Veris Residential Inc (VRE) 2007 Q1 法說會逐字稿

Good day, everyone. Welcome to the Mack-Cali Realty Corporation first quarter 2007 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, operator, and good morning, everyone. Thank you for joining Mack-Cali's first quarter 2007 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're seeing in our various 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 $0.86 per share. This compares to $1.05 per share for the first quarter of 2006, although last year's results included a $0.21 per share gain on the sale of marketable securities. Therefore, earnings for this quarter are actually up $0.02 a share year-after-year accounting for that one-time gain on stock.

Our occupancies increased slightly from 92.0% leased last quarter to 92.2% this quarter, trending in a positive direction. Some of our suburban markets and submarkets were very active this quarter and we did see some slight positive absorption in our portfolio. I'm optimistic about the market recovery. It's important to note that there are very few large blocks of space available in some of our more active submarkets such as Morris County, Jersey City and other areas.

To give you an example of this, there is a 175,000 square foot spec building that was built at 100 Kimball of which we acquired a partial interest as a result of our acquisition of the Gail Company roughly one year ago. There is a lease out for signature today imminent for virtually the entire building. It so happens that that tenant is one of Mack-Cali's current tenants, vacating roughly 85,000 square feet in another Mack-Cali Building, and we have about to complete a transaction with the other existing tenant in that building to fill the space. And so the trends are moving in a positive direction and we do see further opportunities to take advantage of our land inventory.

We also had some good activity in our suburban Philadelphia and South Jersey portfolio and we're optimistic about recovery in those markets. The CBD markets such as the Jersey City Waterfront, Downtown White Plains and Washington, D.C., remain very strong and so all of these markets with high barriers to entry and high regulatory controls on new development and the placement of new inventory have positive trends.

But for four transactions last -- this quarter, we would have had a positive or a 2.1% roll-up equal to last quarter's 2.1% roll-up. We did have four extraordinary transactions that caused slight roll-down of 1.2% portfoliowide. But again, but for those transactions, we think that we have effectively washed through rent roll-downs within our portfolio.

Our leasing teams were very effective at keeping fee high costs down this quarter, and our tenant improvement and commission expenses were just $1.97 per square foot per year, down substantially from last quarter's $2.88 per square foot per year. And while the economics of lease transactions do remain competitive, these tightening markets and high barriers to entry and lack of large blocks of space should continue to show improvement in the overall net effective rents within our portfolio.

For the balance of 2007, rollovers are just 4.8% of base rent, or roughly $28 million, and so we have done a good job managing down exposure and lease expirations within our portfolio.

Some of the leasing highlights of the quarter included an exciting transaction with Wyndham Worldwide, a worldwide hotel company, for a 15-year lease on a quarter of a million square foot new headquarters in Parsippany, New Jersey. This transaction allows us to deploy some of our land inventory, our developable sites in Parsippany at the business complex, as well as satisfy the needs of a growing tenant within our portfolio. It demonstrates Mack-Cali's commitment to strategic controlled development. I might also mention that we have planned basically a sister building almost identical to this Phase 1 development, slightly less space, about 225,000 square feet, in the hopes of accommodating the rapid growth of Wyndham Worldwide.

In Jersey City, Merrill Lynch continues to take back some of the space that we expected they would vacate when we purchased 101 Hudson Street about two years ago. They leased an additional 58,000 square feet for a new 10-year term. You might recall when we bought the building, we anticipated taking on vacancy of about 311,000 square feet as a result of a scheduled lease expiration of Merrill Lynch. Well, due to the strength of that market, the growth of Merrill Lynch among other companies, that vacancy, if you will, has now been cut to 180,000 square feet and we have leases out for at least a third of that 180,000 square feet as we speak today.

Also in New Jersey, Daiichi Sankyo, a rapidly-growing pharmaceutical company, signed a new lease for 46,000 square feet in our business campus where they currently occupy a building as their headquarters, 2 Hilton Court. Daiichi Sankyo leased the 46,000 square feet at 7 Campus.

Public Service in our Cranford region renewed its lease for 46,000 square feet at 20 Commerce Drive and so our tenant retention and our relationship building with these important tenants and clients remains very strong.

In southern New Jersey, at Moorestown West Corporate Center, we signed leases for two full office/flex buildings, one with Xerimis for 64,000 square feet and a 10.5 -year renewal on expansion, and another with Sterling Medical and a five-year renewal for 49,000 square feet.

In suburban Philadelphia, MDS Pharma renewed 47,000 square feet at our building at King of Prussia.

During the quarter, we also successfully completed a public offering of common stock selling 4.65 million shares and generating net proceeds of over $252 million. We believe this offering demonstrates the confidence of the investment community in our future prospects and further strengthens a very strong balance sheet.

One of our most significant and exciting announcements during the quarter involves our plans to enter the downtown Manhattan office market with the acquisition of SL Green's condominium interest at 125 Broad Street. We're acquiring approximately 40% of a 40-story building or about 525,000 square feet for $273 million. The balance of the building is occupied and frankly owned by Sullivan and Cromwell but for a small piece of condo interest that's owned by the ACLU. In addition, as part of this strategic transaction, we're selling to SL Green our only building in Greenwich, Connecticut, 500 West Putnam Avenue, located midway between Greenwich and Westchester. The 121,000 square foot office building is being sold for $56 million and so you can see that the pricing levels between 125 on a unit basis and 500 West Putnam are very close.

