Veris Residential Inc (VRE) 2008 Q2 法說會逐字稿

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

Thank you. Good morning, everyone and thank you for joining Mack-Cali's second quarter 2008 earnings conference call. With me today are Barry Lefkowitz, the 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 to 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. And then Barry will review our financial results, and Mike will give you an update on our leasing results. FFO for the second quarter of 2008 came in at $0.93 per share, as compared to $0.88 per share for the second quarter of 2007. Despite the market's overall sluggishness, I'm very pleased to report that we had a good quarter with respect to our leasing accomplishments. We had 1.3 million square feet of lease transactions, and as a result, our portfolio ended the quarter at 92.3% leased, up from last quarter's 92.1%. Rents rolled up this quarter by 6.5%, compared to last quarter's 0.8% roll downs with roll ups in almost all of our markets, a reflection of the fact that as we projected, our portfolio has essentially been marked-to-market.

We also managed to keep our leasing costs low with tenant improvement and commission expenses for the quarter at $2.86 per square foot per year, in line with last quarter's expenses of about $2.83. For the remainder of 2008, we face rollovers that are very manageable. About 2.6% of our base rents were less than $16 million. Unfortunately, however, we continue to face challenged markets and we don't necessarily think that we've seen the worst of this economic downturn. And so we expect leasing transactions to remain very competitive and we will certainly continue to concentrate our efforts on keeping our properties extremely well leased, and extremely well maintained.

Our portfolio continues to out perform in most of the markets where we operate with lease rates exceeding market averages in Northern and Central New Jersey, Westchester, suburban Philadelphia and Washington, D.C. And so we're pleased that even in these challenging times and challenging markets, we can maintain our competitive advantage and our market leadership, a testament to the strength of our franchise and our human capital. Some of our notable lease transactions during the quarter included a three building lease transaction, totaling over 138,000 square feet, with a global engineering company. This involved both a renewal in Hamilton Township at our Verizon Business Center, and new leases for two of our office buildings at Morristown Corporate Center in Morristown, New Jersey. Including a seven-year lease for an entire 75,000 square foot building. We leased 101,000 square feet to Tullett Prebon, a major market broker dealer at 101 Hudson Street in Jersey City. The deal included a 63,000 square foot 12-year lease extension and a 38,000 square foot, 15-year expansion. We also signed a new 10-year lease for 60,000 square feet with DMJM + Harris at our 30 Knightsbridge Road complex in Piscataway, New Jersey. So we made tremendous progress in reletting the AT&T acquisition properties.

More recently, we announced another significant transaction with Arch Insurance Company, who leased over 106,000 square feet at Harborside Financial Center Plaza 3 in Jersey City. This is a lease that carried the term of 15 years and was a very interesting transaction in that it involved the buyout of certain leased space to AICPA and resulted in a very significant positive economic transaction for Mack-Cali. In the property management area, during the quarter, five of our properties received BOMA awards from the New Jersey and Westchester chapters of BOMA. And our build-to-suit development for AAA mid-Atlantic, again at Verizon Center Business Park in Hamilton Township, received a New Jersey New Good Neighbor Award from The Business and Industry Association in honor for design excellence and the creation of employment within the community. And so we continue to be recognized for our expertise in property management and development as well.

And now I will turn the call over to Barry, who will review our financial results for the quarter. Barry?

Thanks, Mitchell. Net income available common shareholders for the second quarter of 2008 was $18.3 million or $0.28 a share versus $51.1 million or $0.75 a share for the same quarter last year. For the six months ended June 30th, 2008, net income available to common shareholders amounted to $33.3 million or $0.51 a share, as compared to $69.7 million or $1.04 a share last year. FFO available to common shareholders for the quarter, amounted to $75.2 million, or $0.93 a share, versus $73.2 million or $0.88 a share in '07. For the six months ended June 30th, 2008, FFO available to common share shoulders was $146.1 million or $1.81 a share, versus $143.4 million or $1.74 a share in '07. Other income in the quarter included approximately $141,000 in lease termination fees. Second quarter last year had lease termination fees of about $873,000. And for the six months of the year, termination fees totaled $879,000 as compared to $990,000 in '07.

