Veris Residential Inc (VRE) 2004 Q1 法說會逐字稿

Good day, everyone and welcome to the Mack-Cali Realty corporation first quarter 2004 conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Good morning and thank you for joining Mack-Cali's first quarter 2004 earnings conference call. With me today are Barry Lefkowitz, Executive Vice President and Chief Financial Officer, and Michael Grossman, Executive Vice President.

On a legal note, I must remind everyone that certain information discussed on this call may constitute forward-looking statement within the meaning of the federal securities law. Although I 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 would like to review some of our results and what we're seeing in our markets. Then review our activities for the quarter. Barry will then follow with a discussion of our financial results, and then Mike will give you an update on the markets and our leasing results.

FFO for the first quarter came in at 87 cents per share, versus 97 cents per share for last year's first quarter. Clearly, the decline reflects the lower rents and occupancies this year, compared to last year. Our net income was 44 cents per share for the quarter, versus 52 cents per share for first quarter 2003.

With regards to the economy, we have seen some positive signs of recovery. Just this morning, there was a fabulous announcement concerning employment, and certainly that has been the pattern over the last several months. There is a degree of optimism that we're seeing and sensing in our discussions with corporate America. We're seeing this reflected in a general increase in activity in many of our northeastern submarkets with Jersey City being particularly strong. In terms of employment our core northeast markets, which make up about 92.5% of our base rent have continued to outperform the national economy. And while the nation's unemployment rate is 5.7% or perhaps slightly adjusted today, here in New Jersey where we have the largest concentration of properties, it is 5.2%, and has continued to maintain itself below the national average over the last 11 months. New Jersey has also added over 50,000 jobs over the last 12 months, primarily knowledge-based employment. West Chester's unemployment rate is is 4.6%, and Connecticut is 4.9%. While suburban Philadelphia is even with the national rate.

On the other hand, we recognize that the recovery must be sustainable over a period of time before it translates into increased demand for office space. Since businesses have to feel the confidence to make long-term decisions about capital spending, and expansion. And therefore, we continue to expect the markets to remain competitive throughout the remainder of this year.

During the first quarter, when we did experience some losses in occupancies, as we had anticipated, and as we had discussed on the last earnings call, this was primarily due to some large expiring leases, including Ford Motor Company, for 96,000 feet and Avaya for 49,000 feet in New Jersey and in Dallas an expiration of MCI of 82,000 square feet. As a result, our occupancy declined from 91.5%, to 91.1% this quarter.

We continue to see a fair amount of activity from smaller users, many trading up to class A space, that flight to quality. And this quarter over 90% of our leases were for spaces under 10,000 square feet. Rents in our core northeast markets declined 9.2% this quarter, compared to last quarter's 4.4% roll down. This was unusually high due to a few large leases with rolling down rents in New Jersey and suburban Philadelphia. An example of those include Deloitte & Touche for over 88,000 square feet in Parsippany with a roughly 12.5% roll down. Allstate in suburban Philadelphia, over 25,000 square feet with an 8% roll down. PNC Bank in suburban Philadelphia, 23,000 square feet with a 19% roll down.

Rents in our non-core southwestern and western markets fell 25.4%, compared to over 30% last quarter. And so our portfolio wide roll down was 10.2% on average. However, our TI and commission expenses were quite low this quarter.

Approximately $2.14 per square foot per year, versus last quarter's $2.59. Since our larger transactions were mostly for less costly renewals, and flex space. And just to give you breakdown of that $2.14, $1.44 was tenant improvement allowance, and 70 cents, the balance, were leasing commissions. At the end of the first quarter our remaining rollovers for 2004, were 5.2% of base rent, or $26.3 million, and our rollover remaining for 2005, and we have made some progress there, is 12% or $60 million.

Now, let me talk about several of the activities this past quarter. In April, we acquired at 317,000 square foot class A office building, a beautiful building in Parsippany, New Jersey. 5 Wood Hollow Road and we bought that building for $34 million, or $107 per square foot. And this added to our already strong presence in the Parsippany Morris County submarket bringing us to over 2.2 million square feet in that very vibrant submarket. We bought the building with a lease from Lucent that runs through the end of September of 2005. The building is half occupied by Pfizer, and we're in discussions presently with Pfizer to potentially expand and extend their occupancy in that building.

Some of the quarter's leasing highlights include, as I mentioned before, the Deloitte & Touche renewal, for 88,000 square feet plus at Mack-Cali Business Campus in that submarket, Parsippany, New Jersey. AFP Imaging Corporation's renewal for almost 48,000 square feet at Cross West Chester Executive Park in Elmsford, New York. A brand new lease with CPG Partners in Roseland for almost 44,000 square feet at our 105 Eisenhower Parkway building, and a renewal of 40,000 feet, a single tenant occupancy building for Greater New York Mutual Life in East Brunswick, New Jersey. And that renewal was done well in advance of a year early.

Since the quarter's end, we also announced Deutsche Bank's lease extension for 90,000 square feet through the end of 2006 at Harborside Financial Center Plaza 1. The balance of Deutsche Bank's lease, 295,000 square feet will expire at the end of this year, and at that time we will be renovating this building. Repositioning it in our Harborside complex.

