Veris Residential Inc (VRE) 2004 Q2 法說會逐字稿

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

Good morning and thank you for joining Mack-Cali's second 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 statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved.

We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the Company.

First I'd like to review some of our results and what we're seeing in our market. Then review our activities for the quarter. Barry will then follow with a discussion of our financial results and Mike will give you an update on the markets and our leasing results.

FFO for the second quarter came in at 90 cents per share versus 98 cents per share for last year's second quarter. Obviously a reflection of market conditions and rent rates within the markets. We did however have a positive quarter with regards to both leasing and acquisitions. Our portfolio ended the quarter at 92.2 percent leased, up considerably from last quarters 91.1 percent. This increase was due to both net absorption during the quarter of almost 184,000 square feet out of a total of over 1.5 million square feet of transactions portfolio-wide, as well as from our acquisition of almost 1.5 million square feet of fully leased office properties.

In most of our markets we are seeing some encouraging signs of economic recovery and increased optimism within the business community. Demand continues to pick up across the board but especially in our Northeast market with increased space showings and inquiries. Activity remains strong among smaller tenants in particular. But we're also beginning to see a few larger space requirements of over 100,000 square feet.

This is primarily in Morris and Somerset counties in New Jersey as well as along the Waterfront in Jersey City.

In suburban Philadelphia, activity has picked up especially in our high-quality assets where we are seeing a flight to quality. Pricing, however, has still not caught up with demand and is relatively soft.

The markets in general remain very competitive and we believe it will still take a while for the recovery to translate into sustained, increased demand for office space and as a result we expect pressures on rents and TI packages to continue well into next year.

Before I review our activities for the quarter, I do want to announce 2 very recent developments. Continuing our program of recycling capital out of our noncore markets, we are currently negotiating -- in the final stage of the negotiation of a contract to sell our remaining 3 wholly-owned assets in Texas.

The sale would involve 2 buildings in Dallas and 1 in San Antonio and will total approximately $42.35 million.

And just this morning we entered into a contract to sell Kemble Plaza 1 in Morris Township, New Jersey for $77 million. Kemble Plaza 1 is a 387,000 square foot Class A office property that we developed for AT&T in 1981. As part of the large transaction we announced with AT&T just this past June, we had extended AT&T's lease at properties through August of 2014. And by extending this lease we were able to make this property very sellable. We decided to sell the property to take advantage of the favorable investment sales market and to redeploy the significant capital from this sale into new investment opportunities.

The sale equates to approximately $200 a square foot for the asset at a going in yield of approximately 7.5 percent.

And now I'd like to briefly review some of our activities for the quarter. The most significant accomplishment of the quarter was our transaction with AT&T which I alluded to a moment ago. This involved 13 office buildings totaling 2.5 million square feet of office space. The transaction included the acquisition of over 1.1 million square feet of Class A office properties in New Jersey.

That included 30 Knightsbridge Road in Piscataway a four building office complex totaling over 670,000 square feet and Kemble Plaza 2, the sister building to Kemble Plaza 1 in Morris Township, New Jersey, which is a 475,000 square foot property. You may recall that we sold Kemble Plaza 2 to AT&T in the year 2000 for almost $83 million. Also included was AT&T's lease extension as I referred to a moment ago at Kemble Plaza 1 a one-year lease at Kemble Plaza 2 and a leaseback of nearly half the complex at 30 Knightsbridge for almost 11 years.

We paid $12.9 million in cash to AT&T and, including certain lease obligations in closing costs, the total cost of that transaction was approximately $92 million. We believe this transaction was an excellent opportunity for Mack-Cali for extremely favorable pricing and this was a direct deal with AT&T through their global real estate division. It allowed us to add over 1.1 million square feet of Class A office properties to our Core Northeast portfolio. It also allowed us to enhance our relationship with a valuable long-term tenant. And that was further evidenced by the fact that, concurrent and simultaneously with the execution of the deal, we expended a lease for almost 40,000 feet with AT&T at 795 Folsom Street in San Francisco which was a building that we acquired from AT&T about five years ago.

The deal, however, does add to our leasing challenges since we will need to lease up these blocks of space over the next couple of years. And to assist us in these efforts, we've already supplemented our internal leasing staff and, frankly, we've also provided exclusive agencies to a number of the preeminent brokerage firms within the region to help us with this effort.

The AT&T Kemble Plaza 1 lease was the largest lease of the quarter and it did impact our leasing statistics by helping us keep our costs low and limiting our rent roll downs. Our TI and commission expenses for the quarter were approximately $2.03 per square foot per year versus last quarter's $2.14 cents. Without the AT&T lease the figure would have been about $3 per square foot per year which reflects the continuing competitive environment that we are all in for tenants.

Our portfolio-wide roll down was 7.9 percent compared to last quarter's 10.2 percent. Without the AT&T lease it would have been about 10.4 percent. Important part and point is that in our core Northeast market the roll down was just 3.3 percent this quarter compared to last quarter's 9.2 percent roll down.

While rents in our noncore Southwest and Western markets -- much of which we hope to sell by the conclusion of the Texas contract -- sell 26.1 percent compared to 25.4 percent last quarter. And so the Western and Southwestern markets continue to remain under significant rental pressure.

At the end of the second quarter, our remaining rollovers for 2004 were just 3.2 percent of base rent for just under $17 million. Most of the space will be rolling in the fourth quarter with AT&T's 400,000 square foot plus or minus lease at our new Piscataway complex, property expiring.

Next year about 13.3 percent of our base rent or about $69 (ph$) million will roll over. The sizable leases that will be expiring include the AT&T lease at Kemble Plaza 2, 475,000 feet, the Lucent lease in our newly acquired building at 5 Woodhollow and Deutsche Bank down at Plaza 1 in Harborside. So, clearly, there are leasing challenges ahead.

