Veris Residential Inc (VRE) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation's second-quarter 2009 conference call. Today's call is being recorded. At this time I would like to turn the call over to the President & Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining Mack-Cali's second-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'd like to review some of our results and activities for the quarter and generally what we're seeing in the markets. And then Barry will review our financial results and Mike will give you an update of our leasing results.

FFO for the quarter was $0.87 per diluted share. This compares to FFO of $0.93 per share for the same period last year. However, it's approximately $0.06 above consensus. This is primarily due to slightly better revenues at the property level, as well as lower expenses generally related to utility expenses, partially as a result of the cooler temperatures that we've all been experiencing, as well as lower utility rates.

We had some strong leasing activity throughout the quarter, with a total of almost 826,000 square feet of lease transactions. Our portfolio ended the quarter at 90.6% leased, obviously slightly down, 10 basis points down, from last quarter at 90.7%, but still a very healthy number in this economic environment. Approximately 265,000 feet of that 825,000 feet was related to 2009 expirations.

Rents rolled down in the quarter by 7.3% compared to last quarter's 6.1% roll-down, demonstrating continued pressure on the rents within the marketplace. An example of the types of deals that contributed to these sorts of numbers is Fazio Mannuzza Roche Tankel, which is an accounting firm that I'll talk a little more about later on. But generally, this related to a space at 20 Commerce Drive in our Cranford Business Park in Cranford, New Jersey, where a lease for approximately 20,000 feet was expiring during the quarter. Fazio, who are leaders in the accounting and tax and business advisory service field, signed a new 11-year lease for the entire space. And while the Fazio lease carries a lower rental rate, we were able to achieve positive absorption, minimal downtime, reasonable fix-up costs and thus keeping our portfolio well leased in a very difficult economy.

In general, our leasing costs were slightly higher for the quarter, $3.11 per square foot per year, compared with last quarter's $2.99 per square foot per year, so slightly higher, but not materially, reflecting again continued economic pressure within the marketplace.

For the second half of 2009, remaining rollovers within our portfolio are just 2.2% of our base rent, or approximately $14 million. For 2010, we face rollovers of slightly more than 11%, or $70 million. And so we know we have a lot of wood to chop. But our leasing teams are out there doing a great job. And despite this challenging environment, the likes of which probably none of us have ever seen in our careers, we continue to outperform almost every market in which we do business, with our leased rates exceeding market averages in Northern and Central New Jersey, Westchester, suburban Philadelphia, and Washington, D.C.

In the quarter, Mack-Cali acquired the remaining interests in the Mack-Green-Gale and 55 Corporate Partners joint venture for $5 million. You all recall our discussion about our transaction with SL Green and Gramercy Capital. This has resulted in the Company owning 100% of these ventures. As a result, we have now consolidated 11 additional office properties, aggregating approximately 1.5 million square feet, the old Belle Mead portfolio, as well as a pad where we're building a build-to-suit 15-year pre-lease deal for Sanofi-Aventis in Bridgewater, New Jersey. The building is scheduled for completion in 2011 and will serve as an expansion of their North American headquarters. And by accomplishing this transaction, we've simplified our lives, removing a joint venture and partnership structure and all the revenue is now inured to the benefit of Mack-Cali shareholders.

Also in the quarter, we completed a public offering of 11.5 million shares of common stock at $25 per share, and used the net proceeds of $275 million to pay down our revolving credit facility and further delever this company into an enviable position with respect to its balance sheet. We also recently closed on a $17 million mortgage financing with Valley National Bank, a major regional bank within our corridor, on our 200,000 square foot Woodbridge, New Jersey office building. And that building was done on a handshake with the CEO of Valley National.

Some of our notable leasing transactions during the quarter included Herzfeld & Rubin, a major full-service global law firm, specializing primarily in litigation. They signed a 56,000 and change square foot deal, 20-year term, at 125 Broad Street in downtown Manhattan. The firm is moving its headquarters to our building.

Global Aerospace, the world's leading aerospace insurer, signed a new 12-year lease for a full floor of approximately 48,000 square feet at One Sylvan Way in our Mack-Cali Business Campus in Parsippany, New Jersey. Global Aerospace is taking space that was previously leased to Wyndham Worldwide, which only last quarter moved to its new corporate headquarters at 22 Sylvan Way, the 0.25 million square foot building that we developed for Wyndham in the same campus, and have begun discussions with them regarding the possible phase two development of a similar amount of new development space.

Fabrication Enterprises has signed a combined renewal and expansion for a total of almost 58,000 square feet at two properties in our Cross Westchester Executive Park in Elmsford, New York. The manufacturers, importers and distributors of various medical products renewed its existing 20,000 square foot lease for 6.5 years at 3 Westchester Plaza and signed a 10-year expansion for over 16,000 square feet. At the same time, the company signed a 6.5-year renewal for almost 21,000 square feet at our 250 Clearbrook Road property.

And finally, Bank of America renewed their lease of over 22,000 square feet at 4 Century Park for five years. Four Century Park is a 64,000 square foot Class A office property located in Blue Bell, Pennsylvania.

And I think that these leases, particularly Herzfeld & Rubin, Global Aerospace -- in the case of Herzfeld and Rubin, they were in occupancy of their current offices at 40 Wall for over 40 years; Global Aerospace at their location in Short Hills for 10 years; and Fazio at their location in Springfield, New Jersey for over 15 years. I think that these leases in particular reflect the trend that we've talked about, flight to quality -- quality of assets and quality of sponsorship, and the confidence in a strong, stable, financially secure landlord like Mack-Cali.

As in past years, Mack-Cali also continues to be recognized for its expertise in property management. Several of our properties received The Office Building of the Year, the TOBY award, from the New Jersey chapter of BOMA -- 222 Mount Airy Road in Basking Ridge, in the under-100,000-square-foot category; 412 Mount Kemble Avenue in Morris Township in the 0.75 million-to-0.5 million-square-foot category; Harborside Plaza One at our Harborside Financial Center along the Jersey City waterfront, where we recently completed a $12 million renovation, we won in the renovated-building category. And finally, 23 Main Street in Holmdel won the corporate facility award for the second straight year, the headquarters of Vonnage. So we're very proud of the accomplishments that I've just recited.

And now we'll move into the financial results for the quarter. Barry, would you walk through that, please?

