Veris Residential Inc (VRE) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation first quarter 2008 conference call. Today's call is being recorded. At this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Good morning, and thank you for joining Mack-Cali's first quarter 2008 earnings conference call. With me today are Barry Lefkowitz, Executive Vice President and Chief Financial Officer, and Michael Grossman, Executive Vice President. On a legal note, I must remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the Federal Securities Law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the company. First, I’d like to review some of our results and activities for the quarter, and what we’re generally seeing in our markets. And then Barry will review our financial results, and Mike will give you an update on our leasing results. FFO for the first quarter of 2008 came in at $0.88 per share as compared to $0.86 cents per share for the first quarter of 2007. Our occupancies ended the quarter at 92.1% leased, down slightly from last quarter's 92.7%. Rents for the quarter rolled down slightly by about 0.8 of a percentage point compared to last quarter's 1.9% roll down. And once again, if we accept several of the larger transactions that we did, which we’ll talk a little bit about in a moment, such as Foamex in Media and a 15,000-foot deal in Elmsford, the rent would actually have rolled up by a half a percentage point, which gives us comfort that we've generally marked our portfolio to market.

Our TI and commission expenses for the quarter were about even with last quarter, within a penny, at $2.83 per square foot per year. And for the remainder of 2008, we face rollovers that are quite manageable, of just 4.6% of the base rent of the company or about $27 million. To talk a little bit about what we’re seeing in the markets, clearly the economics of leased transactions remains very competitive. The markets are generally sluggish, and leasing velocity, without question, has slowed. And while all of that’s happening, we continue to concentrate our efforts on keeping our properties well leased, and our leasing activity for the quarter totaled about 815,000 square feet. As we've stated previously on these calls, we knew we were going to face some sizeable lease expirations in this quarter, most notably, a full-building tenant at our Capital Office Park in Greenbelt, Maryland, that was the vacating of 164,000 square feet by Hewlett-Packard, and a few other larger transactions or larger move-outs that we were aware of and familiar with. But while the markets are clearly challenged, in the quarter Mack-Cali again outperformed with regards to the leased rates of our portfolio in almost every market that we operate in, including Northern and Central Jersey, Westchester, and suburban Philadelphia. And so we continue to maintain our competitive advantage through our high-quality properties and our high level of tenant service. Our leasing activity for the quarter did include some sizeable new leases, some positive absorption. Town Sports International leased an entire flex building at our Cross Westchester Executive Park in Elmsford, New Jersey. The lease is for almost 82,000 square feet, and it’s a 10-year deal.

I mentioned in -- anecdotally Foamex in Media, Pennsylvania, at our Rose Tree Corporate Center leased 43,000 square feet on an 11-year deal for its new headquarters. Aetna Life Insurance Company signed a seven-year, 42,000 square foot lease at our 3 Independence Way in Princeton Corporate Center in Princeton, New Jersey. And TYCO Telecommunications signed a five-year, 40,000 square foot plus lease for its worldwide headquarters at our Kembel Plaza II in Morris Township, New Jersey. In the property management area, four of our New Jersey properties will be receiving BOMA awards next month for Office Building of the Year, again, a testament to the asset quality within our portfolio. They include 101 Hudson Street in Jersey City, 343 Thornall Street in Edison, our own headquarters building, 4 Becker Farm Road in Roseland, and 23 Main Street in Holmdel, which is the Vonage headquarters. Our 50 Main Street building in White Plains will also receive a Best of BOMA Award for the Best CBD Curb Appeal. And next month our build-to-suit development for AAA Mid Atlantic at our Horizon Center Business Park in Hamilton Township, New Jersey, Robbinsville, will be the recipient of a New Jersey New Good Neighbor Award from the New Jersey Business and Industry Association, a brand new 120,000 foot building leased on a 15-year net basis. And so our company continues to be recognized for its expertise in property management and in development. A few other factoids that I'd like to mention that occurred primarily in the quarter and in this case, marketable securities extended to about a week ago. We sold our marketable securities -- I’m sure you've all seen that in our filings -- that we had purchased in a company that we have talked about on previous calls. We made about $0.5 million dollars on that investment, and we are no longer owners of any securities in that company. And I'd like to also provide a few additional points of interest.

You saw in the press release a sort of a headline indicating that there was a net income decline quarter over quarter, of about 19%. I’d like to clarify that that's primarily due to depreciation on 125 Broad Street, our New York Trophy asset in Lower Manhattan on a quarter-to-quarter comparison -- '08 to '07. I’d also like to set the record straight with respect to our recoveries and our margins -- our operating margins. They remain in the 60% range, as they have historically remained in the 60 to 62% range for all of our recoveries on operating expenses, real estate taxes, and utilities. Our other income categories include about $2 million in parking, about $700,000, plus or minus, in lease terminations, a little bit in tenant extras, some profits of about $400,000, and some miscellaneous small items, including payroll reimbursements that aggregate to about $1.1 million. Our G&A run rate is approximately $12 million, $12.5 million a quarter plus or minus, including all stock issuance and other expenses. With respect to cash flow, which is a metric that I like to talk about because at the end of the day, it’s pretty important, the quarter for us was about a break-even, and that's after having spent about $15.2 million between tenant improvements, leasing costs, and about $3 million in building improvements. If you add in amortization of intangibles and straight line adjustments, etc. the adjustments for CAD hovered at about $19 million for the quarter. And so we continue to evolve strong cash flow within the company.

