Veris Residential Inc (VRE) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation third 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 and good morning, everyone. Thank you for joining Mack-Cali's third 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 our 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 $0.81 per diluted share. We did have some significant leasing activity throughout the quarter, totaling approximately 820,000 square feet of leased transactions. This velocity enabled us to end the quarter at 90% leased, slightly down from last quarter's 90.6%. Rents did roll down this quarter by 13.7% on a cash basis, and if you extrapolate the larger transactions that are noted in our filings in Bergen County and Westchester, the roll-down would actually be approximately 8.5%. But clearly this roll-down reflects the continuing pressure in the commercial real estate markets.

Our leasing costs for the quarter were $2.40 per square foot per year, which in fact is reduced from last quarter's $3.11 per square foot per year. For the remainder of 2009, rollovers are just nine-tenth of a percent of base rent, or slightly more than $5 million. For 2010, we face rollovers of approximately 10% of our base rent or about $63 million. Almost $11 million of this 2010 rollover is attributable to Citigroup global markets that at our 125 Broad Street building in Lower Manhattan.

As I've discussed in the past, Citigroup's intention to vacate the space has been know and we have been marketing the space quite actively, and in fact have leased out on one reasonably large transaction. Despite the challenging environment, our portfolio continues to outperform most of the markets where we operate, with our lease rates exceeding market averages in Northern and Central New Jersey, Westchester, suburban Philadelphia and Washington, DC.

Our third quarter leasing activity reflects the continuing trend toward a flight to quality on the part of tenants. Tenants are looking for strong, stable landlords that have long-term ownership strategies. In addition, because of the scale of our portfolio, we are able to offer tenants a great deal of flexibility with respect to the location and product type, and a number of our transactions have demonstrated that. And so while our occupancy is down a little bit, largely due to shrinking space needs by some of our tenants and changes in their business plans, we continue to attract new customers seeking the strength, stability, and superior product and location that Mack-Cali can afford.

Some of our activities include a completed public offering of $250 million of 7.75% senior unsecured notes due in 2019, one of the first unsecured transactions done in this most recent wave of debt issuance. Some of our notable leasing transactions during the quarter included KPMG, an international provider of audit tax and advisory services signed a ten-year renewal in two locations with us in Bergen County, totaling about 100,000 square feet both in Woodcliff Lake. Public Service Electric and Gas Company, a major utility provider in the Northeast and in New Jersey renewed almost 48,000 square feet at our 20 Commerce Drive building in Cranford, New Jersey. This was a slightly more than three-year renewal and our 177,000 square foot building at 20 Commerce Drive is about 99% leased today.

IBM renewed its lease for approximately 44,000 square feet for a three-year term at 17 Skyline Drive in Hawthorne, New York. This 85,000 square foot office building located in our mid-Westchester Executive Park is 100% leased. Emigrant Bank completed a transaction totaling 34,000 square feet on a 15-year term and as well expanded by a couple of thousand square feet at 7 Westchester Plaza in Cross Westchester Executive Park. This 43,000 square foot office flex building in Elmsford is also 100% leased. And lastly, Belmay, a global manufacturer of fragrances, renewed their 27,000 square foot lease for a five-year term at 200 Corporate Boulevard South in South Westchester Executive Park. This 84,000 square foot office flex building in Yonkers, New York, is 99.8% leased today.

And I'm also quite pleased to tell you that we've continued our leasing momentum into the fourth quarter with some very important transactions that we've recently announced, which obviously are not reflected in our third quarter results. First, the law firm of Dave Pitney signed a long-term lease for a full building, 100,000 square feet in our 1 Jefferson Road Building in the center of Morris County Office Campus in Parsippany, New Jersey. As the release indicated, we own this building together with JPMorgan Asset Management and the Hampshire Companies, and Mack-Cali is responsible for the leasing and management of the facility.

As well, another law firm, Budd Larner signed a lease extension through October of 2024 for approximately 55,000 square feet at our Mack-Cali Short Hills Building located at 150 JFK Parkway in Short Hills. This 248,000 square foot class-A office building remains 100% leased. And so I think that some of these transactions, in particular KPMG and Budd Larner having been our tenants in both instances since 1988 is another demonstration of how we build long-term relationships with our high caliber tenants.

As in past years, Mack-Cali continues to be recognized for its expertise in property management. This quarter, Mack-Cali received two honors from the Southern Connecticut Chapter of the Building Owners and Managers Association, commonly referred to as BOMA. Our 40 Richards Ave class-A office building in Norwalk received the TOBY award, that's the office building of the year, and the chapter named our property manager as the 2009 engineer of the year. And so we're very proud of these accomplishments.

