Veris Residential Inc (VRE) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation second 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. Good morning, everyone. Thank you for joining Mack-Cali second 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 markets. After that, Barry will review our financial results. And then Mike would give you an update on our leasing results.

FFO for the second quarter 2007 came in at $0.88 per share as compared to $0.95 per share for second quarter 2006. However, included in our results from last year were $0.09 of income from notable particular items that did not occur this year. In Barry's remarks he will detail those items for you. Our occupancies ended the quarter at 91.9%, down just slightly from last quarter's 92.2%. While we have seen an uptick this year in certain markets, particularly the Jersey City Waterfront, Morris County and the Washington Metroplex, markets in general in the suburban areas are still sluggish. There has been only a very limited amount of positive absorption so they're still hasn't been much upward pressure on rents although TI packages have abated to some extent. We've had a very slight rent roll up this quarter of .3% compared to last quarter's 1.2% rolldown. And so the trends are moving in the right direction. Our TI and commission expenses for the quarter were $2.91 per square foot per year. This compares to last quarter's $1.97 which was unusually low due to a higher degree of renewals in that quarter, which obviously are less costly. I might add the economics of lease transactions remain competitive. However, as I pointed out a moment ago, concession packages do seem to be abating. For the remainder of 2007, rollovers are just 2.6% of base rent or just over $15 million. For 2008, we have now managed down our lease rollovers to 8.3%, or approximately $49 million. And so we've made good progress in our pro active early renewal efforts.

With respect to acquisitions and dispositions during the second quarter, we continue to enhance our position in core markets, as well as expand into the adjacent Manhattan marketplace, long a goal of the Company. In Hamilton Township, New Jersey, that's located between Princeton and Trenton, we completed the development of a brand new, 120,000 square foot class A office building for AAA mid-Atlantic at our Horizon Center complex. AAA pre least the building for 15 years, so it was built to suit, and cost us approximately $19 million to build. As part of the deal with AAA we acquired from them two buildings just down the road on Route 130, totaling 69,000 square feet, plus developable land to accommodate about 220,000 square feet of office space. This acquisition totaled $8.8 million. I might also add that we've seen a good amount of activity in the Hamilton area and we have very high expectations to put that land to use. We also exercised options to purchase land to accommodate 600,000 square feet of development adjacent to our Capital Office Park in Greenbelt, Maryland. This acquisition was $13 million. And so with all in costs of just over $20 in FAR, we think we can be very competitive in a compelling marketplace outside of Washington D.C.

And of course our most significant transaction of the quarter was our acquisition of interest in 125 Broad Street in lower Manhattan. This marked our entrance into the downtown Manhattan office market where we acquired about 40% of a magnificent 40 story building, about 525,000 square feet from S. L. Green for $273 million in a very strategic transaction. As we have stated previously and publicly, we believe that 125 Broad Street offers many synergies with our Jersey City properties. It provides us with an excellent starting point downtown. As we have seen, downtown is a rapidly improving market and we believe it still has substantial upside potential. As we've also mentioned we're interested in making additional investments in Manhattan on an opportunistic basis, both downtown and midtown, and we continue to look at potential opportunities. We have been working with Bob Savitt, a very well-respected the owner and operator particularly in the fashion district in the garment center, looking at every opportunity that comes our way. As I mentioned also a moment ago, the deal with S. L. Green was very strategic. In addition to our purchasing 40% interest on 125 Broad Street, we couple that transaction with the sale of our only building in Greenwich, Conn., to S. L. Green, 500 West Putnam, for $56 million. And so we believe that it was a very favorable transaction as far as Mack-Cali is concerned.

During the quarter we also sold a second Connecticut building, 1000 Bridgeport Avenue in Shelton, Conn., for $17 million, in a market that we thought was very thin and where we didn't have a competitive advantage and therefore it wasn't a strategic asset for us. We have also recently sold our only two properties, office properties, in Atlantic County, New Jersey, in Egg Harbor, for $12.5 million. This transaction represented a significant gain for the Company. These were our only buildings in the Atlantic County, or Atlantic City area, and we felt there was significant leasing risk going forward and did quite well on the sale. In each of these instances it allowed us to exit submarkets that we did not believe provided significant growth opportunities for us and lacked any competitive advantage. And so we continue to refine our portfolio, exiting these types of submarkets as well as exploring new and adjacent markets as well.

With regard to leasing, there are few leases that I would like to make mention of. At Harborside Financial Center on the Jersey City Waterfront, our Plaza One building is now 100% leased after one of our financial service tenants expanded quite recently by an additional 29,000 feet. As you recall, about a year-and-a-half ago, we had in excess of 300,000 square feet of availability in this building. So we're extremely pleased with our leasing success, with the caliber and quality of tenants within the Jersey City marketplace, and of course Plaza One now has been completely modernized. And so we're very proud of our assets.

