Veris Residential Inc (VRE) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation First Quarter 2010 Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Good morning, everyone, and thank you for joining Mack-Cali's first quarter 2010 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 laws. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the company.

First I'd like to review some of our results and activities for the quarter and what we're generally seeing in our markets. And then Barry will review our financial results, and Mike will give you an update of our leasing results.

FFO for the first quarter of 2010 was $0.72 per diluted share. We did have some significant leasing activity in the quarter, totaling approximately 803,000 square feet of lease transactions. We ended the quarter at 88.8% leased. And of course, that's slightly down from last quarter's 90.1%.

However, of that 130 basis point drop, 100 basis points is attributable to the expiration of the Citigroup lease at 125 Broad Street in Downtown Manhattan. It should be noted that we anticipated that lease expiration. We knew that they would not renew that lease, and we're very actively working on some hopeful lease transactions.

Rents rolled down in the quarter by approximately 8.1% compared to last quarter's 10.5% roll-down. Our leasing costs for the quarter were $3 per square foot per year, down from last quarter's $3.69 per square foot per year; some slight improvement in those metrics.

For 2010, remaining lease rollovers are approximately 5.4% of base rent or about $33 million. And for 2011, rollovers are about 11.6% of base rent or approximately $72 million.

Despite a challenging environment, our portfolio continues to outperform most of the markets in which we operate, with our leased rates exceeding market averages in Northern and Central New Jersey, in Westchester, in Suburban Philadelphia and in Washington, DC.

Mack-Cali continues to be the preferred provider of office space in all of our key markets. And we're pleased that we've continued to secure renewals with our existing tenants, very high-grade corporate tenants, and as well attract new tenants to our portfolio.

Some of the notable leasing transactions during the first quarter included the following. We signed a lease with FedEx for the entire building at 600 West Avenue in Stamford Executive Park. We're certainly pleased to have attracted this world renowned courier service to this 66,000 square foot office/flex building in Stamford.

Par Pharmaceutical, a public company, a developer, manufacturer and marketer of generic drugs and innovative proprietary pharmaceuticals for specialty markets, signed a five-year lease renewal for approximately 60,000 square feet at our premier 300 Tice Boulevard in Woodcliff Lake, New Jersey. This exceptional 230,000 square foot building is now 96% leased.

We also signed a renewal with Telcordia Technologies, a developer of fixed, mobile and broadband communications software and services. This renewal for 39 months is for approximately 48,000 square feet at our One River Centre, Building Two, in Red Bank, New Jersey, at Exit 109 on the Garden State Parkway. This 120,000 square-foot building is now 93% leased.

You'll recall that we announced back in January a refinancing of a $150 million secured loan with the Prudential Insurance Company of America. VPCM, which is a wholly-owned subsidiary of the Virginia Retirement System, joined Prudential as a co-lender and thus establishing a new relationship for us in the capital markets.

This loan, which matures January 15th of 2017, carries an interest rate of 6.25% and continues to be secured by seven properties in our Bergen County, New Jersey, portfolio.

As has been the case year-after-year, Mack-Cali continues to be recognized for its expertise in property management as well as our ongoing energy conservation efforts. This quarter, a number of properties were honored with the Energy Star designation from several buildings in Tarrytown to Paramus, to Parsippany and Fair Lawn, New Jersey; Roseland, New Jersey; and more recently, our building at 125 Broad Street in downtown Manhattan. These awards of course are given by the United States EPA and the United States Department of Energy and are given for excellence in a building's energy performance and efficiency characteristics.

As well this quarter, Mack-Cali was named Best Manager of 2009 by the Mid-Atlantic Real Estate Journal for the exceptional job that the property management team of Mack-Cali Business Campus in Parsippany did, and they do day-in and day-out. And finally, in Monmouth County at 23 Main Street in Holmdel, we received Office Building of the Year designation from the New Jersey Chapter of BOMA in the corporate facilities category.

As you've seen in the press release, we've reaffirmed our prior guidance range of $2.70 to $2.90 per share. However, we continue to see situations where particularly in larger corporate users they remained focused on cost cutting, which of course results in employment loss, job cutting. And they continue to look for space consolidation and restructuring in what I would call a tenants' market. Usually, it seems almost programmatic. The space reductions range in the 10% to 15% range, in exchange for which long-term renewals are provided with some immediate economic concession.

