Veris Residential Inc (VRE) 2004 Q4 法說會逐字稿

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

Thank you. Good morning. And thank you for joining Mack-Cali's fourth 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 markets, 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 fourth quarter came in at $0.90 per share versus $0.91 per share for the fourth quarter in 2003. We had a very active quarter of leasing with over 1.5 million square feet of transactions. Our portfolio ended the quarter at 91.2 percent leased, compared to last quarter's 92.9 percent.

Our change in occupancy was primarily due to AT&T's lease expiration of roughly 400,000 square feet at the 30 Knightsbridge complex in Piscataway, New Jersey, a complex you may recall that we acquired from AT&T in the second quarter of 2004, as well as the effect of several new acquisitions and dispositions. And while we managed to sign almost 530,000 square feet in new leases, mostly with smaller business users, we're still not seeing much in the way of overall new demand.

Businesses continue to defer their expansion decisions, and the markets remain quite competitive, with continued pressures on rent and large capital spending requirements for tenant improvements. As I've said on prior calls, we don't expect these pressures to abate until well into 2005 and into the early part of 2006, when we all believe there will be more of a sustained economic expansion and recovery that gives businesses enough confidence to add new staff and absorb more office space.

We also continue to see the effects of mergers and consolidations in many of our markets and the lack of clarity that those business combinations are providing. You might consider the recent announcement with SBC and AT&T. We think, frankly, that this could be a net positive for the New Jersey marketplace over time, as there will not appear to be much redundancy in that business combination, and the R&D and lab components of the Company are headquartered here in New Jersey.

A few of our northeast submarkets are showing good demand. I would say most notably Jersey City, and to a lesser extent, Morris and Somerset counties in New Jersey with several large deals in the marketplace right now.

Now I will review some of our activities and results for the fourth quarter. In the fourth quarter, we acquired 5 office properties totaling over 400,000 square feet in our northeast core markets. Included in this were 3 buildings in Parsippany, New Jersey, one in Moorestown in South Jersey, and one in Bala Cynwyd quite recently, Bala Cynwyd being a very vibrant submarket in suburban Philadelphia.

In addition, we acquired a 62.5 percent interest in One River Centre, a 3-building complex in Monmouth County, New Jersey, by converting our mezzanine loan to equity interest. You may recall that we initially participated in this property in late 2003 with minimal risk when the property was roughly 52 percent leased. Over a short period of time, with our involvement as leasing and managing agent in the property, the property is well over 90 percent leased today, and we're currently in discussions to acquire the balance of the partner's interest and own 100 percent of this magnificent property at exit 109 on the Garden State Parkway.

Just yesterday, we completed a very exciting acquisition, one of our largest acquisitions ever, in acquiring 101 Hudson Street on the Jersey City waterfront, the Gold Coast, for approximately $329 million. This 42-story property is truly one of the trophy properties in the region and in the state. It now increases our holdings to approximately 25 percent of the waterfront's Class-A office space. And as I mentioned before, we've seen quite a bit of traffic in that market over the last 3 or 4 months.

During the quarter we reduced our holdings in our non-core markets by selling 2 wholly-owned properties in Texas. Just a few weeks ago, we sold our building in Nebraska, which we had taken back in foreclosure, and completed our exit of Texas, selling our last wholly-owned asset in the state, as well as our joint venture assets, 2 buildings in the Houston submarkets.

During the quarter, we took advantage of the favorable sales market and sold Kemble Plaza 1, a 387,000-square-foot office property in Morris Township, New Jersey for $77 million. This was part of the strategic transaction done with AT&T in the second quarter, whereby extending the lease in this facility we made it a very marketable investment sales asset and took advantage of the pricing levels that we're seeing today.

Recently we sold our interest in 3 Skyline Drive, an office building at Mid-Westchester Executive Park in Hawthorne, New York, for $9.6 million. Our interests were sold to the building's tenant, Terrell Pharmaceuticals.

Some of the leasing highlights for the fourth quarter include Morgan Stanley's renewal of 306,000 square feet at Harborside Financial Center, Plaza 2. Pfizer's 155,000-square-foot lease at 5 Wood Hollow Road in Parsippany, a recent acquisition. A&E Distribution's leased for 63,000 square feet at Mack-Cali Airport in Little Ferry next to Teterboro Airport. Fiserv Solutions, a renewal for 60,000 square feet at 250 Johnson Road in Morris Plains, New Jersey, a long-term home for this great tenant.

Forest Laboratories 36,000 square-foot expansion at Harborside Plaza 5. Forest Labs, a generic pharmaceutical company, continues to expand its presence, now occupying approximately 180,000 square feet at Plaza 5. And just this week we signed leases totaling almost 94,000 square feet at Harborside Plaza 5, including a 72,000 square foot lease with Iksis [ph] North America, a French technology company, for its North American headquarters. Harborside Plaza 5 is now 87 percent leased. And as I mentioned a moment ago, we're extremely encouraged with the level of traffic and showings that we're seeing down in the Jersey City Gold Coast market.