125 Broad Street is an outstanding waterfront property with an extremely high quality tenant base, a great stepping stone for Mack-Cali to enter the Manhattan marketplace. Citigroup is the main tenant occupying approximately 330,000 square feet. I have already been in dialog with them about their occupancy in the building and two other fine tenants, Oppenheimer and Arc, are in occupancy in the remainder of the space. Besides the synergy that this acquisition offers with our Jersey City properties, again, we think it's an excellent starting point in a rapidly improving market with significant upside potential for Mack-Cali.

Looking forward, while we will continue to strengthen our core portfolio, we will also look to continue to pursue growth opportunities in some of our new adjacent markets, such as Manhattan, downtown and other locations throughout the borough, and the Boston metroplex area.

Now I'll turn the call over to Barry who will review our financial results for the quarter.

Thanks, Mitchell. Net income available to common shareholders for the first quarter of 2007 was $18.6 million or $0.28 a share versus $32.6 million or $0.52 a share for the same quarter last year. FFO available to common shareholders for the quarter amounted to $70.1 million or $0.86 per share versus $80.8 million or $1.05 per share in 2006. You will recall last year's numbers included $0.21 per share from the gain on sale of marketable securities. Absent this gain, FFO for the first quarter of 2007 increased $0.02 per share or approximately 2.4% over the same period in '06.

Other income in the quarter included approximately $117,000 in lease termination fees. The first quarter of 2006 included $890,000 of lease termination fees.

Same-store net operating income, which includes -- excludes those lease termination fees I just discussed, on a GAAP basis increased by 4.8% for the first quarter of '07, as compared to the same period in '06, and on a cash basis increased by 7.4% for the first quarter of '07, as compared to '06.

Our same-store portfolio for the first quarter was 27.2 million square feet, which represents about 94% of our portfolio. Our earned income portfolio at quarter end totalled 237 properties, aggregating 25.2 million square feet, which represents about 87% of the portfolio.

During the quarter, we completed a public offering of common stocks selling 4,650,000 shares and generating net proceeds of $252 million. We utilized those proceeds from the offering to pay down our $600 million unsecured credit facility. Currently, we have no outstandings on that credit facility.

At quarter end, Mack-Cali's total undepreciated book of assets equaled $5.3 billion and our debt to undepreciated asset ratio was 37.8% and our debt-to-market cap ratio was 33.4%.

We had interest coverage of 3.3 times and fixed charge coverage of 2.8 times for the first quarter.

We ended the quarter with total debt of approximately $2 billion, which had a weighed average interest rate of 6.14%.

We are affirming our 2007 full-year guidance range of $3.38 to $3.54 per share. Our mid-case assumption includes the acquisition of 125 Broad Street condo interests in downtown Manhattan for $273 million, and the sale of the 500 West Putnam Avenue property in Greenwich, Connecticut, for $56 million. We also include lease starts of about 1,300,000 square feet for the last nine months of 2007 versus expirations of an equal amount for the same period, and we anticipate that our percentage leased will be approximately the same number, 92.2% at year-end as it is today.

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

Now Mike will cover our leasing activity. Mike?

Thanks, Barry. On the leasing front, we had a productive first quarter. We signed 120 transactions, totaling 1,025,000 square feet and retained 75.8% of outgoing space. This compares with the transaction volume of 815,000 square feet during the same period a year ago. Not only are our leasing teams doing a great job of attracting and securing tenants in the marketplace, our 20 basis points space lease gain was achieved while still keeping costs in check. We have been able to generate traffic in this competitive market and experienced an overall modest increase in space showings in our New Jersey and New York properties comparing both quarter-to-quarter and with the first quarter of '06.

Westchester was particularly active in the first quarter with a 27% increase in the lead square footage year-to-year. We also had good leasing volume in Westchester this quarter with several important tenants signing lease extensions. We're especially pleased to report a 40 basis point space lease gain in Northern New Jersey. This performance is more significant when factoring in the 2.3% rent roll-up we achieved in this market and the lower-than-average leasing costs our teams negotiated.

New business activity within our buildings was solid with new lease signed, new leases signed among a diversity of business types. Some of our larger transactions in this region were concluded with companies in the energy, telecom and pharmaceutical industries.

Our suburban Philadelphia team took advantage of the improving market there and marked well-above average transaction volume.

Companywide, a significantly larger portion of renewal volume this quarter resulted in the previously mentioned high-retention rate and enabled us to further reduce our expirations for the remainder of the year. We're also making headway on our 2008 expirations, which currently comprise 10.3% of lease space and about 9.3% of rent.

Our remaining expiring space this year is concentrated in three submarkets. Westchester and Bergen, each with just about 20% of expiring square footage, and Hudson under 14% of our total expiring space.

Complete details and a bi-market breakdown of our space lease and transaction activity can be found in the supplemental package on our website.

Moving to market conditions, we'll be using information provided by Cushman Wakefield and unless otherwise noted, I'll site overall Class A vacancy rates and direct Class A average estimate rents. The Manhattan markets, mid-town, mid-town south and downtown, further tightened in the first quarter with vacancy rates ranging from 4.2% to 6.3%. Overall availability across all classes is down nearly a third from a year ago. Rents continued to increase with diminishing supply of available space. Downtown leasing activity for the first quarter totalled 1,025,000 square feet, almost a half million square feet more than the same period last year.

Availability in Westchester County down slightly to 17.8% and there were no significant returns of space to the market. Asking rents were nearly constant at $31.19.

Fairfield County availability was down a bit to 14.2%. Again this quarter, transaction volume was high due to intra-county relocations and asking rents continue to rise, averaging $32.12. There were no new construction announcements in either Westchester or Fairfield.