Same store net operating income, which excludes lease termination fees increased by 0.7% for the second quarter of '08 on a GAAP basis and for the six months increased by 0.8%. Same store net operating income on a cash basis increased by 1.4% for the second quarter of '08 and for the six months increased by 2.6%. Our same store portfolio for the second quarter and six months was 28.5 million square feet, which represents about 97.6% of our portfolio. Our unincumbered portfolio at quarter end totaled 239 properties aggregating 25.8 million square feet of space which represents 88.3% of our portfolio. Currently our short-term bank borrowings are about $320 million.

At quarter end, Mack-Cali's total undepreciated book assets totaled $5.5 billion and our debt to undepreciated asset ratio was 40.6% and debt to market capitalization ratio was 44.5%. We had interest coverage of 3.4 times and fixed charge coverage of 2.9 times for the second quarter, an interest coverage of 3.3 times and fixed charge cover of 2.8 times for the six months ended June 30th, 2008. We ended the quarter with total debt of approximately $2.2 billion, which had a weighted average interest rate of 5.74%. We have adjusted upward our 2008 guidance to $3.59 to $3.69 per share. Our mid-point case assumes the expected recognition in the third quarter of approximately $7 million or $0.09 a share of lease termination from a tenant Harborside Financial Center Plaza 3, which space was simultaneously leases to Arch Insurance for 15 years. Lower short-term interest rates, and leasing starts of about 700,000 square feet for the remaining six months of the year versus scheduled expirations of a similar amount.

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 measures are relevant and reconcile them to net income. Available on our web site at www.Mack-Cali.com, are our supplemental package and earnings release, which includes the information included by Regulation G as well as our 10-Q. Now Mike will cover leasing activity. Mike?

Thanks, Barry. Our 1.3 million square feet of leasing activity in the second quarter brought us to a total of 2.1 million square feet year-to-date, which is in line with the same period last year. We saw 158 transactions during the second quarter, of which 80% were for leases of 10,000 square feet or less. In spite of the turbulent economic news and stagnant market conditions the leasing teams and the outstanding relationships we developed in the business and brokerage communities have yielded positive results. Occupancy gains in our central New Jersey portfolio contributed to a 20 basis point increase in space leased, and as a result, we finished at 92.3% for the quarter. Leasing costs per square foot per year remained in line with last quarter at $2.86 and we retained 70.3% of our outgoing space. 2008 remaining rollover is 728,000 square feet, representing 2.6% of our leased space.

Second quarter lead activity was below first quarter levels by about 13%, with fewer tenants in the market, the competition for the deals remains fierce, given the current economic climate, future space needs are more difficult to define and in many cases cause prospective tenants to request for flexibility in lease structure. This adds another layer to the process for the slowing lease commitments and making negotiations a little more complex. Quarter to quarter, vacancy races and asking rents in our market showed little movement. Northern and central New Jersey were virtually unchanged from March 31st levels. The largest vacancy rate changes occurred in suburban Philadelphia with 100 basis point reduction and Westchester County New York with 90 basis point reduction. Year-over-year, the combined Northern and Central New Jersey vacancy rates have increased by 220 basis points as discussed last quarter, a major factor in the central New Jersey market was addition of the former 1.9 million square foot Lucent facility in Monmouth County. This space is not being presented as the typical sized user, but the remaining additional vacancy represents more competition with fewer tenants we are seeing in the markets.

Vacancy rates in our suburban markets are either flat or down slightly from this time last year. Regardless of vacancy rate fluctuations, asking rents have held steady or increased slightly in all of our markets. So far, we have seen only minor changes in sublease space availability both in our own portfolio and throughout our suburban markets. As Mitch noted, we are pleased with our second quarter leasing results, and maintain a cautious outlook for the rest of the year. We still face significant competition for tenants and uncertainty in the business climate but are working diligently to maintain our dominant presence in our markets.

Mitch?

Thank you, Mike. As I like to do when we meet up on these calls, provide some what I call factoids about some of the metrics that affect our company and our performance.

For the second quarter, I would like to reiterate our same store, which on a cash basis was up 1.4%. Generally, from the expense side of the equation, we have seen favorable expense reductions in most areas with the notable exception of utilities where energy costs continued to spiral as a result of the global issues surrounding the cost of oil and related products. And so we are continuing to be challenged with respect to maintaining efficiency in the cost of energy and, of course, a large percentage of that cost increase is paid for by our tenants. And so we ended the quarter at 92.3% leased with a cad payout ratio of under 96%. And so for the quarter, we were actually cash flow or free cash flow positive by about $2 million, a very favorable result after spending about $18 million on tenant improvement work, commissions and some building improvements. And so we view that as a real positive.

