Veris Residential Inc (VRE) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation Third Quarter 2005 Conference Call. Today's call is being recorded. And at this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Good morning and thank you for joining Mack-Cali's third 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 filed with the SEC for risk factors that could impact the Company.

First, I'd like to review some of our results and activities and discuss what we're seeing in our markets. Then Barry will review our financial results and Mike will give you an update on the markets and our leasing results.

FFO for the third quarter came in at $0.88 per share compared to $0.93 per share for the third quarter of 2004. With respect to guidance, we have reaffirmed our fourth quarter 2005 guidance range at $0.85 to $0.87. And for the first time, we've put out full year 2006 guidance with a range of $3.32 to $3.48 per share.

Our portfolio ended the quarter at 90% leased, unchanged from the last quarter. We had another strong quarter of leasing activity within our portfolio with over 1.6 million square feet of transactions in the quarter. So far this year, we've leased over 4.6 million square feet.

Here are some observations on what we're seeing in our markets. Frankly, the markets remain highly competitive with every deal a challenge. The economics of lease transactions continue to remain under pressure and we've seen little change in the dynamics over the past few quarters. There has been some good activity throughout Northern New Jersey, as well as Monmouth County and the Route 287 Corridor in Middlesex County. In Westchester, activity has picked up a bit since Labor Day and we continue to see good demand, particularly from smaller users in the 5 to 10,000 square foot range.

Washington D.C. remains strong. However, we have seen a bit of a slowdown recently in suburban Philadelphia activity, which is a change from the earlier part of the year.

In the Southwest, San Francisco continues to strengthen and Denver is slowly improving, although rents in these markets remain quite weak.

In general, we have yet to see significant new job growth in most markets and until we see job growth, the recovery for the real estate markets in the office sector will remain slow.

And now I'll review some of our activities and results for the third quarter. First, we acquired Monmouth Executive Center in Freehold, New Jersey, further increasing our presence in the growing Monmouth County. The four building office complex totals 236,000 square feet and we acquired it for $32.8 million. The portfolio is leased at approximately 76% and we do have a substantial amount of leasing activity in process at Monmouth Executive Center.

In the leasing area, we were able to generate almost 700,000 square feet of new leases with large leases, including 117,000 square foot 13-year lease with an AIG subsidiary, American Home Assurance, at our 5 Wood Hollow Road building in Parsippany. This lease was for the majority of the leasing space that was expiring in the fourth quarter and right now, the building is full. We leased over 100,000 square feet for almost 11 years to the New Jersey Turnpike Authority at our 581 Main Street Building, Mack-Cali Woodbridge Center in Woodbridge, New Jersey.

In addition, we leased approximately 100,000 square feet to QualCare at 30 Knightsbridge Road in Piscataway, one of the former AT&T properties that we acquired last year. QualCare will initially occupy about 78,000 square feet for 15 years and the balance of the space will start in 2009, or before.

We're also renewed two leases with IBM in Westchester, 292,000 square feet for a 5-year renewal at Mid Westchester Executive Park in Hawthorn, New York.

And another AIG subsidiary, National Union Fire Insurance, expanded its presence at 101 Hudson Street in Jersey City by over 71,000 square feet for an additional 7 years and 4 months. AIG now leases almost 280,000 square feet at 101 Hudson Street. And I believe that the AIG expansion within the entire North Jersey Corridor is further demonstration of the trends that exist where companies are decentralizing their work force to suburban locations surrounding Manhattan.

For the quarter, our tenant improvement and commission expenses were $3.00 per square foot per year, up slightly from last quarter's $2.90, reflecting the continued competitiveness in the market place. Our portfolio-wide roll-down for the quarter was approximately 5.4% compared to last quarter's 18.5%, clearly an improvement.

Roll down was 4.9% in our core Northeast markets, which now make up over 95% of our base rent. In our weaker markets in the West, roll-down was 15%, reflecting the continued pressure in those markets.

Our lease rollovers for the balance of 2005 are just 1.2% of base rent, for approximately $7.4 million. For 2006, our rollovers are 8.2% of base rent for $45.2 million, reflecting a decrease over the last few quarters from almost 10%. So, we continue to make progress in pro-active early lease renewals.

Since the end of the quarter, we've broken ground on a 120,000 square foot build-to-suit Class A operations center for AAA Mid Atlantic in Hamilton Township, New Jersey. Triple A has preleased the building for 15 years. We will be developing the building on land that we own at our Horizon Business Park, where we also recently developed a building for Verizon. Upon completion of this build-to-suit project, Mack-Cali will acquire from AAA three office and office flex properties totaling 83,000 square feet and land to support development for almost a quarter of a million square feet from AAA at their campus just on the other side of Route 195 from our Horizon Business Center. And so this will give us additional capacity to build new product and redevelop product in the every growing Mercer County marketplace in Hamilton Township.

