Veris Residential Inc (VRE) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation first quarter 2005 conference call. Today's call is being recorded. At this time, I would like to turn the call over to the President and CEO, Mr. Mitchell Hersh. Please go ahead, sir.

Good morning and thank you for joining Mack-Cali's first quarter 2005 earnings conference call. With me here today are Barry Lefkowitz, EVP and CFO, and Michael Grossman, EVP.

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 the 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 first quarter came in at $0.89 per share, up $0.02 from the $0.87 per share for the first quarter 2004.

As you've seen in our press release, we have refined our guidance for the year and I'll have Barry discuss that in greater detail, but I think the essence is that we are seeing slower decision making in the corporate community, resulting in lease executions being pushed out to the latter part of the year, thus affecting our guidance.

Our portfolio ended the quarter at 91.1% leased, down marginally from last quarter at 91.2%.

During the quarter our occupancies were impacted by the expiration of 295,000 square feet of Deutsche Bank's 385,000 square foot lease at Harborside Financial Center Plaza 1. We're currently underway at Plaza 1 with extensive renovations to the building, investing at this point some $12 million in capital improvements, including new lobbies, partial new fascias, new entrances and so forth and we're confident that, given the location, right at the heart of Exchange Place in Jersey City, we will be very successful in leasing this facility in the near term.

We did complete over 1.3 million square feet of leasing activity, with about 768,000 square feet of new leases in the quarter. As well, our occupancies were helped by new acquisitions that we've recently added to our portfolio, but I must tell you that in general the recovery has been very sporadic.

On the positive side, we're seeing an increase in leasing velocity across our Northeastern markets, especially for deals in the smaller category, the 10,000 square footers.

On the other hand, some submarkets that were strengthening just a few months ago, such as Morris County, Southern New Jersey in the Marlton area, Moorestown area, have recently, once again, slowed down a bit. Westchester County was flat during the quarter and there are still soft pockets in areas such as Middlesex and Union Counties in New Jersey.

On the other hand, good news has come to New Jersey in the form of Verizon's commitment to relocate its corporate headquarters to the former AT&T headquarters in Basking Ridge. This should certainly benefit the New Jersey market place, bringing approximately 2000 new jobs to Morris County, New Jersey, which, of course, is the heart of many of Mack-Cali's properties in Parsippany and elsewhere in Morris County.

Job growth across the country, in general however, remains somewhat weak and, as I mentioned before, businesses are still somewhat reluctant to make decisions that impact growth and thus taking more space in office buildings.

From a deal standpoint, economics continue to remain under pressure since markets are still highly competitive and vacancy rates, in general, are still in the mid-teen range.

And so we remain cautious in our outlook for the balance of this year. I certainly don't expect a widespread recovery until there is clear evidence of sustained economic recovery and job growth, until we see greater confidence on the part of global corporations in hiring new employees and taking more office space.

And now let me review some of our activities and results for the first quarter. We acquired 1.6 million square feet of new properties in our New Jersey markets. The acquisitions included the magnificent 101 Hudson Street on the Jersey City waterfront, that building totaling approximately 1.25 million square feet, and thus increase our holdings along the Gold Coast to now 25% of the Class A market or about 4.3 million square feet.

Other acquisitions within the New Jersey market include 23 Main Street in Holmdel, New Jersey, Monmouth County, a vital, vibrant, growing area in the state. This was a very interesting transaction in that we were able to acquire a surplus office building on a magnificent piece of property -- 88 acres -- a 350,000 foot surplus office building from a major insurance company with whom we've done business with, and simultaneously lease the entire facility for roughly 12-1/2 years to Vonage USA, the voice-over-Internet provider, a very leading business in that space.

During the quarter, we acquired the remaining interest in One River Centre in Monmouth County, a three-building complex just shy of a half a million square feet at Exit 109 on the Parkway in Middletown, New Jersey. You recall that we originally initiated our investment in that property as a mezzanine loan and subsequently converted our interest to 100% ownership. Now the facility, the complex, is roughly 91% leased and our all-in cost is something shy of $180 a square foot.

We recently entered into an agreement to acquire another Monmouth County property, Monmouth Executive Park in Freehold, the western edge of Monmouth County. Monmouth Executive Park is a four-building complex comprising approximately 236,000 square feet of Class A office space and we're acquiring that for approximately $32.8 million. That's set to close next month.

I mentioned a moment ago that we view Monmouth County as one of the top submarkets in the state. Our holdings in the county will now increase to 17 buildings totaling over 1.6 million square feet upon the completion of the Monmouth Executive Park transaction.

