Veris Residential Inc (VRE) 2006 Q1 法說會逐字稿

Good day everyone and welcome to the Mack-Cali Realty Corporation first quarter's 2006 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.

Thank you. Good morning, everyone and thank you for joining Mack-Cali's first quarter 2006 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 would like to review some of our results and activities for the quarter and what we are 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 first quarter came in at $1.05 per share, an increase from the $0.89 per share for the first quarter of 2005. As you have seen in the press release approximately $0.20 of this amount is attributable to the gain from the CarrAmerica stock which we had purchased.

As we had expected our occupancies in the quarter decreased with our portfolio ending the quarter at 90.4% leased compared to last quarters 91%. This was largely due to anticipated lease expirations in the quarter. That accounted for over 40 basis points of the decline. The other 20 basis points of the occupancy decline was due to the acquisition of Capital Office Park complex in Green Belt, Maryland, which is currently approximately 84% leased. Again, an anticipated result.

While the markets remain competitive and the economics of lease transaction are still under pressure, we do believe that markets have in fact started to stabilize. We are seeing general increase in velocity, increase in demand, in space showings in the majority of our northeast markets. We are also seeing a number of large requirements in our markets that to us signal the point of inflection and the beginning of an economic recovery that will have positive impacts on the office markets in the areas that we operate.

Areas particularly active during the quarter have been the suburban Philadelphia market with our leasing reps reporting the best activity they've seen in several years in the markets that we operate in suburban Philadelphia and the Jersey City Waterfront which has a number of very large requirements in the market today, an outgrowth in my view of the midtown market expansion.

And now I'll review some of our results and activities for the first quarter. Our TI and commission expenses were $3.53 per square foot per year, about even, up slightly, a few pennies from last quarter, continuing to reflect the markets competitiveness and a few specialized transactions that were done during the quarter that were a little more expensive than normal.

Rent roll down for the quarter was approximately 4.8%, compared to last quarters 1.6%. And while the quarter was a tough one in terms of rollover, for the balance of the year rollovers are really relatively moderate.

About 5.6% of base rent or approximately $32.4 million, that equates to 1.4 million square feet expiring through the remainder of the year of which we believe over 300,000 square feet is committed to date. With the market activity we are seeing we are quite confident that we will be able to build up some occupancy gains over the next few quarters and do anticipate ending the year with higher occupancy.

In the development area during the first quarter we announced the joint venture agreement with the PRC Group to develop what is now a fully preleased class A office building in Red Bank, New Jersey, in Monmouth County.

The building has been leased by K. Hovnanian, Hovnanian Enterprises. It's approximately 93,000 square feet, it's a ten-year lease, just opposite Hovnanian's new headquarters building that they are getting to occupy.

PRC contributed the land to the joint venture and Mack-Cali will develop, co-manage and be responsible or was responsible largely for leasing the building. Red Bank is a thriving sub-market in a thriving county and we are excited to begin our first project in this trendy area and expect to advance into the second phase which is a smaller building of about 20,000 square feet in the near-term.

As I've already referenced during the quarter we completed the acquisition of Capital Office Park, a seven building class A office complex in Green Belt, Maryland, for about $162 million, a very high quality complex that almost triples our holdings in Washington, D.C., and also provides us with growth opportunities through our option on land where we can develop up to an additional 600,000 square feet of office space and we are already involved in at least one transaction involving the development land.

During the quarter we contracted to sell our only building in Fish Kill, New York. The building we call West Ridge Business Center and there will be a very nice gain reflected as a result of that sale, about $3.8 million. We certainly expect the closing of that to occur within the next 30 or 45 days.

The most significant deals that we announced during the quarter were our agreements to acquire the Gale Company, the Gale Real Estate Services Company, an interest in a 2.8 million square foot property portfolio in New Jersey. We expect these transactions to close next week on May 9th, and to reiterate what I've said on the last call and in various previous announcements, we firmly believe that these deals will solidify our position as the dominant landlord in New Jersey.

And equally as important, Gale's third party services platform will provide our company with significant new growth opportunities for future growth in a number of different venues. The Gale company has been a major competitor of ours in New Jersey. They have had a great franchise and brand over many years. And we are excited about this.

The Gale Company will operate as a division of Mack-Cali. And as also been previously announced, the consideration paid for the acquisition of the Company is an earn out formula beginning with a $22 million payment with an additional $18 million that can be paid in consideration of the acquisition based on an earn out formula for a total purchase price of a maximum of $40 million.

A part of the initial consideration, $10 million, is being paid to Stan Gale in the form of operating partnership units and so there is absolute complete alignment between the interest of Stan, the interest of the Gale management team, and Mack-Cali.

The property acquisition what was known as the Belle Mead portfolio, will add 20 class A. office properties totaling 2.8 million square feet to our Northern and Central New Jersey portfolio. Most of the properties are located in areas where we already have a significant presence, areas such as Parsippany, Princeton, Roseland,and so this acquisition will allow us to cement our positions within these sub-markets.

In fact, areas like Roseland to effectively be the dominant landlord in the entire sub-market and hopefully continue to improve the earnings growth visibility within the Company. We will acquire substantially all of the ownership interest in 13 of the 20 properties which are valued at approximately $378 million.

This total of these 13 interests is about 1.9 million square feet. And we will acquire approximately half interest in seven properties along with our new partner, S. L. Green.

These properties are valued at $127 million and total about 900,000 square feet. In connection with that joint venture, Mack-Cali will effectively be the operating partner, will be responsible for leasing management, property management, asset management, construction services and repositioning these properties in the marketplace to create value for both Mack-Cali and our partner S. L. Green and to add fee income along the way.

Some of the other things that we are doing in connection with the Gale acquisition, I view as very exciting. We will be acquiring the Stan Gale interest in what we call a non-portfolio property interest. That includes development land in Parsippany right at our campus that's fully approved and ready to go for another 122,000 foot development.