At Harborside Plaza 5, our new building of 980,000 square feet we signed over 25,000 square feet of leases during the quarter, and about 13,000 square feet since the quarter's end, bringing the occupancy of this building to 64.1% leased today. I must tell you that activity at this property continues to be strong with interest from both small and large users. We've seen a continual positive progression in the number of space showings and the velocity, since the beginning of this quarter. This past quarter, Harborside's amenity base continues to improve all the time. Which is helping to attract tenants to this destination. In addition to the enhanced transportation, with the reopened path to the World Trade Center, as well as new child care services, and the ever increasingly popular Hyatt Hotel that we own together with the Hyatt Corporation, we see new amenities that include Scalini Fedeli, a wonderful restaurant in a number of locations, including Chatham, New Jersey and they expect to open with a similar installation at Harborside in June, right around the corner. So we're pleased at how this property has emerged as the waterfront's premier city within a city a true destination location.

I would like to mention several other governance related issues in the company. We've nominated a new independent director to our board, Allen Bernakal, the former Deputy, Chief Executive Officer of Deloitte & Touche. Allen is a recognized financial expert with years in the public accounting arena. And he will be acting as the chairman of the board's audit committee. Governor Brendan Byrne who has served as a director since the company's IPO back in 1994 will retire from the board when his term expires in May. The Governor just turned 80 years old on April 1st, and we wish him well in the future.

As well today, we announced the resignation of Timothy Jones, Tim Jones, our President. Tim has decided to pursue private investment opportunities. I will assume the title of President and I would like to thank Tim for his valued service to the Mack-Cali team, and our company and shareholders over the past seven years. He's a friend and we wish him well.

Additional management responsibility will be assumed internally. Mike Grossman will expand his realm of responsibility to include all leasing activities and acquisitions within the company. Barry Lefkowitz, Executive Vice President and Chief Financial Officer, and Anthony Krug, Senior Vice President of Finance will expand their sphere of management into the asset and property management areas. And, of course, Roger Thomas, our Vice President and General Council will also expand his realm of responsibility. We have a deep management team at Mack-Cali, that's committed to our strategic plan and to serving our tenants and growing our presence in our core northeast markets. We will, as well, be promoting several vice presidents to higher levels within the company in our senior management -- property management and asset management areas.

I would like to comment on our guidance. We put out in our press release today an amended guidance range of $3.50 to $3.60, which is a reduction from $3.55 to $3.69 reported last quarter. This is principally due to our having taken advantage of the interest rate environment in doing an additional $100 million bond offering in March. Which resulted in approximately a three-cent reduction. There was about a penny attributed to additional stock option exercises last quarter and as well we have approximately a two-cent reduction attributable to a severance package for Tim Jones.

Before I hand the call over to Barry, again, I would like to reiterate that I believe our company and our strategy are on track. We're well poised to capitalize on what we all believe now is is a recovering economy, because our class A properties and our excellent position in these high barrier markets have enriched and enhanced our franchise, and, of course, our balance sheet and the flexibility that it exhibits allows to us leverage and take advantage of opportunities, as we go forward. Now Barry will walk through the financial results for the quarter.

Thanks, Mitchell. Funds from operations available to common shareholders for the first quarter of '04 amounted to $64.9 or 87 cents per diluted share this compares to $69 million or 97 cents a share for the same period last year. Net income available to common shareholders for the first quarters was $26.3 million or 44 cents a share, versus $30 million or 52 cents a share for the same quarter last year. Parking and other income in the quarter included $800,000 in lease termination fees. As compared to same quarter last year, we had $3 million.

Same store net operating income, which excludes the lease termination fees on a GAAP basis decreased by .4%. For the first quarter of '04, as compared to the same period in '03. Same store net operating on a cash basis decreased 1.1% for the first quarter of '04, as compared to the same quarter in '03. Our same store portfolio for the first quarter was 26.7 million square feet which represented about 95% of our portfolio. We finished the quarter with $30 million outstanding borrowing on our $600 million unsecured credit that facility. Today we have around $90 million drawn there. Our unincumbered portfolio at the end of the quarter totaled 233 properties aggregating about 21.1 million square feet of space which represents 78% of the portfolio.

During the quarter, we sold in two separate offerings $200 million of five and an eighth percent 10-year senior unsecured notes. The notes were priced to yield approximate 4.98%. The proceeds of note issuances were used to fund a portion of the amounts needed to retire $300 million of 7% notes which matured March 15th of this year. As well as repay some monies on our credit facility. At the end of the quarter Mack-Cali's total undepreciated book assets totaled $4.3 billion and our debt-to-unappreciated assets was 36.6%. And we had total debt-to-market cap of 31.7%.

The company had interest coverage of 3.2 times and a fix charged for 2.6 times for the first quarter. We ended the quarter with total debt after proximately $1.6 billion with a weighted average interest rate of 6.71%.