During the quarter, we continued to dispose of our remaining non-core assets in non-strategic markets. We sold our Nebraska building, the Brandeis Building and, more significantly, we completed our exit of the Texas markets by selling our last wholly-owned building and joint venture asset in the state and were able to close down completely our management operations in the State of Texas.

Our properties in the Northeast and Mid-Atlantic regions now account for 94.5% of the base rent of Mack-Cali and so we really have made significant progress over the past few years on reshaping and refocusing our portfolio in our core markets.

We've recently entered into a contract to sell our only 2 assets on Long Island, located in the near-- the close-in suburbs of Manhasset and North Hills. Long Island is clearly not one of our core markets. The leases were burning down on these facilities and, given the location, again very close to New York City in Nassau County, we decided to capitalize on the extremely favorable sales market and sell these 2 properties for $72.5 million or, on average, roughly $248 a square foot.

We've also entered into a contract to sell 201 Willowbrook Boulevard in Wayne, New Jersey, a 178,000 square foot office building located adjacent to the Willowbrook Shopping Mall. The consideration for this sale is $18.3 million, however the building is only 56% leased. It has underperformed due to its difficult location at the end of a shopping center in a highly congested area, coupled with the fact that the building is a lower Class A quality. So we are delighted with that sale, which should close imminently.

On the leasing front, besides the new Vonage lease, other leasing highlights for the quarter included Dassault Falcon Jets' commitment for another 11-year renewal and expansion at Mack-Cali Airport in Little Ferry, New Jersey, adjacent to the Teterborough Airport. Dassault Falcon Jet occupies 114,000 square feet for their domestic headquarters.

We executed a new 72,000 square foot lease in Plaza 5 at Harborside with a French technology company, IXIS North America. This is now their North American headquarters with a full deck data recovery center included within the demised premises.

Science Application International's new 5-year lease for 45,000 square feet at One River Centre in Middletown -- and that's just a sampling of some of our leasing accomplishments over the quarter.

Our TI and commission expenses for the first quarter were $2.23 per square foot per year, down slightly from last quarter's $2.33. But make no secret about it, the markets are still very competitive and tenant concessions are still in the air.

Our portfolio-wide rolldown was 4.4% compared to last quarter's 13.7%. Last quarter's number was unusually high and I would say that the rolldowns will still average in the 5% to 10% range for the near term until the markets fully stabilize and we reach equilibrium.

Our rollovers for the balance of 2005 are roughly 7.5% of base rent or $41.8 million. Clearly we face considerable leasing challenges this year. As I said repeatedly, the markets will remain highly competitive, certainly throughout the balance of the year, but we are clearly in the market place with a great franchise and we're very optimistic about achieving our goals.

As far as lease expirations going forward, we do have 2 significant leases that will expire in the second quarter, the first being the 475,000 square foot lease at Kemble Plaza II, the AT&T lease that was part of the strategic AT&T transaction done almost a year ago, and 108,000 square feet with Winston and Strawn, a law firm, at 1400 L Street in Washington, D.C.

With respect to the Winston & Strawn space, we are in deep negotiations with the GSA to backfill all of that space and we're optimistic that we will soon complete that transaction. And with respect to the AT&T 475,000 square feet, we're in discussions right now with 3 or 4 users in the range of 25,000 square feet to 100,000 square feet each, so we're optimistic about moving that space.

In the third quarter, MDC Holdings' lease for 127,000 square feet at 3600 South Yosemite in Denver will expire -- MDC the publicly traded housing company. We're looking at various strategic alternatives for Yosemite, including the possibility of conversion of use of the facility and we'll keep you all posted on our expectations and objectives.

In the fourth quarter, Lucent's remaining space of 162,000 square feet at 5 Woodhollow Road in Parsippany, New Jersey, will expire. That's October. But we are currently in lease negotiations with 2 tenants that will fully backfill that space on a long-term basis.

During the first quarter -- and something I'm very pleased and relieved to announce, quite frankly -- is that we have finally broken ground on the entertainment and recreation phase of Meadowlands Xanadu. Piles are being driven as we speak. Approximately 500 construction workers are employed at the site. The wetlands portion of the parking area has now been substantially filled under our Army Corps permit. As you know, this phase of the project is being led by our partner, the Mills Corporation, who fully expects to have this entertainment and retail portion of the project in service in the latter part of 2007.

Just last week 2 of our New Jersey properties, 103 Carnegie Center in Princeton and Mack-Cali Commerce Center in Totowa, received office building of the year awards from BOMA in connection with BOMA's Mid-Atlantic region. We're very proud that our property management group continues to service our tenants and take good care of our assets and continues to be recognized with the highest honors in property management.

And now I'm going to hand the call over to Barry, who will review our financial results and activities for the quarter and give further commentary with respect to our guidance.