We will be acquiring Stan's interest and becoming JP Morgan Asset Management's partner in an asset that is under development right now in Parsippany on the other side of Interstate 287 from our campus. And as well entering into a venture with JP Morgan and the Gale interest in our newest market, Boston. And we can talk more about that as time moves on.

As well, we will be acquiring the Stan Gale interest in several operating properties including an asset in (inaudible-technical difficulty). We will be acquiring his interest in Princeton Forestal Village and several others potentially in Newark.

Some of the other exciting thing that we are doing as a result of this acquisition include our acquiring the Gale interests as the designated redeveloper of the Seaport Village of Belmar, New Jersey, where we will be participating in a mixed-use redevelopment of the entire downtown district at the Seaport including residential properties, commercial properties and very exciting as far as we are concerned.

So we believe completely that the competitive advantages that this transaction will provide will afford many new growth opportunities for the Company, it will allow us now to enter the Boston market in a value-added transaction where we will be acquiring again together with JP Morgan Asset Management a seven building portfolio in the suburban markets north of Boston and be able to demonstrate that the Mack-Cali Company together with the Gale Company and in particular Stan Gale and his partner in Boston, John Heinz, will be able to add significant value and deal flow to the Company moving forward.

With that I would like to turn the call over to Barry who is going to review our financial results and financial activities for the quarter. Barry?

Thanks, Mitchell.

Net income available to common shareholders for the first quarter of 2006 equaled $32.6 million, or $0.52 per share, versus $22.4 million or $0.36 a share for the same quarter last year.

Funds from operations available to common shareholders for the quarter ended March 31, 2006, amounted to $80.8 million, or $1.05 per share versus $67.7 million or $0.89 a share for the quarter ended in 2005.

Included in net income and FFO for the 2006 period was $16 million resulting from the investment and sale of marketable securities available for sale during the period which represented $0.21 a share in net income, $0.20 from the gain and $0.01 from the dividends that we recognized during this period.

Parking and other income in the quarter included approximately $900,000 of lease termination fees as compared to $183,000 in the quarter, for the same quarter last year. Same store net operating income which excludes the lease termination fees I just discussed on a GAAP basis decreased 4.1% for the first quarter of 2006 as compared to the same quarter in '05, and same store net operating income on a cash basis decreased by 6.6% for the first quarter of '06 as compared to the same quarter in '05.

Our same store portfolio for the first quarter was 27.5 million square feet which represented about 91% of our portfolio. Our unencumbered portfolio at quarter end totaled 252 properties, aggregating 26.2 million square feet of space which represents 86% of the portfolio.

In January we repaid the $144.6 million, 7.37% mortgage loan which encumbered Harbor Side Financial Center Plazas II and III. These mortgages were repaid by using borrowings under our credit facility.

Also in January we sold $100 million of 5.8% notes due January 15, 2016, these were reopening of the November bond deal that we did. The notes were priced to yield 5.66%. We also sold $100 million of 5.25% notes during January--due January 15, 2012.

These notes were price to yield 5.48%. Both the--the proceeds from both these offerings approximated $200.8 million and were used to reduce outstanding borrowings under the credit facility.

Today we have about $130 million drawn on our $600 million credit facility. At quarter end Mack-Cali's total undepreciated book assets equaled $5.1 billion and our debt to undepreciated asset ratio was 41.6%, and our debt to market capitalization ratio was 35.9%.

We had interest coverage of 3.6 times and fixed charge coverage of 3 times for the first quarter. We ended the quarter with total debt of approximately $2.1 billion which had a weighted average interest rate of 6.1%.

Our FFO guidance range for 2006 is now $3.52 to $3.68 per share, and is based on the following major assumptions. Our midpoint case assumes leasing activity, that is leases that commence during the year of 1.8 million square feet for the last nine months of 2006, versus scheduled lease expirations during that same period of 1.3 million square feet.

The plan also assumes no new acquisitions or sales beyond the soon to be announced Gale Real Estate Services Company and the interest in 2.1 million square foot portfolio as well as the sale of our sole asset in Duchess County which is now under contract as Mitchell discussed before.

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

Now Mike will covering our leasing activity. Mike?

Thanks, Barry.

At March 31st our consolidated properties were 90.4% leased compared to 91% leased at year end . We started 2006 with expirations heavily weighted in the first quarter with almost 670,000 square feet expired between year end and March 31st. We were able to mitigate these expirations to some extent with leasing activity signing 170 transactions totaling more than 814,000 square feet during the quarter.

There was enough absorption in those transaction to keep our occupancy loss to 40 basis points with remaining 20 basis points attributable to our Capital Office Park acquisition. These transactions reflect retention of 47.8% of expiring space for the quarter.

Our rent roll down on a cash basis comparing out going rents plus escalations to first rents payable after any concession period was 4.8%, an improvement in leasing commission costs averaged $3.53 per square foot per year. Expiring leases company-wide for the remainder of 2006 total a little over 1.3 million square feet, representing about 5% of leased space, and 5.6% of annual rent. And so further details on our leasing activity can be found in the supplemental package on our website.

Now I am going to review leasing activity by market. Our market information is provided by Cushman and Wakefield and unless otherwise noted will discuss overall class A vacancy rate and direct class A average asking rents. Beginning with Northern New York City suburban markets, overall availability in Westchester County stood at 15.6% down from 16% at year end 2005. Average asking rent lead slightly to $29.60 compared to $29.89 in the prior quarter.