In additional activities, we're currently in discussion with our AFE partners in a potential acquisition situation for Plaza 89 land at Harbor Side Financial Center, where we are considering the conversion of that land to residential condominium development. Those discussions are in progress right now and the order of magnitude of that situation is a million square foot development with a price tag just for the land, and we would be selling the land for in access of $70 million.

In summary, the leasing environment does remain difficult. Rents and costs remain under pressure. However, we do remain extremely focused on continuing to improve our occupancies, continuing to enhance our Northeast presence. We certainly believe that given our land holdings, given our intellectual capital and our financial capital, we are extremely well poised to capitalize on the economy as it continues to recover. Our franchise is strong. Our asset quality is high. And our financial position is very strong. And with that, I will now turn the call over to Barry. Barry.

Thanks, Mitchell. Net income available to common shareholders for the third quarter of 2005 equaled $20.6 million or $0.33 a share versus $28.1 million or $0.46 a share for the same quarter last year. For the 9 months ended September 30, 2005 net income available to common shareholders amounted to $79.1 million or $1.29 a share as compared to $70.2 million or $1.16 a share for the same period last year.

Funds from operations available to common shareholders for the quarter ended September 30, 2005 amounted to $66.7 million or $0.88 a share versus $69.7 million or $0.93 a share for the same period in '04. For the 9 months ended September 30 of '05, FFO available to common shareholders was $205.2 million or $2.71 a share versus $202.2 million or $2.70 a 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 $700,000 for the same period last year. For the first 9 months of the year, termination fees have totaled $7 million as compared to $2.2 million in '04.

Same-store net operating income, which excludes the lease termination fees I spoke about before, on a GAAP basis decreased by 10.2% for the third quarter of '05 as compared to the same period in '04, and for the 9 months ended September 30, 2005 decreased by 3% over the same period last year.

Same-store net operating income on a cash basis decreased by 10.2% for the third quarter of '05 as compared to the same period in '04. And for the 9 months ended September 30 of '05 decreased by 2.5% as compared to the same period in '04.

Our same-store portfolio for the quarter was 26.9 million square feet, which represented about 91% of the portfolio. And for the 9-month period, the same-store portfolio consisted of 25.4 million square feet or 86% of our portfolio.

A decrease in same-store net operating income for the third quarter versus last year was primarily due to changes in occupancy in the same-store portfolio, which resulted in a reduction in percentage leased as of September 30th.

Our unencumbered portfolio at quarter end totaled 251 properties aggregating 24.8 million square feet of space, which represented 84% of our portfolio.

During the quarter, we extended and modified our $600 million revolving credit facility for an additional 2 years. The facility now matures in November 2009 and the facility fee was reduced by 5 basis points to 15 basis points at the BBB BAA 2 pricing level.

Also in the quarter, we paid off three mortgage loans with a total of $62.7 million. In paying off the debt, we unencumbered three office properties; one in Bridgewater, Woodbridge and Short Hills, New Jersey totaling approximately 640,000 square feet. The mortgages were repaid primarily with borrowings on the unsecured credit facility.

Also, I am pleased to note that just a few weeks ago, Fitch reaffirmed the Company's unsecured debt ratings at BBB flat and changed its rating outlook to positive. At quarter end, Mack-Cali's total undepreciated book assets equaled $4.8 billion dollars. Our total debt to undepreciated asset ratio was 41.5% and debt to market capitalization ratio was 37%.

The Company had interest coverage of 3.2 times and fixed charge coverage of 2.6 times for the third quarter. For the 9 months ended September 30, '05, the Company had interest coverage of 3.3 times and fixed charge coverage of 2.6 times. We ended the quarter with total debt of approximately $2 billion dollars, which had a weighted average interest rate of 6.11%.

Our funds from operations guidance for 2006 of $3.32 to $3.48 per share is based on the major following assumptions. Our mid-case assumes 2.5 million square feet of lease commencements in 2006 versus scheduled lease expirations of 2.1 million square feet. The plan also assumes at the mid point that the Harbor Side Mortgage, which matures in January, is refinanced with unsecured debt in addition to terming out a portion of our credit facility outstanding.

And on a final note, please note that under the Securities and Exchange Commission 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 September 30th, our consolidated portfolio was 90% leased, unchanged from our percentage leased at June 30th. We saw 184 transactions Company-wide during the third quarter, which totaled over 1.6 million square feet and include retention of 58.1% of expiring space. Leasing cost including tenant improvements and leasing commissions averaged $3.00 per square foot per year of lease term.

First rental rates payable subsequent to any concession period decreased an average of 5.4% over the expiring rental rate, including all escalations. Expiring leases company-wide for the remainder of 2005 total only 1.2% of lease space and annual rent. During 2006, 2.1 million square feet are scheduled to expire, representing 8.1% of lease space and 8.2% of aggregate rent. Further details on our leasing activity can be found in the supplemental package on our website. I'll now briefly discuss activity by market.