While we still had to be very aggressive to close leasing transactions during the quarter, our tenant improvement and commission expenses were actually lower than last quarter's. The fourth quarter was $2.33 per square foot per year, down from the prior quarter's $3.23.

Our portfolio-wide roll-down was 13.7 percent for the quarter, or roughly 8.7 percent for the year, compared to the prior quarter's 4.2 percent. However, the roll-down was a bit skewed as a result of the 306,000-square-foot Morgan Stanley lease, without which our roll-down would have been 4 percent.

It's important to note, however, with respect to the Morgan Stanley lease, that this lease was done on a triple net basis with no tenant improvement allowance, a minimal brokerage commission, and no expense stops. And given the fact that our tax abatement expires in 2005, we thought this was a real smart deal for this Company to do. It now extends the lease out to 2013.

Our rollovers for 2005 are roughly 10.5 percent of base rent, or about $55 million. There's no question about it, for 2005, we face considerable leasing challenges in the first and second quarters. Deutsche Bank's 295,000-square-foot lease at Harborside will expire in the first quarter, and in the second quarter we have several large leases expiring, including AT&T's 475,000-square-foot lease at Kemble Plaza 2 in Morris Township. This was a one-year lease done following the strategic acquisition of this property from AT&T as part of the global deal that we did in June.

In Washington, we have a lease expiration with Winston & Strawn, a 114,000-square-foot law firm lease at 1400 L Street that's expiring. However, we do what have we think is a deal in process with the GSA to backfill this space. And in Denver, MDC's Holding lease, a housing company, expires, and that's about 133,000 square feet at 3600 South Yosemite in Denver.

So 2005 will be yet another challenging year with markets remaining highly competitive and an overall economic recovery not yet in our sights. We need to see continued and sustainable job growth to increase demand for office space. We are seeing good signs that indicate that the expansion that has been seen in the particularly the mid-town Manhattan market is spilling over into the surrounding suburban markets.

As I mentioned, we've seen a good deal more activity in Jersey City, and we've seen a number of quite large and exciting transactions of companies that have been located in lower Manhattan that are apparently ready to make some serious commitments in the suburban markets, particularly Morris County.

Before I hand the call over to Barry, I would like to highlight some of our accomplishments for the year 2004. 2004 marked our 10th year as a public company. During the year we continued to strengthen our presence in our core northeast markets. We acquired 14 buildings totaling over 2.4 million square feet in New Jersey and suburban Philadelphia. These core markets, now making up over 94 percent of our portfolio's base rent, continue to outperform virtually all other markets throughout the country because of the high barriers to entry and the limited inventory, as well as the depth of the macroeconomic base within this region.

In 2004, we further reduced our holdings in nonstrategic markets. We met our commitment to the marketplace by selling 2 buildings in Texas, and as I mentioned, recently selling all of our remaining assets in the State of Texas. We also sold a mixed use joint venture property in Daly City, California, because we thought we could maximize value in a non-core, non-strategic submarket of San Francisco.

Mack-Cali continued to outperform in our core markets, with our leased rates exceeding the market average in almost all of the submarkets in which we do business. Our real-estate expertise was again honored in 2004, with 4 northeast properties and Mack-Cali as a whole receiving industry awards. And during the year 2004, in what was yet another year of tepid economic growth within the United States, we leased almost 5 million square feet during the year.

During the year, we took advantage of the favorable interest rate environment to strengthen our balance sheet and increase our capacity and flexibility to act on opportunities, like 101 Hudson Street. And so I do believe that our Company and our strategy are on track. We've entered 2005 in a strong position, with a strong leased and occupied portfolio and a great deal of financial flexibility. And so we're poised to meet the challenges ahead and to capitalize on the opportunities in a recovering economy.

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

Thanks, Mitchell. Net income available to common shareholders for the fourth quarter of 2004 equaled $30.3 million, or $0.49 a share, versus 27.4 million or $0.47 a share for the same quarter last year. For the year ended December 31st, 2004, net income available to common shareholders equaled $100.5 million or $1.65 per share versus $141.4 million or $2.43 per share for 2003.

Funds from operations available to common shareholders for the quarter ended December 31st, 2004, amounted to $67.9 million, or $0.90 a share, versus 66.5 million or $0.91 a share for the quarter ended December 31st, 2003. For full-year 2004, funds from operation available to common shareholders amounted to $270.1 million or $3.60 a share, versus $275.7 million or $3.82 a share for the same period last year.