Thanks, Mitchell. For the second quarter of 2009, net income available to common shareholders amounted to $20.4 million, or $0.28 a share, as compared to $18.3 million, or $0.28 per share for the same quarter last year. Funds from operations for the quarter amounted to $76.5 million, or $0.87 a share versus $75.2 million or $0.93 a share in '08. Other income in the quarter included approximately $774,000 in lease termination fees. Second quarter last year had lease termination fees of about $141,000.

Same-store net operating income, which excludes lease termination fees decreased by 0.4% on a GAAP basis. On a cash basis, same-store net operating income increased by 0.7% for the second quarter. This was principally as a result of burning off of free rent from the prior period. Utility costs for the second quarter of '09 declined from 2008 primarily as a result of lower rates as well as reduced consumption. Our same-store portfolio for the quarter was 29.2 million square feet. Our unencumbered portfolio at quarter end totaled 235 properties, aggregating 24.3 million square feet, which represented about 78.6% of the portfolio.

As Mitchell mentioned, during the quarter we completed several key transactions. We acquired the remaining interest in our two joint ventures with SL Green, Mack-Green-Gale and 55 Corporate ventures. As a result, we are now consolidating 11 office properties, consisting of 1.5 million square feet owned by Mack-Green-Gale venture and the 205,000 square foot build-to-suit project for Sanofi-Aventis. As a result of consolidating the 11 office properties, our debt balances at June 30th include $151 million in mortgages secured by 10 of those properties.

Also in the quarter we completed a common stock offering of 11.5 million shares, raising about $275 million in proceeds, which was used to pay down our revolving credit facility. We currently have $30 million drawn on our $775 million revolver.

We completed a $17 million mortgage financing with Valley National Bank. The mortgage loan, which is collateralized by our office property in Woodbridge, New Jersey, has a 25-year term and bears interest at an effective rate of 6.94% per annum through the end of year 10. At that time the rate will reset at 225 basis points over the 10-year Treasury yield 45 days prior to the date of the reset.

Also during the quarter we recorded a gain of $1.7 million in closing out the remainder of the acquired lease obligations assumed as part of AT&T transactions in '04. At quarter end, Mack-Cali's total undepreciated book assets equaled $5.6 billion and our debt-to-undepreciated-asset ratio was 37.3%. The Company had interest coverage of 3.3 times and fixed-charge coverage of 2.9 times for the second quarter of '09. We ended the quarter with approximately $2.1 billion in debt, which had a weighted average interest rate of 6.43%.

Finally, we have revised our 2009 FFO guidance to a range of $3.15 to $3.25 per share.

Please note that under SEC regulation -- 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-K.

Now, Mike will cover our leasing activity.

Thanks, Barry. At June 30th, our consolidated portfolio was 90.6% leased, as compared to 90.7% at March 31st. We signed 140 deals for 826,000 square feet in the second quarter, which is a 30% increase in both deal count and square footage over our first quarter activity, but is still below typical levels. At almost 430,000 square feet, the total space signed for new leases and expansions outpaced each of the last three quarters. This quarter's tenants have committed to longer lease terms. The weighted average term of this quarter's transactions was 6.6 years, which is longer than we've signed since the second quarter of 2007.

Our leasing costs per square foot per year came in slightly higher than last quarter, and concessions in the form of free rent increased from an average of one month per deal to almost two months per deal in the second quarter. We continued to experience downward pressure on rental rates, as evidenced by the roll-down in first year rents.

Comparing year-to-date prospect activity with the same period last year, we saw slightly more leads, but for smaller spaces, which was consistent with what we experienced in the first quarter. Lead activity square footage is off 30% year to date through June 30th. The decrease in prospect activity was heaviest in the Northern New Jersey counties of Bergen and Passaic and more modest in Westchester, New York and Fairfield, Connecticut. The slowdown in leasing velocity throughout our markets continued with second-quarter results off the 2008 average by a range of 8% in Westchester, New York to 62% in Washington, D.C. Most markets were down in the range of 40% to 50% from last year's activity levels.

Vacancy rates in almost of our markets continued to increase this quarter. The largest upticks in our major markets for the last quarter were represented by suburban Philadelphia at 160 basis points, and Westchester, New York at 120 basis points. Northern Central New Jersey saw an 80 basis point increase in the second quarter.

Space available for sublease in our portfolio remains steady at 4% of inventory. In our major markets, companies continue to return space to availability in large numbers. Subleased space in our markets now represents a range of 9% of total availability in Washington, DC to 34% of total availability in Manhattan. The most significant increases this quarter were in Westchester, New York and Northern New Jersey, where sublease space now represents approximately 25% of total availability. The heaviest concentrations of sublease space in Northern New Jersey are in the Morris County submarket of Parsippany, with sublease space representing 36% of overall availability, and on the Hudson waterfront, where it comprises 66% of overall availability.

Mitch?

Thank you. In closing the formal remarks, I'd like to add a few additional thoughts. Clearly, while we are still in a very difficult economy, we're very pleased with the renewal activity that we're seeing as well as some of the new leases and the new tenants and the diversity that we've added to the portfolio, some of which I described in my earlier remarks. However, tenants are still delaying decision making and making commitments. But we're seeing a slight uptick in leasing in some of the markets that we operate in.

I guess we're certainly very pleased with our overall performance and the fact that after paying what we believe is a fairly healthy dividend of $0.45 per quarter in cash, we've retained almost $18 million in free cash flow in the quarter, after spending over $10 million in TI and leasing costs and some -- that sort of capital. And expect on an annualized basis to finish the year not too far different in terms of occupancy, although we expect continued pressure on occupancy, maybe 100 basis points or so. But we expect to finish the year with in excess of $60 million of free cash flow, amplifying our balance sheet, maintaining strong coverage ratios, and, while doing all of that, hopefully spending almost $60 million on an annualized basis in TI and leasing costs, which would reflect an improving market.

And so, with that balance sheet flexibility and our well-leased portfolio and our premier properties, when things start to turn around and opportunities present themselves, we will certainly measure the risk involved and will take advantage of our brand, our financial flexibility, our good name in the marketplace, and our deep relationships throughout the industry, a practice that has continued to serve this company well over a long period of time.

And with that, we'll now take your questions. Operator?

Thank you. (Operator instructions.) We'll take our first question from John Guinee with Stifel.

Hi. Mitch, can you hear me?

Yes. How are you, John?

Good, good. Very nice job, very impressive. Walk -- you guys, because of the delevering and the equity raise, are clearly in a position where the corporate unsecured market is viable relative to asset-specific mortgages. Can you talk through your thought process on the short term of accessing those two alternatives and also your long-term plan in terms of keeping your leverage low enough to access the corporate unsecured market?