Looking at the rollover picture going forward, as I mentioned in my remarks, we have about 2.6% or about 700,000 square feet, 2.6% of our annual base rent remaining to roll over for the remainder of 2008. Next year in 2009, that figure is about 8.4% of our base rent or about 2.2 million square feet. We continue to benefit from annualized contractual rent increases. The remaining six months of this year, we have increased on annualized basis of $2.8 million and next year, about $7.7 million in similar amounts moving into 2010 and 2011. We had what we view as a very positive quarter from an earnings perspective. We have maintained a very well leased portfolio. We had some increases in joint venture income.

We've lowered some of our G&A costs, and gained more efficiency in some of our divisions, particularly our construction division, where we've moved more to a construction management model. We had lower interest costs and we had about $0.01 gain from the sale of the notable marketable securities that we have talked about frequently on this call. As I mentioned again during my remarks, we believe that generally we've marked our portfolio to market. We have benefited quite nicely from what has proven to be a very active market along the Jersey waterfront, and done some creative transactions as well as a result of excellent tenant relationships and a very diversified portfolio with important infrastructure, engineering firms like Shaw Facilities And so with all of that, I would just like to reiterate that we will certainly continue to maintain our focus on keeping our buildings well leased and well maintained.

We believe at some point in this economic environment, particularly with the restrictions on debt capital, there seems to be none available in the markets, that there will be some opportunity moving forward, but quite frankly, we've yet to see any market clearing prices as a result of very limited transactions and trades in the market place. And so while the credit markets in general remain paralyzed, we at Mack-Cali maintain a very strong balance sheet. We have a very high credit quality tenant base, which is ever so important, particularly in difficult economic times and so it is with a high degree of comfort that we feel we will be able to comfortably navigate through this period of uncertainty and economic down draft and clearly, we'll be able to capitalize on opportunities when they do arise and at some point, clearly that will happen.

And so with that, I would now like to take your questions. Operator, would you arrange for that, please?

Thank you, sir. (OPERATOR INSTRUCTIONS). We'll pause for just a moment to assemble our roster. And we'll take our first question from Michael Bilerman with Citi.

Mitch or Barry, I wonder if you could review our guidance for the full year, just based on where you're trending and what you've already accomplished in the first half and the fact that you don't have a lot of leases rolling in the back half. You seem as though you would be fairly comfortable coming in here at the high end or maybe even slightly above.

Yes, certainly, we can talk about that. We have, obviously out performed in this quarter, certainly exceeded consensus by about $0.05 and the transaction that was just completed, that I alluded to and Barry also mentioned it in his comments when we talked about the $7 million on a trade line basis, that would be applied to the third quarter, you know, we have taken a very careful look at where we think we are going to be given what should be a very significant third quarter, as a result of that transaction, the arch insurance transaction. And accordingly have moved our midpoint guidance by about $0.16. So it is a reflection of some outperformance during the first half of the year, and a reflection of what we already have in the bank, so to speak, for the third quarter as a result of a very unique transaction.

And based on your comments, would you it be safe to assume that you put the flex portfolio on the shelf?

Yes, you are breaking up. I could not understand your question.

Sorry is that better?

Yes, that's much better.

Would it be safe to assume on your comments on the debt markets that you are sort of shelving the flex portfolio sale that you talked about earlier this year?

Yes, that would be a safe assumption. We have -- I had a fair amount of discussion with a very credible buyer who had done business with us in terms of asset dispositions and our recycling of capital efforts in the past, and I guess much to their surprise, given -- given their great track record, they were unable to get debt capital to finance their deal. And while we did look at the potential of applying some mezzanine financing to it, at the end of the day, it didn't make sense. They are excellent cash flowing assets, no reason or compelling strategic reason to sell them and certainly to do sort of a mezzanine financing deal, layering on financing at fairly low rates to make the deal work, given the limited amount of debt capital that this particular buyer was able to find in the market place, it just didn't make sense. And so, the portfolio is well leased. We have a great franchise down in the South Jersey/Morristown area, Burlington County, and we'll see what the future holds. But right now it's off the table.

Thank you. Great quarter.

Thank you very much.

And we'll go next to Jordan Sadler, KeyBanc Capital.

Thanks. Good morning, guys.

Hi.