During the quarter, Mack-Cali continued to outperform the markets in occupancies with lease rates higher than the market averages in all of our Northeastern markets. The range was anywhere from 40 to 870 basis points. Other activities in the second quarter included our acquisition of the 317,000 square foot fully leased Class A office building, 5 Woodhollow Road in Parsippany, for just $34 million. I referred to that a moment ago in connection with the Lucent lease.

Our activity, frankly, has been quite strong enough Parsippany submarket. And we are in discussions with the subtenant occupying 1/2 of that 5 Woodhollow building for a lease extension as we speak today.

Added to the AT&T deal and including the 5 Woodhollow Road acquisition we acquired a total of nearly 1.5 million square feet of office properties during the quarter -- all in New Jersey and all at very opportunistic pricing levels.

During the second quarter, we also purchased a landsite at an excellent location in Princeton, New Jersey, adjacent to Carnegie Center. This 60 acre site was purchased for $20.5 million and will allow us to build approximately 770,000 square feet of commercial space in four buildings, office buildings and a hotel. The site is fully accrued, fully entitled and ready to put a shovel in the ground. And we are currently albeit preliminary in discussions with a major tenant for a build to suit at that site.

With regards to our Meadowland Xanadu development project, this mixed use project which of course we are developing in partnership with The Mills Corp. announced a groundbreaking on September 29. Just several months away, where we will be formally breaking ground on the construction of the ERC -- the Entertainment Retail Complex component of that project.

Leasing highlights for the quarter included Deutsche Bank's lease extension for 90,000 square feet at Harborside Financial Center in Jersey City. Also at Harborside, Jefferies & Co. signed a 48,000 square foot renewal and expansion. In Bergen County, United Retail renewed their lease for 65,000 square feet at Mack-Cali Center One in Rochelle Park, New Jersey. In Colorado, State Farm exercised a new 48,000 square foot lease at Pyramid Court in Englewood, Colorado. In Westchester, Coca-Cola leased 44,000 square feet at 555 Paxter Road in Elmsburgh which fills most of the vacancy left at the building by Fuji's relocation.

At Harborside Classified, our new tower down at Harborside, we signed about 30,000 square feet of leases during the quarter, bringing the building to almost 66 percent leased and just on Monday, came to an agreement and a handshake with a major tenant to take a full floor for a 10-year lease term about 36,000 square feet on a fast track with a lease execution expected by mid-September.

We're also very pleased to have been honored for our real estate expertise during the quarter with three industry awards. Mack-Cali received 2 Building of the Year Awards from New Jersey Foma, for excellence in property management for Mack-Cali Commerce Center, in Totaway (ph) New Jersey and 103 Carnegie Center in Princeton, New Jersey and also received New Jersey's (indiscernible) Impact Award recognizing our Company's influence in the industry.

Before I hand the call over to Barry I would like to add that we are very pleased with our performance this quarter, particularly in increasing our occupancies and in strengthening our core Northeast presence through property and land acquisitions. We're also encouraged by the positive signs of recovery that we're beginning to see in our markets. And are confident that our Company is well poised to capitalize on the recovering economy.

I'd also like to summarize some salient statistics.

At the end of the quarter, again, we were 92.2 percent leased over a full percentage point above last quarter, which was 91.1. Our FFO payout ratio was 69.79 percent. Below last quarter's 72.26. Our CAD payout ratio was 92.44 percent versus 96.42 percent last quarter. Our leasing costs were $2.03 versus $2.14 last quarter. We spent about $13.5 million in the quarter for building improvements and TI and leasing commissions. And we had -- we'll have an estimated free cash flow at the end of the year of about $6 million, based on our current expectations.

And so we feel pretty good about where our financial statistics and results are today. From a roll down perspective, and we all acknowledge that we are in an environment where there is continued pressure on rents, continued pressure on tenant concessions and TI packages, our core Northeast portfolio rolled down just 3.3 percent versus 9 percent last quarter.

As a minor digression, our hotel in Jersey City the Hyatt Regency which we own in partnership with the Hyatt Corp. the Fritzger (ph) family, has been posting very good results. Occupancies in July are at about 89 percent. And we project an unlevered return through 2004 at just under 10 percent. 9.9 in change. And so the hotel continues to perform extremely well as the only full-service class lodging facility complemented with meeting rooms and catering facilities along the waterfront well served of course by the mass and public transportation system and the ferry systems serving the Harborside complex.

And so with that I'm now going to turn the call over to Barry, who will review in more detail our financial results and activities for the quarter. Barry.

Thanks Mitchell. Funds from operations available to common shareholders for the second quarter of 2004 amounted to $67.6 million or 90 cents for diluted share as compared to $70.7 million or 98 cents a share for the same period last year.

For the six months ended June 30th, 2004, FFO amounted to $132.5 million or $1.77 per diluted share as compared to $139.7 million or $1.95 per share for the same period last year.

Net income available to common shareholders for the second quarter was $15.8 million or 26 cents per diluted share versus $33.6 million or 58 cents per share for the same quarter last year. For the six months ended June 30th, 2004, net income available to common shareholders was $42.1 million or 69 cents per diluted share versus $63.6 million or $1.10 per diluted share for the same period last year.

Parking and other income in the quarter included $600,000 of lease termination fees. Second quarter of last year had lease termination fees of $1.3 million. In the quarter the Company incurred $1.3 million charge or 2 cents per share in G&A costs associated with the resignation of Tim Jones as President. Ant quarter end the Company identified its three wholly-owned office properties in Texas as held for sale and included the results of discontinued operations for the period.

The Company recognized that unrealized loss of $10.5 million net of minority interests in the quarter related to these properties.