Sure. John, just sort of as a barometer, we're over 70, almost 79% unencumbered at the present time. And generally we have maintained the philosophy, if you will, that having the unencumbered balance sheet allows us a great deal of flexibility in terms of continuing to improve asset quality within the portfolio, flexibility to sell and particularly in markets that we don't think on a long-term basis will continue to serve the benefits of our shareholders, and migrate those dollars into stronger, deeper macro markets. So I don't think any of that has changed.

I think that our philosophy over time has allowed us to take advantage of the secured financing market in a period of time where the unsecured markets have remained closed. Although there has been some discussion about unsecured offerings and hopefully we'll see some in the not too distant future -- we would expect, by the way, that the rate, if you will, would be somewhere sub double-digit, but in the 8% to 9% range for unsecured paper with the credit quality of Mack-Cali behind it. And we are hopeful of seeing that opportunity in the not too distant future.

We've also looked at other facilities and there's been some discussion recently about TALF financing, which primarily has so far been in the corporate sector and, as you know, in the auto loans and consumer loans and credit card loans. But there's been some recent discussion about some real estate companies, more I guess retail-focused companies, looking for TALF financing. But for us, that's three-to-five year financing and we don't think it does a lot for us.

So I think the goal would be to selectively continue to look for secured mortgage financing, where we think that the stability of a particular asset would lend itself to that sort of financing. We will likely roll over at least several of the current mortgages that have expiry dates in the next couple of years. But we still think that the flexibility of the unsecured markets allows us to be more nimble in the leasing markets. We don't need to secure the approval of lenders with respect to lease transactions. And we talked in prior calls about our experience, particularly in the CMBS area, with our Virgin Atlantic, Virgin Mobile lease, which by the way, you've probably read is being acquired by Sprint, or that's the plans, further enhance that credit.

And so we don't see a lot changing going down the road. And we think that having the ability, with a 78% or 79% unencumbered pool to selectively access the secured markets at favorable interest rates of probably 7 -- 6 -- the Valley National deal was 6.875%. Some of the other transactions in the secured mortgage arena that we're discussing are similar, 7.5- to 10-year term on an absolute basis, 25-year amortization and 7% to 8% annual interest rates.

So that's how we feel about it. We've worked very long and hard to operate this company to a BBB rating with, at the higher end of the coverage numbers with respect to interest rate coverage and fixed charge coverage in that arena. And we don't see any reason to change that going into the future.

Thank you very much.

You're very welcome.

We'll take our next question from Jamie Feldman with Bank of America Securities - Merrill Lynch. Actually, we'll take Michael Bilerman with Citi.

Hi, this is Mark [Montanen] on behalf of Michael Just had a question regarding the utilities. I know you mentioned they were down largely year over year about 18% same store, and this is attributable to both cooler temperatures and lower rates. But I was trying to get a little more granularity and wondering if you could tell us what the rates were actually down on average year over year in your buildings?

In terms of rate, when we went through and we did our modeling last year, we had modeled, quite frankly, continued increases in the portfolio in terms of overall utilities. It wasn't until kind of I guess late last year, beginning of this year, where we kind of saw a reduction in utility cost. And what happens is -- and I guess it's really important to point out -- is a lot of the properties that we have the utility pricing is done on an hourly basis. So it's -- you are really open to the stock market. And what we saw was -- we saw, just to give you an extent of how we've seen prices come in -- last year gas, natural gas, which is primarily the driver for utility costs, we saw that kind of go down about 20%, 30% and we've seen those kinds of reduction in the costs, [on a] unit basis.

Let me just add to that, just to give you some sort of depth of perspective on this. For the year over year, for the quarter we spent approximately $15.5 million on utilities, versus almost $20 million for the year-ago quarter, same store I'm talking about. And so even from the persp- -- that's on an absolute dollar basis. From a budget perspective, we spent 40% less than our budget. And it's also important to remember that, in these escalations, in these utility costs on an absolute basis and certainly the escalations that might occur, about 50%-or so, maybe 50% to 60%, are reimbursed to us by our tenants. So this is a benefit both in terms of the performance of the same-store portfolio in the Company and it's a benefit clearly to our tenants in keeping their cost of occupancy lower. And the size and scale of our properties allows us to have these demand features, as well as the technology we've employed through our energy department, where we can use the lowest-cost kilowatt hour charge, as a result of our demand meters because of the scale of this operation.

Great. Okay. And then I guess continuing this on into your guidance, it's up about 9% at the midpoint for the year. Is this attributable to both -- I know you just mentioned better than expected utility costs, but is it also attributable to better than expected leasing? Or is there some one-time items that you have in your estimates that we might not have in ours for 3 and 4Q?

You know, there are a couple of things that are incrementally added to the guidance. First of all, we had anticipated doing certain financings. I talked about that a little while ago with John Guinee, about the opportunity to access the unsecured market. And so there are some modifications as a result of not having done certain longer-term financings that are benefits to the portfolio. Fortunately, we have utilized fewer of our reserve dollars from a credit perspective, a tenant credit perspective.

As you know, we had reserved a significant amount of money for the Lehman situation and Lehman [assumed] their lease in bankruptcy with us. And that's all been ratified by the bankruptcy court, so that's a couple cents a share.

We have, as we talked about before, slightly enhanced NOI at the property level and reduced utility costs, which are a benefit to us. And we've also lowered our G&A expenses. Where we had roughly an $11 million per quarter run rate, now we're closer to a $10 million per quarter run rate. And so all of these things on an incremental basis have added to our previous estimate, or model, if you will, that resulted in the prior guidance.

Great. That's really helpful. Thanks.

You're welcome.

Next we hear from Jamie Feldman with Bank of America Securities.

Great, thank you. Can you hear me this time?

Yes.

Okay, good. So I was just hoping you could give a little more color on your view of where your markets stand in terms of sublease space that could still come back on the market, or tenants that are just underutilizing their space, and kind of where we are in that cycle.

Again, we [scrub] pretty hard on this, Jamie, and try to understand who we're competing with, if you will, in the market so we know that about 5% of -- or between 4% and 5% of our portfolio is available. The larger blocks of space haven't really changed. Half of the old AICPA space in Jersey City in Plaza 3 at Harborside, and the Toys "R" Us building in Paramus that has, for all intents and purposes, a January 1st of 2013 expiration -- and so the total sublease space on a direct basis, that we're very much aware of and is quite transparent, results in about a slightly more than 1 million square feet in our portfolio.

