Veris Residential Inc (VRE) 2004 Q3 法說會逐字稿

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

Good morning. Thank you for joining Mack-Cali's third-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 would like to review some of our results and what we're seeing in our markets. Then review our various 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.

We had a very positive quarter of leasing with almost 1.2 million square feet of transactions. I am pleased to report that our portfolio ended the quarter at 92.9 percent leased, up from last quarter's 92.2 percent with positive absorption of almost 193,000 square feet.

What we're seeing in our markets generally is businesses taking advantage of the current soft market conditions to either renew leases early -- blend and extend, if you will -- or upgrade their space to our higher quality buildings. And while we have signed over 500,000 square feet of new leases this quarter, we frankly have not been seeing much in terms of overall new demand in the markets. The markets remain a tenant's market.

The economic recovery we started to see earlier in the year seems to have slowed down to some degree. Businesses are still reluctant to add new staff and make long-term capital commitments about office space. We also continue to see the effects of mergers and consolidations and to some extent downsizing within the markets. And with that said, there are a few markets that are doing well.

In Jersey City, for example, demand is strong both from small and larger users. In Morris and Somerset counties activity has improved, and there are some larger users out in the market as we speak. In general, although we are hoping that now with the election over stability and some degree of economic growth will return, we do expect pressures on rents to continue into late next year and into 2006.

Now I would like to review some of our activities and results for the third quarter. We sold a joint venture mixed-use property, Pacific Plaza, in Daly City, California for $143 million. We have now sold all of the projects in California that we had jointly developed with our partner, Highridge Partners. The overall yield on our investment activity on those development projects exceeded 15 percent on an IRR basis.

Leasing highlights for the quarter included the following. A 73,000 square foot renewal with Norris McLaughlin, a major lawfirm at our Mack-Cali Bridgewater project, our renewal with Nextel of New York for over 62,000 square feet at 565 Taxter Road in Elmsford, New York, and a new lease with Ameritrade for a full floor of 36,500 square feet at Harborside Plaza 5 in Jersey City. Plaza 5 is now 73.4 percent leased, and we are in negotiations for leases right now that will fill the balance of that building.

We had to be very aggressive to close leasing transactions during the quarter, and this is reflected by our tenant improvement and leasing commission expenses which were the highest that they have ever been at $3.23 per square foot per year as compared to last quarter's $2.03 per square foot per year, a reflection of the reality of the market.

Our portfolio-wide rolldown was 4.2 percent compared to last quarter's 7.9 percent. Rents in our core Northeast markets declined 4.1 percent this quarter compared to last quarter's 3.3 percent rolldown, and so the rent pressure continues.

Rents in our non-core Southwest and Western markets fell only 7.7 percent compared to 26.1 percent last quarter. But as you know we are continuing to reduce our holdings in these markets and have entered into binding contracts to sell our last three wholly-owned assets in Texas. At the end of the third quarter, our rollovers for the remainder of 2004 were only 1.8 percent of base rent or just $9.5 million. The largest lease expiring in the fourth quarter of 2004 is AT&T's 405,000 square foot lease at 30 Knightsbridge Road in Piscataway.

As you will recall, this building was part of our strategic transaction with AT&T closed on June 1. Renovations to this building, common area improvements and cosmetic improvements will be starting next month, and this will make it more attractive for multitenant use. Next year, 2005, 12.1 percent of our base rent or $63.5 million will roll over with leases expiring with AT&T, Lucent, and Deutsche Bank in New Jersey that totaled about a million square feet. We do, therefore, have considerable leasing challenges ahead of us, and as in previous quarters, Mack-Cali continued to perform well in our core Northeast markets with leased rates generally higher than market averages in each of the markets that we do business in, with the exception of Fairfield County, Connecticut. We exceeded the Northeast market averages by a range of 4.5 to slightly over 10 percent.

After the close of the quarter, we completed our sale of Kemble Plaza 1 in Morris Township, New Jersey. In June we had extended AT&T's lease on this 387,000 square foot property through 2014. This allowed us to position this asset for sale, to take advantage of the very favorable investment sales market, and we sold the property for $77 million, representing a $12 million gain.

