national economy. However, frankly, we don't expect to see such improvement begin until after corporate confidence is restored and companies start to increase their capital spending and add jobs.

And now I'd like to briefly review some of our first quarter activities. In the quarter, we sold an office building in Houston for $5.83 million in our continuing effort to recycle capital and dispose of properties in non-strategic markets. In April, we also sold one of our joint venture properties, Stadium Gateway, in Anaheim, California. Our joint venture partnership with Highridge held a 65% interest in that property, which was sold for $52.5 million.

With regards to our Meadowlands Xanadu property to redevelopment the Continental Airlines Arena site, we are still working on a development agreement with the State of New Jersey along with our joint development partner, the Mills Corporation. We were extremely encouraged by the recent court ruling just last week in State Superior Court that refused to halt progress on this project. We signed some significant leases during the quarter that also helped reduce our 2004 rollovers in New Jersey.

As we mentioned in our last call, we signed a 10-year, 180,000 square foot lease renewal with U.S. Life for an entire building in Neptune, New Jersey, and a new 12-year, 90,000 square foot lease with Barr Laboratories for an entire building in New Jersey. We also signed a new lease for two buildings in the Denver market for 75,000 square feet with Sirenza Microdevices. The California-based firm will relocate its corporate headquarters and R&D operations to two office properties at Interlocken Technology Park in Broomfield, Colorado.

Just recently, also in the Denver market, we agreed to two fairly substantial lease renewals, one with First Tennessee Bank for an entire 73,000 square foot building in Inglewood, which was a ten-year extension to a lease expiring in 2005, and a five-year 69,000 square foot renewal with McKensem(ph) Information Solutions HBO for an entire building in Louisville, Colorado. The Denver market that has been extraordinarily weak, so these leases and this proactivity were very important to Mack-Cali.

In Jersey City at our Harborside Financial Center Plaza 5, the tenant we had previously mentioned which was in financial trouble in fact defaulted on their lease in the first quarter. Fortunately, we had not started any tenant improvement work on this space. The loss of this tenant, unfortunately, reduced the occupancy of Plaza 5 to 52% leased from previously 58% leased. However, the encouraging news is that we do have leases out on about 50,000 square feet of space as we speak that should bring occupancy back up to its previous levels.

Before I hand the call over to Barry, I would also like to note that we're extremely pleased that in the quarter, Standard & Poor's added Mack-Cali stock to its MidCap 400 index. We believe this demonstrates the strong confidence that the financial markets have in our company, and believe that being added to this index will benefit our company by helping to increase our liquidity over the long term. Now Barry will review our financial activity for the quarter.

Thanks, Mitchell. Funds from operations for Q1 2003 amounted to $65.6 million or 92 cents per diluted share as compared to $65.9 million or 92 cents per share for the same period last year.

Net income for the first quarter was $30 million or 52 cents per diluted share versus $40.6 million or 70 cents per share for the same quarter last year. This represents a decrease of 25.7% on a per-share basis. Included in our results for the quarter was $3 million in lease termination fees and $1.4 million of costs related to the early retirement of senior unsecured notes. The net effect of these two items was a positive 2 cents per share.

Same-store net operating income, which excludes lease termination fees, decreased by 3.6% for the first quarter of 2003, as compared to the same period in 2002. About 60% of the same-store change was attributable to base rent decreases, mostly on account of 170 basis point reduction in percent leased at the same-store properties. The balance of the decrease was from increased expenses in 2003, net of recoveries, mainly due to snow removal and utility costs from the inclement weather in the Northeast. Our same-store portfolio includes 25.2 million square feet which represents 93.2% of our portfolio.

At quarter end, Mack-Cali's total undepreciated book assets equaled $4.3 billion and our debt to undepreciated ratio assets was 41%. The company had interest coverage of 3.2x and fixed charge coverage of 2.6x for the first quarter. We ended the quarter with total debt of $1.8 billion which had a weighted average interest rate of 6.87%.

During the quarter we exchanged with teachers insurance $25 million of existing 7.18% senior unsecured notes due in December of 2003 for $26.1 million of 5.82% senior unsecured notes due in March 2013. The notes were price to yield 6.4%. We also repurchased from Teachers another $25 million of December 2003 notes for $21.6 million.