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

Thanks, Mitchell. For the third quarter of 2009, net income available to common shareholders amounted to $19.1 million, or $0.24 a share, as compared to $22.6 million, or $0.34 a share last year. For the nine months ended September 30, 2009, net income available to common shareholders amounted to $51.6 million or $0.71 a share as compared to $55.9 million or $0.85 a share last year. FFO for the quarter amounted to $75 million or $0.81 a share versus $82.1 million or $1.02 a share in '08.

In '08, we had some significant leasing termination fees that were included in the $82 million number, about $8.2 million worth. For the nine months ended September 30, 2009, FFO was $219.6 million or $2.52 a share versus $228.2 million or $2.83 a share. Other income in the quarter included approximately $533,000 of lease termination fees as compared to $8.2 million in the same quarter last year.

Same-store net operating income, which excludes lease termination fees increased by 1.1% on a GAAP basis for the third quarter of '09 and for the nine months decreased by 0.1%. On a cash basis, same-store net operating income increased by 2.3% for the third quarter and increased by 0.9% for the nine months. Our same-store portfolio for the quarter at nine months was 29.2 million square feet. Our unencumbered portfolio at quarter end totaled 236 properties, aggregating 24.3 million square feet of space, which represents about 78.6% of our portfolio.

During the quarter, we completed the sale of $250 million of 7.75% senior unsecured notes, which come due August 15th of 2019. As of the end of the quarter, we had $279 million in cash and had no drawings on our $775 million credit line. At quarter end, Mack-Cali's total undepreciated book assets equaled $5.9 billion and our debt to undepreciated asset ratio was 39.8%. The Company had interest coverage of 3.1 times and a fixed charge coverage of 3 times for the third quarter of '09. We ended the quarter with approximately $2.3 billion in debt, which had a weighted average interest rate of 6.6%.

We are providing 2010 FFO guidance for the first time. Our 2010 guidance range of $2.80 to $3 of FFO assumes at the midpoint, leasing starts of approximately 2.1 million square feet for the year versus scheduled lease expirations of 2.7 million square feet.

Please note that under SEC Regulation G concerning non-GAAP financial measures such as FFO, we are required to provide an explanation of why we believe such financial measures are relevant and reconcile them to net income. Available on our website at www.mack-cali.com are our supplemental package and earnings release, which include the information required by Regulation G, as well as our 10-K.

Now, Mike will cover our leasing activity.

Thanks, Barry. At September 30th, our consolidated portfolio was 90% leased, as compared to 90.6% on June 30th. A few large block expirations in our Northern New Jersey properties were the biggest contributors to the decrease in percentage leased. During the quarter, we saw 122 transaction and 820,000 square feet, which is on par with last quarter's activity. We signed fewer new deals on a percentage basis than last quarter with the higher renewal volume producing retention of 67% of our outgoing space.

Now, our early renewal program has reduced 2010 expirations to 9.7% of leased space. Almost 30% of our 2010 rollover happens in the first quarter and we're actively pursuing those tenants who have yet to commit. Increased renewal volume has also resulted in lower leasing costs this quarter, which came in at $2.40 per square foot per year. Effective rents are nonetheless impacted by increased concessions in the form of free rent. We also continue to experience downward pressure on our rental rates as evidenced by the roll down in first year rents.

Our lead activity year-to-date continues to follow the pattern of more leased for less space than we saw during the same period last year. This is indicative of the lack of large block users in the market and smaller tenants exploring both a flight to quality and testing the market for the best possible deal terms. Central New Jersey and suburban Philadelphia were particularly active this quarter as compared to the same period last year. Overall leasing activity in our markets continues to be slow with third quarter volume below the 2008 average in most of our markets. In some cases, such as Prince George's County, Maryland, the drop-off is as high as 50% over last year, although we did see a slight uptick in activity in Fairfield County, Connecticut and downtown Manhattan.

Vacancy rates continue to rise in almost all of our markets this quarter, although Central New Jersey's vacancy decreased by 50 basis points. The biggest increases were seen in Prince George's County, Maryland market at 390 basis points, and Washington, DC at 240 basis points. Subleased space continues to make up a large percentage of availability in many of our markets, averaging 20% of overall vacancy.

Mitch?

Thank you. In closing and without restating the obvious that you continue to hear from the macroeconomists that talk about job loss and what's happening in -- with the cost reduction at corporate America and global corporations are undertaking, and how there doesn't seem to be a stemming of job loss yet in what today was reported as GDP growth in the economy. The market conditions continue to be very challenging. Certainly, the media and the press headlines will tell you that commercial real estate continues to face deleveraging and uncertainty with respect to the looming debt maturities and market fundamentals.