Sub-lease space increased to 16.4% of total availability due to several new large blocks coming to market including the Kraft Food space of 120,000 square feet in Tarrytown and (inaudible) Company's 50,000 square feet in Rye Brook. Mack-Cali's Westchester office and office plex properties totaling 4.8 million square feet were 95.4% leased at March 31, compared with 96% in the prior quarter. Lease expirations for the remainder of the year total 198,000 square feet and they represent 4.3% of total Westchester leased space and 5.5% of its total annualized base rent.

Fairfield County availability declined ending the quarter at 17%. It's a reduction of 70 basis points. Sub-lease space crept up as a percentage of availability and stood at 25.4% and average asking rents increased from $30.53 to about $30.75.

Mack-Cali's Fairfield properties which total 852,000 square feet were 86.8% leased at March 31st, up 20 basis points from the prior quarter. Expiring leases for the remainder of the year total 32,000 square feet, which accounts for about 4.3% of our leased space and up 5.8% of the total annualized rent for the county.

There are no significant projects under construction in either county. And for the first quarter Westchester and Fairfield maintained their positive momentum with absorption of space despite the additional of sub-lease space coming on line. There was a higher than average leasing activity also in both markets.

In Northern New Jersey, availability declined from 20.3% at year end to 19.5% at March 31st. Asking rents increased from $28.46 to $28.84. Sub-lease space as a percentage of availability fell significantly to 24%, this is down from 33% in the prior quarter. Key sub-lease blocks taken off the market include 333,000 square feet that JP Morgan Chase chose to backfill and 70,000 square feet leased to Citgo Fund Services, both are in Jersey City.

In the Bergen County sub-market availability increased from 22.7% at December 31st, to 24.3% in the first quarter. Mack-Cali's Bergen properties are 95.4% leased, down from 97.5% at year end.

Availability declined in Morris County from 24.3% to 23.4%. Some of the larger blocks of vacant space are located in far Western Morris County and in the Morristown area. The Parsippany sub-market with the majority of our Morris County presence has a 15% vacancy rate.

Strong absorption and the previously mentioned backfilling of sub-lease space in Hudson County facilitated a reduction in overall availability from 18.5% last quarter to 16.4% as of March 31st. We are particularly encouraged by the increased interest we've seen in this market from existing tenants exploring expansion opportunities.

Mack-Cali's 4.3 million square feet in Jersey City is 94.2% leased with only 1.4% of lease space rolling 55,000 square feet as scheduled in '06. Mack-Cali's 12.8 million square feet of space in the Northern New Jersey region ended the first quarter 88.8% leased, down from 89.6% at December 31st.

The lease is scheduled to expire during the remainder of '06 total 440,000 square feet and represent 4% of lease space and 4.1% of total rent. The Central New Jersey market held nearly steady through the first quarter with availability increasing slightly from 19% to 19.6%.

Sub-lease space is up slightly as well to net 37% of overall availability. However, the asking rents increased by $0.45 to $28.49. Mack-Cali's Central New Jersey properties totaling 4.7 million square feet closed the quarter at 89.9% leased, down only slightly from the 90.1% at year end and this happened in a very competitive market.

Leases scheduled to expire during the remainder of 2006 total 146,000 square feet representing 3.5% of the regions leased space and 4.1% of its total rent. There is still very little speculative construction in either Northern or Central New Jersey.

The largest concentration of unleased space is in the Princeton market where 453,000 square feet of currently unleased space is expected to be completed in late 2006, early next year. This represents about 15% of Princeton's 3 million square feet class A inventory and certainly could provide additional competitive pressure upon delivery.

In the suburban Philadelphia, availability held constant at 19.3% overall in the first quarter, asking rents gained $0.03 to reach $25.80. As mentioned last quarter the improved performance in this region over the past several quarters has precipitated new construction with deliveries beginning by mid-year '06.

Mack-Cali's office/office plex holdings in the suburban Philadelphia market total at 3.7 million square feet located in both Pennsylvania and nearby Southern New Jersey. They ended the quarter at 90.7% leased down 30 basis points from year end. The regions expirations for the remainder of 2006 total 344,000 square feet, representing 10.3% of leased space and 13% of it's total rent.

Availability in the Washington, D.C. market ticked up just slightly from 9.6% to 9.7% this quarter, a solid performance considering the continued delivery of new product to the market. Asking rents eased $0.15 per square foot to $47.43. Suburban Maryland comprising Montgomery and Prince Georges' county saw availability fall from 8.1% to 7.1%.

The new product pipeline in the DC market currently stands at 6 million square feet, a robust regional economy and the Federal Government demand have so far enabled absorption to keep pace with these deliveries.

Mack-Cali's 1.3 million square feet in this market, were 86.3% leased at the end of the first quarter. 2006 expirations total 6.4% of lease space and 6.4% of its total rent for the region.

In our major markets, outside the northeast, Denver's suburban vacancy continued its improvement falling from 16.6% at year end to 14.1% at March 31. Asking rents increased strongly from $18.88 to $19.91.

The San Francisco market also continued to improve with availability falling from 16.3% at the end of 2005 to 14.7% in the first quarter. Asking rents also increased again from $34.44 to $35.98.

Mack-Cali's holdings outside the northeast total 1.9 million square feet, and were 93.4% leased at March 31st. Expirations during the remainder of the year comprise 6.3% of space leased and 9.5% of the aggregate rent.

Overall we saw generally stable fundamentals for the quarter in our core northeast markets. A continued strong economy should result in additional suburban demand as single-digit availability in midtown Manhattan may prompt companies to look to the suburbs for some of their space needs.

Mitch?

Thank you, Mike.

Just before we open the lines to your questions, there are a few metrics that I would like to run through to clarify a number of points including some information that I had seen come out in notes this morning that perhaps might be a little bit confusing. The first of which is dividend coverage and cash flow.

Firstly I would like to tell you that I'm delightfully proud that we have consistently been a cash flow positive company. I'm not sure how many companies in our sector can say that after going through a fairly rough patch particularly post-9/11.

