Veris Residential Inc (VRE) 2005 Q4 法說會逐字稿

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

Good morning, and thank you for joining Mack-Cali's fourth quarter and year end 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 for the fourth quarter and talk about what we're seeing in our markets. Then I will discuss the announcement we made last week about our plans to acquire the Gale Real Estate Services Company along with interest in a 2.8 million-square-foot portfolio in New Jersey. After that, Barry will review our financial results and then Mike will give you an update on our markets and our leasing results.

As you have seen in our press release, FFO for the fourth quarter came in at $0.86 per share compared to $0.90 per share for the fourth quarter of 2004. With respect to guidance, we are firming our guidance for full year 2006 at the range of $3.32 to $3.48 per share. In Barry's discussion he will provide more color on our guidance. For the quarter, we leased over 1.1 million square feet, and our portfolio ended at 91% leased which was up from the prior quarter's 90%.

The markets do remain very competitive and the economics of lease transactions still remain under pressure. We are still not seeing wide scale corporate expansion that would result in job growth expansion and thus an increase in office space demand. And so the real estate recovery remains relatively slow. However, we do believe that the markets have begun to stabilize and we are seeing a general increase in activity space showings and traffic in most of our northeast markets. This is a particularly good sign. Areas of particular note with respect to this type of activity include Morris county in New Jersey, and Westchester county in New York. Activity in suburban Philadelphia has also picked up as has southern New Jersey, but I must say albeit very competitive in those markets.

And now I will review some of our results and activities for the fourth quarter. Our TI and commission expenses were $3.50 per share -- per-square-foot, per year up from last quarter's $3 per-square, foot per year. Thus reflecting the market's continued competitiveness. Our portfolio-wide roll down for the quarter was 1.6% compared to last quarter's 5.4%. A good sign that things are beginning to stabilize. Our rollovers for the year 2006 at this juncture are only 7.9% of the base rent of the Company or $44.4 million. So in fact we have done a great deal of proactive lease rollover management for 2006.

The first quarter of 2006 is particularly challenging with about 630,000 square feet rolling over. This includes the Nabisco lease expiration in Parsippany for a single building of about 154,000 square feet. And several other fairly large lease expirations. So we do expect the first quarter to be challenging, but are very hopeful that it will moderate throughout the balance of the year and that we will see some positive momentum continue to build.

In the fourth quarter of 2005, we broke ground on a 120,000-square-foot build to suit office property for Triple A mid-Atlantic at our Hamilton Township Horizon Center. The lease includes a 15 year term, triple net deal, and the building is being developed on land that we own in our land inventory at Horizon Center. So we continue to make use of our wholly owned land inventory. As well as that we will be acquiring when we complete the building three office buildings from Triple-A, just down the road that will include about 84,000 square feet of existing buildings and a land parcel to develop an additional 243,000 square feet of additional commercial space in Hamilton Township. And so this transaction provides us with a replenishment of our land inventory in what has proven to be a very vital and vibrant sub market located between Princeton and Trenton right at the Amtrak and New Jersey transit lines. And additional existing inventory in that marketplace.

During the fourth quarter, we also announced a significant expansion in Washington, D.C., with our agreement to acquire Capital Office Park, a seven building class A office complex located in Greenbelt, Maryland, just 12 miles outside of the center of the district for approximately $162 million. The acquisition of this complex which totals over 842,000 square feet will serve to triple our holdings in the vibrant Washington, D.C., metro market. It will also provide us continued growth opportunities through options on land contiguous with Capital Office Park to develop about 600,000 square feet of office space as demand increases over time. I might point out as well that but for approximately $62 million in the assumption of debt, the sellers are taking the majority of their equity in OP units, equity in Mack-Cali.

At Harborside Financial Center Plaza 1 in Jersey City, we have recently completed a $12 million modernization project. That includes a new entrance, a new lobby, a partial new facade and common area upgrades throughout the entire building as well as system upgrades. That has already resulted in improving the marketability of the building and the proof of that is that during the quarter we announced two leases in the building, plaza 1. Sumitomo Banking Corporation signed a new lease for over 40,000 square feet for almost 11 years, 10 years 7 month term. As well the firm renewed its lease in plaza 2, the adjacent building for a 10 year term for almost 31,000 square feet. So we continue to evolve our relationship with Sumitomo Mitsui, a very strong banking corporation.

As well Fred Alger and Company signed a new 15 year lease for about 38,000 square feet in plaza 1. This is a relocation and an expansion out of midtown Manhattan. So some of our precepts about as Midtown tightens, Jersey City and the Gold Coast will continue to evolve and see more activity from a diversity of users. We are seeing the proof of that as we speak in plaza 1.

We also recently completed extensive upgrades at 5 Wood Hollow Road in Parsippany. A building that we acquired in late 2004 where with we renovated the entrance, the approach to the building, the lobby, the common areas, the mechanical systems, and the building is now 88% leased with very high caliber tenants. Some of whom we do business with in other parts of our portfolio like Cingular Wireless, formerly AT&T Wireless. And in general, we are seeing improving leasing trends.

For the year 2005, we leased about 5.7 million square feet of space. Of that, about 2.5 million square feet was new, new tenants. And over 3.2 million square feet in renewal and other retained tenants. And so we are seeing better velocity develop in the marketplace and rent roll downs in fact are diminishing. Our retention rate for the quarter was 82%. So we continue to trend in a very, very positive direction with respect to our long-term relationships with the most vital parts of Corporate America.

Now I would like to discuss the acquisition plans that we announced last week. I must caution, however, that while we fully expect to conclude the acquisition based on certain agreements in principle that we have reached, there can be no assurance that they will close or that the structure or terms will not reflect some changes from the current contemplated terms. To reiterate the exciting announcement that we talked about last week, we have agreed in principle to acquire the Gale Real Estate Services Company as well as interest in a 2.8 million-square-foot class A office portfolio in New Jersey. Not only do we expect this acquisition to cement our position as the dominant landlord in New Jersey bringing our owned and managed assets in the state to some 20 -- almost 23 million square feet upon the completion of that transaction, but our expected acquisition of the Gale platform will provide us with a very powerful engine for the future growth of our company.

