Veris Residential Inc (VRE) 2003 Q2 法說會逐字稿

Good day and welcome to the Mack-Cali Realty Corporation second quarter 2003 conference call. Today's call is being recorded. At this time I would like to turn the call over to the Chief Executive Officer, Mr. Mitchell E. Hersh. Sir, you may begin.

Thank you. Good morning, everyone. Thank you for joining Mack-Cali's second quarter 2003 earnings conference call. With me today are Timothy M. Jones, president, Barry Lefkowitz, executive vice president and Chief Financial Officer, and Michael A. 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 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 follow with a discussion of our financial results, and Tim and Mike will give you an update on the markets and our leasing results. In what is still a very challenging economy, our FFO after adjustment for straight lining of rents came in at 92 cents per share. 8% below last year's second quarter FFO of $1 per share. Last year's $1 in FFO, however, included one-time items totaling 7 cents. Later, we'll discuss our move to report FFO including the effects of straight-lining of rents. In our markets, we have yet to see any new job growth, and businesses are still very reluctant to make long-term decisions about capital spending, adding employment, and, of course, adding office space.

This seems especially true for large space users. There is, however, a fair amount of leasing activity from small and mid-size users with many firms looking to trade up to better quality class A space. A lot of lateral movement in this market. While we're not seeing any widespread recovery, there has been some positive momentum in certain submarkets such as union and Monmouth counties in New Jersey as well as Westchester county in general. Space showings in the Jersey City water front market have also picked up due to the reinstatement of the Business Employment Incentive Program. And we do have over 60,000 square feet of leases out for execution on our Harborside plaza 5 building.

But in this market, as in others businesses have been very slow at making final commitments for space. The markets remain highly competitive, and our rents rolled down this quarter by 7.7% portfolio wide. Rents in our core northeast markets, however, declined by 3.9%. While rents in our much weaker Non-core southwestern and western markets fell by a remarkable 20.8%. Our tenant improvement and commission costs held steady at $2.73 per square foot per year versus last quarter's $2.75. A result of laddering out leases well before the economic downturn.

While the credit quality of our overall tenant base remains exceptionally high, even we did experience losses totaling 89,000 square feet due to tenant defaults in the second quarter. Most of these losses were for small spaces, but we did lose a 40,000 square foot tenant, Meridian benefit in Wayne, New Jersey, and a 19,000 square foot tenant, Data Peer U.S. Depot in Ft. Lee, New Jersey. Although we did complete almost 1 million square feet of leases during the quarter, these credit losses helped contribute to a slight decline in overall occupancy from 92.4% leased last quarter to 92.2% leased this quarter.

As I've said previously, over the next few quarters, we do expect further reductions in occupancies by up to 200 basis points by the end of the year. Also in the third quarter, Harborside Plaza 5 will be brought out of lease-up and added to our space leased statistics, adding up to 130 basis points to our vacancies. As a result, we may be experiencing declines in leased rates of over 300 basis points by the end of the year. I've said this on previous earnings calls. At the end of the second quarter our rollovers remaining for 2003 were just 4.1% of our portfolioio's base rent, or $20.2 million. And for 2004, a very manageable 8.2% of base rent, or $40.6 million.

Despite the challenging economy, our core northeastern markets are generally outperforming most other markets throughout the entire country. Because of their limited new inventory and extremely diverse macro economic base. In these core markets, Mack-Cali continues to outperform the competition with our leased rates higher than the market average by a range of 190 to 860 basis points. Because of our size and our strong positions in the markets, we service, we remain optimistic that our performance will improve as the national and regional economies recover and companies start increasing their capital spending and employment. Now I'd like to briefly review some of our second quarter accomplishments and activities. In April, we sold one of our joint venture properties, stadium gateway, a 273,000 square foot office property developed in Anaheim, California.

Our joint venture partnership with Highridge held a 65% interest in the property which was sold for $52 1/2 million representing over a 27% internal rate of return to Mack-Cali. On the leasing side, in New Jersey during the quarter, we signed a new lease in Roseland for 55,000 square feet with novartis, the pharmaceutical company, a 50,000 square foot renewal in florum park with a major law firm, Bressler, Angmarie, and Ross, and a 49,000 square foot renewal in Parsippany with J.B. Hanour and company.

We renewed two leases for entire buildings in Denver, Colorado, one for almost 73,000 square feet with first Tennessee Bank and one for 69,000 square feet with Mcketthon Information Solutions. In the quarter we received three industry awards, recognizing our property management and development expertise. We received two building of the year awards from bowman, New Jersey, for Mack-Cali business in Parsippany and for 95 Cristopher Columbus drive in Jersey City, which although we sold in 1998, we continue to manage.