And that we expect through the year 2006 to have expended some $64 to $65 million in capital investment, in building improvements, in tenant improvements, leasing commissions. And after having paid all of that we still expect to finish 2006 cash flow positive. And so I would number one like to point that out. And that continues a history of a very strong balance sheet within Mack-Cali.

With regard to some of our margins and some of the expenses, everybody that I know is experiencing increased cost for utilities, particularly given what's going on in the petroleum markets and the Middle East situation, and in fact we did experience about a 16% increase in the first quarter in utilities and about 10% in real estate taxes.

Obviously as we continue to see this wall of capital bolster and inflate property values, it's no secret that it's difficult to convince tax assessors that real estate taxes should diminish and decline, notwithstanding fundamentals and the lack of rent growth when the absolute prices that are contained in property deeds show continuing increasing values.

But having said all of that, probably 60% of all of these increases give or take are expense increases that we can pass on to our tenants by virtue of our leases. Clearly anticipated by the tenants to absorb these increases when the leases and the deals are negotiated.

And lastly I would like to as well point out that many of these margin declines are cyclical and one quarter should not represent the year. Relative to rent roll downs, we did experience about a 6.6% cash NOI decline in the quarter.

We've seen our core markets decline about 4.8% this quarter and that compares to last year in a similar venue where we saw role downs of anywhere as much as 14.7% in our core markets. And so the point of that is that we are beginning to see stabilizing effects within our markets. Our markets are gaining velocity. They are gaining strength.

There's more traffic and space showings. There are more deals being made. Just today we signed a 48,000 square foot lease in Parsippany for a major corporation at Four Campus that brings our occupancy in that building up to 93%. And so generally the markets are making progress.

We believe that we have made some very good strategic portfolio moves, particularly by expanding our footprint in the Washington, D.C. marketplace through the Capital Office Park acquisition and having the former ownership, the seven general partners that are very highly recognized names in the DC marketplace take $87 million of our stock as part of that transaction.

And, of course, we are incredibly excited about the closing of the Gale acquisition which we anticipate to occur next week, a whole new set of opportunities for the Company. Some additional management strength within the Company, particularly on the deal side of the equation through the addition of Mark Yeager, who will be the President of the Gale Company and an Executive Vice-President of Mack-Cali.

And so that we think the months ahead and the years ahead will offer great opportunity for Mack-Cali and its shareholders. With that we will now open the floor to questions.

Operator?

[OPERATOR INSTRUCTIONS]

I will go first to Jim Sullivan, with Green Street Advisors.

Thanks, hey, Mitch, can you cite any examples of tenants moving from midtown to Jersey City or moving jobs in a meaningful way, or is that, your expectation based on the activity that you are seeing?

Will, I can certainly site Fred Alger as being an example of that. I can certainly site IXIS, which is a French technology company moving into Plaza V, effectively relocating their headquarters from midtown into 70,000 square foot in Plaza V.

We have another deal out for signature right now, approximately 70,000 square feet, that's partly a consolidation in Plaza I, that's a midtown company. And I will tell you that, and while of course I offer no assurance that any of this will happen, we are in discussion right now for new development at Harbor Side with two midtown companies representing over 2 million square feet of new development at Harbor Side in our effective land bank of 3.5 million feet of development potential adjacent to Plaza V. So I think it's more than anecdotal at this point, Jim.

Is some of that land the land that had you thought about selling for residential use?

No, that's another 1.2 million square feet of development capability. The contract is being drawn on that right now to sell that for condominium development residential.

It will be a two phased take down. The first phase will be $37.5 million and the second phase will be $35 million. The second phase being based on certain presales on Phase I, and Mack-Cali gets half that money. That's in progress right now. It's in the works.

Switching to the various Gale interests that you are acquiring, are those all above and beyond the original deal that you announced.

They are.

What's the aggregate dollar amount?

Well, it's hard to say right now. There's an investment of some $24 million in those properties but as we continue to create new opportunities as a result of some of these things like in Boston that number of course will go up.

But our Boston deal is going to be essentially a 70/30 deal where we will own 30% with the ability to promote our interest to 50% by doing all of the real estate operations, management, etc., up. But right now it's $24 million. We are in discussion with a few, at least one additional significant acquisition that is partly owned by Gale and S. L. Green currently.

A question for Michael. You cited 20% type vacancies in Northern and Central New Jersey. You also suggested that asking rents are increasing. How do landlords get rent growth in markets that are 20% vacant?

Let me just responds to that then Michael can as well. How you get it is by having strategically located high quality assets.

And notwithstanding market vacancies, it's a question of where your assets are located, it's a question of the quality of the asset and the quality of the landlord and we very often see situations where tenants will clearly pay more money to be in a Mack-Cali building with its excellent location and in many instances in campus environments with huge amenity basis surrounding it.

It's hard when you look at macro data, I understand that, Jim, to kind of rationalize down to the ground level. But that's how it works in the real estate business.

Okay, and then with respect to the same store (inaudible) there was a big jump in the straight line rent number, is that an indication that your free rent is increasing.

It's just as a result of some build out and some other things that happen really mostly at the Water Front which will burn off to unusually large.

That's free rent associated with some Jersey City leases?

Yeah, free rent with larger leases but mostly it's build out time. We turned over the space terms of doing their own build out and you've got to recognize rent when you start doing that.

Mitch, you did your AT&T deal back in '04 the biggest building in that transaction, it looks like it's still completely empty. What were your original lease up assumptions and what are the prospects for leasing up that building?

Well, the prospects are looking much better these days. You might recall that although I thought we could turn a home run into a grand slam based on having acquired the building for effectively something like a $60.00 basis, by leasing it earlier we had been working with a full building tenant that for a variety of reasons, nothing to do with us or real estate chose not to make a move. It was roughly a year end 2005 deal.

