Veris Residential Inc (VRE) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to Mack-Cali Realty Corporateion second-quarter 2005 Conference Call. [OPERATOR INSTRUCTIONS] At this time I would like to turn the call over to the President and Chief Executive Officer, Mr. Mitchell Hersh. Mr. Hersh, please go ahead sir.

Good morning, and thank you for joining Mack-Cali’s second quarter 2005 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 filled 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 various markets, then review our activities for the quarter and beyond. Barry will then follow with a discussion of our financial results, and Mike will give you an update on the markets and our leasing results.

FFO for the second quarter came in at $0.94 per share, a 4.4% increase over the $0.90 per share for the second quarter of 2004. As you’ve seen in our press release, we have refined guidance for the full year of 2005 at now $3.50 to $3.55 per share.

In terms of occupancy, as we anticipated, it was a difficult quarter. Our portfolio ended the quarter at 90% leased, down from last quarter’s 91.1%. Of course this was primarily due to the expiration of AT&T’s 475,000 square foot lease at Kemble Plaza II in Morris Township New Jersey. This accounted for roughly 1.6% of the portfolio, which was offset to some degree by 400 basis points of positive absorption that our leasing teams were able to generate and certainly that mitigated against some of the impact.

Frankly we had the highest quarter of leasing volume in more than four years, with over 1.6 million square feet of leasing transactions within our portfolio. About half of that square footage was attributable to eight large leases, each at over 50,000 square feet.

In the northeastern markets we are beginning to see slight up ticks in occupancies in most of our submarkets, although we haven’t seen any improvement in general economics, including concessions and rents.

Activity in the southern New Jersey area has recently slowed down a bit, but we are seeing a pickup in activity in a number of our submarkets, such as Morris County, Somerset County and the I-78 corridor in central New Jersey.

In Colorado and San Francisco we’re beginning to see modest signs of improvements in terms of overall occupancies, although rents remain relatively weak due to excess supply and only the beginnings of economic improvement in those regions.

In general what we’re seeing are businesses still reluctant and hesitant to make long term expansion decisions, and the economic recovery remains very sporadic. Although companies are reporting economic improvement and earnings improvement, we haven’t seen that translate into employment growth in any large degree, nor have we seen that obviously translate into increased office absorption. So in all of our markets economics remain under pressure.

We continue to remain cautious in our outlook, and as I’ve just said, we don’t expect a widespread recovery in the office sector until there’s sustained economic recovery that translates into new jobs.

Now I’ll review some of our activities and results for the second quarter. During the quarter we continued to dispose of non-core assets. We completed our sale of our only two Long Island assets for $72.5 million, capitalizing on the favorable investment sales market. This translated to about $248 a square foot. We also completed the sale of our Willow Brook building at the Willow Brook Shopping Center in Wayne New Jersey for roughly $18.3 million. This was a lower quality, underperforming asset in a very difficult location, and we’re very pleased with that sale.

Since the end of the quarter we acquired Monmouth Executive Center in Freehold New Jersey, further increasing our presence in Monmouth County, which we believe is going to continue to be a growing area of the state of New Jersey. This four building office complex, totaling about 236,000 square feet, was acquired for $32.8 million.

In the leasing area, highlights for the quarter included the following; Cingular Wireless, formerly AT&T Wireless in several of our locations, leased over 456,000 square feet at three buildings in New Jersey. These leases included two renewals, again formerly AT&T Wireless, for 384,000 square feet, in two of our Paramus buildings, and an additional lease for about 72,000 square feet at our recently acquired 5 Wood Hollow Drive Building in Parsippany New Jersey; all now under the moniker of Cingular Wireless.

GSA’s new lease of 114,000 square feet at our 1400 L Street Building in Washington, D.C., this deal was very significant since it was a replacement tenant for the Winston and Strawn law firm, who previously leased 108,000 square feet at 1400 L Street. Their lease expired earlier in the quarter.

At Teterborough Airport in Little Ferry New Jersey, Casio renewed its lease for 96,000 square feet at our Mack-Cali airport building, and we transacted a new lease with SBC services in San Francisco at our 795 Folsom Street building for 63,278 square feet. That building was acquired about five years ago from AT&T who remains a tenant in the building. In Roseland we consummated a new lease for about 61,000 square feet with Bisys at our 105 Eisenhower Parkway building.