Last week we acquired an office property in Moorestown, New Jersey -- South Jersey -- 232 Strawbridge Drive for $8.7 million. We now own three buildings at Strawbridge Corporate Center totaling 220,000 square feet that are approximately 91 percent on average leased. We paid $8.7 million for this asset, and it now brings our total ownership in the Moorestown market to 1.6 million square feet with an average lease throughout our portfolio in Moorestown of 93.5 percent. So clearly we have done very well in this submarket. Currently we're looking at acquisition opportunities in Bergen and Morris counties in New Jersey and in suburban Philadelphia.

We are also pleased that just a few weeks ago we were honored for our property management expertise by receiving BOMA's Office Building of the Year Award for a building in Connecticut -- 1000 Bridgeport Avenue in Shelton, Connecticut. This is the fourth award that we have received this year for property management, and I truly believe that it demonstrates how our company remains focused on our core real estate business and on tenant satisfaction.

With regards to Meadowlands Xanadu, while there have been several lawsuits and litigations pending and continuing, most notably Hartz Mountain, we are confident that we will continue to move through the approval process generally having received all approvals and permits with the exception of the Army Corp permit which is pending now, and that the entertainment and retail component, the ERC as it is called, will open as scheduled in the spring of 2007.

As Mack-Cali is leading the development of the office and hotel components of the project, we do not foresee starting development of these components until market conditions improve. You will recall that our maximum investment in Phase I, which is the 2.2 million square foot ERC, is $32.5 million. That phase of the project is approximately $900 million, and so clearly our investment is de minimus in comparison to the overall scope of the project.

Just to conclude, markets are still very challenging, and they are likely to remain that way until there is strong sustainable job growth and the job growth we have seen thus far this year has clearly been below expectations. We are pleased with our performance this quarter, especially our leasing activity and our increased occupancy, and continue to believe that we are well positioned with a premium Class A portfolio of properties and a very strong and flexible balance sheet.

And now Barry will review our financial results and our activities for the quarter.

Thanks, Mitchell. Net income available to common shareholders equaled $28.1 million or 46 cents per share for the third quarter of 2004 and $70.2 million or $1.16 per share for the nine months ended September 30, 2004. Net income available for common shareholders, which included in 2003 a gain on sale of investment in unconsolidated joint ventures of $20.4 million or 32 cents per share, equaled $50.4 million or 84 cents a share for the third quarter of 2003 and $114 million or $1.96 per share for the nine months ended September 30, 2003.

Funds from operations available to common shareholders for the third quarter of 2004 amounted to $69.7 million or 93 cents per diluted share as compared to $69.6 million or 96 cents per diluted share for the same period last year. For the nine months ended September 30, 2004, FFO amounted to $202.2 million or $2.70 per diluted share as compared to $209.2 million or $2.91 per share for the same period last year. Parking and other income for the quarter included $700,000 in lease termination fees. The third quarter of last year had lease termination fees of $1.5 million.

Same-store net operating income, which excludes lease termination fees, on a GAAP basis increased 1.5 million -- I'm sorry 1.5 percent for the third quarter of 2004 as compared to the same period in '03 and for the nine months ended September 30, 2004 was flat over the same period last year. Same-store net operating income on a cash basis decreased by .4 percent for the third quarter of '04 and for the nine months ended September 30, 2004 decreased by .8 percent as compared to the same period last year.

Our same-store portfolio for the third quarter was 25.7 million square feet which represents about 91 percent of our portfolio. Our unencumbered portfolio at quarter-end totaled 242 properties aggregating 23.4 million square feet of space, which represents 81 percent of our portfolio.

We have received from Prudential Insurance Company of America, our existing lender, a commitment to refinance $150 million interest-only portfolio loan which is coming due in May of 2005. The effective interest rate on the new loan will be approximately 4.85 percent which will result in interest savings of $3.4 million annually versus the current rate. The loan will mature in January of 2010 and is expected to close later this month.

We are also in the process of redoing our $600 million unsecured credit facility, which had about $104 million outstanding today. The interest rate on the outstanding VARs on the new facility will be reduced to LIBOR plus 65 basis points based on our current credit rating. The new facility will mature three years from closing which is expected to take place later this month.

At quarter-end, Mack-Cali's total undepreciated book assets equaled $4.4 billion, our debt to undepreciated asset ratio was 38.3 percent, and our debt to market capitalization was 33.7 percent. The Company had interest coverage of 3.6 times and fixed charge coverage of 2.4 times for the third quarter. And for the nine months ended September 30, 2004, the Company had interest coverage of 3.4 times and fixed charge coverage of 2.6 times. We ended the quarter with total debt of approximately $1.7 billion, which had a weighted average interest rate of 6.44 percent.