We also were awarded a new Good Neighbor award from the New Jersey business and industry association for Harborside plaza 10, the Charles Schwab building in Jersey City. With regards to our Meadowlands Xanadu project to redevelop the Continental airlines arena site, we're in the process of negotiating a developers agreement with the state of New Jersey together with our partner the Mills Corporation, and we expect to have it completed sometime in the month of September. We did not complete any acquisitions in the quarter, although we are under contract to acquire three office buildings in our core markets in New Jersey, in Westchester, and suburban Philadelphia for a total of approximately $24 million.

In addition, we are in negotiations to sell specific plaza 2, a joint venture retail and theater component adjoining our Pacific plaza office development in Daly city, California, for well in excess of $30 million, and we have a letter of intent as well to provide $16 million in mezzanine financing which is convertible to equity through its term for a roughly half a million square foot class A office complex in Monmouth county, New Jersey. Before I hand the call over to Barry, I would like to note that we were very pleased that in the quarter Moody's investor services upgraded our investment grade credit rating to BAA2. Very few companies have been upgraded in today's unfavorable economic environment. So we view this upgrade as a very strong vote of confidence in Mack-Cali and its financial policies.

Now Barry will review our financial results for the second quarter. Barry?

Thanks, Mitchell. Funds from operations after adjusting for straight-lining of rents for the second quarter of 2003 amounted to $66.5 million, or 92 cents per diluted share. As compared to $71 million or $1 per share for the same period last year. For the six months ended June 30 2003, FFO after adjusted for straight-lining of rents amounted to $132.1 million or $1.84 for diluted share as compared to $138 million or $1.92 per share for the same period last year. In order to best report FFO in accordance with the securities and exchange commissions's recent guidance in respect to regulation G concerning non-GAAP financial measures and to disclose FFO on a comparable basis with the vast majority of other companies in the industry, Mack-Cali is revising its definition of FFO to adhere to the nary definition by including the effects of straight-lining of rents.

As a result, FFO using the revised definition for the quarter ended June 30, 2003, amounted to $70.7 million, or 98 cents per share versus $73.3 million or $1.02 per share for the quarter ended June 30, 2002. For the six months ended June 30 2003, FFO amounted to $139.7 million, or $1.95 per share versus $140.9 million or $1.97 per share for the same period last year. The effects of the inclusion of straight lining of rents adjustments for the second quarter of 2003 was $4.2 million or 6 cents per share and for the six months ended June 30, 2003, was $7.6 million or 11 cents per share. Net income available to common shareholders for the second quarter was $33.6 million or 58 cents per diluted share versus $35 million or 61 cents per diluted share for the same quarter last year. For the six months ended June 30 2003 net income available to common shareholders was $63.6 million or $1.10 per diluted share versus $75.7 million or $1.31 per diluted share for the same period last year. Included in our results for the quarter was $1.3 million in leased termination fees and $970,000 in net costs related to the loss on early retirement of debt.

Same-sore net operating income which excludes lease termination fees on a cash basis decreased by 1.4% for the second quarter of 2003 as compared to the same period in '02. And for the six months ended June 30, 2003, decreased by 2.6% over the same period last year. Same-store net operating income on a GAAP basis increased by 4% for the second quarter of '03 as compared to the same period in '02. And for the six months ended June 30 of '03 decreased by 2.2% as compared to the same period last year. Our same-store portfolio includes 25.2 million square feet of space which represents 93.2% of our portfolio. As Mitchell mentioned earlier, Moody's investor services raised its credit rating for Mack-Cali to BAA3 to BAA2 on may 14th. The company now has level ratings from all three agencies. We feel the ratings upgrade will help the company achieve better flexibility and tighter pricing in the marketplace. In June, the company issued $100 million face amount of 4.6% senior on secured notes due June 15th, 2013. This issuance represents the lowest ten-year coupon the company has ever achieved. The $99.1 million of proceeds were used to repay $62.8 million of Harborside plaza 1 mortgage at a discount of $1.7 million, and to reduce outstanding borrowings under the company's revolving credit facility. During the quarter we also repurchased from teachers insurance and annuity association $45.3 million of existing 7.18% senior on secured notes due December 2003 for $46.7 million. The repurchase fully retires the 7.18% notes which were due to come due at the end of the year. Currently we have just over $108 million drawn on our $600 million unsecured credit facility. Our unencumbered portfolio At quarter end totaled 233 properties aggregating 21.4 million square feet of space which represents nearly 80% of our portfolio. At quarter end Mack-Cali's total undepreciated book assets equaled $4.3 billion and our debt to underappreciated asset ratio was 40%.