As you probably know, our plan is to acquire the Gale Real Estate Services Company, a leading privately owned real estate firm with great brand recognition including its third party management construction and leasing business as well as its development joint ventures with institutional investors and its development platform. So we are very excited about the opportunities that this platform will provide for Mack-Cali as well as an entirely diverse consistent income stream for the Company. To be clear in case there was any confusion about this, Stan Gale, who is the Chairman -- the current Chairman and CEO of the Gale Company, will retain his Gale Holdings International, and that presently has investments primarily in Korea and in Boston. That will not be part of this transaction. However, I will tell you that we are already in discussion about certain opportunities that may emerge in the Boston market. As I've stated previously over time that that is a market that is of interest to us consistent with our presence along the northeast corridor of the United States.

The Gale Real Estate Services Company will retain its name, its identity and its headquarters in Florham Park, New Jersey, and will operate as a division of Mack-Cali. I will serve as Chairman and CEO of that company. Mark Yeager, a very capable real estate professional, will continue to serve as the President and Stan Gale will serve as non-Executive Vice Chairman. As part of his role in continuing to move the Gale Real Estate Services Company forward over a three year period, approximately almost half of the purchase price will be in the form of an earn-out over a three year period so Stan's interest will be completely aligned with Mack-Cali. The initial upfront payment of some $22 million includes $10 million in OP units in Mack-Cali. So the continued performance of the Gale Real Estate Services Company and its impact and positive impact on Mack-Cali is something that will have the full attention of Stan Gale over an extended period of time. Stan will be entering into long-term noncompetes and so we think that there is complete alignment between all of us.

I will tell you that the Gale Real Estate Services Company is one of our strongest competitors here in New Jersey. So it's fully expected that this acquisition will greatly enhance our competitive position throughout the state, and particularly the sub markets that are most important to the growth engine of the state of New Jersey. As I've already indicated, this platform will provide us with a significant third party services business that not only will generate current income for Mack-Cali, it will expand our relationships with the global economy, part of what Gale does presently is facilities management for AT&T, GlaxoSmithKline in parts of the U.K. and Europe. And as we have seen over many year period in the real estate business, these relationships and many others like it through their third party business result in opportunities for development build to suits, tenancies within our existing facilities and potential acquisition and disposition opportunities over time. We are very excited about what this platform can do to expand the growth opportunities for Mack-Cali.

We also announced our agreement in principle to acquire interest in 2.8 million square feet of class A office properties in New Jersey. This is a very interesting structure that we are entering into. We expect to acquire substantially all of the ownership interest in 12 and possibly 13 properties. We are still evolving several of the details. But right now for the 12 properties they're valued at $337 million. They total about 1.7 million square feet. The properties are all located in northern and central New Jersey. These properties are currently 95.1% leased. And we would acquire them from an existing joint venture of SL Green and the Gale Company.

We would also expect to acquire a 50% or a one-half ownership interest in eight or possibly seven, if we move one asset around, Class A office properties. For the eight, the valuation is $168 million so half of that or $84 million would be the Mack-Cali portion of the interest. These assets total 1.1 million square feet and they are also located in some of the best sub markets in northern and central New Jersey. Our interest in these properties would be acquired from that same SL Green/Gale joint venture and they would retain approximately one-half ownership interest, they meaning Stan Gale in this case in those properties.

The properties would continue to be leased and managed by the Gale Real Estate Services division. However, at that juncture that division would be a division of Mack-Cali. So in fact, Mack-Cali would benefit from all of the leasing management and construction services income derived from those properties. Those properties are currently approximately 56% leased. And that means there will be considerable upside potential stemming from all of the fee income and the creation of value by retenanting those superior buildings which have simply just had turnover and lease expirations over the last year or so. This transaction would significantly build on Mack-Cali's dominant position in some of the state's strongest sub markets such as Parsippany, Roseland, Princeton, and a special bonus, if you will, is that we will be partnering with SL Green in the ownership of this joint venture.

One of the industry's top performing publicly traded real estate companies that I know you are all familiar with. So that's especially pleasing in this transaction. So we are real excited about these expected transactions and the competitive advantages that they will provide. The new growth opportunities that these acquisitions will allow us to pursue in many different avenues through a service platform consisting of facilities management, property management, asset management, third party leasing for institutional owners. Construction services. A third party book of business of over $100 million right now in third party construction. Development build to suits, joint venture interest with Stan Gale on a number of different projects and potential expansion of geography as a result of this, consistent with what we've outlined over the last number of years in terms of the shape of what Mack-Cali is and what it could be.

With respect to just some of the statistics and kind of a reflection of 2005, we finished the year at roughly 91% leased. Approximately the same give or take a few basis points as we finish 2004. So we have continued to maintain strong occupancies in our portfolio in what has been a challenging economic time for the United States. We continued to maintain strong coverage ratios, our CAD payout ratio for the full year 2005 was 93.2%. So another year for Mack-Cali to have finished the year cash flow positive at roughly a $14 million free cash flow for 2005. Notwithstanding all of the expenses involved in retenanting spaces, particularly in a competitive environment. So our balance sheet management and our financial flexibility continue to be superior. We have seen a diminishing in rent roll downs. Obviously again, having moved through a very difficult period post 9-11. Finally, we are beginning to see what looks to be an inflection point in terms of our ability to push rents.

And now I'm going to turn the call over to Barry who is going to review our financial results, our activities for the quarter. He is going to talk a little more about the guidance that we affirmed today. Then Michael is going to discuss our leasing results. Barry?

Thanks, Mitchell. Net income available to common shareholders for the fourth quarter of 2005 equaled $14.4 million or $0.23 per share versus $30.3 million or $0.49 per share for the same quarter last year. For the year ended December 31, 2005, net income available to common shareholders amounted to 93.5 million or $1.51 per share as compared to $100.5 million or $1.65 per share for 2004. Funds from operations available to common shareholders for the quarter ended December 31, 2005, amounted to $65.1 million or $0.86 per share versus $67.9 million or $0.90 per share for the quarter ended December 31, 2004. For the year ended December 31, 2005, funds from operations available to common shareholders was $270.3 million or $3.57 per share versus $270.1 million or $3.60 per share for 2004.