In northern New Jersey, available increased to 19.2% with overall leasing activity slightly off from last year. Average asking rents were up marginally to $29.66. In the major submarkets in northern New Jersey, Bergen County availability went up to 25.5% but asking rents grew slightly to $30.

Morris County vacancy increased to 26.3%. However, asking rents were up more than $1.00 to $29.09.

Hudson County vacancy ticked up to 15.3%. Asking rents there were up $0.50 to $32.95. Some blocks of under-utilized space have been put on to the sublease market recently, most likely to take advantage of the current strong rents. Overall, sublease space now comprises about half of the total availability.

In central New Jersey, availability rose slightly to 20% and asking rents were unchanged at $29.43. There were no new construction starts in either market in the first quarter.

Despite some ongoing softness in in northern and central New Jersey, our properties continue to perform well. Our Bergen County portfolio is 95% leased. Our leasing team is making progress on reducing large blocks in our Morris County properties and we're 98.6% leased in Jersey City with good interest in the (inaudible) space that's rolling next quarter.

Looking at the suburban Philadelphia market, availability dropped 14.6% in an active market and asking rents were about level at $26.17. A lack of high-quality, large blocks of space have spurred 0.5 million square feet of speculative construction in four projects.

Washington, D.C., continues to tighten despite some construction, new construction. Availability declined to 8.3% and average asking rents broke the $50 mark.

In suburban Maryland, vacancy rose to 9.3% and average rents decreased slightly to $27.21.

As the New York City rents climbed to all-time high levels and availability there diminishes, we believe our suburban properties are well-positioned to attract companies looking to reduce costs by relocating portions of the workforce outside of the city but still within high quality environments that are convenient to their current employee base.

Again, we're very pleased that we've been able to continue to outperform our markets and increase our occupancy this quarter despite the ongoing competitive landscape in several of our submarkets.

Mitch?

Thanks, Mike. Before we open the lines to your questions, I would just like to address a few issues and make note of some accomplishments. Again, our same-store increase on a GAAP basis for the first quarter was 4.8%. On a cash basis was 7.4% and so you can see that we are making very good progress in leasing up some of our vacancies, particularly as a as a result of the vacation, if you will, of Plaza One at Harborside by Banker's Trust and now that building being virtually fully occupied once again by Deutsche Bank and the progress we're making in the AT&T properties, both at Kimball Plaza Two and 39th Bridge. In fact, those cash-paying rent tenants are now contributing to same-store growth within the Company.

I would also point out that we have seen, as we typically do in the first quarter, seasonal increases in some of our expenses, utilities most notably, which is not uncommon for the first quarter. Of course, we all recognize that the cost of energy is increasing, particularly given the mideast and oil situation. However, as we know and you know, that the majority of these increases are pass-throughs to our tenants under the structure of our leases. And so while we have seen higher than typical increases for the quarter, they should balance out over the course of the year.

As we projected, our CAD payout ratio was slightly more than 102% for the quarter. We did project a slight excess or about 110% for the full-year of 2007, as we continue to lease up vacant space and pay the tenant improvement and leasing commissions associated with that and so there is nothing unexpected in that area.

With respect to guidance, we have this morning reaffirmed our 2007 guidance in the range of $3.38 to $3.54 and so at the present time, we're quite comfortable with the modeling that we did three or four months ago where we thought we would be for 2007.

And with that, operator, I would now like to open the lines to questions.

Thank you very much. (OPERATOR INSTRUCTIONS) First question comes from Michael Bilerman with Citigroup.

Good morning, guys. Mitch, you talked about that the roll-downs are effectively behind you. When you look at your weighted average rent at about $24 in the office portfolio, which is about equal to where the rent is for the '07 expirees, where do you think that mark-to-market is? You think it's flat overall for the portfolio or do you think there is some spread?

Yes, Michael, I would tell you at this juncture I would be comfortable in telling you that it's about even at that number. We're still in competitive markets and I, although I do feel pretty good about the fact that we are beginning to see pretty strong signs of outflow given the exuberance in mid-town and we're seeing that particularly in, interestingly in Morris County, a little bit in Somerset County, and of course, in the waterfront marketplace in Jersey City. So I would like to be surprised to the upside, but I would tell you at this moment that it's probably about even.

And then another thing you had mentioned was based on the fundamentals in the market that you may start tapping your land inventory. You mentioned the other building next door to the one you're building for Wyndham. What else is at least on the plate that could come in a short period of time?

Well again, I don't want to be, of course, at all misleading, but we do have a number of very interested parties in the waterfront area. These are, again, Manhattan-centric companies and I'm not talking about the big one that we have discussed before that as to date not made a decision, but these are 250,000 to 300,000 foot requirements. And they're pretty active at this point, so cautiously optimistic that we land at least one of those and I would tell you that with 30% to 40% pre-leasing, I would go ahead and build a 1 million square foot tower in Jersey City which would probably at this moment in time be Plaza Four because of the velocity we're seeing in that market right now.

How many tenants are you talking to in terms of that 250 to -- ?

There are three tenants currently in that, interestingly in that band of square footage.

And do you care to wager probability as where those discussions are about landing one and moving ahead?

I would tell you it's our time. I would very much like to see one landed at this point today. We all know what is going on in mid-town and the barriers to entry and the cost of entry in that marketplace and I have to tell you that I really believe that businesses now are looking very carefully at bifurcation because of the continuing increased costs of doing business in Manhattan and in the metropolitan area. So, I frankly thought the other deal as did the president of their real estate division as well as their real estate broker, thought the other deal, the one we have talked about on this call before down at Harborside would have long since made its decision, which it has not. So it's hard to predict but there seems to be increasing interest. The waterfront has been an area where we have been able to push rents and accelerate rents by probably 20%, certainly in 101 Hudson Street since the day we bought it two years ago, and so I'm quite optimistic about being able to land something there and start a new building.