Our market information is provided by Cushman and Wakefield and, unless otherwise noted, we will discuss overall Class A vacancy rates and Direct Class A average asking rents. Beginning with the Northern New York suburban markets, Westchester County continues to improve. Availability continued to decrease ending the quarter at 16.1% compared to 17% at June 30th. Asking rents remain stable at $29.22, down from $29.73 in the second quarter. Sublet space continued to diminish as a percentage of availability going from 14.3% to 12.8%. A few larger transactions in the White Plains EBD and the former Altreia Headquarters building in the Eastern sub market, as well as the decision by the developers of the Readers Digest site to demolish a portion of its office space, contributed to the significant decrease in available space.

Mack-Cali's Westchester Office and Office Plex Properties, totaling 4.8 million square feet, were 95.6% leased at September 30th compared to 95.9% in the prior quarter. Leases totaling 39,000 square feet will expire during the remainder of the year. Looking toward 2006, 385,000 square feet are scheduled to expire, representing approximately 8.5% of total Westchester lease space and 9.5% of its total annualized base rent.

In Fairfield County, availability increased from 18% last quarter to 19.1% due to several corporate announcements, which added over 380,000 square feet of available space. International Paper announced it will consolidate operations at its headquarters in Memphis, Tennessee and the [Due] Pharma announced significant layoffs after losing a patent on one of its major drug products.

Leasing activity outside the Stanford CBD showed some strength contributing to overall stable performance. Countywide, sub lease space continued to diminish, now representing 23.6% of available space and asking rents moved up from $29.33 to $30.51. Royal Bank of Scotland and RBS Grands Capital announced the consolidation of business operations in Stanford that will call for construction of a build-to-suit property in the central business district, totaling a minimum of 450,000 square feet to be completed in 2008 or 2009.

Significant construction completions in the region included a total of 637,000 square feet in Norwalk, of which 364,000 square feet is leased. Mack-Cali's Fairfield properties, which totaled 852,000 square feet, ended the quarter at 85.1% leased, down from 86% at June 30th.

Remaining 2005 expirations amount to 8,000 feet and 2006 expirations total 48,000 square feet, representing 6.7% of all leased space, and 8.5% of the total annualized rent.

While leasing volume in Northern New Jersey remains high at nearly 2 million square feet for the quarter, and year-to-date leasing exceeding all of 2004, vacancy increased slightly from 19.9% last quarter to 20% at September 30th. Asking rents were virtually unchanged at an average of $28.70. Sublease space did show a decline from 33% of total availability to 30.7%, although there are still a few large blocks available.

Again, availability increased in Bergen County sub markets from 22.9% at June 30th to 24.5% at the end of September. Mack-Cali's Bergen County properties are 98.3% leased.

Morris County also saw a slightly increased availability ending the quarter at 23.7%, up from 23.5% last quarter.

Hudson County showed some improvement with availability declining from 17.7% to 16.9%. Mack-Cali's 4.3 million square feet in Jersey City is 91.1% leased, with virtually no expiring space during the remainder of 2005 and less than 1% of leased space scheduled to expire in 2006.

Despite the slightly negative third quarter absorption in the competitive Northern New Jersey market, Mack-Cali's 12.8 million square feet of space in the region ended September at 89.2% leased, up from 88.7% in the second quarter. Within our Northern New Jersey portfolio, leases totaling 131,000 square feet expire during the remainder of 2005, representing 1.2% of the region's leased inventory and 1.1% of its total rent. In 2006, leases totaling 763,000 square feet are scheduled to expire, representing 6.8% of lease space and 6.5% of total rent. No additional construction was announced in the third quarter.

The central New Jersey market remained stable in the third quarter despite a sluggish economy and the continued vacating of space by several large telecommunication firms. Availability picked up from 20.1% to 20.4 % at September 30th. Sub lease space comprises over a third of the availability. Average asking rents rose nearly $1.00 to $28.65. Mack-Cali's 4.7 million square feet of Central New Jersey properties were 88% leased at quarter end, up from 86.4% at June 30th. Expirations through the end of this year total 24,000 square feet and represent less than 1% of the region's leased inventory and total rent. During 2006, a total of 212,000 square feet is scheduled to expire, which represents 5.2% of the regions leased space and 5.9% of its total rent.

Suburban Philadelphia marked its sixth consecutive quarter of positive absorption. Available space decreased from 20.4% at June 30th to 19.9% at the close of the third quarter. Asking rents continued a gradual decline, averaging $25.33 for the quarter, down $0.14 from the second quarter. Mack-Cali's office and office plex holdings in the suburban Philadelphia market totaled approximately 3.7 million square feet located both in Pennsylvania and nearby Southern New Jersey. They remain 90.8% leased at September 30th, unchanged from the prior quarter. Expirations for the remainder of the year totaled 103,000 square feet and represent 3% of the region's lease space and 3.4% of its total rent. 2006 expirations total 523,000 square feet, which amounts to 15.6% of leased inventory and contributes 16.3% of the region's total rent.