Parking and other income in the quarter included $0.5 million in lease termination fees, as compared to 800,000 including the same quarter last year. Same-store net operating income, which excludes lease termination fees, on a GAAP basis increased by 1.8 percent for the fourth quarter of '04, as compared to the same period in '03. And for the year ended December 31st, 2004, increased by 0.4 percent over 2003.

Same-store net operating income on a cash basis increased by 3.1 percent in the fourth quarter of '04 as compared to '03, and for the full year of '04 increased by 0.1 percent as compared to 2003. Our same-store portfolio for the fourth quarter was 25.9 million square feet, which represents 91 percent of our portfolio. Our unencumbered portfolio at quarter end totaled 248 properties aggregating 23.1 million square feet of space, which represents 80 percent of our portfolio.

During the fourth quarter, we refinanced $150 million secured loan with Prudential Insurance Company of America. The loan carries an effective interest rate of 4.84 percent, which is a reduction of 226 basis points from the previous loan. The loan now matures January 15th, 2010, and is secured by 7 properties. The previous loan was secured by 11 properties.

We refinanced our $600 million unsecured revolving credit facility with a group of 27 lender banks of which we currently have $290 million drawn. The $600 million unsecured facility, which is expandable to $800 million, carries an interest rate equal to LIBOR plus 65 basis points, representing a reduction of 5 basis points from the previous facility. The credit facility which also carries a facility fee of 20 basis points has a 3-year term with a 1-year extension option. The interest rate and facility fee are subject to adjustment on a sliding scale based on the operating partnerships on secured debt ratings.

In January of 2005, we sold $150 million of 5.125 percent notes due January 15th, 2015. The notes were priced to yield 5.2 percent. The proceeds from the issuance of approximately $148.1 million was used to repay outstanding borrowings under the credit facility and for general corporate purposes.

At quarter end, Mack-Cali's total undepreciated book assets equaled $4.4 billion and our debt to undepreciated asset ratio was 37.9 percent. And our debt to market capitalization ratio was 32.8 percent. The Company had interest coverage of 3.5 times and fixed charge coverage of 2.5 times for the fourth quarter, and for the full-year 2004, the Company had interest coverage of 3.5 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 6.32 percent.

Our funds from operation guidance for 2005 is $3.45 to $3.65 per share and is based on the following major assumptions. Our mid-point case assumes leasing activity of 3.1 million square feet during 2005, versus scheduled lease expirations of 3 million square feet, which would put us roughly at the same level of occupancy at the end of '05 as we began in '04.

From now through the end of 2005, our mid-point case assumes minimal property sales and reinvestments beyond the 101 Hudson acquisition, which closed yesterday, and the planned sale of our Long Island assets which for $72.5 million. In addition, the plan also assumes refinancing approximately 150 million in other debt maturities as they mature through 2005.

Please note that under SEC Regulation G, concerning non-GAAP financial measures, such as funds from operations, 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 Regulation G, as well as our 10-K.

Now, Mike will cover our leasing activities. Mike.

Thanks, Barry. As of December 31, our consolidated portfolio was 91.2 percent leased compared to 92.9 percent leased at September 30th and 91.5 percent at December 31, 2003. During the fourth quarter we signed 174 transactions totaling over 1.5 million square feet. For the full year, we signed 697 transactions for 5 million square feet. These transactions reflect retention of 55.2 percent of expiring space for the quarter and 64.3 percent for calendar year 2004.

Further details on our leasing activity can be found in the supplemental package on our website. Our market information is provided by Cushman & Wakefield, and unless otherwise noted, we will discuss overall Class A vacancy rates and direct Class A average asking rents.

Beginning with our northern suburban region, Westchester and Fairfield counties, we saw a slight increase in overall availability but additional contraction of sublease space on the market. Availability in Westchester increased from 18.1 percent to 18.7 percent. Sublet space was reduced from 750,000 square feet to just over 700,000 square feet, representing approximately 17.5 percent of total available space, down from 20 percent in the third quarter.

Asking rents eased slightly in Westchester to $29.83 per square foot, down $0.14 on average. Mack-Cali's Westchester and office flex properties totaling 4.9 million square feet, ended the quarter at 95.9 percent leased, down from 96.3 percent in the prior quarter. Leases totaling 317,000 square feet expire during 2005. This comprises approximately 6.8 percent of total Westchester leased space and 7.1 percent of its total annualized base rent.

In Fairfield County, availability increased slightly from 17.1 percent to 17.5 percent in the fourth quarter, following a slight decrease in the third. The percentage of total availability represented by subleased space decreased to 32.2 percent down from about 34 percent, and asking rent increased from $29.60 to $29.73. Mack-Cali's Fairfield properties comprising 852,000 square feet ended the year at 88.5 percent leased, down from 90.7 percent at the close of the third quarter.