And when you look at the rents that you would be targeting and your land basis and the project, where would yields and potential costs comes out for a 1 million square foot building?

I would say that the all--in cost based on a land attribution of approximately $30 in FAR, which I think is very, it's on the low side in terms of market value, but it's reasonable given that we have very little basis in that land. With that land attribution and all-end commissions and tenant improvements, we would be around $400 a foot. I would think -- the operating package with the pilot programs, it's somewhere around $9 a square foot and so the low $40 threshold would return to us at least an 8.25% on costs and so when you're dealing with 15-year leases, generally speaking down there with the very strong credits and annual increases ranging somewhere between 2% to 3%, certainly in the 2% range, I think that 8.25% yield, when valuations down there are probably 5.5% on those leases, cap rates, it's a pretty good spread and value creation.

Great. Thank you very much.

You're welcome, Michael.

Your next question comes from Jordan Sadler with KeyBanc Capital Markets.

Good morning. Could you just give us a little more color on the trend in same-store growth? Obviously, as you mentioned, same-store cash NOI was up 7.4%. I think cash revenues were up north of 8%, 8.5% this quarter, year-over-year. But I thought you guys were calling for a flattish same-store growth this year. Should we expect it to come in later this year or how should we expect it to trend?

I think the trend is going to be that it would tend to equalize and flatten out. We have, what affected us again was the fact that we had some vacancy, fairly large blocks of vacancy in the AT&T buildings and Harborside that are now rent-paying tenants. As we look through the course of the year, while velocity is pretty strong on leasing activity, certainly in Kimball Plaza and the balance of 30 Knight Bridge. By the time those tenants actually begin paying rent would be much later in the year and so I think you would see same-store kind of flatten out through the remainder of the year.

Flatten out at 7% growth or sort of flatten out and go lower?

No, I think they would flatten out approximately where they exist today.

Okay, wow. And then in terms of occupancy, I think, Barry, you commented that 92.2 was a good number by year-end that you would maintain. But last quarter, I thought perhaps you may have said you would have expected occupancies to tick up a little bit more by year-end. Am I remembering you correctly?

I would like to take that one, Jordan. I think our projections have consistently been that we would finish this year somewhere slightly in excess of 92%. If we look at the trend line a year ago this quarter, we were at 90.4% occupancy, and so through a lot of hard work and creativity and deal flow, we have been able to build that up to 92.2%. I would expect it to be flat to frankly maybe slightly down, 10 basis points down year-end.

And just coming back to Merrill Lynch and their role in Jersey City that you saw, that 185,000 square feet or so, or 180,000, I calculated and I'm not sure if I got this correctly, but just in the change from your lease, from your tenant -- I guess disclosure, that rents there were in the $17 range. What would be your expectation for future rents there?

$17 is a triple net rent. We're seeing rents today in 101 Hudson Street of roughly $32 to $33 a foot and roughly expense, call it somewhere in the $10 range, because that building is no longer on fox lance or it's coming off it's fox lance tax abatement, so taxes are probably close to $5 a square foot at the present or where we sit today. When we bought the building, we pro formad roughly $28 rents with that same expense ratio and so we're doing a lot better with all of the new leasing since having purchased the building and just to remind you, since Michael Bilerman asked about the cost of replication being -- and I said it was -- it is today approximately $400 a square foot to build. We bought 101 Hudson Street, which is every bit as good as any building in the metropolitan New York area in terms of quality, quality in materials and infrastructure, for $263 a square foot and we projected at that time a cash yield of approximately 6.83% if my memory serves, and so we're doing a lot better. The markets improve and, again, the picture for that building is today we're seeing rents of about $33 gross.

And lastly, could you just maybe update us on your status of additional investments in Manhattan?

Well, at the present time, we are very close to finalizing a, or I have been working on a joint venture situation with an operating company in Manhattan. We're pretty close to being there. A respected Manhattan operator, the goal of which will be to continue to look for value-added and repositioning-type assets, both in lower Manhattan and the mid-town markets, but the southerly markets and certainly not the Avenue buildings. This is an individual who has a lot of lineage and history in the city, a lot of connectivity, and shares common goals with respect to how to create value within a market that is so much on fire as we all know.

Great. Thank you.

You're welcome, Jordan.

And now we will hear from David Cohen with Morgan Stanley.

Good morning. Just a follow-up on that question. Could you talk about the level of equity investments that those transactions might represent for you guys?

Well, at this point, it's hard to say but I think we've talked about over time investing as much as $1 billion in the Manhattan market. Obviously the, once we are finalized with this strategic partner, we would explore, which I have done on a preliminary basis with some institutional joint venture partners to assist us in providing capital for this expansion. But as we all know, given the magnitude of the assets within the city, and looking at, for example, our acquisition or impending acquisition of 125 Broad, these are all $250 million and above, $250 million and above type investments. I can tell you that with respect to our strategic partner that they will be completely aligned with us and we'll have substantial equity as will we in all the transactions.

Okay, and I think Mike talked about just higher asking rents in a bunch of markets. How firm are landlords being on those asking rents? I mean are they still applying discounts when they're signing leases? Are they allowing discounts back?