Also during the quarter Moody’s investor services has expanded its space by over 36,000 square feet, another floor, at Harborside Plaza 5 in Jersey City. That’s now resulting in an occupancy of over 91%, about 91.3% leased at Plaza 5. At this juncture activity in the building has remained steady, we have various proposals and frankly leases, out today that would virtually fill the remainder of that building. The other good sign, of course, is that existing tenants within the building are expanding by significant measures.

At Harborside Plaza 1 in Jersey City we have begun a major renovation to the building that includes a new entrance façade, new lobby, and new infrastructure within the building, presently spending about $12 million. The project is scheduled for completion in the fall, and certainly that will dramatically enhance the marketability of this building. We do have a number of active leads at this point that we’re working on, to deal with the roughly 295,000 square feet of vacancy within Plaza 1.

Just last week we renewed two leases with IBM up in Westchester, totaling 292,000 square feet. One lease, the larger one, for 248,000 square feet at 19 Skyline Drive, extends that lease through 2013, and the other lease, which is a bit of a contraction at 17 Skyline Drive from 85,000 feet to about 44,000 square feet, also renews that lease for five years.

For the quarter our tenant improvement and commission expenses were approximately $2.90 per square foot per year, up somewhat from last quarter’s $2.23, reflecting both the market’s competitiveness and some of the larger transactions that we were able to accomplish in the quarter.

Our portfolio-wide roll down for the quarter was about 18.5% compared to last quarter’s 4.4%. this was due primarily to a roll down of 14.7% in our core northeast markets, which now make up almost 95% of our base rent, and in our weaker markets in the west, roll down was much higher, 46.1%. This was largely due to the SBC transaction in San Francisco, where the rent went from about $46 a square foot to $22. However in connection with that transaction the former tenant of those two floors essentially paid a year’s rent at that higher number, $46, to provide for the TI and leasing commission dollars to move SBC into the building.

Our rollovers for the remainder of 2005 are only about 3.8% of the base rent of the company, or roughly $20.7 million. Certainly we have our challenges ahead, as well into 2006.

For the balance of this year we have only two significant leases expiring, MDC Holdings' lease for about 122,000 square feet in Denver, at 3600 South Yosemite, and we expect that that will result in a move out and a repositioning of that building; and Lucent’s remaining space of about 162,000 square feet at 5 Wood Hollow Road in Parsippany, which expires in the fourth quarter. But certainly the good news in Parsippany is that we have leases out for signature as we speak, to essentially take out the remainder of all of that space.

Progress continues on the construction of the entertainment and retail phase of Meadowland Xanadu. As a matter of fact, there was a topping off ceremony two days ago for the first parking garage structure. The project is on track for completion in the latter part of 2007. I’d like to remind everyone that Mack-Cali’s investment in this very significant project is only $32.5 million for a 20% sharing in the ERC, the entertainment and retail component, which is certainly in the order of magnitude of $1 billion. And of course Mack-Cali has an 80% share with what I call optionality in perpetuity on developing up to four office buildings of 440,000 square feet each, and a hotel component of 520 rooms, when and if market demand calls for those facilities to be built.

On some other positive notes, we signed a lease on Monday for a build to suit development of 120,000 square feet at our horizon center in Hamilton Township on a 15 year triple net lease. At this point I’m not at liberty to disclose the tenant other than to tell you it’s a very strong credit, and we are moving forward with that project.

Before I hand the call over to Barry, I’d like to reiterate that the leasing environment certainly remains very challenging. It has, and at the present time is remaining, a tenant’s market with rents under pressure and concessions while perhaps stabilizing, certainly not improving from a landlord’s perspective, certainly not dramatically. We clearly believe that our company and our strategy are on absolute track, we continue to upgrade and improve our portfolio, make sensible acquisitions and certainly very logical dispositions within the portfolio and continue to enhance our presence in our core northeastern markets.

To give you a bit of color on what we see in terms of the remainder of 2005, we expect a modest improvement in occupancy throughout the remainder of the year. We have a significant amount of activity right now on the AT&T space, both in 30 Knightsbridge, where we have a lease out for execution on 75,000 square feet, with an option to take out the remainder of that floor, which would be in total about 117,000 square feet. We have leased a small portion of the space at 30 Knightsbridge. We are in very active discussion with a major tenant for approximately 2/3 of Kemble Plaza II. That’s about 300,000 out of 475,000 square feet. And so, we are seeing a pickup in activity in a number of pockets that are very important to the occupancy and economic issues surrounding our portfolio.