The company completed its first perpetual preferred issuance during the first quarter and a publicly registered transaction the company sold $25 million of 8% CRC cumulative perpetual preferred stock to Teachers. The preferred stock is redeemable at par at the company's option any time after 5 years.

During the quarter we retired $7.4 million of 8.7% mortgage on the Willowbrook property located in Wayne, New Jersey. Currently we have just over $118 million drawn on our $600 million unsecured credit facility. Our unencumbered portfolio at year end totaled 231 properties, aggregating 20.9 million square feet of space, which represents 78% of the portfolio.

I am pleased with the financial stability that Mack-Cali continues to enjoy. Please note that under new Securities and Exchange Commission regulation G concerning non-GAAP financial measures sunshine as FFO we are required to provide an explanation as to why we believe such measurements are relevant. [Audio break] -- available on our web site at www.mack-cali.com are our 10-Q supplemental package and our earnings release which include the information required by Reg G. Now Tim will cover our leasing activity. Tim?

Thanks, Barry. As Mitchell mentioned, at March 31st our consolidated portfolio was 92.4% leased compared to 92.3% at December 31st. During the quarter we signed 155 leases totaling just over 1 million square feet. These transactions reduced retention of 63.5% of expiring space and gross rental rates for the first year decreased an average of 7.4% over the expiring rental rate including all escalations. TI [inaudible] $2.75 per square foot per year of lease.

Further details on our leasing activity can be found in the supplemental package on our web site. Please note for the first time we have included a break down of explanations by market. Our market information is provided by Cushman and Wakefield and unless otherwise discussed will -- Now I will turn it over to Michael Grossman.

First quarter leasing activities for Westchester and Fairfield indicate a stabilization of the northern suburban market. Leasing velocity returned to its historical average and closely matched space coming back to the market. Direct availability remained nearly constant in both counties compared with year end 2002.

In Westchester, the providers of our statistics made an adjustment to the market total effective with the first quarter of 2003. Eliminating approximately 3 million square feet of owner-occupied buildings, reduced the Class A denominator altering the published availability percentages. Calculating consistently with the fourth quarter 2002 statistics in Westchester county the overall Class A availability remained constant at 18.9%. It consists of 81% direct availability and 19% sublet space, again the same proportion as year-end 2002. Over the new market denominator, which excludes owner occupied buildings, the availability is 21.6%.

Westchester's direct availability still includes the 383,000 square foot Mount Pleasant Executive Center whose purchase by New York Life was announced earlier in the year. It is not included in the absorption because the transaction closed just a few days after the end of the first quarter. Inclusion of this transaction will yield a reduction of approximately 150 basis points in the Class A availability percentage in the second quarter.

Mack-Cali's Westchester properties, which include 2.1 million square feet of office, 2.3 million square feet of office flex space, and 387,000 of industrial space, were 96.6% leased in the first quarter.

Remaining lease expirations in 2003 comprise 6.1% of our total Westchester inventory. Following a poor fourth quarter, Fairfield County appears to have stabilized in the first quarter of 2003. Overall Class A availability decreased from 20.9% to 19.9%. Sublet availability also decreased by 218,000 square feet to 2.1 million square feet during the first quarter. It represents 35% of the overall availability.

Mack-Cali's Fairfield properties comprising 579,000 square feet of office space and 273,000 square feet of office flex space end of the first quarter 98.6% leased. Leases representing 4.7% of our total inventory expired during the remainder of 2003. Net direct absorption for the quarter totaled a positive 56,500 square feet in Fairfield, reducing the downturn in the fourth quarter.

Net direct be absorption was negative 85,000 square feet. Class A asking rents declined from $31.76 in the fourth quarter to $30.84 per square foot in the first quarter.

In Westchester County, Class A rents moved slightly from $29.64 per square foot to $29.62 per square foot, again indicating the current stability of the market. Noteworthy transactions in the market for the first quarter included Americawest Mortgage Company, which rented, Catherine Gibbs school which took 65,000 in Connecticut, Thompson Corporation which leased 55,000 square feet in Stamford, Connecticut, and Advanced Publications taking 46,000 square feet in [inaudible], Connecticut.