And as we all realize, clearly real estate is a lagging indicator. However, we're pleased to be able to say that we are navigating through this economic storm pretty well here at Mack-Cali. We made sure very early in this cycle that we were in front of all of our tenants well in advance of lease maturities, lease expirations. We made sure that our balance sheet was in order and that we continue to maintain the highest quality properties and operating team to continue to meet the needs of our tenants, our customers.

We look at our situation and we see that we'll probably complete 2009 with about $64 million of free cash flow, and based on that same dividend level, the $0.45 per share per quarter, which we think is a pretty healthy dividend, and what we expect in terms of our guidance relative to modeling 2010, that we'll finish 2010 with positive cash flow, probably on the order of magnitude of $25 million or so.

And so we keep talking about being the landlord of choice in those markets where we have a major or dominant presence. We think that some of the leasing transactions that we've talked about demonstrate the empirical results of that. And that's because we find that our overall strength, stability, and the strength of our franchise give us a huge competitive advantage time and time again. And so clearly when the market does recover, and it will, it will provide us with some real momentum into the future.

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

Thank you. (Operator Instructions) We'll go first to Jordon Sadler with KeyBanc Capital Markets.

Thanks. Good morning. Mitch, could you just give me a little bit of color on your thinking in terms of, you're still cautious, certainly, on the outlook based on what you're seeing. You've built a bit of a war chest in terms of cash on the balance sheet. I know you have some uses coming up, but what sort of are you seeing on the transaction or opportunity front? And if you could describe what your thinking is there?

Good morning, Jordan. I think I would echo what you've probably heard on other earnings call from our brethren in the office and related sectors. There have been very few opportunities unmasked or uncovered at this point from an investment sales perspective. There have been very few properties that have come to market, at least properties that are of the quality that are important and inherent in the Mack-Cali portfolio. Most of what you've seen are secondary, tertiary product and real distressed situations, but the kind of properties that we don't want to know.

There's the whole notion of kick the can, delay and pray all of the axioms, and metaphors, and expressions that everybody else has used and talked about, and the fact that borrowers have gotten some level of forbearance from their lenders provided they're meeting debt service, and that that's prevented an economic tsunami in collection with the deleveraging. But at some point there will and there needs to be a day of reckoning. And so we expect that over time we are going to see opportunities in our markets and the ability, or the fact that we have the ability to act in a very facile manner both with an operating team and a balance sheet will allow us to take advantage of some opportunities.

But right now, I don't want to overstate that. I think that the original projections that sort of everybody had in their minds about seeing these massive opportunities and the notion of building a real significant war chest to pounce on them similar to what existed, perhaps, in the days of the RTC back in the early '90s hasn't occurred. The untested part of the market is, at least part of the debt market, is what happens with the unlocking of the securitized financing that exists and the realization on the part of, as well, of balance sheet lenders that they need to take write-downs, and they need to find and work with sponsors that can reposition assets to be successful moving into the future.

So I would say that from a transactional perspective, there's been a relative paralysis and hopefully over the next year to two years we will begin to see the unlocking of a significant amount of opportunity.

And just moving into 125 Broad, you mentioned it -- Citi moving out. It appears you're marketing 350,000 square feet of space available and for some reason that sounded a little bit more relative to the leasing I thought you had previously reported. Can you maybe just give us some detail of what's going on.

Yes, the space available is approximately that. It's approximately 330,000 square feet. We, as I indicated without being specific, are in actual lease negotiations with one tenant that's going to be probably, let's just say in the 50,000 square foot range. And we have quite a number of prospects as we have had. Now, we think the general reaction to 125 Broad is that it's an extremely high quality asset, certainly one of the higher quality assets on the Lower East Side, Lower Manhattan on the East Side. Well located with respect to transportation. The ability for companies to take advantage of the Lower Manhattan employment program, which is an incentive program. Stone Street, which provides a unique environment.

So we are in very active discussions, but you do have a situation in many markets, and Manhattan is certainly no exception to the rule, where you've got lots of tenants that are testing the market, that are looking to see what financial benefits they can derive from relocating. And in some instances, they go back to their current landlords and they use that as a hammer. And in some instances, their current landlords, if they have the ability to acquiesce, they do. And that's obviously effected a couple of transactions that we thought we were going to be able to completion.

But we do have a fair amount of activity and most of the users that we are talking to are at least full floor users if not multiple floor users. So we're optimistic. But right now, we're assuming that we're going to have a significant period of revenue loss in 2010 because even if we sign leases tomorrow, there's a period of rent concession and it'll take a while to build up the income stream. So after Citigroup vacates in February or the end of January, we basically modeled very little revenue on that space for the remainder of 2010.