Looking at this quarter, we had an FFO payout ratio of about 67% and a CAD payout ratio of about 85%. If we do the leasing that we think we’re going to do throughout the remainder of the year, we will have spent some $60 million between tenant improvements and commissions and that includes about $12 million in general building improvements. We expect that we would finish the year roughly break even on a cash flow basis. So, we continue to be a very, very healthy balance sheet and cash flow-positive company in the face of a very difficult economy.

And now, I’ll turn the call over to Barry and he will review our financial results and financial activities for the quarter. Barry?

Thanks, Mitchell. Net income available to common shareholders for the second quarter of 2005 equaled $36 million, or $0.58 a share, versus $15.8 million or $0.26 a share for the same quarter last year. For the six months ended June 30th, 2005, net income available to common shareholders amounted to 58.5 million or $0.95 a share, as compared to 42.1 million, or $0.69 a share for the same period last year.

Funds from operations available to common shareholders for the quarter ended June 30th, 2005, amounted to $71.4 million, or $0.94 per share, versus $67.6 million, or $0.90 a share for the quarter ended June 30th of ’04. For the six months ended June 30th of ’05, FFO available to common shareholders was $138.5 million or $1.83 per share, versus 132.5 million, or $1.77 per share for the same period last year.

Parking and other income in the quarter included $3.4 million in lease termination fees, as compared to $600,000 for the same period last year. For the first six months of the year, termination fees totaled $3.6 million, as compared to 1.5 million for the same period in ’04.

Same-store net operating income, which excludes the lease termination fees I just discussed, on a GAAP basis, decreased by 1.3% for the second quarter of ’05, as compared to the same period in ’04, and for the six months ended June 30th of ’05 decreased by 1.2%, in the same period last year. Same-store net operating income on a cash basis decreased by .8% for the second quarter of ’05, as compared to the same period in ’04, and for the six months ended June 30th of ’05, decreased by .6% as compared to the same period last year.

Our same-store portfolio for the second quarter was 25.4 million square feet, which represents about 86% of our portfolio. Our unencumbered portfolio at quarter-end totaled 248 properties, aggregating 24.5 million square feet of space, which represents 83% of our portfolio.

During the quarter, we repaid two property mortgages. We repaid 45.5 million, which encumbered our One River Centre property, and $35 million, which encumbered our Mack-Cali center VI property. The mortgages were repaid with borrowings under our credit facility.

At quarter-end, Mack-Cali’s total un-depreciated book assets equaled $4.8 million and our debt to un-depreciated asset ratio was 41.1% and debt to market capitalization ratio was 36.3%.

The company had interest coverage of 3.4 times, and fixed charge coverage of 2.8 times for the second quarter. And for the six months ended June 30th, 2005, the company had interest coverage of 3.4 times and fixed charge coverage of 2.6 times. We ended the quarter with total debt of approximately $2 billion, which had a weighted average interest rate of 6.14%.

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 include the information required by Regulation G, as well as our 10Q. Now Mike will cover our leasing activity. Mike?

Thanks Barry. As of June 30th, our consolidated portfolio was 90% leased, compared with 91.1% leased at March 31st. During the second quarter, we signed a total of 184 transactions, which total over 1.6 million square feet, and reflect retention of 50.2% of expiring space for the quarter. This below average retention results primarily from the expiration of AT&T’s 475,000 square foot lease at Kemble plaza. Leasing costs, including tenant improvements and leasing commissions, averaged $2.90 per square foot per year of lease term. First rental rates payable subsequent to any concession period decreased an average of 18.5% over expiring rental rate, including all escalations. Further details on our leasing activity can be found in the supplemental package on our website.

I will now briefly discuss activity by market and our market information is provided by Cushman and Wakefield and, unless otherwise noted, will discuss overall class-A vacancy rates and direct class-A average asking rents.

In Westchester and Fairfield Counties, leasing activity increased during the second quarter, surpassing 2004’s mid-year figures. This resulted in an improved occupancy in Westchester and stable occupancy in Fairfield, due to the predominance of intra-county moves among transactions in Fairfield.

Availability in Westchester dropped from 18.6% to 17%, with asking rents virtually unchanged from last quarter, at $29.73. Sublet space decreased significantly from 18.2% of available space to 14.3%. Mack-Cali’s Westchester office and office/flex properties, totaling 4.8 million square feet, were 95.9% leased at June 30th, compared with 96.1% in the first quarter. Leases totaling 120,000 square feet expired during the remainder of the year, representing less than 3% of total Westchester leased space and annualized space rent.

