Veris Residential Inc (VRE) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation first-quarter 2009 conference call. Today's call is being recorded. At this time it is my pleasure to introduce the President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining Mack-Cali's first-quarter 2009 earnings conference call. With me today are Barry Lefkowitz, Executive Vice President and Chief Financial Officer, and Michael Grossman, Executive Vice President.

On a legal note I must remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the Company.

First, I would like to review some of our results and activities for the quarter and what we are seeing in our markets. Then Barry will review our financial results and Mike will give you an update of our leasing results.

FFO for the quarter, excluding a non-cash item, was $0.88 per diluted share. This is unchanged from FFO of $0.88 per share for the same period last year. Given the deterioration in the commercial real estate market in the Boston metro area, the Company wrote off its investment, about $3.5 million, in the Route 93 venture and thus took a $0.04 per share impairment charge.

We had some solid leasing activity over the quarter with 645,000 square feet of lease transactions. Our portfolio ended the quarter at 90.7% leased, down a bit from last quarter's 91.3%. Of this 60 basis point drop, however, 40 basis points was related to putting the brand-new Wyndham build-to-suit headquarters facility into service. Wyndham Worldwide moved into this 0.25 million square-foot brand-new building and simultaneously vacated 150,000 square feet at our Mack-Cali business campus in Parsippany, New Jersey.

Rents rolled down this quarter by about 6.1% compared to last quarter's 1.6% roll down. In our core markets in Northern and Central New Jersey we had roll downs of 6.4% and 7.5%, respectively.

To give you an example of these types of deals that are contributing to these numbers let me give you a factoid about a tenant in Paramus. Harsco Corporation, a long-term tenant in our Mack-Cali Center II in Paramus, exercised a lease renewal for approximately 22,000 square feet. The prior premises consisted of approximately 31,500 square feet thus a reduction in the amount of space occupied by about 30% and a 17.5% roll down in the rents.

The reason I tell you this is because it's a reflection in historical performance and a testament to a couple of things ; the fact that I have stated for many, many quarters that over a period of time we were rolling our portfolio back to market equilibrium. If you look at the average office rents within our portfolio of approximately $24.84 a foot and this deal at $24 starting out with $2.41 per year in leasing costs, total costs for tenant improvements and brokerage fees, it's roughly where that same lease, although a bit larger, started out about 10 years ago. And thus this is a reflection in the consistency in the suburban markets, the fact that the markets don't spike, generally speaking, and as I have said moved back to equilibrium within a reasonable measure of volatility.

Our leasing costs over the quarter including tenant improvement work and commissions came in at a total of approximately $2.99 per square foot per year compared with last quarter's $2.64. For the remainder of 2009 our rollovers are approximately 4.2% of our base rent or about $24 million. For 2010 rollovers are approximately 11.5% of base rent or slightly more than $68 million, and so we feel that our rollovers going forward are quite manageable.

Our portfolio continues to outperform most of the markets where we operate with leased rates exceeding market averages in Northern and Central New Jersey, in Westchester, and in Washington, DC. We are pleased that even in these challenging markets, and certainly that may be an understatement, we have maintained our competitive advantage and our market leadership.

Despite our outperformance, however, there continues to be a great deal of uncertainty in the business sector. Businesses remain reluctant to make office space decisions, and when they do they are looking for shorter lease terms generally, lower rental rates, and more flexibility. And so we continue to concentrate our efforts on keeping our properties well leased with a very fine roster of very high credit quality tenants who in most instances, notwithstanding market conditions, would prefer to stay where they are in a Mack-Cali building.

In an effort to preserve capital we announced that our Board of Directors declared a cash dividend of $0.45 per common share. This new quarterly dividend indicates an annual rate of $1.80 per share compared with the previous annual dividend rate of $2.56 per share. This is expected to result in enhancing our balance sheet by retaining an additional $62 million on an annualized basis based on the current share count.