We had built in an expectation that it would not be any problem for us to carry that building for three years. And with a very slow modest lease up and still make it a very respectable return for the Company based on the acquisition.

We now have a series of possible transactions, essentially at this juncture I believe we are going to multi-tenant the building. We have 37,000 square feet in the south building out for signature right now. We have a couple of larger deals that are considering the building quite seriously. They're kind of viewing it as an alternative to new development.

Where new development would require rents on a gross basis somewhere in the $33.00 to $35.00 square foot range to be able to step into what is equally a high quality building particularly with some refreshing of the systems within the building for rents that are probably $10 a square foot less than that.

So the building is being carefully considered now and I really think that kind of paints the picture for you. The other building, Knightsbridge, is well on its way to stabilization at this point in terms of occupancy .

Obviously the amount of leasing you do between now and the end of the year bring part of that equation, what's our year end occupancy target --

In that building?

No, I'm sorry, moving on to your--

Okay we believe that we will finish the year around 92%.

Got it, thank you.

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

I'm sorry, good morning. Mitch, can you comment a little bit on the difference in fundamentals you are seeing right now between your office assets and your flex assets?

Ross, to some extent that depends on location. In Westchester where we have about 2.5 million feet of flex it really trades like office space in many respects, you have a lot of small to mid-size businesses with local ownership, very credible, viable business models, where the owners and the proprietors live within the Westchester market place, want to operate their businesses up there and frankly pay office type rents in the mid-$20.00 average for the whole building.

If you move into the Jersey marketplace and that would, I guess for us start in Totowa and the move into South Jersey, there's clearly a separation between flex space and office space in terms of the economics. In South Jersey you are probably looking at gross deals for purely spec space in the mid-teens versus office space that's in the mid- 20s.

So that's sort of the separation that you see.

Okay, and with respect to your rent spreads, I think you'd quoted a number that was slightly under down 5%, 4.8% for the quarter. When do you think you are going to cross over into positive territory? Obviously moving up occupancy in the markets would help that, do you think that's a 2007 event?

Yeah, I think we have washed through a huge amount of expiration at rents that were clearly way above what current market conditions are as a result of the frenzy we saw in the late 90s.

And we have turned over half of the portfolio roughly in the 9/11 era. And so I expect that we have really kind of washed, this year will be quite pivotal for us. We will effectively be moving from a roll down to a gain in economics, a gain in revenues and net effective rents.

I think it's all coming to an ebb in 2006.

Okay, and then final question and I was intrigued by your comments about the potential new development in Jersey City because that would go head to head with the new construction that's going on in lower Manhattan. What are your thoughts in terms of the dynamics over the next, let's call it three to five years in Jersey City with respect to the willingness of tenants who have leases expiring to stay in Jersey City versus getting tempted to go back to lower Manhattan.

I don't think in my opinion there's any chance of that happening. I think the--once a tenant and I can site examples of major companies like Garban among a number of others who have basically seen a tremendously positive reaction on the part of their employment base once they have made that pivotal decision to locate in Jersey City.

There was the initial concern about commutation patterns, public transportation and exactly what the shape of the Jersey City market would be in contrast or comparison to lower Manhattan.

Well, now Jersey City has done a remarkable job and we like to think we've helped it along to some extent, along with others in creating an enormous amenity base. The public transportation system is second to none in Jersey City. You still have very easy access by car and plenty of parking.

So your ability to draw employment from both--from the outer borrows, from the western suburban markets as well as the thousands of housing units that have been created along the waterfront running all the way up to the GW Bridge, has really bolstered the marketplace.

The cost of occupancy advantages cannot be ignored. They are very, very significant. Order of magnitude of $10.00 or more per square foot and then when you factor in the as of write BEEP program in New Jersey which now has become bullet proof as a result of the bonding capability that exists through the BEEP funding mechanisms in the EDA. Further lower occupancy costs by anywhere from $2.00 to $10.00 a square foot. You have lower costs of operating and utilities, etc.

And a real nice life style. Now in the Jersey City marketplace. It's a real high quality of life, a lot of retail amenities, etc.

If you look at downtown and again I say this with due respect to the 9/11 tragedy, I say it with due respect to the fact that all of these markets to some extent are kind of attached at the hip and as one market does well so will the others but downtown there's been a lot of uncertainty as to what the plans would be for the rebuilding of the trade center.

And even if in fact that's been resolved as a result of some of the recent announcements between New York and Silverstein and the Port Authority, etc., etc., you are going to be in a massive construction zone down there that is going to impact on the quality of life for not only corporate tenants but for residential--the residential community for a long time to come.

So to me the hurdle was really getting people to believe in the credibility and viability of the Jersey City marketplace and now I completely believe that there's enough positive momentum and enough positive perception of that marketplace, where not only will companies not move back to lower Manhattan but you are going to see more company's coming out. I firm many believe that.

Thank you.

You're welcome.

We'll go next to Chris Haley with Wachovia Securities.

Good morning, Mitch. I would like to go through the Boston or the incremental move up to Boston through the 70/30 venture. Can you give us a little bit more color on this, the assets that are involved, management structure?

Yeah, at this point, I don't mean to be too vague but we are firming up our transaction up there. The portfolio is under contract and we are completing all of the venture documentation now along with the completion of the Gale transaction. It is a value-added acquisition. It's going to be-- we are buying buildings for $85 a square foot.

We believe that at the end of the day with capital and the fact that a number of the assets have leases for some period of time, a couple of years, they are under occupied as a result of the tech adjustment that occurred in the early 2000 era as well as some of the larger companies like Kodak and others kind of moving into a different mode of consolidation.