Mitch, I just wanted to congratulate you on your successful leasing effort in the quarter. I just wanted to ask you what the momentum looked like, if it continued to spill over into the third quarter, or if sort of the sluggish economy is getting the better of you at this point.

Yes, thank you, Jordan. I would tell you that the market is very sporadic at this point. I would -- I would submit that in general, given the uncertainty in the economy, tenants are looking for a lot of optionality. There is -- there is clearly some consolidation occurring in a number of industries from pharmaceuticals to financial services, and -- and so there's a tremendous amount of uncertainty in the market place right now and what used to be what I would call a slam dunk transaction on a five-year renewal, is now, you know, can we do a five-year renewal with a cancellation and we'll pay for it after three years because we don't know what the shape of our company is going to be, whether it's going to be larger, smaller or part of another company in a couple of years. And we see that sort of psychology in almost all of the markets that we are operating in.

So my view is that we're going to be in turbulent times in the United States economy, if not the greater global economy for probably a couple of years. And I don't think that the banks and the Fed and all of the intervention that's going on is going to necessarily unlock a liquid debt market place for a couple of years. And so it's hard to predict what leasing velocities and how consistent they will be. Obviously, tenants have leases that expire, and they need to deal with that, and certainly, we try to provide flexibility while maintaining the best interests of our shareholders. I would also tell you that some of the remarkable gains that we have been able to achieve in Jersey City, as one location, and I suspect it will be -- result in a few other locations, is the result of price point affordability and there's just no question about the fact that there are companies that are of necessity now, because they can't grow their top line earnings looking to slash their costs and part of the cost is cost of occupancy, and the other big component is cost of labor. And if they can -- the companies can draw from different demographics to reduce their cost of labor as well as their cost of occupancy and deal with the marketplace like a Jersey City, for example, where at this point it's really easily formulaic to walk into the offices of New Jersey EDA and get your Beef grants and get a number of other as of right incentives. It has -- it has been a tremendous benefit and bodes extremely well for that market place. So there seems to be some momentum there. But other than that, Jordan, this is a -- this is a very, very challenging period of time and we feel really good about the fact that our exposure for rollover and our credit risk exposure is so manageable and minimal, moving forward over the next couple of years because I really do believe this will be a few year phenomenon.

Is there an emerging new leadership? I mean, if I could use that word, to -- in terms of industries, where -- I mean, like you saw a couple of engineering firms. I don't know, industry exposure to global infrastructure growth or export growth in New Jersey specifically, that seemed to be --

Yes, I think that we -- we certainly just here at Mack-Cali have done about 0.25 million square feet of deals in the quarter with engineering or infrastructure-type engineering firms. So I think a combination of the global need for high -- for highly talented, sophisticated engineering firms, even if it's doing work in Asia or other parts of globe that right now are expanding. Of course, the theory is that they are linked pretty closely at the hip and it's only a matter of time before they face some economic stress, that in combination with the need for improvement in our domestic infrastructure seems to be fueling what perhaps at one point was more of a cottage industry, and now has become more of a main stream industry.

And I think that locationally in New Jersey, great location. Easy access to airports and international travel as well as being part of the -- you know, the financial capital of the world, has demonstrated that these companies are growing here as well as the fact that highly educated talent is available in this market place, whether it was the result partially of telecommunications engineers that have migrated now in different disciplines within engineering, the talent is here. So we've seen great expansion in that area. There's a lot going on right now in pharmaceuticals. I mean, you saw the announcement today of Bristol-Myers making an offer for ImClone. There's a lot of expansion and consolidation in pharma right now that's occurring and New Jersey is still the medicine chest of the United States. I think we will continue to see some good expansion within that industry.

Insurance companies, well, you see it with Arch. You've seen it historically with -- we've done a number of major transactions with components of AIG. They are continuing to migrate some of their work force to take advantage of a variety of things including business continuity. And so, I would say that those are probably -- infrastructure engineering, pharma, the insurance industry, which, of course, is part of fire, have continued to demonstrate strength into the New Jersey market place.

And lastly, just on the guidance coming back to it, I saw the $0.16 per share increase at the midpoint. You mentioned the $7 million or I guess about $0.09 coming from the lease termination fee. The other $0.07 is coming from -- is that purely from the core? So better occupancy?

Yes, I think it's better occupancy. It's better traction on some rent growth. Yes, it's core growth.

Oh, lastly. I forgot about this. The hotel. It looked like the hotel had a good quarter. Anything different going on there or one time or is it that -- should that be recurring?