I must admit, David, it's a little bit counterintuitive when you see vacancies in certain markets tick up but the asking rents go up. So I think it's merely cosmetic. We're out there doing what we need to do to reinforce and shore up any of the vacancies within our portfolio. I think one of the advantages that we really have is the core competency within our markets where we are so prolific, so strong, and decisions are made in such a fluid manner to the extent we have seen some investors who have institutional partners and governance procedures where they have to really go through a very big process to get leases approved for anything other than your sort of mundane lease. Really gives us a tremendous advantage in the markets and that is why I think we have been able to not only wash through much of our roll-downs except for a few extraordinary transactions, but actually begin to improve the same-store growth.

Okay, and when you talked about the lower (inaudible) this quarter but the challenging lease economics, can you just reconcile why those costs were so low? Are we going to see those tick back up again?

No -- well, you might see those tick back up because I think $1 a square foot reduction is probably a bit extraordinary. But I can tell you that we have, in many instances, been able to push back on tenant improvement allowances which is not only important from a cash flow perspective but to the extent tenants really need various improvements, be it IT infrastructure or physical improvement and they're investing their own money in the space, that creates more longevity and tenant retention. So, there is no question that the net effect of rent picture is improving within our portfolio.

Okay, and just last question, can you just talk about any exposure to some of the subprime lenders and what that may represent as a percentage of your NOI?

We really have almost none. We have a subprime lender in one joint venture asset in Rockland County and it's a 125,000-foot occupancy in a 232,000 square foot joint venture asset and they have, obviously, reduced their workforce, but they're still in occupancy and operating. We have another component of Freemont Capital or Freemont Investments and Loan in Westchester at [Taxter] Road and they have about 58,000 square feet. And other than that, they're just very small pockets of space throughout the portfolio.

All right, thanks a lot.

You're welcome.

Moving on, we'll hear from Michael Knott with Green Street Advisors.

Morning, guys.

Morning.

Hey Mitchell, speaking from your comments today, you sound more optimistic than what it sounded like we heard last quarter. Is that the right inference from your comments comparing today versus a couple of months ago?

Yes. As I said to you, I think that we're finally reaching a bit of a point of inflection. I am optimistic about market recovery. I just today received a copy of a survey that was sponsored by KPMG reflecting the sentiment of chief executive officers throughout most of the major industries and companies in New Jersey and it so happens that KPMG's headquarters is in a Mack-Cali building in Short Hills, New Jersey, as well as occupancies in Bergen County and Woodcliff Lake. And I think that notwithstanding the cost of doing business, we compare favorably to a number of adjacencies, particularly again, mid-town Manhattan, and so clearly sentiment is in a more positive frame of mind right now in terms of business expansion in a number of different sectors throughout the state. Decision making has still been slow but we're seeing a lot more interest in many more large blocks of space, which is evidence that companies are clearly looking at and taking seriously the notion of bifurcation because of what we all know is happening in New York City and, again, in particular, mid-town. So I would tell you that between things in the pipeline, general sentiment reflected in the business community, notwithstanding we all recognize that New Jersey is an expensive place to do business from all the different tax perspectives as is Westchester and so forth. The tone is improving and the types of users that we're beginning to see in the marketplace are large corporate users and, as I said before, Michael, there are very few large blocks of space available today in, in most of the strong suburban markets, which is where our portfolio is, and I know you took a tour of that not too long ago so you have a good sense of that.

I would tell you the one market that hasn't really shown much velocity or vibrance is Princeton. The Mercer County market has remained fairly slow but eventually, I'm sure that will resolve itself. So the answer to your specific question is yes. I am feeling a better tone to the market, more interest on the part of corporate users, more interest on the part of larger users, and hopefully that will not only bode well for our ability to begin to at least push rents in certain submarkets, but hopefully will lead to more opportunities for us to deploy our land bank.

Okay, thanks. And could you give us just your sense as to your assessment of the Gail acquisition from last year, both from a portfolio perspective as well as the management aspect?

Yes. I think that in every sense of the word, it has been a positive result and a great acquisition for us. Of course, we know that it strengthened our branding and our franchise, through the connectivity has allowed us to now enter new markets such as Boston and take advantage of some fairly defining and historic opportunities such as the Filene's redevelopment through John Hines. We're making progress on the Callahan portfolio and the Andover and [Bilricka] suburban markets on the Route 3 and 93 corridor in northern Boston so that's been a positive.

We continue to foster strong relationships with institutional entities. As you see, JP Morgan Asset Management continues to partner with us and that was primarily a Gail relationship and we probably will have another building opportunity in Morris County as a result of that and so the -- there has been a bit of a new opportunity set created. The day-to-day operations of Gail are led by Mark Yeager, who remains quite close to me. I'll see him today and we collaborate daily on the activities of Gail.

We did a very, I think, a very strategic yield or transaction with Gail Facilities management, the GFS division, which is a labor-intensive division providing property management for corporate users and we contributed that to a new joint venture with Newmark Knight Frank and for us, that only enhances our connectivity with one of the foremost commercial real estate brokerage firms, expands the business base of that global management or global facilities surfaces because now they participate in all the RFPs for property management and facilities management that all of the brokers in Newmark see, take some of the burden off Mack-Cali in terms of overhead and administrative expenses, and the Gail Construction division is a profitable construction company. I think perhaps just defining it as a construction company is a misnomer because through Tom Walsh and his associations and associates in that organization, have also been able to take advantage of some new opportunities such as the development, the redevelopment of Belmar, where were the designated redeveloper and that was really fostered and fermented through the construction company. The construction company is doing a book of business that exceeds $100 million a year, maybe it's $125 million as we speak. Profit margins are not robust in construction, but the company will make a few million dollars every year after all of its expenses and it's great connectivity, as well as it's a relationship builder because they're a highly respected construction company and many of our tenants have used them for years in our own buildings. And so it's just one more segment of relationship building.