Please note that under SEC regulation G concerning non-GAAP financial measures such as FFO. We are required to provide an explanation as to why we believe such financial measures are relevant and reconcile them to net income. Available on our Web site at www.mack-cali.com, our are supplemental package and earnings release which includes the information required by reg G, as well as our 10-Q. Now Mike will cover all the leasing activity. Mike?

Thanks, Barry. At March 31st, our consolidated portfolio was 91.1% leased compared to 91.5% at December 31, 2003. During the quarter, we signed 151 transactions totaling 727,337 square feet, and these transactions produced retention of about 54.7% of outgoing space. First, rental rates payable subsequent to any concession period decreased an average of 10.2%, over the expiring rental rate, including all escalations. TIs, plus leasing commissions averaged $2.14 per year of lease with an average term of 4.7 years. Further details on leasing activity can be found in the supplemental package on our Web site. Our market information is provided by Cushman & Wakefield and unless otherwise noted we will discuss overall class A vacancy rates and direct class A average asking rents.

Starting with our northern suburban region, both West Chester and Fairfield counties lost some of the leasing momentum that built towards the end of 2003. Fewer large transactions and reduced activity resulted in negative absorption for the first quarter 2004 in both counties. Availability in West Chester increased from 16.8% in the fourth quarter to 17.2% in the first quarter, however, sublease space on the market decreased from 839,000 to 780,000 square feet. Now approximately 23% of total available space. Despite the lower level of activity, asking rents rose slightly during the quarter to $29.11. Mack-Cali's West Chester properties containing 2.1 million square feet of office, 2.3 million square feet of office flex and 387,000 square feet of industrial space ended the quarter 95.1% leased. This compares with 94.9% in fourth quarter 2003. Fairfield County availability increased slightly to 18% in the first quarter, however, there was a reduction in amount of subleased which is down to 34% of total availability to 31.5%. Class A asking rents declined slightly to $28.95 per square foot. Mack-Cali's Fairfield properties comprise 579,000 square feet of office space, and 273,000 square feet of office flex space and in the first quarter 90.6% leased down from 91.7% at the end of last year. Noteworthy transactions in West Chester and Fairfield for the first quarter include Diageo North America consolidation into 277,000 square feet in a building to be constructed in Norwalk, Connecticut. FactSet Research Systems which renewed and expanded into 129,000 square feet, also in Norwalk and Kraft Foods which leased 78,000 square feet in Tarrytown, New York. Other than the build-to-suit for Diageo, there's no new construction reported in either county.

In northern New Jersey, class A overall vacancy decreased from 18.2% in the fourth quarter to 18% in the first quarter, and asking rents averaged about $29.16. Sublet space comprises 32% of overall class A availability. Focusing on some of the major northern New Jersey submarkets, Bergen County class A vacancy is increased to 22% to 22.7% in the first quarter, but Morris County decreased from 21.3%, to 19.9%, and Hudson County dropped from 15.7% to 14.2%. Mack-Cali's northern New Jersey properties total $11 million square feet, and are 92% leased.

In the central New Jersey market, availability increased from 25.8%, to 26.1%. In the first quarter, asking rents were $28.15. Sublet space comprises 42% of total availability there. Mack-Cali central New Jersey presence is 2.8 million square feet which is 91.5% leased. There were no new construction starts in northern New Jersey and central New Jersey during the first quarter and there's less than 3% vacancy in the 2.8 million square feet scheduled for 2004 delivery. Noteworthy transactions in northern and central New Jersey in the first quarter include BASF, which leased 148,500 square feet if Floran Park and another 103,000 square feet in Rockaway and City Street which leased 147,000 square feet in the Somerset Upper 287 Carter submarket.

Suburban Philadelphia class A vacancy rate showed marked improvement this quarter, dropping from 27.5% at the end of '03 to 25% as of March 31st. Although vacancy for all classes fell only slightly from 26.3%, to 25.9. Asking rents remained steady at $27.11 and sublet space makes up about 23% of the total availability. Our office holdings in this market include approximately 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 southern New Jersey. These properties were 89.4% leased at the end of the first quarter.

In Washington, D.C., class A vacancy benefited from a flight to quality trend and dropped from 10%, to 9.5% this quarter, but asking rental rates fell to $44.78. The market as a whole saw a negative absorption for the first time in five years amid sluggish leasing activity and delivery of 256,000 square feet of fully vacant speculative construction space. Mack-Cali's 328,000 square feet in Washington are 99.3% leased.

In our major markets outside the northeast, Dallas non-CBD vacancy fell from 24.1% to 21.9% with rent steady at $21.50. Denver suburban vacancy rate was virtually unchanged at 22%, and asking rents in Denver averaged about $18.29. Lastly, San Francisco's vacancy rate was steady at 22.7% and represents average $29.52. The leasing activity in the first quarter reflected the lack of job creation in the national economy, and the resulting hesitantly is by business to commit to additional office space. This was despite the strong economic growth and corporate profit information now circulating. We remain optimistic that continued economic expansion will result in increase in job growth and demand for space this year. Mitch?