At 101 Hudson Street in Jersey City, we have the effect this quarter of the expiration of Merrill Lynch's lease. This was a scheduled expiration when we purchased the building where Merrill Lynch had determined that it would give back 311,000 square feet. We were able to substantially reduce that 311 to about 180,000 feet by quarter's end due to the activity of many tenants in the market including Merrill Lynch and others. By others I mean just last week we leased almost 72,000 feet to Lehman Brothers. 63,000 of that was expansion space and that now leaves only 139,000 feet vacant in the building with a fair amount of activity. Merrill Lynch today leases 294,000 square feet through the 2017, in 101 Hudson Street, and Lehman leases 273,000 square feet in the building as well.

In Morris County, in New Jersey, Daiichi Sankyo, a very successful Asian pharmaceutical company leased the entire building at Two Hilton Court at our Mack-Cali Business Campus, in Parsippany. The lease represented, again, the entire building, 186,000 square feet. It included their renewal of almost 90,000 square feet on a 10 year basis and expanding into Deloitte and Touche's former space, almost 97,000 square feet on a 15 year basis. And so now Two Hilton is effectively leased for 15 years from the beginning of 2008. As I mentioned, Daiichi is back filling space that is being vacated by Deloitte and Touche. Deloitte and Touche signed a lease for 160,000 square feet representing a very significant amount of growth at 100 Kimball Drive, in Parsippany. 100 Kimball is a building that our Gehl subsidiary recently completed. They developed it on behalf of the ownership. The ownership is a joint venture of J. P. Morgan Asset Management, the Hampshire Companies and now, Mack-Cali. And so as I mentioned there has been a significant uptick of activity in the Morris County marketplace. Of coarse we're proceeding with a build to suit for Wyndham Worldwide as well as exploring other opportunities in this marketplace.

During the quarter, Mack-Cali received two property management awards from local chapters of BOMA. One was for Best Building Exterior, at 50 Main St. in White Plains, from the Westchester BOMA. And as we know, White Plains has been an active market. The other was an Office Building of the Year Award for Five Wood Hollow Road in Parsippany, and that was from New Jersey BOMA . And so we continue to be recognized for what we do best, which is providing our tenants with superior work environments.

Finally, I would like to note the establishment of a Business Development Team here at Mack-Cali with the recent hiring of both Virginia Bauer and Beth Gorin. Ginny Bauer, who for the past couple years, served as New Jersey's Commerce Secretary and Beth, who has led economic development efforts at the regional level in two states, in Bergen County and Lehigh Valley Pennsylvania. We will continue to work with us to identify new business opportunities for the Company so that we can leverage our scale and leverage relationships. Ginny Bauer will also work with me, with corporate leadership, to advocate and organize efforts to preserve and enhance New Jersey's business environment, and to use our vast scope of relationships to generate opportunities not only in New Jersey but throughout our portfolio.

At this point I would like to turn the call over to Barry who will review our financial results and our financial activities for the

Thanks, Mitchell. Net income available to common shareholders for the second quarter of 2007 was $51.1 million or $0.75 a share versus $26.6 million or $0.43 a share for the same quarter last year. In the six months ended June 30, 2007, net income available to common shareholders amounted to $69.7 million or $1.04 a share as compared to $59.2 million or $0.95 a share for the period last year. Funds available for op -- from operations available to common shareholders for the quarter amounted to $73.2 million or $0.88 a share versus $74.4 million or $0.95 a share in '06. For the six months ended June 30, 2007, FFO available to common shareholders was $143.4 million or $1.74 per share versus $155.2 million or $2.00 a share for the same period last year.

As Mitch -- as Mitchell mentioned previously, our results for the prior year included several income items of note. Income of approximately $2 million, or $0.03 a share for a settlement of a claim from a former tenant in Denver, recognition of $2.8 million or approximately $0.04 a share for recoveries of higher property operating expenses over the past year, that past year, meaning 2006 -- meaning 2005, related particularly to energy costs. Commission income of $1.3 million or $0.02 a share receive from a large leasing transaction we brokered at 95 Christopher Columbus Drive in Jersey City, a property we did manage at that time. Also other income in the second quarter of '07 included about $873,000 in lease termination fees. The second quarter last year had lease termination fees of approximately $1.3 million. The six months of this year termination fees totaled $1 million as compared to $2.2 million for the same period in '06. Same-store net operating income which excludes the lease termination fees I just mentioned before on a GAAP basis was flat for the second quarter of '07. And for the six months ended June 30, '07 increased by 2.4%. Same-store net income operating, on a cash basis increased by 3.2% for the second quarter of '07 and for the six months ending June 30 of 2007, increased by 5.2%. Our same-store portfolio for the second quarter was 27.9 million square feet which represented 95% of the portfolio.

Also during the quarter we extended and modified our $600 million revolving unsecured credit facility from additional the two years. It now, matures in June 2011. With the extension, our current borrowing rate was reduced by 10 basis points to 55 basis points over LIBOR. And today, we have about $160 million outstanding on that facility. Our unencumbered portfolio at quarter end totaled 240 properties aggregating 25.7 million square feet of space, which represents about 88% of the portfolio. At quarter end our undepreciated book assets equaled $5.5 billion and our debt to undepreciated asset ratio was 38.2% and debt to market cap ratio was 36.4%. We had interest coverage of 3.3 times, six charge coverage of 2.9 times for both the quarter and the six months ended June 30, of '07. We ended the quarter with total debt of about $2.1 billion which had a weighted average interest rate at 6.13%. Also we have very minimal debt maturities until March of 2009.