Parking and other income in the quarter included $1.3 million in lease termination fees as compared to 400,000 for the same period last year. For the year, termination fees totaled $8.3 million as compared to $2.6 million in 2004. Same store net operating income which excludes lease termination fees on a GAAP basis decreased by 8.1% for the fourth quarter of 2005 as compared to the same period in 2004 and for the year ended December 31, 2005, decreased by 3.3% over the same period last year. Same store net operating income on a cash basis decreased by 8.4% for the fourth quarter of 2005, as compared to same period in '04 and for the year ended December 31, 2005 decreased by 2.9% as compared to the same period in '04.

Our same store portfolio for the fourth quarter was 26.7 million square feet which represents about 91% of the portfolio. For the year, the same store portfolio consisted of 25.2 million square feet or 86% of our portfolio. Our unencumbered portfolio at quarter end totaled 250 properties aggregating 24.7 million square feet of space which represents approximately 84% of our portfolio. During the fourth quarter, we sold $100 million of 5.8% notes due January 15, 2016. The notes were priced to yield 5.87%. The proceeds from the issuance of approximately $99 million was used to repay outstanding borrowings under our credit facility. In January of 2006, we repaid the $144.6 million mortgage which encumbered our Harborside Financial Center Plazas 2 and 3. The mortgages were repaid by using borrowings from our unsecured credit facility.

Also in January of this year, we sold $100 million of 5.8% notes due January 15, 2016. This was a reopening of the November bond deal. The notes this time were priced to yield 5.66%. In addition, we sold $100 million of 5.25% notes due January 15, 2012. These notes were priced to yield 5.48%. The proceeds of both of these offerings of approximately $200.8 million were used to repay outstanding borrowings under the credit facility.

Today, our $600 million unsecured credit facility has $187 million drawn. Leaving over $400 million of unused capacity. At quarter end, Mack-Cali's total undepreciated book asset totaled $5 billion. Our debt to undepreciated asset ratio was 42.8% and debt to market capitalization was 39.2%. The Company had interest coverage of 3.1 times and fixed charge coverage of 2.6 times for the fourth quarter. And for the year ended December 31, 2005, we had coverage of 3.3 times, interest coverage that is, and fixed charge coverage of 2.6 times. We ended the quarter with total debt of approximately $2.1 billion which had a weighted average interest rate of 6.15%.

Our FFO guidance range for 2006 remains unchanged at $3.32 to $3.48 per share and is based on the following major assumptions. Our mid case assumes leasing activity that is lease starts and commencements during 2006 of 2.4 million square feet versus scheduled expirations of 2 million square feet. The plan also assumes no new acquisitions or sales beyond the soon to be closed Capital Office Park acquisition and our recently announced plan to acquire the Gale Real Estate Services Company and interest in a 2.8 million square feet -- square-foot portfolio.

Please note that under SEC Regulation G concerning non-GAAP financial measures such as funds from operations, we are required to provide an explanation of why we believe such financial measures are relevant and reconcile them to net income. Available on our website at www.Mack-Cali.com are our supplemental package and earnings release which includes the information required by Reg G as well as our 10-K. Now Mike will cover our leasing activity.

Thanks, Barry. As of December 31, our consolidated portfolio was 91% leased compared to 90% leased at September 30, 91.2%, at December 31, 2004. During the fourth quarter, we signed 167 transactions companywide totaling over 1.1 million square feet. For the full year, we signed 721 transactions for 5.7 million square feet. These transactions reflect retention of 82.1% expiring space for the quarter and 56.1% for calendar year 2005.

First rental rates payable subsequent to any concession period decreased an average of 1.6% over the expiring rental rate including escalations for the fourth quarter transactions and 8.2% for calendar year 2005. Expiring leases companywide for 2006 comprised 2 million square feet representing 7.6% of lease space and 7.9% of annual rent. Further details on our leasing activity can be found in the supplemental package on our website. I will 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.

Across our markets, we've seen stable or strengthening fundamentals as a strain on new construction and an improving economy facilitate positive absorption. Beginning with our northern New York City suburban market, Westchester county, ended the year with overall availability of 16%. Down slightly from third quarter and 270 basis points lower than year end 2004. Asking rents stayed nearly constant for the year ending at $29.89 compared to $29.83 at the close of 2004. Sublease space continues to decrease as a proportion of availability ending the year at 12.6%. It comprised 17.4% of space a year earlier. There were no major relocations or downsizings in the county and the economy continues to benefit from significant new retail and residential development in White Plains.

Mack-Cali's Westchester office and office plex properties totaled 4.8 million square feet and were 96% leased at December 31, compared with 95.6% in the prior quarter. Leases totaling 360,000 square feet are scheduled to expire during 2006, representing 7.9% of the total Westchester lease base and 8.9% of its total annualized base rent. Fairfield county availability decreased from 19.1% last quarter to 17.7% at year end. A single large transaction accounts for much of the drop and that was the UBS lease for 255,000 square feet of space in Stanford. Sublease space now represents 24.1% of availability and asking rents remained nearly equal to the third quarter at $30.53 which is $0.80 higher than a year earlier.

Mack-Cali's Fairfield properties which total 852,000 square feet ended the quarter at 86.6% leased up from 85.1% at September 30. Fairfield leases expiring during 2006 totaled 43,000 square feet or 5.8% of our lease base and 7.5% of the total annualized rent. There were no new significant construction announcements in either Westchester or Fairfield. In northern New Jersey, increasing leasing volume offset some of the impact of several large spaces which were returned to the market. At year end, availability stood at 20.3% which was nearly even with the third quarter but up from 18.8% 12 months ago. Asking rents eased from $28.70 in the third quarter to $28.46 essentially flat from a year earlier. Sublease space ended the year at 33.2% of total availability.

In the Bergen county sub market availability decreased from 24.5% at the end of September to 22.7% at year end. Mack-Cali's Bergen properties are 97.5% leased. Morris county's were slightly increased availability ending the fourth quarter at 24.3% compared with 23.7% in the third. Available space in Hudson county increased to 18.5% September 31, up from 16.9% in the prior quarter. However, we've seen a pickup in large block inquiry from New York City by financial service firms looking to consolidate and expand their operations. Also, we are in discussions with current tenants for expansions to accommodate planned moves of employees from New York in addition to some new hires.