So it's a value-added acquisition. We think we will be all in at somewhere around $115 to $120 a foot, so very substantially below replacement costs and I think one would agree that the Boston markets are about as high barrier to entry as--particularly in the northern quadrant as any including New Jersey, very difficult regulatory environment, a lot of home rule, huge environmental issues and so we think that the inventory is really protected.

And I am delighted to say that we will be working with Stan Gale and John Heinz, who have demonstrated an enormous amount of success in that market. The two of them responsible for the State Street Bank building, bringing that deal to roost.

Understanding the marketplace starting the building essentially as a spec, 1.1 million square foot, absolute home run for them and for JP Morgan at the time. And we will have a limited amount of capital investment in this with the opportunity to get a promoted interest through making this even more successful than we underwrite it at and fee income and to me this is the stepping stone.

Right, I appreciate that. Recognizing that development, the State Street transaction was a unique transaction, these assets though are in the suburbs, so you are establishing a foot hold. These assets that you are looking at in trying to grow this base, these are third party owned assets today and that's how you plan on growing them, meaning there are no assets that are going to be brought into this venture or this platform that are already owned by these individuals?

No, this is a portfolio that's privately-owned. It totals about 600,000 square feet.

And through cultivating a relationship over I guess a several year period of time it's now ripe for transition due to legacy issues within the family that owns it right now. And to me that's how you add value.

You can't, anybody can stand at the auction block as long as you have a checkbook and there are plenty of checkbooks around today.

The kind of bigger picture stepping back from Boston as a whole, hearing about additional investment opportunities through Stan, I think you mentioned Princeton, Newark, and another suburb or node. What would you place kind of your investment opportunity or kind of an annual new investment opportunity on the acquisition side that you are comfortable with over the next one to two, three years?

And then could you address what you think your development pipeline range might be in terms of high-end and low-end in terms of new capital that could be put to work on the development side?

Well, I think that clearly we are going to be able to ramp up our development and I expect the deal flow to pick up a lot of momentum as a result of the great relationships that the Gale organization bring to the fold. They have great people, great infrastructure, a lot of talent.

I talked about Mark Yeager before and it goes down through their development groups, the construction services group with Tom Walsh and Ian Marlowe Gale global facilities management group. And Joe Adamo, who is part of the Belle Mead Chubb organization years ago. And so brings a tremendous amount of history.

So, we're dealing with a lot of talent, a lot of depth in relationships that will only enure to the benefit of our ability to expand our development opportunities and our acquisition opportunities. These things are hard to predict.

I can tell you that one asset in particular and we are not at the finish line but we are discussing it could represent, it's a couple hundred million dollars asset, with a development component to it that we are in discussion on right now and I mentioned before S. L. Green and Gale and us. So it's hard to quantify these things but there clearly is going to be a deal flow benefit and a development opportunity benefit as a result of this transaction.

Are there any platform, you mentioned in your prepared remarks, the steps I guess partly through Gale that are opening up new business platforms?

Yeah.

Is this--is New York City included in this or Long Island included in this platform list?

I sold out of Long Island but we--no, Long Island is not something that we are looking at. the Gale relationship in Long Island as Stan's father and his brother now operate, I guess the preeminent residential real estate brokerage firm in Long Island. And very highly respected.

But we don't particularly see--that's not an area we are looking at at all in terms of commercial activity. New York, I don't know at this point, Stan has some interests there.

But relative to what's right in front of us, we have a global facilities management group that will--that at this point has under management with some recent assignments in a couple of Simon malls in Florida and a few other things that are at the cusp of being completed, probably 65 million square feet of global management companies like Glaxo Smith Kline in the U.K., AT&T on a worldwide basis including the new AT&T/SBC company.

Other very strong relationships in the corporate community. So that's an important business model that I fully expect will expand going forward. Today we have fee income between property management and third party commissions through the joint ventures of over $7 million as a result of this acquisition.

There's construction revenue which has pretty much been on an annualized basis given the third party construction that the Company has been doing both in the public sector, I don't mean publicly traded, but public government agencies and the private sector of over $100 million a year with pretty decent margins in that business. So there's a whole new set of opportunities available as a result of this transaction.

That's helpful. Thank you very much.

You're welcome.

We will go next to David Cohen with Morgan Stanley.

Hey, good morning. Just wanted to ask you again about your comments regarding lower Manhattan, but how would that change when we're talking about Secaucus and are you interested in being a developer there?

In Secaucus?

Yeah, I mean the new Allied Junction Station.

No. We have, I mean we have one of the most premiere sites that I see potential of in the Meadowlands. We are the principal redeveloper of the office component that can provide up to 1.76 million square feet of office in the Meadowlands redevelopment, affectionately known as Xanadu.

And we are seeing as we speak today the progress being made of bringing passenger rail service through that site with a spur to the Lautenberg Center, which I believe is what you are referring to. We will have the availability to park cars in connection with the office component at suburban office ratios of about 3.5 to 4 cars per thousand.

In Secaucus as far as I know there's no parking because it was originally contemplated and built as strictly as a rail passenger hub and so there's no parking there. And I think we will be able to build very affordable product at the Meadowlands that in my view is one of the great sites, the last of them, that's sort of outside of midtown Manhattan.

So, we didn't even really look at the transit or the Lautenberg station recently because I looked at it six or seven years ago and didn't think the economic model, at least in my opinion, at that time was workable. I didn't feel that you could achieve low to mid-$30 rents, office rents in that marketplace. It's a highly industrial area. It's surrounded by many, many warehouses and so forth and I'm real happy with what our optionality is in that area.

And where are you in terms of deciding on Xanadu, the building--constructing the office buildings?

I think it's early. I think that the first things that had to happen there are being put in place now and that includes this massive transportation infrastructure improvement including the passenger rail.