We narrowed our 2007 full-year guidance range up to $3.42 to $3.50 per share. Our midpoint case assumptions includes lease commencements of 900,000 square feet for the six months of -- the remaining six months of '07 versus scheduled expiration of about 700,000 square feet. Please note that under SEC regulation G concerning nonGAAP 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 cover our leasing activities.

Thanks Barry. Our leasing teams produced another solid quarter of activity sighting 135 transitions for almost 1.1 million square feet. Transaction count in square footage increased slightly over the first quarter and for the year we completed 255 leases for 2.1 million square feet. Velocity was strong in northern New Jersey where most of our larger deals were accomplished this quarter and we had a particularly active period in Westchester County as well. We retained 59.1% of our outgoing square footage in the second quarter and it retained 66.6% of outgoing space year to date. Leasing costs of $2.91 per square foot per year reflect the modestly tightened conditions we're experiencing in our markets. Although sill very competitive, we're completing more as-is more transactions as well as deals with tenants willing to assume a portion of the cost of fitting out their space. Our year to date average of $2.68 is well below the $3.47 average the same period last year. Our launch through of rent rolldowns continues. This quarter's transactions included a number of deals with strong initial rent growth which combined with some of the remaining above market outgoing rents to produce slightly positive gains.

Looking at our occupancy, after a gain in the first quarter, our overall space leased decreased by 30 basis points in the second. The Merrill Lynch expiration in northern New Jersey had the largest impact, but was partially mitigated by positive absorption and other properties in that market. In spite the turnover. our Jersey City portfolio finished the quarter over 95% leased. And our northern New Jersey properties are over 91% leased. In central New Jersey large transactions in Piscataway and Freehold helped us achieve 900 basis points of positive absorption and we're over 91% leased in this market as well. Despite a slight net loss of space, our 4.8 million square feet in Westchester remains 95.8% leased. And our team in suburban Philadelphia completed over 150,000 square feet of deals to keep our properties there above 90% leased. Negative absorption was minimal elsewhere in our portfolio and our occupancies continue to significantly outperform all of our major markets.

Space showings continue to be active, exceeding second quarter 2006 in both number of prospective tenants and total square footage of the requirements they represented, In addition to the already apparent inquiry from Manhattan companies in Jersey City, this quarter's prospective tenant data includes several showings at our Westchester properties. Spurred by a lack of available space and rising prices in the city businesses appear to be widening their search for space. Our remaining expirations for 2007 are at the lowest mid year percentage in many years. And again that's thanks to our ongoing aggressive early renewal programs.

Looking at our market conditions, Cushman & Wakefield reports that all of our major markets had declining vacancy and increasing asking rents. In addition to the ongoing strength in Manhattan and D.C. markets, northern New Jersey's vacancy dropped significantly this period and suburban Philadelphia, recording positive absorption for the eighth straight quarter. New construction is still constrained with spec of product limited for the most part to markets able to bear the additional supply. Remaining 2007 deliveries should not pose a dramatic burden on our markets. While showing improvement, vacancy rates remain high in all of our markets outside Manhattan, and the district, with gains toward equilibrium being made slowly. In spite of the ongoing difficulties, our leasing teams are committed to keeping our properties well leased at the best possible economic terms we can achieve. Mitch.

Thank you Mike. As I have done on prior calls I would like to provide a few points of information relative to our performance this quarter. Some of this information was contained in Barry's remarks, but it's noteworthy. We finished the quarter with $3 million plus or minus of free cash flow. Our CAD payout ratio for the quarter was about 94.5%. Reminding you of our view that we would finish 2007 with approximately 92.5% occupancy, or 92.5% leased. We do believe that the end of the year we will probably have a CAD payout ratio of about 110%. But we have continued to be very mindful of our cash position and our CAD payout ratio. As was reported, our NOI was on a cash basis up 3.2%, which is another very good quarter. On a cash basis, actual cash received, not averaging rents pursuant to GAAP. So we're very pleased with those results.

At this point, I would like to now take your questions. Operator?

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll have our first question from (inaudible), Stifel Nicolaus.

Good morning, how are you guys?

Doing well. Thanks.

Hey, thank you very much for hosting the call.

You're welcome.

I'm here with John Guinee. And I wanted to ask about the Wyndham build to suit in Parsippany. It's budgeted to cost at about $260 per square foot. Could you provide a brief description the expected finished product? And then the major cost components such as land based building, structured parking, if that is going to be there, intended improvements and soft costs?

Sure I know that John likes to focus on development, so I am happy to do that. The building is .25 million feet, it is primarily surface parking. The land, actually was contained at a fairly high-level because we imputed all of the costs of carry from the day we acquired the asset, or the land, if you will, from Prudential along with the balance of the business park. And so while land, historically, might have a value in that area of perhaps $35 per square foot on a FAR basis, we imputed a higher costs due to several years of carrying the property. The building itself is a Class A corporate quality facility. It is granite clad, it's quite magnificent actually. If you have seen their renderings on our website, it is designed in close cooperation and communication with, actually, Steven Holmes, who's the CEO of Wyndham, who has had a keen interest in the design of the facility. So we're very excited about it. The project has received all of its prerequisite approvals. We have awarded major contracts, on a very competitive basis.