Mack-Cali's 4.3 million square feet in Jersey City is 93.4% leased, with only 1.4% of lease space or 55,000 square feet scheduled to expire in 2006. Mack-Cali's 12.8 million square feet of space in the northern New Jersey region ended the year at 89.6% leased up from 89.2% in September. In 2006, leases totaling 762,000 square feet are scheduled to expire representing 6.8% of lease space and 6.4% of total rent. The central New Jersey market produced modest absorption in the fourth quarter with availability decreasing from 20.4% to 19%. This represents a significant improvement from year earlier when availability registered 23.3%. Sublease space still comprises over a third of available space. Asking rents fees to $28.04 remaining essentially flat for the year. And the majority of the speculative construction in northern and central New Jersey is located in the Princeton sub market where 450,000 unleased square feet is scheduled for delivery in the second half of 2006 and early 2007.

I'm pleased to report Mack-Cali's 4.7 million square feet of central New Jersey properties were at 90.1% leased at year end and this is up from 88% the prior quarter and 82.8% a year earlier. During 2006, a total of 225,000 square feet is scheduled to expire which represents 5.4% of the regions lease space and 6.4% of its total rent. Marking seven consecutive quarters of positive absorption suburban Philadelphia closed out in the year with availability of 19.3% down from 22.4% at the end of 2004. The fourth quarter seemed to mark the end of a steady decline in asking rents posting an increase from $25.33 to $25.77. The improvement in the suburban Philadelphia market has sparked some speculative construction projects in southern Bucks county the Southern Route 202 corridor and the King of Prussia/Valley Forge sub markets but this will only add about 400,000 unleased square feet to the 35 million-square-foot class A inventory.

Mack-Cali's office and office/flex holdings in the suburban Philadelphia market totaled approximately 3.7 million square feet located in both Pennsylvania and nearby southern New Jersey. They ended the year at 91% leased, up 20 basis points from the third quarter. Expirations for 2006 totaled 438,000 square feet, amounting to 13.1% of the regions leased space and contributing 15.4% of its total rent.

Washington, D.C., continues its strong performance with availability falling from 10% to 9.6% at year end despite competition from significant new construction. A robust local economy and with the lowest unemployment in the country has sustained public sector demand and indicates continued strength in 2006. Average asking rents ended the year at $47.58, down $0.15 from the prior quarter but up from $46.13 a year prior. The 25 million-square-foot suburban Maryland market location of our newly acquired Capital Office Park ended the year with availability of very tight 8.1%. Mack-Cali's 450,000 square feet in these markets was 88.6% leased at December 31. Up from 83.8% in September.

2006 expirations amount to 3.6% of leased space and 3.7% of total rent for the market. Major markets outside the northeast, Denver suburban vacancy rate declined substantially from 19.1% in the third quarter to 16.6% at year end. Asking rents edged up $0.17 to about $18.88. San Francisco's availability was at 16.3% December 31, and that's unchanged from September 30. Essential business district availability was 14.8% with substantially all absorption for the year coming in class A space evidencing that in migration and flight to quality has characterized this market's recovery. Asking rents increased over the quarter from $30.36 to $34.44. This compares with an average asking rent of $28.80 just a year earlier. Mack-Cali's holdings outside the northeast total 1.9 million square feet and were 93.2% leased at year end. Expirations during 2006 comprised 8.6% of space leased and 12.2% of the aggregate rent.

In summary, the fourth quarter results support our expectation that fundamentals in our major markets have begun to stabilize. We face continued pressure on deal economics and our competition in our markets but we are encouraged by the increased activity and absorption. Mitch?

Thanks, Mike. And now we will open the floor to questions. Operator?

Thank you, gentlemen. [OPERATOR INSTRUCTIONS] We will go first to Jordan Sadler from Citigroup.

Good morning, guys. I'm here with Jon Litt. My first question just relates to the guidance. I think, Barry, you said that the Gale portfolio is included in your guidance.

Yes. That is correct. He said it was included in the guidance. And kind of the way we will look at that is from an accretion model perspective. Generally year one because of timing is essentially a flat year. But then it becomes accretive, significantly accretive at least the way we look at it in the second year, something on the order of magnitude of $0.07.

And so $0.07 in '07 for instance?

Correct.

But because of timing relatively flat in '06?

Yes. Relatively flat in 06.

And the expected timing on a close?

Probably 45 days from now plus or minus.

You also mentioned it seemed like the deal is moving around a little bit in terms of the number of properties that could be in it.

Only moving around from the perspective of one asset that we'll probably include in the venture which would also serve as the new headquarters location for Mack-Cali in Metro Park.

And then just on a separate question, I was flipping through your 10-K and it looked like you guys accumulated a couple of million shares, 1.8 million shares of Car America during 2005 and into early January. Are you guys engaged in the process? Or what's going on there?

Well, you are correct. We acquired roughly a 3% ownership position in the Company. It was my view supported of course by the Board, that there was a disconnect from a valuation perspective and that the acquisition of stock represented in my view a very good value. And from a more strategic position that interest, if you will, in that company would certainly be incrementally additive because the market overlay particularly Washington. And it appears that our hypothesis so far has proved correct. The answer to your question is that we are not engaged in any specific discussions at this point.

I guess the question is, was there ever a confidentiality agreement signed between the two of you that would prohibit how much you could buy?

Absolutely not, Jon. As you know, the threshold for 13D filing would be 4.9%. And we were moving in that direction. And then we felt that there was more of a fully priced stock emerging. So we no longer -- we discontinued any buying. And we signed nothing with the Company.

Is it reasonable to assume that you might look at other companies and do the same thing as the use of capital -- or will you invest in stock as opposed to real estate?

I guess if you look at the metrics involved here at least from our perspective, the disconnect or disparity between net asset value and the stocks trading level, the market overlay, the geography, the types of assets, the quality of assets, the general quality of the income stream, it was a rather compelling story where it warranted taking effectively free cash flow and investing in the Company. As I said, it proved to be a very good bet. If and when that situation goes any further or how it ends only time will tell. Would we do it for other companies? Only if it met those metrics and I'm not sure I know of any companies today that exactly meet those metrics.

It sounds like you were doing this for more than just the appreciation of the stock. You were doing it with the hopes of maybe gaining control of the Company.

Well, we live in a world where anything can happen. And the rules of the road are pretty strict. So I don't know where it all ends up. But either way we feel like we made a sound investment.