The company had interest coverage of 3.5 times and fixed charge coverage of 2.7 times for the quarter. And for the six months ended June 30, 2003 the company had interest coverage of 3.4 times and fixed charge coverage of 2.7 times. We ended the quarter with total debt of approximately $1.7 billion, which had a weighted average interest rate of 6.82%. I am pleased with the financial stability Mack-Cali continues to enjoy. Please note that under SEC regulation G concerning non-GAAP financial measures such as FFO, we are required to provide an explanation of why we believe such financial measures are relevant and reconcile them to net income.

Available on our Website at www.Mack-Cali.com, are our 10-Q, supplemental pack and our earnings release which includes the information required by regulation G. Now Tim will cover our leasing activity. Tim?

Thanks, Barry, as Mitch mentioned at June 30 or consolidated portfolio was 92% leased compared to 92.4% at march 31. During the quarter we signed 170 transactions totaled 973,000 square feet. These transactions produced retention of 57.7% of expiring space and gross rental rates for the first year decreased an average of 7.7% over the expiring rental rate including all escalations. Tenant improvements plus leasing commissions averaged $2.73 per square foot per year of lease. Further details on our leasing activity can be found on our web site. Our market information is provided by Cushman and Wakefield, and unless otherwise noted, we'll discuss overall class A vacancy rates and direct class A asking average asking rents. Now I'll turn it over to Mike who will review the Westchester and Fairfield County markets. Mike?

Thanks, Tim. Westchester county leasing results for the second quarter indicate continuing improvement in the market with some progress made in absorbing vacant space, while Fairfield County showed mixed results with generally soft demand and a continuing glut of available sublease space. Overall class A availability in Westchester improved from 21.6% in the first quarter to 19.4% in the second. Although a large portion of the absorption is attributable to New York life's purchase of a vacant 383,000 square foot building, activity elsewhere in the market resulted in an additional 60,000 square feet of positive absorption. Significant leasing reduced available sublease space from 842,000 square feet in the first quarter to 781,000 square feet in the second.

A more than 7% decrease. Sublet space represents about 20% of the overall availability in Westchester. Mack-Cali's Westchester properties, which include 2.1 million square feet of office, 2.3 million square feet of office flex, and 387,000 square feet of industrial space, finished the second quarter, 95.8% leased. Remaining lease expirations in 2003 comprised 4.2% of our total Westchester inventory. Fairfield experienced negative absorption in the second quarter following a small positive showing in the first. Overall class A availability increased from 19.9% to 20.5%. Sublet availability also increased by 80,700 square feet to nearly 2.2 million square feet.

Sublet space announced a 35% of overall availability unchanged from the first quarter. Mack-Cali's Fairfield properties comprising 579,000 square feet of office space and 273,000 square feet of office flex space ended the second quarter 92.1% leased. Leases representing 3.71% of our total inventory expired during the balance of this year. Net direct absorption totaled a negative 143,000 square feet in Fairfield. In Westchester, net direct absorption was a positive 312,000 square feet. Fairfield class A asking rents further declined from $30.84 per square foot in the first quarter to $30.34 per square foot in the second.

Overall asking rent in Westchester rose by 1 cent per square foot to $29.63. Noteworthy transactions in the market for the second quarter included New York life closing on the purchase of the 383,000 square foot one Rockwood road in Mount Pleasant New York, G capital which leased 221,000 square foot in Norwalk, Connecticut, Graham capital which purchased a 105,000 square foot building in Norwalk, Connecticut, and zip brothers which leased 61,000 square feet in Greenwich, Connecticut, in a move from New York City. Significant to Mack-Cali transactions for the quarter included Fremont investment and loan which signed a new lease totaling 26,000 square feet at 555 taxter road in Elmhurst, New York, MCMahon securities which renewed an expanded in Greenwich, Connecticut. Progressive casualty insurance, which took 16,900 square feet in Yonkers, New York, and applied behavioral analysis corporation which renewed its 10,400 square foot space also in Yonkers, New York.

Market reports indicate increasing inquiry in Westchester as the county continues to benefit from New York city corporate dispersion strategies. It appears that Westchester's relative accessibility from Manhattan, Long Island and northern New Jersey provides a strong appeal to city-based firms that desire to locate portions of the work forces in the suburbs while remain retaining current employees. The significant occupancy of long vacant large blocks of space within Westchester over the past 18 months and renewed focus on the county by New York City businesses bode well for further recovery upon improvement in the general economy.