Our cash NOI for the quarter was up just a shade under 3%, and so the discussions that we had over the last few earnings calls about reaping the benefits of collecting rent for leases that were done within the last year or so remains demonstrable within the performance of the company. And at this juncture, I’ll turn the call over to Barry and he can review our financial results and then Mike will pick up on our leasing results for the quarter.

Thanks, Mitchell. Our net income available to common shareholders for the first quarter was --for 2008 was $14.9 million, or $0.23 a share versus $18.6 million or $0.28 a share for the same quarter last year. Funds from operations available to common shareholders for the quarter amounted to $70.9 million or $0.88 a share versus $70.1 million or $0.86 a share in '07. Other income in the quarter included approximately $738,000 in lease termination fees. First quarter of last year had lease termination fees of about $117,000. Our same-store net operating income, which excludes lease termination fees, increased by 0.2% on a GAAP basis and increased by 2.9% on a cash basis, primarily for the reasons that Mitchell just enumerated in regards to leases previously done in prior years where we’re starting to collect the rent and out of the free rent periods and also for step up of rents that we have. Our same-store portfolio for the first quarter was 28.5 million square feet, and that was about 97.6% of our portfolio. We continue to have a large unencumbered portfolio of properties which total 238 properties aggregating 25.7 million square feet of space. This is about 87.7% of our portfolio. Currently our revolving credit facility has borrowings of $317 million outstanding.

At the end of the quarter, our un-depreciated book assets equaled $5.5 billion, and our debt to un-depreciated assets ratio was 40.8%. Our debt to market cap ratio was 43.5%. We had interest coverage of 3.2x and fixed charge coverage of 2.7x for the first quarter. We ended the quarter with total debt of approximately $2.2 billion, which had a weighted average interest rate of 5.8%. 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 our net income. Available on our website at www.mack-cali.com are our supplemental package and earnings release, which includes the information required by Regulation (g) and as well as our 10-Q. Mike will now cover leasing activity. Mike?

Thanks, Barry. As we anticipated, 2008 has so far presented our leasing teams with a number of challenges. Our lease rollover was heavily weighted into the first quarter, coinciding with a slowdown in leasing activity. Countering several large block expirations, our 815,000 square feet of transactions, included a high percentage of new business providing absorption to mitigate a portion of expiring space. We were therefore able to hold the decline from our year-end occupancy to 60 basis points, closing the quarter at 92.1% leased. This compares to 92.2% in first quarter 2007. It’s worthwhile to note that our leasing team achieved a 160 basis point increase in space leased in our Central New Jersey properties, an extremely competitive market. The transactions with Tyco and Aetna were a major factor in offsetting first quarter expirations, but sluggish recent lead activity in New Jersey indicates that this level of new business will be difficult to sustain. This quarter’s large block expirations brought down our retention to 36.1% of outgoing square feet, which is well below our average of 70% to 80% retention. Occupancy costs were held at $2.83 per square foot per year, virtually identical to fourth quarter of 2007, despite a much larger proportion of new lease transactions which typically entail more construction work. Free rent granted was also unchanged from 2007 at one month on average. Rent roll-down for the quarter amounted to 0.8%, underscoring that our existing rents are generally marked to market. Expiring square footage for the remainder of the year amounts to 4.8% of space leased and 4.6% of total rent. 2009 expirations amount to 8.7% of both leased square footage and rent. Space showing activity among our properties was mostly flat compared to the prior quarter, the slowing of activity in our Central New Jersey and Westchester markets.

Our major markets showed increases in Class A availability of up to 100 basis points according to Cushman & Wakefield statistics. An exception was Central New Jersey. A 1.9 million square foot former Lucent property was added to the region’s availability for the first time, despite being vacant while marketed to sale and redevelopment. This contributed to a nearly 400 basis point vacancy increase. Asking rents were generally flat across all our markets. Sublease space, which had a significant impact on our markets after the tech bubble burst and 911, has not yet become a factor. With the exception of a few small pockets, we haven’t seen much movement in sublease availabilities in either the broad markets or our portfolio. There is relatively little new construction, none at all that competes with our Suburban Philly, Westchester, and Connecticut portfolios. The first quarter leasing activity reflects a decrease over prior quarters, and we approach the remainder of the year with concern that business decisions have stalled as companies evaluate their future direction and space needs during this economic slowdown. Mitch?