Okay. But you didn't approach the Company at all, it sounds like, in terms of doing something strategic. It sounds like you were comfortable from a valuation disconnect but also you like the assets in the markets. It doesn't sound like you approached the Company.

We have had no dialogue with the Company specifically about anything more than courtesy discussions but that's it. No strategic discussions, nothing else.

Thank you.

You're welcome.

We will now move on to John Kim with Banc of America.

Thank you. I'm here with Ross Nussbaum. Just to follow up on the Car America stake that you have. Have you hired an advisor to either evaluate the potential strategic transaction with Car or another public company?

No, we haven't.

Have you bought or sold any stock in February?

No, we haven't.

Turning to Xanadu, I realize that your $32 million equity commitment is fulfilled. Are you more inclined at this point to keep your ownership stake regardless of what Mills does with the asset? Or would you rather sell it at this point?

I think that the future potential of that project and that site is enormous and I think that our basis -- our cost of entry is extremely low. If you compare it to the potential value creation over time. The deal that we crafted was as you stated a equity requirement which has been fully funded of $32.5 million, period, the end. And in exchange for that we get a 20% residual ownership interest with a subordinate pref return of 9% on our equity, subordinate to Mills/Can-Am. And the majority rights to the hotel development and the office components in the future as well as a small management fee for the family entertainment and retail portion of the project.

As part of our joint venture with Mills and our agreements with the state, vis-a-vis The Sports Authority for -- there are restrictions on sale of Phase 1 of the development which is the Mills portion of the development whereby our agreements provide that our consent would be needed if the asset per se, the retail and family entertainment development were to be sold on an asset basis. As well, I believe The Sports Authority as a quasi judicial arm of the state has a similar level of control. I couldn't tell you any more than I read about what Mills' situation is other than we know there have been no defaults.

I attended a meeting a couple of weeks ago with the Chairman of The Sports Authority and the CEO of The Sports Authority, George Zoffinger, Carl Goldberg, among others with Larry Segal and some of his team from Mills and we talked about the project. Right now construction is well underway. The Mills team indicated that there are no concerns, immediate concerns certainly anyway relative to funding the construction activity. And beyond that, I don't know anything other than I have a seat at the table in terms of what ultimately happens to that project if, in fact, ownership is intending to change or any other material type of change.

And can you comment on the status of obtaining a construction loan on the project and how involved are you with the status?

We're not involved at all. We have no contingent or other guarantees, liabilities, or things of that kind, guarantees of completion. And the responsibility to obtain a construction loan and any other form of loan in connection with what's being built right now is the responsibility of the Mills Corporation. And I have no idea where they are in that process.

Turning to utility costs they have increased about 36% in your same store portfolio this quarter. I may have missed this, but where do you see cost in '06 and how does it affect your same store NOI guidance.

Well, we believe that we've certainly seen a fairly significant spike in energy particularly electricity and -- which is a very significant component of our operating expenses. For the full year of '04, we saw roughly call it a 4% rise. And for the full year of '05, we saw about a 21.5% rise in utilities. I think that the nation as a whole is concerned about the cost of energy and I would say largely going forward we have reasonable protection in that increases are mitigated by the fact that 60 or 65% are part of the escalations that we can bill to our tenants. But we are all concerned about the cost of utilities. We saw a little bit of a spike in operating expenses for the year. It was about an increase of about 7.9% versus 2.6% in '04 a result of some Union contracts. The fact that Unions have taken grasp of some of the service industry such as cleaning in many of their jurisdictions that we do business and it reflected in higher costs.

I guess what the one anomaly we saw is that there was a slight decline in real estate taxes year-over-year. Which if you look at some of the valuations that have existed in some of the investment sales, that I find a little anomalous but notwithstanding we will take it all day long. Energy and utilities is the area of concern. And we are watching it. We did some pretty, I think proficient hedging against the cost when we bought some long-term contracts, but those contracts don't last forever. And we will realize we have a situation with oil and petroleum that is more of a global issue right now.

Mitch, you've also talked about how your leasing costs and your TIs have increased thus quarter compared to last quarter. But most of your leases signed this quarter were renewal leases. Have renewal TIs increased to levels similar to new leases?

No. Where we saw the real increases were on some new deals and it did cause an aberration for the quarter. Our annualized TI is about $2.95 per-square-foot per year. Which is about a $0.60 per square foot, per year increase over a year ago reflecting a couple of things. Reflecting the continued competitive environment that we are in. Plus many of the deals with the higher costs were new deals. Some of which were in markets like Short Hills where you have sort -- you have much higher rent structure justifying higher TI. The waterfront area where you have clearly a longer lease in general, a 10 to 20 year lease versus a 5 to 7 in many of the suburban markets.

So those all told reflected in some higher costs, a deal down in one of the AT&T acquisition buildings a 30,000-foot deal, brand-new was about $6.50 a-square-foot per year for a tenant PayChex who happens to be a portfolio-wide tenant of ours reflecting a couple of things the fact that it was a competitive environment. But probably more that because of the way in which we acquired the building at such a low cost, if you remember that deal, it required more of a removal and a replacement in connection with putting a new tenant in place because of some of the aged TI installation that AT&T had when the building was built. You have to put all of these factors together. I will certainly acknowledge the fact that we have remained in a competitive environment in particularly Philadelphia, suburban Philadelphia as an example.

While we have seen more traffic and more signs of life and improvement in the market, it's not inconsistent for tenants and the brokerage community to kind of want to play one way and [lord] off the other. And that eventually -- you never want an empty building and so landlords tend to do what's necessary to keep a tenant and it's driven pricing down and I would say that market is more reflective of that. But when you contrast that with, for example what we are doing with Gale and think about the market penetration that we will have, and the competitive advantage, we should be able to counterbalance some of that moving forward.

And just final question, what will be the G&A impact from the Gale acquisition?

There really shouldn't be any G&A -- it will go up slightly, but it will be normalized against the income that we are getting out of that company which is quite significant.

Okay. Thank you.

You're welcome.

Next we will move to David Fick of Stifel Nicolaus.