This past quarter the Company closed on $64.5 million in secured mortgage financing through Guardian Life Insurance Company of America in two separate mortgage transactions. The first mortgage for our building in Clark, New Jersey, along the Garden State Parkway, a 182,000-foot Class A building, was for $19.6 million. The second mortgage through Guardian was for our River Center Complex, which is the three-building Class A complex also along the Garden State Parkway at exit 109, for $44.9 million. One River Center is approximately 450,000 square feet.

Some of our notable lease transactions during the quarter included the Ayco Company, a provider of financial counseling and education services for corporate executives and employees. Ayco signed a 10-year, three-month renewal for 34,000 square feet and some change at 8 Campus Drive in our Mack-Cali Business Campus in Parsippany. Ayco was an existing tenant, another testament to the fact that tenants would like to remain in place with strong landlords. And this asset, 8 Campus, is 100% leased; 215,000 square feet.

Diebold Enterprise Security, a global security system, very recognizable name, signed a seven-year six-month lease for 32,000 square feet. New lease at 3 Westchester Plaza in Elmsford. Located in Cross Westchester Executive Park this asset is a 93,000 square foot office/flex building that with this lease is now 85% leased.

Acorda Therapeutics, a biotechnology company, signed a three-year renewal -- again, to stay in place -- for 46,000 square feet at 15 Skyline Drive at Hawthorne, New York. Located in our Mid-Westchester Executive Park, 15 Skyline Drive is a 55,000 square foot Class A office/flex building that with this renewal is now 100% leased.

Eisai Corporation of North America, a research-based human health company who is building a very strong presence in Burton County, signed a new long-term lease for over 41,000 square feet at our magnificent 300 Tice Boulevard complex in Woodcliff Lake, New Jersey. 300 Tice is a 230,000 square foot, Class A+ office building that is 100% leased.

In other news, Mack-Cali was recognized by Forbes.com as one of the nation's 100 most trustworthy companies. The survey conducted by the Los Angeles-based financial analytics company Audit Integrity identifies companies that have consistently shown transparent and conservative accounting practices and solid corporate governance and management patterns. And we are pleased to be honored alongside many of the country's leading businesses.

Finally, I would like to mention our global solution with Gramercy Capital Corp. and SL Green. You may recall that Gramercy is the mortgagee on what we affectionately call the B properties as part of the Belle Mead portfolio, a $90.2 million -- $90.286 million loan, where SL Green was a 50% partner of ours. Gramercy extended the maturity of that mortgage for two years to a new expiration date of May 9, 2011.

You may also recall that we took an impairment charge in the fourth quarter writing down our equity to below the mortgage amount totaling approximately $27 million in these assets, writing off our investment in the properties. As part of this global solution Mack-Cali has also acquired SL Green's 50% interest in these properties as well as its nominal interest in the A properties, which were the core Belle Mead properties, totaling about 3.5 million square feet, as well as SL Green's 50% interest in the to-be-built Building Four for sanofi-aventis in Bridgewater, New Jersey.

To refresh your recollection of this, Building Four is a 205,000 square foot to-be-built development project under a 15-year net lease with sanofi-aventis. We expect the unleveraged yield on this project will be close to 10% including our fees.

Total consideration paid to SL Green in connection with redeeming their interest in the B properties and the nominal interest in the A properties, the Belle Mead portfolio, as well as its 50% interest in the sanofi to-be-built project was $5 million. I would also like to point out that with respect to the B properties and the mortgage extension with Gramercy Capital Mack-Cali shall be essentially acting as manager for Gramercy Capital and Mack-Cali shall have no obligation whatsoever to contribute any capital for any costs, including operating, leasing costs, commissions, tenant improvements, and recurring capital for these properties which those obligations will remain with Gramercy Capital.

With that I would like to now turn the call over to Barry to report our financial results.

Thanks, Mitchell. For the first quarter of 2009 net income available to common shareholders amounted to $12.1 million or $0.18 a share as compared to $14.9 million or $0.23 a share for the same quarter last year. FFO for the quarter amounted to $68.1 million or $0.84 a share versus $70.9 million or $0.88 a share in '08.