Same-store net operating income which excludes lease termination fees on a GAAP basis decreased by 2 percent for the second quarter of '04. As compared to the same period in '03. And for the six months ended June 30th of '04 decreased by .8 percent over the same period last year. Same-store net operating income on a cash basis decreased by 1.4 percent for the second quarter of '04 as compared to '03 and for the six months ended June '04 decreased by .9 percent as compared to '03.

Our same-store portfolio for the second quarter was 26.1 million square feet, which represents about 91 percent of our portfolio. We finished the quarter with $99 million of outstanding borrowings under our $600 million unsecured credit facility. Our unencumbered portfolio at quarter end totaled 241 properties aggregating 23 million square feet of space, which represents 80 percent of our portfolio.

At quarter end Mack-Cali's total undepreciated book assets equaled $4.4 billion and our debt to undepreciated asset ratio was 38.4 percent. Our debt to market capitalization ratio was 35.3 percent. The Company had interest coverage of 3.5 times and fixed charge coverage of 2.7 times for the second quarter. The six months ended June of '04 the Company had interest coverage up 3.4 times and fixed charge coverage up 2.7 times.

We ended the quarter with total debt of approximately $1.7 billion which had a weighted average interest rate of 6.41 percent.

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 supplemental package and earnings release which includes the information required by Reg G as well as our 10-Q.

Now Mike will cover our leasing activity. Mike.

Thanks Barry. As of June 30th our consolidated portfolio was 92.2 percent leased compared to 91.1 percent at March 31st. During the quarter, we signed 188 transactions totaling more than 1.5 million square feet. These transactions reflect retention of 78.5 percent of outgoing space.

First rental rates payable subsequent to any concession period decreased an average of 7.9 percent over the expiring rental rate including escalations. Further details on our leasing activity can be found in supplemental package on our website. Our market information is provided by Cushman and Wakefield and unless otherwise noted we will discuss overall Class A vacancy rates and direct Class A average average asking rent.

Starting with our northern suburban region both Westchester and Fairfield Counties showed increasing rent activity following a relatively slow first quarter. However, the placement of the 620,000 square foot former (indiscernible) headquarters on the market resulted in negative net absorption. This building is in contract to be purchased by about a private developer who will reportedly renovate the property to accommodate leasing to multiple tenants.

The availability in Westchester increased from 17.2 percent in the first quarter to 18.1 percent in the second. Sublet space continue to diminish, now 745,000 square feet or about 20 percent of total available space. Asking rents remained nearly steady at $29.48 per square foot -- down 15 cents. Mack-Cali's Westchester office and office flex properties totaled 4.8 million square feet, ended the quarter 96.1 percent leased, 100 basis points above the first quarter's close.

Fairfield County availability decreased slightly from 18 to 17.4 percent in the second quarter. It was a further reduction in the (indiscernible) subway space with 31.5 percent of the total availability to 30.6 percent. Asking rents increase from $29.13 to $29.56. Mack-Cali's Fairfield properties comprising 772,000 square feet ended the quarter 91.1 percent leased, up from 90.6 percent at the end of the first.

Noteworthy Mack-Cali transactions in Westchester and Fairfield during the second quarter include Coca-Cola Enterprises, which leased 44,000 square feet at 555 Paxter Road in Elmsford, National Economic Research Associates which renewed its 34,759 square foot lease at 50 Main Street in downtown White Plains and (indiscernible) Corporation which renewed its 18,800 square foot lease at 200 Clear Brook Road in Elmsford, an office flex property.

There were no new construction announcements during the second quarter in either county. In northern New Jersey Class A overall vacancy increased to 18.8 percent up 80 basis points from the first quarter. Asking rents averaged $29.10 -- virtually unchanged. Sublet space comprises 41 percent of overall Class A availability. In the Bergen County submarket Class A vacancy increased slightly to 23.1 percent in the second quarter. However, in Moorestown you get decreased from 19.9 percent to 18.6 percent. Hudson County Class A availability increased significantly from 14.2 percent to 18.5 percent due to the addition of 1.1 million square feet of sublet space coming online in Jersey City that was preleased to UBS PaineWebber. Mack-Cali's northern New Jersey properties totaled 11.8 million square feet and ended the quarter 91.8 percent leased.

In the central New Jersey market availability declined from 26.1 percent to 24 percent in the second quarter. Despite the positive absorption, asking rents declined from $28.15 to $27.54. Sublet space comprises 23.7 percent of this market's total availability.

Mack-Cali's central New Jersey presence is now nearly 3.7 million square feet which is 92.6 percent leased.

Significant northern and central New Jersey transactions from Mack-Cali included United Retails renewal of 65,000 square feet at 365 West Passaic Street in Rochelle Park, Jefferies & Co. which renewed and expanded a total of 48,000 square feet at Harborside Financial Center and the Sherwin William Company which renewed in 37,000 square feet at 10 (indiscernible) Road in upper Saddle River. There were no new construction starts in northern and central New Jersey during the second quarter.

In Warren Township, Citigroup recently announced it would consolidate up to 1600 employees from Manhattan and elsewhere in New Jersey leasing 700,000 currently vacant square feet in a former Lucent office campus. This absorption is not reflected in the second quarter statistics.

Suburban Philadelphia Class A vacancy rates continue to improve following a strong first quarter. Overall Class A vacancy declined from 25 percent at the end of March to 23.7 percent at June 30th. Asking rents declined slightly at $26.61 and sublet space remained at a constant 23 percent of total availability.

Our office and office flex holdings to this market totaled approximately 3.5 million square feet in both southern New Jersey and suburban Philadelphia. These properties ended the second quarter 90.8 percent leased, up 140 basis points from the first quarter.

Mack-Cali's most noteworthy transaction in suburban Philadelphia during the second quarter was a new lease with Fiberlink Communications Corp. which took 36,000 square feet at 18 Century Parkway in Blue Bell, Pennsylvania. In Washington D.C. Class A vacancy declined further from 9.5 percent in the first quarter to 9.3 percent.