Significant Mack-Cali in the quarter included the renewal and expansion of the E and B(ph) Giftware, totaling 28,400 square feet in Yonkers, New York. [Inaudible] and Baker Engineering which signed a renewal of 16,400 square feet also in Elmsford.

Market conditions in the region are showing promising signs. The velocity of space coming on the market that is slowed and particularly the flow of sublease space that has diminished. A desire among metro area corporations for geographic diversity seems to be becoming a strategy with Westchester County becoming a preferred destination for metro area businesses. This has resulted in much larger typical than usual transactions in the region that have removed larger, difficult to lease, long-term vacant blocks of space. The region sees no significant new construction. Despite the positive signs, the still sluggish economy prevents us -- prevents us from predicting significant positive absorption during the balance of 2003. Tim?

Thanks, Mike. In northern New Jersey, overall vacancy remained flat at 17.8%, but Class A direct vacancy increased from 10.2% to 11.6%.

Looking at some of the major northern New Jersey sub markets, Morris County's Class A overall vacancy rate dropped from 23.7% to 22.7% this quarter, in part due to a 32% reduction in sublease availability. Although some sublease space was converted to direct availability, approximately 165,000 square feet was taken off the market altogether.

During the quarter, Morris County recorded over 500,000 square feet in leasing activity. This is an increase of more than 270,000 square feet over the fourth quarter of 2002. Our 2.6 million square feet in Morris County is 89% leased. Availability in Bergen County grew slightly from 20.1% to 20.5 % in the first quarter, with sublease space making up nearly 30% of the overall available square footage. Transaction activity in Bergen County was also very strong totaling more than 400,000 square feet versus 187,000 square feet in the first quarter. Our 3.8 million square feet in Bergen County is 98% leased. Hudson County's vacancy dropped from 14.5% to 13.4% this quarter. Our 2.1million square feet of stabilized in service office space on the waterfront is fully leased.

Mack-Cali has a large percentage of its portfolio in these three northern New Jersey sub markets representing more than 35% of our square footage. Even in this difficult climate, our stabilized properties in these counties averaged 96% leased. Central New Jersey's vacancy rate went from 25.5% to 26.9% this quarter, with sublease space again playing a major role in current conditions. 34.4% of the total space available in this region is sublease space. Mack-Cali's central New Jersey's presence is 2.8 million square feet, which is 98.2% leased at the end of the quarter.

There were no new construction starts in northern and central New Jersey during the first quarter. The 3.7 million square feet currently under construction represents just 2.2% of the 168 million square foot inventory. Over 85% of the space has already been leased so it should not create significant additional supply burden in the markets as it is delivered.

Suburban Philadelphia's vacancy rate is unchanged from the 20.6% we saw at year end but leasing activity has been slow and the market is facing delivery of all 880,000 square feet currently under construction during 2003, and only 20% of that space has been rented so far. Our holdings in this market include 2 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 89% leased at the end of the first quarter.

The Washington DC market has remained healthy with vacancy dropping from 9.1% to 8.3% in the first quarter. Our 328,000 square feet in Washington is fully leased.

Looking at our major markets outside the northeast, Denver suburban vacancy rate dropped slightly from 27.3% to 26.8% during the quarter and San Francisco vacancy rate continues its rising trend, moving to 20.3% at March 31st.

We continue to operate through a down cycle in most markets but believe that our quality portfolio, high credit, diverse tenant base and strong management and leasing teams will allow us to weather the current conditions and be poised to take maximum advantage of market conditions once they start to improve. Mitch?

Thanks, Tim. Just in closing, I'd like to say that we continue to believe that Mack-Cali remains well positioned in our markets, despite the country's current economic situation. We're working very hard on all fronts to maintain occupancies, manage rollover, and enhance our Northeast focus. With that, I'd now like to open the call for questions. Operator?

Thank you, sir. Today's question-and-answer session will be conducted electronically. At this time if you would like to ask a question, please press the star key, followed by the digit 1, on your touch-tone telephone. If you are using a speaker phone for today's conference, please make sure the mute is turned off in order for our signal to reach your equipment. Please use your handset while asking your question in order for you to be clearly heard. Once again, ladies and gentlemen, if you would like to ask a question, please press star 1. We will pause now for just a moment in order to give everybody a chance to signal. We'll take our first question from Stuart Axelrod, Lehman Brothers.