Included in net income and FFO for the first quarter was $0.04 a share of a non-cash impairment charge on a joint venture investment. FFO for the quarter excluding this non-cash item was $0.88 a share. This is unchanged from the $0.88 a share of FFO we had in the same quarter last year.

Net income excluding this item was $0.22 a share as compared to $0.23 a share for the same quarter last year. The impairment charge of $0.04 a share resulted from the write-off of our investment in the Boston Route 93 portfolio joint venture, and that charge is included in equity and earnings of unconsolidated joint ventures on our financial statements.

Other income in the quarter included approximately $0.5 million in lease termination fees. The first quarter of last year had lease termination fees of about $738,000. Same-store net operating income, which includes lease termination fees, decreased by 0.9% on a GAAP basis and on a cash basis same-store net operating income increased by 0.3% for the first quarter.

Our same-store portfolio for the quarter was 29.2 million square feet. Our unencumbered portfolio at quarter end totaled 235 properties aggregating 24.4 million square feet of space, which represents about 83% of our portfolio.

In the first quarter we completed $64.5 million in mortgage financing with Guardian Life. The 10-year loans bear interest at 7.25% and are interest-only for the first year with 30-year amortization thereafter. At quarter end our total undepreciated book assets equaled $5.4 billion and our debt-to-undepreciated assets ratio was 41.4%. We had interest coverage of 3.1 times and fixed charge coverage of 2.7 times through the first quarter of '09.

We ended the quarter with approximately $2.3 billion in debt, which had a weighted average interest rate of 5.37%. Currently we have $365 million drawn on our $775 million revolving credit facility and approximately $60 million in cash on hand.

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

Thanks, Barry. At March 31 our consolidated portfolio was 90.7% leased as compared to 91.3% at the end of last year. In the first quarter we retained almost 47% of our outgoing square footage, which is below our usual 60% to 70%. Without the impact of Wyndham's space return, our retention would have been 57% of outgoing space.

We signed 103 deals in the first quarter; 645,000 square feet of transaction activity is almost 20% more than our fourth quarter volume but is still below typical levels. Our broader markets have experienced a similar slowdown in leasing velocity turning in first-quarter results that were 40% less than the 2008 average. New leases total 243,000 square feet compared to last quarter's 163,000 square feet.

Average lease term on all transactions increased from the fourth quarter's 3.8 years to 5.5 years this quarter. As is typical, 85% of our transactions were for smaller deals of less than 10,000 square feet. Unlike last quarter when we signed nothing over 25,000 square feet, we did have a number of large block deals as Mitch highlighted in his remarks. We continue to experience downward pressure on first-year rental rates, but have not seen an upsurge in concessions on improvements and free rent. We averaged just less than one month of free rent per deal signed, which is consistent with several years and our TI costs were in line with previous quarters.

Comparing year-to-date prospect activity with same period last year we were virtually flat relative to number of leads and down over 30% when measuring square footage. We are seeing very few large block users in the marketplace.

Vacancy rates in all of our major markets are up year-over-year with the largest increase in Westchester County, New York, at 180 basis points. Vacancy in Northern and Central New Jersey is up only 30 basis points since the first quarter of 2008, although direct asking rents have dropped more than $2.

Space available for sublease in our portfolio remains steady at 4% of inventory. In our markets sublease base represents anywhere from 8.3% of vacancy in Washington, DC to 34.3% in Manhattan. Leasing continues to be challenging but our dominant presence, brand, and reputation provide us a significant competitive advantage in the market. Mitch?

Thank you, Mike. Let me just give you a few more factoids as I have done in previous quarters to give you a measure of what is going on in the economy. With respect to our Hyatt Regency down along the waterfront in Jersey City, which many of you have been to and it's a magnificent 350-rounds facility, occupancies have held relatively stable. We finished the quarter at 77% year-over-year. That is about even to slightly, actually, less than a year ago but not materially.