Fairfield leases expiring during 2005 total 73,000 square feet, or 9.6 percent of our occupied space, and 11.3 percent of total annualized rent. Noteworthy, Mack-Cali transactions in Westchester and Fairfield during the fourth quarter include, Board of Cooperative Educational Services, which renewed a total of 30,000 square feet in the Cross Westchester Executive Park in Elmsford, New York. And BTX Technologies, which leased about 23,000 square feet at 5 Skyline Drive, an office flex property in Hawthorne, New York.

There were no new construction announcements during the fourth quarter in either County. However, 2 Norwalk properties totaling 637,000 square feet will be delivered in 2005. Diagio North America will occupy 277,000 square feet of this total, but will consolidate from several other Stamford and suburban West Chester locations. Overall transaction volume and absorption in the central business districts of Stamford and White Plains were encouraging. However, lackluster job growth in both counties limited business growth and demand for new space.

In the Bergen County submarket vacancy decreased again from 22.6 percent to 21.1 percent. Morris County showed positive absorption ending the year with availability of 21 percent, down from 24.3 percent in the third quarter. During the fourth quarter, 8 leases in excess of 50,000 square feet were signed in Morris with total absorption offsetting much of the 970,000 square feet vacated by BASF in the third quarter.

Hudson County availability continued to decline in the fourth quarter, totaling 17.2 percent at year end compared to 17.9 percent in the third quarter. Nearly 70 percent of total availability is composed of subleased space. Mack-Cali's northern New Jersey properties total 11.7 million square feet and ended the year at 92.5 percent leased, down 1/10th from the third quarter. Leases totaling 1.5 million square feet expired during 2005, representing 13.8 percent of total northern New Jersey leased inventory and 10.3 percent of its rent.

In the central New Jersey market, availability decreased from 24 percent to 23.3 percent in the fourth quarter. Average asking rents increased $0.72 to $28.06. Mack-Cali's central New Jersey presence is now 4.1 million square feet, which is 82.8 percent leased. This compares with 92.9 percent at the end of the third quarter, reflecting the impact of the expiration of AT&T's leasing Piscataway.

Expirations for 2005 totaled 232,000 square feet, representing 6.9 percent of the region's leased inventory and 7.3 percent of its total rent. In addition to the transactions Mitchell mentioned, other significant northern and central New Jersey transactions for Mack-Cali included Citigroup Global Markets, which renewed 26,000 square feet at 140 East Ridgewood Avenue in Paramus, and also renewed 22,000 square feet at 325 Columbia Turnpike in Florham Park. There are minimal construction deliveries for 2005 in northern and central New Jersey.

Improvements in the suburban Philadelphia market continued in the fourth quarter. The vacancy rate decreased from 23.7 percent at September 30th to 22.4 percent at year end. Asking rents fell from $26.21 to $25.79 and sublet space decreased from 24 percent to about 23.2 percent of total vacancy. Mack-Cali's office and office flex holdings in this market total approximately 3.7 million square feet in both suburban Philadelphia and nearby southern New Jersey. These properties ended the year at 91.2 percent leased, which is up from 91.1 percent in the third quarter.

Leases expiring during 2005 total 453,000 square feet. This is 13.5 percent of the region's space leased and 11.8 percent of its total rent. Noteworthy transactions in Mack-Cali properties in this region included, Computer Sciences Corporation which renewed its 26,975 square feet at 2 Commerce Drive in Moorestown, New Jersey, and Brinker Capital which took 19,600 square feet at 3 Westlakes in Berwyn, Pennsylvania.

In Washington D.C. vacancy continued to decline going from 8.6 percent in the third quarter to 8.2 percent at year end. Asking rents eased slightly from $46.59 to $46.13. Job growth in the region continued -- contributed to the strong performance over the year. Absorption outpaced the significant new supply coming on line, but there were 17 new projects in the pipeline totaling 5.8 million square feet. More than half of this space is estimated to be speculative and still available, which will provide a challenge in the coming year.

Mack-Cali's 450,000 square feet in the Washington market ended the year 94.4 percent leased compared to 98.2 percent in the third quarter. Expirations in 2005 total 190,000 square feet or 48 percent of our space leased and 54.5 percent of the annualized rent in our D.C. properties. Over half the space is represented by the Winston & Strawn expiration Mitchell mentioned earlier.

In our major markets outside the northeast, Denver suburban vacancy rate edged upward to 19.7 percent from 19 percent in September, average asking rents decreased from $19.13 to $18.39. Finally, in San Francisco, vacancy rates again decreased ending the year at 19.9 percent compared to 20.8 percent in the prior quarter. Average asking rents were up $0.24 to $28.80.

Mack-Cali's holdings outside the northeast totaled 2.1 million square feet at year end and were 88.3 percent leased, down slightly from 89.4 percent in the third quarter. 2005 expirations in these markets totaled 200,000 square feet, representing 11.2 percent of the market space and 9.2 percent of their base rent.