Actually this is where the synergy of Gehl Construction comes into play. You know that a little more than a year ago we acquired the Gehl Company along with its various component businesses, Gehl Construction, the Development Team, etc, and the synergies have worked out quite well. They have an extremely talented construction group of executives within the construction division. We have been able to compel very competitive pricing in the market. And so we're optimistic that the project will be at or below budget. But today, given the rising cost of steel, the rising cost of labor and concrete in particular, due to offshore demand, which still hasn't yet abated, to put up a building of that quality, you are in the range of $250 to $300 a square foot. Again, somewhat depending on the parking component and whether there is any structured parking. I hope that answers your question.

That's $250 to $300?

Yes.

Yes. What do you think about the pruden -- about the structured parking?

Can you repeat that?

How much would the parking cost separate than that?

The parking -- again that's surface parking?

Yes surface, I mean not structure.

Right.

If you broke that out from the land in the base building costs?

You know something, I'll break it out and I'll send it to you and to John. How's that?

That would be great. Thank you very much.

You're welcome.

We'll have our next question from Michael Bilerman, (Citi).

Hey, good morning. Mitch, can you give us an update on where you are in your discussions for new build in Jersey City?

Yes. I am waiting to -- I have been in discussion with the consulting group from one of the largest commercial real estate brokerage firms in the region who is working very closely with -- and has an assignment from a major Manhattan centric corporation to carefully review the concept of bifurcation and to look at moving a significant part of their workforce out of midtown Manhattan. This particular company also happens to own two assets in midtown Manhattan. The company that we are working with is confidential at this point. I can tell you that we expect a decision on this issue quite eminently. What that means, I mean, given the time of year we are in, I'm told it will be within the month of August. Nonetheless, it is imminent. Now that particular requirement, depending upon how they ultimately view the demographics, could result in either nothing, in terms of a pre release. It could result in a minimum of 350,000 feet on a long-term prelease out of the million foot building that we would build. Or as much as 750,000 square feet. This particular company has done the dance with the outer boroughs and all of their alternatives. I am advised that we are in a very favorable position from all perspectives. That is about all I can tell you right now.

You mentioned (inaudible) two buildings in Manhattan. You pointed that out as a potential trade idea?

Yes, well they are not interested in selling the real estate at this point. It's wholly owned by the corporation. I have obviously discussed that and suggested it that it become part of the transaction. At the present time they are not interested in that.

What's the progress on a -- the couple of other targets, (inaudible) I think last call you mentioned two or three -- 300,000 (inaudible)?

Yes, the progress on those has been very slow. It doesn't seem to be a tremendous -- tremendous amount of decision making. I can tell you that I was approached quite recently with a very valid offer, if you will, by a hedge fund. A very significant, well-capitalized hedge fund, to enter into a joint venture with us, to spec the million foot building and provide 75% of the equity capital. So that's something that I'm at least thinking about if this particular transaction doesn't move forward. The notion is that there has just been such extreme pressure on rents in midtown and with limited availability over the next six or seven years in the downtown market, the view is that we could very well capture the market. As you know, I have been -- I had an aversion to building spec there. I don't want to put my overhang into the market but I do have this discussion, if you will, as recently as last week.

Right. Is there anything you can talk a little bit about, your relationship with Savitt, in terms of the New York venture? How much have you looked at? Has anything progressed further along?

Yes, we've looked at a lot. And we've elected to pass on a lot. The view that we have is -- and I think we unilaterally share this, that we want the best of class wherever we are. And so we have looked at a number of assets, some of which you read about recently, have traded. And Bob's expertise and his family's lineage, which is almost a century in owning substantial assets in the fashion district and to some extent the garment district as well as downtown, they recently sold the building on Prince Street. it didn't fit our profile for various reasons, is that we want to make sure that if there is a market adjustment, to use a delicate term, that we're left holding the best asset in the market. And so we've, on that basis, given pricing levels, and given peculiarities of different assets, whether it be not having a grand enough lobby as a conversion from a fashion district building, which is showroom based to an office building, we've elected to pass. But we are looking at a lot of stuff.

Is there anything you are under contract on?

We are not.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) We go next to Jordan Sadler, KeyBanc Capital Markets.

Good morning. I just wanted to follow up on the Jersey City discussion a little bit. You mentioned the possibility, and I know it's only a discussion you had last week, of building spec, but in that same vein, could you maybe provide some thoughts or insights on Goldman's plans to build another tower in Jersey City?

I know what I read. They did get their approval to build a second tower, they continue to occupy the first tower. The expectation, and they said publicly, is that that building will be full in 2009. There's every indication that that, in fact, will be the case. You see the lights going up, going on increasingly as the tower rises. So they obviously have optimistic expectations for their business and they are building in lower Manhattan as we all know. And this is directly across the river in eyeshot. So all indications are they're going. And that's certainly a dramatic positive for the marketplace. Gold -- Goldman indicated when they built the first tower that under no circumstances do they have any intention of sharing the building, of sub-leasing, or leasing space in the building, that they're very security conscious, and they have been true to their word in that respect. They never put a square foot in that building up for third party lease. So one would believe that their growth plans and employment count, in addition to what they're doing in lower Manhattan would dictate that they ultimately need a smaller additional facility there. And I think it's great for the marketplace.