Okay. And lastly on the guidance, Barry, maybe could you just give us a little more detail, what are you expecting on releasing spreads and/or expenses? Or (inaudible), however you look at it?

I'll just comment. We expect that there'll be continued pressure on rents not unlike what you've seen this quarter in terms of roll down and that's pretty much what our mindset is. We don't want it to be, but that's what we've modeled for 2010. So you can kind of look at what the roll-down was on a cash basis for the quarter. We don't think that really looking at GAAP is particularly relevant. So which of course, GAAP would be 300 or 400 basis points less in terms of roll-down. So our view is cash is king and that's how we really do our modeling.

Expenses we expect to be relatively flat, although we've had clearly the benefit of seasonal benefits relative to utility costs and lower utility costs on a unit basis. So we're hoping that that continues into 2010. So I would say that our expenses are modeled on a relative flat basis. We think we will ultimately get the benefit of some real estate tax appeals and certiorari appeals, but we don't know what those are yet. So we're not really building those into our model, but clearly we've got massive real estate appeals going on because of the income adjustments and the [attended] valuation adjustments.

And we've also modeled in a bit of a decline in occupancy, a couple of hundred basis points, and we're hoping that doesn't happen either. But we're very realistic about the pressure that exists in the marketplace. So we think we've taken a very realistic view of sort of where we are in the world today and input all of those numbers into our 2010 guidance. As I mentioned before, we projected our cash flow or free cash flow for 2010 and that's based on what we think is incorporating all of the above, maintaining a pretty healthy occupancy and spreading out the expenses in connection with releasing and so forth probably close to $60 million in just EI and leasing commission costs for next year. And that's how we've modeled it, Jordan.

Thank you for the time.

You're welcome.

Our next question comes from Michael Bilerman with Citi.

Hi, thanks. It's Josh Attie here with Michael. Just a follow-up on the way you're thinking about the guidance. It seems like you're assuming slight occupancy decline. Where could be there up side to that estimate? I know you're having discussions that could lead you ultimately leasing more space than the 2.1 million that you're assuming next year. Just maybe some color on what the tone of those discussions are and what you think the chances are there could be up side to that leasing number?

Yes, first of all, it's important to think about the fact that rents don't start when you sign the leases. So we're talking about signing transactions with a ramp up in rent starts at least with respect to currently vacant space. So that's part of our calculation of guidance. Now, we have, as you've heard from, again, many of our brethren, consistently operated our portfolio by going through every single space and thinking about every tenant within our existing tenant roster and what their plans are. And I will tell you that we believe that we've modeled in a realistic view of tenants that are probably going to leave the portfolio and a realistic view of net positive absorption to replace those tenants.

The up side exists in the velocity picking up in terms of leasing demand in the marketplace. The up side exists in tenants that have been on the fence regarding their space requirements because of the uncertainty in the economy, the lack of clarity. And we could talk for several days about all of Washington's initiatives and the fact that that is imbuing a sense of uncertainty in the business community as to what the cost of business will be going forward, what the tax burdens will be, and were sub-chapter S corporations, how that might impact ownership of these companies in smaller businesses, which are a large part of the economy in this country on a direct basis.

And so there continues to be uncertainty, which is reflecting itself in the lack of commitment on the part of many companies in terms of capital spending and in terms of making commitments relative to employment. So that's where the positive can be by some of these companies that are on the fence or have told us that they're not sure they're going to renew, or they might renew for less space, will renew and they'll renew for all of their space or maybe even more. But at this point, there is a fair amount of uncertainty and cloudiness to it, and so we've modeled in carefully a conservative view of that.

And just, I know Barry or Mitch, this is Michael speaking, if you look at today the $0.81 you report gets you to like a 320 annualized number. If you look at your guidance for the fourth quarter, you get somewhere towards the high end of next year's range. I mean, is there anything, I guess, in this quarter's results that are not indicative to 4Q and then not indicative to next year. And I realize you're trying to be as conservative as possible. We're just trying to tease out if there's anything else maybe non-operating that's going on in terms of the guidance.

I would tell you, Michael, that the real anomaly in the quarter was almost a 31% reduction in the utility costs. We don't know that that's sustainable for the obvious reasons and so that would be the most significant aberration, if you will, in the whole platform.

And same-store NOI for next year in terms of what's embedded in the guidance is what?

It's relatively flat. It's a slight negative.

On a GAAP or cash?