Thanks, Mitchell.

Net income available to common shareholders for the first quarter of 2005 equaled $22.4 million or $0.36 a share versus $26.3 million or $0.44 a share for the same quarter last year. Funds from operations available to common shareholders for the quarter amounted to $67.1 million or $0.89 a share versus $64.9 million or $0.87 a share for the same quarter last year.

Parking and other income in the quarter included $200,000 in lease termination fees. In the same quarter last year we had $800,000 in lease termination fees.

Same-store net operating income, which excludes lease termination fees, on a GAAP basis, decreased by 1% and on a cash basis decreased by 0.4% for the first quarter of '05 as compared to the same period in '04. Our same-store portfolio for the first quarter was 25.4 million square feet, which represents about 85% of the portfolio.

Our unencumbered portfolio at quarter end totaled 247 properties aggregating 24.2 million square feet of space, which represents about 81% of the portfolio.

In January of this year we sold $150 million of 5.125% notes due January 15th, 2015. The notes were priced to yield 5.2%. The proceeds from the issuance of approximately $148.1 million were used to repay borrowings under our credit facility.

More recently, in April, we sold $150 million of 5.05% notes which are due April 15th of 2010. The notes were priced to yield 5.09%. The proceeds from the issuance of $148.8 million were used to reduce outstanding borrowings under our credit facility.

In addition, after quarter end, we repaid 2 property mortgages. We repaid $45.5 million that encumbered our recently acquired One River Centre that Mitchell just spoke about in Monmouth County. And the second was the mortgage on Mack-Cali Center 6. That was $35 million. These mortgages were repaid from borrowings under our credit facility.

At quarter end, Mack-Cali's total undepreciated book assets equaled $4.8 billion and our debt-to-undepreciated-asset ratio was 42.5% and our debt-to-market capitalization ratio was 38.9%.

We had interest coverage of 3.4 times and fixed-charge coverage of 2.4 times for the first quarter. We ended the quarter with total debt of approximately $2 billion, which had a weighted average interest rate of 5.98%.

Our FFO guidance for 2005 is $3.45 to $3.55. Our mid-case-- mid-point case assumes that lease commencements for the remainder of the year of 1.5 million square feet, which is a reduction of about 200,000 square feet over what was previously forecasted to commence 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 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.

I'll now turn it over to Mike to talk about leasing.

Thanks, Barry.

As of March 31, our consolidated portfolio was 91.1% leased compared to 91.2% leased at December 31, 2004. We signed a total of 185 transactions in the first quarter, totaling over 1.3 million square feet and reflecting retention of 42.5% of expiring space for the quarter.

Tenant improvement and leasing commission costs averaged $2.23 per square feet per year of lease term. First rental rates payable, subsequent to any concession period, decreased an average of 4.4% over the expiring rental rate, including all escalations.

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 relatively quiet leasing activity with generally stable occupancy and rental rates. As we perceived throughout our regions, the market appears to be poised for improvement as economic recovery leads to job creation. Unemployment in Westchester dropped from 4.8% at the end of last year to about 4%, an encouraging sign.

Leasing activity in both counties comprise a large portion of inter-county relocations resulting in little change in overall availability. In Westchester availability at 18.6% and asking rents at $29.71 were virtually unchanged from the last quarter. Sublease space increased slightly, now comprising 18.2% of available space.

Mack-Cali's Westchester office and office flex properties, totaling 4.8 million square feet were 96.1% leased at the end of the first quarter, up from 95.9% leased in the prior quarter. During the remainder of the year, leases totaling 202,000 square feet will expire. This represents approximately 4.4% of total Westchester lease space and 4.6% of its total annualized base rent.

Availability in Fairfield County crept up 500 basis points to 18%. Sublet space continues to diminish as leases expire and currently represents under 28% of available space. Asking rents were $29.97, which was nearly unchanged.

Mack-Cali's Fairfield properties totaling 852,000 square feet were 88.3% leased, nearly unchanged from the prior quarter. Expirations during the remainder of the year total about 70,500 square feet, 9.4% of our occupied space and 11% of the total annualized rent.

There were no new construction announcements in the first quarter in either county and, again, both counties had a flat start this year, but returns of space have slowed and very little new sublease space has been placed on the market. The presence of several larger tenants seeking space of 50,000 square feet and reportedly increasing activity among smaller tenants, which are the mainstream of our tenant base, are encouraging signs for the remainder of the year.

In northern New Jersey, vacancy continued to decline, ending the quarter at 18.2%, down from 18.8% at the end of 2004. Asking rents continued to remain nearly flat at $28.71. Sublease space, now about one-third of total availability, continued to decrease.