Asking rents were covered somewhat increasing from $44.78 to $46.52. Strong demand from the federal government and the resumption of hiring among private sector companies has approved absorption to more than 700,000 square feet year-to-date. Significant construction activity which is reportedly 60 percent pre-leased will nonetheless make maintaining its momentum something of a challenge.

Mack-Cali's 450,000 square feet in Washington and 98.9 percent leased. In our major markets outside the Northeast, Dallas's non-CBD vacancy increased slightly to 22 percent with rents easing from $21.50 to $21.10. Denver suburban vacancy rate was nearly level at 21.9 percent and asking rents there averaged unchanged at around $18.13. But, finally, San Francisco's vacancy rate decreased from 22.7 percent to 21.4 percent and its rents averaged $29.28 off slightly from the first quarter. Mack-Cali's (indiscernible) the northeast provides 25 buildings and 2.7 million square feet and they are 86.6 percent leased.

Although the timing of sustained improvement in the market conditions remains uncertain we have confidence in the fundamentals of our core markets, the quality of our properties and the ability of our leasing property management teams to provide attractive leasing opportunities in the marketplace. Mitch.

Thank you Mike. At this time we will open the floor to questions. Operator.

(OPERATOR INSTRUCTIONS) Chris Capolongo (ph) with Deutsche Bank.

First, I just wanted to think through the situation at Harborside. Harborside 5 is about 300,000 square feet to lease up. The Deutsche Bank space coming out of it plus the Schwab space and the Goldman overhang --whatever that might be. Which space do you think is best positioned in that market. And is there enough demand to fill that space and, really, over what period of time would you see that happening?

Let me give that a try. First of all the Goldman space I don't believe represents overhang in the market. Goldman has been continuing to move personnel into that facility. There has been absolutely no indication whatsoever to the marketplace that any of that Goldman building will or is available for sublet. So I really don't believe that at least at the present time that's placing any pressure into the marketplace. The only remaining sublet space in the marketplace that we are somewhat confronted with is a minor amount of space that remains at 101 Hudson through Lehman Brothers, which is we got a less than seven years remaining on the terms so there are all kinds of complexities in allowing that space to be highly competitive in the marketplace again. Jersey City historically has been a larger tenant market and larger tenants want long-term security, long-term stability. And so I think that that space continues to become as time progresses less and less competitive. Plaza 10 still does have probably -- I mean, I don't know what the exact number is -- but somewhere I would imagine around a quarter of 1 million feet, plus or minus, that is available for sublet. The floors that that is available on are not contiguous. When original sublets were done to Missooho (ph) Bank and others, the building, the stacking in the building was disrupted and broken up by virtue of floor allocations. And but that certainly remains a presence in the market and the last significant block of sublet space which you didn't mention is at Newport and that's the new UBS building of about 1.2 million square feet. Rumored to be under lease, although not confirmed to Mellon Bank for a substantial portion of that space and also rumored, while not confirmed, that UBS is going to take occupancy of the residual space, assuming that Mellon does that deal and so that's sort of the landscape.

Now with respect to our complex Plaza 5 is first generation premier institutional quality Class A space at very competitive numbers as a result of market conditions. Today, I would estimate that the average transaction that we do on a 10 year basis -- and these are transactions that I would say followed are basically breakeven at about 50 percent occupancy -- are done on an average basis over 10 years of $28.50 gross with an $8.50 expense stock and anywhere from $30 to $40 in tenant work and also some fairly hefty leasing commissions which of course we love to pay.

But so effectively we're probably talking 20 net, with a little higher amortization of TI. And that reflects itself in somewhere around an 8 percent yield against costs for that building. But we only have about 300,000 feet to deal with, out of almost 1 million in that tower. And I can tell you that with the deal that I personally shook hands on on Monday that I alluded to in the call for a full floor -- is probably going to evolve into a floor and 1/2 by the time we're done. We have enough action on the building, I think, to fill it. And certainly enough over the near-term to get ourselves above 75 percent occupancy.

And so that leaves only Plaza 1. We will be doing some repositioning to Plaza 1. The building has the advantage of being literally at the front door of the Exchange Place Path which is a significant advantage to a number of different installations. We've been showing the space actively. We will be putting some capital dollars into that complex. I would imagine we're going to put $4 million in base building, enhancements, improvements, lobby reconstruction etc. So call it $10, $11 a square foot. And we've had a high level of interest from both redundant pipe users and also, frankly, a whole new wave of interest from media type and entertainment type uses that would love the convenience of that location. And, frankly, the building's uniqueness in character having evolved as you know as the original Harborside complex did over many years.

And, so, that certainly is very encouraging. And I think that's really what we're seeing down in Jersey City at the present time.

So, Barry, that space will come out as developments -- development of process.

Yes we have to evaluate, this is Mitch continuing the discussion. We have not taken that space out of service at the present time. First of all, the lease remains in effect until -- through the end of the year and we are collecting rent on the entire 385,000 feet and then from January we will go forward with 90,000 feet with Deutsche Bank. And so, at the present time we haven't done anything. We haven't taken it out of service and we will see what the level and magnitude is of building improvement necessary, as we move closer to the lease expiration.

So you will basically evaluate it at the time?

Yes.

So there's no decision made.

Right, correct.

And then just in terms of the build to suit? The potential build to suit? I was wondering if you just could maybe give us a sense of what type of tenant it was and really what's your threshold return on a build to suit project?

Of course to some extent threshold return depends on the credit that we are attracting. But the reason we acquire that site, first of all that was a nonmarketed transaction. It was a private family investment who happens to be in the development business and has very very substantial financial wherewithal -- the family -- and as the generational passing is occurring within the family, they fully intended to develop that site. They took it through all of its approvals, as I said in the call you can literally put a shovel in the ground tomorrow.