Well, we reported cash up this quarter of 2.3% and GAAP up 1.1%. So on both basis, probably slightly negative.

And then just a last question, Mitch, just in terms of M&A, and obviously you've been I guess a player, I wouldn't say agitator, but you've taken stakes in the past, whether it be car, which (inaudible) to someone else. You took a little stake in [Wash Reed] and ultimately selling it for a profit. Go back to the Redskin deal where you took a look and then passed, and have shown a lot of discipline over the years in sticking to value. I'm just wondering how you think about that today in terms of I know there wasn't a lot of private opportunities that you're talking about. But is there anything public to public that is attractive? I mean is that -- using your currency in that fashion?

Yes, well I'm glad you wouldn't say agitator. Thank goodness for the things we didn't do at the pricing levels that existed, right. So we try to be careful about what we do, and again, not a reflection on what -- but you do raise the subject of public to public and I -- without being any more than generic, say that there might be some opportunities going forward as a result of the need for certain companies to expand their platform and kind of hitch their wagon to greater financial strength, and those companies that have performed particularly well in the public market. Obviously, there was a wave of primarily the reequitization that allowed companies to fix themselves at least for a period of time on their balance sheets.

But I guess the unknown is how quickly will velocity develop in terms of employment gains and what will that mean for various companies and their portfolios in terms of sustainable cash flow. And that's unclear at this point. So I don't rule out, let's put it this way, the possibility of seeing some level of consolidation in the public sector going forward.

And you being a player in that, or you're just saying in general?

Well --

Okay. Thank you.

Our next question comes from Sheila McGrath with KBW.

Good morning. Manhattan office rents have come down quite a bit and I'm just wondering your thoughts on how that might impact Jersey City's value prospects versus Manhattan. And are you seeing any notable changes in the market in that regard?

Well, I guess I would say -- hi, Sheila, first of all. The answer is reflected in some recent transactions that have been announced along the waterfront that have actually been positive, notwithstanding the rent compression that's occurred in Manhattan. You've got the DTC, Depository Trust, that has made a firm commitment to the waterfront for almost 500,000 square feet. There were various options for them because I was part of that process early on, that were in Manhattan. And they decided for a variety of reasons not to lease them, which was the as of right incentives that New Jersey offered, but also a variety of other aspects, including contiguous high-quality space, et cetera, that motivated them and induced them to make a commitment to New Jersey.

So we still are very encouraged by the waterfront. We still believe that the affordability, which is part of the overall quality of life and quality of doing business down there creates a bit of a bifurcation. And so I haven't seen too many instances of companies closing up shop and going back into New York City and moving all their employees back there, particularly Midtown, because of the fact that rents have come down. Now, there have been certain situations, like for example Moody's that had leased space from us at Plaza 5 and they were expanding their employee count quite significantly. Then they sold their building and moved into 7 World Trade and they reduced their employee count. So that kind of sapped a little bit of growth from the waterfront, but that was back into Lower Manhattan, not Midtown.

So I still see a bifurcation with respect to Midtown. I don't see any trends evolving where companies are going back to Midtown because they can get cheap space, and that's pretty much what we're seeing.

Okay. Thanks. That's helpful. One other quick question. Could you just give us some prospective on lenders' attitudes on secured mortgages versus earlier in the year. Are you seeing companies wanting to get more active on financing properties or other players?

No, we see kind of more of the same that the life companies, at least the ones that are in our universe want to deal with the highest quality companies and sponsorship. But the leveraged levels really haven't changed, whether it's loan to value or however you want to characterize it. That 50% zone is still sort of the target in terms of the risk that they want to undertake and the rates are consistent generally with the unsecured markets at this point in time. And so you really haven't seen rate compression, frankly, in the secured markets that correspond to the rate compression as you've seen in the unsecured markets.

And look, we certainly are a participant to some extent in the secured markets. But they're complicated transactions. They come with lots of bells and whistles in terms of needing mortgage approvals on leases and it reduces your ability to be facile in the market in terms of leasing, et cetera. So our preference has been, as you've seen reflected in recent debt issuances, to continue to move the company more to an unsecured corporate borrowing.

Okay. Thank you.

Our next question comes from George Auerbach, ISI Group.

Hi. Good morning. Mitch, how should we think about your mark to market on a portfolio-wide basis. Would you expect that on a cash basis your in place leases are 10% or so below market like you expect in 2010?

Below market? No, I would tell you that our portfolio is probably at market and the differential that you will see will be market specific relative to net effective rents on the amount of rent concession that you have to provide. I think that largely the capital expenses for TI, et cetera, have kind of flattened out at this point and now it's just a matter of how much of free rent you provide in a transaction. But I think generally on an average rent basis, we're probably pretty much at market.