There are several situations that we're working on currently that we believe will certainly have long-term benefits to our portfolio by eliminating rollover risk in the future, by securing the income stream of a number of our properties with the highest quality corporate credit, doing business in the global economy. However, having said that, these restructurings will potentially exert pressure on our earnings, particularly on a near-term basis. And that would tend to move the earnings to the lower end of our guidance range.

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

Thanks, Mitchell. For the first quarter of 2010, net income available to common shareholders amounted to $14.5 million or $0.18 a share as compared to $12.1 million or $0.18 a share for the same quarter last year.

FFO for the quarter amounted to $66.5 million or $0.72 a share versus $68.1 million or $0.84 a share in 2009. Other income in the quarter included approximately $354,000 in lease term fees as compared to $0.5 million for the same quarter last year.

Same-store net operating income, which excludes lease termination fees, decreased by 2.8% on a GAAP basis. On a cash basis, same-store net operating income decreased by 0.4%. Our same-store portfolio for the quarter and full year 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 approximately 78.6% of the portfolio.

At quarter-end, we had total undepreciated book assets of $5.9 billion, and our debt to undepreciated asset ratio was 39.9%. After retiring a $150 million bond that came due in April of this year, that ratio came down to 38.3%.

The Company had interest coverage of 2.7 times and fixed charge coverage of 2.6 times for the first quarter of 2010. We ended the quarter with approximately $2.3 billion in debt which had a weighted average interest rate of 6.7%. On April 15th, the Company retired $150 million of unsecured notes, which came due using cash on hand. Currently, we have approximately $115 million in cash and no outstandings on our $775 million revolving credit facility.

Our 2010 guidance range is unchanged at $2.70 to $2.90 of FFO per share. 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 or our supplemental package in earnings release, which includes the information required by Regulation G as well as our 10-K.

Now Mike will cover our leasing activity. Michael?

Thanks, Barry. At March 31st, our consolidated portfolio was 88.8% leased, down from 90.1% at December 31st. Our 803,000 square feet of leasing volume consisted of 308,000 square feet of new leases and 495,000 square feet of renewals and other tenant retention transactions.

As a measure of demands across our portfolio, new lead activity in the first quarter was up last year's first quarter totals by 13% on number of leads and 4% per square footage. Inquiries for space increased in the northernmost New Jersey submarkets of Bergen and Hudson counties adjacent to Manhattan, as well as our Suburban Philadelphia market. Our other suburban markets were [off] last year's first quarter totals slightly.

As mentioned last quarter, our 2010 rollover was weighted in the first and fourth quarters of the year. We currently have approximately 1.5 million square feet expiring in the remainder of 2010, representing 5.3% of our leased space.

Looking at our markets, both Northern and Central New Jersey experienced positive absorption in the first quarter. With less space being returned to the market, these upticks occurred even though leasing activity was flat in Northern New Jersey compared to 2009's average and off by 30% in Central New Jersey.

Northern New Jersey's vacancy improved by 90 basis points, primarily as a result of a 280 basis point occupancy gain in Morris County, and Central New Jersey's vacancy improved by 30 basis points.

Westchester County, New York's, vacancy increased by 110 basis points. Suburban Philadelphia's vacancy rates stayed flat, and Prince George's County in Maryland improved by 170 basis points. Westchester County, New York, and Fairfield County, Connecticut, and Suburban Philadelphia, all posted moderate increases in leasing volume over the 2009 average.

Asking rents varied a little across our markets during the quarter. Sublease space as a percentage of overall availability declined in all markets except Washington, DC, and now averages approximately 17% of overall vacancy.

Mitch?

Thank you. Before I open the call up to questions, I'd just like to recite a few of the factoids that I traditionally talk about on these calls.

First of all, I would make the point that the same-store NOI will probably continue to be under pressure certainly this year. We would anticipate that it would be in the negative range potentially of 0% to 5% down through the course of 2010.

I might make note that although this first quarter reflected a GAAP NOI of minus 2.8%. If we were to adjust for the exclusion of the Citigroup situation on 125 Broad Street, it would be minus 0.8%, which is a dramatic lift in that reduction. I point that out, because I think that would give you some perspective on the blended portfolio outside of our one building in Manhattan.

As well, I think in general, we've continued to benefit in the area of real estate taxes. We are actively and aggressively challenging [serchiary] reviews. And almost throughout our portfolio, we all know that municipalities as well as state governments are all under pressure. And so clearly, these situations take some time, but we have benefited from some tax appeals.

We continue to benefit from utility cost savings both in terms of generally usage and rate. This quarter ended up to be almost a 7% reduction in utility usage. But unfortunately, the quarter also reflected about 3.5% reduction in property revenues, which is obviously a reflection of some occupancy loss in the portfolio.