Actually, John Guinee here with David Fick. Mitchell, macro strategy question. Since you acquired 101 Hudson and then including Capital Office Park and the Gale portfolio, you have acquired about $1.1 billion worth of product versus about $115 million worth of disposition. That's about a ten to one ratio. For any office company that's a relatively unique strategy, especially given the aggressive underwriting by private buyers right now.

Right.

Tends to be doubly unique given a lot of people think of you as a development company with 10 million square feet.

You were kind of losing the signal if you could get closer to the phone.

You tend to be thought of as a development company with 10 million square feet of development capacity. From a macro point of view why the aggressive acquisition very little disposition and very little development.

First of all, we have had a very active disposition program over the last three years where we've sold about an equal amount almost $1 billion worth of noncore assets. We've repatriated all of that capital back into our home turf, as it were. So we have gone through three years ago what a lot of companies are only going through now. And we have been able to take profitable dispositions and bring that into new opportunities in our core markets. If you look at the nature of the acquisitions that we have done, we bought 101 Hudson Street which I'm sure you would agree is an absolute trophy building. At a price that was about I would say 50 to $60 a-square-foot less than replacement cost. $263 a foot because of our competitive advantage in knowing the seller over a many year history. So it strengthened our position and a premier asset along the waterfront with a going in yield of about 7%. So plus or minus our cost of capital with a lot of growth opportunity we have been in the year that we've owned that asset we've rolled over some of the expiring Merrill Lynch space with both existing and new tenants at rents that are 7 to $8 a-square-foot more than they paid before we bought the building. And so we think the growth potential and the upside in that acquisition is quite significant for us.

COP down in the suburban Washington market now enables us to build our franchise in that metro marketplace in a very competitive way because the Greenbelt area is a strengthened area as a result of NASA development which is almost next door, the Federal Courthouse which is absolutely right next to the property. Among many other government and FDA and research arms of the government and technology in some of the emerging industries, and we as part of the deal were able to effectively raise through the issuance of OP units and a rising stock fortunately almost $100 million of equity and assume a market rate for the balance which was $62 million in debt and enter the transaction at roughly the cost of capital in the low sevens with a lot of growth opportunity and the ability to build up to 600,000 feet at $22 in FAR which is certainly a very attractive number to enhance our land inventory and we don't have to pay for it for a year. Unless we have a build to suit.

So I think you need to -- you can -- we have the ability to build 11 million feet through our wholly owned land inventory, John, but building spec development today is irresponsible in this man's opinion. There is not one market in the state of New Jersey that can justify albeit but for maybe Parsippany that can justify spec development now. It will put pressure on existing inventory and it's fiscally in my personal opinion inappropriate. But it's being done in several markets particularly as Michael said in the Princeton market. It's only going to drag down some of the existing landlords that have turnover. The markets have not reached equilibrium to justify spec.

So unless you have the opportunity to build to suit on a development deal which we are working on another one right now in Monmouth county, which will be -- if we finish the deal fully preleased, about a 90,000-foot building, there is no point in building because it's going to sit there empty or you are not going to be able to justify returns to give you any kind of return on your equity. And so I think that Mack-Cali with its land inventory and now layering in the Gale Company with development, with institutional relationships, in the development sector and some of the added benefits of that transaction and the market penetration and the competitive advantage that that brings, we will be able to put our land inventory to use accretively going forward. And we will be able to measure the risk of development against the cost of capital and against the credit on the leases. But otherwise, I just don't think you want to be building right now. That's how I look at it. I hope that answers your question.

Good answer. Thank you.

You're welcome.

Next we will move to Greg Whyte from Morgan Stanley.

Good afternoon, guys. Not to sort of beat on the Car issue too much, but I'm -- your stock is down 2% this morning which obviously from an equity market capitalization perspective wipes out way more than your investment in the Car interest and reflects any from conversations I've had concern in the community about the investment. Can you give us any sort of color on what your thinking is seeing how the stocks reacted this morning.

Well, I have been busy in here so I haven't looked at the stock this morning too much. But I would say, Greg, that's a little anecdotal with all due respect. The entire, as far as what I'm being told, the entire screen today is red in REIT land or generally red. So that reflects capital flows. It reflects a lot of things. As far -- and I honestly don't believe it's a reflection of the market's view towards an opportunistic investment in a situation where on a 1,806,400 shares if my number is correct, we have made somewhere around with a dividend $10 million since late December. And have done it in a purposeful way and a strategic way where maybe that investment would get us a seat at the table if in fact the Company was considering or interested in doing -- that company something different strategically. And now lo and behold there have been all of these anecdotal releases about potential situations.

So we look at it from the perspective of having bought value, bought it strategically where if it evolved into something larger than just a 3% ownership of the Company it would make very good incremental overlay for Mack-Cali. And if not, we can always liquidate our investment like everybody else does on a daily basis and make a lot of money for Mack-Cali shareholders. But we didn't invest in a widget company or a multinational industrial company. We invested in what we perceived to be an undervalued real estate company where we know the assets, we know the management, and we know the markets they are in. And if you disagree with that thesis, you are certainly entitled to your opinion. But that's my opinion.

Okay. Just on the operating expense item, and you commented on utilities and energy costs. In terms of build backs from tenants are you having a harder time building back? The sort of cost differential seems greater when we look at the margins.

No the answer is no. Traditionally December year end is a very big year -- month in the year because you aggregate billings and you bill actuals against budgets and so you kind of rationalize that always in the first quarter of the following year. And that is consistent, especially with the larger tenants where they can easily get a bill adjustment for electricity for 5 to $600,000 and it has to go through an approval process. So there is always a lag on recovering large escalations. Nothing -- we see nothing aberrational about it.

Then just maybe for Mike, you outlined a couple of the larger leases that will roll in '06. But if you look across the portfolio and where you do have space rolling, can you give us any indication of what you think the mark to market is on an expiring versus renewal rent basis?

Yes. Well, I mean, our largest situations are in Parsippany where we have the Nabisco lease rolling over, 154,000 square feet. And I would tell you that the roll downs from fully loaded rents are probably in the area of between 5 and 10% in that market. We are working on a deal, can't tell you we will make it but we are working on a deal for the entire building right now. So that's probably generally after you adjust for new base years. Remember, we adjust based on base rent plus all escalations against going in face rents so that it's apples to apples. I would say in the 5 to 10% range plus we will have some capital to spend on the building. Beyond that, it's a lot -- most of the blocks are a lot smaller, a lot more manageable where we should have some pricing power. Fort Lee has a 69,000-foot expiration with Mellon Bank in our Bridge Plaza. That's a challenging market. But beyond that, I think -- I can't imagine anything going much above that 5 to 10% roll down range.