Hilliard designed all of the buildings on the complex and so it is a very high-quality design.

The reason they sold it, and they entered into a direct negotiation with us is because it's somebody whom I've known for 25 years in the real estate community in New Jersey. And they became somewhat preoccupied with another project in another state and being a relatively small infrastructure, they decided that their priority would be this other unique development in another state. And so, I think we bought the property at an extremely favorable pricing level.

And the reason we bought it was because Princeton continues to exhibit and demonstrate its ability to attract pharmaceutical, life science, medical, and educational type uses. It's an exceptionally beautiful community. It's got the benefit of more pharmaceutical headquarters than any enclave in the United States. The state of New Jersey is the only state in the nation I guess we all saw that at the Democratic convention that has passed stem cell research legislation to promote as part of a state initiative and a legislative initiative and of course you've got the benefits of Princeton University as well as state universities within the region.

Coupled with all that you have an enormous amount of reasonably affordable housing in great residential community and so that, we believe that as the health care and pharmaceutical industry continues to expand and it is expanding that that site is at Main and Main. If I were in response to your question about yield if we were to do a credit deal on a build to suit development on that site and we're a pretty deep infrastructure here in terms of development expertise, the ability to analyze and assess development costs -- I would tell you that if it were a rated credit, we would probably and a promising opportunity and say a 15 ish year anywhere from 10 to 15 year lease, we would probably do the deal at somewhere around 9 percent free and clear.

And again that really depends on the whole picture of lease term and credit.

Karen Vises (ph) with Lehman Brothers.

I wanted to ask about the Kemble 1 sale, what the anticipated GAAP and economic gains are from that?

Sure, the anticipated gain is approximately $12 million. In round numbers and, again, it was part of the overall strategy of doing the -- what I will call the mega AT&T transaction.

Also the Union Pacific building that you have in Omaha? It appears to be a very old building. Do you have any plans to move that asset -- status of selling?

We are sort of in the final throes. We believe the greatest opportunity at that building is sort of twofold. There's no question that Union Pacific is moving out. We took the building back, we made some money on the note when we sold the building. We captured and swept all the cash flow from the lease since November. So we did Omaha -- Nebraska, rather, is an ownership and a landlord-friendly state. And we were able to move through the process of foreclosure very seamlessly.

The building has a 650 car parking garage that is an attached or it's an adjacent structure. And so we think there's some opportunity in continuing to develop revenue out of that garage. And it serves a good part of the downtown region in Omaha. As far as the strip building, the structure itself. Where we think that is going to end up is in the hands of a residential converter. And the market that we have targeted to basically recover our bases in the property which is about $8.5 million give or take is to sell it to a converter and we were just going out now with teasers into the marketplace and it's been a fairly high level of interest. Omaha is gentrifying downtown district and we think that's the best opportunity there.

Great. That's helpful. Last question is about the percentage of leases being retained. I've noticed that's kind of been trending down -- have you seen any trend in terms of reasons for that?

I'm not sure that it's trending down. Maybe you can be a little more specific in -- I will try to help you.

Well you I think you stated or I think actually Barry stated on the call the percentage square footage being retained just looking at the number of percentage of the number (MULTIPLE SPEAKERS)

That was Mike Grossman who talked about 70 (MULTIPLE SPEAKERS) retention. Is that what you're referring to?

Yeah, well, that was a fairly dramatic increase over last quarter and retention without the AT&T transaction was 69.8 percent, still very healthy. And so our retention this quarter was exceptional, compared to recent quarters where we've had anywhere from 60-ish to 70 percent retentions. So I think the number is improving. And it -- I think to some extent -- demonstrates the fact that stability is becoming an important feature in where tenants can remain in high-quality assets where they have landlords that are have financial wherewithal, very nimble in how we deal with them addressing their needs for expansion contraction and some of their economic needs. And we have been able to do in our leasing group who is very prolific a very good job in retaining tenants.

Chris Haley with Wachovia.

I have a lot of questions to you just in terms of the leasing approved. Have you changed or are you maintaining a philosophy for tenants that might be interested in downsizing who might want to take their downsizing meaning you don't want space back? Or are we getting a point where certain spaces within your portfolio you are willing to say okay, I want to take that risk and pick up that little bit more demand coming?

(indiscernible) in terms of vacancies?

You know, Chris, I think it's a little bit difficult to generalize. I've heard the notion that empty space or vacant space is an opportunity. And I kind of marvel at that. I will tell you where it's an opportunity. It's an opportunity when you can come into high-quality Class A development property at bases that will put you all in at 120 bucks a foot worst case like AT&T's property where we're buying vacancy that's a year away as in Kemble Plaza 2 and if you net net all of the gains that we now have been able to realize as of this morning, frankly, between $12 million on Kemble Plaza 1 and value the lease in Piscataway at a reasonable cap rate where AT&T took back half the building and you start to bring your bases down in the property and then you add-in a fairly modest lease up as there's an economic recovery and I mean modest.

And put in full boat (ph) TIs $30 to $40 a foot whatever capital you need in the building and leasing commissions and you can end up at maybe $120 a foot. I think you've very well protected in your downside coming in the face of a recovering economy. But to just generalize and suggest that you should be taking back space because there's signs of an economic recovery? I would not subscribe to that.

I don't expect that we're going to have any pricing pressure or rent pressure on the landlord side of the equation well into 2005. And that's if we're lucky.

So when you look at, and thanks for that Mitchell -- when you look at the land in Princeton. How do you view this land and location vs (technical difficulty) you have some other land what was it (technical difficulty) How does this land fit in and when do you think you might want to get working on it?