The real positive aspects are that we continue to reflect positive cash flow for the quarter on a CAD basis, which for us our CAD payout ratio was about 77.5%, and that less dividends reflected about $12.7 million free cash flow from a CAD calculation perspective. And that's after spending about $10 million in the quarter on tenant improvement costs and leasing commissions.

We expect for the year to the extent we're able to use our crystal ball that while occupancy may continue to be under some level of pressure, we'll hopefully, and I say hopefully because it will reflect good leasing velocity, spend in total about $64 million for the year on tenant improvement costs and leasing commissions and still reflect a positive cash flow on a CAD basis of somewhere around $18.5 million at year end. And so we are in an enviable liquid position.

I would also submit that we continue to evaluate our portfolio on a mark-to-market basis, and clearly the rents continue to be pressured by market vacancies and by diminished demand. And we'll certainly probably talk more about that in the Q&A. But we think that right now on a mark-to-market basis, to the extent we can create a science out of this, that our portfolio is probably somewhere around 107% or 108% of market, so that it is not a material markdown on a market-to-market basis throughout the bulk of our portfolio.

So with those few additional elements, I would now like to open the call to questions. Operator, if you'd be so kind?

Thank you. (Operator Instructions). And we'll take our first question from George Auerbach at ISI Group.

Good morning.

Good morning.

Mitch, can you give us some color on the leasing prospects at 125 Broad Street? And also, give the amount of competing supply downtown, what is your outlook for the rents at that space?

Well, I can tell you that the markets are under significant pressure. The competing properties in general would include the former Goldman Sachs base and 100 Church, although that's more of a West Side focus.

125 Broad Street is an extremely high-quality asset and does have a great deal of infrastructure. But having said that, again, it's a very competitive market with diminished demand, particularly as a result of the financial services industry being under continued pressure from a variety of areas and not the least of which is employment contraction.

We do see a lot of not-for-profits. We see technology companies, insurance companies still in the marketplace looking for consolidation. There's a lot of old product downtown as there is probably almost everywhere throughout the Isle of Manhattan. And so it's an opportunity for tenants to consolidate.

We're working on a couple of transactions now, and I'm not going to be too specific, because we are competing for the situations where I think we can make some significant inroads to our plus or minus 290,000 square feet of vacancy in that asset.

The rents today I would say -- most of the leases are long-term leases 15 to 20 years. Some are 20 with cancellations after 15 years, some level of modest payment for the unamortized portion. Operating expenses are about $16, $15, $16, more close to $16 than $15, including taxes in the downtown market. And I would say that the average rents are somewhere in the $35 plus or minus range on a gross basis, plus electric in that market today.

But I would also tell you that in order to facilitate leasing in that market, you're looking at legitimate tenant improvement packages of, I'm reflecting on all the potential transactions that we're involved in, anywhere from $65 to $90 a square foot, whether or not they meet it, if you follow me, and commissions on top of that.

So you're looking at $100 type packages to install a tenant that's got good quality credit on what is, let's say, on average of 15-year lease with somewhere around $35 average rent with a $16 expense. Does that give you the information you need?

Yes, that's very helpful.

Yes.

Barry, I am sorry if I missed it, but did you give the rental spreads on the leases signed during the quarter?

Well, yes, we did actually. In terms of the same-store, we said that the GAAP is down 2.8% and on a cash basis were down 4%. And we were down 8.1% on cash for the roll-up and roll-down and 9.4% on GAAP for the leases done in the quarter.

Thanks. Sorry, I missed that. And finally, Mitch, last year you were appointed to Governor Christie's economic transition team. Can you discuss some of the initiatives that the Governor and your subcommittee are considering to track and grow the business base in New Jersey, and also when you're seeing these initiatives could have an impact on employment growth?

Yes, absolutely. I think the Governor has done an exceptional job so far in continuing to maintain an on-point message about being business-friendly. That includes the Lieutenant Governor, Kim Guadagno, who will in addition to her role as Lieutenant Governor will serve as Secretary of State and the economic czar, and her primary mission right now is to reduce the regulatory hurdles in connection with doing business in New Jersey, cutting out the red tape. And that includes not only issues that surround building and even with small businesses adding on to a small factory, but it includes regulatory environment affecting pharmaceutical companies and others in terms of them getting necessary permits for their scrubbers and all the other equipment that they use in research from the EPA.