And just a point of clarification. I know you said that last week that Lehman signed a 60 something thousand square foot expansion. When is the commencement date on that?

The commencement date on that is -- well the expiration is 1/31/18. 2018. The commencement date, I believe is January of '08.

And then just on the overall sort of capital market situation, you've had a relatively conservative view on valuations for the past whenever time frame, which limited your investment activity and I guess accumulated some dry powder certainly with your issuance in February, given some of that framework. What's your expectation for investment over the course of the next 12 to 18 months? Meaning will you sort of wait it out a little bit to see how things shake out? Do you think the cap rates are about to move up?

Yes, I think a couple of things. I think, obviously our stock at this point is pretty cheap. So it's my intention to advance the notion of buying back some stock on a modest basis over time. I will have that discussion with the Board in the near future. So that -- that is one component. I think that we have seen an incredible dislocation in the repricing of risk in the credit markets. It is affecting every sector. If you look at the public home builders, I mean there's been a huge erosion on an incredibly rapid basis. It's across the board. The CNBS markets are closed down. There are no bids. The CDO markets have closed down. We have seen implosion of various hedge funds that are trading these types of instruments.

And so I think at this point , while it may not signify, hopefully, a serious downturn in the economy, it's going to put a lot of pressure on a lot of owners. I can't tell you the number of e-mails that I get from mortgage brokers that are peddling, if you will, mezzanine financing instruments for assets that are being acquired in Manhattan. Because of the re-evaluation of credit by the banks, I can tell you they have definitely said new underwriting standards. I am sure you know that. Many of these contract purchasers are left short between their first mortgage and the equity. And so they're in the market for mezzanine financing. And while that may seem attractive in terms of coupon rates and getting into deals, you really need to evaluate the risk. We have looked at a number of those opportunities and felt that where coverage ratios on the first mortgage were substantially below 1-0 coverage, you really have to wonder that even if rents are significantly below market, will you ever have the opportunity to roll them to market before inheriting the risk of the first mortgage.

So I think that we could very well be on the cusp of the leveraged purchaser, the leveraged owner having some issues which could dislodge some opportunities. On the other hand we have seen an extraordinary amount of offshore capital from all parts of the globe that have the benefit of the cheap dollar so they have strong currency and they have continued to invest. Although I might add that some of these offshore investors from notable places like DuBois and other places are generally leveraged buyers. And so I guess when I -- in summary, my attitude is we'll be very careful capital allocators going forward. We've looked at a lot of deals. We've looked at public company deals recently and didn't feel that they made sense for us. Didn't feel that given certain market risk and initial dilution, that would be exerted on our Company, that they made sense.

So the long answer to a short question, we're going to be careful, we're going to pick our spots. We will continue to look at opportunities. We may be able to do some modest stock buybacks and we'll see what happens. But one thing is for sure, we do have an enormous amount of capacity in the Company to write a big

Any expectations on cap rates in suburban markets?

You know, they've been -- they've been relatively stable. Again, it depends on what markets you're in. If you do some of the deals that I talked about like a 15 year prelease with a good credit. Those buildings have value in my opinion of anywhere between 5.5%, and 6.5% free and clear or cap rate depending on the particular set of circumstances. And so I would say the six to seven range is probably the good quality level on average in the suburban markets. I am clearly not including markets like Jersey City where you probably see certainly 75 to 100 basis points lower. But then you have the tangential markets, that , you know, markets like we sold off, such as Shelton Conn. which has a couple million square foot market, mostly owed by one other individual where the cap rate might be 9% give or take on today's value. But you are inherent risks. Where your cap rate on an average basis over three years could very well be, to the seller, 5% or 6% because of the risk of turnover and rollover, and early lease terminations, etc.. So we're pretty careful in what we do. But I would say that 6% to 7% is the range of -- the trading range today, low 7% of the better quality suburban

Thank you.

You're welcome.

We go next to Michael Knott, Green Street Advisors

Hey Mitch, I was just wondering if you could you follow up on your comment about looking at public company deals?

Well, I mean there was one company that was announced recently. And of coarse we looked at it early, and tried to do something much earlier stage, and the Company was effectively entered into looking at its strategic objectives through an investment bank and we looked at the Company. For us, it didn't make sense, for all the reasons I articulated. For others it might make more sense.

(Inaudible) on the economics and time line of the Boston development?

Boston?

Yes.

The Boston development is on track. As a matter of fact I spoke to John Heinz this morning. The final approval is due to be memorialized on August 14th. The project is -- so it's a 36 month project, essentially from now. We're trying to work through a pre-sale of the hotel. He and I along with (Fornato) and J.P. Morgan Asset Management actually where -- they're talking about that right now, I had to talk to him earlier because of the earnings call. But that's -- the objective right now is to is to try to get the hotel done because we think it will be a very significant magnet, to have a very high end flag associated with the project, but it's on schedule.