Thank you, Mike. I guess the take away from that is that clearly the markets are still challenging. There continues to be pressure on rents. We do feel that concession packages have fairly well bottomed, but nonetheless, we still have challenges ahead, but we are seeing more optimism on the part of corporate decision makers and more robust job growth and so we think that will translate into more positive results as we go forward.

To give you a sense of the cash components that we've been spending in connection with tenant improvements and leasing, I talked last quarter about projections for the year. We spent in the quarter $16.5 million of which about $12 million or $12.2 million was tenant improvement, allowances and work for first and second generation space. We spent $3.4 million on leasing commissions and we do project that throughout the year, we will spend somewhere around $78 to $80 million of which we expect at the end of the year will bring our occupancy to arrange 93%. Based on having spent that money, our CAD payout ratio this past quarter was about 96.4% and our FFO payout ratio was about 72.2%. We do expect that this juncture to finish the year at roughly a neutral or cash flow slightly positive to neutral basis at the end of the year.

And so with that, we are now happy to entertain you questions. So, I'll open the floor to questions. Operator?

Thank you, gentlemen. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please make sure to pick up your hand set to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star one, on your touch-tone telephone to ask a question. If you find that your question has been answered, you may remove yourself by pressing the pound key and we'll pause for just a moment o give everyone an opportunity to signal for questions. And we'll go first to John Litt of Smith Barney.

Good morning. Mitch, I'm not sure if anyone else had a problem but our lines dropped and the Web cast dropped earlier so we missed quite a bit of what you had to say but I just wanted to circle back on the guidance, and, it looks like you are attributing part of that to the bond offering -- or to the note offering. How has the guidance changed with regard to your occupancy assumption because it's 93% as you just mentioned seems a little bit higher than what I think you had mentioned in prior quarters?

It really hasn't changed at all. You know, maybe a couple of basis points on the occupancy but generally, the -- clearly the guidance adjustment was attributable to the three categories that I articulated.

In terms of, you know, the use of proceeds from the debt offerings, paying down your line, what's your expectation in terms of putting that money back to use in terms of the timing, the volume of either acquisitions or development activity?

Well, I can tell you right now, we have a couple of situations in the pipeline, hopefully we'll be able to make some use of the proceeds. We are drawn on our line today, about $90 million. And, you know, we're an L plus 70 borrower. Obviously the bond offering we had anticipated carrying cash on our lines, so the spread between the -- what was still a very attractive bond offering in the 5% range, versus the L plus 70 is where we come up with the three-cent reduction in our guidance. But the answer is that we haven't been formulaic because with regard to acquisitions, as you know, the markets are still very price sensitive, and so we're -- we continue and want to create value by more strategic and more entrepreneurial and value-added type activity. And I'm pretty comfortable saying that there are a few of those situations in the pipeline right now.

In terms of the -- correct me if I'm wrong but I think had you taken a mezzanine position in an asset with the expectations of maybe taking the fee simple ownership of that. Can you give us an update on that?

Yeah, I would expect we're right now about 74% occupancy in that complex. I think we have clearly enough in the pipeline, basically to bring that to full stabilization this year. That would be my expectation that we'll convert our position to equity certainly before the end of the year or maybe a lot sooner than that. We're working through some mechanics on that, or actually the existing ownership is working through the mechanics. But in the meantime, we -- you know, our mezzanine is performing fully, and our capital expenditures are pretty much on target here and there spending a few pennies more on TI, but really doing the extremely well with the credit quality of the tenants and we're getting the leasing fees and the management fees and also construction service fees.

And now is the expectation that the conversion of that from an interest to the NOI, is that expected to be dilutive event, if you did go ahead and pull the trigger?

No, we'll convert to 62.5% of the equity. You know we have a coupon of 11% on the equity, but I would expect on a stabilized -- so the answer is on a stabilized basis, I would expect the project to return between 9 and 10% on an NOI basis.

Thank you.

We'll proceed to Greg Whyte of Morgan Stanley.

Good morning, guys. We experienced the same dropoff and I sense from the [ INAUDIBLE ] gave some -- sort of a couple of bullet points as to why there was a revision to the guidance?

Would you like me to restate that?

Yes, if that did, in fact, communicate, would you mind repeating those.

Not at all. We had last quarter indicated guidance in the range of $3.55 to $3.69.

Right.

Today we revised that to $3.50 to $3.60. The adjustment in that are basically attributable to three categories. Three cents is attributable to the $100 million bond offering that we did in March.

Mm-hmm.

A penny is attributable to the exercise of more stock options than we had modeled in last quarter. Obviously a reflection of the stock price, and finally, approximately 2 cents is a reduction reflective of the severance agreement that we provided for Tim Jones on his resignation today.

Okay. That's helpful. The other question I had was the TI leasing commission $80 million that you just mentioned a few minutes before the end, was that for the entire year or was that for the remaining three quarters?

For the entire year.

Okay. And then I just wanted to know, you seem to sort of reigned back in a little bit on the disposition of non-core assets. I just wanted to get your thoughts on that.