Do you have a same-store number excluding the weather impact?

Well, if you back the weather component out, effectively what happened was, on weather, it was net of recoveries about a $1.3 million. So it was about 40% of the same-store change. So you'd have to back off 40% of that, so we'd still be down about -- you know, close to 2.5%.

Okay. And, Mitch, a question for you. A bunch of tenants that are not renewing this year. Could you review those and just highlight which ones are consolidating, which ones are moving to other sites within the market?

Sure. The tenants that I talked about include, for example, Reuters in suburban Philadelphia. As you, I'm sure, read over the last couple of months, Reuters is undergoing very significant consolidation and downsizing. We had expected that that office of 42,000 square feet would reduce its size to something on the order of 12,000 to 15,000 square feet, and then they came out with the announcement and absolutely closed down the entire operation and let go all of the people, including the senior people, within the office. So that's sort of the nature of the anomalous environment that we're in because of the economy.

In Denver, we certainly anticipated Sun Microsystems leaving their premises. We've done some superior work, in my view, in retenanting those buildings, both to Sirenza and now Classic Sports in Colorado Springs. Bombardier was a definite, you know, facility that was going to close down. We've known that for over a year. The Colorado Springs market is a very, very difficult market, very limited amount of demand. So we have our work cut out for us.

Fuji, as you know, in Westchester, was looking to expand their operation, and it was very difficult for us [inaudible] to accommodate the amount of space that they needed going forward, and so that's really what happened there. They did lease about 160,000 square feet in another location in Westchester.

In Dallas, MCI Worldcom, obviously being in bankruptcy, closing down a variety of operations. We've had very limited exposure to MCI credit, in total some $2.7 million. We expect that their operations in Morris County and Parsippany will remain with us. That is what we have been told to date. In Boeington County, I mentioned Beckett Corporation, roughly 65,000 square feet. That in fact is the result of a merger and consolidation, and our building was a redundant facility. So in terms of the larger components, that's what we're seeing.

Just, you know, broadly, in terms of general market demand, my sense is we're continuing to see flight to quality and we're certainly benefiting from that. We're continuing to see tenants wanting to take advantage of those that have some reasonable stability in their business plans, take imagine of more of a tenant's market, if you will, by locking in long-term, favorable rents. Certainly we see that in Denver, by way of example, and to a limited extent in these markets. So we haven't turned the corner.

But we've taken a very realistic view of our own portfolio, gone through piece by piece, square foot by square foot, and that's how we've come up with the analysis of the projected occupancy losses that I've indicated on this call. I hope I'm pleasantly surprised and that we won't lose all of it and that we will begin to see some stronger demand and that, you know, we'll improve on those numbers.

Okay. As it relates to the term fees, additional color on that. Is there one user, a bunch, or whether that's ready-bake into the occupancy numbers?

Yes, I can comment on the termination fees. Basically a significant portion, over $1 million, was the tenant in Plaza 5, the financial service tenant that we lost. In a building in Little Furry, New Jersey, adjacent to the airport, Ford Motor Company had an early termination right for a fee of about $325,000. In Denver, we had a situation where the tenant, ESI, or Revolving Systems, $300,000. In Soundview Plaza in –Stamford, $272,000 from the world wrestling foundation. In Colorado we had an HMO community health plan that basically couldn't retain its funding from the State of Colorado. They paid us $175,000. So those are the larger components of the termination fees. I would say that going forward, our expectation, for example, this quarter, is that they will be much less than that, probably in the $800,000 range based on what we know today.

Okay. Great. And just lastly, we hear you're negotiating with Westchester County on the Grasslands(ph) campus. Could you give more color there?

We're in the process of trying to formalize an agreement with the county. We have, in fact, been designated to develop the biotechnical park, which is adjacent to the medical center and New York Presbyterian, the campus that exists. The land is referred to as the North 60, in that it's 60 acres. We have been designated to develop a development of multiple facilities totaling about 950,000 square feet.