The road networks that were being built not only to serve Xanadu, but the regional traffic improvements that the state is initiating including an improvement to the turnpike exit, new fly overs over Route 3, and that's all as you know, I think you know in progress, in process now. So we've had a few tire kickers come and talk to us about the office, but I think in part, it's--they have to see the improvements of really being realized, then the market will follow.

Okay, and just in terms of the Capital Office acquisition, it sounds like it's in a great location with great assets. I'm just curious as to why is it only 84% leased and where do you see leasing progress today?

Well, it's 84% leased because it was under managed. You had effectively to some degree third party management and while the assets are exceptional in my opinion in terms of the quality and the quality of the campus and the fact that there's a Marriott hotel right in the campus, I think that you will see a lot of progress made in picking up that lease up right now.

We have probably 40,000 feet of deals out for signature right now and we've only really owned it for about a month. So we are making a lot of progress. The market is good there. There is a large appetite for defense industry, NASA, Federal Court system, and other Federal agencies that are affiliated with National Security.

And so I'm very optimistic about the prospects for not only the existing occupancy or the occupancy pick up in the existing portfolio but hopefully we will see some development deals materialize down there in the not too distant future.

Okay, and just one last thing. In terms of, you said you expect to be cash flow positive this year, just curious, does that include the investment gains or is that just based on like before?

No, money is fungible and by making what I believe was a very smart investment in Carramerica we brought $16 million of cash into the Company and if you recall on the last earnings call prior to the Carr situation, I had talked about the fact that we thought we might go slightly cash flow negative this year because of the anticipated occupancy gains that we would make in the cost to build out that space and the fact that timing of the rents being more centered from mid-year to the end of the year would kind of offset that occupancy gain in terms of a cash flow position, and so we expected to be slightly negative. But like I said, money is fungible and that $16 million has now in our view offset and mitigated against being slightly cash negative.

Great. Thank you.

You're welcome.

We'll go next to Jonathan Haberman with Goldman Sachs.

Hi, good afternoon. Just a quick update on Gale. I guess, Mitchell, what's the percent leased at this point between what's stabilized and what's in lease up?

The stabilized portfolio is down 93.5% leased. The joint venture assets are about 65% more or less.

Okay, and you mentioned 92% I guess in terms of year end occupancy. Is that purely organic or is part of that inclusive of the 95%, 93% I guess now.

Yes, I can give you the statistics on the blend of the portfolio if you just give me a minute.

Today if you look at Mack-Cali as of 3/31, we were 90.6% we add in the COP transaction, the Green Belt, Maryland Capital Office Park because it was 84.7%, that cost us 20 basis point in occupancy, brought us to 90.4%.

If you add in the wholly-owned Gale assets of 93.9%, that brings us back to 90.6%. Effectively while we certainly will make progress in further equilibrium, in the wholly-owned Gale assets, the progress that will be made is both the occupancy pick-up in COP, which again is 842,000 feet, about 15% vacancy more or less, and our wholly-owned inventory today of almost 30 million square feet which is 90.6% occupied. So a lot of it's organic within our current wholly-owned portfolio.

Great, thank you, and then in addition--in terms of Boston did you mention which sub-markets or would you be willing to share that?

Yeah, in terms of Gale.

Yes, in terms of Gale.

Yes, the sub-markets that we will have deepening penetration in will be Parsippany, Roseland.

I'm sorry, I was referring to Boston. The Stan Gale interests in Boston, you mentioned technology, is that 495?

No, 495 crosses, it's the northern quadrant of Boston, what's known as the Northern Square.

Northern square. And the relationship with Heinz, are there additional opportunities there? Is that a relationship you can leverage further?

I certainly expect it.

Okay. and then just lastly in terms of Green Belt, you said the 85% with some pick-up there, do you anticipate taking down that land option and I guess what pushes you forward with that development eventually?

I have every expectation to taking down the land, we are buying the land at $22 in FAR. So it will be about a $13 million cost. We have until, I guess next February, to take it down. So it's essentially a free option.

And you can't make land in that sub-market. So, and it's fully approved. So I would fully expect to take it down.

Actually one more for Barry quickly. In terms of the pick-up and lease terms where do you expect that to trend for the full year?

We generally don't budget lease termination fees. We generally budget for other income. And we run anywhere between $2.5 million give or take to $3.5 million per quarter and that's generally how we budget it.

Okay, thanks very much.

We'll go next to Steven Rodriguez with Lehman Brothers.

Good morning, quick question about your G&A line. I see that it's $9 million in the quarter approximately and $33 million last year, full year. I believe last quarter you mentioned that it could be $7 million up for full year '06. So running at the $9 million run rate it looks like you are going to be below budget, is that safe to assume or can you give us some color on that?

You kind of broke up on that last part but essentially, but for the increase in G&A as a result of Gale going forward, our run rate should be about the same on an annualized basis as last year.

Okay. And one more question about the Carr gain, the $16 million gain, what are the tax implications on that?

There are no tax implications.

Zero implications. Okay. Great. Thank you.

You're welcome.

We'll go next to Ian Weissman with Merrill Lynch.

Hi, good morning, just a quick follow up on the Jersey City potential development. Mitchell, what does it cost to build class A building in Jersey City?

I would suspect that the cost of replication of a Plaza V today with the land imputation at something--call it market at $30 or $35 in FAR, would be in the low $300 range. Probably trending to $325 given the price increases in the various materials and trades that everybody has been experiencing. Of course our land basis there is really only about $8.00.

What type of return threshold would you look for?

I'm sorry?

What type of return threshold would you look for?

Well, we built Plaza V and we built it through the worst of time as you'll recall because of the 9/11 situation. And so leasing and so forth was disrupted and the market changed materially. At the end of the day we finished that building which is almost 1 million square feet on a cash return of 10.2%.

Would the potential tenants be relocations out of Manhattan or expansion?