We don't own any land with S. J. P. We haven't had that joint venture in effect for some time. We have two other sites in Princeton. We have one at Overlook where we can build 150,000 feet of highly desirable location. Not too far from the Carnegie Center area. But, again, limited to one building of 150,000 feet and then at the train station of 1 Drive we can build a building of 97,000 square feet. Are you still there, Chris.

(technical difficulty)

What would you say your bases would be (MULTIPLE SPEAKERS) (technical difficulty)

I would tell you that on the Carnegie Center side, with what we paid for the land will be in at with parking at somewhere around $200 a square foot and so that is $18 net based on the formula I outlined before.

Do you have anything remaining in your guidance for the rest of the year in terms of new investments?

No. Nothing at all.

And your guidance also reflects the sales?

Yes, yes, it does. In this quarter.

And last question. Barry, what would you say your yield on your capital investment in the Texas assets is today not the yield to market but what yield your capital (technical difficulty)

Today the yield on that is about 3 percent. On a cash basis and probably about 6 percent on FFO basis with adding in straight line rent.

John Lutzius with Greenstreet Advisers.

Good morning. I'm interested in your comments on the Citibank move into the suburbs. I'm guessing perhaps that you're not familiar with the precise detail. But can you give a little color on the economic incentives? The savings that a tenant like that gets to keep as they move from Manhattan into the suburban market?

Well the BEEP (ph) program -- first I hope all is well. Nice to talk to you. To the program it's been estimated that the benefit is -- has a value of somewhere around between $60 and $70 million and that's of course the sort of statutory as of right titlement through the business employment incentive program. I think more importantly, this is a reflection on the fact that there is continued concern about locating all of your employment base within the Manhattan marketplace.

We have had numerous meetings with some of the major corporate users in Manhattan, some downtown, some not. And they have indicated that as a result of the continuing threat of terrorism and the ability to attract employment, especially in the face of this continuing threat, that they are very very seriously looking at this radius expansion. And so I believe that over time the suburban properties -- anywhere from Somerset County on in towards the metropolitan area -- will be the beneficiary of that thinking. And Citigroup was the first significant announcement of exactly that.

It strikes me Mitch, that there's been more activity in the Westchester area along this line than there has been in Jersey. Is that your sense of it and if it is --?

Not really. Other than the Morgan Stanley transaction in the old Texaco building and purchase there's been very little outmigration. I think immediately following September 11th, we saw some law firms and other professional firms that wanted to be on the train line but didn't want to be in Manhattan. Wanted to have auxiliary offices but I haven't seen a lot of that trend out there. And we're hearing pretty good talk in the Somerset County and Mars County areas, particularly even companies that are thinking about development.

And that's another reason that we feel that the 9 million square feet almost 9,020,000 square feet of which about 4+ million is Parsippany and Princeton. That -- these are the places where corporate America wants -- are going to be continued to locate employment.

And I'm guessing that was an important part of your thinking with respect to your AT&T deal.

Right. My view of the AT&T transaction, again, for some $92 million acquiring almost 1.2 million square feet, basically, that we were buying development property because we had coverage on all of the acquisition properties for some period of time which would give us a leg up on being able to market that product into the future, full coverage on Kemble Plaza 2 and pretty good coverage on the entire Knightsbridge. And of course half of it at least for almost 11 years the AT&T to serve as their Web hosting headquarters and it would enable us to basically have development product. To position into the future at a very, very low basis. Because the assets are extremely high-grade assets. I mean, again they are institutional quality assets that were built for AT&T.

As you think about that how much of the fill of those development type projects do you think is going to come from folks leaving Manhattan?

All I can tell you is, again, not to be redundant, we're seeing pretty good at least space showings, very real space showings particularly over this last quarter of large requirements at Kemble Plaza 2 we had a space showing. And we also have the right to take back space early which, of course, we needed to have that flexibility. We had a space showing on Monday a 150,000 footer of very very real requirement to identify Mars County. As their hubbub location and that is a downtown user.

Mitch, when you do your back of the envelope analysis with the $120 square foot basis that you mentioned earlier in the call, does that give any consideration to the assumption of lease obligation part of the AT&T deal or do you split those --?

Yes that's all in there. The net present value of all of that assumption was when we released the transaction was $76 million. And by the way we think we're today going to execute our first sublet or sub sublet however you want to look at it. Against a lot of that space in Floran (ph) Park. So we never counted on any mitigation against that expense but it looks like we are going to have some mitigation so that's good news. But the way that shakes out is we had $76 million in that cost. Then we had $12.9 million in cash to AT&T. And then we had some closing cost so 92 includes everything. And then it depends how you look at it.

If you capitalize the value of the AT&T lease in Knightsbridge which we saw evidence of the value of a long-term AT&T lease as evidenced today and literally this morning and my putting my signature on the sale agreement for Kemble Plaza 1 at a 7 1/2 cap with a slightly shorter term lease than in Knightsbridge. And that gives us a gain of about $12 million.

It depends how you look at the numbers. But even assuming none of that has value for the discussion of creating some basis you're looking at 92 million or roughly 1.2 million in space and add in the tenant improvement allowances from carry and TI commissions, offset the rent at AT&T is going to be paying in what I'll call the future empty space over the next year or so. We are in pretty good numbers. And we can be very very competitive is the point.

That's very interesting. Thank you. Just one last question. What was your sequential same-store occupancy growth from the...?

The same store was 92.3 percent versus 91.1 percent last quarter.

(MULTIPLE SPEAKERS)

Well yes first quarter was 91 1.

Holly Whitman with Goldman Sachs.