In the Bergen County submarket, vacancy continued its steady improvement, going from 21.1% in the fourth quarter to 20.2%. Mack-Cali's 3.8 million square foot Bergen County portfolio is 98% leased with only 141,000 square feet or 3.8% of space leased expiring in 2005.

Morris County posted nearly identical availability numbers, ending the quarter at 20.4%, down from 21%, and Mack-Cali's 3.3 million square feet in Morris County is 90% leased. But we face a number of challenges with the upcoming expirations. Outside of the large blocks being surrendered by AT&T at Kemble Plaza and Lucent at 5 Woodhollow, which Mitchell mentioned earlier, almost 130,000 square feet of smaller tenants expire in 2005.

Hudson County availability stayed nearly even at 17.1%. Sublease space makes up over 64% of the total, which is down from 70% at year end. Mack-Cali's 4.3 million square feet along the Jersey City waterfront is 89% leased following the first quarter partial surrender by Deutsche Bank at Harborside Plaza 1 and there are no significant 2005 lease expirations. Deutsche Bank retained 90,000 square of Plaza 1 and we're repositioning the balance of the space for multi-tenancy, having recently begun the renovation of the building.

Mack-Cali's northern New Jersey properties total 13 million square feet and were 91.4% leased at quarter end, down from 92.5% leased in the prior quarter. Leases totaling 1 million square feet expire during the remainder of 2005, representing 8.8% of total northern New Jersey leased inventory and 7.1% of its total rent.

In the central New Jersey market, conditions continue to improve, with availability declining to 22.2% from 23.3% in the prior quarter. Average asking rents were $27.40, down a little from year end, but slightly higher than the third quarter of 2004.

Mack-Cali's central New Jersey presence is now 4.5 million square feet, which is 85% leased, up from 82.8% leased at the end of year. Expirations for 2005 total 138,000 square feet, which represents 3.7% of the region's leased inventory and 3.9% of its total rent.

Development activity continues to be restrained and no new projects were announced for northern or central New Jersey.

The suburban Philadelphia market continues to recover, with vacancy decreasing to 21.7%, down from 22.4% at year end and 23.7% at September 30th. Asking rents appear to be stabilizing, closing the quarter at $25.65, down $0.14. The trend of improving market fundamentals has been consistent since the second quarter of last year, but it has yet to produce increased effective rents.

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 and these properties ended the quarter 89.6% leased, down slightly from year end. Leases expiring during 2005 total 321,000 square feet and this is 9.7% of the region's space leased and 8% of its total rent.

The Washington, D.C., market continues to tighten with vacancy of 7.5%, down from 8.2% last quarter. This is reflected in the $1.75 increase in asking rents, which average a record high $47.88. The market has 5.8 million square feet currently under construction, of which 65% is speculative and only 30% of that is pre-leased. Although a strong job market helped sustain positive absorption that continues to outpace deliveries of new space, existing landlords still face stiff competition with new product that's coming on line.

In keeping with our goal of providing premier office space, Mack-Cali is currently undertaking a renovation and upgrade of the common areas of our 1201 Connecticut Avenue property. Mack-Cali's 450,000 square feet in the Washington market was 94.9% leased at the end of the first quarter. 2005 expirations total 185,700 square feet or 46.1% of space leased and 52.8% of the annualized rent in our D.C. properties. We are in active negotiations, as mentioned, for a large portion of the expiring space, but do expect to see some negative absorption in our D.C. portfolio in 2005.

In our major markets outside the Northeast, Denver's suburban vacancy rate remains stable at 19.8%, with average rents at $18.43. Both numbers were virtually unchanged from year end 2004.

In San Francisco, vacancy rates continued to decrease, closing the quarter at 18.6%, down from about 19.9% fourth quarter '04. Average asking rents reflected the lower availability, rising $0.60 to $29.40.

Mack-Cali's holdings outside the Northeast total 2 million square feet and were 91.6% leased at the end of the first quarter. 2005 expirations in these markets total about 175,000 square feet, which represent 9.8% of leased space and 7.1% of total base rent.

So while occupancies in many of our markets remained flat for the quarter, the lack of new sublease space, consistent deal flows in that space returned and no new construction provides expectation of improvement with economic expansion. However, recent events such as the increased energy costs and some less-promising economic growth numbers insert ambiguity that may keep businesses hesitant to add employees and make commitments to new space. Overall, we anticipate a challenging leasing environment for the balance of the year.

Mitchell?

Thank you, Mike. At this time we'll open the floor to questions. Operator?

Thank you, Mr. Hersh. [OPERATOR INSTRUCTIONS] John Stewart, Smith Barney.

Mitch, can you provide some specific examples of the slower decision making that you've seen?