Clearly there are instances, and Jersey City is one case, where, for example, Morgan Stanley has put part of their space on the market for sublease. And there are some smaller blocks of space as well available for sublease. I believe that representatives for tenants make their clients aware of every opportunity in the marketplace and, as part of their responsibility, talk to tenants about the fact that having direct leases with their landlords, especially strong, stable landlords, gives them more flexibility and many advantages in doing these deals. And as you know, for example, with the other half of AICPA we were able to work with the tenant, in that case AICPA, to craft a very mutually acceptable deal with Arch Insurance.

And so this is a part of life today. But I would tell you that, in general, the sublease space in most of our markets, with the perhaps exception that was noted before of Morris County, is not as extreme as it is in some of the markets, like Midtown Manhattan. And where, in that case, it might actually triple the vacancy rate or -- and I've heard figures and I've seen statistics saying that in Midtown, for example, that of the availability 34% or so is sublet space.

So it's something you have to deal with in the market. It puts some pricing pressure on, but like I said before, I think that clearly tenants are -- to the extent they're able to make final decisions these days -- and I do sense that with all of the green shoots that are being talked about by the administration and Wall Street in general, and the market improving, that there's a little more optimism and hope. And I think, while job loss in every sector, including the service sector, has been quite significant and we all know what the statistics are and we think there's probably shadow unemployment on top of the reported unemployment that bring the numbers to very significant levels -- I think that companies are starting to think about the fact that maybe they've cut a little too much. And they have to think about growing their businesses in the future. And so as part of that, I believe that working with a strong, stable landlord, having the opportunity to -- this flight to quality, both in terms of asset quality and landlord sponsorship quality is something that direct landlords like a Mack-Cali will always have an advantage over a tenant that's trying to sublet its space. Does that answer your question?

Well, I guess what I'm trying to figure out, not so much your portfolio, but in the rest of the market, do you think that most of the space that's going to come back on the market has come back on the market?

I think the large blocks of space have come back into the market in general. Anecdotally you might see a different situation. But I think a lot of the credit risk has been removed from the system, certainly with the major users. Their companies have taken the opportunity in the face of the inability to raise their top-line growth, they've slashed their expenses, cut employment. That's been the soup du jour this time around and there's sort of no place to go right now. But companies have fixed lots of balance sheet problems in lots of industries. And so I don't project, or see, at least to the extent it's sort of in front of us on the radar screen, any major blocks coming back into the market space -- into the marketplace at this point in time. And frankly, I think there's a little bit of a more positive bent towards companies thinking about expansion, where they want to take some of that stuff that's been put into the marketplace as part of this flight to quality.

Okay. Thank you.

You're welcome.

Next we hear from Nick Pirsos with Macquarie.

Good morning. Thank you. A couple questions -- of your recent lease signings, on a percentage basis, how many would you estimate are taking greater space? And how would that compare historically?

That's a difficult metric. We've had the good fortune in some instances because of all of the things I've talked about, as the strength of sponsorship and asset quality, to add to our family, if you will, some very fine new tenants that, frankly, had to make very difficult decisions. The Herzfeld & Rubins of the world that formed their partnership in 1955 and grew to one of the largest litigation firms in the world and at their current home for 40 years. It was a difficult sort of sea changing decision for them. But I would estimate that they took roughly the same amount of space. It's a lot more efficient for them, so they'll have better utilization than they have in their former home. A company like Fazio took a little more space, maybe 4,000 feet, more than they previously had because they envision the opportunity to grow their firm.

So in total, if we look at the expansion space within our portfolio, which is probably the only thing we can measure on an absolute basis, year over year we -- well, let's say the beginning of 2008, we saw expansion of 44,000 square feet. And I realize it's a small number in the context of our total portfolio. And this quarter we saw roughly 64,000 square feet. So a net incremental gain from the beginning of 2008 to this quarter, which might signify once again that companies are beginning at least to think about what the paradigm shift is going to be in the improving economy -- the new normal, if you will, going forward.

Great. That's helpful. The second question, just on utility costs, given the volatility we've had and obviously we don't know what sort of volatility is going to be ahead of us, but is there opportunities to hedge?

You know, we have hedged where it's possible over time. And I think generally we have done well. It seems to be clear that the cost of oil is obviously under a lot of pressure right now because of the cessation of demand, primarily driven, obviously, by the consumer. And so it appears that there may be some further downward trends in the cost of utilities. And, again, we can pass a lot of that through in the form of escalations to our tenants.

So I think it's a little early to do too much hedging and with some of the deregulation still occurring in some of the jurisdictions and the way in which power is sold, it's also somewhat difficult. But we have traditionally done some hedging and it's certainly in natural gas and it's worked out well for us. But we think it's maybe a little bit early now.

Great. And just lastly, New Jersey's been in the news recently concerning real estate development and political contributions, not in a favorable sense. Do you see any negative fallout or opportunities as a result of these developments?

Well, I'm reluctant to even comment about that. I guess we certainly, having the State of New Jersey as a significant tenant of ours in a variety of different assets, we -- there are very strict pay-to-play rules and laws on the books in the state. And having -- being the beneficiary of being a public company, having everything absolutely transparent and regulated through the SEC and the New York Stock Exchange and Sarbanes-Oxley, as well as our own internal controls and our own external auditing, we certainly are very much removed from even the thought process of some of the stuff you've read about.

Relative to opportunities, from what we have read, a lot of that development, the alignment of development with that corruption scandal, was residential in nature. There were a number of different municipalities where there were residential projects talked about, which of course is not our core competency and area of our focus. So I would say that we're probably not going to see anything evolve out of that in the form of absolute real estate opportunities.

Clearly that sort of scandal is not good for the image. I'm not sure how much different New Jersey is from a lot of other places in terms of how it operates. It just gets a lot of press. And all that stuff, if you will, is bad for business. But it'll blow over. And hopefully whomever is culpable in those instances will have to move through the system, and the negativity with respect to perception and public relations will blow over as pretty much everything else does, a one or two day story.

Great. Thank you.

You're welcome.

Sheila McGrath with KBW has our next question.

Good morning. Mitch, I was wondering if you could review that Valley National deal again, on the reset of the interest rate, and also if you could give us any details on loan to value, or debt service coverage?