Fairfield has yet to show consistent signs of recovery with significant returns of space in the Stamford market, more than offsetting positive absorption in Greenwich and Norwalk. Financial services, computer new economy and consumer products companies made up a larger percentage of the space leased in Fairfield and were among the industries most affected by the recession. These three groups accounted for nearly half the space returned during 2002 in Fairfield. Westchester county had much less concentration in these industries and was thus less affected by the contraction. Its industry diversity continues to help stabilize the office market and will most likely result in a quicker recovery upon improvement in the economy. Tim?

Thanks, Mike. In northern New Jersey, overall vacancy is at 17.8% for the third straight quarter, and class A direct vacancy increased only slightly from 11.6% to 11.7%. Asking rents averaged $30.25. Looking at some of the major northern New Jersey submarkets, Morris County's class A overall vacancy rate dropped from 22.7% to 22.2% this quarter. Our 2.6 million square feet in Morris County is 90.2% leased. Availability in Bergen County rose from 20.5% to 21% in the second quarter. Subleased space continues to burden Bergen County making up over 36% of the overall available square footage. Our 3.8 million square foot inventory in this sub market is 98.1% leased. Hudson County's vacancy increased from 13.4% to 14.6% this quarter.

But the reinstatement of the beep incentives has generated renewed interest in the sub market. Our 2.1 million square feet of stabilized in-service office space along Hudson County's waterfront is fully leased although as Mitch indicated will be bringing Harborside Plaza 5 out of lease-up next quarter. This addition will bring our Hudson waterfront inventory to 3.1 million square feet which is 83.9% leased. This does not include plaza 10, our 575,000 square foot joint venture, which is fully leased to Charles Schwab. Including plaza 10 would bring us to 86.5% leased. More than 35% of our company's square footage representing almost 40% of our annualized base rents are located in Morrisberg and in Hudson Counties.

Although it's still a challenging operating climate, we continue to maintain high occupancies. Central New Jersey's vacancy went from 26.9% to 27.1% this quarter. There are 3.2 million square feet of sublet space available in this market representing over 40% of the total available space and 11% of the total market inventory. Asking rental rates averaged $28.21 per square foot. Mack-Cali's central New Jersey presence is 2.8 million square feet, which is 92.6% leased. At the end of the second quarter there were 3.5 million square feet under construction in northern and central New Jersey representing just 2% of the 169 million square foot inventory. Less than 8% of this space was unleased at the end of the quarter.

Suburban Philadelphia's vacancy rate increased from 20.6% to 21.3% in the first quarter and rental rates averaged $26.76 per square foot. Our holdings in this market include 2 million square feet of office space in both southern New Jerseyand suburban Philadelphia and 1.4 million square feet of office flex space in Burlington county, New Jersey. These properties were 87.9% Leased at the end of the second quarter. The Washington D.C. market continues to demonstrate resilience with vacance virtually unchanged at 8.4% and average rental rates at over $46 per square foot.

Our 328,000 square foot in Washington was 96.3% leased. And our major markets outside the northeast Denver suburbon vacancy rate dropped from 26.8 to 24.2% during the quarter and rental rates averaged $18.58. And San Francisco's vacancy rate rose again from 22.2% at March 31st to 23.9% at the end of the second quarter. Although wide spread economic recovery has yet to gain momentum, we're poised to make the most of upswings as they happen. Our properties continue to be well leased, our 2004 rollover is very low, and our leasing and management team continues to be focused on our keeping our buildings filled, serving tenants and keeping costs under control. Mitch?

Thanks, Tim. Now we'll open the floor to questions. Operator?

q-and-a

If you would like to ask a question at this time, press star, then one on your touch-tone phone. If you are in the queue and no longer wish to ask a question, simply press star-9. The first question comes from Gary Boston of Smith Barney.

Good morning. Mitchell, you mentioned repeated what you've said in the past regarding the potential for further occupancy declines in the balance of the year. Just based on the quarter, it seems like the pace of leasing is continuing to generally keep up with expirations notwithstanding a few defaults here and there. Could you just walk us through sort of the thought process in terms of where you're getting the extra 200 basis points? I know there were some second half events that you were looking forward to and just maybe some update on that?

Hi, Gary.

Hey.

We have analyzed every lease within our portfolio. As you know, we have about 2100 tenants. And we have looked at every space and every expiration over the next three years. Going by that analysis, looking at every single tenant, discussing with those tenants what their plans are, some of those spaces are obviously available for sublet now, some business conditions have changed we have modeled in a very realistic but somewhat conservative view of the effects that those expirations would have on our portfolio. The decline in occupancy of approximately 200 basis points not including the effects of plaza 5 in Jersey City are our realistic assessment of the expirations through the remainder of this year and the net effect of, you know, what the probabilities are of providing replacement tenants within those spaces.