Our FFO guidance range for 2005 is $3.45 to $3.65 per share and is based on the following major assumptions. Our midpoint case assumes leasing activity of 3,160,000 square feet for 2005 versus scheduled lease expirations of 3,400,000 square feet. This would put us roughly at the same level of occupancy at the end of '05 as where we began with '04.

From now through the end of '05, the plan assumes property sales and reinvestments of about $50 million. And in addition to the $150 million mortgage I previously mentioned, the plan also assumes refinancing of about $100 million in other debt maturities that we have in '05 with a weighted average interest rate of 7.2 percent as they mature in '05.

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 Web site 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 September 30th, our consolidated portfolio was 92.9 percent leased compared to 92.2 percent leased at June 30th. During the third quarter, we signed 184 transactions totaling nearly 1.2 million square feet. These transactions reflect retention of 69.3 percent of outgoing space. Hearst rental rates payable subsequent to any concession period decreased an average of 4.2 percent over the expiring rental rate, including all escalations. Further details on our leasing activity can be found in the supplemental package on our Web site. Our market information is provided by Cushman & Wakefield. Unless otherwise noted, we will discuss overall Class A vacancy rates and direct Class A average asking rents.

Beginning with our Northern suburban region, during the third quarter the Westchester and Fairfield County office markets held their own in both availability and rents. Availability in Westchester stayed constant at 18.1 percent, and sublease space was nearly unchanged at 750,000 square feet or approximately 20 percent of total available space. These figures include the vacant 620,000 square foot former Altria headquarters, as well as IBM's placement of 96,000 square feet on the market. This reflects the strengthening of the market for smaller units, which comprises the mainstream of office transactions in the county.

Asking rents rose slightly to $29.97 per square foot, up 49 cents. Mack-Cali's Westchester office and office/flex properties totaling 4.9 million square feet ended the quarter 96.3 percent leased, 20 basis points above the second quarter's close. Leases totaling 112,000 square feet expired during the remainder of 2004. This is approximately 2.4 percent of total Westchester leased space and 2.7 percent of its total annualized base rent.

Fairfield County availability again decreased slightly from 17.4 to 17.1 percent in the third quarter. However, the percentage of total availability represented by sublease space increased from 30.6 percent to 34.3 percent. Asking rents remained nearly constant at $29.60.

Mack-Cali's Fairfield properties comprising 852,000 square feet ended the third quarter 90.7 percent leased, 40 basis points lower than at the close of the second quarter. Leases expiring during the remainder of the year totaled 25,000 square feet or 3.2 percent of our occupied space and 4.5 percent of the annualized rate.

Noteworthy Mack-Cali transactions in Westchester and Fairfield during the third quarter include Nextel of New York, which renewed and expanded into a total of 62,400 square feet at 565 Taxter Road in Elmsford, New York; Quintiles, which took 25,300 square feet at 8 Skyline Drive in Hawthorne, New York, and Media Horizons, which renewed 20,000 square feet at 40 Richards Avenue in Norwalk, Connecticut. There were no construction announcements during the third quarter in either county.

In Northern New Jersey, Class A overall vacancy increased again to 19.8 percent, up 100 basis points from the second quarter. Asking rents eased slightly from $29.10 to $28.69. Sublease space comprises 39.6 percent of overall Class A availability, a slight reduction.

In the Burton County submarket, Class A vacancy decreased from 23.1 to about 22.6 percent. However, Morris County reversed earlier gains and closed the quarter with availability of 24.3 percent, up sharply from 18.6 percent. A major contributor to the increase in vacancy was BAFS vacating 755,000 square feet in an outlying part of the market as part of its consolidation, adding to other large blocks of sublet space in the county.

Hudson County Class A availability decreased this quarter from 18.5 percent to 17.9 percent. Both Hudson and Morris counties are experiencing an increase in larger requirements in the 50,000 to 150,000 square foot range. Mack-Cali's Northern New Jersey properties totaled 11.8 million square feet and ended the quarter 92.6 percent leased, up 91.8 percent at June 30. Leases totaling about 101,000 square feet expired during the remainder of 2004. They represent just less than 1 percent of total Northern New Jersey leased inventory and 1 percent of its total rent.