We have the future opportunity in [Florham] Park at the Exxon site with the Jets and what looks to be a major high-end residential multifamily-type residential community and for us, that will mean 600,000 feet, more or less, of office development and a very good submarket next to the Moorestown Airport. And so I would tell you that the synergies created as well as the profitability is all positive.

Okay, thanks. That's helpful.

You're welcome.

Our next question comes from John Guinee with Stifel Nicolaus.

This is John Guinee. How are you?

I'm good, thanks, and I know your name is John Guinee.

You guys hit the market just right on your common equity raise. Congratulations.

Thank you.

Can you talk through why you chose not to do a convertible or exchangeable note?

I think if you look at the, sort of the universe of converts, you will see that the converts-- that the more favorable coupons result from companies that are paying out lower dividends on a yield basis. So that companies that have been able to do converts in the 30% range, plus or minus 25%, 30% have higher multiples. And due to that have lower dividend yields and there are the notable New York-centric companies and perhaps a few others. I'm talking in the office sector, and so for us, it wasn't such an attractive piece of paper. To look at, providing optionality at lower thresholds on, on the convert premiums and at -- it harkens back, as we looked at it, to some of the old days where there were forward equity yields done and very few companies came out in a positive way. But if you're a high-flying office company in New York or Washington and your yield is 3.5%, you can do a 30% up or better conversion and a very low coupon. It's a great piece of paper. For us, it was not so great.

Great. One more question. This is just, I want to confirm the lease term fee from this quarter. I think you said 110,000 but I was kind of --

It was 117,000.

All right. Thanks.

You're welcome.

Nice job. Thank you.

And moving on, we will hear from Chris Haley with Wachovia.

Good morning.

Morning.

Mitch, your first quarter cash flow to dividend payout ratio is just about 100%, maybe a little bit over, and your full year is 110%. You're feeling a little bit better about the markets so -- but mathematically, that would imply that your concession levels will accelerate during the second, third and fourth quarter to kind of get to your 110% payout for the full-year. Could you provide some color or reconciliation to that?

Well, right now, it's about 103% after the first quarter. We have three quarters to go and we're projecting that it's 110% plus or minus at the end of the year. So I think what I said is that we see conditions pretty much even in terms of mark-to-market. We see continuing trends towards improvement of net effective rents, but it won't change that dramatically. So to build up another 7% over three quarters is pretty consistent with the first quarter. And it's not a pure science. We'll only know the answer once we get to this point in time next year.

And there is another point that I would like to make is when we report cash flow, what we do is we report it as we expend it, not necessarily as we, as we incur it, not necessarily when we sign the leases. So what you're seeing us paying for in the first quarter are things that were done 6, 9, 12 months ago when we had higher than what was historically normal TI and leasing commission costs and we expect that, that kind of runout to come out through this year so that what we're seeing in terms of lower costs, it certainly in this quarter, and maybe going forward, will be reflected in next year's numbers in terms of how we pay the money out and how we install the tenants.

Thank you for that, Barry, particularly noting that your second, third and fourth quarter, first quarter trends in CapEx per square foot per lease years have been trending down each quarter so if I use a lag analysis on committed capital to be spent and then how it flows through your income statement, I'm just trying to -- which would be positive to a forward 6 to 9-month run rate in terms of actual dollars being spent, and you have less leases rolling, just trying to gauge whether or not you're playing the conservative side or there is something we need to know about that is going to hit second, third or fourth quarter that -- ?

No. Chris, let me clarify. We didn't mean to kind of confuse the issue there. The -- everything, just like same-store growth, is a reflection of when you start collecting the money or when you're paying the money out. And what I said before about the answer to the same-store growth was that even though we're making continued progress in leasing, by the time those tenants begin to pay rent,, it will be closer to the end of the year and so it should flatten out same-store growth for the year. Similarly, although we're paying bills from six months ago for tenant improvement, conditions have not changed that dramatically in the markets with respect to DI per square foot, although this particular quarter trended down, or leasing commissions to dramatically impact it. And so I think the better way to look at it is that conditions are firming based on what we have seen over this quarter and last quarter, and based on those two quarters or an average of those quarters, based on CAD payout ratios, we're slightly in excess of our cash flow. And so I would submit to you that if you utilize that formulation and kind of balance it through the remainder of the year, we'll end up somewhere around averaging 2.5% to 3% per quarter exceeding our CAD. And that's sort of a simplistic way of looking at it.

Okay. Moving from a leasing question to more of an investment question, your marginal dollar may be more oriented toward Manhattan, lower Manhattan, versus your predominant market exposures in New Jersey, Philly, D.C. The same way you address New Jersey versus Manhattan. Can you give us your best guess or how you guys are underwriting new deals on investments in New Jersey in terms of going in return requirements, high unlevered rate of return, IRR requirements, and what kind of the spread is going on that you look at between New Jersey, suburban New Jersey, and lower Manhattan, mid-town?