Just as an overview, Gary, I will tell you that it's my view, having been in this business for 30 years and having been through many different business cycles, that the level of dormancy in the market is higher now than I have ever experienced it. You do hear instances of some leasing velocity pickup. It's my view being, you know, on the front lines that that velocity pickup is generally a lateral movement where tenants do, in fact, have the ability to move or -- the flight to quality the actually -- I'm sure you've heard -- many times. But the cost of accomplishing that to the landlord is severe. Now, fortunately, for Mack-Cali, we are in an extraordinarily strong cash position. In this company. We planned for a downturn. We hoped it had never happened, but it did, and it's a lot more severe than any of our expectations.

The costs to put new tenants in or replace tenants today, you know, this whole discussion of NER's net effect of rents is extremely high. And as I say, we're proud and pleased at Mack-Cali to be able to have the cash income without the effects of straight-lining rents to support whatever we need to do to keep our portfolio fully leased or leased to the extent it's possible and Buoyant while at the same time completely supporting our dividend and all of the capital needs both for tenant improvements and the capital that we put back into our real estate to keep it pristine. But anybody who's telling you that velocities and market conditions have improved, I don't think is providing a realistic perspective of what I am seeing not only viewing the northeast, which certainly is the deepest, best-performing part of the United States, but looking at our portfolio in other markets that have fewer barriers to entry and a lot more supply to deal with, there's still a heck of a lot of subleased space in the market, yes.

It's abating. There's not a lot of new addition of subleased space that I see. But they're still within our own portfolio today, roughly 5.7% of our portfolio is available for sublease or shadow space, as it's called. So I believe it's my responsibility to provide a very realistic assessment of where I see the picture, how I view the picture going forward over the next couple of years. If you look at this company, Gary, and I don't mean to be verbose, but I feel this sets the overview of probably many questions that will be asked, our company and our leasing associates, and I'm right there with them on the front lines, lease on average a million square feet a quarter.

And that's a pretty high rate of leasing activity. And I'm the first one to tell you that I still believe unless there's a remarkable change in velocity and demand over the next six months -- and I don't think it's going to happen, because of the lagging effect that exists in our business, that we're still going to lose some occupancy. So I hope that kind of gives you the picture. And the overview.

I appreciate the candor . You know, just as you're looking out, then, through the balance of the year, do you think that the retention rate that you've experienced so far, 55, 60%, is a pretty good number? And for the balance of the space that doesn't necessary get retained, what sort of downtime are you factoring into your forecast?

We have -- number one, yes, I do think it's realistic. And I do feel that the downtime today, in general, approaches a year. On leasing. I can tell you that there have been instances that, you know, we have seen the bloodletting, I'll call it, in some of the markets where there have been leased that are, you know, call them 10 to 15-year leases where in some instances, between free rent downtime just in terms of fit-up, you're talking about two years.

And that's why, you know, we, in our reporting, have been so cautious, so conservative and so careful, particularly as it results in this whole concept of straight-lining effects because if in the event you have situations where you have credit risk and we've all seen some remarkable situations where unexpected credit risk has occurred over the last couple of years in corporate America, you could have some real issues. But in our modeling and in all of our projections and corporate modeling, we figure that on average for a five-year transaction, which is kind of the average that you see in the market, yes, you see the anomalies in the quausi urban areas or the urban areas where generally the leased trend a little bit longer, but you're looking at about a year of downtime.

And today it's not unrealistic on a five-year lease to see, in general, in suburban markets, $30 T.I.s, tenant improvements, full leasing commissions and six months free rent. Occasionally, you know, let's say frequently you'll be able to add that free rent period on to a longer lease term so it would become a 66-month lease. But that's the kind of costs you're looking at. So when you're assessing the cash flows of companies, you have to assume today that it's costing you probably between brokerage and T.I., anywhere from 40 to $70 a square foot, depending on the particular circumstances, the length of lease, et cetera.

Great. I appreciate it. One last question. On the Schwab space in Jersey City, could you give us a sense on how much of that you think is currently available for sublet in the market?

They still have about half the space available. There hasn't been much in the way of new activity since having done the Reuters transaction and the Mitsue we transaction.

Great. Thanks a lot.

You're welcome.

The next question comes from Greg Whyte of Morgan Stanley.

Good morning, guys. Just maybe two continue in a similar vein there, when we look at the decline in the -- in tenant retention rates, and given the difficulties that you're suggesting in terms of leasing our space, I'm just surprised that we're not actually seeing T.I. and leasing commissions go up a little more. Can you talk to us a little -- I mean, are we thinking about this in the wrong way, or should we be expecting you to spend more to try and, you know, bolster occupancy?