No, I think that the hotel, we have been able to migrate ADRs for a period of time and for the first half of 2008, it was about on budget. Occupancy, is hovering in the mid to high 80s. So we think we benefit from being an affordable alternative in a very high caliber facility to some of the constraints in New York City. We're close to Newark airport. That continues to be a benefit for both business and leisure travel. The corporate facilities, meeting room-type facilities have done well there. And so we're optimistic about the continued performance of the hotels. I think -- I've heard from the lodging industry that the pressure on the airlines industry has resulted in some of their contractual rack rate arrangements they have has diminished because of layoffs in flight crews and things like that. We haven't experienced that in the Hyatt and so we we are optimistic about it going forward.

And our next question comes from Ian Weissman of Merrill Lynch.

Yes, good morning. A question on the Arch deal. Was that a consolidation out of New York City?

Yes. They maintain a -- a large -- they will continue to maintain a facility in New York City. But this is a major consolidation out of lower Manhattan.

And was the deal a rent roll up or roll down?

Well, from a pure rent perspective, you know, dollars, escalated rent to new face rents, it is a roll down, but I think you have to look at the fact that the -- there's a major contribution being made to mitigate against that, and to mitigate against the cost of TIs and leasing commissions from the existing tenants. So I think the timing of the transaction with respect to the former tenants lease term or remaining lease term was fortuitous to us. It's a 15-year deal commencing in November, so it's a long-term deal with a very high credit quality tenant with very acceptable rents for -- for, you know, the Plaza 3 component of Harborside.

Could you just quantify what the rent roll down was?

I would tell you that on -- I don't have the figures in front of me, but I would say on average, it's probably a mid-$30 deal and the rent was slightly more than $40 plus or minus, on the existing tenant, fully escalated on a lease that would have expired in less than -- in about four years.

Okay. And final question, I know we sort of heard a lot about consolidation out of New York City. We've heard recent talk about you talking to a major financial services industry about a potential development in Jersey City. Obviously, the financial services companies are thinking about cost reductions. Can you just update us on any additional discussions or progress made on that front?

Meeting with one today that has a 500,000 square foot requirement that at the very least is considering a bifurcation. Now, I met with a lot of financial service tenants among others over the course of the last couple of years and for one reason or another, it has not resulted in build-to-suit opportunities. It has, in fact, resulted in clearly, maintaining 100% occupancy, plus or minus a few basis points in our 4.3 million feet in service in Jersey City. There have been ephemeral events, as you know, Ian, occurring in the market place, within your own firm, among others, that to make these long term or longer range decisions has been very difficult for the leadership of these companies because it's sort of they wake up the next day and they don't know what's going to hit them in terms of mark to market and subprime write-downs, et cetera. I can only tell you that there continues to be a high level of interest in reducing cost of occupancy among other costs, as I expressed before. And frankly, as I said, I'm meeting with -- with a principal and their broker of a firm today that I never talked to before.

I was going to ask you if that was an initial meeting or lease signing.

Yes. I wish it was both, but I can only say the former is accurate.

Okay.

But, you know, look, that's the business we're in, Ian. You go through this process and nobody more than I would like to say that we have signed, you know, half million foot lease for -- a prelease and we're going to start building down in Jersey City, but certainly the interest is there, and certainly the economics are compelling. And if things continue to go the way they have been going with the write-downs of some of these firms and the need to control costs because they are getting whacked left and right, from the securitized financing, that, at some point I -- I suspect it's going to happen.

Okay. Thank you very much.

You're welcome.

And we'll now go to Sloan Bohlen of Goldman Sachs.

Good morning, guys. Just one clarification on the guidance. A portion of the increase was due to the out performance on an separating standpoint. Just to clarify from here, are you expecting that occupancy or same-store growth stays flat from here or continues to get better or how should we think about that?

Well, we said that last quarter, that we thought the same store growth would be sort of in a zone of flat to up about 2%. And I don't -- I think that's how you should think about it. We haven't seen enough of a track record to suggest that it would be higher than that. So that would be the zone.

Okay. And occupancy --

Yes, occupancy, , is going to fluctuate within the zone as well. There's not enough traction in the market place right now, in my opinion, to take a more optimistic view than

Okay. And then one quick one for Barry. You guys had mentioned a slight improvement in joint venture income and on the G&A side as well. Should we consider this quarter a good run rate going forward or was that kind of a one-time thing?