Thank you, Mike. Before we open the lines to questions, I’d just like to address a few things. First of all, as you've seen in our press release filed this morning, we reaffirmed our guidance, expressed comfort with the net income and FFO per diluted share for the full year of 2008 in a range of $3.40 to $3.56 a share, that's FFO for the full year. And so in this very uncertain economic climate, we will continue to be cautious and focus on keeping our buildings well leased and effectively managed. As I've stated, our lease expirations and rollover for the remainder of 2008 is approximately 4.6% of our rent, and for 2009, it’s about 8.7%. So we've brought that down from double-digits and continue to manage effectively on a proactive leasing program. Largely our tenant base is pristine with respect to credit quality. That's not to say we don’t have our little problems here and there in certain industries, but with our strong balance sheet, we will certainly be able to comfortably navigate through this period of time. We will continue to monitor the markets for new opportunities and certainly be in a position to capitalize on opportunities that do arise. So with that, I would now like to open the floor to your questions. Operator?

Thank you very much, sir. (OPERATOR INSTRUCTIONS) Our first question today will come from Citigroup’s Michael Bilerman. Please go ahead, sir.

Good morning. It’s [Irwin Guzman] here with Michael. Can you update us on your posture regarding any potential acquisition opportunities? I know you previously discussed you expected some assets to come back to market in the New York Metro area, but that you were very cautious on the macro outlook. What’s your thinking there?

Well, as we’ve all seen, there’ve been very few trades occurring in the marketplace period, and liquidity is a very serious issue these days, and certainly the credit markets have largely been closed. So a lot of the symbolic-type transactions that might have provided some level of clearing price in the marketplace haven’t occurred. And so I think our posture is, at this moment in time, every dollar of liquidity is precious, and until we see evidence that liquidity can be restored or replenished, we’re going to be very, very careful. Having said that, we continue to look at the possibility -- and again, these are merely discussions at this point -- of continuing to divest or recycle out of what I would consider to be some non-core product that we have within our portfolio. We’ll see if sponsorship on the buy side can put their capital structure together. And we continue to look at a couple of transactions that would be equity-based -- OP unit-based transactions -- but obviously, we need to take into account the fact that the stock is trading relatively inexpensively or cheap at this point and be careful about our all-in cost to capital.

So we’re kind of on the sidelines. We are, you know, doing a couple of our build-to-suit developments. We’re a participant in a small spec – a 100,000 foot spec building that doesn’t require much capital in Parsippany and Morris County, where we’ve had an excellent track record of success. But in terms of acquisitions right now, we’re not your man.

Okay, and you mentioned the Hewlett-Packard building that went dark during the quarter. Are there any other large blocks of space for the rest of the year that you think might be a problem?

Yes. We have identified expirations over 20,000 square feet throughout our portfolio, and we have a pretty good sense of who is staying and not. And I would say that we have a couple of 75-ish thousand square foot situations, a few in parts of New Jersey where we’re reasonably comfortable at this point that we do have at least one tenant who is consolidating to backfill the bulk of that space. We have a situation in Parsippany with roughly a 75,000-foot transaction with Pfizer at our 5 Wood Hollow Road that we’re -- it’s a second quarter event, and we’re pretty clear at this point that they’re retrenching and that space is going to come back to us, and another 30,000-footer with Verizon in Greenbelt. So we have a very good handle on who’s out and who’s not, and it’s not really terribly extensive beyond what I’ve said now.

And those market assets – sorry. The assets that you’re thinking of selling, are those asset-specific or sort of markets that you’re trying to reduce your exposure to?

It’s both asset-specific, and it’s a flex portfolio that we don’t think incrementally adds competitive advantages for us. So, you know, and its all concentrated in one particular portfolio. So that’s something that we’re looking at, and it might happen/might not.

Okay. Thank you.

You're welcome.

And moving on, our next question will come from Jordan Sadler from KeyBanc Capital Markets. Please go ahead.

Good morning. Just following up on that last -- one of the last questions there on expectations for this year, Mitch. Do you think occupancy is downwardly biased if anything at this point?

You know, I think we’re going to see a sign wave, if you will, based on our best projections, and I think we’re going to end the year roughly where we are today. We should go through a positive progression based on some things in the pipeline right now. But I think, basically, we’ll be where we are at the end of the year based on what we know today. And I would tell you that given the environment out there, to finish the year with, you know, 92-ish% occupancy, strong cash flow, strong tenancies in what I have to tell you is one of the most difficult, murky markets I’ve seen in my career, I think is a pretty good way to end the year.

And when you say "difficult, murky," you’re referring more so to the capital market side, or has the tenant sort of leasing and demand for space seized up?