Well, as I said before, part of our foresight, if you will, was to lock in leases early in the process, so we've been able to, in some instances, mitigate against capital expenditures in terms of T.I. by having done that and prepared for this downturn. On the other side of the equation, however, the -- as I said a moment ago, the T.I. allowances and the brokerage commissions, or the combination of those, have increased, depending on submarket substantially. And certainly if you can lock in a lease where the lease rates, the effect of lease rates provide sufficient increases over a period of time to justify the capital expenditures that that's what you try to do. But, you know, our T.I.s and leasing commissions are trending now at $2.73, $2.75 per square foot per year.

A year and a half ago, that was about $1 a square foot less. And so we have, too, have had the impact or feel the impact of those additional cash requirements. And fortunately, as I said a moment ago, we're in a position from a cash flow perspective to be able to support these types of tenant improvements, but we, in our leases, make sure that we can recover some of this expenditure through rent increases over the term of the lease.

Mitch, in terms of the average lease term, it's gone down by roughly 25%. Is that a function of sort of the tenant mix to a smaller tenant base, or is it an act of sort of move on the part of management to try and limit lease terms so that you can cap in a better market?

Well, you know, as I said, I've been in the business a long time, and I believe that the appropriate approach is to do a sound transaction for as long a lease as can be accomplished with high-grade credit. We -- for example in Denver, and I think we are one of the more formidable landlords in that marketplace right now in terms of our recent leasing activity, the tenants have taken advantage of locking in long-term leases at very significantly progressed rents. So you do have an entire constituency of brokerage community that is advising the tenants generally to take advantage of a difficult market, a tenant's market, to lock in long.

And as I said before, where we can lock in long leases with high-grade credits and where we can build in rent increases to justify the economics, certainly that's something that we can do. You cannot market time, this industry. And so to take the approach that you're going to go one way or the other and that -- and to view yourself as a landlord having any control over that is unrealistic, in my view. So we deal with the marketplace, and we try to negotiate the strongest economic package for Mack-Cali as we can.

In terms of plaza 5, I'm just curious to know, what sort of rents are you quoting on negotiating today versus a year ago?

A year ago the rents in the marketplace ranged from about, let's say, $33 to $38 a square foot, full-service gross, depending on the length of the lease, the concessions, the rent increases, et cetera, built into the lease. Today we're seeing rents that are hovering at the $30 mark, Frankly, give you an example, 15-year leases that actually start sub-30, $29, plus or minus with an $8 1/2 expense stop. $3 to $4 increases ever five years. And T.I. packages that range from, on the low side, $30 a foot. To the high side of 40 to $45 a square foot.

Okay. And then just one last quick update, I think you said -- you made reference to the Xanadu planning for September. Can you give us a little more color on that and project out maybe what sort of activities should we see, you know, sometime next year?

Yes. The expectation on the part of all of us who are involved, the state and the sports authority which, of course, is part of the state Mills, and we are that we will complete the developer's agreement before the end of September. As you can imagine, a very comprehensive, complex set of documentation, and that we are simultaneously advancing all of the specific planning and environmental, et cetera, type permits, all the approvals necessary to permit construction. The actual design is being refined in response to issues surrounding the various family entertainment and fashion elements as well as our, you know, being deeply involved in the design development of the office components and the hotel. And it's the hope of everyone that you'll see a groundbreaking before the end of this year. And from there, we just forge forward until completion.

Okay. Great. Thanks a lot.

You're very welcome.

The next question comes from David Shulman of Lehman Brothers.

Yeah, hi. Good morning. First question, Mitch, the press report on Harborside 10 the Schwab building, that you guys sold it or it's in the process of being sold to I-star. Can you confirm? Deny?

I really can't comment on that situation because, you know we have a policy of not commenting on speculation or rumors, as you can appreciate . I can tell you there has been a high level of interest in the part of the investment sales community in seeking out assets of that particular type of profile. And the cap rates and the dollars per square foot for assets that have that kind of a lease, that high-quality, well-located-type asset base are very high, very extraordinary levels at this point.

Could you comment, Harborside if you don't want to say, can I ask it a different way, is Harborside being marketed, that asset being marketed right now?

The asset is not actively being marketed. We are entertaining a variety of discussions from particular entities that fit the profile that I've just identified.

Okay. I'm not going to press you anymore. Next thing, what's the status of our friends on the litigation on the Xanadu project?

Well, so far they have basically lost every round in court, and I'm sure that they will continue whatever it is they're doing. But notwithstanding that fact, the sports authority which, of course, is the primary defendant or the state of New Jersey in all of this --

Yeah, yeah, you guys are really parties in interest in that.