Well, you know, let me repeat the strategy. In Denver, you know, we are bringing our occupancy up dramatically within that portfolio. You know, to the mid 80% range and so our leasing activity has been extraordinary in that marketplace. Obviously, the economics are tough, but we're filling the buildings with very good quality, high grade credits in most instances, and we're paying the bills and we're breaking even basically after all operating expenses and taxes and the amortization of TI and leasing commissions. That, I think is generally the trend, anywhere between zero and maybe $1 or $2 positive per square foot on an annualized basis, so that -- we are stabilizing that portfolio, and as there's a sense that the world is returning to normal, and the Denver marketplace being a very high quality of life technology-oriented marketplace, we'll regain its traction and then we'll market that portfolio for sale, but we, -- right now it is not for sale.

In Texas, we only really have three assets left, two in Dallas, one which is the 82,000 square foot MCI building in Richardson, Texas, that MCI's lease just expired and the other one is Tri-West in Dallas and then Century in San Antonio. And if you -- if you extract the MCI building, the 82,500 square feet, our occupancy in Texas is over 75% today. So there too, we're making progress on filling our remaining inventory, and clearly that's all for sale. Tri-West I would expect once we get a little bit closer to stabilization, we'll nose around the market, and see what we can do in terms of selling that building and in San Antonio, we've had a couple of what I would call semi soft offers. They were hard and then, you know, the buyer had an appendectomy and all that sort of stuff and so, you know, they have been delayed but clearly those buildings are on the market and I would expect hopefully over the next 12 to 18 months that we will have sold them.

And then in San Francisco, which is our California presence,we're doing pretty well. We've got some leasing challenges ahead of us, but we own good quality product, and, you know, at Folsom Street and [ INAUDIBLE ] on Market Street and interest in 301 and Convention Plaza, rather, Mission and Third and our interest with High Ridge in Daly City, Daly City is really virtually full, exceptionally well-performing asset and we're looking at our options with respect to what we should do with Daly City going forward. As you know, it's a mixed use project, it has the theaters and it has some retail element to it. But generally speaking San Francisco is a hold for us, and that's what I stated consistently for about three and a half years since having them brought in on the strategic plan. So when you look at it, Greg, we pretty much sold everything with an exception of a smattering of assets that we indicated we would sell.

Just one final question and then I will leave it there. The -- some of the comments we're hearing about cap rates are that they are at the margin is there has been a slight tick up recently and I'm just curious to know what your experience of that is in your major markets.

Yeah, I'm -- you know, I apologize for this Greg. I'm going to ask you to repeat the question. I must apologize to the entire listening audience. I was just brought a note by my IT department that 26 lines were dropped by our conferencing facility. And that is outrageous, but I will, and the management team will be available to anybody at any time today or in the next several days to discuss any matters that you have in concern. Greg, could you just repeat your question?

Yes, I'm just curious to know whether you are seeing any change in direction of cap rates from an acquisition or disposition standpoint. We've heard some comments from other management teams about a slight uptick recently and I'm wondering if you have seen the same thing.

The answer to that is no. I know that there's been a theory expressed and espoused that there would be an immediate correlation to the uptick in interest rates. I do expect that based on the environment, we're seeing right now, or we're in relative to rising interest rates, the leveraged owner is going to have some issues going forward with recasting loans, and dealing with the equity component and the TI, and the cost of releasing the facilities, but the reality is we haven't seen much of a change at this point. Our acquisition activity has been limited to where we have an edge which is generally through a long-term relationship with the seller. And these are not markets transactions, they are not open to the general buying public if you will.

All right, thanks a lot guys.

You're welcome.

And we'll now move on to Karen [ INAUDIBLE ] with Lehman Brothers.

Hi, good morning. First, actually I just wanted to ask if you have anything important to update on Xanadu?

Xanadu, you know, again is moving forward. We expect, at this juncture, we're optimistic about breaking ground on that project in the late summer, possibly September. The litigation is still pending with Hearts and the Stern family but the court had a hearing on it in the last week of April, and the appellate division, and they generally, essentially at least in the discussion by the justices, although they haven't opined officially at this point, but there was one -- only one issue and it related to documents, the submission of documents by the sports authority to make them public. Basically they seemed to indicate all other issues are they appear to be in a position of concurring with the lower courts, which would hopefully close out and finalize the litigation and it would end the appeal. And so that problem would be removed. And now it's just a matter of working through the remaining permits. There was a meeting yesterday that I attended, along with Mills with the highest levels of New Jersey state government, including the commissioner of DEP, commissioner of Department of Community affairs, the chairman and CEO of the sports authority, of the chairman of the port authority to work closely with us to finalize those permits and that approval process so that this project can begin. And so essentially the engineering work is done, and, of course, the first phase of this project will be undertaken by Mills in connection with the infrastructure improvements and the family entertainment sporting element and high-end fashion retailing venue. So that's about what I can tell you on Xanadu.

Okay. Also I think you mentioned early on in the call that you made some lease progress on the '05 expirations, but on percentage basis, it seemed like you still have a long way to go. I'm wondering if you have any comments on how that's going at this point.