Okay. And where do you think that mark to market was 12 months ago?

Well, I think that 12 months ago -- I think you've seen kind of a 10% reduction on an average basis over the last year.

Okay. And just a follow-up on Sheila's question. What was the net effective rent on the [DT CDO] in Jersey City?

The deal is in the low to mid 20s and if you fact -- on a gross basis, it's -- the actual transaction was the sublease from the -- with JPMorgan Chase in Newport. So I don't have the exact specifics of where it ended up. So I'm kind of giving you market speak, but we were involved with them in the beginning so I have a sense of what they were looking for in terms of economics. The benefit that they got through the [BP really is approximately $20 a square foot per year over ten years. So they got a very attractive transaction and situation, and the way I look at is that it's a 500,000 square feet of less space in the market in relatively tight market in Jersey City as we look at maturities in our portfolio into 2013, in our Jersey City portfolio.

Okay. And I guess just finally going back to the expense margins. You said that you expect the utility trends to maybe return, to move north back to maybe a more normalized level, which you think might be offset by some tax savings. When should we expect those tax savings and will they be of the same magnitude as the increase in utility costs?

Yes, well we -- if you look over the year, the full year of 2008 utility costs were actually up. You remember the cost of oil had risen so dramatically and they were up about 15%. Through the course of the year, we've seen in the first quarter a reduction, a negative cost of utilities of about 3% and then 20% in the second quarter and almost 31% in the third quarter. So we think that they normalize somewhere in the -- looking at '08, at a reduction of about 15%. We think what we've seen more recently over these last few quarters are anomalies as a result of seasonal issues and the fact that there was such a lower cost of petroleum, which translates into the cost of energy, and an overcapacity, oversupply of energy in the market. So obviously it's reduced kilowatt hour charges and natural gas charges have significantly come in.

So that's where we think it normalizes. With regard to tax issue, real estate tax issues, these appeals take a while and so we really haven't modeled in any savings in 2010. We know that we're going to have some and we know that the order of magnitude might be ultimately significant. But you've got municipalities and corporate governments throughout the entire Northeast, throughout the country, but certainly in our markets that are under a tremendous pressure with respect to their budgets, and fiscal pressures, and the residential property tax issues, and school system loads, et cetera.

So these appeals are going to take a while and we try to work with communities and provide in giving them -- in taking credits rather than cash refunds, so that we don't put additional pressure on the communities in which we do business. But it's hard to predict when we'll see the resolution or the adjudication of some of these appeals, but it could take throughout 2010 into 2011 to see the appeals completed, and those are 2009 appeals.

Okay. That's very helpful. Thank you.

Our next question comes from Ross Nussbaum with UBS.

Hi, Mitch and Barry, good morning. Two questions. One, you've got a mortgage with Prudential coming due in January. What's the game plan for that $150 million?

We're still in discussions on that and I have to tell you that before the unsecured markets opened up, we were much of a more -- had a much greater proclivity to move forward with the transaction. I tried to express before some of the complexity of doing secured financings and all the bells and whistles that come along with it. We have a very strong relationship with Prudential. I would say that at this point, we're not 100% clear, but I'm not sure that we're going to move forward and recast that loan. We don't need the capital at this point.

We're $280 million long. We're undrawn on our line. If I look at the maturities out through 2011 and recall that our line runs to June of 2012 with the extension, without attributing any cash flow, any positive cash flow, all of the maturities net of the cash I was sitting with today draw a line down $365 million on a $775 million line. So the cost of capital is important. The imminent, the thought of imminent need for the amount of capital that we have on our balance sheet has us thinking. So I would say it's probably unlikely that we move forward with that transaction.

Okay. And then looking at your tenant roster and the lease expirations for next year, as I go down the significant tenant list in the supplementals it looks like very few of your top tenants have leases maturing next year. But the two that I guess are on there are Samsung and then half of the Lehman Brothers space. Do you have any specific update on where you are with either of those?

With regard to the half of the Lehman Brothers space, the answer is no, but I consider 101 Hudson Street to be a pretty fertile environment. We see lots of activity and so we're -- while it's not released at this point, I don't -- Lehman is an active tenant, the NewCo Lehman, in the building and maybe they'll need more space. Maybe they'll want to retain it. I don't know at this point.

With regard to Samsung, they have not yet made a decision on what they're planning to do. We've -- to be very candid with you, we've had lots of discussions with them, their broker, with the special servicer that has the $19 million loan on the property that matures almost concurrently with the lease. And you recall I've had -- I've talked about that a little bit on the earnings call. Insofar as I understand right now, the matrix of available properties and also the matrix that contains the economics of what they believe they can structure a lease extension at 105 with us would be are under consideration in Korea. It's been pretty quiet over the last 45 days or so.