Yes. The -- I'll give it to you simple. I mean, the way it was structured, basically, from our perspective, it's -- although it's drafted and structured as a 25-year transaction, from a self-liquidating perspective, and that's the way that Valley National wanted to do it -- from our perspective it's really a 10-year financing, and with a 25-year amortization schedule. And essentially, other than a small fee payment at the maturity of that 10-year period, we have the ability to pay off the loan. It's not yield maintenance. It's not an early payment that you would think of traditionally. It was just a matter of how the bank wanted to structure the deal. But from our perspective, it's a 10-year deal, 6.875% interest, with a 25-year amortization schedule.

I think -- and this also goes a little bit to John Guinee's question originally about the secured financing, et cetera. The asset was -- the proceeds under the mortgage are approximately $85 a square foot. The building I think was valued from their perspective in terms of an appraisal at roughly it's an 8.5% cap rate. And they took a very conservative loan to value, less than 50%, because that's the nature of secured financings. And certainly we are, I think, in a very enviable position in terms of how the balance sheet lenders look at us. And we don't even, never really even really thought about CMBS-type financings other than on a rare instance or in a JV.

So I think there's a very conservative valuation. I would tell you to rebuild that building, forgetting about rebuilding the income stream, with the credits that we have there, like the New Jersey state government, the New Jersey Turnpike Authority, which is a toll road between the Parkway and the New Jersey Turnpike, so when they need revenues they just have to raise the tolls. And they have half the building and the other half is occupied by premier tenants like NetJets and other major enviable tenants.

But I think it's a reflection -- and so to replace the building you're probably looking at somewhere around $225 to $250 a square foot, all in, with TI and leasing costs and so forth. It's a granite building. It's Canadian grained granite, one of the finest buildings in the entire region, a premier -- visibility along the Turnpike, et cetera.

So the proceeds are in no way a reflection of inherent value. No way are they a reflection of replacement cost, or any other metric other than the fact that lenders, secured lenders, have taken the general position that to be safe, in a difficult economy that they're going to loan, on very conservative valuations, no more than half the proceeds of that valuation. So that's one of the reasons we don't think that secured financings, although we will continue to do them selectively, and roll some where we have maturities, are the best long-term capital plan necessarily for this company.

In other instances I've previously talked about the limitations where we had that CMBS loan with a perfectly viable, good lease extension. And because that one was a CMBS loan that we inherited as a result of the Gale acquisition and the old Belle Mead portfolio, we couldn't get the attention of the special servicer there for a long time. They were busy putting out fires and brush fires and apocalypse situations that were confronting them. And so it forced us to take very strong and aggressive position with them, because we weren't about to pass up an opportunity to roll a lease out to 2016, or almost 2017 in that case, with what turns out to be a phenomenally strong credit.

And so there's lots of issues that lead us to continue to believe that from a long-term capital stack perspective and balance sheet perspective, we're where we want to be with the unencumbered, unsecured financing and the continued ability to delever the Company when, and to the extent, that opportunity is available to us.

Okay. Thank you.

You're welcome.

Our next question comes from Chris [Kotan] with Morgan Stanley.

Good morning. Turning back to the leasing, could you talk a little bit about the key deal terms tenants are pushing for in terms of TI, free rent, or base rent, and any differences you're seeing across your submarkets?

Yes. I would tell you generally we're -- many tenants are still looking for immediate rent relief, particularly where you have blend-extend. That's sort of a term of art that our industry has been using lately, blend-extend -- renew, maybe incrementally add a little space and sometimes take back a little space.

Tenants have, in all different industries, both because of the difficult economy, because of stress on their own revenue streams, and also because of perception that's been to some extent promulgated by the media and by the press about commercial real estate being the next shoe to drop. And not distinguishing necessarily between a landlord like Mack-Cali, which has an amply strong balance sheet and the ability to navigate through these tough seas, and other sponsors, investors, owners, who don't -- who have refinancing risks facing them, whether it's through the CMBS markets or otherwise, and have lost substantial value in their properties and substantial cash flow and the need to put a lot of equity in if they are able to refinance.

And so part of the problem has been this perception where the commercial brokerage community has gone to all of their tenants, clients, and said, "Hey, this may be a good time to talk to your landlord, get some immediate rent relief." But as professionals and as fiduciaries they also advise them you have to give something to your landlord back. And so it's lease term extension, or more space, that sort of thing.

So I think that on the blend-extend we've clearly seen tenants come to us and say, "Hey, can we have a couple months of free rent and we'll give you additional term on the back end." On new deals, in some instances we've seen tenants say to us, "Hey, we have an existing rent obligation. We have another year or year and a half on our lease, wherever it is. We see this as a great opportunity to move into superior assets like yours, with a landlord who's got a great reputation of doing what they say they're going to do, even before the tenant asks. And so we want to take advantage of that. We want to pay market rents. But we need you to help us pay our current rent." And so we see a variety of different situations where we might have to absorb however much that might be. If it's a year's rent, it might be $20, $25 a foot on average that you have to add to the -- what I'll call the concession package.

So we kind of see it all. The one thing we're not seeing, in general, is we're not seeing tenants come to us asking for more tenant improvement dollars. We know what that range is, depending on where the property is. If it's a waterfront property it might be somewhere in the $40 per square foot range for a 12-to-15-year lease. And if it's in many of our suburban locations, it might be a turnkey or a dollar allowance that's worth $25 or $30 a square foot, or maybe $35. Again, long-term leases, which by the way, we've been able to do. We've been able to ladder out our lease maturities as we move through this difficult cycle. That last quarter was 6.6 years on average. So we have many leases with very credible tenants that are long. And that's a benefit.

So the dollar concessions haven't really increased. It's immediate rent relief to help their own cash flow or their own balance sheets. Or it's taking over a lease obligation somewhere, which is both an opportunity for them and it's an opportunity for us.

Super. Thank you.

You're welcome

Next we'll hear from Michael Knott with Green Street Advisors

Hey, Mitchell, obviously you did an equity raise not too long ago and delevered a little bit. What's your outlook or your strategy for delevering over the next couple of years? Do you expect to further delever or -- ?

Yes. I would tell you that it's certainly our go- -- we have always maintained a very conservative balance sheet and have been at the lower end of leverage and the higher end of coverage ratios. It's our goal to continue to do that. If we see an opportunity to further delever the balance sheet we will do so. There's no absolute number. We're on a debt-to-book basis something like 37%. And we talked before -- Barry talked about the coverage ratios and the fixed-charge coverage being 2.9, which is a very enviable position to be in at this moment in the economic cycle.