While Washington D.C. remains one of the healthiest markets in the country with Class A availability steady at 10%, abundant new construction deliveries, and a reduction in overall transaction volume are making the leasing environment much more competitive. The construction pipeline now totals 6.8 million square feet, of which 4.8 million square feet is speculative and 31% of that total pre-leased. Average asking rents were nearly constant compared with the second quarter at $47.73, an increase of about $0.19.

Leasing activity continues to lag, with 4.1 million square of new leases executed year-to-date compared to the 3 quarter average of 5 million square feet in past years. However, a strong local economy and demand for space by government agencies and law firms continues to encourage optimism that absorption will keep pace with the space being added to the market. Mack-Cali's 450,000 in this market ended the quarter at 83.8% leased, down from 92.9% leased June 30th. Remaining 2005 expirations total about 16,000 square feet, or 4.5% of leased space, and 4.9% of the annualized rent in our D.C. properties. 2006 expirations amount to less than 2% of leased space and total rent to the market.

Moving to our major markets outside the Northeast, Denver suburban vacancy rate edged up from 18.9% last quarter to 19.1%. Asking rents rose slightly to $18.71.

And in San Francisco, San Francisco's markets showed continued strengthening, with available space falling from 17.8% in June to 16.3% at September 30th. More than half the absorption year-to-date has been in migration from the suburban markets. Average asking rents showed a slight increase to $30.36.

Mack-Cali's holdings outside the Northeast totaled 2 million square feet and were 87.4% leased at September 30th. Remaining 2005 expirations amount to less than 1% of leased space and total rent. 2006 expirations comprise 10% of space leased and 13.2% of the aggregate rent.

In summary, the quarter was categorized by stability in most markets, though few companies are committing to significant hiring or expansion that would drive up occupancy. As we predicted in June, the leasing environment continues to be challenging and we believe it will remain so through the balance of the year. Mitch.

Thanks, Mike. As has been my practice on previous calls, I've talked a little bit about our cash position and some of our same-store results and I'll do the same on this call. For the quarter -- the third quarter, we spent almost $13 million between tenant improvements, and leasing commissions and building improvements. That breaks down to about $11.2 million for TI and LC and about $1.4 million for building improvements. And so we project that at the end of the year, we will have spent about $60 million in those two categories, breaking down to about $53.5 million for tenant improvements and leasing commissions and $6.5 million on basic building improvements. That puts us at a CAD payout ratio for the quarter at 96% and projected for the year at 98%, with free cash flow at the end of the year of about a break-even to potentially as much as $5 million. So, we still are doing quite well from a free cash flow perspective.

As far as same-store results, we have been impacted this quarter, particularly as a result of paying expenses and utilities, real estate taxes, and operating for the first time in many years in the following assets -- Plaza One at Harbor Side Financial Center, which, of course, is the former Bankers Trust/Deutsche Bank Headquarter Building at Exchange Place, Kimball Plaza II, the 475,000 AT&T acquired property, 30 Knightsbridge, which I talked about on the call as having some significant leasing activity, and 3600 South Yosemite, which was the former home of MDC Holdings or MDC, the public home builder in Denver. And all of that combined affected our expenses by about $7 million for the quarter. And so with that, I will now be happy to open the floor to questions.

Operator [Operator Instructions] And our first question is from John Litt with Citigroup.

Good morning. It's Jordan Sadler here with John. My first question relates to just the guidance. If there's any way you guys could provide a little bit more of the underlying assumptions in terms of maybe the releasing spreads next year on the 2.1 million square feet, and/or maybe transaction activity.

Hi, Jordan. Well, we have modeled in a leasing pickup of about 150 basis points throughout the year 2006 from where we are today. So, that gives you some sense that we are not modeling in at this point significant traction on leasing gains. I think Barry said in his remarks that guidance reflected -- or the mid point of guidance reflected about 2.5 million feet, which was a combination of 2.1 million feet of leases expiring and about 400,000 of pickup. So, that gives you a sense that we're, at this juncture, not modeling in significant traction gains. Nor frankly, are we modeling in any different economics in terms of the structure of those leases from the types of deals that we're making today. Does that give you --

Do you think rents will be rolling down flat?

No, I think rents are going to be flat. I think that TI packages have basically flattened out. We're, I believe, in a bit of a trough right now. However, quite frankly, having said that, given our market positions, we have done quite well on some of the larger leases that I enunciated on the call. As a result of having at the right time, the right place, large blocks of space in premier assets that provided the visibility for companies like QualCare, the Turnpike Authority having an asset that overlooks Interchange 11 at the Turnpike and the Parkway, etc. So, we've done well in some of the larger leases.

Okay. And in terms of transaction activity, are you modeling any acquisitions or investments?

We are in discussion with a, what I would say, is close to a couple hundred million dollar transaction in our core markets. We have modeled in that particular transaction. It's kind of flat really. It doesn't have a major impact. That transaction will have a large component of units to it and so it will effectively, in addition to being premier real estate in very strong core markets, be an equity issuance, if you will.

Okay. And that's, what did you say, about $200 million or so?