In the central New Jersey market, availability remained constant at 24 percent in the third quarter. Asking rents were nearly unchanged, decreasing 20 cents to $27.34. Mack-Cali's Central New Jersey presence is 3.7 million square feet, which is 92.9 percent leased compared to 92.6 percent in the second quarter. Explorations for the remainder of the year total approximately 430,000 square feet, representing 12.5 percent of the region's leased inventory but less than 1 percent of its total rent. Significant Northern and Central New Jersey transactions for Mack-Cali included the 72,000 square foot renewal expansion by Norris McLaughlin, end markets at Mack-Cali Bridgewater, groundwater environmental services renewal in 24,200 square feet at 1340 Campus Parkway in Wall Township, (inaudible) North America's lease of 21,000 square feet at 4 Gatehall Drive in Parsippany and New Jersey Property and Liability Insurance which leased 20,600 square feet at 222 Mount Airy Road (ph) in Basking Ridge. There were no new construction starts in either Northern or Central New Jersey.

Suburban Philadelphia's Class A vacancy rate remained unchanged in the third quarter at 23.7 percent. Asking rents declined 40 cents to $26.21, and sublet space represents 24 percent of availability. Our office and office/flex holdings in this market total approximately 3.5 million square feet in both suburban Philadelphia and nearby Southern New Jersey. These properties ended the third quarter 91.1 percent leased, which is up 30 basis points from the second quarter. Leases expiring during the remainder of 2004 total 79,569 square feet, representing 2.5 percent of the regions space leased and 1.7 percent of its total rent.

Mack-Cali's noteworthy transactions in suburban Philadelphia and Southern New Jersey included Bren Crest Services' renewal of 27,835 square feet at 1 Plymouth Meeting and Plymouth Meeting, Pennsylvania; Harleysville Mutual Insurances' renewal and 20,330 square feet at 224 Strawbridge Drive in Morristown, New Jersey, and JCA Associates, which renewed in 19,000 square feet at 1256 North Church Street also in Morristown.

In Washington D.C., Class A vacancy continued to declined from 9.3 percent in the second quarter to 8.6 percent at the end of the third. Asking rents edged up 7 cents to $46.59. Strong demand from government, lawfirms and nonprofits continued to drive absorption, particularly in buildings that recently came online or under construction. Announcements were recently made for over 1.1 million square feet of new projects, and the development pipeline now totals 6.8 million square feet. This may provide a future challenge to maintaining current market momentum.

Mack-Cali's 450,000 square feet in the Washington area are 98.2 percent leased compared to 98.9 percent in the second quarter. Leases expiring during the balance of the year totaled 21,500 square feet, which accounts for about 4.9 percent of our space leased and 5.2 percent of annualized rent in our D.C./Maryland properties. In our major markets outside the Northeast, Dallas' non-CBD vacancy decreased from 22 to 21.8 percent with rents essentially flat at $21.06.

Denver's suburban vacancy rate improved from 21.9 percent to just under 19 percent, and asking rents averaged one dollar higher at $19.13.

Finally, San Francisco's vacancy rate continued to decrease ending the quarter at 20.8 percent compared to 21.4 percent in the second quarter. Average asking rents were $29.04, off slightly from $29.28. Mack-Cali's holdings outside the Northeast are 89.4 percent leased, up from 86.6 percent leased at the end of the second quarter.

We are encouraged by the continued stability and the fundamentals of our core markets, bolstered by increased inquiry from large requirements in certain submarkets, occupancy upticks in others and of course the lack of new construction starts. We believe we can make positive strides in these markets, while others will continue to challenge our leasing team. We see a limited number of new requirements generated by business expansion, and much of the current market activity results from consolidations, spinoffs and corporate needs for space reconfiguration or refurbishment. Although we face potential stress on our occupancy in upcoming quarters, we are well positioned to capitalize on the momentum generated as economic growth returns. Mitch?

Thanks, Mike. Before I open the call to questions, I would like to comment on the election. As I said before, we are all hoping that now with the election over, stability and some degree of economic growth will return to our economy. Early indications are that the Bush administration will continue to bolster a number of very important industries that proliferate throughout our core markets and in particular proliferate throughout New Jersey. Some of these sectors and industries include pharmaceuticals. You have seen and heard a lot about that in the short span of time since the election was conceded by Senator Kerry. The insurance and financial service markets as evidenced by the recent Citicorp transaction and a number of larger transactions that are in the market right now throughout New Jersey, and certain telecommunications and technology industries.