As Mitchell indicated, businesses are still slow to expand and make commitments to new space. As confidence returns, we are poised to provide well located, high-quality assets for tenant space needs. We have repositioned and introduced to the market the properties purchased from AT&T last year and as these were user-owned facilities, this will offer companies the first opportunity to locate their business in these high-quality buildings. Our experienced leasing teams are working very diligently at all properties to secure high-caliber tenants at optimal terms. Mitch.

Thank you, Mike. A very comprehensive report. And now we'll open the floor to questions. Operator.

Thank you, gentlemen. (Operator Instructions). And our first question will come from John Stewart with Smith Barney.

Hi, guys. It's John Stewart here with John Litt. Mitch, could I get you to expand on your comments that you're seeing some tenants ready to make some serious commitments out of lower Manhattan to the suburbs?

Yes, certainly. I think I've indicated on prior calls that we've had discussions with certain large users that have a large employee population in lower Manhattan. Several in the insurance industry in particular. And they have indicated to us that as a result of various concerns, demographic concerns, as well as, what we all fear, a potential threat of terrorism, that for business continuity purposes, for quality of life and the ability to attract a wider range of skilled and educated employees, that they were intending to relocate several thousand employees, actually, into the suburban markets, and in particular, identified the Morris and Somerset County markets, Morris in particular, as targets for this relocation or distribution of work force, if you will.

There are several hundred thousand square foot plus requirements in the market for a variety of uses, a combination of general office and administrative uses and data center hot sites, hot spots, as they're called, that are looking at -- and hopefully more than looking at this point, at several of Mack-Cali properties in these markets. Whether this represents a continuum or a continuing trend, time will tell. But right now there is a substantial amount of activity in the market as a result of this.

Do you have a sense for timing?

Oh, it's imminent. These requirements have been out there for 3 or 4 months, and there's been a substantial amount of due diligence done from a real-estate perspective, ascertaining infrastructure capability, et cetera, so we're pretty hopeful about at least 1 or 2 of these situations.

Do you have a sense for whether Verizon intends to move to the Jersey suburbs or do you think they will go to another market?

Certainly public knowledge that Verizon has been exploring corporate headquarter relocations in both New Jersey and in the state of Virginia. Clearly the MCI situation adds a layer of complexity to that situation, but I have personally spoken with the State Treasurer in New Jersey to try to get a handle on it, as well as talking to the highest level executive force within Verizon in New Jersey.

Verizon first of all has been in a great deal of detailed discussion with Pfizer concerning the former AT&T headquarters in Basking Ridge that was transferred -- that was purchased by Pharmacia and then transferred to Pfizer as a result of that merger. And the headquarters of Verizon Wireless exists in somewhat of a fragmented occupancy in the Bedminster region. There are some 1,800 employees of Verizon Wireless located in the state of New Jersey, as well as Verizon New Jersey.

And I can tell you that based on my discussions with the Verizon people, there's a strong preference, at least at the people that are located here now to stay here. And so I think that bodes well for the state. The State Treasurer's office and the Governor's office have been extremely proactive in a retention program, we call it the "BEIP" program, Business Employment Incentive Program in New Jersey, some $64 million second only to Goldman Sachs in terms of economic magnitude, to retain Verizon in the state.

So I'm not in Ivan Seidenberg's office, so I don't know what he's deciding, but there's a great deal of effort being made to see them stay in New Jersey and expand in New Jersey.

I think John Litt has some questions as well.

Barry, I was thinking about your guidance. When you first gave your guidance it was before the 101 deal. And I'm surprised that there's no change to it subsequent to the 101 deal.

Basically, when we did the -- when we did the 101 deal and we're looking at now at this point in time we said we were looking at a number of different alternatives for the financing of that transaction, right now, and at that time we did not have the planned sale of our Long Island assets on our radar screen or in our guidance on the midpoint. That has some effect to the guidance and brings down a little bit the accretion that results from those 2 transactions.

That, coupled with some review of our leasing assumptions for the full year of 2005, which primarily resulted in pushing out some of the leasing activity that we thought we were going to achieve during the year, has culminated in basically having the guidance stay pretty much where it was in the prior -- when we reported last time.

Is there some leasing activity where you have or haven't seen, since you've last reported, that causes to you think that you're going to not be able to do -- I mean, I think you said 3 million square feet of leasing last quarter is what you expected to do this year.

John, let me respond to that. Some of -- in this environment, again, not existing, perhaps, in the one euphoric environment which is midtown Manhattan, but in general, in the suburban markets these transactions are taking a long period of time to close, and so we expect that we will be able to achieve the roughly 3 million square feet of dealing with scheduled expirations, as well as the absorption of some of the -- what I'll call first-generation space that we have throughout the year.