Slightly under $200 million, yes.

And I guess it would probably be in the mid 7 sort of cap rate range if it were not really accretive initially.

Yes, going in, it's plus or minus a 7, and we expect obviously, to -- there's a moderate amount of vacancy at about 14% and there's some rollover. And we would expect to be able to ramp that up to -- by at least a half of percentage point over the course of the year or so.

Okay.

And again, I'm giving you cash yields. I'm not giving you GAAP yields.

Okay. The sale of the residential parcel that you mentioned potentially in Jersey City, is that the Plaza 8 parcel, the Plaza 89?

Yes, it's the Plaza 89, which is part of our AFE, the last remaining component of the AFE partnership. You recall we built the Plaza 10, which is the Schwab Building on part of that land, and this is the remainder. We have -- I believe have pretty well reached consensus in the partnership and we do have a credible legitimate offer on the table that aggregates in excess of $70 million. It's a phased payment. More than half of that would be upon the zoning approval and then some phasing of the remainder with a very capable, credible buyer.

Okay. Would you be taking back any paper on that at all?

We wouldn't be taking back any paper, but roughly half of the development, if we move forward with this transaction, would, in effect, be a secured option. There would be a very significant nonrefundable cash down payment or deposit on the second phase. And there would be a very limited time window under which the developer could take down that second phase or lose his rights and lose the deposit. But the initial cash component would be, at this juncture, almost $40 million, if we move forward with that deal.

Okay. And is that a fourth quarter event or take some time over the next year?

We've been working on it for a while. It's been difficult to gain complete consensus on the part of the AFE partners, but I think we're just about there. And so we're scheduled to have, what I hope is the final meeting the second week of November and we would move forward right away the way things stand right now. But, of course, we have to -- they have to go through the approval process.

Sure.

The land is zoned. It's fully -- it's a permitted use, but they have to go through the site plan approval process.

Of course. I'll yield the floor. Thanks for the time.

You're welcome.

Our next question is from Chris Haley with Wachovia Securities.

Hi, Mitch, Barry and Mike. How are you?

We're all well, thanks.

Good, thanks. I have several questions. I will try to go through them quickly. The excluded termination fees are running about $0.83 to $0.84 in the third quarter so I would annualize that and assume a little bit of same-store growth and minimal impact from the acquisitions to kind of get the mid point of my guidance for next year. Is that right?

Yes, but again, we've had some anomalous behavior on some of the termination fees. We certainly don't expect that it's a run rate, the $0.03 cents.

Okay, but if I look at termination, are you assuming any material number in reference to termination fees next year?

No, it's usually a couple hundred thousand a quarter.

Okay. It would have been full year '05? What do you think it's going to wind up being?

Full year '05 is -- we'll give that number to you in a minute but it's probably going to be like $0.06.

Okay. What was your view, and if you need to correct that, might as well -- while looking, ask the questions, what would you say your annual development run rate might look like, given some of your comments over the last 2 quarters, 3 quarters to try to put some sites to work recognizing market conditions. Do you think you'd like to have $50, $100 million of development in the intermediate range for you guys?

The answer is yes, I would like to. But we will certainly pick our spots. There may be a circumstance where we would develop -- which we're in the process of finalizing a small spec building in a very, very tight vest pocket location where we've got huge interest in the building in this particular location. But generally speaking, I wouldn't build spec in any area right now. I think it's completely premature.

Okay, and what would -- in your '05 guidance, what do you expect total leasing volume to be for '05?

2.5 million; is that for '05?

For '05, right.

For '05 it's going to be going to be about somewhere around 5.5 million feet, plus or minus.

Okay, so what kind of CapEx per foot number should I be using for the '06 volume assumption?

I would stay with that $3.00-ish type of number right now. I think that it's reflecting itself to be a pretty accurate number.

Okay, and you don't expect any cost pressures either from materials, labor, outside of market conditions?

Yes, there's certainly have been pricing increases in things that affect TI work, like sheet rock and certain labor cost increases, but net-net, they haven't been all that significant.

Okay, thank you.

You're welcome.

And our next question is from Carey Callaghan with Goldman Sachs.

Good morning. It's [Jay Haverman], Goldman Sachs. Can you provide some update on the AT&T space, as well as the former Bankers Trust space? Are you expecting any lease up there in '06?

Yes, hi, Jay. With regard to the Plaza I, which is the former Bankers Trust, as you know, Deuesche Bank occupies 90,000 feet out of the 395,000. They've indicated that they want to stay at least an additional year. So, that would give us a little more than 2 years from now. With regard to the remainder of the space, the 295,000 feet plus or minus, or so, we're finishing some significant building renovations right now -- a major new entrance façade, new building systems, new lobbies, major work. And that should be done by the end of the year. We have a lease out for signature right now for 36,000 feet for a new tenant.