We have positioned this company well for the next wave of that economic expansion, having acquired properties largely as a result of the strategic transaction with AT&T in very high barrier to entry markets at something far less than 50 percent of replacement costs. We believe that these properties will be well positioned to take advantage of the economic expansion over the next year to two years. Time will tell.

And now I would like to open the floor to questions. Operator?

(OPERATOR INSTRUCTIONS). Karen Zesis (ph). Lehman Brothers.

Good morning. A couple of questions. First, I noticed especially in your same-store portfolio a sharp increase in the straight line rents. Is there anything in particular causing that?

No, just the way the rents are going, we are starting lower and trying to get bumps as we go along, and there is a bit more free rent in the portfolio than there had been in the past.

Okay. Would you say that is a trend in the most recent quarter or just this year in general?

This is Mitch. I think generally what is trending in the marketplace are large concession packages that are beginning to subside. As Barry indicated, there is a component of free rent as an element in many of the larger longer-term lease transactions being done today, and I think that with GAAP accounting you will see GAAP same-store numbers improved as a result of averaging the lease rates over the lease term. But initially on a cash basis, I think many of the transactions being done today have to some degree -- excuse the expression -- been artificially bolstered as a result of this averaging.

Okay. You mentioned some of the tenant risks and you know you mentioned Deutsche Bank. Can you comment in particular on potential for Merck downsizing and what their concerns might be in your space?

Well, if you look at -- first of all, I really cannot comment on Merck to any extent beyond what we have all read. They have some event risks that they are obviously dealing with, and it is too early to tell as to what impact that might have.

A large component of the R&D element of Merck is done in suburban Philadelphia, and that is where Merck has its tendency with us. With respect to their occupancy in New Jersey, they have a rather elegant corporate headquarters in White House, which is in Huntington County, which has been designed completely as a corporate headquarters. It is to some extent geographically outside of most of the core markets.

And so looking at what -- if in fact there is some downsizing as a result of the VIOXX situation, I don't think it would have an impact on our core New Jersey markets, and I think to the extent Merck continues to be a significant force within the pharmaceutical industry, they will need to continue to maintain and over time expand their occupancy throughout the Philadelphia suburban markets.

With respect to the other pharmaceutical industries or companies, we have continued to see large-scale planning at least for expansion. We have seen companies like Pfizer who have both done a significant amount of external third-party leasing from companies like Mack-Cali, as well as have invested significant capital of their own on research facilities within the Morris County markets in New Jersey.

Okay. I may have missed this, but did you give any kind of update on the Texas assets that are currently held for sale?

I did mention the fact that we have a binding contract on those assets. Two of the buildings, TriWest and Century in San Antonio, are scheduled to close on the 23rd of this month. And the last asset, which is an empty building, 82,000 feet formerly occupied by MCI, is scheduled to close prior to the end of the first quarter of 2005. But the contract is binding, and that is the status.

Okay. Last question. The leases that you said you are currently in negotiations for for Harborside 5, can you give us a sense if that is multiple tenants you're talking to or one larger tenant to fill the rest of that space?

Well, the answer to that ironically is both. So as to be protective of the confidentiality with regard to these tenants, we have several things in the works right now, and we are confident that there is enough activity over the near-term between what we are doing to hopefully, if not fill the building in one circumstance, to make a very significant gain in occupancy in several other circumstances.

The economics of all these transactions are roughly equal, and at the end of the day with either scenario, we have taken a very careful look at the economics of Plaza 5, and we expect that the free and clear is going to exceed 10.2 percent regardless of how that final chunk of leasing ends up.

Great. Thanks.

John Stewart. Smith Barney.

Good morning. It is Andrew Colter (ph) here with John Stewart and Jon Litt. Mitchell, I was wondering if you might be able to update us on any potential developments in subleasing the acquired AT&T lease obligations? You have previously spoken about developments in (inaudible) Park.

Yes, we have done some subleasing against what was 922,000 feet of ongoing obligations with a variety of expirations. We have sublet or participated in sub-subletting, if you will, about 81,000 square feet. That is primarily or two-thirds of that is on the Brelan (ph) Road properties, and a third of that is in the Somerset County market at 290 Davidson.

And so we are making progress against that mitigation. We are also looking at some other interesting aspects with some of that real estate on perhaps a longer-term basis.

Okay, great. Just also on the Carnegie Center in Princeton, I think you had at least previously spoken about some potential developments there, possibly a full site development. Has there been any progress since last quarter?