ADRs in a hotel, however, moved from over $221 a foot year-over-year to about $165 a room rather, which gives you a reflection of what is happening across the board in the economy. Rev par moved from $167 to approximately $127.

With respect to the liquidity and balance sheet capacity of the Company, adjusting for the new dividend at $0.45 per share and the impairment that we talked about, the $3.4 million writing down our investment in the suburban Boston portfolio -- Boston hasn't been very kind to us since our initial foray -- we had an FFO payout ratio of just slightly more than 50% and a CAD payouts of about 62% with over $7 million of free cash flow after these adjustments.

In closing, I would like to offer a few additional thoughts. The credit crisis continues to inflate the economy and certainly is having a significant impact on landlords. And so when signing leases it's more important than ever for tenants to align themselves with a landlord who offers strength and stability.

All too often these days landlords are credit constrained, and in some instances, unable to fund capital improvements and leasing costs and commissions. In a Mack-Cali building tenants know that they have chosen a landlord who remains committed to reinvesting capital in its properties and has done so on a consistent basis and has the resources to do just that.

I also wanted to comment on liquidity and access to capital in these markets and the variety of tools, both debt and equity, that are available. As I indicated, through the dividend modification we have now put ourselves in a position of retaining an additional $60-plus million a year, about $62 million on an annualized basis, based on the current share count.

We still see the possibility of doing some additional secured financings, although those financings are generally low leverage, time-consuming, and limit some flexibility, quite frankly, in your alacrity with respect to responding to tenants needs in connection with leasing. But we still see some amount of that on the horizon.

But we also believe that we will continue to look carefully at accessing all of the capital markets when it's appropriate, including debt and equity. I, frankly, don't want to rule anything out in this world of uncertainty and unprecedented events. We will continue to evaluate the capital markets with an eye towards continuing to reduce the leverage in the Company and maintaining our financial flexibility, as well as capacity to build on our position and stature as an industry leader.

While generally, of course, in a defensive posture, particularly in these uncertain times, we believe that opportunities will arise when there is more visibility, more clarity. And we will and want to be in a position to act quickly and act accordingly.

So with all of that we continue to remain cautious. We will operate conservatively and we will continue to focus our attention on serving the needs one of our greatest assets, our tenant base. And now we will take your questions. Operator?

(Operator Instructions) Irwin Guzman, Citi.

This is [Mark Montanen] on behalf of Irwin. A couple of questions, regarding your leverage do you guys have an internal limit based on either debt service coverage or debt to undepreciated assets? I know you quoted that often. Or is there really no hard and fast limitation?

Well, certainly there are limitations with respect to the covenants and the investment grade rating and the bank line covenants, but we don't have internal limitations. We operate in a relatively conservative fashion. We have always been a very modestly levered company from all perspectives -- debt to market cap, debt to undepreciated book, and coverage ratios where we post 3.1 or so interest coverage and 2.7 plus or minus on fixed rate coverage.

So that is how we operate, that is our mantra. But there are no specific hard and fast internal guidelines beyond being cautious, careful, with a view towards always understanding that there is a degree of uncertainty in the market place.

Okay, great. Thanks. Given us some modest retracement spreads last month at least in the indices, do you believe the 7.3% rate on the mortgages you obtained in January is commensurate with what rate you think you can achieve in the market today?

You know, if you look back on the Harborside lease, which was almost a $0.25 billion at 6.8%, and then what we did in January, which was in the 7% handle, I would made that that is the market plus or minus a couple of basis points either way.

But as I said, with respect to secured financings the leverage is quite limited. You are looking at potentially 50% or less loan to value and value is a big unknown determinant in this unclear environment that we are in. And generally speaking these transactions take a long time to complete. So I would say we are delighted with what we had done and we think that plus or minus the interest rate is market.

Great. And then finally at the midpoint your net income guidance increased about 10% quarter over quarter. Is it primarily due to a better than expected first quarter or a bit of a modest uptick in your outlook for the rest of the year?