Well, I think a combination of both but I can tell you that obviously midtown has done incredibly well and it's a market in complete equilibrium, very robust but I'll tell you that I am talking to some potential tenants right now that are having sticker shock, number one, in what was a mid-$40.00 rent when they did the deal and they are looking at $80.00 or more today, and they can't get the kind of space that they need to consolidate their growing operations.

And we have also seen and I know this will be kind of music to your ears, a tremendous growth trajectory in the banking industry, investment banks and the related components of the I banks. Huge explosive growth going on right now.

Okay. Thank you.

You're welcome.

We'll go next to Chris Haley with Wachovia Securities

Mitch, I have a follow-up, my recollection was the initial leasing levels in the wholly-owned Gale assets was 95 and the GV was sub-60. And are the numbers that you gave kind of fresh numbers, 93 and 65?

Yeah, the change--yeah, 93.9 and the mid-60s is a result of the fact that we took 343 (inaudible) out of the mix.

Okay, all right, thank you. The one question I had, previously you've stated the coming influction point and we can look at that on a same store basis whether it be cash or GAAP or rent changes, or tenant improvement packages.

What would you characterize as kind of the best metric that we should be looking at to really, to put meat on the statement that you are at that influction point where things are getting better.

Occupancy. As we continue to grow our occupancy, that's going to reinforce the markets, the stability of the markets, it's going to draw markets closer to equilibrium and that's going to pick up rents.

I guess the statement, saying 90% to 91% leased going to 92% you're above market leased which is a credit to your team and the assets in a market where you are--your occupancy, or your vacancies are still 15% or a little higher, the inducement costs are still relatively high. I'm trying to think of things in terms of marginal economic return on leasing, how would you characterize that as a signal for turn?

Push back. When the tenant that's coming in on a ten-year deal with call it reasonable face rates, looking for $35 a foot and we can say to them no, you are going to get 30, and they are going to say yes, they will take it.

Pardon my interruption but you or Michael, would you guys care to comment in terms of which markets you're in today where you are doing that and where you are having success and then what markets you think might that occur in '07?

I believe that from what we are seeing today, first of all the Central Jersey market place, the Union County, Middlesex County, those are markets that include Woodbridge, Metro Park, Cranford, Essex County, Short Hills, Florham Park, these are markets today that clearly are resilient, have improved significantly and you can push rents and you can push back.

Markets that are at the cusp of recovery include Roseland which again is Essex County, Roseland was bifurcated because roughly half of the Roseland market was owned by Mack-Cali and half of it was owned by Gale. And so while we continued to see some level of expansion, particularly in the service sector there, law firms and accounting firms and that sort of user, there was always the ability to play one landlord off the other.

Well, that's now dissipated. It's gone away as a result of this acquisition. So I would expect you will see significant improvement to bottom line and top line growth there.

Jersey City is improving. We are already half done with Plaza I and we just completed the renovations and we have deal flow behind it right now to support, to fill the building. And so we are finally beginning to have some pricing power competitive push back ability in Jersey City.

Parsippany, huge amount of activity right now. And very frankly a nicely layered level of activity. One of the JV assets that we are acquiring Stan's interest in which is 100 Kimball is 175,000 foot gorgeous new building being built--being completed in the marketplace but that's a $35.00 number.

7 Campus which was the Kraft/Nabisco building that the lease just expired this past quarter, 150,000 feet, is a mid-$20.00 number. So good price point competitiveness that will be expanded as a result of the Gale transaction with us and then of course we can build new product, significant new product on our development land in Parsippany but that's 18 months away. So--

Westchester?

I'm sorry?

Westchester, where would you put that in the scale of A,B, or C.

Michael, why don't you comment on Westchester?

Sure. The Westchester market we clearly are pushing rents in downtown White Plains. We are almost close to 100% leased in our 750,000 square feet plus or minus.

And in the western portion of the county where we have primarily our asset base we also are seeing some reduction and free rent. We are certainly pushing rents on some of the smaller leasing activity which is primarily our tenant mix in that market, the tenants in the Westchester overall are in the 8,000 to 10,000 square feet range on average. So we are pushing rents on the smaller deals it's a lot easier and we are getting some traction.

Philadelphia, Chester and Delaware county?

We are--we haven't really seen a whole lot of let up on the concession packages there. We are getting traction in our occupancy and the flex product there we are doing very well with. We have been able to release. We've had some turnover in that market in the last three, four months but we are making good traction on occupancy.

In that market, Chris, the Blue Bell market and the Plymouth meeting market, I think you will experience a little bit of a pressure in that market as a result of Merck. Merck is kind of withdrawing from a number of facilities in favor of moving into a new campus, and so that's going to put some pressure in the market. We have seen better activity, frankly, out along 202 in in 202 in Berlin, in West Lakes but the economics are still tough in Philly.

I'm sorry, last, Fairfield?

Fairfield? It's been a tough market, it's been a huge amount of space, there's been a recent influx in the market as a result of Royal Bank of Scotland. They took space while they are building the Old Louie Dreyfus sight at the train station.

So I don't think how permanent this pick up is going to be because most of what they are doing is on a short-term lease basis while they are building a new building. In Stanford and Norwalk have gone through very tough times. They look like the poor step-children compared to Greenwich and Westport although Westport doesn't have much product but Stanford and Norwalk are not where the hedge funds really prefer to be.

That's very helpful. Thanks again.

As there are no further questions at this time I would like to turn the call back over to Mr. Hersh for any closing remarks.

Thank you very much.

I hope you can sense the enthusiasm for the Gale transaction and the acquisition of the Belle Mead portfolio and the opportunities that we see as we move forward with this great new platform.

We will keep you posted on everything and we look forward to reporting to you next quarter. Thank you very much and have a good day.

Once again, that does conclude today's call. We appreciate your participation. You may now disconnect.