As you probably know, the market rents have moved quite dramatically, very rapidly, in Boston particularly in the CBD. It seems to be fairly barrier constructed market right now. Not a lot of availability. And so we're talking to different law firms, there was a law firm deal recently in Prudential Center. It was one of the tenants that John Heinz had been talking to but early on, ruled it out because of the timeline and also the expansion potential that they needed to have within the building. So my -- my view and perception at this point is the projects on time, on budget. And there do not appear to be any roadblocks. The one that was kind of talked about was the historic preservation issue with the skyline, etc., and that approval was granted this past Monday night. So we're in good shape on that project, and the suburban portfolio is picking up some steam now, took a while, but we're entering into a number of leases, and so, hopefully next quarter I can talk in more detail about -- because we'll have actually signed what I believe will be some significant new leases in the suburban portfolio. Right now we have signed letters of intent and leases out.

Okay that's very helpful, Mitchell. Any expectation on the unleveraged yield on that development in Boston?

The expectation was somewhere between nine, and eleven, depending on how the moon and stars aligned. We don't believe -- we don't certainly believe that it will, in any circumstance, or under any circumstance be below 9% unleveraged.

Okay and then my last question, can you just comment on what you think your borrowing costs are today, both unsecured and secured?

The secured market has changed dramatically. First of all the availability of secured financing today has -- has dissipated significantly. Spreads have widened, maybe 10, 20 basis points, but leverage levels have been reduced. We have a couple small things we're looking at on a secured basis and the banks are very very skidish right now about underwriting, I guess it's tied into the whole the (mirrot) of issues with CNBS. Certainly the CNBS market's, have, at least as we see it, have effectively closed down. Now I've seen people postulate that while spreads have widened the absolute interest rate costs of equalize because the Treasury has come in. But as I said we have seen 75% loan to cost, loan to value loans coming it, now being talked about in the 50% to 60% range, particularly on the part of insurance companies. As far as our average debt costs, you heard before we were in the 6.1, 6.2 range, all in at 2.1 billion, we reduced our borrowing costs on our line which is a LIBOR based cost by about ten basis points in recasting our line.

As I said, the issue today is really , if you don't have a lot of capacity on a short-term basis, on a short-term borrowing basis, you lack certainty. That was another reason, frankly, that in connection with looking at the public company deal and the view it had to be in all-cash deal, to get away from the issue of what was becoming a sea of red and having to deal with the value of currency. We did'nt want -- we did not want to use all of our capacity, which was very significant, or the bulk of our capacity in a a time of what I said before, dislocation and turmoil, certainly in the credit markets. We think we'll be better served than having that

Thank you.

You're welcome.

We go next to Steven Rodriguez, Lehman Brothers.

Good morning guys. I was wondering if you could talk about some of the drivers behind your higher operating expense group.

We looks at that pretty carefully. The quarter over quarter, year over year, quarter, second quarter, was about $3.4 million difference and that was particularly attributed to -- It broke down in a variety of areas. The repair and maintenance throughout the portfolio, this is a same-store basis, was $440,000. We had higher cleaning costs because of the unionization of cleaning throughout the entire region from Washington up through Stanford. That was also a similar number, about $440,000. Insurance was up slightly, about $300,000. There has certainly been discussion that insurance has stabilized. I think largely it has, but it is still going up. So that was $300. Various miscellaneous repairs, we had some HVAC repairs and boiler repairs and those types of things were another $500,000 or $600,000. We have decided because of the caliber of tenants that we have, to modify in some instances the level of on-site security personnel and surveillance. Our facilities to improve the level of service for our tenants and that costs 230 grand more than the same period last year. Just the association fees that in land where we have some ground leases like Plymouth meeting, which is Pennsylvania Real Estate Trust, the mall next door, things like that were about $200,000. And then just some very incidental, anecdotal expenses for window cleaning was about $130,000. Some total of all that exceeded $3 million that really is the difference. These differences fluctuate, they normalize, they equalize and in many instances they are recoverable under the leases. It is hard to look of a particular quarter and save it that is a fair snapshot. It is merely a snapshot in time.

The increased level of security is recoverable?

Largely, yes.

One last question. Could you tell us the releasing spreads on 101 Hudson on the space at ( Lemica)?

I guess I am talking to my tenant now, so I have to be careful. What I can tell you is -- let me put it to you in these terms. When we purchased 101 Hudson for $263 a square foot and we talked about replacement costs today and that we're really the only show in town, pretty much, down in the waterfront area, is approaching $400 a square foot, still a bargain compared to midtown which was 11 or 12 or $1,300 a foot to build. We underwrote the building of approximately $26 gross. We've recognized that the (inaudible) the statement was burning off and that taxes -- taxes, real estate taxes would move to market by about $1.50 to $2 more and the pilot programs, we have been doing deals in that building, averaging about $40 a square foot on a gross basis with about $12 of operating all in. And so if you look at the acquisition, which was only atwo and a half years ago, the way we underwrote it at the time was just sub 8% -- I'm sorry, it'e just sub 7%, it was 6.8% at the numbers I talked about, $26, $27 gross which would equivocate to about $16, $17 net. We have improved the bottom line significantly as a reflection of the rapid improvement in the market and the lack of availability and the fact that it is a premier asset.