Well, we -- I indicated that we have 5.2% of the portfolio remaining as 2004 rollover, $26.3 million, we think that's certainly manageable. We think we've done a real good job in bringing that down. We brought it down from 7%, just last quarter, and as far as 2005 rollover, we're down to about 12%, so we're in a similar position with 2005, at this moment in time as we were with 2004 a year ago in what we believe is an improving economy. So, you know, we think that these are manageable expirations.

All right. Last question I have is just if you have any update on what's happening with the AT&T Wireless Cingular merger.

No. The -- they are still assessing their options, as I pointed out last quarter for a company that's going to be the largest wireless provider in this region, when they combine with Cingular, they -- other than our facilities they only had two other facilities in New Jersey, much smaller. One in Middlesex County, and one in a farflung location in Somerset. So, you know, again, I can't answer it accurately, other than to say that they are continuing to assess their options, but we do bring the infrastructure in terms of the Paramus location be a headquarters type location in one building and a call center, a 24-hour call center in another of our Paramus buildings. So we're watching that closely.

Okay. Great. Thanks.

You're welcome.

And we will now proceed to Chris Haley of Wachovia Securities.

Hey, it's Greg Carnie with Chris. I wanted to follow up real quickly on the guidance. You said 3 cents related to the bond offering. Was there a reduction in guidance in February related to the bond offering as well?

Yeah, there was a prior -- two prior issuances. Barry why don't you run through those numbers.

Sure. We -- you know, if you look at what we did -- you know if we look at what we've done in the first quarter of this year, back towards the end of January we issued $100 million of notes. Those are the notes that you are talking about that relate -- that we discussed in our prior guidance. Then in May -- I'm sorry, in March of this year, we issued a second $100 million of notes. Those notes were not -- that issuance was not in our guidance.

Okay.

And that's what is reflecting the three cents.

All right. Thanks. Thanks for that and then circling back to TIs, the capex that you outlined for the year, is that assuming -- you know what sort of leasing relevance is that assuming. Is that a sequential increase in square feet per year or higher leasing levels looking at the '04 expirations, you guys would easily [ INAUDIBLE ] '05 and still come in overall flat.

I will give you a sense of where I think based on our modeling and bringing us through the year up to around 93ish percent, plus or minus. In the second quarter we're probably going to -- based on the current expectation and the velocity and you remember this includes base building, capex expenditures, which for the year is projected to be about $8 million.

Okay.

We'll probably spend in the second quarter about $2 million on early 2005 renewals and the same amount for the third quarter in the fourth quarter about $7 million, as we get closer to 2005, for those 2005 renewals. The first and second generation TI in the second quarter, we expect to spend over $17 million. The third quarter about $14 million and the fourth quarter between $11 and $12 million. And the commissions for first and second generation, we expect will approach $5 million in the second quarter, about $3.5 and then a little more than $4 in the fourth quarter. So over the next three quarters we expect to spend about $29 million, about $22 million, almost $23 and about $27 million on base building capex and leasing commissions and TI and that would put us, based in the marketplace we see today in terms of concession packages and commissions, at about 93% occupancy at the end of the year.

And what sort of assumption are you guys making for early '05 leaseup? What percent is that? Of that '04 leasings?

What's our --

Hello?

I'm sorry. We're having a lot of trouble with this conference. We're projecting that that's going to bring us to around 10% rollover at the end of the year for '05.

Okay. Good. And then just finally was there any disposition guidance in the '04 number.

No, there was none.

Thanks. That's all for me.

You're welcome.

We'll now proceed to David Loeb of FBR.

Mitch, I wonder if you could give a little color of the Deutsche Bank moveout of Harborside one and you plan to position that site with relationship to Harborside 5?

Yes, the Deutsche Bank has a fairly important infrastructure in that building, and, you know, so I'm not clear at this point, nor are they, frankly, as to whether that's going to remain a long-term installation. We all recognize the issues of the federal white paper in terms of business continuity that many of these banks, in particular, are dealing with in the New York region. So I'm not sure whether that 90,000 is a long-term keeper or not, beyond the end of -- into 2007 and beyond. But as far as the balance is concerned, we will do HVAC upgrades in the building. We will do a new lobby installation in the building. We are in discussion right now with an existing Harborside tenant where in addition to a long-term renewal discussion on what they have now and they are significant, they are looking at the balance of Plaza 1, as incremental additional space. So it is early in the process. We just recently, as you see, finalized the Deutsche Bank situation. So I think that we will be on an optimistic basis being repositioning this particular asset in an improving market where if this recovery we're seeing is sustainable it will benefit our releasing efforts in connection with Plaza 1, as well as hopefully finishing up in Plaza 5.

What kind of asking rents do you see for that space in Plaza 1 and what are you asking today for Plaza 5?

The -- the asking -- the rents -- forget the asking rents. Let's talk take rents. The deals are being done today in the $28 to $30 range going in and most of the deals are -- many of the deals are ten-year deals or longer, and we're seeing anywhere from a point and a half to 2% per year incremental increases in those rents. The TI packages are somewhere around $30 to $40 a foot again depending on lease term, lease size, and credit quality, et cetera. And basically the operating expenses are in the range of $8.50 a foot.