We have an expansion within Harborside of 25,000 feet right now. And so, we're beginning to gain some traction there. The rents are mid $20.00-type rents, which is basically what we modeled in for that asset. As far as the AT&T assets, we're making definite traction in Piscataway at 30 Knightsbridge. Given the Verizon Yellow Pages transaction, 100,000 feet to QualCare, we have a lease out right now for 25,000 feet that we expect will convert within the next couple of days or certainly a week or so. So, we're making good traction there. Regarding Kimball Plaza, which, as you know, is about a mile from Verizon's new headquarters, the former AT&T headquarters, in Basking Ridge, we are in discussion on a major transaction. It's taken a very long time, a lot of fits and starts with a corporation that would be, if the deal makes, would be leased -- they would be leasing 2/3 of that complex.

And the reason that they want to do this is that they own their own corporate headquarters and they are going through a rezoning process to convert that to residential in another community and that's sort of the motivation for this consolidation. And we have a couple of hundred thousand square foot plus or minus-type; I would say they're more than tire kickers at this point, but we're not in the lease stage. So, a lot depends on what happens with the big one and what happens with the tire kickers.

Okay, and just moving to energy costs, can you talk about '06 guidance? You mentioned the $7 million increase in expenses and probably due to higher utilities, as well as real estate taxes. But what have you factored in for next year for increases on energy costs?

Yes, we've basically defaulted to market in all of our analysis. Most of the hedges that we had acquired have run off or are in the process of running off. You just can't do that forever. But we got some benefit from the hedges. And so we're figuring that the general energy costs are going to increase on a kilowatt-hour basis somewhere around 10%. And of course, there will be the spikes in natural gas. There will be some spikes throughout that could raise pricing levels for short periods as much as 50%. But most of that's recoverable.

And lastly, you mentioned spec development. And it really sounds like it's only occurring in D.C. Is that the case? Are you seeing it sort of emerge in other markets as well?

I would say I've seen it emerge in limited ways in a number of -- in several of the sub markets that we are active in. I think it's a mistake. I think it only puts pressure on the ability to raise rents and we're not going to do it. We've got great relationships as evidenced by, for example, the AAA deal. And we'll pick our spots and we'll lease on a risk-adjusted basis. We'll build some buildings. However, having said that, I think as the economy begins to turn the corner and admittedly, it's been a lot more difficult and slower than any of us had anticipated or imagined, we will be able to leverage our land holdings, which aggregate more than 10 million square feet right now, and get involved, in my opinion, over the next 2, 3 years in a significant development program that will fuel growth of earnings as the economy improves, as consolidation becomes even that much more important in the global economy, and as demands for brand new product become more apparent in space usage. So, I think we're really well poised for the future but it's premature now.

Okay, thank you very much.

You're welcome.

Our next question is from Ross Nussbaum with Banc of America Securities.

Thank you. It's John Kim with Ross. A quick question for Barry on the utility costs; what is your reimbursement rate for the increase in cost? Does that vary by market or by tenant?

Generally, there's two ways that we get reimbursed for utilities. One is the direct electric that we provide for the tenants, which we get dollar for dollar reimbursement on, which is a large component of the utilities. Then there's the common area utilities, which generally, we collect back somewhere between 60 and 80% of that through escalation charges.

And so what's the range of your reimbursement rates?

As I said, it's between 60 and 80%.

Mitch, there's a -- I was wondering if you could comment on the portfolio being marketed in Westchester, how interested you are in that portfolio and how competitive it is to some of your space there?

Well, the portfolio -- Eastridge is on the east side of Westchester, where we don't have any holdings. We looked very carefully at that but it was beyond nosebleed territory where the pricing ended up. Now, it really hasn't traded yet, as far as I know. It's kind of dormant, but there was a buyer selected. But we looked at the portfolio at $230 million and that was valuing an empty building at roughly $100 a foot and everything else at fair value. And the number it was reaching was to $280 million. So, somebody is going to get hurt, in my opinion, if there isn't a real rapid recovery in the economy. And it sure is not going to be Mack-Cali. So, we looked at it carefully and may come back to market based on the fact that they haven't closed on it yet and our eyes are open.

John Kim. Okay. And then I had a final question on your tenants, on your top tenants. You've done a great job managing the quality of your tenants. But I was wondering if you could comment on two of your larger tenants? One was Vonage and the other was Cendant, based on the business model for the first one and I guess the second would be the recent announcement of splitting into four companies.

Absolutely. Well, with regards to Vonage, obviously, they are in the process of occupying the building. They are doing major work on the building. The whole center section of the building is being renovated right now with a brand new entrance façade. And so significant dollars are being spent and it's both of our money in terms of upgrading the asset. As we all have followed it and read in Barron's over the weekend, Vonage is in the process of either a recapitalization event or potentially, a sale of the business and I'm not really in their board room, so I can't opine on anything beyond what I've read. But they do have an exciting business model in terms of having a tremendously large advantage in the number of subscribers and Jeff Citron has proved to be a very successful entrepreneur in both Iowa and DCNN Date Tech. And in personal discussion with him, he feels very confident that the company will do very well. And so they're hiring people. They are certainly committed to building that business model.