A couple of questions here. On the Xanadu projects sounds like things are in place and you're ready to break ground there but I just had seen that Hart (ph) filed yet another lawsuit against you and just wonder what impact that was going to be if they're going to the any proven delay (indiscernible) results? (MULTIPLE SPEAKERS)

Hart's Mountain (ph) on Monday filed a lawsuit for a temporary restraining order in Superior Court in Bergen County and late yesterday afternoon was denied the TRO. So while they continue to be somewhat of an obstructionist they have had virtually no success in the judicial system with the one minor exception of the judge Sybil Moses is still considering their request to provide access to some 260 pages of documentation that were part of the -- our (indiscernible) process. She has reserved decision on that. That decision is expected imminently. But other than that Hart's has lost every venue of every judicial proceeding that they have attempted in this project and I'm sure that somebody from your shop listened to the Mills earnings call yesterday and Larry Siegel (ph) who is my counterpart and our partner was very clear about the fact that the groundbreaking is proceeding on the 29th of September. That Mills and their partner Can Am are fully committed to funding the project and actually some $72 million worth of infrastructure work is underway. Between infrastructure and utility relocations, that sort of thing all in permitted areas that the only outstanding permit is the Army Corps 404 permit is the only permit of any sort of substance. And hopefully that will be obtained in the next month. And, again, it's important to remember that Mack-Cali has a very finite investment in this project. We have $32.5 million of absolute maximum capital committed to Phase I which is expected now to be as much as anywhere from $900 million for discussion purposes, I don't know where Larry exactly holds that value. And in exchange for which we get 20 percent interest. And we funded so far between $8 and $9 million we funded 8 and there's some request for additional funding that might bring us to $9 million.

So as far as we're concerned, collectively, the partnership of Meadowlands Xanadu, we are proceeding full bore on the project and there's nothing that has occurred within the court system to prevent that.

Is it costing you guys anything additional, like any incremental cost associated with these legal actions?

Certainly it's costing money to pursue the counter to the legal challenges but, again, Mack-Cali's investment will not exceed $32.5 million from Phase I, regardless of how those costs are accrued. And we do get a preferred return of 9 percent on our investment so there is certainly very little exposure to Mack-Cali.

And then I know we touched on the Princeton development a lot but I was just wondering how you see your competition there, just knowing that Boston Properties are, you guys have a fair amount of space already in the Carnegie Center?

The Boston Properties Carnegie Center product is high-end products, high-quality product. It's always been very well leased because as I said before, this is Main and Main. Our roadway infrastructure Meadow Road at our Princeton site is interconnected with Carnegie Center and we actually share some easement rights and so forth. But I think that if somebody is looking for a very significant concentrated development, we have certain advantages and, frankly, we could lease or sell the hotel component of this project all day long. With the amount of interest and inquiry we have received since we we have acquired the site. We haven't done anything there because we are in, again, very preliminary discussions at this point. And I don't want to raise the level of optimism but it is a requirement that involves the entire site and we don't want to foreclose our options. So we are moving very deliberately on what we do there.

And I'm not sure that Carnegie has the ability to address the needs of this particular requirement because of the size.

David Shulman with Lehman Brothers.

I have a question for Barry. On the addback of the unrealized lost FFO. I thought under (indiscernible) guidelines if there is an asset impairment it gets deducted from FFO and is not an addback.

You know we don't view this as an asset impairment. Effectively what it is is the recognition of the loss pursuant to the contract that is being worked on.

The contract hasn't happened and this was from the previous quarter -- that was a technical.

That is -- that's what drove us to classify the asset has held for sale was the agreement was reached in principle. And the lawyers are just basically papering the documents at this point.

And if you look at our definition of FFO, it clearly states we believe that unrealized losses on assets held for sale is an addback and I think if you look at the Mairy (ph) guidance it's not necessarily clear I think it was some vagueness in that.

Yes because certain things -- other firms that have announced impairments have taken a haircut. It's a technical issue. It's not a cash thing, it's a technical.

Again we don't view it as an "impairment". We view it as the accrual of a loss based on the transaction.

Because there's an actual transaction on hand?

Correct.

That's probably a technical difference as opposed to maybe it sells in two quarters from now or not.

Yes.

Michael Maron, Bear Stearns.

On the 5 Wood Hollow Road acquisition did you about going in yield on that acquisition?

Yes the going in yield on the acquisition was somewhere around 11 percent. Even higher than that, actually. You know and again the building's fully leased through November or October -- the end of October of '05 and the -- Lucent was the master tenant if you will, Pfizer sublet -- well actually American Express came in post 9/11. And took the entire building from Lucent then when they reconsolidated back downtown Pfizer retained it, came in and retained about half the building. And we're probably rounding third base with Pfizer at this time in terms of a longer-term extension to remain in the building. So that's kind of the picture.

What kind of rent would that do to the yield?

You know, again, the rent would be of course a significant increase to what their sublet rent was. It will be in the low 20s, very little work, because the building is really very high caliber and the installations were virtually brand-new put in by American Express in terms of the furniture systems and the technology. So I would guess that at the end of the day, if you discount the original yield on the asset and you look at the renewal we'll probably be certainly north of 10 percent.

On the 30 Knightsbridge Road project. Any consideration of selling those similar to the Kemble Plaza 2 project?

Always think about everything but at this point I believe that the -- and, again, who knows? But at the installation that AT&T has at that facility which is a very high-tech Web hosting operation, unlike their consumer businesses or their core telephone business, will be an attraction to other high-end users. It's a very well constructed complex, a lot of amenities, and really well located in a nice parklike setting. And so I think at this point it would be premature to sell the asset other than possibly to consider condominiumizing their occupancy in the building which is something we're kind of kicking around.

And, finally, what's your estimate for occupancy by the end of the year?

It's really a little bit difficult to say. The occupancy could actually kick down a node because of AT&T's occupancy, frankly, of 30 Knightsbridge because they do have the entire complex at this point. And it's a matter of what they choose to do by the end of the year. They have rights to vacate parts of -- they're hard on roughly half of it almost 11 years. The rest they have a lot of rights to. So that could impact our occupancy a little bit. Downward. So at this point it's really a little difficult to predict. Because on the other side of the equation we're seeing more demand in a lot of other locations.