Now Plaza 1 has some other issues down the road relative to the tax abatement coming off, so taxes on that building will probably be -- on that portion will be probably around $5 a square foot as opposed to $3 a foot in the remaining part of Harborside. I expect that rents won't be too dissimilar, however, the gross rents in Plaza 1.

So is it a different kind of tenant or is it pretty similar tenant profile?

No, I mean, it's -- it can be the same class A office user. The building is literally the entrance to -- it's a separate entrance to that building, or it can be entered through the arcade of Harborside, and it is literally at the mouth of the Exchange Place path. It's just a few short steps away. The same thing with regard to its proximity to the entrance of the arcade at the Hyatt Regency. So it's an exceptional location, and it's -- it is every bit as first class as the rest of Harborside.

Okay. That helps. Thanks.

You're welcome.

And Carey Callaghan of Goldman Sachs has our next question.

Hi, this is Ally Goodwin here with Carey. I just had a couple of follow-up questions. First on Xanadu. I know you said that you were planning to break ground there in September but you put another $2 million investments this quarter. I wonder what that was used for and sort of what you see as your investments going forward and how that will work play into all when you break ground.

Okay. We -- in our disclosure, and in all of these conference calls indicated that the deal that we have structured with Mills provides that this phase one of the development, which, again, just for definition purposes would include approximately 2.2 million square feet of high-end fashion retailing, very Disneyesque theme oriented, educational and sporting venues including the Alpine Ski Dome, The Wave, Fat City, kids Wannado City, right now we are focused on, and in particular Mills on structuring a deal with a major cooking installation, where an Emeril Lagasse type facility would be part of the theme, part of the theme of this first phase would include it being completely wired with Wi-Fi and also there are discussions with broadcasting networks right now to actually broadcast from that location, as well as media companies. That gives you a sense of what this phase one is. And it's also inclusive of about $65 million of infrastructure improvements, roadway improvements, and the like. In the immediate adjacency to the sports complex.

That phase one is anticipated to cost somewhere around $750 million, maybe $800 million. And we, at Mack-Cali will own 20% of that. And for our 20%, we have a capital limitation, a capital contribution limitation of $32.5 million. In connection with that capital, we have absolutely no guarantees. No guarantees of completion. No recourse whatsoever. So our -- our financial exposure, if you will, is limited $32.5 million, against an $800 call it, million, phase one of this project. And we'll be entitled to a 9% [ INAUDIBLE ] in line with Mills. And Mills, of course works with [ INAUDIBLE ] in terms of their equity financing. And what we have been spending money on to date is, of course that Mills had their investment in the empire tract and that's kind of passive at this point, sitting on the side. But we're spending millions and millions of dollars on engineering costs, legal fees, permit filing fees, and the like and marketing of the project, et cetera. There are a number of letters of intent in progress, in connection with a lot of these users, Mills is working closely with a variety of cinema operators. There's going to be a 31-screen stadium seating cinema at this magnificent complex. So most of the money that's going out the door is to fund these soft costs.

Okay. Great. And then just going back to the three-cent dilution that you mentioned before, I'm just trying to do the math here and it looks like you paid down the line and then we're really just wondering specifically how you funded the $34 million acquisition in April, and if that does actually provide some accretion if it does is that included in the three-cent dilution.

Yes, we actually drew on the line. And then we drew down the line.

You are getting a little accretion there then if you are using the line to finance the acquisition when you --

Yeah, but we had had talked about this particular acquisition last quarter. It was in the pipeline.

Okay. And then just one final question. Just what's going on with the equity income there? We just noticed that it dropped a lot. Your equity income in joint ventures.

Yeah, basically that was as a result, if you recall, last year we had Plaza 10. Plaza 10 was a joint venture. There was significant income that came from that. Plaza 10 was sold at the end of September of the past year. That's the differential.

Okay. Great. Thanks a lot.

And David Shulman of Lehman Brothers has our next question.

Yeah, hi, everybody. First a question for Barry. On Harborside 1, are you going to take that building out of service, and start capitalizing costs against that rather than expensing it starting this year?

Well, you know, we're still firming up our view as to what we're going to do there. Obviously it will be driven by what happens. You heard Mitchell talk of some discussion about potential leasing and, you know, we're still working on that. So that will be dictated by how we move forward there.

But that is certainly a possibility if you don't have an active tenant.

It is certainly a possibility that we -- that may happen.

Okay. Now question for Mitchell. You know we have discussed this offline before, Mitch, but given the governor's new tax proposals on the so-called millionaires of New Jersey have you gotten any brush back from tenants either existing tenants or prospective tenants coming into the the state as a result of these proposals.

David, as you say, you and I have discussed this offline but not that particular element. The answer is no. The answer is is that I think at this juncture, it's more political issue than it is a reality, and the perception is that, you know, it may not be passed, as a result of the republican opposition to the program, and so I think we need to wait and see, and, of course, there are various initiatives that are challenging this tax right now, various think tanks and other proponents. I have not heard from any tenant at this point, anything specifically related to this proposed tax.