But given the time required and the, just sort of, the lack of alacrity in completing these transactions, it pushes out the income stream a little bit further when we're actually going to collect rent. And that's why it's affected our thinking. We still have the activity, we still expect to close the deals, but the time lag just is going to push out the income perhaps a little bit further.

And the Long Island sale, I mean, you're still net positive on acquisitions even after Long Island against 101 and some of the other activity you've done.

Well, yes, but you have to understand, and I'm sure you do, that the last time we reported, and in that guidance, we did not consider the displacement of the income stream from the Long Island buildings, but as a function of our desire to continue to shape the Company's portfolio, and given the fact that Long Island was not a particularly fluid market for Mack-Cali, having only 2 buildings in Nassau County and not considering it to be a strategic market for us, I felt it was the right time to take advantage of the craze in pricing that exists in the investment sales market, and sell those assets at an incredibly high pricing level.

But nonetheless, we're selling those assets and taking in the capital and will reinvest that in more opportunistic -- in a more opportunistic fashion, but the income is going to be lost. And so that's affected us to some extent.

Okay. Thank you.

You're welcome.

We will now hear a question from Greg Whyte with Morgan Stanley.

Hi, good morning, guys. On the 101 Hudson Street, can you give us some indication of what the sort of lease rollover expectations are over the next year or so?

Yes, really nothing. The building is about 1,250,000 square feet. I know it's been reported 1.2 million, but it's 1,246,000 to be exact. And we have about 45,000 feet of space that was unleased or as of the acquisition yesterday. There's a tremendous amount of activity in that building right now, in terms of demand for the product. We don't really have any role until 2007, which is a part of the Merrill leased space.

Merrill re-upped for about a third of their space. They occupied about 600,000 feet in the building, so we have about 400,000 feet coming back to us in 2007, which, frankly, works really well with the lease rollover schedule that we have at the Harborside complex. It's my expectation, given the level of demand in activity in 101 Hudson, that that 400,000 feet is going to be dealt with pretty summarily, so I don't think we're going to have that much space come 2007.

Mitch, what's the average rents on the asset right now?

The average rent is average between $27 and $28 plus electric, plus tenant electric. So I saw your note, and you're pretty close on the estimate of cap rate. It's a little bit higher. It's just a shade under 7 percent. And then based on some contractual increases, it goes higher next year. And, so from my perspective, at making a deal on that super trophy asset at $263 a foot, and considering the fact that with free land, essentially, at Harborside, would it still cost us more than 300 a foot to put new product in place. To me this is a really magnificent acquisition for the Company.

And I'm assuming that the mark to market is pretty minimal. You think the rents you've got there right now are pretty close to market?

No, I think that, based on what we're seeing at Harborside, the rents are probably 10 percent below.

Okay.

Anywhere between 7 to 10 percent below.

Just one additional question. Your leasing activity in the fourth quarter on an annualized basis, if I look at it, certainly was greater than you had accomplished in the earlier part of the year. Is that merely a function of what was rolling in the quarter, or is it -- is there any indication that there's an acceleration of leasing pace or activity?

No, I think the pace is about the same as it's been. There was a desire on the part of a number of businesses to sort of step up to the plate and finalize their negotiations prior to year end. The Company has historically been doing a million feet a quarter, and I see no reason to think it's going to be any different going forward, notwithstanding minor cyclicality, if you will.

Okay. That's helpful. Thanks a lot.

You're welcome.

Moving on, we'll hear from Chris Capolongo with Deutsche Bank.

Good morning. Mitchell, I was wondering if you could just expand on -- or just give us a general sense of your leasing strategy, for the upcoming year. Would you say that you're more likely to do shorter term deals with minimal capital expenditures at this point? Is that something you're thinking about, trying to keep the lease length to almost time improvement in the market?

Well, we should only have that kind of control over the marketplace. Our business is to fill buildings at the highest rents that we can, and to maximize value. And that's what we do every day. Each market has its own particular characteristics as the type -- as a result of the type of businesses that proliferate and the type of real-estate assets that exist within those markets.

Generally, in the waterfront market, we see 10 to 15-year leases, and these are long-term commitments on companies that are making substantial investments in real estate that they lease from others. The amount of capital that companies that are in financial services, in particular, are putting in place in our real-estate along the waterfront is incredible, the dollars per square foot. And so generally you would see those leases tend to be longer.

Our tenant improvement allowances in those markets are at the higher end of the spectrum, but, of course, we have longer leases to amortize those improvements over, and we're making investments generally throughout our portfolio with very high-grade credit. So they're generally quite safe in terms of our investment of capital.

But as you move through the markets you see different rent tendencies, in the Morris County market, in our Parsippany business campus, generally these are corporate users that they, not unlike the waterfront, want to make longer commitments, want to take advantage of the economic benefits of longer commitments, and that's what the market demands, and we respond to that accordingly. But each market is different, and if you are in a submarket of Elmsford in Westchester, you're going to do what the market demands, and if that's a 5 or a 3-year lease, that's what you're going to be negotiating.