Yes. We have been working with a major corporation for the last 6 or 7 months that has-- owns its own property and is in the process of moving its headquarters, rezoning its property for a higher and better use in its current location, residential use, and has been working with us in the Morris County market for that period of time.

We're confident that we are going to make a deal with them and this will be a deal in the order of magnitude of a minimum of 150,000 square feet in Morris County. However, it's taken that long to transact the lease. That lease would commence there-- as soon as they sign the lease, they're ready to do the fixup and move in. So we had originally anticipated that that lease would commence now, mid part of 2005, and we're now projecting that by the time all is said and done it will be, probably, the latter part of the fall.

And that's the-- that's a typical example of what's going on out there. As well, there has been a real flight to quality over the last couple of years in this economic downturn and we've clearly seen tenants move to higher-grade properties with higher-grade landlords and clearly we've been the beneficiary of that.

And, as a result, many of these transactions that we see today involve lease takeovers or other forms of mitigating against current lease exposure. So it's not atypical to see a deal where a tenant has, perhaps, a year to 2 years of remaining lease term in another facility, that is not under extreme pressure to move, but wants to take advantage of what I will call more of a tenants' market than a landlords' market, make a deal in a higher quality asset and then move. So, given the fact that there isn't that extreme pressure on the tenant to be forced out of another location, the deals are taking a little bit longer.

So I think the combination of those factors have just delayed decision making and the tenants don't have quite the same sense of urgency to cut that deal as they had in prior periods. And so, net/net, in looking at the overall situation and based on empirical examples over the first-- what I would say the last 6 or 7 months, that's why we felt compelled to move our guidance.

OK. You also said job growth remains weak. To what extent is the slowdown that you're seeing and your comments reflective of what took place in the first quarter as opposed to what's happened since March 31?

Well, I think-- again, with respect to job growth, I think that as we see it, it's very submarket specific. We are seeing-- clearly, we will see evidence of good employment gains, I believe, in Morris County and, perhaps, in Somerset County, as a result of the stabilizing effects of Verizon on telecommunications. I think we'll see companies like Avaya and Lucent that still have fairly significant presence in those counties be the beneficiary of what is now a major consolidation in Verizon.

We're seeing in Monmouth County, for example -- and Vonage is a good example -- where Vonage will be adding to their employment base approximately 500 jobs to a total of 1000 employees, plus or minus, in Monmouth County. Right now they are in subleased quarters in Middlesex County. They sublease offices in R&D facilities.

So I think that telecommunications is clearly beginning to show positive signs of stabilizing effects and growth. And then there are all the industries that are going to surround what companies like Verizon and Vonage do -- financial services, legal and accounting services, et cetera, et cetera, in addition to the Avayas and the Lucents of the world that are more technology-related.

So we're beginning to see some pretty good signs that will affect our markets.

As far as, if you look at, for example, the waterfront, 4 or 5 months ago we began to see more of an indication that financial services was adding employment and if you looked at most of the big major financial service companies, including your own, there were pretty good signs that there was a sense that the economy was growing and employment would be added. That kind of stopped and, naturally, that affects the waterfront area to some extent.

So-- but having said that, we continue to see a fairly strong demand on the part of the insurance industry. We're involved right now in a couple of what I would call sizable transactions that would affect, on a long-term basis, positive elements in 101 Hudson from insurance company uses.

So you really need to look at the specific submarkets and the bifurcation within submarkets. I would tell you, for example, Washington, D.C., and having firsthand experience in re-leasing 1400 L Street, that there's-- there's-- while we talk about $48 asking rents, there's a pretty large bifurcation between having a building near the Capitol or on Pennsylvania Avenue and having buildings located outside of what I would call that A-plus corridor. You'll see differences in the rents of, perhaps, $10 to $15 a square foot.

So, again, you really need to look at each submarket and the influences on employment within-- within those particular areas.

I guess I was just kind of trying to get a sense for to what extent the slowdown you're seeing and the downward guidance was reflective of first quarter versus what's happened since then.

But just two more quick questions and then I'll yield the floor. Number one, can you refresh our memory of what's in your guidance with respect to the AT&T space at Kemble Plaza and what were the-- what was the rent on the Vonage deal?

Well, OK. Let me address the Vonage situation first. Vonage is, effectively, a cost-plus deal. We bought the building for roughly $70 a square foot from this insurance company who's maintaining a phase-out, a very partial occupancy of about 70,000 square feet for a very short period of time.