As far as Cendant is concerned, we had been engaged in discussion with Cendant prior to that announcement concerning the possibility of expansion within our campus on a build-to-suit basis. And then of course, lo and behold, they talk about the breakup into four companies. The good news for us is that three out of the four companies in the larger units are going to remain in Parsippany. They do have varying lease expirations with us. But in general, they're long-term lease commitments, and they have indicated to us that they want to further discussions concerning some new development opportunities on the business campus. And so that's about all I can tell you right now. It looks like they're going to stay there. It looks like they want to grow there. And of course, given our land holdings on the campus where we can support about 1.2 million of new development, I think we'll end up, hopefully, doing something that's mutually beneficial.

Good, that's helpful. Thanks a lot.

You're welcome.

Our next question is from Alexander Goldberg with Lehman Brothers.

Yes, hi, good morning.

Good morning.

Have you disclosed your projected all-in costs, land and hard and soft, for the Horizon Center for the AAA natural yield?

Yes, the yield is -- the costs are approximately -- call it roughly $17.5 million on the build-to-suit. The yield should be about 10.

10, and the 17.5 million, that's the land and that's the whole thing?

Everything.

Okay.

Everything in connection with the new building.

And what do you guys value land at on an FAR basis?

Land down there -- well, of course, we base it on our holding position, but roughly speaking, $20.00 a foot.

But you wouldn't consider that market, correct?

I'm sorry?

You wouldn't consider $20.00 a foot market, would you?

If we were to sell land down there, it would be in the $20.00 to $25.00 dollar range.

Okay, and then going back to the resi conversion, iIn addition to the Harborside area, do you have any other parcels that you're potentially looking at for conversion to residential?

No.

So, the Jersey City site is the only one that is up for consideration?

That's right.

Okay, thank you.

And our next question is from Jim Sullivan with Green Street Advisors.

Hey, guys. It's actually Michael Knott. Most of my questions have been answered. I just wanted to ask Mitch if you could sort of present sort of the bull case, if you could, for Northern New Jersey. We continue to see vacancy in the 20% range as you guys outlined and it just seems sort of pessimistic. I'm just wondering if you can sort of speak to the positives and then what you see going forward and if you're still bullish on a second half of '06 recovery like you had mentioned on previous calls?

Actually, I thought I was rather optimistic. But, first of all, Michael, other than -- and this may sound somewhat rhetorical, but other than Southern California, perhaps Washington D.C. and parts of Manhattan, parts -- parts, not all -- I think that the markets here continue to do as well, if not better, than most markets throughout the nation. And all we need to look at is the market statistics to bear that out. I do feel that, while we're not immune to the pressures of cost of living and cost of doing business, there is still a very good reason for companies to want to maintain a New York metropolitan and Washington metropolitan centric business model. It's easily accessible. There's a tremendous amount of intellectual capital available, given the universities that exist throughout this region. The transportation systems are very efficient.

And net-net, while we haven't seen much job growth in many industries, and frankly, I'm seeing consolidation in a number of industries like telecommunications, we still house more pharmaceutical headquarters in New Jersey than anywhere else in the United States, any other state. We still have the nucleus of telecommunications and telecommunications engineering in New Jersey, albeit a much smaller presence than in the past. And like I said, while we're not immune from the pressures that exist throughout the globe and certainly throughout the nation, there are a lot of good reasons to do business within this region -- the housing availability, the cultural activities, etc.

And I would expect that we'll get our fair share of growth translating into job growth and office growth as the economy continues to demonstrate some traction over the next couple of years. I mean, if you look at Manhattan and you compare the cost of doing business and the cost of living, and Manhattan has, in fact, done relatively -- certainly, midtown has done relative well over the last couple of years. Then that would make the argument that companies that want to do business in Manhattan are going to expand, when they begin to expand, in the suburban markets and the adjacencies. We've seen that in companies like AIG and insurance. We've seen -- you can come into the market right now and see at least five or six examples of financial service companies building for their own account, data recovery and data facilities in suburban New Jersey.

And along with that are going to bring jobs, both in the development phase and permanent jobs, and technology and high-end type jobs because they are very concerned about business continuity. And so looking at the medium to longer term, I think that we will gain our fair share of growth. We've shown ourselves to be a relatively resilient economy in the Northeast, and I'm not only speaking about New Jersey. I mean, we have a significant presence in Westchester, a reasonably significant presence in suburban Philadelphia, and the bottom line is that office usage has been under pressure as a result of the contraction in the economy. A lot of the jobs that have been created over the last couple of years have been lower paying jobs in retail and leisure activities responding to the high level of consumer spending.

But I think everybody in the administration and the Fed realizes that we need to see some real strong growth in the higher end jobs and wealth creation if we're going to remain competitive as a nation. So, it's a long answer to a long question. But we have historically done very well. This is not the first time I have seen a recessionary environment. I've lived through it in the '70s. I've lived through it in the '80s and in the beginning of the '90s. And we always end up resilient and we always end up -- if you have the best product in the best sub markets and the best franchise, you do well.