Sure. I guess I was asking just in terms of the Morgan Stanley lease at Harborside and the Pfizer lease, the 2-year deal in Parsippany. I guess maybe on the Pfizer deal, was there some nuance to it that --?

Yes. The situation is as follows -- Actually, we have about 9 months left on the overlease with Lucent, which Pfizer was a subtenant on. So we get 27 months from October of this year. And the nuance is that as part of economic expansion within the region, the State of New Jersey kind of co-invested with Pfizer in their campus, which is nearby 5 Wood Hollow, to actually make real-estate investments by expanding the research facility there, by about $400 million.

And the unit that we have in 5 Wood Hollow is scheduled to move into that new facility, which is wholly owned, again, by Pfizer, with participation, in the economics by the State of New Jersey, and from our perspective, which goes to your specific question, the amount of time that's left on that lease, which, again, as you know, call it 3 years from now, should provide a much stronger economic base within that region, and we think at that point in time, if we continue to see sustained economic activity and job growth, the rents will be higher to $30 a foot than they will be to $20 a foot in that market with the kind of quality asset that 5 Wood Hollow is. So, that kind of addresses your issue of, yes, in that instance we would prefer to have a shorter lease because we think the rents are going to grow. But to say that we control that is not accurate.

Sure.

It was a function of circumstance.

Sure. So that means that there's basically 180,000 square feet of Lucent space that will expire at the end of '05 that's un --?

Yes, you mean the remainder of the building?

Yes.

Yes, right, but we are working with a couple of requirements on that now.

Okay. And then just the last question, on Nabisco's expiration at the end of '05, is there any sense of what the thoughts are?

Well, Nabisco is definitely out because they -- that was part of the Kraft acquisition. So the lease is going to expire. Kraft/Nabisco is still perfectly willing to participate in some level of participation in the cost of a new lease. We've been working with several different tenants in 7 Campus, and we're cautiously optimistic. We've got a couple of requirements that are full building requirements for the 150,000 feet, and we have a couple that would require the building to be broken up.

But the good news is that we are seeing activity, and the Mack-Cali business campus is probably among the most desirable locations in the entire region, because of the confluence of Route 287, Route 80, and Route 24. So we're seeing a good deal of activity at this point.

Thanks so much.

You're welcome.

Our next question will come from Goldman Sachs, Carey Callaghan. Please go ahead.

Thanks. Good morning. On the Long Island sale, could you give us a sense, Mitchell, of what the cap rate might be on that, so we can get a sense of what the income loss might be?

Well, the actual cap rate on the sale is, for the purposes in which you're looking at it, is about 9 percent. But in reality, the leases are fairly well above market, and if you look at, for example, 600 Community Drive, which is 237,000 feet plus some storage and the allocation of price on that is $64 million, you're looking at pretty substantial pricing for that asset. But, again, it's in a really particularly good location right off the LIE in a very highly desirable area, which is very close in in Nassau County.

Okay. The AT&T 475,000 square foot that's coming off I think in the second quarter, what had you contemplated in your earnings guidance? Are you assuming that that remains vacant for the rest of the year?

We had figured in our guidance that approximately 150 out of the 475 would be leased throughout the year 2005, with virtually minimal income coming into service in 2005. But we do anticipate in our modeling leasing in 3, 50,000-foot increments throughout the year.

So you maintain that view?

Yes, I think that's a conservative view.

Okay. And then lastly, it looks like your -- in the quarter your same-store operating service expense comparison versus last year was up 6 percent, although for the year you had tracked significantly better than that. Is there anything unusual in there?

No. We are seeing slight increases in expenses, and with respect to gross margins, there's a little bit of a differential from prior years because rents have generally been flat, but expenses haven't been quite as flat. Real-estate taxes have continued to increase. In particular, I would say that's probably the one area of highest level of increase. So it's really -- that's pretty much it. Does that answer your question?

Does it, yes. Thank you.

You're welcome.

Christopher Haley from Wachovia has our next question.

Hey, guys, it's Gregg Korondi with Chris. Couple quick questions on '05 and leasing activity. What are kind of your expectations for capital costs and what's going on with free rent with the large rollovers that you have?

Well, our expectations, again, we underwrite pretty conservatively given the realities of the marketplace. I mean, we expect 2005, and this should only happen, which means we're on target with all of our leasing, to spend about $75 million in TI and LC, leasing commissions, throughout the year, and, of course, that doesn't include the $11 or $12 million in general building improvements that we put back into our real estate to keep them state-of-the-art, first-class buildings. But, again, that's a function of the leasing velocity.