But the deal that we structured with Vonage is that from dollar in to dollar out -- that is, if the building at the end of putting in new capital improvements, including re-waterproofing the building and repaving the parking lots, to putting in tenant improvement dollars, leasing commissions and new toilets, if that's what's required -- from dollar in to dollar out we get a 10% yield on our investment, including the cost of carry. So while this tenant won't be in full occupancy for, call it, 6 months, from the day we bought the building to the day that they fully occupy, we are in a position of covering all of our costs with a 10% yield. And then we get 2% per annum increases. The deal is a triple-net deal. So-- so that addresses Vonage.

With respect to our guidance in AT&T, if you recall when we did that strategic deal with AT&T, we modeled in extremely conservative absorption on lease-up for both 30 Knightsbridge and the AT&T building, which has this-- had that 1-year lease that will be expiring in the third quarter, 1-year lease with AT&T. Our guidance includes 30,000 square feet of absorption.

Now in 30 Knightsbridge, which has about 300,000 square feet to lease, we have a lease out under negotiation right now with a premier company for 75,000 square feet. And with regard to AT&T, I mentioned-- Kemble Plaza, I mentioned before, the deals that we think are doable right now, 3 deals ranging from 25,000 feet to 100,000 feet. But our guidance includes only 30,000 feet.

Ross Nussbaum, Banc of America.

Thank you. Good morning, it's John Kim with Ross.

Can you provide an update on your lease with Toys-R-Us and if you've been in discussions with its new ownership group regarding their intentions for that space?

We have not been in touch with the new ownership group. The lease, as you know, has a considerable amount of term on it, roughly 8 years, and it's a-- they, too, have a net lease. So our base rent, which I would tell you is someone-- something over market right now, is fully protected as a result of it being net.

There were rumors -- and, again, they were fairly prolific on the street -- that AT&T -- I'm fixated with AT&T right now -- that Toys-R-Us was planning to vacate its Wayne facility that they purchased, which was the old American Cyanamid facility that they purchased in Wayne, New Jersey, and renovated and so forth and so on and added on to to create their world headquarters. There were some rumors on the street that they were considering vacating that, moving back in to Paramus and doing something else with their Wayne property.

But those are merely-- that's merely conjecture. We have not had any official dialogue or contact from the new ownership.

Do you get a sense they-- the new group will either utilize the space more or sublease the space?

Yes, well, for-- for the last couple of years since they moved into Wayne they were what I would call not-very-aggressive subleasers of their space. They hired a broker and they did, I would say, quietly market for sublet Mack-Cali Center 6, which was formerly their world headquarters. But they weren't particularly aggressive in the market and it was fairly quiet.

So I would say that they'll do-- they'll either move back in to all or a portion of it or continue to look for a sublet tenant.

Mitch, you mentioned earlier in your remarks that you're exiting Long Island, but did you look at the Citibank building in Long Island City, Queens? And what are your feelings regarding that market relative to Jersey City?

Oh, I think it's a vastly different market. I looked at it simply because I wanted to be informed and naturally I-- we were on the short list and so we received the information and the materials.

But I look at it quite differently than Jersey City. Jersey City, first of all, is in an accepted, much-- has a much different level of acceptance in the corporate community and a diversified user base than does Queens or Long Island City.

But I would say that the critical components are the following. There's been an enormous amount of housing and now the housing in Jersey City and along the Gold Coast has turned to condominium development, which means that there's permanence, ownership, involved in residents moving in to the community and that is a vital part of creating a sense of community. As well, Jersey City, aside from the magnificent views that it has, overlooking lower Manhattan and the Harbor in both directions, can draw from a much wider demographic, in my opinion, to support a workforce because you can bring in, very conveniently, a workforce from all of the New Jersey and Westchester suburban markets, as well as, of course, the five boroughs as a result of the mass and public transportation.

So I look at this situation completely differently than I do Long Island City.

OK. A question on your land holdings. Can you comment on what you believe the market value is of your land parcels relative to book value? And if you're pursuing any alternative uses or selling any of the land?

Yes. Well, I guess I wouldn't-- wouldn't be able to comment other than to say that we carry, for example, the land in most locations-- many-- much of the land was part of the acquisition opportunity so, for example, in Jersey City, at Harborside, we can develop on the main Harborside parcel, approximately 3.5 million square feet.

That land is held on the books at something like $8 a foot. The market value of that land, as supported by-- not-- transactions that are not too distant, like the Goldman acquisition and a few others were done at $32, maybe $35 an FAR. So that gives you some indication of the spread between book value and market value.

We have had, on the northern end of our property in Jersey City, adjacent to the Schwab building, what was formerly Harborside Financial Plaza 10, we can develop 1.2 million square feet. That's the land that we own in joint venture partnership with the AFE partners, as we did the Schwab building.