I think there is generally a paralysis in decision making on the part of corporate leadership. I think aside from the capital markets and the fact that the credit markets and the debt markets are frozen at this point, we have seen a notable slowdown. I think obviously the concern about Wall Street employment is an overriding impact in the market, obviously more so in the Manhattan-centric markets than other markets. But I think there is, right now, a lot of uneasiness in the corporate or the executive suites of companies in all different sorts of industries because of the fact that there doesn’t seem to be clarity about, you know, where we are going in connection with the tension between economic slowdown and inflation and the cost of energy and the cost of staples, like food, and the pressure in the housing industry and, accordingly, the pressure on the consumer. So there is a general tone in the marketplace, and I think I talk frequently enough to what I would consider to be the preeminent leaders in commercial real estate brokerage to be comfortable in saying – or, you know, at least make the statement -- that the tone right now is caution. The tone is that the market is probably going to be more to a negative bias than a positive bias, and so lots of decisions that are being put on the shelf right now.

Is the tone differentiated by market? Meaning, are the New York suburbs more negative than, let’s say, northern Virginia or up toward Boston?

You know, I guess it varies to some extent, but look, clearly Manhattan is under pressure. You can’t lose all the kinds of jobs that have already begun to unravel on the street and in financial services without suffering some pain. It’s certainly applying pricing pressure already, and it will put sublease space into the market, which will be a competitive set to any first generation space. There’s no question about that. We have continued to see a reasonable amount of velocity and strength in Jersey City and, again, that is both a quality of life and the fact that it’s a validated market at this point with tremendous infrastructure. And it’s also a half to a third of the cost of certainly Midtown, and that’s becoming really very important, as I predicted it would be over many of these calls, given the write-downs and the losses that have been taken on the street and in the banking industry. So I would say that that’s -- the Manhattan-centric market is probably the most exposed at the moment, but there have been issues, you know, again, surrounding the pharmaceutical industry where they’ve slowed down their expansion, I would say unilaterally. And the consumer spending is beginning to kind of work its way and infiltrate in the thinking and the embedded thinking of corporate leadership. So, you know, not trying to be too gloomy here, but we have seen a noticeable slowdown in traffic, probably in all of our markets, from a year ago. No question about it.

That’s helpful. Thank you. My last one is just on a housekeeping item. I noticed Morgan Stanley moved down your top ten list, as measured by annual base rent. It was about $9.5 million of annualized-base rent from them on the fourth quarter supplemental, and they’re now $6 million of annualized rent despite having done additional lease and increased space. Any comment on that?

Yes. Their renewal rent in Harborside kicked in, and it’s net, it’s a net rent. So, you know, you need to add something like $12.00 a square foot for the operating expenses if you wanted to equivocate.

That’s helpful. Thank you.

You’re welcome.

Our next question will come from Stifel Nicolaus, John Smith.

Actually, John Guinee here. How are you?

Good, John.

Hi, Mitchell, nice job.

Thank you.

Can you, on page 32, 11 million square feet of development rights and then your JVs, can you just spend a few minutes kind of bringing us up to speed on any activity on either your land positions and/or your joint ventures?

Yes. Right now we have under construction the Wyndham Worldwide Headquarters, which is the first of what is expected to be a two-phase project that’s in Morris County in Parsippany. Phase I is a quarter of a million feet, almost the same size for Phase II should it come to pass. We have a joint venture project with JPMorgan, also in Morris County in Parsippany. It’s a 100,000 foot spec. We’re building it through our Gale subsidiary. And so we have fee income, we’re the managers, we’re the leasing agent for the property, and we own about 8.3% of the equity. We have signed a lease with Sanofi-Aventis for what we call "Pad 4" in Bridgewater, and that’s a 204,000 square foot fourth building of a complex that SL Green/Gramercy owns. Our participation is -- in this 204,000 square foot expansion, we’re 50/50 with SL Green. So that should commence relatively imminently. It’s a 15-year net lease.

And we are in very early discussion with a non-inventoried piece of ground that’s not in the schedules with another pharmaceutical company. I met yesterday with our Gale team to talk about a project which would be the second project done for a particular pharmaceutical company. So those are sort of what’s in the pipeline, what’s in the discussion arena right now. The remainder of the land inventory at this point is generally fully entitled. Where necessary, we’ve employed or installed infrastructure so that we’re protected in terms of, or about as well protected as you can be, from regulatory changes and preserving our entitlements. But at this point in time, other than that one spec in Parsippany where we’ve seen enough velocity for, you know, really high quality type space, and given our limited exposure, we’re comfortable proceeding with it.

Everything else at this point is, you know, not being built. We are of course a 15% partner in the Filene’s redevelopment up in Boston, which is a joint venture of Vornado, JPMorgan, us, and Gale International. That’s in the early stages. It’s a 1.25 million square foot mixed use development, office, retail, hotel, and condominium. But we’re kind of, you know, sitting on the sidelines. We’re being fiscally responsible, and we are poised to develop quickly with high quality product in great locations as the markets recover, and they will, in fact, at some point recover.