I think that, again, any Avenue-type asset today, I mean there are sources of money throughout the entire globe looking to invest in the safe haven, or the perceived safe haven of mid-town Manhattan, particularly the more highly institutional quality buildings, and so you've seen them trading up at record levels, $1,200, $1,300 a square foot, maybe more or maybe soon to be more, cap rates in the 3.5% range or maybe even less or soon to be less, and -- . However, if you look at it from a replacement cost perspective, they're in several new development projects that are in process, contemplated. It -- if not in process in mid-town and the Times Square area such as SJP's property, and I sat on a television show with -- on a panel on a television show with Steve [Pazyki] a few weeks ago at CUNI and we talked about replacement costs and he said that that building will cost him between $1,000 and $1,100 a foot, if I remember correctly, to put it up. The ground was about $350 a square foot of FAR and between soft and hard on top of that, that is where he expected the costs to be. And so if you're looking at sales in place with some level of, not on a speculative basis, he's building that on spec as a few others have announced, it's not unreasonable to see these buildings trading in the $1,200 or $1,300 a foot range. If the notion is that there is going to be a continuum of rent growth because most of the deals that are being done in Manhattan are negative leverage type deals.

In New Jersey, I talked about the waterfront where you can build a new building for $400 a square foot where, because of the barriers to entry, the constraints on entry, other than us, there are only a -- less than a handful of people who have any development land along the waterfront, and if can you develop not only for your costs to capital, which probably in this Company is somewhere around 7.25% blending in equity returns, and you can build positive leverage to that, which naturally is the only way we would build, then I think it's a pretty good deal because the value of that, given the frenzy in the marketplace for commercial real estate assets, suggests that you're probably 200 or 250 basis points positive to the value on a cap

I'm sorry, so just trying to put this in perspective, buying where you're seeing underwriting on a initial and a longer-term yield, IRR yield --

Yes.

-- what is the spread differential used? Because we don't hear many New Jersey trades. We hear a lot of New York trades.

Right.

Kind of give us how you see the market in terms of lower Manhattan mid-town versus Jersey.

Yes, I think that the IRR expectations and the underwriting expectations in mid-town are certainly sub-7% today in most cases probably.

What would they be in New Jersey?

I think that you're probably looking and hoping to have double-digit IRR returns or certainly very close to that.

Is that your underwriting or is that the market?

That certainly is our underwriting, but the markets, I think, generally would comport with that, maybe slightly sub-10%.

So 300 basis points differential or more?

I would think.

And is that a -- ?

Certainly 250.

Over a cycle, what has been your experience, even recognizing that you have not been in New York but probably have monitored it. What has been your experience of that spread over time?

I think it's historically wider than it has been over time. Much wider.

Okay. So when you think about that, why would you be putting marginal dollars into Manhattan today?

Because I think they are strategic reasons, and so long as we can do it, do those transactions at roughly cost of capital or plus or minus, let's say minimal negative leverage as a start, with the -- with clear expectations that we can move that north of cost to capital. It's strategic advantage because it allows us to take advantage of the tenant synergy, particularly again between the waterfront in New Jersey and the kinds of companies that, right now, we're seeing doing business in lower Manhattan. And I think you have to factor that in.

Okay. That's very helpful. Thank you.

You're welcome.

Our next question comes from Michael Bilerman with Citigroup.

Yes, a couple of follow-ups. Thinking about the Manhattan joint venture, what sort of hurdle in terms of a promote for your operating partner, what sort of promote would he have?

Well, we're in the process of finalizing it, Michael, but the -- I think that before there will be a promoted structure for the operating partner, based on my latest discussions, aside from their fee income of which we would participate in, for leasing management and construction. We will, Mack-Cali would see very close between an 11% to 12% IRR.

Okay, and the way you would think about it is, you go into joint venture with this individual and then anything that you go out and buy would then go into a fund structure with an institutional partner or would they be separate sort of ventures?

We -- the next step is to, we have had preliminary dialogue with institutional partners. There's lots of interest, obviously, to put money out so I think it's too early to tell you that. We also want to take advantage of the relationships that both of us have in expanding the base and so each of us would have the opportunity to participate in let's call it third party deals as opposed to exclusivity without any promoted structure, but obviously, if we bring an institutional partner on board, there will be a new level of promotes, which would accelerate the initial returns to Mack-Cali after which our operating partner would also participate in the promote.

And then can you just quantify, you've talked about $1 billion, I guess, of total asset value. What ultimately would be your equity as you sort of see over the next year or two into Manhattan and what sort of leverage would be that on top of that?

I think for the leverage level would probably be in the 60% to 65% range more or less and the appetite for us to invest there, obviously it's not hard with that level of leverage to get to $1 billion with minimal equity. But if we're probably talking $250 million.

Of your equity?

Exactly.

And then in terms of just the GAAP and cash effects of 125 Broad and the tradeout of the Greenwich asset, I guess from a cash perspective, it's somewhere a little south of 4. What is going to be the GAAP yield?

Well, we expect it to be somewhere around 6.4%.

And is your anticipation of putting a loan on the asset or you'll just fund it off the line?

Right now, we'll fund it off the line and we have also some sale proceeds that are still available to us from our Colorado and California sales. I think we have probably $100 million available in that pocket to take advantage of.

And what was the GAAP yield off of the sale on the Greenwich asset? I know it was south of cash.

Well, I mean it's a lot of turnover and so forth and so I don't think we assessed it from that perspective. We looked at it from a price per square foot and a cash yield perspective.

What is the current NOI just coming off, just as we strip it out of our numbers out of the first quarter? I just want to make sure I'm getting the right GAAP NOI coming out.

We'll look it up right now for you.

Okay. I just want to clarify on the same-store NOI. You're still forecasting for the year for it to be flat over and so the -- as you move through the quarters and the comparisons over last year become more difficult, you expect it to flatten out?

Right. Yes, first of all, the -- if you take your $56 million on Greenwich and just apply a 4 cap to it, 4%, that is the NOI, plus or minus.