So, yes, that's the goal. I can't tell you that -- like I've heard some other CEOs talk about the fact that there's an absolute number, 25%, and then maybe one or two cases anecdotally I've heard no leverage, which of course we don't see as a possibility in the near term anyway. But we'll continue to look to delever, to maintain a huge margin of safety within our cash flows and our balance sheet, to have the ability to continue to in general have lots of line capacity when and if we need it. Right now we're out $30 million or $35 million on the line. We'll probably be out nothing by the end of the month because of just cash flow and coming in -- and we also have about $33 million sitting in the bank in cash. So, yes, we'll look to delever further if we have that opportunity, Michael.

Okay. And then my last question is on leasing. [Appears that] you've been disappointed by these [quite] low tenant retention ratio of 50%. Most of peers have said that it's been easier to keep tenants in place, that most tenants want to stay in place. So I'm curious your thoughts on the retention ratio, especially as the lease expirations --

Right. I think --

-- will (inaudible - technical difficulty) next year.

Yes. There's -- certainly tenants want to stay in place. And clearly it's always easier for a tenant, provided their physical plant works for them, not to move. It's less costly. It's less distractive for them. And it's -- and our goal is never to have empty space because the revenue pays the bills. And there are economies of scale. And once you pay in the operating costs, everything falls to the bottom line anyway. So believe me, as you probably know, in our many, many one-on-one discussions, we're all about leasing. And we've navigated through horrendous environments, whether it's the late -- the middle 1970s or the early 1990s. So we've kind of seen it all, at least I certainly have.

But in this instance, we've had a little bit of a paradigm shift. First of all, there has been more financial distress in what I'll call the industrial sector of the economy this time around than we have seen in past cycles. In the early 90s, real estate was under enormous pressure. The thrift industry dissolved. But the government stepped in, formed the Resolution Trust. You were able to get financing on properties. You were able, frankly, to take -- be the beneficiary, or we were, of opportunities as a result of the structure that was put around the real estate problem that existed, partially -- or primarily as a result of the thrift industry being deregulated.

But there was a lot of business happening. When the economy was on the brink, or the financial system was on the precipice, going back to first Bear Stearns and then moving through the fall of last year with Lehman Brothers and there was all this discussion about apocalypse. There was a huge amount of distress, a lot of bankruptcies, the inability for businesses to finance themselves, which still exist to a large degree. There's still a huge unavailability of credit in the system, not only for real estate, but in general. And so that's presented certain challenges.

Now, we had State Street Bank, for example, 115,000 square feet in Princeton, and that's obviously a big part of the lack of retention this quarter. And they basically took an ax to their headcount, shut down operations, consolidated operations, took federal money, TARP money, and so we're under all kinds of constraints as a result of that.

We have another tenant Idarc Media, which you may remember several years ago as Verizon Yellow Pages, and they've faced lots of pressure, I guess partially as a result of the internet and web-based information services that -- so there's less of a requirement for the old yellow page telephone book, and they filed bankruptcy and they dumped back 41,000 feet that we never expected and rejected their lease in Greenbelt, Maryland.

So we've seen some of that too. But there is no question that from a whole variety of perspective, some of which I talked about, the distraction, the expense of moving, the brokers want to deal with Mack-Cali. And so where we have existing tenants, while they may test the market, which is part of what the brokerage community has to do as their responsibility and they may say you can -- here are the general rents.

It's like one of the top level partners at one of the largest brokerage firms said to me the other day, brokerage -- based in New York City, he said, look, I told the tenant that I represent, because they've come to us to extend out their leases, they have three different leases with us in three different buildings, and, naturally, it's a reflection of the rents are less in terms of what they're proposing than the current rents that have been fully escalated. The rents are eight years old right now. So there may be some mark-to-market. But he said that he told his client, if you want a "cheap deal," you want a $20 deal, there are lots of buildings I can show you. But I don't know who -- he said I don't know who's going to own those buildings six months or a year from now, whether it's going to be a bank or it's going to be a landlord that's basically constrained as a result of the equity he had to put in it. And he said, when you -- when it comes time for you to come -- want to come back to your landlord in two years and say, I need more space or -- and I'm willing to, you give me a little fix-up and I'm willing to trade it off, he said, you better know who you're dealing with. And on top of that, last but not least, the broker wants to get paid.

So there are all of these elements that go into the thought process today. And, but like I said, we're, to some extent, a little bit of a victim of the marketplace. There are these landlords that are under pressure. There is the notion of this unraveling with respect to refinancing risk, and so it's providing -- it's a tenant's market right now. And we're going to have to meet the market generally. But no question, at the end of the day, the tenant wants to stay with us long term most of the time.

Okay. And then do you, as you go into two thousand -- higher lease expiration, do you worry the ratio will not improve?

I would tell you that we have done as scientific an analysis as we can do and we've identified every tenant out several years because we also try to do five year modeling, but we've all seen that the things change pretty rapidly in this global economy. We pretty well know who's vacating. And there is more percentage in those known vacates out of the expirations in 2010 and some of the out years that I would -- than I would like to see. There's -- and this is a high percentage in general. But the other element to this, Michael, is that we have lots of time in keeping such close contact with our tenants through both our property management and our leasing personnel to identify who's leaving most of the time, way early, so that it gives us the opportunity to market that space and try to backfill it, just like we did with Fazio in Cranford with virtually no downtime other than some minimal cosmetic and minor hard construction fix-up.

So, yes, does it worry me? Yes, believe me, I'm worried about lots of things. But we think that we are ahead of the curve and we have a competitive advantage in a variety of ways.

Thank you.

You're welcome.

Our next question comes from George Auerbach with ISI.

Hi. Good morning.

Good morning.

Can you give us an update on your efforts to backfill the CitiGroup space at 125 Broad Street?

I sure will. I think we are pretty close, and I -- it just it takes a long time to get deals done, particularly larger deals in this environment from a variety of perspectives. We have more than a dozen responses to request for proposals that we've put out. We have had -- I personally attended a meeting with the principals last week on a floor and a half deal, where I'm feeling pretty good about it and it's reasonable economic package. We're hopeful of getting word this week. Unfortunately, one of -- it was a death among one of the principals, and so, obviously, things have been delayed, and that clearly is priority at this point.

But so we've seen a lot of activity. Most of the activity has been downtown centric, not unlike Herzfeld and Rubin Companies that have kind of been match-boxed together over years as they've expanded their firms they're on multiple floors, have older, inefficient installations, and want a refreshing new office environment in a very high-quality building that's extremely well located.

And so I'm hopeful from an economic perspective because our expenses in the building are modest. We don't, at the moment, and reflected in the recent deal, we did see much impact from a roll-down perspective. Hopefully we'll be sort of revenue neutral even in this difficult market. We have seen some midtown tenants, but the falloff in midtown in terms of rents have probably lured them back into midtown occupancies.