If you were to assign values for these entitled parcels, is it $10.00 a foot or $50.00 a buildable foot?

Well, to some extent it depends on what the parking component is and whether you have to replicate land with structured parking. But I would tell you that my best estimate is if you used an average across the board of $30.00 to $35.00 an FAR, that would a reasonable representation of value. And so, you know, 11 million feet at $30.00 or $35.00 is a fair amount of value.

Thank you very much. Great.

You're welcome.

And moving on, we will hear from [Sloan Bohlen] from Goldman Sachs. Please go ahead.

Hi, you guys. Mitch, I’m just wondering if you could give us a little background on your decision to sell your stake in marketable securities. I know you’ve talked before that it was potentially a strategic, you know, competitor of yours. Is it just on valuation that you sold it, or was the competitive nature of your idea kind of played out?

Well I, you know, haven’t had a tremendous amount of success in engaging or, let's say, getting their attention. You know, it was as I said -- in my view having a small position entitled us to, or sort of, you know, entitled us to a seat at the table. But, you know, we accumulated the stock over a number of months, and it didn't seem like it mattered if we owned it or we didn't. And there were continually questions and speculation about which company it was and, you know, what the meaning behind it was. And not unlike what we did once before, when the stock showed a profit and the REIT market began to recover, we sold it.

Okay. And just along, I guess, different lines, you know last quarter you repurchased shares, and this quarter you decided not to. Could you just give us an update on where that falls in your, you know, level of capital deployment?

You know, we still have a remaining authorization to repurchase shares, but as I said before, until there is clarity with respect to the credit markets and the debt markets and the availability to replenish capital within the company, we're not going to do much of anything, and that would include buying back stock. We have the ability, in my opinion, with our balance sheet strength and all of the other attributes that factor into balance sheet strength to, as I said, navigate through a very difficult period of time. I don't know how long this is going to last. More recently there seems to be some indication that the credit markets are -- at least for investment grade rated unsecured paper -- beginning to open up a little bit, although the spread is fairly high, and there hasn't been a lot done there. But there needs to be more clarity on being able to replenish capital within the company before we’re going to spend what our capacity is.

Okay. Thank you, guys.

You’re welcome.

Now, UBS, [Jamie Feldman] has our next question. Please go ahead.

Thank you very much. Did you guys say what your leasing spreads were for the quarter?

Yes, I did. I went through the -- it was 0.8%. And then I said if you took out a few of those deals like Foemex and one 15,000-footer in Elmsford, they actually would revert to a positive 0.5 percentage point.

Okay. I had missed that. Thank you.

You’re welcome.

So, if you look at, I think last quarter when you laid out the guidance, you also gave some assumptions, and one of them was that occupancy would recover after the first quarter decline. It sounds like now you’re saying occupancy is going to stay flat. Can you just walk through what your current assumptions are or your revised assumptions are in terms of occupancy, same-store growth that underlie the guidance?

Yes. We had -- and again, this is really for a mid-point case -- that leasing activity for the last nine months of 2008 would be about 1.5 million feet versus lease expirations that are scheduled of 1.3 million for that same period. So, you know, we’re anticipating somewhere around where we are today -- 92% to 92.5% by year end, plus or minus. I mean, like I said, it’ll be a bit of a sign-wave throughout the remainder of the year, and that’s based on how we feel about velocity we’re seeing in the market today. And we’re pretty comfortable with our mid-point guidance based on those estimates.

Okay. And then in terms of the same-store growth?

Yes. I think that, you know -- yes, I think that from a cash perspective, as we indicated before, we’re reaping the benefits now of contractual rent increases that we have that are fairly significant on an annual basis over the next three or four years, coupled with the fact that we’re collecting rent on leases that were done over the last year or two, burned out of free rent periods, etc. etc. And so what that says is that our cash and OI growth hopefully will be sustainable in this area. If you look at the full year ’07, actually it was just under 5%. Of course it went through cyclicality quarter to quarter, but it averaged 4.9% over the year. So I would say looking at this quarter, 2.9% is probably reasonably sustainable. We should be in that zone, from a GAAP perspective, probably a lot less. I mean it was only 0.2%, and that’s simply because averaging the rents over the lease terms when you’re doing less leasing is less of a factor. But right now, frankly, I’ll take the cash.

Okay. And then in terms of the leasing markets, certainly you suggested there is real weakness. Can you talk a little bit about what you’re seeing in terms of TIs, (inaudible) markets, and then free rent and other concessions?