There really has not. There was supposed to have been an RFP issued for a major institutional use. We do expect that to be forthcoming. It has not come out yet, and that particular requirement -- again it is an institutional use -- can only be accommodated on less than a handful of sites within that particular marketplace. And so we think we will have certainly a good shot at the deal. But as with some of these larger requirements for one reason or another, it has been delayed.

Great. Final question just on the Nebraska site as well. Any potential sale to a condo developer there?

Yes, we have two deals out right now, and that one is -- it is going to be first come, first serve. We will clearly get out with a profit, and the users are both 10-31 buyers so they are motivated. And they are both converters in that they plan as we suspected to convert the office component to residential.

Both contracts are in progress right now. Both are quite viable and from developer/owners that have done business in that marketplace, and so hopefully by the time we meet up again next quarter that will be a done deal.

Great. Thanks very much.

Ed Wacabush (ph). Zimmer Lucas Partners.

Just two quick questions. What do you see as a current run-rate for (inaudible) earnings of unconsolidated subs with your current dispositions? Also, again on straight line rents, is this something -- is the current level something we should see going forward, or is this just some sort of a one quarter issue?

I'm sorry. On the straight line rent situation, again I think basically concessions have subsided. They are beginning to subside in the markets. I think that you will probably see more of a perpetuation of what you have seen this quarter going forward. I don't think there should be aberrations and anomalies.

With respect to the equity and earnings, basically that is limited right now to the hotel, which is our joint venture with the Hyatt Corporation, which I might add and we are going to get your exact number in a moment, but right now our performance on that hotel for the first nine months of 2004 is about 83 percent occupancy, and the ADRs have moved up to about $142 a night. Approximately the number that you are looking for is about $1 million a quarter.

Okay. I appreciate that very much. Thanks.

John Stewart. Smith Barney.

Barry, can you help us understand why your guidance for next year is so far below current consensus? I mean particularly given some of the interest savings you're talking about and at the midpoint no change in occupancy? Can you help us understand the rationale there?

Let me respond to that. I think that looking at the markets realistically today, if you look at our portfolio and say that approximately 12 percent of the rent is rolling over next year through 2005, maintaining occupancy roughly to the point where we started this year, which is a slight rolldown from where we are today. Again looking at it quite realistically.

And if you evaluate market rents and say that depending on the market you might average between 5 and 10 percent rolldowns on $600 million worth of income, you are looking at roughly 10 cents as a result of that equation.

And so that is a large component of the guidance going forward. Rents in the markets today in the low $20 -- I'm talking in general now -- in the low $20 area with $8 plus or minus in expenses, yield somewhere around $12, $13, $14 net, and that is generally what tenants are looking for, larger tenants making deals today. And so when you are looking at cost basis on buildings of $200 a foot, which, of course, we are not, and some of the opportunistic buys that we have been able to accomplish, again particularly with AT&T and some of the other things we're doing, put our cost basis at either $100 or well below $100 a foot.

You can see what kind of returns -- real returns on invested capital -- are being generated as a result of some of the leasing transactions that you're hearing about today in the markets with recent acquisitions. You know 5, 6 percent yields in terms of real numbers. And so when we took a very close look at each of our submarkets, the real rents in each of our markets related to the prospect for absorption against our expirations, we felt comfortable with the guidance that we put forward today.

So I guess the inference would be that you expect to continue to see negative same-store next year?

Yes, I think that is right. I think that the reality of the marketplace is that we are going to see a very slow recovery. Hopefully the moon and the stars are aligned now with a lot of the political agendas behind us and with a very strong administration regardless of your political proclivities. Between the House and the Senate and the Administration, they ought to be able to accomplish some objectives now, which should lend to confidence in the business community in terms of capital spending. But this is going to be a slow climb. And so we see the '05 period of time as pretty neutral to negative to a negative bias, and then hopefully '06, a much more positive bias. We see every deal in the marketplace, every single one of them. We have looked at every large deal being done today, and you see tenants that are moving from $26, $27 a foot rents into recent deals that have been announced in the marketplace and have net net effective rents after concessions and free rent in the $20 range.

And as I said, when you takeoff your OpEx expenses and your taxes, you end up at you know that 12-ish number, not including amortization of your tenant improvements. And so that is what we think about the markets right now. We think we put out again, not to be redundant, but a pretty realistic view of where we're going to be through '05. And again we are a cash flow positive company. 86 percent on CAD this quarter this reported quarter. Probably about neutral plus or minus moving through '05 on a cash basis.