Fairfield County availability remained flat at 18%. Sublet space is down to about 24% of available space, and asking rents declined $0.64 to $29.33. Mack-Cali’s Fairfield properties total 852,000 square feet and were 86% leased, down from 88.3% in the first quarter.

Remaining 2005 expirations total 39,000 square feet, which is 5.4% of our leased space and 6.3% of the total annualized rent. Notable Mack-Cali lease transactions in Westchester and Fairfield for the quarter include the renewal of Evening Out in 32,720 square feet at 75 Clearbrook Rd. in the Cross Westchester Executive Park in Elmsford, New York; a new lease with Guski Trucking Company, for 20,717 square feet at 250 Clearbrook Rd. also in the Cross Westchester Executive Park and the US Postal Service, which renewed its 17,600 square foot at 7 Odell Plaza, in the South Westchester Executive Park in Yonkers, New York.

No new construction was announced in the second quarter, and the increased leasing activity and significant decrease in sublease availability in both markets, is encouraging.

In northern New Jersey, high leasing volume, driven by several large tenants locking in renewals, did little to absorb available space. Vacancy increased from 18.2% to 19.9% in the second quarter. Asking rents were unchanged at about $28.70. Sublease space remains at about 33% of total availability.

In the Bergen County sub-market, availability increased from 20.2% in the first quarter to 22.9% in the second. Morris County also exhibited increased availability, ending the quarter at 23.5%, compared to 20.4% in the prior quarter. This includes the previously mentioned AT&T expiration.

Hudson County availability increased slightly, from 17.1% to 17.7%, and gains from some large sublease transactions were offset by several large spaces being returned to the market. The sublease portion increased to over 67% of available space. Overall, Mack-Cali’s northern New Jersey properties totaled 12.8 million square feet and ended the quarter 88.7% leased, down from 91.4% in the first quarter.

Remaining 2005 expirations total 412,000 square feet, and represent approximately 3.5% of the region’s leased inventory and total rent. One new development project was announced and it’s the first major speculative development within the region in several years. It’s 175,000 square foot building at the center of Morris County and it’s scheduled to break ground before the end of the summer.

Market conditions in central New Jersey showed continued improvement in the second quarter. Large employers, such as Verizon and Vonage have made commitments to the region. Although there are still large blocks of sublease space available, vacancy declined from 22.2% in the first quarter to 20.1% at June 30th.

Average asking rents rose slightly, to $27.66, up from $27.40. Mack—Cali’s 4.5 million square feet of central New Jersey properties were 86.1% leased at June 30th, up 110 basis points from March 31st. Expirations during the remainder of this year total about 90,000 square feet, representing less than 2.5% of the region’s leased inventory and annualized rent.

The suburban Philadelphia market continues to recover. Restrained construction activity and increased leasing volume have combined to produce the fifth consecutive quarter of improved absorption in this market. Vacancy decreased to 20.4%, down from 21.7% at March 31st, and average asking rents remain stable at $25.47, down $0.18 from the first quarter. Mack-Cali’s office and office/flex holdings in the suburban Philadelphia market total approximately 3.7 million square feet, located both in Pennsylvania and nearby southern New Jersey and are 90.8% leased as of mid-year, up 120 basis points for the quarter.

Expirations for the remainder of the year total 150,000 square feet and represent 4.5% of the region’s lease space and about 5% of its total rent. Notable transactions in Mack-Cali’s suburban Philadelphia properties included a new lease for 21,473 square feet, with Bohlinger Inc. at 232 Strawbridge Dr, in Morristown, New Jersey; the renewal of Foundations Inc., in 20,800 square feet at Two Executive Drive, and that’s also in Morristown and a new lease with Keystone Insurance Company, for 19,924 square feet, at 300 Stephens Dr at the Airport Business Center in Lester, Pennsylvania.

Washington DC saw a slowing demand, particularly for class-A properties, with a return of large spaces to the market, several of them, and the delivery of over 500,000 square feet of available space in new buildings. Vacancy was up, from 7.5% to 10%, while rents eased from $47.88 to $47.54. 5.2 million square feet is under construction, of which 3.2 million square feet is speculative. That 30% of the speculative construction has been pre-leased. Nine additional projects in the works could add 2 million square feet to the pipeline this year.

Leasing activity lagged significantly, with 2.5 million square feet of new leases executed year-to-date, compared with the six-month average of 3.5 million square feet in past years. As a result, the market has become much more competitive.