We have had some preliminary dialogue with residential developers who have an extraordinary level of interest in that property because of its location on the waterfront, supported by public transportation, et cetera. And so we are having preliminary dialogue.

The caveat to that is we have a partner on that piece of ground and all of the partners are not in complete accord on a sale at this point. So we're working towards that end.

On some of the other land that we have, for example, in Hamilton, New Jersey, we are in what I would call absolute final document review with a major credit to build them at our Horizon Center a new headquarters -- it's a AAA credit -- to build them 120,000 square foot headquarters building, which would pretty much use up all but about 100,000 feet of development potential at that site. So I think we'll be making use of that site.

In Parsippany we are under contract to-- as-- essentially as a merchant builder to build a facility for a particular company that's in zoning right now and in the approval phase, about, hopefully, any-- We've been in negotiation with another one, again, an R&D facility. The negotiation has taken an extraordinary amount of time because they're-- the headquarters of this company is based in Europe. And so it's made-- it's protracted the negotiations.

But that particular transaction -- and I have every confidence, I've been told that we're going to finish up by next week and I've been in the heart of the negotiation with the principal side of the tenant -- will effectively take out our land costs in Parsippany. So we'll be able to develop approximately a half a million feet, 475,000 feet in East Hanover and another, give or take, half a million feet in Parsippany and, essentially, our land cost will be zero as a result of that transaction, based on what we're selling the property for and our profit in connection with developing the building for their ownership.

So that gives you an example of some of the things that we're doing with our holdings. We're-- we look at things pretty carefully. I mean, I mentioned in the call that Denver, which-- where we own 1.5 million square feet and I believe it's premature to sell as a result of what I would still say is the negative psychology in that market relative to economic growth and employment growth. We have a building at Yosemite where MDC has outgrown as a result of the explosion, so to speak, in the housing markets and the fact that the company has grown so rapidly and it's not in a particularly vital office market, so we're looking at potential conversion of that building to, perhaps, a residential use and we're examining that.

So I hope that gives you a sense.

Yes, it does. Just as a followup, would you part of the residential development at Jersey City or would you be selling it to a third-party developer?

At this juncture, my objective if we go forward with that is to sell our interest, primarily because I think that the numbers at this-- certainly at this level of discussion would justify it. And it is a partnership and managing a partnership or a joint venture can be cumbersome, as we-- as we have seen. So in that instance we would sell our interest.

Chris Capolongo, Deutsche Bank.

I'm not sure if this is for Mitchell or Barry, but I just-- to go through the guidance, I just want to make sure I understand what leasing do you need to do to get to the low end and what do you need to do to get to the high end?

Well, basically, what we're looking at from a mid-point perspective and you can kind of back into high end and low end, we're looking at executing and commencing leases of about 1.5 million square feet for the remainder of '05.

OK. We do-- we do do roughly 1 million, 1.5 million square feet a quarter. Let's assume we do 1 million square feet, which has kind of been the run rate for a number of years, roughly half of that tends to be stuff that commences during the period in which the leases are done and the other half tends to be leases that are-- that are done for future periods. And that's basically what we're looking at here.

OK. What was in the guidance before?

What was in the guidance before was that we were going to do about another 200,000 feet above the 1.5 million that we talked about and, effectively, that got-- that, effectively, as Mitchell described before, got elongated because of decision processes and what-have-you. It's not that those things aren't going to happen, they're just going to happen in different periods than what was originally expected.

OK. And, quickly, the AT&T leasehold space, have you made any progress there or is that just-- is that a tough sell?

No, the-- I mentioned before that the 30 Knightsbridge in Piscataway, which is part of that, we have a lease out right now for 75,000 square feet and with regard to Kemble Plaza-- Oh, you're talking about the third-party leases?

The third-party leases, yes, sorry.

Yes, we've mitigated against that to some extent. We've done sub-subletting of approximately-- just under 100,000 square feet. We had 922,000 square feet. We sublet 98,295 square feet. So 10.7% of the space has been sublet.

And then, Barry, the mortgages were just-- they were reaching maturity, right? There's no prepayment penalties there?

There were no prepayment penalties on the mortgages. They were-- they were both maturing this year and we paid them off, in one case, a few days early. In another case, a month early.

Coleen-- Greg Corant (ph), Wachovia.

Yes, hi, guys. It's Greg Corandi (ph). Just real quickly, Mitchell, you mentioned that leasing activity, obviously, you guys brought down guidance because of that, some delayed activity, I guess. What are kind of your expectations for the balance of the year on the leasing commissioning and concession front?

I think, generally, we've seen the worst of it. We look at deals and actively pursue deals every day and I would tell you that tenant concession packages or tenant improvement packages haven't expanded or gotten any greater. So I'm feeling pretty good about that.