Yes. They haven't changed markedly. Again, that's a little bit sub-market specific. From our perspective it’s -- the Philadelphia Suburban markets have -- concessions have increased a little bit. Princeton hasn't been a real strong market. But I think, generally speaking, it’s not a matter of concession so much as it is a matter of tenants making affirmative decisions. So I think the economics are competitive, but the TI packages and the free rent, the concession packages in aggregate are not really increasing, and you can see that because our leasing costs are within $0.01 of what they were last quarter and historically have been in that zone. I think leasing costs for the year of '07, averaged $2.72. We had some spikes as high as $2.98, and this quarter we’re $2.83. It's just a matter of decision making, and I think the economics should remain about flat.

Jamie Feldman - UBS And then finally, you mentioned Pharma and financial services as real weaknesses. Are there any sectors that maybe are doing better.

Mitchell Hersh Yes. I think we continue to see some positive strength in the insurance industry and asset management, where there are serious cost-of-occupancy issues. We continue to have, I would say, a reasonable level of traffic in both Morris County and of course the Waterfront from the insurance industry, and the same thing for asset management. Those are probably the two strongest sectors. Obviously financial services, banking is pretty soft right now.

Thank you very much.

You're welcome.

And our next question today will come from [Green Street Advisors], [Michael Knott]. Please, go ahead.

Mitchell, question on the leasing costs for the quarter. They were about the same as last quarter, but the rents associated with those leases were about $4.00 lower, it looks like. Can you help me with the interpretation of, doesn’t it seem like this quarter’s leasing costs were bigger as a percentage of the underlying economics?

Well, I’m going to pull out – because I want to see the composition of the $4.00 number that you’re referring to.

That was a little under $22.00 this quarter for the weighted average base rent compared to about $25.50 or so last quarter?

Okay. Well, again, I am looking at the -- I think you have to look at the composition of what’s involved. I mean, you have to segregate the flex properties from the office properties. The office weighted average -- and I don’t know what it was last quarter, but it was 26.52 this quarter, and the flex properties are 14.76, and the flex is a little bit weaker which is one of the reasons, frankly, that I am entertaining the notion of selling part of our flex portfolio if I can get the right valuation out of it because it’s a little more subject to cyclicality in the marketplace.

Is that an active discussion or process?

Yes, it is. It is. It’s a matter of the buyer -- who has in fact been a very good buyer from us in the past - is working to put their capital structure together. And in today’s world of capital structures and the -- there will be a leverage component. And they’re working on putting that together. They’re a reputable firm. They have certain strategic reasons why they want to do this deal, and we’ll see, but it is active.

And that would be for the entire office flex portfolio?

No, for a part of it.

Green Street Advisors Okay.

Anything else, sir?

Green Street Advisors Yes, one last question. Did you mention any prospects for releasing the HP space at Capital Office Park?

No. We have an agent down there, as well as our own resources. Weve shown it to a number of space-showings, a considerable number of space-showings. I would say that probably the largest is probably in the 20,000- to 25,000-foot range, so we're clearly breaking up the building to release it, but it hasn't been a high velocity or high demand right now. But all the things that the GSA is saying about expanding in Prince George’s County are the right things, so I would expect that we’re going to continue to see some opportunity there.

Green Street Advisors And then, Mitchell, I know the last couple of quarters you’ve talked about being very cautious with respect to allocating capital. Are you still looking in the garment district with the partner you had lined up with some time ago to look for opportunities? Has that been put on the back burner?

I would tell you that we communicate regularly and -- but I have to tell you again, until there are clearer signs about liquidity and the credit markets and some level of trading to evolve a clearing price, I don’t see anybody doing anything. And I think, again, we are where we are -- which I think is a very good place. And the things that we haven’t done over the last couple of years are some of the best things because there’s been a huge level of overpaying with aggressive underwriting, and that’s no secret to you. So I’m pretty comfortable with where we are.

I hope that this is not too long or too protracted a downturn, but it’s a pretty serious downturn in my opinion -- very much unlike the last few that we’ve seen, and in particular the early 90’s when the RTC was formed because this is a multi dimensional problem, as I expressed before, that involves the consumer which of course involves all sorts of different industries from automobiles to housing to retail sales, coupled with the weak dollar and the credit markets that are generally unlocked at this point -- or locked up rather at this point. So I just think that this is a time to be extremely careful and extremely cautious and shepherd every dollar of liquidity that the company has until there are clearer signs.

Well said. Thank you.

You're welcome.

Now we will hear from [Chris Haley] from Wachovia Securities. Please go ahead.

Good morning, Mitch. Chris Haley.

Good morning.

I was interested in your observations between the New Jersey markets and Philadelphia submarkets over the last 30 – I mean 90 to 180 days, particularly in light of where concessions might be, and also taking into account the changes that have occurred in the financial securities market which would lead me to believe that New Jersey would be greater impacted than that of the suburban Philadelphia markets. Can you give us a sense why you made the comment that Philadelphia seems to be a little bit more competitive than it was regarding inducements?