Thanks to the already mentioned GSA transaction, Mack-Cali’s 450,000 square feet in this market was 92.9% leased at June 30th. Remaining 2005 expirations total 61,000 square feet, or just under 16% of leased space and annualized rent in our DC market properties.

Moving to our major markets outside the northeast, Denver’s suburban vacancy rate improved to 18.9%, down from 19.8% last quarter. Asking rents eased slightly to about $18.48. The vacancy rate in San Francisco continued to decrease, ending the quarter at 17.8%, compared with 18.6% in the first quarter and marking two years of continued positive absorption. Reflecting the tighter market, average asking rents increased $0.84 to $30.24. Mack-Cali’s holdings outside the northeast totaled 2 million square feet, and were 91.9% leased on June 30th. And remaining 2005 expirations total 150,000 square feet or 8.4% of leased space, and 6.2% of aggregate base rent in those regions.

While many of our markets continue to exhibit gradual improvement we believe the remainder of the year will bring a challenging leasing environment. Employment and job creation statistics are encouraging, and should provide for some increased demand, however economic uncertainties continue to keep business conservative when it comes to committing to additional office space. Mitch.

Thanks Mike. Now we will open the floor to questions. Operator?

[OPERATOR INSTRUCTIONS]

Jon Litt with Smith Barney.

Hi it’s John Stewart here with Jon Litt. Mitch, can you give us a sense for what the acquisition pipeline looks like for the balance of the year?

Well we are looking at a number of opportunities within our core markets right now. We haven’t really factored in any acquisitions in terms of our guidance, but I will tell you that we are looking at several portfolios at this juncture that could be meaningful.

Can you give us a sense for – try to draw parameters around the dollar volume?

Well I will tell you that it’s between 100 million and $200 million at this juncture.

Can you also give us the yields on acquisitions/dispositions during the quarter in the build to suit?

Yes. The yield on the build to suit has a going in yield of 10% on all costs. The acquisition environment, at least what we have been doing, ranges from about a first year yield on NOI of – what we’re looking at in terms of those larger opportunities, of about 7%, stabilizing at about 7.5%, that’s large portfolio type acquisitions. The smaller acquisitions such as a free hold, for example, are going in yields of about 8% stabilizing very shortly thereafter, in year two to year three, of about 10%. So we’ve been fairly opportunistic on the smaller portfolio acquisitions.

On the disposition yields the Long Island situation, by way of example, had significantly over market rents. There were two different buildings, the larger building has about nine years remaining on the lease on an adjusted basis moving it to market rents it was about a 7% plus or minus yield on the disposition. The larger building actually, based on the allocation, traded at about $270 a square foot. The whole deal, including the smaller building of 55,000 feet, averaged at $248 a foot. There’s only less than four years remaining on the lease on the smaller building, and that too is significantly over market.

Okay. Then lastly, when was the large Cingular renewal lease? When did that lease expire?

The larger leases had an expiration of March 31 of 2007, and those leases were extended, effectively, for 81 months and the new deal in Parsippany is approximately a six year deal. So they’re all co-terminus.

I got you. Thank you.

Carey Callaghan with Goldman Sachs.

Mitchell or Barry, can you walk us through the Q2 results relative to your own guidance? I think you said you were looking for $0.87 to $0.89 at the time of the last call. It looks like the lease term fee was maybe part of it, maybe $0.04 to $0.05, were expense recoveries also unusually high in the quarter?

We’re at $0.94 as you noted before. $2.8 million of that was from lease termination fees from a single tenant out in California which weren't in what we were looking at; that came together at the very end of the quarter. In addition there were a couple of small items, some additional lease termination fees above that, and a couple of small items, a few hundred thousand dollars here and there. Nothing specific, which basically if you take out that $0.04 it brings us to about $0.90 and our high end of our guidance was $0.89 and there’s a couple of dollars in a couple of different places that gets us that extra penny.

And on the expense recoveries, which seem to be relative to your base rent, just seem to be a little higher in Q2, say versus Q1. Is that higher run rate in Q2 sustainable going forward?

What you have in Q2 is, what you generally have is, we finish our settle ups with tenants from the prior year and so you get a little bit of variation in Q2 as a result of that, and that’s where a couple of those hundreds of thousands of dollars came from.

Okay. Then you had an 8% increase in same store operating expenses, it looks like utilities was a big chunk of that. But even the other things, taxes and other, were at pretty solid rates, 5% to 6%. What are you looking for, for the back half of the year, in operating expense growth?