Right. You know, the instructions from the governor's office to the sports authority have been to move forward at warp speed to get this project on its way to completion. And they are primarily dealing with the issues surrounding harts. And as I said, harts has not been successful so far in any of their litigation endeavors.

Okay. Next thing, the increase in free rent during the quarter compared to a year ago, is that due to signing of leases with lots of rent bumps or more -- a lot more free rent at the front end?

David, what you're referring to really has nothing to do with the specific terms of any of our leasing activities. It's really a matter of discontinued operations for some of the assets held for sale. Barry can go through that in some detail.

Okay. Let me go offline, then, on that if you've got to do a technical counting.

That's really what it is. It has to do with leasing.

Okay. It's more technical accounting, things going in and going out, okay. Next question, on your portfolio what percent of your portfolio is leased but not occupied in your -- in your occupancy, 92% occupancy, what percent of that is leased but not occupied?

The -- I alluded to a figure before in terms of 5.7% in the portfolio available for sublet or otherwise shadow spaced. Some of that space is occupied. So, you know, but that's the best assessment we can make of space that's underutilized or available for sublet.

Okay. And then to have you here on the wire, Mitch, you should think about running for governor. I have you on the wire here on CNBC saying -- this is a quote. I'm reading from the wire copy on Dow Jones. I have you quoted as saying begun -- begun to see rent pressure starting to lift in the east coast markets. That sounded a little different from what you were -- you were a little more pessimistic on the call in saying that statement.

Well, I don't think so. I think that the rent pressures have begun to lift. It's just that they're at fairly depressed levels right now.

Okay.

With very significant cash components attached to the transactions in the form of T.I. But the reality is rent pressures have begun to lift. It's just that they're in a trough.

Okay.

And while markets are beginning to stabilize, I'd like to finish, as Arnold said, I will be back. You know, we're kind of stuck in the mud.

Okay.

And that's the reality of the marketplace.

Okay. Thank you so much.

You're welcome, David.

Bye-bye.

The next question is from Dan Oppenheim of Banc of America.

Thanks. Just a quick question. Wondering about the 2005 rollover now, still a ways away, but just as the markets remain pretty challenging at this point your '04 rollover is modest but relative to peers and certainly relative to peers it's modest. Wondering if you think if some of them will look to offer free rent to entice some of your current tenants with '05 rollovers to take space there and are you are trying to address that by signing '05 leases early at this point?

We are definitely proactively engaged in lease expirations in '05 which is about 14.1% of our expiring leases in base rent, about $65 million. And beyond. Into '06 and '07 at this juncture, although those particular two years are slightly more modest. So we're certainly very, very involved in trying to lengthen out leases. And naturally, it's always far less expensive at the end of the day to retain a tenant than it is to replace a tenant. And so we're out there doing that.

And so do you have any specific goals in terms of reducing that rollover for the -- we get to this '04 even or what would you like to get that down to?

Well, I'd certainly like to get that number down into the 10% range. You know, early next year. You know, by this time next year I mean, that would certainly be the goal.

Okay. Thanks.

Or lower.

: The next question is from Chris Capalongo of Deutsche Banc.

Good morning. You touched on earlier some small tenant credit concerns. I wonder, is there a way to quantify that, or, I guess, how does the watch list look compared to, say, last quarter or a year ago?

It's actually less vulnerable at this point. We do have -- we have gone through a whole series of modeling, and now we have a watch list that has a ranking of one, two and three. And basically, you know, we have built sufficient reserves into our modeling to accommodate all of the number one tenants and we hope and trust that not all of them which totals something like 1.8 million -- somewhere in that range for the quarter. Per quarter.

We're hopeful that we don't experience any of that credit loss, but that's how we built our reserves. And it's pretty well thought out. You know, we have an individual in our treasury department, Bill Fitzpatrick, who comes from the rating agency end of the world, and he spends a great deal of time doing actual underwriting of tenants from both public information to the extent that's available and other information so that we can properly assess security requirements in connection with executing our leases, and we're constantly watching our tenants.

Okay. And in terms of MCI, I think 82,000 square feet was set to be given back in the third quarter. But with respect to the other locations in the portfolio, they still won't be affected, is that the case, or has there been any change?

Yeah, actually, the 82,000 feet in Texas outside of Dallas that you're referring to,MCI has come to us to retain the building. They have to the extent it's meaningful, a very sophisticated amount of equipment in that building. I can't tell you where it ends up, but they are in discussion with us right now to retain at least half the building and possibly more.

Okay. Thank you.

You're welcome.

The next question is from John Lutzius of Green Street advisors. Morning.

Morning Gentlemen.