And just as far as s previous mention of a [2H] '06 recovery, do you feel that's going to be extended out a little bit?

Well, I think that we're beginning to see some decent signs in a couple of industries that will demonstrate some growth. I mean, we've seen some M&A activity as recently as yesterday in pharmaceuticals that could be good for this region, the Novartis announcement, and, unfortunately, we're in an environment right now where for every good announcement, there's a counter balancing one about some kind of tort action or some other debilitating thing. But I think that we are making progress and most of our earnings modeling and guidance is a reflection of the fact that while we do -- and I do believe we will see modest recovery, certainly with more velocity, as we move through 2006. By the time we get these tenants in place, it will be the latter part of the year and that's reflected in the guidance we put out.

Okay, thanks a lot.

And we do have a follow-up question from Chris Haley with Wachovia Securities.

Mitch, you're looking at leasing volumes in 2006 about half the level of 2005. Is there a reason? Obviously, there's expiration issues and schedules. Is the 2005 volume reflective of a more aggressive stance to try to lock customers in? I'm trying to look at '05 pace versus an '06 estimated pace.

Well, what we've projected in -- first of all, the 2.1 million feet in '06 are lease expirations.

Right, schedules.

Yes, that would correlate to a similar amount of space in 2005, plus or minus. And the bottom line to all of this is we've been leasing, on average, about a million to a million and a quarter feet a quarter, plus or minus. And between expirations, early renewals, and new activity, I don't expect that will change dramatically.

Okay, so we're looking at a million, a million three, and so looking at your current run rate of FFO and backing out the expenditures for leasing costs, are there any material changes year-to-year in expected building improvements?

I'm sorry, Chris, could you just repeat that last one?

Chris Haley. Sure, are there any material differences between '05 and '06 regarding building improvement expenditures?

No, not really, and you need to bear in mind that the 2.5 million feet that we talked about in 2006 are in-place commencements in 2006, so that kind of skews the number because, again, we do a lot of proactive early renewals where the leases, for example, don't expire, until '07 and '08. And so it's part of the leasing velocity for the year, but not part of the commencements for 2006, if I'm making myself clear?

I may have to come back to you on that one, but that's okay. Barry, on revenue recognition policy, do you have a deal with the accounting provisions related to delaying of revenue or GAAP recognition of leases that capital expenditures that are still being spent on by the landlord?

You know, many years ago, we adopted a revenue recognition policy that basically said when we turned over the space to the tenant, and it particularly becomes an issue in very few leases, but let me take a step back. Generally, we build the space for our tenants so the issue that you're talking about is not something -- it's fairly clear the lease -- we finish our obligations. The lease commences when we turn the space over to the tenant. We have no further obligations to them other than maybe some punch list or stuff that's out in the future where we have to hang carpet obligations maybe 5 or 10 years out into a major lease.

Having said that, when we provide allowances to tenants, we generally -- and have adopted a position many, many years ago that we begin the straight lining of the rent at the time when the beneficial -- the tenant takes beneficial occupancy of the space, or whether or not they're actually in there or not, or they're doing work or what have you where the risk of loss now is theirs and we have no further obligations. And that's how we've done it.

So regarding your discussions with your auditors you see no or little risk that this policy would change going into '06 regarding current discussions?

I would tell you that what we've seen is that there's nothing in GAAP that's changed at this moment in time, other than that there's been a lot of discussion amongst a lot of people about this issue and thus far, we've not seen anything in GAAP change at this point.

Okay. Finally, Michael, can you just quickly -- and you talked about Westchester, Fairfield, Northern New Jersey, Central New Jersey, Philadelphia and D.C. and your non-core. Could you just quickly just give me your rough sense as to where you are on those six leasings in terms of mark to market for each of those areas?

I'll respond to that. I think that's part of our -- all of the areas that you've identified are part of our core portfolio.

Correct.

And we are, you know, looking at 5-10% roll-downs on expiring leases. And that hasn't really changed over the last several quarters.

Is there a difference between the core six markets and the non-core because if I just listened to the rollover exposures, you have single-digit rolls in your major markets. You have double-digit roll in '06 in your non-core.

Correct. Again, San Francisco and Denver, from a rent perspective, remain relatively weak and those are going to fluctuate. But this last quarter, it was 15%. The quarter before that, it was more than that. So, those markets are under a lot more pressure but our core markets are smaller tenants, you always do a little bit better. And so Westchester has a larger component of smaller tenants and we do a little bit better. But, on average, it's 5 to10%.

Thank you very much.

You're welcome.

It appears we have no further questions at this time. I'd like to turn the conference back over to Mr. Hersh for any additional closing remarks.

Well, I would like to thank all of you for joining us today. We certainly look forward to reporting to you again next quarter and look forward to seeing many of you at [Nareed] in Chicago. Thank you very much. Good day.

That concludes today's teleconference. We thank you for your participation. Have a great day.