Well, first of all, in New Jersey I think notwithstanding the foibles and issues surrounding New Jersey, and how and if New Jersey advocates for business or not, it’s still in my opinion a very deep macro economy that draws from a variety of different sectors. And if you look at our filings and you look at our tenant diversity, you can see that securities and financial services represent less than 20% of our income stream. As surprising as -- and I admit that that’s surprising on the surface given our proximity to New York City, which aside from tourism and foreign capital is primarily a financial services market, being the financial capital of the world. And so we have seen not a lot of deterioration because of the diversity in the marketplace in New Jersey. In Philadelphia, at least in certain submarkets -- and I’m only speaking from our exposure, but I’ll tell you that the first building that I bought in Philadelphia was in 1976 in Plymouth Meeting, so I’ve got a little experience there. And I know that it’s a marketplace that has fewer barriers to entry than New Jersey, so new supply has always been a problem in suburban Philadelphia. And if you look out as far as [exden] you can see that. And then if you couple that with some of the newer issues that surround business incentives and the KOZ zoning etc., etc., those impact the markets and create a tension between the CBD and the suburban markets.

And the pharmaceutical industry has been a very significant player in a number of submarkets that at least we participate in, including Blue Bell in Philadelphia. And there’ve been a lot of changes and paradigm shifts in those industries, including the fact that Merck, who is a large tenant in the marketplace, built the campus, and they withdrew a tremendous amount of leased space, and that put a lot of pressure in that particular market. So our experience has been it’s more of a cyclical market. It is exposed to potential new supply, unlike the majority of the markets we operate in in New Jersey that are much more barrier-constrained. And as I said, surprisingly we’re not as concentrated in financial services as one might imagine, and the numbers bear that out, both in terms of MSA penetration and sector diversity within our portfolio. I think at the last earning’s call, I talked about the fact that only about 0.8% of our rollover for 2008 was -- or even less than that, was in financial services, and for 2009 it’s up 2%. So we’re not really exposed, and, you know, most of our tenants, I mean you look at the list, are top credit quality tenants. I mean, you know, these are the majors, and so that’s what I can offer, Chris.

Just a follow-up. The rate of change in vacancies may also be driving concessions higher. Is that an accurate statement that the rate of change in the major New Jersey markets has been less than the rate of change in vacancies in the suburban Philadelphia markets you’re in?

Well, you know, Central Jersey has had a pretty good gain. Northern New Jersey was down about 100 basis points, as was suburban Philadelphia. But in Central Jersey on the gain in vacancy, you have to factor in probably the single largest gain is in Holmdel, New Jersey, which was a Lucent-- or is owned by Lucent. They had a deal to sell it to actually a Philadelphia-based company, it was under contract. It’s a couple million square feet. It was designed originally by Eero Saarinen. And the acquirer, the contract purchaser’s goal, I think, was to get it rezoned to residential. And aside from the residential market being under a lot of pressure, I don’t think that the community was supportive. And so insofar as, at least it’s been reported in the press, that contract is no longer in place. I think there’s litigation between the former contract purchaser and Lucent. But from Tordo Wheaton and Cushman & Wakefield, they’ve now taken that several million square feet and put it back into the marketplace as inventory. And so that threw the number up from -- I don’t know what it was, but it was probably, again, 100-type basis points down to 4.3% up give or take.

Okay. That’s a helpful color, and clearly sideways is being viewed positively right now. So continued success.

Thank you.

And our next question will come from [David Cohen] from Morgan Stanley. Please go ahead, sir.

Good morning. Just wanted to follow-up on the flex portfolio sale. If everything, you know, happened as you hope it will, can you just talk a little bit about pricing and how would that would look versus maybe early ’07, late ’06 levels, and are there any occupancy issues that may kind of when we see that number, may shift it?

David, with all due respect, I’d rather not get into that level of detail at this point. Again, these are discussions that I’ve been having over the last several months, and I don’t want to be misleading about it. I mean I think I have an interested buyer who has certain strategic reasons and will pay us a fair price for that portfolio, but they are in the midst and they’ve got a great track record, so they tell me they can do it. I believe that they can, but they’re putting together their capital structure which involves or includes debt and that needs to be, it’s in the process of being underwritten. And I’d really rather not kind of give the market a signal as to valuation until we’re further entrenched in the process.

Okay. Can you talk maybe a little bit more generally then about just office and flex assets that you’re seeing on the market and what you might be seeing in terms of cap rates and price per foot?