You are talking about net income not net operating income.

Right.

That is a metric that is really based on depreciation. The adjustments there are based on the amount of depreciation.

Right, okay. So nothing core?

Right.

Okay, thanks.

John Guinee, Stifel Nicolaus.

Mitch, nice job. Two things. One, you might just want to explain to everybody when you talk about limited leasing flexibility with a fixed-rate lender and how they like to know what goes on with a particular building, explain that in more detail. And then, second, could you just walk through your major known move outs in the next 18 months?

Yes, and I will restate your name is John Guinee. The flexibility issue, although it's not often talked about, it really is an important issue to think about with regard to mortgage financing. Traditionally lenders have always had the requirement to have an approval right with respect to major releases. And so depending on the size of the asset there were barometers and parameters surrounding the size of the deal that the mortgagee would have consent rights to.

As we have seen it evolve in this credit crisis mortgagees, or perspective mortgagees, have really now demanded almost unilateral approval rights with the respect to leases because of at least the thought that maybe at some point they may have to step in to the shoes of ownership. In today's market, as we have seen almost on every day of the week, you need to be in a position where you can immediately transact a deal.

The markets in some instances are so fluid, particularly with new tenants that are considering relocations and being advised by the brokerage community. You need to know that you can do a deal, you can sign a deal. The tenant needs to know that and their broker needs to know that, and then at the end of the day they are going to get paid, the broker.

So generally speaking, the more time it takes to have to go back to a mortgagee for them to consent to a lease transaction, whether it's because of renewal rights or extensions and additional space, etc., is a little bit cumbersome. And that is a fact.

With regard to -- and also the fact that we have the majority of our assets unencumbered with unsecured debt gives us a real benefit and I believe an advantage in the marketplace with respect to the speed at which we can commit to a transaction and actually sign it unconditionally.

With regard to the second question that you had about the major move outs, I would say that the two most material move outs throughout the next year are State Street, which is down in Princeton, 500 College Road. We have known for a while that State Street was in a contraction mode. It's about 114,000 square feet, and so that is a second quarter '09 event. But we are actively engaged in marketing the space and we have some live, warm body leads.

The other one of note is the Citigroup expiration, which is roughly a year from now, slightly less than a year from now, at 125 Broad Street in lower Manhattan. And we have had a lot of interest. I can tell you we are short-listed in several good-sized transactions. That is 330,000 square feet, more or less.

There is activity down there. There is a flight to quality going on, a flight to efficiency, because the floor layouts at about 37,000 square feet are very efficient. They are actually quite new in terms of their build-out and so that is an attraction. We can be very competitive because of our basis in the asset and our control over or reasonable operating expenses. So we have seen a fair amount of activity and I am really optimistic about executing some deals on that space.

Outside of those two transactions I would say that they are more the ordinary course of business; anywhere from 10,000 square feet to 20,000 square feet plus or minus throughout the portfolio, throughout the next year or so. Nothing looming large other than that really.

Great. Thank you very much.

Michael Knott, Green Street Advisors.

Can you just give us an update or a reminder on the Lehman situation? And then also sort of similar to John's question, can you go through the prospects for leasing up any space that has been vacant for a while such as the Greenbelt, Maryland, space?

Yes, with regard to Lehman just to reiterate, Barclays has assumed at this juncture all of the financial obligations of Lehman. At 101 Hudson the plan, if you will, is that Lehman is moving through its bankruptcy proceeding. The plan at this juncture is that they will assume their lease in bankruptcy for all of this space at the current rental rate. They will shorten the term down on the lease assumption to a minimum of three years, then hopefully more than that.

As I said, Lehman is moving through its bankruptcy. You may have read recently, I think yesterday or the day before, that there were some issues surrounding their bankruptcy proceeding, challenges from the UK component, and that may delay this whole assumption issue. But in the meantime they are in full occupancy and all of the obligations have been assumed by Barclays.