In terms of G&A, I would say they are probably around the $48ish million annual basis. We would look at that. In terms of joint ventures, this is probably a little bit higher than what we would expect going forward. The hotel had a good quarter this quarter, as well as the other joint ventures, they were more one time kind of things. So the hotel continues to perform well and quite frankly has done better -- has done better than what we had originally anticipated, for this quarter.

Okay. Thank you guys, very much.

And next is John Guinee with Stifel.

Very nice job, Mitchell, Barry. Can you spend some time updating us on the other JVs that haven't been discussed Mac, Greene, Gale, Princeton Forestal--

Well, let's see, where shall I begin? We have our joint venture with SL Greene. What I would call -- although, there are minimal interests in a number of problems. The real joint venture is on the seven building portfolio, which is a little more than 800,000 square feet, and , it's -- it's today about 70%-ish leased, with many challenges moving forward. So, you know, plus or minus 70% leased, and we're working it. And SL Green is our equal partner in that. Princeton Forestal is a 10% position. GE Capital is the majority ownership. A number of families own another 10%. We manage it. We do the leasing. We do the construction management. And it's performing well.

As far as other joint ventures, we have our project in Boston with Vornado and JPMorgan and Gale International and while we've done some remediation on the site and we have certainly gotten all of our approvals for about a million and a quarter square foot mixed use project, about $720ish million project, plus or minus. At this point, until we are assured that we have construction financing, which would be somewhere around $400 million, we're going to go real slow on that project. I would tell you that the office leasing demand as well as retail demand seem to be quite reasonably strong in Boston. We have -- we have another joint venture, what we call the Callahan portfolio in Boston. It's in the suburban markets and Andover, up in the route 93 corridor. We bought the complex very low cost. Again, it's a joint venture with JPMorgan and Gale international and we're set -- we're 30%. JP is 70%. We bought it pretty much empty and we have achieved, I guess right now somewhere -- I think with a couple of deals that we have, that we are hopeful of signing, we will be 40ish percent leased. Minimal capital investment there, fully financed. So that's performing obviously slower than we had hoped and anticipated, but it's performing okay. The hotel we talked about, that's our joint venture with Hyatt and the Pritzker family. And does that address your

Yes. One last question. Hey, Barry, how much of your guidance increase is attributable to interest savings?

We think that there's probably about, $0.03 for the remainders of year that's attributable from savings we had booked previously in terms of interest costs.

Got you. Nice job.

Thank you.

We'll now go to Mitch Germain with Bank of America.

Congratulations on a good quarter, guys.

Thank you.

Your plans for the $300 million up secured in the first quarter of '09?

Yes, we -- we have a -- our first tranche of senior unsecured coming due in mid-March 2009. It's got about a 742 all-in coupon on it or all-in interest costs. We are in the midst of doing some -- what I would call secured financing on one or two assets that we feel pretty comfortable that we will take in proceeds that would roughly approximate that tranche. That's a $300 million tranche, and so we will be under no pressure in our opinion to -- to deal with, to enter the unsecured markets, should they remain as illiquid as they have been with so few trades in any sector of the corporate environment. And so we would expect that somewhere in the late part of the fourth quarter, we will have this liquidity event and if all things remain equal, and that will remove any pressure from having to redeem that on our line.

And -- but having said that, the world changes quickly, as I alluded to before, and should we need to take that down on our line, we have the capacity to do so. We are about 320 drawn. We have good cash flow. So we expect by the end of the year we would be in that zone barring this 250 or $300 million that I'm talking about in terms of the secured type financing. And so with our $775 million line, plus our $75 million overnight note program, we will be in a very very liquid position should we want to take that down on our line.

Great. And I apologize if you already mentioned it, what was the buyers or the potential buyers LTV requirement on the flexed portfolio sale.

What was their what requirement?

Loan to value.

They were looking to apply approximately 60 to 65% and --

Great.

And they couldn't achieve that.

Appreciate the comments. Thanks.

And now to Michael Knott of Green Street Advisors.

Hey, Mitchell or Mike, can you just comment on the 2009 lease expirations? In New Jersey it looks like 1.3 million square feet. A big chunk of the small lease rollovers in '09. Thanks.