Well, I will tell you that the replacement cost of high quality suburban assets, you know, campus type three- and four-storey granite clad assets are somewhere in the $250.00 to $275.00 a square foot range, with very little structured or under building parking, that’s primarily surface parking. So that gives you a sense of at least replacement cost as a metric. I would tell you that cap rates, there just haven’t been any trades. That’s not to say that there haven’t been sellers that brought product to market. I still get e-mail blasts from investment sales brokers every day. But there is just no backlog of buyers at this point because largely the leveraged buyer has evaporated from the marketplace. There’s too much bad news and bad sentiment out there for anybody to try to put together aggressive or optimistic underwriting, and so there really haven’t been any trades. I still -- having said all that, I still think that cap rates, given the quality of assets that at least we own in places like Jersey City -- are still in the plus or minus 6% range. I think it will cost us -- if we hopefully in the not too distant future, especially given the cost differential with Manhattan, get an opportunity to build -- it’ll cost us $4.25 a foot all-in, plus or minus depending on final TIs and etc. etc. And we bought the 101 Hudson Street February two years ago for $262.00 a foot. So those, you know, those are the metrics that I think are important.

The suburban stuff, I think replacement cost is probably the only thing that you can look at that’s real right now because there just simply haven’t been any recent trades. And it’s really a question of, you know, if you say it’s a 7% cap rate, is that 7% on stabilized income or is it 7% on hopeful income? So it’s a very difficult market right now. It’s my view that while perhaps there won’t be "blood in the streets," although there might be, we are in the most illiquid environment that I have seen since 1990/91.

Okay. And just moving to the service income businesses, given the environment that we’re in, I mean should we expect construction services and real estate services to decline? Have you guys changed your internal, I guess, budgets for those businesses?

Absolutely have actually done some level of restructuring to become a lot more cost efficient and have a lot more efficacy in the bottom line. Saw this coming, took some steps -- at least to some extent saw the difficult environment coming as you know, as we’ve talked about. Some would say too pessimistic, but here we are. And we took some steps, and I took some steps beginning six or eight months ago with some of the service businesses to kind of change the shape of them and refocus them to eliminate any exposure where possible -- not only from an overhead perspective, but also from a default or delinquency perspective. And so that includes doing a lot less third-party construction, unless it is properly secured and we understand who’s paying the bills type of thing. We sold our complete interest in the facility service group to Newmark Knight Frank, made a couple million dollars on that because, at least from our perspective, it wasn’t particularly additive. It was very labor intensive and global in nature, and so we had different jurisdictions to deal with in terms of taxes and those sorts of things. So I think where possible we have altered our business model to become more efficient and take less risk in this environment.

And where would you expect kind of a full year income level to be for that business? I understand it probably-

You know, I mean, this year it’s still going to do $100 or $120 million, but of course some of that is ours so to speak. It’s captive, it’s the Wyndham Worldwide, and it’s a lot of tenant work in Mack-Cali owned buildings, whether they’re the Gale Division or not. So I guess if you strip all of that out, the business is doing probably 40-ish, you know, outside of it, but that I think will diminish over time, and we will be become more of a manager and a construction manager, and less of a constructer because the margins have narrowed. There’s a huge level of competitiveness in the marketplace. A lot of these jobs now require bonding and -- particularly if they’re public, they all require bonding -- and there’s razor-thin margins. And frankly in a turbulent, difficult environment, I don’t want to be exposed to the credit risk. You know, if they’re our tenants, we’re perfectly comfortable with them, but if we don’t have a strong relationship or a track record, I’m less comfortable. So we are, I would tell you, submersed in the process of risk management, risk assessment, and risk aversion at this point in the cycle.

Okay. Just a last question for Barry. Can you just talk about the utilities -- spiked up a couple million dollars this quarter, what was that?

You know as we’ve seen over the last couple of years with the onset of deregulation in the marketplaces, we continue to and with the energy markets being what they are -- we continue to see increases in our utility costs, the bulk of which are paid by the tenants. Just like you see the cost of gasoline at the pump going up, we’ve seen similar increases in electric costs.

Is this a better run rate?

You know, it’s hard to say because for a lot of our electric we pay rates that are tabulated by the hour, so it’s like saying, do you know what the price of gasoline’s going to be next week at the pump? It’s kind of gotten to that, where there’s not a lot of visibility on a long-term basis. We have a general sense of direction. We continue to see these things increase in cost, but don’t have a good understanding of what they’re going to be except by an hour-by-hour basis.

I’ll just give you an anecdotal comment on the cost of energy. I happen to be on the State University Board with the President of a very large utility, and at a Board meeting two weeks ago, he told me that from the residential side that their receivables are $30 million higher than they were a year ago. So you can get a sense of what’s occurring in the consumer-driven marketplace, and somewhere along the line if that continues, that’s going to migrate to more costly energy for the commercial markets because the pockets are deeper.

All right. Thank you.

You're welcome.

Gentlemen, it appears there are no questions at this time. I would like to turn the call back to you for any additional or closing remarks.

Well, I want to thank all of you for joining us on today’s call. I know it was a little bit somber, but at least this company is well positioned to move through these difficult markets. We certainly look forward to reporting to you again next quarter. Have a good day. Thank you.

Thank you, everyone, for your participation. That does conclude today's conference. Have a great day.