We have met with the State of New York and been working with the State of New York, both the Governor's Office, the Senate, and the Legislature. There is a grant available to help fund all facets of this project, including the early components of soft costs. We believe -- it's our expectation that we fully qualify. We were up in Albany a couple of weeks ago, and we should be hopefully receiving a very substantial seven-figure grant to begin to move forward and forge progress on that project, to continue to design all of the infrastructure, the roadway improvements, etc., etc., as well as the overall master plan, refine that. And then there's indication under the Genesis Program in the State of New York, that there could be very substantial dollars available to us to help fund the infrastructure, particularly the off-site infrastructure.

We, as I said, are working with Westchester County to construct the ground lease, and the ground lease will be set up in such a way as that we will have plenty of time to see hopefully the economy emerge and evolve out of its current strain, and given the State of New York's emphasis of this research park as a biomedical facility, along with its proximity to the Westchester County Medical Center and the synergies that exist there, as well as New York Presbyterian, we think we can attract tenants, both early-stage incubator type tenants and then larger stage pharmaceutical tenants, and have a very successful development over what we imagine would be -- you know, a period of time, probably of five years.

So the first delivery of an office building in '05, '06?

My best guess is we're going to see another year of design and conceptual work, and hopefully during the course of 2004, we will be able to lock in our first build-to-suit tenant. I would imagine you're right, probably at 2006-type delivery for the first development phase, which could be as much as a quarter of a million feet.

Okay, great. Thanks.

We'll take our next question from David Loeb, Friedman, Billings, Ramsey Group Inc.

Mitch, I want to follow up on the vacancy comment. You had really good leasing momentum, and it sounded about a million shares, close to 40% of that was new tenants. You were able to achieve that in really a very low demand environment. Do you think that momentum slows down? Is that why you think you won't be able to offset the bulk of these tenants that are leaving?

I simply don't think that the momentum and velocity we're seeing in the market keeps pace with known expirations where tenants are terminating their occupancies due to either changes in their business plan, reductions in employment and capital spending and other reasons. So there is a delta between demand and expiration, no question about it.

Thanks.

You're welcome.

We'll take our next question from Michael Marron, Bear, Stearns & Company.

Good afternoon. Could you just translate what that means in terms of occupancy and same-store NOI for '03?

Again, my expectation is, and I've tried to view every element of the portfolio and present as much of a worst-case scenario as I can contemplate or envision today, and I think it's consistent with our prior calls. We're going to be in the range, sort of worst-case, of seeing another deterioration of some 220 basis points within the portfolio, barring, you know, things turning around, which of course could always happen. And that's going to put our occupancy at just a bit over 90% in our current in-service portfolio.

But then, of course, we need to factor in Plaza 5, which is a 980,000 square foot tower that we're completing in Jersey City, which is going to be about somewhere around 600,000 square feet leased, hopefully, based on the leases that we have out today.

I will tell you that our break-even on Plaza 5 is right at that level, about 60% leased, we break even on the facility. So that's the best analysis that I can provide at this point in time. I would also emphasize the fact that the tenants that form the majority of our income stream are very high grade, high quality tenants.

We've analyzed, to the best of our ability, at-risk tenants, credit loss possibilities, and we feel very comfortable with the consensus or the modeling that we've provided to the street based on all of those different factors, including the loss of occupancy. So if I look at, by way of example, a roughly 6.5% rollover through 2003 and I tell you that there's about a $31 million rollover exposure through the end of the year, I would say approximately $9 million to $10 million of that would not be retained based on our current expectations of occupancy.

Okay. And I assume there's no change in your prior FFO range?

No, absolutely not. We're holding our guidance exactly as it was in the previous quarter.

Okay. On the lease activity on the quarter, obviously the leasing TI and commissions were up. Do you expect that to hold true for the rest of the year, or does that $2.79 number reflect the longer term leases in the first quarter?

My overriding comment would be that certainly the cost of tenanting both first generation and retenanting and preserving occupancy is more than it was over the last year or so, no question about that. But the numbers that you've seen do reflect some very substantial leases that we identified before, you know, 12-year lease up in Bergen County with Barr Labs and a major renewal down in Neptune, in Mamet (ph) County, so I don't anticipate the numbers should migrate much off of that.

Can you comment on the Cap rates you achieved on the two dispositions you mentioned and updating timing on the Southwest portfolio?