Good Morning

Mitch, can you give us an update on the Goldman building in Jersey City? When will it be ready for occupancy? How much of that building is Goldman going to occupy and how much trouble do you think it will bring to the market?

Well, the last information that I have, based on discussions with people actually at Goldman, which was probably four months ago, was were that they have fully identified a work force, if you will, to relocate to that building, and that's a work force of at least 3,000 people. And there really -- I know of nothing official that has altered that. And that's kind of been the message to the marketplace and to Jersey City in terms of, you know, the government and the taxing authorities, et cetera. There have been some recent rumors, and I ascribe them to strictly rumors, that Mellon Bank has identified that facility as one on its target list to accommodate this roughly 1 million square foot requirement as you probably know we are as well in discussion with Mellon in connection with a couple of our sites, and so that's the latest that I can tell you.

The building is still not complete. Based on visual observation. They still have a ways to go, it appears in terms of finishing the cladding of the building and certainly the upper floors. That's about the best I can tell you now, John.

Thanks. Just your real estate best guest as to when you think it might be ready for occupancy.

You know, I haven't seen much actual physical activity down there over the last couple of months. You know, so it would be hard for me to project that. Yeah, they had originally shown an October 1st, '03 completion in all of the brokerage community surveys, but I'm not sure, you know, that that's possible given what I see out there.

John Lutzius Okay. Okay. Turning just to your core Jersey market, is there any pain out there in terms of other landlords that were perhaps not as well positioned as you folks are with respect to their balance sheet, et cetera, payment you can take advantage of through acquisitions?

Well, you know, certainly the -- this has been an extraordinary time to some extent, an aberration, you might say, because of the historically low interest rates that have permitted landlords and ownership in certain instances to gain a little more breathing room, and we certainly haven't seen a lot of the stress as a result of that. But it would seem to me that when you're funding, you know, T.I. and commission packages at, you know, the levels I described before and you're not collecting rent in some instances for a year or two, depending on the fixup time and the free rent period, that's probably not sustainable on a long-term basis particularly if we continue to see interest rates inching up with volatility in interest rates as we have just seen. So even, you know, floating rate borrowers are probably need to be a little more cautious and careful now and probably to some extent should have thought more carefully about terming out some debt in the low-interest rate environment such as the $100 million senior unsecured note that we did just in June at 4.6%, and today the treasury, on the ten-year, is for whatever it is, 29 or, you know, it's been extremely volatile. But having said that, I do think that there will be some opportunity going forward. I talked very briefly about our doing a $16 million mezpiece that's fully convertible to equity on a three-year mezzanine loan.

And the reason for that is it's extremely high-grade property, extremely well located in our core markets. There is a mortgage on the property a first mortgage. And until we have a little more certainty that leasing velocity will kind of take that property out of the woods, we're going to stay out of the sort of First Mortgage position and be ready and prepared to step in the future as we are permitted to do as a mez lender or alternatively convert our position to equity. Basically the current ownership there will be putting in dollar for dollar with us on a Parry pusue basis for all the T.I. and lessing commissions required and any other cab ex for the property. We'll be getting a nice internal rate of return on our money over the lease term. And we'll watch it very carefully, and it will enable us to potentially, in one form or another, step into a nice ownership position of a very high quality asset. I haven't seen a lot of that. And that was basically relationship-driven transaction. It wasn't marketed, wasn't available to the marketplace. But as I said, John, I just haven't seen many instances of that sort of thing yet.

Okay. Thanks. And then just last question, the Denver portfolio, is that currently on the market? Is that something that's going to have to wait till next cycle to be sold?

Yeah, I think it's going to wait till the next cycle. We brought occupancy up to -- we're hovering right now at about 83%. We have a number of transactions and deals in progress. The rents are net effective positive, but they're low. And, you know, there's been a huge amount of rent compression out there. And, again, the same situation, T.I. dollars and so forth required. We've been very careful about tenant credit quality and the security elements to the deal, but I don't see us really doing anything out there until we further stabilize the property and move into a more positive rent cycle where we can harvest a little bit more value there.

Okay. Thanks very much.

You're welcome. Take care, John.

The next question is from Jay Habermann of CSFB.

Hey, guys, my question was just asked and answered. Thank you.

You're welcome, Jay.

There are no questions in queue. You may continue.

Well, thank you very much. I appreciate everyone joining us today. And in closing, let me reiterate that the economic recovery we are all looking for has been very slow in coming. But notwithstanding that fact due to our market strength and our financial strength, Mack-Cali is very well positioned to benefit from the recovery when it does occur. As always, we are working hard on all fronts to maintain occupancies, manage our rollover and enhance our northeast focus. We look forward to reporting to all of you again next quarter on our progress. Thank you and have a good day.--- 0