But, so I would say that we probably, at this point, have over a million feet of proposals out and I'm cautiously optimistic that we're going to hit the boggy on hopefully one or more of those and start making some real progress into that expiration.

And, I'm sorry, you said that the rents you expect are comparable to what Citi's paying, which I believe --

Yes.

-- is 39 a foot?

In that range on a sort of near-term basis, maybe a little bit lower, obviously, for the first year or two.

And what kind of work would you put into that space to --

Well, part -- I would say that the average is probably in the $50 to $60 range, to be very candid. The average lease terms are generally, like Herzfeld's 20 years. I mean, many of the leases are in that range, 15, 20 years, I guess on the low end 12 years. Little bit of pressure exerted in one of our preeminent investment banks, has some excess space downtown and they're putting a little pressure in the market in terms of -- but their space is raw, so there are more fix-up dollars required. But that's pretty much what we're seeing.

Okay. That's great. Thank you.

You're welcome.

Our next question will come from David Shapiro with BGB Securities.

Hi, guys.

Hi.

Most of my questions have already been answered. Maybe if you can talk about some of the transaction activities that you're seeing in the markets. I know that you guys are probably not active just yet in the market. But are you seeing anything in some of your larger markets in the Bergen area or as to the waterfront? And sort of where do you think for, I guess, A-type buildings like yours, where the bid-ask is in some of these various areas?

Well, I don't, David, I don't think as much of -- there might be a spread in bid-ask, but I -- and I'm sure there is. But there has been such limited transactional activity that there are really no barometers or gauges at this point to accurately reflect that. I mean, the -- so if you talk to the -- your community, the analytic community, you will talk about an 8% cap rate for suburban-type assets of the quality in which we have. But I -- and I think that's probably appropriate right now. But there's just nothing -- there's no financing available and -- virtually none. There may be some seller financing in certain rare instances. But we've seen such little volumes of activity. And, frankly, a lot of the deals that were done at high pricing levels are coming back to haunt the investors because of the vacancies and the pressure on rent.

So I think we have a ways to go before we get a sense of what reality is in the marketplace. The best thing you can have now is cash flow and a strong balance sheet to weather through this and move through this. We are in lots of discussions with our institutional friends and partners, if you will, about opportunities going forward. Many of the funds and institutions are undertaking damage control right now. They either have -- it's not only office, they have mixed pools of -- in every sector of the real estate business classes of assets. And damage control is what's sort of in front of lots of these investors right now. But our goal ultimately is to be able to partner up with some of our partners who we've performed well with and for over time and put -- both put skin in the game going forward, get some promoted interest for our expertise and our skill set and our sponsorship and brand name and really, hopefully, at some point take advantage of all of our strengths and the market weakness and consolidate further into the markets in which we choose to expand in, which are probably no different than the markets we operate in today.

But to -- there are just -- there haven't been trades other than the rare end user who wants to buy a building that even to the extent they have some minimal occupancy in and they -- but financing is the risk. And whether -- and the execution is at risk because of the financing risk. So we have a ways to go here.

(Technical difficulty) leasing -- I'm not sure if you explored this already. But as far as the rental rate rolls expected for the portfolio as a whole, I know you talked about it broadly a little. As a whole, where do you sort of expect that for the next two years?

Well, the -- I mean, from a metric perspective and purely on an office property basis, not reflecting the flex properties that we have, I mean, our average rent and it's in our supplemental that you all saw today of $24.45 in '09, a little bit higher in '10, and then a little bit lower again in 2011, which are sort of the maturity -- the areas or the periods of least maturities that we have in front of us.

We're not too far different in terms of the deals that we're doing today. Yes, we have experienced some of these roll downs. If you took out the -- kind of the specials like the Fazio deal where we were able to lure in a very high-quality 20,000-foot tenant with no downtime, our roll downs would have been in the -- at less than 5% as opposed to the 7.3%. So there are always the special situations that create aberrations and anomalies to the figures.

But if I look at those expiring leases and the rental rates, the $24.45 in '9, and the $26.50 in '10, and then back in the $25 range in '11, I think we meet the marketplace. And so we shouldn't see -- the issue is going to continue to be what is the demand side of the equation. And hopefully the demand will begin to pick up as companies start thinking about reengaging in the practice of employment versus unemployment. And that -- and I've seen that in other cycles. And this one's been pretty long and protractive now in terms of an economic downturn. You start to anecdotally see companies, generally the larger, the mid -- the larger businesses start saying they'll take a little more space, that there's a -- they have 20,000 feet or 25,000 feet and there's a 4,000-foot unit with either a lease expiration or it's empty next to them. And their lease is coming up in a year and a half, and they'll engage us in a discussion about [blend]-extend. And, by the way, I'd like to take that 4,000 feet because I do think that the United States' economy has a future and our business is going to grow again, but, by the way, I don't want to pay for it for a year while I don't use it.

And so we're very pragmatic and realistic about what we can expect in the marketplace. But what that will do for us is, as I said, the economy's the scale. Once you're operating a building, you're paying all the expenses anyway, so all this incremental revenue will fall to the bottom line once the tenant begins to pay its rent.

And so that's how we look at the world on a longer-term view about keeping our portfolio stabilized and being responsive to our tenants and not being under any illusion about what the marketplace holds. We know the difficulties in some of our markets. We know the white plains of the world, for example, have been immersed in sub-prime lenders that have gone bad and lots of space. But, yet, we're right at the train station and we know tenants would like to be with us, we just have to meet the market. And we're going to do it because ultimately we're going to have the ability to move our rents with the market and have -- continue to expand our family of tenancies with the strongest best tenants in the market. And they'll let you live and breathe at a point in time.

And so we're pretty aggressive. I would say among the most aggressive in terms of how we have -- you know, the appetites keep our portfolio as well leased and as full as possible. And I don't see dramatic roll downs from our current in-place fully escalated rents to the new rents that we'll be bringing in.

Thanks for the color, Mitch.

You're welcome. Good talking to you, David.

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

Hey. I'll try to keep this quick. It sounds like you're definitely more optimistic than you've been, Mitch, the -- it sounds like the tone. And so what does it take, what do you need to see before you start spending or investing in sort of opportunistic acquisitions or other investments?