We've continued to talk with their broker who is CB Richard Ellis, about what their plans are. You are aware of the fact that there is an empty building, a huge empty building next door to 105 that's owned by a private equity opportunity fund that bought it at a relatively modest cost. But one would expect that the building needs an extraordinary amount of capital to rebuild the systems, and it really hasn't been operational in a number of years. It used to be, through a variety of acquisitions, Mellon Bank's data facility, back office facility.

So we don't know what the answer is and I don't know where the whole situation ends up with regard to the mortgage and so forth. The special servicer indicated that while they could react to situations or specificity in terms of the lease transactions reacting either in approving or not approving them, they could not be proactive in those discussions for fear of lender liability and could not help in kind of painting the picture on the canvas of what a deal might look like. So the reality is that it is a midyear 2010 expiration.

The reality is that Samsung actually was part of building the building originally, when it became a Bell Mead building, and they have a lot of capital invested in the facility and the lobby, and they have all of their electronics, and their screens on display. It's quite attractive and insofar as I know, and I've been there personally and met with senior management on the domestic front, they're very happy there. But like anybody else, they're looking at economics. I don't think the spread is that significant where they should -- where they will ultimately leave, but I can't answer beyond what I've just told you.

Appreciate the color. Thanks.

We'll go next to Jamie Feldman with Bank of America-Merrill Lynch.

Hi, this is [Yanna Galoman] on behalf of Jamie. Good morning. You guys discussed the kind of shrinking requirements by most tenants and I guess we're just kind of looking for any pockets of optimism. Are there any indications perhaps in specific industries or certain submarkets that some tenants have cut employment too far or are seeing an increase in demand and hiring again?

Well, my answer would be that it's really, it's anecdotal, and it's market specific. Naturally, we have tenants that are expanding in a variety of sectors. We've seen a little bit in the pharmaceutical area, particularly in the offshore, as it were, and generic pharmaceutical companies. But I would say there generally is more a trend, and I'd like to offer you the optimism to make everybody feel better, but there has been more a trend of cost containment than there has been the inverse. And clearly until you see some decision-making and kind of finality with respect to some of these initiatives that impact cost of doing business, whether it's healthcare reform or financial regulatory issues, you're going to see this, I believe, tenuous activity and behavior on the part of corporations.

Anecdotally, again, we see expansion, but there are no trends necessarily evolving yet.

Thank you very much. And then just in terms of the sublease space, if you can give an update on how competitive you feel some of that space out there is with current tenant requirements.

Yes, on a direct basis, the sublease space within our portfolio is somewhere around 4% of the consolidated portfolio. So it hasn't really expanded. I would say that, look, sublease space generally casts a little bit of a pall into the market from a landlord's perspective, and it does put pressure on rents. But there are many instances where sublease space cannot offer a couple of important things to tenants, and that includes flexibility for the future. It includes stub terms beyond the remaining sublet term.

And usually companies that are subleasing space, that are sort of competing with their landlord and/or externally sublet space are companies that really don't want to invest capital in those spaces. And so they're looking to shed costs, mitigate expenses, cut the bottom line expenses because it's been so tragically difficult for companies to increase their revenues and their top lines throughout the industrial part of our economy. And so while it's there and it's a threat, we at least in our markets don't see specific instances or empirical evidence that it's really kind of transforming the marketplace.

Great. Thank you very much.

Our next question comes from Michael Knott with Green Street Advisors.

Hi, good morning, guys. This is Enrique on behalf of Michael. Turning back to Jersey City, do you feel there's more support from the state in drawing more big leases to New Jersey in that area? And if so, you already talked about the effective rents, but where would kind of hard building costs be and is there any opportunity there? Would you guys consider a build to suit, or where would rents have to move in order to make that attractive?

Yes, hi. I don't think the pricing levels are anywhere near to the current market conditions to support new development. I think there is not enough demand in the marketplace. If you look at the DTC situation, as I talked about before, on an effective basis I mean you're looking at pretty low net effective rents. But I would say that construction costs have come in dramatically, and if you could new product there at sub $400 a foot, which I think is entirely feasible at this point, you would still need gross rents that are approaching $40 a foot. I don't think the market can support that at the moment.

There have been a few companies that -- users that, and their representatives kind of noodling around on the edges of envelope thinking about what -- and talking to us about what the cost of development might be. But I think you need to see more positive absorption in the marketplace before pricing levels would be able to absorb new construction.