Okay, Great. Thanks.

You are welcome.

Next question comes from (inaudible) Morgan Stanley.

Hi. Good morning. Can you please explain why the (inaudible) relatives of the compared to the last (inaudible).

I am going to ask you to indulge me and repeat the question. We had zero little bit of an audio break down. We just increase the gain. So could you repeat your question?

Right, could you please explain the voltivity in the relative (inaudible) explain the 2.7 million in 1Q.

I think your question is volatility in the real estate service income?

That is right.

And when you say service income, what are you referring to specifically?

The real estate service income. The real estate services.

Oh, okay, through the Gehl subsidiary?

Yes.

Okay, fine. If I look at the six months that we have reported, which we had revenues of about $52 million, and expenses of about 49 and change and it was in the second quarter and so while I'm sure that there is voltivity an operating income to the Company of almost $2.5million. And about half of that was in the second quarter and so While I'm sure that I am sure there is volatility as service contracts burn off, as leasing changes, we're doing third-party management contracts, for institutional owners, it appears at least at the moment that there seems to be a run rate evolving. If you looked at the six months versus the second quarter it's roughly half. And so I would acknowledge that there is volatility. We do some land management contracts. The construction company, of coarse something it's more full with contracts and sometimes it's not but it seems to be having a run rate somewhere in the area of 100 to 125 million a year with a couple percentage points as a profit margin. We are hopeful of being able to stabilize it at roughly this what I would can a run would call or run rate.

Thank you.

We go next to (John Votachec), (inaudible).

Hi this is actually (Frank Rivet). How are you re you guys doing? Congratulations, by the way on deciding to buyback stock. We agree that would be a good -- good use of capital.

Thank you.

My question kind of follows up on the expense line items specifically operating services. It sounds like maybe that was the line-item that captured that additional $3 million of expenses that you were talking about?

That is right. It's in the 16.6%.

Is that -- what do you think as far as -- the $3 million -- you named to a lot of things. How much of that is kind of recurring versus what would just just happened in the quarter and it won't be recurring?

Well first, you know again, I'll start with the premise that the areas that we think are continuing to increase in cost are real estate taxes and utilities. Those are -- those are items and issues that are outside of our control, partly in real estate taxes obviously being fueled by revaluations based on sales prices and it is hard to argue those cases although, of coarse we are doing it every day. Utilities, again, outside of our control and where we can hedge and where we can buy bulk quantities, we do that. Were we think there are favorable rates.Operating expenses, I mean labor costs are going up. I mentioned all of a line items before, but if you look historically, the full year for 2006, operating costs were up on the same store portfolio 3.4%. We had swings throughout the year. We didn't have 16.6% but we had substantial swings throughout the year. So my comment would be that based on 16.6, this quarter, 9%, next quarter, new leases where we have burned off (base) years and have recoverables, we will stabilize that substantially below that number throughout the course of the year. But I can't tell you exactly what that number is.

Thanks.

We'll have a follow-up from Michael Bilerman, Citi.

You talked about the same store and 3.2% on a gap basis and you talked about a bunch of one time items from 2006. If you net out those items and the lease termination fees which were down, you get -- What would the number be?

Given that when we report the same-store, we took -- we don't include lease termination fees and the other items that I spoke about wouldn't necessarily be in their.

So you've already taken out the higher expense recoveries, all the other items that you've talked about.

Recoveries have to do with the way we bill electric to the tenants, So that's been excluded both last year and this year from those so we can normalize it so you can get an understanding of what the real estate numbers are so it is already done.

Thinking about the back half of the year at your guidance implies about $0.84 to $0.88 in quarterly FFO , You had $0.88 this quarter, understand there is some margins have been three-quarters lower. But , can you sort o just walk us through what takes you from the low end to the high end relative to 2Q results which showed $0.88 or the higher end of your guidance? So I'm just kind of piece

Michael, first, I just want to interject, you look at the year over year on same-store, having removed those items, the cash increase in the second quarter of 2006 was half a percentage point and the gap was 1.9%. So you see that there is material improvement on cash NOI, particularly in the company. With regard to the item that -- the question you just asked, what affect that, the guidance obviously is the timing of commencement within two leases throughout the course and duration of the year and so we have done our best estimate of where we will be in terms of the actual commencement of leases by year end.

But what would cause a slowdown from the $0.88 from where you are today? I would assume that there is no -- If there is no one time item in this quarter's numbers, what would cause you to sort of decline to and $0.84 a run rate to get to the bottom of the guidance?

The timing of leases?

Was there any that rolled off in this quarter that has to be released up?

With the Merrill Lynch lease rolled off this quarter, and that was the significant role off.

And that won't start back till the beginning of '08.

Right.

Okay. Is anything on G&A? It was up to 12.9 million from 11 in the first quarter, can you talk a little bit about what is being expensed that caused that increase from what the expectation is for the back half?

I would just tell you it is fluctuations and anomalies, nothing in particular that I can point to.

Okay. And then just on the -- in your opening -- in your response to one of my questions you talked about an offer that was put forth by a hedge fund to take 75% of the equity to go and build spec. What kind of deal did they present? How much did the value creation did you think you can modify up-front or is it just the heavily promoted structure? How do you think about that?