Just one last question, did I hear you correctly when you said the vacancy on the joint venture component of the Gale portfolio was 56%?

The occupancy.

Okay. Is there reason why it's so low?

Yes. They had an unusual number of lease expirations and changes of business plan as it were. Tenants that just no longer leased the space. For example, one of the buildings, Wells Fargo had roughly half the building and they closed down their operation three years ago and so it just hasn't been refilled. Now under -- I guess this is a testament to the market strength of Mack-Cali and now with the Gale Real Estate Services Company as a division of the Company where SL Green is walking shoulder to shoulder with us, dollar for dollar to create value and that's pretty good testament to the recognition of the -- certainly the combined brand strength between the Gale and the Mack-Cali franchises. We expect that we'll create a lot of value in that going forward. And now particularly as markets are beginning to turn as we are seeing as I said before a little bit of a point of inflection in terms of more visibility, in terms of traffic and tenant showings and demand and large tenants and so we can accommodate both large and small blocks. I'm hopeful we will do pretty well and as I said, SL Green is leaving a lot of money on the table. So they fully expect it.

That's helpful. Thanks, guys.

Take care.

We will now move to Jim Sullivan from Green Street Advisors.

Mitch, the disclosure that your investment was in Car, was that a requirement or was that a choice on your part?

It was not a requirement. It was a choice.

And why did you make that choice as opposed to just leaving investment in marketable securities on your balance sheet?

As was I think demonstrated by our being very early in Full Disclosure with regard to our supplemental package and being early in the game to have it weigh ten pounds, we believe very firmly in this company that we should always have full, clear, and robust disclosure and so that's why we included it in our filings. But as I said before until we get to a -- if in fact we would have gotten over 4.9% ownership in the Company, then we would have had to have filed a 13D. So it was our judgment that because we did this, because of the activity, we should disclose it.

Mitch, one of the criteria you suggested for the current investment was discount in net asset value. By our measure your own stock has traded at times at a material discount to your net asset value, you have nearly $50 million worth of authorized repurchase capacity. Yet you haven't bought your own stock. Why is buying Car at a disconnect to any of the smart move but -- why not buy your own stock buy your own portfolio which is certainly no better than the Car portfolio.

Yes, legitimate obvious question. And my answer to that would be that we are an existing going concern right now. We have repurchased I don't know $150 million worth of our own stock over time. My view towards this and shared by the Board was that given the valuations and certainly there were disparities in both Mack-Cali and Car, this might emerge into an opportunity aside from absolute dollars that I believe we have certainly made on our investment that it could have the added benefit of being incrementally additive to the Company by having the potential of evolving into a discussion with the Company about the future. If we took that money and I don't disagree with you, Jim that we know our portfolio better and that we are trading at a discount and so that was certainly a safer investment from that perspective. But in terms of the long-term vision to enhance our presence particularly in the mid-Atlantic to northeast and not -- forget about California for the moment with regard to our small position and Car's large position, that's why. And there were some I'm sure that will agree with that and some that will disagree.

Xanadu, Mitch, your investments capped at 32.5 million but do you have any ongoing responsibility in fighting the various lawsuits and to the extent any of those lawsuits go against the partnership, do you have any exposure there.

No, the answer is we have no exposure. The cost of that, of course, is adding to the soft costs of the project and so there are significant costs associated with fending off what we believe are specious and frivolous lawsuits but that's our opinion. We have no exposure. We are as we like to say from the analysis of our agreements by many attorneys, bullet proof. And something is going to open there. We know something is being built there right now because there are 500 people on site and there is money being expended every day.

As far as our ongoing obligations, we aren't ever under a situation unless there is a tenant in front of us willing to sign a lease for a building where we are ever compelled to build a building in connection with the office or the hotel. And so obviously if that happens, we will be delighted to build it. And we will reorder capital accounts for our 80% interest in a piece of ground that can support the office or for that matter the hotel. Our attorneys who crafted our venture agreements and the agreements with the state have concluded and have re-reviewed everything on a number of occasions that we have no exposure whatsoever.

Switching to Denver, you sold a building in Denver during the quarter, it looks like half of the depreciated book value yet there was commentary that there was a substantial drop in vacancy in Denver during the quarter. What's the strategy for Denver? Especially in light of some of the optimistic comments you made with regard to the leasing market.

Well, the strategy for Denver remains unchanged. And that's we will either -- and we have had a lot of discussions with a lot of players, as it were, in the investment markets. The strategy will either be to sell Denver or to monetize our investment in Denver at what we believe will be no less than approximately book and maintain a promoted interest by virtue of the management team that we have created. The building that we sold at 3600 South Yosemite, you are correct that it was sold at a rather steep discount as an empty shell effectively. There is -- was a tenant in the building whom the building was purchased from originally that had a cancellation right in their lease. There is significant litigation right now roughly equal in magnitude to the same price we sold the building for where the claim is that they didn't take care of the building in accordance with the lease.

Our Colorado counsel feels very confident that we are going to prevail and if we do, the price that we sold it for will roughly double and if we don't, it will be what it is. But we believe that there is a very legitimate claim that we have and that's what Colorado counsel has advised us of. But that -- and that building was an outlier. It was bought as a building that was effectively a leaseback. Other than that, our plans remain exactly as I've articulated to you. We will now that the market is improving a little bit, I think if you sell -- if you have sold before maybe six, eight months from now, even think about it, the tone and the psychology in that marketplace has been quite dismal. And so unless you have a rare situation, I think you're selling cheap.

So I think we should hold it a little bit longer. We should continue to explore these venture avenues with capital providers who need a management team. So far we have gone down the road with a few of them. But when it comes to time to cross the finish line, they weren't there. Which is a reflection of, I think or sort of a reinforcement of what I'm saying -- the tone of the investment community is not yet satisfied that there is real growth occurring in Denver. Job growth, corporate growth, et cetera. But it will get there and right now we are 92 or 93% leased in our portfolio. We have pretty good cash flow out of the portfolio. We have an energized team out there. And one way or the other we are going to monetize that investment.