I guess your outlook does not seem inconsistent with other national players, but for companies focused in the Northeast, it seems certainly less bullish than what we are hearing from some of your peers?

You know again I don't know who you're referring to and what markets you are referring to, but I can tell you that other than boutique players in New Jersey kind of all feel the same about the recovery. And obviously Manhattan perhaps has done a little better on progression, more rapidly. But I can tell you as sure as I am sitting here talking to you, that there are a number of major occupants in New York City that for a variety of reasons, not the least of which is employee diversification and distribution of workforce, are in very very serious dialog about some pretty large requirements moving out into the suburban markets again for a variety of reasons.

What the long-term effects, if any, on the Manhattan marketplace will be, I don't know. But again I do acknowledge the fact that midtown has seen a pickup recently, a little more space. The investment banks have been taking some space in midtown. Downtown is still under severe pressure, and there are large requirements and corporate leadership who have been -- high-level corporate leadership -- been involved with the state of New Jersey both through the Treasurer's Office and the EDA, as well as the real estate community process per se to talk about some major dislocations into the suburban markets.

Okay. Thanks of the color.

Karen Zesis (ph). Lehman Brothers.

You mentioned possible acquisitions in suburban Philadelphia. Would you be able to mention if some of the EOP properties that they are marketing there is something you are looking at?

Not really. We did look at it carefully. We don't consider ourselves to be a serious player on that portfolio.

And also would you expect current level of TIs and leasing commissions to sort of be a good run-rate going forward?

Yes, I think so. I think maybe it was slightly on the high side. I mean we did have some expensive transactions you know through a variety of our markets, and I could provide more specifics. But we did a lot of leasing in the Denver portfolio, which was fairly expensive. In some cases, $6 or more a square foot a year. I think that generally we're at the precipice with regard to or the peak with regard to TI installations at this point. So hopefully if anything we will begin to see a bit of a downward bias on the numbers.

Chris Haley. Wachovia Securities.

Good afternoon, guys. It's Dirk Qrani (ph) with Chris. I just wanted to follow-up with the '05 guidance. Was that, Barry, did you say that was a net 50 million on acquisitions?

What we said was that we would sell and redeploy that money. There was about 50 million in sales, including the Texas assets, and the acquisition of about $50 million worth of product with a little bit of lag between the sale and the buy.

Okay. So mutual on the net basis then?

Effectively, yes.

Then the (inaudible) going into '05, just the refinance savings offset by rental rate rolldowns?

Effectively at the midpoint.

All right. Great. Thanks a lot.

Ed Wacabush (ph). Zimmer Lucas Partners.

Just a follow-up question on occupancy. So if you expect to end '05 kind of where you started in '04, what are your assumptions in terms of how much leasing you're going to do in the AT&T building, as well as the Plaza 1 here in (inaudible)?

We have made extremely modest assumptions through '05. Negligible leasing in the AT&T product and virtually not leasing in the Plaza 1. That is what is baked into our projections.

Okay. So if you would not count that, what would be the occupancy growth you're looking for without those extra square feet coming to market?

Well, I would tell you that is probably where we ended the quarter. Flat.

Okay.

So that to us represents some pretty good upside, but we are not prepared at this juncture to realize it in our thinking because of market conditions. Other than you know again there are some large requirements in the marketplace that are not willing or cannot wait for new development to the extent there might be a potential to accommodate new development, and those buildings are in play. But as far as that, until we kind of see the whites of their eyes, we are not willing to bake that into our modeling.

And you know to give you another reflection on the market, if you look at certain of the markets like suburban Philadelphia, and this is in response to Jon Litt's team who said that there is more bullishness in the marketplace, if you look at the brokerage community, right now most of the major landlords, not including us, in the suburban Philadelphia markets have started bonus programs on leasing commissions that are the highest leasing commissions I have ever seen in my career. And if the markets are so strong, why would that be the case? And that is kind of proliferating throughout the suburban Philly market right now.

I appreciate that. Thank you.

Having no further questions, I will turn the call back over to management.

Well, thank you very much for joining us today. We appreciate the opportunity of discussing what has been a very good quarter and continue to be very good performance results in the Company and hopefully a very realistic view of the markets. We look forward to joining you next quarter. Thanks very much.

This does conclude the call. Thank you for your participation. You may disconnect at this time.