We continue to see deals that-- however, that do have these take-back components to them and that-- that's just another level of cost that you have to look at. But as far as the brokerage community coming in and advocating for their-- the tenant, they're not asking for any more today.

In the 10 to 15-year lease category down along the waterfront we're seeing anywhere from $35 to $40 and occasionally $45 a foot depending on the rent and in the suburban markets throughout New Jersey we're seeing, on a 10-year deal, which is more the norm, 10-12-year deal, somewhere in the $30 range and that's pretty much it.

So I think that's certainly stabilizing.

So do you view the Q1 TIs per square foot per year run rate as a good one going forward?

I definitely believe that, yes.

Mitch, I thought you mentioned in your opening comments some of the-- the Xanadu project--

Yes.

[inaudible] out late '07. Is that NOI-producing to Mack-Cali?

Oh, yes, the--

In '07?

Well, in '07? I don't think they're going to see any income until '08 in reality. The expectation is that it's going to open in the fourth quarter of '07. So there might be some income as a result of straight-lining but it would be very minimal and we also get a management fee, but that, too, would be minimal for the remaining part of 2007.

But the project is expected at this juncture, based on the tenant commitments, probably, to cost in the range of somewhere-- this phase one, somewhere in the range of between $1.3 billion and $1.5 billion. As you know, we have a maximum capital commitment, which effectively we've already funded, of $32.5 million. And we have a 20% interest with a pari passu preferred return on our investment.

So we're pretty sanguine about the potential for that to be a good thing for the company.

And finally, you mentioned you reduced your land basis to zero in Parsippany. How do you kind of view the decision process between pursuing acquisitions and developing right now?

Well, clearly, I mean--

What are the opportunities?

I mean, the development yields, the spread is much higher and if you can do risk-averse development and I would look at a deal like Vonage as effectively being a development deal. The deal with-- that I mentioned before down in Hamilton will be at a development yield -- slightly less, because that's a long-term lease with a AAA credit, than a-- more of a partially pre-leased type development.

But the yields will be in the 10% to 11% range and if you look at the acquisition environment, I mean, we're selling buildings at 7 caps. Believe it or not, we're selling Willowbrook at a 4.5 cap to a local entrepreneur that wants the building.

So the acquisition environment is very, very expensive right now and any opportunity that we have to use our relationships and our development skills and our land holdings, that's the real creation of value. And I believe as the economy improves and, given the fact that there's been such limited inventory added over the last 4 or 5 years, coupled with the fact that we have excellent land parcels in great places with an excruciatingly painful approval environment in terms of governmental approvals which create what we call high barriers to entry, I think that will be a real area of growth-- of earnings growth for the company over the next number of years.

And what are you guys including in your expectations for development starts for '05?

Nothing. Nothing.

David Toti, Lehman Brothers.

Two quick questions. The first is, can you provide any more specific guidance on your year-end '05 occupancy and same-store NOI growth assumptions?

Year-end '05?

Yes, the underpinning--

Right. We are-- our expectation is that occupancy at the end of the year will be hovering around 91%, somewhere between 90.6% and 91%. And that's our best estimate at this juncture.

We expect that we will spend throughout the year approximately-- a total of approximately $87 million to achieve that and that's about $75 million in tenant improvements and commissions and about $12 million in traditional building CapEx -- lobby improvements and that sort of thing.

OK. In terms of same-store NOI growth?

It's about flat. As you can see, it's down 1% for the quarter. It was up 0.4% for '04 and so until we see rent growth, given the fact that expenses have continued to rise in certain areas like real estate taxes because of some of the pricing that's being paid for assets, notwithstanding the declining rent environment, so it's probably going to be flat.

OK. And just lastly, you previously mentioned that you've benefited from the movement out of Lower Manhattan. Are you still benefiting from that trend? Do you see any change in that trend at all?

I mentioned before that we're in what I would call reasonably active negotiations with a major insurance company that is continuing to migrate out of Lower Manhattan in a variety of locations throughout New Jersey, including partially at the waterfront, 101 Hudson, and we're in lease negotiations with them right now in Parsippany, New Jersey, for another significant-- when I say, “significant,” it's more than 75,000 square feet.

So I continue to see the trend in the insurance company area. We were delighted to have accomplished the deal with IXIS, which, interestingly, is a midtown relocation. So certainly it's our belief that as midtown tightens Jersey City's going to be a beneficiary.

There are no further questions in the queue at this time.

OK. Well, I want to thank everyone for joining today's call. We hope that we've been informative and we look forward to reporting to you, once again, next quarter. Thank you and have a good day.

That concludes today's call. Thank you for your participation. You may now disconnect.