And then anything on any of the vacant space, Greenbelt, etc.?

Yes, on Greenbelt we obviously were hoping that there would be more of velocity and more demand. We are seeing a lot of small tenants in the marketplace. We are making some deals down there in the 2,500 square foot to 15,000 square foot range. We have yet to see the real traction evolve as a result of the stimulus plan or any of the government-related entities.

So it has been slow going down there, but the properties are exceptional. The complex is exceptional, the amenities, and transportation are exceptional. And we are hoping for better traction in the coming days, in particular through some of the stimulus programs and the government programs. Does that answer it, Michael?

Yes, thanks. And then also if I can ask, I know the office portfolio has historically posted a higher occupancy rate than your office (technical difficulty). I think it might be helpful for others and us to remind everyone why that is the case, why it's such a disparity in terms of the occupancy rates there.

Yes. We exceed the occupancies in most markets because of a number of things -- our franchise, our sponsorship, our financial stability and strength. The fact that we have a tremendous team of human capital that works very hard to keep our portfolio well leased and has great relationships with the brokerage community and in many instances great relationships with the corporate community that does business in our markets.

We are very active in the community. We are a community supporter in terms of the sponsorships and our name is out there. I think more and more in the face of a difficult economic climate all of these elements come to the fore and tenants are very concerned.

I have heard it personally that they want to make sure that their building and their occupancy is going to be on interrupted. They don't want to have a mortgagee as their landlord or a third-party agent. They want to know that at the end of the day, quite frankly, if the air conditioning goes down they can call the CEO of the Company and that is me, or they can send me an e-mail.

Now we have great property management teams that are on site in every one of these instances that wear Mack-Cali emblems and are the face of the Company everyday. Chances are that that call will never need to be made because of the reinvestment that we make in our properties and our capability of doing that and our branding and all of these other things. But they know they have access and that there is a human being at the end of the supply chain, if you will, to speak to if they have financial difficulty, if their circumstances change. That to me separates being an investor and being a real estate professional.

Mack-Cali is a team of real estate professionals, fully vertically integrated, and has all of the skill sets necessary to balance finance, technology, and management with all of these other factors. And in tough environments that makes the difference.

The proof is in the results. The proof is in the fact that we, in some instances, exceed market statistics by 400, 500, and sometimes 600, 700 basis points. It's all due to that fact, as well as the fact that the brokerage community wants to make sure that they are representing their clients appropriately. Also that they are dealing with a landlord that is financially capable that doesn't necessarily need to go through hoops with a mortgagee to be able to finally conclude a lease transactions, so that the tenant can move in or their space can be built out and the broker can get paid. So it's a combination of all these things that really distinguish us from the masses.

Okay, thanks.

Jordan Sadler, KeyBanc Capital.

Good morning. Just wanted to double check on the capital plans going forward, I know you guys are among the least leveraged in the office sector. But still you have significant maturities in 2010 and '11 -- I am looking at the drawing on the revolver -- and maybe some plans here to do a development for sanofi. And I am just curious sort of how you are thinking about the $300 million maturing in 2010. If you have discussed anything with Prudential on that maturity and maybe even looking into 2011?

Well, I tried to address that a little bit in my comments, but I would be happy to reiterate. First of all, with respect to the '10 situation, there is $165 million in unsecured in two tranches totaling $165 million, and $150 million mortgage financing with Prudential that we are in deep discussion with and we have every expectation of extending that mortgage and doing so under mutually satisfactory and beneficial terms. That is looking at '10.

At '11, obviously, we are keenly aware of the 300. We think that we are in a good place, relatively speaking. However, having said that, and again at the risk of being redundant, we are in a period of time now where sort of all things are on the table and I am not ruling anything out. There is uncertainty in the world. The credit markets have remained somewhat frozen and paralyzed. And so kind of living and breathing the business and the capital markets as well as the real estate business.