We’re basically looking for 3%. Some of the anomalies that you see as a result of Plaza 1 at Harborside where previously Deutsche Bank having a lease on the entire facility being a net lease, was paying all of those expenses. So the larger increments that you see in real estate taxes and utilities are largely due to that building. Now that we’ve effectively taken back 300,000 out of 400,000 feet in that building, and we’re paying the expenses on it.

Okay. So it sounds like we’ve got to moderate in the second half of the year.

Absolutely.

Then just lastly, Mitch, on 201 Willowbrook, it looks like you extended credit for two-thirds of the value of the sale at a 5.7% interest rate. Can you just comment on the credit quality of the purchaser and can you sort of indicate for us the profile of the purchaser?

Yes, it’s very interesting that you ask. The purchaser is an entrepreneur who has acquired a number of office building and flex building assets in the area. He has a multitude of different financial interests, including several car dealerships and an import business. He’s quite successful financially and takes a great deal of pride in his small empire as it’s evolved. So we’re feeling pretty good about the credit. It’s important to remember in that building, that it was only about 50% leased, it was a very difficult building from a number of perspectives, including the fact that previous to our conveying ownership, it had asbestos fire proofing throughout the entire building.

One of the initial things that the new owner is doing is remediating all of the asbestos in the building and is spending several million dollars to do that. So in addition to the $6 million in cash that he paid us, he’s putting millions of dollars into the building immediately and initially. So regardless of what happens, and again it’s my expectation that he will completely fulfill his obligations under the mortgage, but not withstanding that fact, the building is getting better all the time under his ownership, and at his expense.

Okay, thank you.

Lou Taylor with Deutsche Bank.

Barry just staying on the lease termination fees for a second, do you expect much in the second half?

We generally don’t model lease termination fees. Generally what we do is we model a level of other income, because typically we have different sources for that. It’s unusual when we have these large lease termination fees, and there’s nothing that is anticipated in our guidance at the present time.

Okay. Then the second question is for Mitch. Mitch, as you look at the leasing activity in New Jersey, is there much net addition of space among the tenants that you see taking space? Or is it still more shrinkage, or is it just people moving around from one building or one submarket to another?

I think that really depends a lot on the particular submarket. I mentioned in the call that in Harborside we’re seeing a fair amount of expansion of tenants, which is a real positive sign for the waterfront. We’ve seen some major financial institutions, I mentioned Moody’s, we’re seeing insurance companies, AIG for example, who is significantly expanding their presence along the waterfront for all of the obvious reasons that we’ve talked about before; cost of occupancy, infrastructure, housing, transportation, etc. In some pockets, and for Parsippany, we’re seeing at least one of those new companies expanding and consolidating in higher quality assets, and that’s why we are doing a transaction with them at 5 Wood Hollow in our new acquisition in Parsippany.

But generally speaking I would tell you that there hasn’t been a widespread or large scale expansionary climate in terms of corporate America as it exists in New Jersey. The pharmas generally have been basically in neutral, pending I think a lot of issues, partly some of the event risks and they’ve suffered, and some of the other issues surrounding R&D in pharmaceuticals. A very positive sign for the central Jersey markets include Verizon moving its world headquarters to the old or former AT&T headquarters in Baskingridge. We are already seeing signs in Morris County and parts of Somerset County, of businesses that are certainly actively looking to move into the area because of the large presence that Verizon is going to exhibit.

So it really depends on the particular submarket and the sector of the economy. Monmouth County we’ve seen stabilizing effects in telecommunications. We recently did a deal, as you know, with Vonage, who’s dramatically expanding their employment base in Monmouth County to 1,000 people from about 300 people over the next 18 months. So it depends on the particular location, but generally speaking there is not a real expansion occurring in terms of net positive absorption.

Great, thank you.

Chris Haley with Wachovia Securities.

I wanted to go into a little bit more detail in terms of the market demand. Job growth numbers, at least in the Philadelphia market, have been pretty healthy, the D.C. area have been pretty healthy, New Jersey maybe a little bit behind, but still positive. In terms of – I may be asking a teaching lesson here, what would be your best guess, based upon your experience, and what is the lag between consistent demand movement and more consistent vacancy reduction, or net absorption? Because it seems as though, you’re not the only company, but it seems as though at least the office portfolios are not moving in the same direction as the market we’re hearing is moving.