Okay. And then as a follow-up, I did see a deal for the BASF Headquarters in Morris, New Jersey of being offered a $47 a foot. Do you guys have any interest in that large asset, or is there just too much capital and other issues to develop to make that attractive?

From my perspective, it's not the necessity of too much capital and it's a large, high-grade facility being offered for very low price on a per square foot basis. But it's kind of on the fringe and giving in my perspective of user demand. I think there are other opportunities available for users. When BASF, who was a very significant user in that market, came back into Florham Park, while it's a free trade zone out on Route 80, it's in my opinion ten miles too far out, at least in terms of how we look at life.

So we're not interested in it. It's not a matter of capital. It's a matter of demand and what the expectation would be of filling a large building like that and how long it might take. And I'm not confident because of the things I just said.

Right. Thank you for that.

You're very welcome.

We'll go next to Nick Pirsos with Macquarie.

Good morning and thank you. A couple questions. First, surrounding just trends on tenants asking for rent release and I presume it's abated over the last six months, but is it because tenants feel more comfortable with the economic outlook? Is it you've worked through your inventory? How would you kind of characterize this period (inaudible) cycles?

Well, first of all you've heard this and I don't mean to be redundant, but we've moved away from the edge and all the clichs that you've heard. And there's possibly a little more optimistic tone in the marketplace. I find that to be very volatile today because GDP is up. There'll be a good number and then tomorrow employment numbers will be rehashed and it might be a bad number. So it's moving the stock market all around and along with that comes sentiment and confidence.

But having said that, we have moved away from the edge and so that we believe that other than what we think we -- what we know we know, we don't think there is really much credit risk in terms of our tenant complexion. There was a long period of uncertainty if you go back a year and you saw some of the icons of the financial industry that were melting down and there was real concern about that. So we think there's less of a strain relative to companies thinking that they're going to survive, and thus they're kind of how aggressive they want to be with their landlords now that they think they've moved away from the brink.

So a lot of that has passed. We have continued to see tenants that are high caliber tenants that have some term left on their lease, a couple of years, realizing that we may be moving away from the precipice and looking to talk to us and we've done a few of these transactions about extending a lease on a long-term basis and getting some immediate benefit. Because they are a little concerned that the markets are strengthening, or at least the fear in the market is diminishing, and they might not be able to get benefits, immediate benefits at least from their landlord. They might get it in other parts of their business.

So we've seen a little bit of that. So I would tell you that mostly what's happening in the markets, at least the ones that we operate in, are that they're quiet. There is not a lot of activity in the market. There still seems to be this tenuous view of the economic outlook for the broad-based economy and that's kind of the picture that we're seeing. But some the anxiety that we saw a year ago when Lehman basically filed bankruptcy and everybody thought that the financial system was facing ruin, some of that anxiety has clearly left the room.

Great. That's helpful. And were there any lease termination fees in the quarter?

There were $533,000 for the quarter. We haven't -- we don't expect any major lease termination fees to take -- to be in place over the next number of quarters.

Thanks. And lastly, does the upcoming New Jersey gubernatorial election have any ramifications for New Jersey commercial real estate in general, at least in the markets that you participate in?

Look, I can't call this election. I think that New Jersey has gotten more proactive in a lot of ways and that was reflected in not only the DTC transaction, but in terms of the pro-growth stimulus programs that were passed in New Jersey that include waver of certain fees for development, urban transit tax hub credits where the state is co-investing in potential new developments where you're located near public transportation. And that would affect Jersey City, and Newark, and other places like that, New Brunswick.

So they've gotten a little more active and realized that having a better image is important. I'm on the governor's real estate advisory board. I would expect that regardless of who wins the election, they'll still have a real estate advisory board and I would still be on it. And so I'd be able to provide some input. So there have been -- there's that improvement and I don't think that changes with the election. Clearly, there have been tax burden issues that have been raised that have been evolving as partisan issues and -- but I think lots of governing bodies are facing similar issues. New York is certainly concerned. New York City is certainly concerned about some of the programs for additional tax burdens being discussed in Albany right now.

So I don't know that it changes with the election, and frankly, I think lots of people will be happy when it's over because it's been a pretty negative campaign.

Great. Thank you. That was helpful.

You're welcome.

This does conclude the question and answer session. I would like to turn the call back to our presenters for any additional or closing remarks.

Yes, well I want to thank you all for joining us in today's call. We hope that we have provided some important input and insight to you and we look forward to reporting to you again next quarter. Thank you very much and have a good day.

This does conclude today's conference. Again, we thank you for your participation.