I mentioned before, the particular TI requirements are generally somewhat submarket driven, because that ties into the length of lease in the waterfront area. You put, in a building like Plaza 5, $40 a foot into space. Sometimes a little more, sometimes a little less, depending on the economics of the transaction. And in the suburban markets, again, depending on whether it's a 3, 5, 7, or 10-year deal, you'll put anywhere from $20 to $35 a foot into the space. All a matter of the particular deal. And we go through every single piece of vacant space and expiring space, look at it independently and individually, and that's how we come up with the estimate of $75 million.

What does that work out to on a per-square-foot basis for leasing in the same buildings? Is that an increase or decrease from where you were for '04?

No, I think it's about flat. Actually, what I'll call the concession packages have flattened out. There's generally a little bit less free rent than there was in the marketplace, and so I would say it's roughly flat at this point, and that's certainly a good sign, because the next thing to happen is there will be some upward rent pressure.

So I noticed in Q4 your straight-line adjustment ticked up. Was that from the Morgan Stanley lease? You just made a comment that straight-line rent pressure is kind of -- or free rents are kind of going away, or at least there's momentum in that direction. So what was driving that increase in the straight-line adjustment?

Hey, I mean, it's not a significant difference. It's $0.5 million. So I don't think that reflects any other trend.

All right. Then --.

Just going to repeat, it's only up about $0.5 million.

And you made the comment that you guys are expecting your normal run rate is a million square feet per quarter and the guidance for '05 is 3.1 million square feet. Is that suggesting some sort of deceleration or is that just conservatism?

No, I think, again, the million feet has historically included leasing that's done for leases expiring in future periods. We're always trying to look 3 or more years ahead. And if we can renew a lease like we did with Morgan Stanley, when we think the opportunity is right, when the tenant is kind of conditioned to do a deal that's all reflected in the run rate of a million feet a quarter.

Good. That does it for me.

Great, thanks.

We will now hear from Caryn Zieses with Lehman Brothers.

Good morning. Good afternoon, whatever it is at this point. Quick question for you on the occupancy decrease. What percentage, I guess, of the loss in occupancy would you say is attributable to the AT&T lease expiration?

Clearly the bulk of it, it's 150 basis points within the differential.

150 basis points.

Is AT&T.

Okay. And can you just comment on the balance, what -- if there's anything in particular?

It's small stuff here and there, nothing significant.

Okay. The other question I had for you is, it sounded like -- maybe this question is for Mike, that some of the trends were improving in suburban Philadelphia. If you could comment on anything specific that you think is sort of jump-starting that.

Well, I don't know what's jump-starting it, but we are seeing more activity. Bala has been a particularly strong market. We've had a lot of activity since our acquisition of the Bala asset on Monument, and Berwyn has seen more activity. I can't speak unilaterally for the Philadelphia markets because Conshohocken still has substantial vacancy. Downtown, of course, other than the couple projects with KOIZ Zoning are struggling, but in the markets that we're operating in we're seeing activity.

The economics are pretty tough. Every deal has some hair on it between lease takeover or some combination of inducement or incentive package. So the markets are still tough, but there is more activity.

Would you say that some of the activity is coming out of downtown, or not really?

It's hard to evaluate it. I mean, the majority of users that we're seeing are service-based users that are already in the markets like law firms or the financial service firms that we're seeing a little bit of expansion, we're seeing some of them take advantage of this market for consolidation of fragmented space requirements. It's hard to get a handle on any particular trend.

The pharmaceutical industry, which has been a driver of economic expansion within the Philadelphia markets has been a little bit frozen as a result of some of the event risk that's affected them, the Celebrex issues and so forth, Vioxx, and so they're not doing much of anything right now. It's hard to make a trend of this beyond what I've just said.

Okay. Great. Thanks.

You're welcome.

We'll now take a question from Zimmer Lucas Partners, Eduardo Abush. Please go ahead.

Yes, hi. Question for Barry or Mitch. In terms of the Ashford Loop JV, I don't know if I quite understand, did you sell that in the quarter, or why is it that you have this big D&A expense going through that?

Yes, well, actually, we did sell it, and it's -- the $4.9 million reflects our share of the write-down, if you will, for the entity, and represents our final exit from the State of Texas.

Okay. And I guess my second question is, in terms -- in your guidance, embedded in your guidance, what is the percentage rent rolldown that you're thinking you'll have in '05?

Based on what we've seen in the markets we're figuring that it's somewhere in the to 10 percent range.

Okay. Thank you very much.

You're welcome.

Mr. Hersh, at this time there are no further questions. I'll turn the conference back over to you for any final and closing remarks.

Yes. Well, I just want to thank everyone for joining us on today's call. We look forward to reporting to you again next quarter. Thank you very much. Good day.

Thank you. That does conclude today's teleconference. Thank you all for your participation. At this time you may disconnect.