Yes. There's nothing looming large in '09. We have made a fair amount of progress with some of those tenants as we stand now. Some of the -- what we consider to be potential move outs, we think we are actually going to be able to renew. But right now, the stats indicate that we have -- as of June 30th, about $49 million of rollover rent for the year or 2.2 -- roughly 2.2 million square feet. We are working every situation. Like I said, we don't have a Hewlett-Packard, so to speak, in 2009, and so, these are more main stream commodity-type transactions. And frankly, in this environment, probably more susceptible to renewal than larger ones who are worried about the dragons coming to slay them as we're seeing today in the corporate environment.

And then any update on the property in Green Belt, Maryland?

Any sort of government leasing has absolutely been frozen because of the election and so some of the benefits that we thought we might see earlier as a result of the GSA, or even, the NHA and some of the large governmental entities and institutes that do business in the region have really done nothing in terms of the leasing because their budgets have been frozen. Hopefully as we near the election, get closer to the election, we'll see some of that unlocked and we'll see better activity and better velocity. We think we have got great product, a great location, great infrastructure serving the area and good affordability on a relative basis on some of the adjacent markets but there hasn't been a lot of leasing activity right now because of the election.

You are still expecting that will stay vacant until 2009?

Yes. Yes, I mean, we might -- we might make some headway into leasing it, but in terms of the income perspective, we are really not including anything until 2009.

Okay. And then lastly, can you just update us on your perspective on allocating capital? The last couple of calls you have very been negative on the economy and the investment opportunities. How does your stance on that issue compare today, versus three months ago?

Well, as I mentioned before, there were so few trades in the market place other than in New York City, really the markets have been generally extremely quiet. And if you look at the major investment sales brokerage firms and even the public components of those companies have had major earnings disappointments because there just hasn't been any activity in that market place. There have been a few deals that have gone to contract. They haven't closed yet. They are in Florin Park in New Jersey and premier properties trading at probably 30% less than the institutional seller had hoped for because of the illiquidity in the market, but still at a relatively rich pricing level compared to replacement costs. And these deals just don't close.

So I just -- I just don't think that there's a clearing price in the market. I don't think there is compelling reason to do anything until there's more clarity in the market place. I would tell you -- and I'm sure you know this, that there's an enormous amount of equity from every part of the globe sitting on the sidelines waiting for the next RTC to occur in whatever sector of the real estate community that might be -- bad debt or whatever it might be. But you've got -- you've got high net worth equity fronts. You've got sovereign wealth equity funds, you have institutional allocations that need to be put to work. So there's going to be a lot of competing equity if and when the markets begin to unlock themselves. But, this has been a period of time where there's been relative dormancy in the market place, and I have not changed my view. I prefer to be in a liquid, strong cash and strong balance sheet position to have a war chest to put to work and/or to weather a protracted economic downturn. And that's what we are going to do here. So I really haven't changed the view.

Thanks for the comments.

You're welcome.

And next we'll go to Chris Haley of Wachovia.

I have a question for you related to your expense levels. I look at your margins in the second quarter, we see either a seasonality impacting or benefiting your results, could you give us a sense as to whether or not there is temporary? Are there any initiatives that you can point to, to suggest that your current margin levels are sustainable in the second half of '08.

Yes, we think the margins are sustainable. We don't see any extraordinary anomalies or aberrations. Again, we had relatively high second quarter utility expenses, but frankly, you know, that -- we all know what that is due to, and the margins, the -- you know, some 60ish perfect on escalation recoveries we believe we will maintain. Naturally you set some new bases. So you erode our margins a little bit, but we have been able to offset that to some degree in maintaining a better level of efficiency in our operating and services and we also have seen a slight decline, I wouldn't call it necessarily a major trend but a slight decline in real estate taxes.

The struggle that's going to exist in that area is that, some of the reliance that tax assessors have had on these extraordinary pricing levels on building sales and trade have created frictionality with regard to diminishing income streams. And now that's exacerbated by the fact that with all of the states, you know, New Jersey, New York, I mean they are all operating on deficit financing, are eliminating some of the aid to municipality. So that puts pressure on the municipalities to pain taken their services and their -- maintain their services and their school systems and they are more reluctant to be cooperative on tertiary reviews. But we've had, in this company, a good trend in reducing our real estate tax expenses. So that's a little bit of a mitigating factor, Chris.

And now we'll hear from Jamie Feldman with UBS.

Great. Thank you. Did I hear you correctly that leasing trends were 6.5% on a cash basis in the quarter?