Right.

Could you repeat your question on the second part? We were double checking that number.

No worries. Just on same-store NOI. I want to make sure I understand it right. You talked about previously, about same store being flat year-over-year and so the expectation is as the comparisons from the later half of the year get more difficult, given the ups you had in '06 at the end of the year, that you would start to see a flattening out of the same-store growth and it would equal out to being flat for the year or is it now you think there is going to be some positive upside? Sorry, we can't hear you.

Okay. The same store for the last 12 months was 4.2%. We reported 4.8% for the quarter. So it should be in that range. That's what we would expect.

Okay. Thank you.

You're welcome.

Your next question comes from Jay Habermann with Goldman Sachs.

Hi, good afternoon. I know it's been a long call. Just a couple of questions. For Barry, can you just discuss the factors that would get you to the low end of your guidance range?

Sure. I mean some of the things that would get us to the low end of the guidance range would be not achieving the leasing that we're talking about doing, changes in interest rates, things like that, not -- operations of certain joint ventures not coming in as planned, particularly the ones like the hotel and some others like that which you're projecting based on trends, not necessarily having booked income, operations at the construction company and the like. Things like that.

All right. And just to be clear on the New York City joint venture, are you -- is your partner basically going to be contributing assets or are you only looking at new assets?

No, new only.

Okay. And in terms of funding your equity requirement, is that line of credit or are you anticipating asset sales?

At the present time, not -- although we have in the pipeline a potential asset or two that we will be selling and we haven't announced specifically what those are and they're not overly material with respect to our portfolio. Initially, it would be line funding.

Okay, and do you think this is an '07 agenda or is this going to be pushed into next year?

No, the creation of the venture is clearly imminent and then we have to, obviously, focus on opportunities and it's hard to predict that, but I think we will be as wired to the community as anybody.

Okay. Thanks.

You're welcome.

Next question comes from Ian Weissman with Merrill Lynch.

Yes, good afternoon. Mitch, can you just give us a quick update where you guys are on the Filene's investment and a follow-up to that, when you made this push into Boston and established this relationship with John Hines, you expressed interest in expanding in that market. Are you involved in any other deals with John at this point and are you looking at his Seaport District development?

We have talked about that but it's very premature. We are, look, going to look at a couple of acquisition opportunities in the market. I think the goal is to continue to work together with John and Gail International in that market. I think that, again, they have market presence and very well-respected and so that's the goal. With respect to Filene's, I was up there, I guess about a month ago, and we, we had our partner JP Morgan Asset Management there and as well as [Vornado] and talked about the project and the status of the project and approvals and so forth and so on. There may be a pre-sale situation on the hotel that is -- it's in the works right now. So I think it's clearly in motion and it's very much happening. I think our capital in the deal was will ultimately be somewhere around $21 million and our partner JP Morgan Asset Management will be funding 70% of the overall 50% equity requirement on the Mack-Cali/Gail side. So it's a reasonable investment in a fairly defining project in downtown crossing.

Okay. Thank you.

You're welcome.

Our next question comes from Steven Rodriguez with Lehman Brothers.

Hi, guys. Most of my questions have been answered but one more quick line-item question. On your real estate services line, I see it dipped down to 2.7 million and the last two quarters it averaged around 11 or 12 million. Is this based on seasonality or why the dip?

That relates to the contribution of Gail GFS into what is now Newmark Knight Frank GMS.

So should we expect it -- the run rate to be much lower in '06?

Yes. Yes. Absolutely.

Okay. Great.

We own 40% of that company now where previously we owned 100%.

Okay. Perfect. Thank you very much.

You're welcome.

The next question comes from Michael Knott with Green Street Advisors.

Hey, guys. Mitchell, can you just reiterate the rent roll-up numbers you mentioned at the beginning of the call? It sounded like there were a couple of leases but that skewed the overall number.

Yes, there were a few leases that, one was the MDS Pharma deal in Renaissance, Valley Forge. It was about a 47,000 foot deal is it had a 22% roll-down from face rent to face rent and that was an older lease that we inherited. There was a deal in -- on [Rela] Boulevard, up north, for 31,000 feet that was a 19% roll-down. A deal in Totoa in our flex portfolio, an 18,000 foot deal with sales components, was 9.9%, again on 18,000 feet, and a Moorestown, South Jersey deal of just under 18,000 feet tat had a 33.5% roll-down. So just those four transactions accounted for moving a roll-up of 2.1% to a roll-down portfolio wide of 1.2%.

Okay and what was the number in the same-store pool? Was it substantially similar to the minus 1.2?

The same-store, what we reported cash of 7.4% and GAAP up 4.8%.

All right, I'm sorry, the rent roll-ups within the same-store pool. Excuse me.

I am trying to understand the corollary.

I was trying to break down the component pieces of the same-store revenue growth on a cash basis between occupancy and rental rate growth.

I think -- we'll have to get you -- you'll need to get us more specifically what you want, Michael, because we don't carry that number here.

Well, I'll follow up on it. Thanks.

Okay.

Next question comes from Jordan Sadler, KeyBanc Capital Markets.

All my questions have been answered. Thank you.

At this time, we have no further questions in the queue. Mr. Hersh, I'll turn it back over to you for any additional or closing remarks.

I want to thank everyone for joining us today. I hope we were able to enlighten you with our activities and some of the things that we'll be looking to do in the future, in the imminent future. And, of course, look forward to seeing you at NAREIT and then reporting to all of you again next quarter. Thank you and have a good day.

Once again, this does conclude today's call. Thank you for joining us. Have a great day.