Okay. Then my final question, Mitch, relates to the AT&T portfolio purchase you made in '04. Looks like one of the buildings, sizable building remains unleased. Some of the others approximately half leased. You've talked about a lot of activity on that portfolio. Where do you stand relative to your original expectations?

Well, obviously I would have preferred to have it leased earlier. And we went down the aisle with a major corporation that was going to consolidate their headquarters and take the entire building. And they as part of that were selling their current headquarters and were having it re-zoned to residential and they ran into some difficulty with regard to they're rezoning in another municipality. And so they so far haven't stepped across the line. We have I would say -- the building's 475,100 square feet. We have an active lead for the entire building right now and we have two active leads for between 100 and 200,000 feet so it would be one or two pods of the building.

The recovery has been a little bit slower, but there is an extreme amount -- there is not much supply of large blocks of space in and around Morris county right now. So I think the building shows well. It's a very high grade institutional quality asset. And we are going to get our share. I would have preferred it had come sooner. We are making good progress in the other building as you know. Piscataway, which frankly was viewed as a tougher market but through relationships, one of mine, we have been able to do a deal with a major healthcare provider for about 110,000 square feet and a couple smaller deals were totaling about 50 or 75,000 feet.

So the answer is that because of the way in which we bought the building we can afford to wait because of having such a low basis, but I'm disappointed in that the market hasn't recovered more quickly. I think it would have obviously been more of a feather in the cap. And that is as honestly as I can say it.

Thank you.

You're welcome.

Next we will move to Steven Rodriguez from Lehman Brothers.

Good afternoon. All my questions have been answered. Thank you.

Thanks.

Michael Dimler from UBS.

All my questions have been answered. Thanks.

Thank you.

Hadie Howell from Millennium Partners.

Just one question. How much of the absorption that you have been seeing in the Jersey markets are a result of expansion as opposed to movements between sub markets and movements between class B, class A.

Well, I guess as a general comment I would tell you that there has been a significant flight to quality as a result of the downturn in the economy and the industry. And tenants have in general seen a great opportunity. I'm not sure we have the empirical statistic that you are looking for. But the trend would say that over the last three years there has been a lot of flight to quality because of the fact that there has been so much pricing power on the part of tenants. In large measure, certainly for the mid size or small tenants that's diminished now. There are not a lot of blocks of high quality space.

There is still some opportunities in the larger blocks as I was just discussing with Jim Sullivan on the AT&T property. Though -- but you have to think about it a little bit in this perspective. If I'm a 0.5 million-square-foot tenant and I can go into Mack-Cali's building in Morris Township that they acquired from AT&T and I can pay him $23 a-square-foot or $25 a-square-foot, depending on how much work I need, et cetera, as a going in rent, and it's a superior class A asset, where I can go to the one landlord after we finish the Gale transaction in Parsippany that's not Mack-Cali/Gale and want a build to suit of similar quality, maybe a little bit newer but nothing that a few bucks can't fix in Kimball Plaza and pay 35 or $36 a foot, if I'm the CEO of that company, my choice is pretty clear. So I think that we still have a pretty significant competitive advantage on the larger users.

Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] We will take our last question from Jay Habermann from Goldman Sachs.

Can you hear me? I'm actually on a cell phone.

We can hear you very well, Jay.

Good thanks. Just to go back to the Car information there. Can you just discuss and stock has depreciated pretty sharply in the last few months are you satisfied that the disconnect has been eliminated? Or do you plan on buying more stock?

I don't plan on buying more stock at this point. I stopped buying a couple dollars ago. So I mean, but again, you recognize that I'm only giving you my opinion of value. We've kind of set a target, a threshold. Our average price on the stock that we bought is $35.21 a share including brokerage fees. And you know where the stock is trading now. So I think it was a pretty good value creation for us.

Okay. And your second point was the geographic overlay. I know you mentioned, forget California, but it's sort of hard to ignore given it's a third of their portfolio. Could you comment on the incremental addition of that new market to your current overlay?

It's not our focus at this juncture. I've always said that we would like to maintain the optionality of a bi-coastal presence and that's why we've held on and done well quite well frankly, with our San Francisco portfolio which is small. But I would say much more importantly in terms of being attractive to us is the metropolitan Washington marketplace. I haven't thought through fully, not knowing exactly how that California portfolio would stack up in terms of rollover and terms of mark to market, et cetera, et cetera. Because we haven't done serious strategic analysis with advisors on the Company. We saw the disconnect. We saw the strategy of the good overlay, whether or not it includes California. And we made a decision. And not requiring -- not having the requirement to disclose that we decided to disclose it because it's part of the pattern of how we operate this company. And we made a lot of money doing it. So that's what I can tell you.

And if there is no welcome reception, when do you plan on selling that holding?

Could you repeat that, Jay, you broke up a little bit.

When would you plan on selling your position if you aren't give a welcome reception?

Well, when you say "a welcome reception," I mean I've had no strategic discussions whatsoever with the Company. I guess we would look at that based on current valuations pretty carefully pretty soon.

Okay. And lastly I'm not sure if this was discussed I got on the call late, but have you discussed further any cost for joint venture for Jersey City?

We are still looking at that situation. I think that there is an extremely interested pension fund who has no presence in the office sector on the eastern part of the United States. We have generally come to terms with issues like valuation and the ability to segment in capital over a three year period so that nothing we would do there is dilutive and the pension fund is in the process of -- since it would be a leveraged acquisition or interest acquisition from their perspective is still reviewing the debt elements to make sure they could -- would be in a position of doing forward a debt over that same two to three year period. And so that's still being analyzed. But it's -- I would tell you that we haven't made a firm decision notwithstanding whether we are going to do the deal. But there is a very interested party at this juncture.

Okay, thank you.

You're welcome.

Mr. Hersh, at this time there are no further questions. I will turn things back over to you for any closing remarks.

Well, hank you very much everybody for joining us on today's call. It's been an exciting 2005 and so far 2006 has been even more exciting and we are real pleased with the Gale and the SL Green alignment and the [Bellmia] acquisition and we look forward to reporting on our progress again next quarter. Thank you very much.

And that does conclude today's conference call. Thank you for your participation. You may now disconnect.