The last building we sold in Houston we sold at a 8.33% cap rate. I don't want to mislead you in any way. The builds was building was only about 82% leased, so it will be incumbent upon the owners, which are more local players in the market, to improve upon that. So that was the cap rate on the sale.

As far as the building in Anaheim, I don't mind telling you that it was an extraordinary success. Our joint venture with Highridge has produced very satisfactory financial results for us, and the overall return to us on that Stadium Gateway project was about a 28% internal rate of return. So that one was a real good one.

Okay. And then any other thoughts on the rest of the Southwest portfolio?

You know, we only have a smattering of assets left in a variety of Texas sub markets. We have two buildings in Dallas, one at the MCI Building, so we're going to have our work cut out for us on retenanting that 82,000 square footer. Triwest is performing nicely. We're working through some renewal issues on that building. Houston, from a wholly owned perspective, we're out of that market now. San Antonio, we have two buildings. So, you know, we feel that we've certainly accomplished the vast majority of the capital recycling program and that there's certainly no pressure on us to move out of those markets. They're not really a distraction.

We've maintained and preserved the nucleus of our operating team out there, so it operates fairly seamlessly. California, we are now -- we've honed in strictly on our Northern California holdings, the San Francisco market, and we've done, you know, well there. We're doing real well in Daly City with our Highridge development, so we're not looking to sell that imminently. The only thing beyond that that remains is the Denver portfolio, which is not held for sale at this point, and we've got to continue blocking and tackling and bringing that portfolio up to stabilization, see the world return to a little bit more normalcy over the next couple of years and then we'll sell it.

Okay. Thanks for the update.

You're welcome.

We'll take our next question from Gary Boston, Salomon Smith Barney.

Good morning. Mitch, I wonder if you could comment on the replacement tenant at Plaza 5 for the space that was terminated, and just the delta in the rents between the old tenant and the new tenant, and sort of what's changed on your expectations on the rents you can get on the balance of that space?

Well -- hi, Gary, first of all. It's always a pleasure to speak to you. First of all, the tenant, the replacement tenant, is a very, very high grade credit tenant, and so it, in fact, is a very significant improvement on the credit quality of the tenant. As far as the break-even analysis that I posed before, at roughly 60% occupancy, that 60% occupancy break-even is reflective of new rents today. New rents today in that market are roughly $28 to $30 a square foot going in. Most of the leases in that marketplace, although the one I'm talk beg is a talking about is a five-year deal, most are longer term, 10- to 15-year leases, with reasonable step-ups. That's three to five hours every year. But the rents have declined from, call it mid 30s, in rare instances high 30s, to the hovering in the real high 20s to low 30s, depending on the package. The TI allowances have moved probably from 25-ish to 35-ish, on average. And so that's the situation down there.

Okay. That's helpful. Just going back to the TIs and leasing commissions overall. You noted that a lot of that had to do with deals that were signed earlier. Can you give us a sense of, you know, of the leasing activity, you know, in the quarter, how much of it was actually signed in the quarter, or can you give us a sort of volume of actual leases signed during the quarter, not the ones that necessarily took effect. My question just really is, you know, is that TI reflective of sort of a last year's market, and should we see a change in that going forward if things start to stabilize, in your view?

First of all, all of the leases were signed in the quarter, and the deals are reflective of today's marketplace. Just to give you a sense of, you know, the suburban marketplace, you're seeing low to mid $20 gross rents on the extreme, and in certain cases, Bergen County and Morris County, high $20s. Your operating packages haven't really changed. They range in the $7 to $8 range. Your TI allowances, on renewals, are obviously less. They're $15 to $20.

On new installations, they're $20 to $35, depending on the longevity of the lease. There is a bit of a rent concession component that is in the marketplace now. That range is, on a five-year deal, I would say you could very well be looking at, you know, one to three months in rent concession, and on a 10-year deal, you could be looking at, you know, three times that. So that's a flavor of what you're seeing in the marketplace, and I think we're at the trough. From an economic perspective, I don't think we're going to see further deterioration in rents.

I think we have seen some indication that sublet space is abating. Some of the shadow space is being redacted from the marketplace. There's been a little more clarity evolving, at least in some of our markets. You've recently read about Pfizer, in connection with the Pharmacia acquisition, indicating that they are going to retain some of their occupancy in the Gladstone area, and infuse $400 million of new effective real estate commitments to Morris County, which, you know, of course, we were very big part of in Parsippany.