Right, that’s an excellent question. I think I have said consistently on these calls that I would expect that this is going to be a year and a half process, and I think we are approximately a quarter of the way through that. I think that in 2005 we’re going to see sluggishness, we’re going to see real moderate absorption, and as we approach this time next year into 2006, I think you will see a significant improvement in absorption and in demand occur. For us, we’ll be able to leverage off of our enormous franchise in these markets to take advantage of what should, if we see continued sustained job growth based on what we have been seeing over the first half of the year, we’ll be able to leverage off of our portfolio significantly and take advantage of improving rents into the second half of 2006.

Before that for the next year I think it’s going to be moderate. I think there will continue to be improvement. Again, fluctuations depending on the particular submarket, the particular sector of the economy that dominates or predominates within a submarket, and the markets will remain competitive. But I’m pretty positive and pretty bullish on what we’re going to see in certainly the second half of 2006. And I also think that we will see a demand for continued efficiency that’s driving corporate America. And those companies, and I include Mack-Cali in this for sure, that have development capability and land inventory that’s ready to go to develop new product into this evolving more efficient corporate sector that we’re working with, will also be the beneficiaries.

I don’t expect that to occur on a large scale, again, until we move into 2006. But, we’re already seeing some signs of that as a result of signing this 120,000-footer down in Horizon, which is outside of the Mercer County, the Trenton and Princeton marketplace.

To continue on that, looking at, say, Westchester and Fairfield, which have 18% vacancies, northern New Jersey, which ranged from 17 to 23, central New Jersey, in the 20s still, suburban Philadelphia in the 20s still, how low did, maybe just anecdotally, how low did these markets get in the kind of go-go days?

Well, I think they certainly all approached the 10%, or even slightly below that, in terms of occupancies, or vacancies, however you want to characterize it. And I think that, you know, you also have the issues, to varying degrees, of sublet space and shadow space, as it’s called, affecting markets. But there’s still another ways to go to reach equilibrium and that’s why I’m suggesting that if we maintain the moderate pace of improvement we will begin to see improving rents. We will begin to see diminishing concession packages, lease take-overs and other elements that need to be amortized in the costs of these transactions. A little bit less bloodletting where you have significant submarket vacancies, but it’s going to be a slow improvement

Right. Just to talk like in terms of just leasing strategies for you, outside of DC, which is pretty tight for you, in terms of your assets and the market’s extremely competitive, but thinking of Philadelphia, Jersey and Westchester, New York, with those availability numbers, you know, in the low, probably the high 15-25 range, do you believe as though you hold—you’re going to be in a position where you’re going to be more willing to give rent away, or give TI away to stay competitive? I’m just trying to think of any leasing strategies you can take advantage of.

Well here’s the leasing strategies. Number one, where we have larger tenancies, we’re securing those tenancies on a long-term basis. We’ve done that consistently. We’ve anchored the portfolio. We tied up Cingular for many years to come. We did the same thing with IBM. And, when you cut through the economics of the transactions, given the very limited TIs and concessions, the net effective rents are not too far different from the last series of renewals that we did with those companies.

So, even where we are on, a go-forward basis, rolling down rents, rolling down face rents, we’ve mitigated or minimized capital expenditures and improved the cash flow of the company. So, we’re anchoring the portfolio on a continual basis, with our larger tenancies. And, to the extent market conditions improve, I don’t think that rents are going to accelerate fast enough for those decisions to be the wrong decisions. So, that’s one of the strategies.

In other markets, like suburban Philadelphia, while you see face rents or asking rents at, for example, $25.00 a square foot, you really need to drill down through those deals. They are large concession packages, large TI packages. Depending on the deal, it could be anywhere to $5.00 to $8.00 a square foot per year. And those markets remain very competitive.

On the positive side is, we’re seeing a little more activity in those markets. So, you know, the strategy is that we’re doing everything that we can, at this juncture, to both anchor various large elements of the portfolio, to continue to position the company to take advantage of what will be an improving rent cycle as we move into next year.

Thank you.

We go next to Ross Nussbaum, with Banc of America Securities.

Thank you. It’s John Kim with Ross. Mitch, in your prepared remarks, you discussed a large lease, in San Francisco, I believe, was with SBC, in which the current tenants were effectively paying for the TIs for the new tenants. And, I just wanted to know if you can comment on that and also where that shows up in your income statement, if that was a termination fee? Or, was that just two sets of revenues coming in in rent?