My job is to make sure among anything else that we can maintain our flexibility to both opportunistically raise capital, to opportunistically maintain maximum balance sheet flexibility and mitigate leverage in the Company. And so with that we are looking at the entire universe and I said it before clearly that all of the --

If the three levers you can pull are asset sales, mortgage financing, or equity, how do they --?

Well, let me just say this. The credit markets are essentially paralyzed, so asset sales in my opinion would be the last and least likely situation that you could even consider. The risk of execution, even if you were to find buyers, is enormous. The pricing needs to be depressed because there is no active investment sales market right now. So out of the bucket that you have just kind of offered up that would be the least likely.

Okay. Then just clarifying this global settlement with Green and Gramercy. What exactly did you get for the $5 million, what was the principal component? Was it the rights to the Building Four development?

What we got was we redeemed their nominal interest in the A properties, which was a nominal interest.

But those -- oh, okay. Right. I know what you are talking about. And then the B properties --

And the B properties we redeemed at obviously their 50% interest and then this deal with Gramercy. We purchased as part of this whole -- this is a global solution -- their half interest in a property to be built that we expect we will build on an unleveraged yield basis of somewhere between 9.5% and 10%, which in any market with a 15-year net lease with a company like sanofi-aventis you can kind of think about the positive arbitrage or of the spread between value and value creation just on any theoretical Cap rate basis.

Can you remind us of the deal on that development and is it to be started at some point in the future? What is the trigger?

Yes, we expect to commence construction in the summer of this year and to complete it approximately 14 or 15 months thereafter. The lease is fully signed and binding. The building is designed and priced, and so it's a go.

Would you plan to construction finance it or --?

No, our cost of funds are less than construction financing. However, having said that we will explore the markets potentially for financing, at least in permanent financing, given the long-term nature of the least and the usability of the asset. So we are certainly going to look at that avenue.

And the expected cost?

We expect all-in to have a cost on the 205,000 feet of approximately $236 a foot.

$236?

All-in including TI, broker, land, soft, hard, etc.

And it is 100% Mack-Cali?

100% Mack-Cali.

Just to be clear, did Gramercy take any bit of a haircut on the principal of the B property loan or is that still --?

The loan principal amount remains at $90.286 million, which is what it was. And as I said before, there is a coupon rate to the loan, but essentially the properties are cash flowing. They are in the aggregate about 68% leased. We hope to make more traction with respect to further lease up, but the capital obligations in terms of leasing costs for TI and commissions it comes out of the waterfall reserve, which is essentially the cash flow right now in the properties.

We are under no obligation whatsoever to put up any capital. And in fact, a priority payment out of this capital reserve or this waterfall is to pay Mack-Cali for management and leasing fees.

Okay. That is helpful. Thank you.

John Guinee, Stifel Nicolaus.

Mitchell, just to clarify, what I think you are saying there is the interest on that $90 million loan is junior to the TIs and leasing commissions needed?

Yes. There is a waterfall where the priority payments are for operating the properties, paying for the lights and heat as it were, as well as the real estate taxes. The payment to Mack-Cali of management leasing fees and everything else is subordinate to that.

Got you, okay. Second question is you were voted, I think, one of the 100 most trustworthy companies and I think your guidance looks really low. Can you comment on that?

I am not sure there is a correlation between guidance and being recognized as one of the 100 most trustworthy companies. I think that clearly the metrics that Forbes used in their research group was based on predictability, consistency, good corporate governance, patterns of management stability, etc.

It was not, as far as we were informed, based on guidance or occupancy or anything else other than the expectation that we were recognized as a leader in the industry. And that is reflected, I think, in our occupancies and the question that was asked before about how we are able to outperform so many of the markets that we do business in.

Great. Thank you.

Gentlemen, at this time there are no further questions. I will turn things back over for any additional or closing remarks.

Well, thank you very much. I appreciate everybody's participation in today's call. We look forward to reporting again to you next quarter. Thank you, again.

That does conclude today's teleconference. Thank you all for joining.