Yes. For the quarter they were. And that was largely a result of a couple of transactions in Jersey City. About 135,000 square foot of transactional activity in Jersey City that ranged from markups or mark-to-market or increases rather roll ups of anywhere from about 12%, actually, to 33%. And the facility -- the 138,000-foot deal that was a combination of Morristown and Verizon center in Hamilton was also about a 28% roll up on about 75,000 feet. So I don't necessarily think that, the 6.5% rollup represents trends, either. As I said before, we do feel relatively sanguine that we have marked our portfolio. It was a painful six years. So barring any major shifts in economic activity that would impact where we think we are going to be in leasing, we should be flat to positive going forward.

Okay. Can you talk a little bit -- would you address the larger tenant demand. Can you talk about what you are seeing in your portfolio from smaller tenants and how resilient they are in the downturn and maybe what your tenant watch looks like right now?

Yes, we maintain, obviously, very, very careful tenant watch list. Sometime ago, we implemented even an email system, just talk about differential levels that we see within the parking lots, you know which is sometimes a good indicator. Once or twice through our corporate relationships I found out about offices closing, although they are very credible lease paying tenants before -- before they -- the on-site manager in the office knew it. So we maintain a very careful credit watch list. We have excellent diversity within our income stream. We -- in our filings, you will see on page 43 -- for example, the industry diversification. We do it by SIC number. We do it by specific industry and we talk about how much or what component of our rent is attributable to what is a very, very long list the way we break it down so you get a really good complexion on the income quality within the company. We obviously reserved where we think that there could be some potential problems. But we thankfully haven't had significant issues.

We had a couple of pretty small residential lenders and these were the midnight move out type tenants for a couple thousand square feet. And when we saw that happening, we implemented this -- what we call tenant notice email system, just to observe day-to-day activity. But we are pretty comfortable that -- that we've properly assessed our credit risk, that we have reserved where we have some level of apprehension, and of equal importance, I would tell you that we're not shy about asking for security deposits where we feel that, at least money that we might spend for TI or brokerage commissions could be at risk, given, tenuous industries right now. And so we do real careful analysis in that sector.

And I will tell you, we are -- we are pit bulls when it comes to collecting money owed and due this company. We are very, very aggressive and not that we have to do a lot of this, but, you know, we are not the bank. Where tenants want lots of extra construction, they need to pay us for part of it up front and that sort of thing. So we maintain, I think, a very high level awareness and controls on accounts receivable and what's happening within our buildings.

Okay. I guess I'm asking, how has that number changed from last quarter, your watch list. Is it about the same?

It really hasn't changed at all. I mean, we kind of look at a year ahead and then we struck it. Probably every 30 days.

Okay. Okay. And then can you talk a little bit -- I mean it sounds like there's potentially some big user demand coming out of the city. Can you talk about I don't know Jersey City, what you are seeing on some of your other parcels or it off the table for a while there?

We are having what I would -- what I would consider the minimal conversation in Marsh County at our business campus with an existing tenant that is thinking about expansion and that -- I'm not talking about Wyndham, another tenant that might necessity a new building to accommodate their needs. It is in the very early stages of discussion. But I think outside of that, and the water front it's pretty quiet out there with regard to, you know, build-to-suit activities, other than maybe healthcare right now, which is also a large industry in New Jersey. There is -- there's not a lot of major expansion going on.

Okay. Thank you very much.

You're welcome.

And we have a follow-up from Chris Haley, Wachovia.

Sorry. I wanted to cam back and ask you -- I'm not sure if you commented on this earlier, about what your capital expenditure budget looked like under your new assumptions for the calendar year '08 and if you had any preliminary thoughts about how that might look in 2009?

Chris, you asked about capital expenditures, because you broke up a little bit?

Sure. I did. Yes. If there's any -- if you could comment on what your current annual expenditures look like for 2008, and any directional input on 2009?

Yes. Yes, if I look at the non-incremental building improvements and the TI and the leasing commissions that we did in '07, we were about $67 million. And we have budgeted for '08 about $75 million this quarter. We spent about 17.8, but we think that the run rate will be somewhere around 75 for the year.

Mm-hmm.

So I would guess '09 will be in that zone.

Okay. All right. Thank you, Mitch. Appreciate it.

You're welcome.

And with no additional questions, Mr. Hersh, I would like to turn it back over to you for any additional or closing remarks.

Yes. Thank you. Again, I would like to thank all of you for joining us on today's call. We look forward to reporting to you again next quarter. And I wish you all a good day. Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.