Actually a follow-up on your comments on Somerset County. I know you have substantial inventory out there. You have land for potential development?

In Somerset County we really don't have that much inventory. We have a first right of refusal on a piece of land that's actually across the street from what was the Lucent Technology headquarters on King George Road in Warren Township and that's the Citigroup just announced the deal. We have a right of first refusal on a piece of ground across the street that probably could accommodate -- we have to go through all the final zoning and so forth -- but probably accommodate close to 300,000 square feet. But it's not costing us anything because it's a continuing right of first refusal based on a property contribution some years ago.

John Lutzius, Greenstreet Advisors.

Just one last thought about the AT&T deal. What is your current thinking on the end game with respect to be assumed lease obligations?

As I indicated before, John, we -- our -- what we did was as part of being good citizens within the real estate community and also a benefit to Mack-Cali and its shareholders, we brought in major -- the major brokerage firms. And we issued exclusive agencies on those sublet properties. And so that that would lessen the burden on our own internal leasing representatives and it would also provide a lot of inducement and incentive to the brokerage community to try to get some deals done in those properties. And I think it's also important to remember that in the vast majority of cases the over landlords in those properties are part of the real estate community here. And so for example in Greenland Road where we have basically two different landlords and three assets, all very well known to us, we have a deal cooking that we think we're going to cut. We thought we would have it done by yesterday but the subsub tenant or whatever you want to call them made some last-minute changes that we need to vet. And we needed consent of the over landlord and that was one phone call to get that because they're friends. And it's good for their property in the long term. So we think that having taken -- the route we've taken by involving the brokerage community and giving them exclusive agencies on some very impressive properties like Teleport, Staten Island and 290 Davidson down in Somerset County, there -- it was the right thing to do and we're hopeful of mitigating against some of that $76 million. But even if we don't, and believe me we're very focused on mitigating it, but even if we don't it still is part of the cost of the AT&T deal. And we're still in it. Very very good numbers.

Where I was going with that with respect to the end game was, your focus is or your comments on the litigation of the lease obligation that you've assumed but -- are you in negotiations with any of these landlords to convert your lease into an ownership in the property or are these leases just going to burn off over time and that will be it?

They will burn off over time. The -- I don't think that -- all but one possibility where I've had very preliminary discussions with the owner who happens to be a publicly traded company. They are not really product that we will own or want to own over the long term.

Jon Litt with Smith Barney.

Just wanted a follow-up on the same light of questioning. Maybe in the aggregate can you talk about the progress you're making or the timing you think you'll see on the lease up of some of the sublease space you have in the AT&T portfolio?

Again we -- not to be redundant we've brought on exclusive agents.

But at this point you don't necessarily have --?

Yes. No. We have -- we probably have if I were to aggregate it, 50,000 feet of the better product in Floran Park, we have deals on, we think. I thought we would have had them executed yesterday and we have the full cooperation of the over landlords but there's this and that's that is part of business and so but that represents maybe $3, $4 million. The larger obligations exist in Somerset County at 290 Davidson and Teleport in Staten Island. And we have very little action at this point particularly on Teleport.

Similar in Carnegie Center?

Yes.

It sounds like you've got a couple of things that are in the hopper?

Well we have at least one on a very preliminary basis.

And what do you think the time frame is on getting that lease out? Getting some tenants (inaudible) building?

Certainly I hope by this time next quarter when we.

Well other than just this one as you pro formaed it and looked at the acquisition of --?

No we didn't. You know something? It was an opportunity to buy the last piece of major ground at Main and Main to support 3/4 of 1 million plus of development in what I believe is going to continue to be a very significant part of the growth of the business community in New Jersey and we bought the property really very well and again we don't have to spend one penny on approvals. They were all long-term approvals. These people were very smart. They got very long-term approvals on everything. And so we have the ability to be patient there. But I happened to think it's going to materialize sooner rather than later.

And then I don't know if I missed this on the sale of your Texas asset and Kemble. What were the yields on those?

Well Kemble Plaza was just signed this morning. And that's a 387,000 foot building. Sold it for $77 million. That's a 7 1/2 cap, $200 a square foot. It's a binding contract. No conditions.

And the yields on the Texas one?

I mean Barry commented before in response about 3 percent on the original invested capital on that. You know we're happy to get out of Dodge and we've written down on a book basis of $10.5 million and this satisfies the balance of the strategic plan to recycle capital out of and we will be completely out of wholly-owned assets in Texas. And that will leave us only in terms of our disposition strategy with Denver, which at this point we're over 90 percent leased but ultimately it will be a sale.

Michael Maron with Bear Stearns.

On the same-store numbers I see year-to-date most of the same-store decline is due to expenses. Your revenues are pretty flat. Is this something that we can expect to continue for the full year?

Okay, well I don't want anybody to be under the illusion that topline revenues are going up. A lot of this is cyclical. The operating and services was up 7.9 percent this quarter but was down 6.6 last quarter and so there are timing differences. There are -- real estate taxes seem to be going up and in general so that's an expense category that continues to increase. Insurance costs continue to go up. A lot of those cost of course are recoverable. But not all of them but right now in the bulk of all cases, rents are below where they were three years ago. And so the top -- there is going to continue to be topline pressure for while.

And on the Kemble Plaza transaction. Was that a private leverage buyer or institutional buyer?

It is a private buyer and I'm not at liberty to disclose the buyer. But it is a private buyer.

There are no further questions. I will turn the conference back to Mr. Hersh for any additional or closing remarks.

Thank you all for joining us on today's call. And we certainly look forward to reporting to you again next quarter on our progress. Good day.

That does conclude today's conference. Thank you for joining us. Have a great day.