A couple of things. I mean, it's not some -- I believe that we're in a period where perception and psychology kind of rule. And if corporate leadership begins to feel better about the prospects and all this discussion of green chutes is -- keeps talking the talk, Obama and the administration and all of the economic czars down in Washington, that eventually it's going to catch on. And if they continue to provide capital infusion through the stimulus and all of the other programs that they have, companies are going to be -- leadership is going to be -- and managements more comfortable with making decisions about growing their businesses.

You know the worst thing you can do is throw fear into the system, which is, of course, what I said has occurred to some extent in commercial real estate with all of the perception [impended]. You talk about health reform and then, of course, the pharmaceutical industry and the healthcare industry, in general, becomes deer in the headlights until they see some clarity as to what that all means to their business. And so it kind of feeds on itself.

So I think we're at a point where it's getting less bad. And being less bad in the face of if there continues to be some real definitive action on the part of the administration, we'll begin to see the tone change and hopefully employment will change.

As far as our company is concerned, our goal going forward is to take advantage of how we've positioned our self in the face of the deepest economic downturn since the deep depression, with a strong balance sheet, with latter debt maturities, with a great roster of great tenants that are paying the bills and allowing us to have that balance sheet. And the relationship that we have with some of the institutional owners that we've developed over many years and some of the things we've done and our ability to be reasonably accurate in calling markets and understanding, in some cases, when it was time to say give and I -- a couple of deals -- you know what I'm talking about probably, where we said, hey, we've got to stop. We're fighting a storm here, an economic tsunami. We -- let's put it to bed.

And so we've tried to give good counsel as real estate professionals to our partners. And we're hopeful that as some of the brush fires that they have to deal with diminish, we'll be able to take advantage of more scale in what we do in an improving economy.

Sort of the thing that I'm not interested in is picking off one or two assets in our markets, although in some markets, for example if it were Manhattan, that would be an enormous undertaking in and of itself because of the scale. But in general, we're hoping to leverage our strength and leverage our relationships so that what we do going forward, as this thing starts to turn around, can be more meaningful to the size of this company and our shareholders than just buying one more building in Parsippany, New Jersey. But we'll continue to look at that too if we see distress and opportunity, but which we haven't yet, really, on the part of ownership or the lending community, yet. But --

Did you look at waterfront?

Yes, and waterfront too. But the waterfront's an area that I still remain completely confident that we will have the opportunity to build into an improving economy. We could still build a building in -- along the waterfront, and we have the capacity and the approvals to build almost four million square feet there, at a lesser cost even with the reduced rents today in midtown Manhattan, even if rents today are $60 a foot in midtown, of which $30 is expenses, we can deliver brand new product. And I'm not only talking about the fact that we're in a very depressed construction cycle. I'm saying that we can deliver a product there at lesser rates, brand new, high-quality, big floor space. So I'm confident that we'll, at some point as the world rights itself and the new normal begins to take hold, be able to build into that marketplace.

I don't know exactly when that will be. And, yes, the market's under pressure because of financial services and all of that stuff. But the world's not going away. And so that's what our preference will be along the waterfront.

And what's the deal with the J.P. Morgan portfolio up in Boston?

You mean the suburban portfolio?

Yes. Yes.

We're -- we have an underperforming pool of assets and we've taken an impairment charge on it. We've told the lender that under the present terms and conditions we are not moving forward. We've done it on a collective basis with our partner. And we're pretty close to some resolution of that. But we have -- we've taken -- we've written down our equity in that deal, which wasn't significant, I mean in the overall context of things. It was $3.4 million.

You know one thing I've seen, and the fact that I have to tell you that the lending community, especially the CMBS, the special servicers, have, aside from anything else, they have -- they're pretty unresponsive. And you try to talk to them and say we have a problem developing here, how do you want us to deal with it? Can we collectively work together to try to produce a better result? And there are many, many, I believe, of these securitized loans and the people who manage them, that are under -- that are in the bunker right now. And that's -- so I think there's a lot of unknown, yet, risk to that system.

But clearly, that market -- those markets, not unlike Boston, although Boston has shown some renewed signs of strength, at least anecdotally, the occupancies fell off and lots of tenants who had made soft commitments to expand in a variety of different industries, whether it was biotech, life sciences, or defense, in addition to not so much financial services, but more in different sectors, cut back and said that they have corporate mandates where they can't execute the leases or where they have maturing leases and they had to move back into consolidated quarters elsewhere. And so it's going to have a little bit of a bad ending there, but nothing we hadn't already planned for.

And the 3.4 million, you took this quarter or when was that written down?

Yes, last quarter.

Last quarter. Okay. Thank you.

You're welcome.

We have a follow up question from Michael Knott with Green Street Advisors.

Hey, guys. Barry, can you just comment on the debt detail page, the CMBS for the new, I guess the Gramercy stuff? The rates seem very high. Can you just help us understand what's going on there?

Yes, that -- I'll tell you what's going on there. You said the rate seems very high. Basically, it's 3.15% rate. It was 2.75 over LIBOR, but there was a pay rate associated with it.

But basically, let me simplify it. It's a, basically, is a cash flow -- the -- you're talking about the Wachovia loan or the Gramercy loan? Just so we're clear.

I was mentioning -- talking about the Wachovia CMBS, but maybe I'm mixing things up.

Yes. You said Gramercy. Gramercy is the six-building pool, which is basically almost a liken to a cash flow mortgage because everything gets pooled in terms of revenues and it goes to paying leasing expenses and management fee costs. We're basically managing the portfolio on behalf of Gramercy, with no going forward capital expenses.

Right.

You're talking about the Wachovia loan, the $19 million loan?

There's a series of them on page 21.

Yes. That is -- that's part of the consolidated portfolio that we just consolidated from the Mack-Green-Yale interest where we redeemed in the S.L. Green interest and we consolidated the portfolio.

Okay. So I was just curious why the rate seemed so high there.

It's just a preexisting (technical difficulty) Yes, that was part of a consolidation. It's kind of like an accreting situation, that's all. That's a technical deviation which we can talk about offline if you'd like. It's merely a technicality --

That's fine.

-- as a result of consolidation.

Okay.

It's similar to accreting part of the market value.

Okay. We'll chat offline then.

Right. Okay.

That will conclude our question-and-answer session. I'll turn the conference over to Mr. Hersh for any additional closing remarks.

Yes. I'd like to thank you for joining us on today's call. Hopefully we've been helpful in articulating what we're seeing in the marketplace from all perspectives and how we fit into that picture. And we look forward to speaking with all of you next quarter if not before. Thank you.

That does conclude today's conference call. Thank you for your participation.