The deal that was suggested from discussion to reality, sometimes is a long road, was a 13% IRR on invested capital, approximately 60 to 70. It will depend on the debt markets would be financed in the deal of the total cost. And then there would be a promote structure from 13 to 20. They get slightly more and it would equalize at 50/50, above 20% of IRR on a leveraged basis.

Are they actively doing this in other markets? What is the history of this? Are they actively doing this in other markets or I mean what's the history of this hedge fund?

There quite formidable. Interestingly, they are the capital source behind the repurchase of an asset that we sold three years ago or four years ago in another -- One of our non-core markets that we disposed of the assets in. They are credible, they're formidable, and also, in addition to the IRR achievement levels that I talked about, we would get all of the fee income. for development, leasing and management.

I thought Merrill will offer early in the quarter. When was the lease ending?

Was effectively the first day of the quarter.

So that's already out of the numbers. I am just trying -- I see your $0.88 is really would be a good starting point.

Again, it is timing. Timing is the issue here. If you want, we -- off line, we can try to go through it in more detail.

Right. Okay. Thank you.

A follow-up from Michael Knott, Green Street advisories.

Hey Mitchell. I am just curious if your philosophical point of view on the share buyback issue has changed from prior periods?

Philosophically, I think that we are in business to, as an ongoing enterprise, and we should not materially shrink our capital base and that our business is to allocate capital to the best opportunities which hopefully will be in the form of a real-estate going forward in one form or another. However I think that given the material dislocation within the industry as hole and the fact that we are trading an extraordinary discount to net asset volume, I would think my discussion with the Board that I will have hopefully next week , will -- that we should consider a moderate buyback program at this point in

Okay, that's helpful. And then my last question, could you just remind us of what your -- maybe your investment target is for Manhattan deals over the next 12 months or so and how you might view opportunities differently in midtown and downtown?

When I say midtown, we are really looking at the 38th Street, 39th Street, and seventh Avenue up to eighth avenue, in that area south, from that area south.. That, of course, would encapsulate lower Manhattan. The trading range in that area right now, you could almost print it, 4%, $500 a foot, give or take $500 a foot, 15 basis points. It depends on -- from our perspective, we want to do better. We want to be able to add some value in terms of the expertise, particularly if there's a fashion center or showroom type asset. Because I believe that Savitt and his organization has demonstrated the ability to deliver a whole new age, if you will, of showroom type buildings and to be able to integrate that with converting many of those buildings to pure office buildings or having a significant component of your office buildings to attract tenants, frankly that simply can't afford midtown rents. That is what has emerged in the high 30s in those avenues. But I said before that the precepts that we're operating under is we want to know that if there is market adjustment and all kinds of hedge funds that are occupying 125, or $140 a square foot space in midtown, are no longer there because of this intermediation of the crab market, we have something we can market as the best in class in those particular submarkets. We have passed on a lot of opportunities because we didn't think they were opportunities for us.

Thanks.

Next question, a follow-up from Jordan Sadler, KeyBanc Capital.

Quickly, Barry, did you mention what your expectation is for lease term fees for the rest of the year?

We don't necessarily estimate lease term fees, what we more do is we look the other income as a bulk item. We have been carrying $3 million a quarter, give or take, for that. That is where it falls out.

I would also add, Jordan, that our lease termination fees are likely to be a lot less than they could have been had we not sold three of the assets that we sold. We were very concerned about the early termination in three of those buildings.

Any insight on the expiring leases with the Citigroup downtown?

I met with the leadership of that component of Citigroup and they like it. They like the building, they like the location, they are completely -- and this was in June, they are committed to maintain their presence downtown. The dialogue has begun. They are still roughly 2.5 years remaining om the lease and so they're from hanging on to the least so they are deliberating. They think they have a bargain right now. They acknowledge that.

Last one for Barry, Barry, your commentary said -- there was as you mentioned a lease commission, was that recognized this quarter in real estate service income?

I was talking about the lease commission that we recognized in the same period last year, in 2006, It was related to a managed building. We did -- we renewed the lease for one of the tenants received that commission.

Okay, so that line item is $5 million this quarter, the run rate?

I guess that is, give or take a couple bucks. Real estate service income includes what we do for a third party property management and some joint venture property management as well some leasing commissions. I guess the one of thing that kind of varies in there is the commission is not necessarily very predictable. You could have -- it could go higher generally. So I think the number that's there within a million dollars or so is probably a good run rate.

And G&A was up this quarter a little higher than expected. Is that -- are they -- is there any relationship there?

Not necessarily. There are a number of small items that make up those differences.

But is 12 million or so, the run rate on that?

I believe so, yes.

Thanks.

You are welcome.

At this time we have no further questions. I will turn the conference back over to Mr. Hersh for any additional or closing remarks.

Thank you. I want to thank everyone for joining us on today's call. I hope you found it informative. We always enjoy having the opportunity to have a dialogue with the analysts and investment community. We look forward to reporting to you again next quarter. Thank you again and have a good day.

That concludes the conference. You may disconnect at this time.