So I kind of think what we're seeing now, Gary, is sort of the trough of the market. And I'm trying to give you as realistic a view as I can of making a deal today in the marketplace.

Great. I appreciate your comments. Thanks.

You're welcome.

We'll take our next question from Greg Kirandi (ph) with Wachovia Securities.

It's Chris. How are you? You mentioned a termination fee in the quarter. Did you mention where that came from and what your expectations are for the rest of the year regarding fees?

It was the tenant that went bad in Harborside, about $300,000 from a tenant in Little Fairy, rather, Ford motor company had an early termination right. A couple of situations in Denver total totaling almost $400,000, a termination in Stamford for about $270,000, and the rest are dribs and drabs. As far as going forward, based on what we're see and know today, this quarter is more like an $800,000 termination fee quarter.

Okay. And the rest of the year you're assuming any --

It's hard to say, but I don't see the run rate exceeding what we're seeing this quarter.

How would you characterize the quality of the tenants that are asking or paying fees or asking to downsize today versus where we were last year, Mitchell? What we're hearing is that some of the better credit customers are now coming and saying, "All right, we want to downsize, we want out," versus the last 12 to 24 months, it had been some of the marginal customers.

What we're seeing, Chris, is that tenants that have paid us these fees only want us at a default situation. In our core markets, as I mentioned before, we had an HMO in Denver who couldn't, for whatever reason, retain their funding, and so that was a default situation. But most of these rights were negotiated years ago in connection with leases or lease renewals. We don't frankly have very many situations that I can think of where tenants of whatever quality are coming to us at this point in the cycle and asking to, you know, to move their premises and to cut a deal with us, so to speak, to pay a fee. So we're not seeing that particular phenomenon.

Okay. The list of customers that you refer to that were going to drive your occupancy down or put pressure on the occupancy over the next couple of quarters, could you give us a sense as to why are they -- are they going to competitive billings, are they just downsizing, or are they going out of business? What might it be, kind of the mix?

Yeah, I had actually done that previously in response to a question on the call, but I'm happy to quickly do it again. We had a 42,000-foot unit in Pennsylvania, suburban -- which is Reuters. They made a major announcement. They're closing division, slashing something like 3,000 jobs, and this particular unit was one of those affected. In Denver, Sun Microsystems is obviously way long on space that they own, let alone space that they lease. So we knew that they weren't going to renew their lease.

We've done a Yeoman's job in my opinion of filling those assets. We announced a deal the other day with Sirenza, taking 75,000 feet of what was Sun space. Another deal that we talked about today, Classic Sports, 11,000 feet out of a 37,000-footer. So we are out there making deals. Obviously rents are way off from where they were --

So it sounds like either -- these companies -- there's still excess space from customers, others are consolidating.

Yeah, I think that's a fair statement.

My apologies for asking the question again. Did someone ask what your mark to markets were by your major markets? I think you had provided information just on one. But if you could give us a sense ...

Yeah. I think, you know, again, averaging our portfolio, at least on the office side, is about $18.86, I believe, on average rent renewals. That's what we did this quarter. I would say that within our core markets in the Northeast, there is still a gap between in-place rents and market rents, to the positive side for Mack-Cali. And it's marginal at this point. It's hard to predict. But there's still a couple hundred basis points, in my opinion, of positive movement.

Is that more Jersey, more D.C.?

I think it's probably throughout our markets, our Central to Northern New Jersey markets, we have some room in a number of situations. D.C., you know, I think we're kind of fully priced there. So my expectation is there shouldn't be a change. And Westchester, we have some positive room. But, you know, the numbers have come down, and it's a few percentage points at this point.

Okay, great. Thanks for your patience.

You're welcome. My pleasure. Take care.

This concludes today's question-and-answer session. At this point I would like to turn the conference back to Mr. Hersh for any additional or closing comments.

Thank you very much. I will simply say that we look forward to reporting to you again next quarter on our progress. I think all of you for joining our conference call today. Have a good day.

This concludes today's conference call. We thank you for your participation. You may now disconnect.