Okay. Thank you.

You're welcome.

We'll now proceed to Mike Marron of Bear Stearns.

Good afternoon. Mitch, are there any submarkets in your core northeast where you feel you are under represented?

Yeah. I mean, if you mean like Washington. We would like to expand our presence there over time. So we intend to do that and since it will continue to focus on, again, opportunistic transactions there, we're certainly not going to compete with the capital that is chasing the asset base that might be traded within Washington because the return expectations are inordinately low. But we will -- you know, we've done, I think a good job of expanding our base in Philadelphia, and suburban markets and we're looking at some further expansion potential in that market. So I think we continue to in fill in the stronger submarkets within the region. Right now, you know, we're looking at further, perhaps, you know, nice-sized scale increases in West Chester. We're a little bit afraid of robust expansion in Connecticut right now. The market, particularly in Stanford has fallen off dramatically, and it was much more interdependent, as we see it on technology, and financial services, of course, it's always been the financial service market but it's fallen off pretty dramatically. And so we're watching very carefully with regard to any expansion. But I would say the only place we're under represented, where we would like to be more represented would be the Washington area.

Okay. If you had to guess how long it would take for market vacancy rates to get from roughly 20% today or 12 to 13%, how long do you think that would take?

You know, I think candidly there is going to be a slow climb. I mean we do see optimism, that's definitely a factor today. But we see caution as well. And I don't particularly think that this particular marketplace is going to be terribly affected by outsourcing or off shoring. We're not that kind of demographic. We have a much stronger knowledge-based economy here, but I think that the corporate America, or the global environment is is going to be more careful this time about adding employment, and I think we're seeing that in financial services. We're seeing a lot more activity in the capital markets, but we're seeing modest activity in the expansion of the job base within the various investment banks. And I think that general tone means that the improvement that we'll see and whether it's 28% to 18% or whatever the numbers, but the general improvements in the market are going to take longer this time around in this particular cycle. My sense is that '04 will remain and it's no different than I stated two earnings calls ago or maybe three, '04 is going to be a fairly difficult year, a very competitive year. The good news is that the quality asset base that we hold is where we're seeing this flight to quality. And '05, will be a modestly improving market. So I think it's probably an 18-month cycle and we'll be much closer to normal, but I think it will take that long.

Just one follow-up on financial services. Any change in the competitive landscape in Harborside? I know there are a couple of large towers that are still sort of out there. I know Goldman Sachs, there's been a lot of talk about that property.

Well, Goldman is physically moving into their building, so I don't know -- I can't speak for them, but that's certainly a very positive indicator for that submarket. And as far as any other large blocks of space, there are really only sublet blocks and I'm led to understand that Mellon Bank is at the cusp of completing their deal for the majority of the UBS Paine Webber space up in Newport and I think that's really the last remaining block of subleased space. Obviously there's some sublease space available in the Schwab building but they -- from at least what we see, they haven't been particularly active.

Okay. Thank you.

You're welcome.

And Lou Taylor of Deutsche Bank has our final question.

Good morning, it's actually Chris Capalongo. Just two quick questions. First you mentioned earlier that you had a significant uptick in demand from smaller tenants. Does this mean you will start prebuilding vacancy, you know, to attract some of that demand.

We did that. We started that program about seven months ago. We prebuilt basically two half floors first that were spaces that were remaining portions of floors where tenants had expansion options, and what we did was we prebuilt it and we were able to accomplish the full leaseup of that space with leases that gave -- that had three to five year initial terms and flexibility on the part of the landlord, us to be able to take that space back if we needed to, to accommodate the expansion rights of other tenants. We then moved into another floor and prebuilt the remainder of another floor. And so in total, I guess we've done about 40,000 feet of what I will call prebuilt but we got there in advance of the market shift and we've seen a lot of this smaller activity. The good news is we have a lot of high-quality incubating type businesses that will hopefully expand into larger businesses and we also have the flexibility to address our larger tenant needs in the future by recapturing that space if we need to, and enough presence down at Harborside given our multi million square foot portfolio at harborside where we can take these smaller tenants, if we need to and move them around and retain them on a long-term basis.

Thank you. Actually that's it.

Okay. You're welcome.

And there are no further questions at this time, gentlemen.

Okay. Thank you, operator. First, again I would like to apologize for the cutoff on the part of the conference service. Our replay of this call is available on our Web site beginning early this afternoon. So certainly you can access that, and as I said before, I, along with the rest of the management team are at your service if you would like to contact us and specifically review anything that you perhaps missed. Again, I would like to thank all of you for joining us on this call today. We certainly look forward to updating you next quarter. Good day.

That does conclude today's teleconference. Thank you for your participation. For those of you who joined us today and would like to listen to the replay of the conference call, please dial toll-free 1- 888-203-1112. Again that number is 1-888-203-1112. And the information will be available starting today after 1 p.m. Central. Thank you very much. Have a nice day. You may now disconnect.