Yes, sure. A large part of the $0.04 that we talked about in the FFO, from the $0.90 to the $0.94 is in fact lease termination fees. The bulk of that is the Home Store lease termination fee, which pays for the TI and leasing commissions for SBC. It was almost $3 million.

Okay. I have a couple questions on Jersey City. Can you discuss the space that American Financial assumed from Schwab in Jersey City? And how competitive that is to some of your space?

I would respectfully suggest that it’s not very competitive to what we have. There has not, from an observer’s point of view, been a large amount of proactivity in marketing the remaining space in that building. We are seeing, in Plaza V, dramatic expansion of a couple of our tenants. We’re working on a couple of situations right now, as I indicated, that include both expansion of existing tenants and some smaller new tenants, that would fill the remainder of that building.

In Plaza I, I think that’s a different price point. There are a variety of issues that are very positive relative to Plaza I, including its proximity to the, what I call, the front door of Exchange Place, in the path station, as well as the light rail, that make it a very attractive location. We’re seeing interest from a variety of different companies in Plaza I. I think our ability to offer a different price point, you know, a mid-$20.00 gross rent in that facility, taking into account TIs and the various improvements we’re making to the building, give us a bit of an advantage there.

And then 101 Hudson Street, you know, we don’t really have much vacancy. We are seeing expansion as we speak from at least two significant tenants in that building. And, we have some vacancy coming up in 2007 and I expect the world will be a different place in 2007 in any event. And, 101 Hudson, of course, is a real trophy asset.

So, I don’t view the Schwab or AFR Building, whatever you want to call it, as particularly aggressive as a competitive force right now.

And then, can you provide an update on your thinking, regarding a joint venture in Jersey City and taking advantage of a different source of capital?

We are looking at that carefully and closely. We will be very careful of doing anything. We’re doing all the underwriting. We’re doing all the work in connection with seeing what the opportunity is there. If we do anything there, we will maintain an equal level of control over managing that asset. It will, of course, involve a significant amount of fee income for the company. But, we are extremely mindful of being able to deploy any net proceeds, which could be quite significant from doing anything down in Jersey City, into new opportunities.

If, in fact, any of the opportunities that I’ve alluded to, in terms of the possibility of portfolio acquisitions evolve, that would be a good place to perhaps deploy some of that capital.

So, we’re doing all of the work in connection with understanding what the opportunity is, but we’re not going to do anything that’s dilutive.

Sure, Okay. Thank you.

And with a follow up question, we return to Chris Haley, with Wachovia Securities.

Mitch, just to go back to questions on the portfolio. You said you were looking at $100 million and $200 million in size. Are those in market, or are those new markets?

Those are expansions within our current markets.

Okay. And then in relation to your guidance, so Barry, you came in a little bit above, excluding the termination fees, you came at the high end, and maybe a little bit above your range. What do you attribute that to? In terms of the occupancy change, the rent change, I’m trying to understand what drove the good performance.

It wasn’t all that significant, Chris. It was just some better operating metrics within the portfolio. It was between $0.01 and $0.02.

Right. Okay, a penny or two matters, right?

Absolutely.

In terms of mark-to-market looking at your remaining ’05 expirations, I think you mentioned this, Mitch, in terms of your mark-to-market, but maybe I missed that. Did you provide an ’05 mark-to-market, as well as what you thought the overall portfolio for ’06 was?

I mean, I’m telling you that my view is that roll downs, unfortunately, we’re marking to market in a roll down manner, and not the other way, at least for the near-term. It’s between 5% and 10%. A lot of the anomalies that existed in this quarter were primarily due to the GSA deal down in Washington. It was a roll down of 27%, but it secures the asset. It was a fairly modest cost in terms of TI allowances, for 10 years, with the government, so that’s a good thing.

And then we had some roll downs in connection with the Cingular/AT&T Wireless transaction that ranged--I guess it averaged somewhere around 18%. And the SBC deal for 63,000 feet and change in San Francisco was 52% roll down, fairly dramatic. So those were the larger elements of the roll down, but I would submit that I think they’re going to average somewhere between 5% and 10% on average.

Okay, great. Thank you very much.

And with that ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Mr. Hersh, I’ll turn the conference back over to you for any closing remarks.

Very well, thank you very much everyone for joining us on today’s call and we certainly look forward to reporting to you again next quarter. Have a good day.

And ladies and gentlemen, this does conclude today’s Mack-Cali Realty Corporation’s second quarter 2005 conference call. We do appreciation your participation and you may disconnect at this time.