So there is a very strong initiative in terms of reducing regulatory red tape. The Governor is focused on reducing the tax burden. He has sent the message with resolve that there will be no reinstatement of the surcharge on the wealth tax, for lack of a better expression, and he will veto any legislation that might attempt to impose a higher income tax.

With the most significant aspect of that being small businesses, I would say that as a nation, 70% of our economy results from the efforts of small business in terms of employment and economic activity. And many of those companies and businesses are formed in either Subchapter S or LLCs that are taxed -- the principals and proprietors are taxed on a personal income tax basis.

And the Governor is very, very focused on not reestablishing that tax. He's taken dramatic action against what I would say a union organized labor -- only in terms of legacy costs and trying to reduce the costs that are imposed on pensions and areas that continue to strain the economy, and not only in New Jersey, but just about every other state in the country.

So he's pretty clear on point, on message. I will tell you that in speaking with corporate leadership and many management teams, they're feeling a lot better about the message that's being sent and some of the initiatives and early actions being undertaken by this Governor.

Some of the other things that we did in addition to immediate tax policy at the transition committee level are more long-term benefits, connecting higher education with the economy, creating inducements and incentives to maintain intellectual capital in New Jersey. We do have some very fine higher educational institutions. I'm proud to be on the board of the second largest university in the state, Montclair State University.

And the interconnectivity between some of the vibrant industries such as pharmaceuticals or technology, and these universities, they're nexus, if you will, is another initiative to keep intellectual capital in New Jersey and offer further inducements to have young people, the new age, the new norm workforce stay in New Jersey, rather than migrate to other parts of the country by providing incentives and inducement, and likewise reciprocally providing it to businesses that engage.

So there are lots of different real positive messages that are being sent. All of the programs that have been developed, the as of right programs such as the Business Employment Incentive Program or the Urban Transit Hub Tax Credit remain in force. The EDA, the Economic Development Authority, is very anxious to attract new business to the state.

So the only reason -- a long answer to a short question is that signs and signals are pretty good and business is reacting in a positive way at this juncture.

That's great. Thanks very much.

You're welcome.

We'll take our next question from James Feldman at Bank of America Merrill Lynch.

Thank you and good morning. Mitchell, you had commented that some lease restructurings and early renewals could take you at the lower end of your guidance range. Can you give a little bit more color on the magnitude of these kinds of deals and the likelihood that basically that they're really going to happen?

Yes, nothing is for sure until it's signed, but there are a couple of situations. What I've seen over this period of time is clearly there's a sentiment almost universally as far as I can see that given the fact that there is excess supply that the markets have been generally under such pressure that it's a typical tenants' market.

The commercial real estate brokerage community has to make a living. And so they're out there engaged with tenants, Corporate America, making sure that they educate their clients to the fact that there are potentially some economic benefits that they can derive in this sort of a tenants' market.

And particularly we have what I would call long-term strategic relationships with some of the larger corporate users in the insurance industry that comes to mind. They're working at working with us to facilitate some of their corporate strategies which over the last couple of years have certainly been cost cutting, cost shedding. They've reduced their headcount, their employee headcount.

And where they have three, four, five, six locations with us that we've been working with these strategies to look at each of their locations with their representatives, and there are situations where frankly they need to expand and situations where they need to contract or diminish some of their physical plant and their headcount.

And naturally, they're looking for some upfront benefit as well, whether it's simply taking 10% of their space in aggregate or 15% of their space in aggregate and cutting off the income stream to what's stopping the bleeding on their side. And having done that, it minimizes our upfront costs. The TI expenses are low. And so pretty much all we're paying for is maybe a small cosmetic upgrade at most, a brokerage commission and in exchange for which we're getting seven, eight or so year lease extensions.

And there are a couple of those situations that what I would tell you are in more than serious discussion. In the aggregate, what does it amount to? I don't know. Maybe 100,000-150,000 square feet through the portfolio that sort of would have an immediate -- or a near-term reduction in rent revenue to us, but certainly on the long term and from a cash management perspective are great benefits to the portfolio.

To some extent, Jamie, a lot of what you're seeing in the market is simply a result of perception. And tenants or their representatives believe that they can seek accommodations from landlords, especially the well-capitalized landlords. And they are out there doing it, because they can do it.

So that's kind of what we're experiencing right now.

Okay. And then can you also comment on what you're seeing from small businesses? Are things still getting worse, are they kind of flattening out, are they starting to get a little bit more active?

I wouldn't say they're getting more active. I would say that we're not getting too many calls where people are ringing the fire bell right now. There seems to be what I would say stabilizing in small businesses, some of our Westchester tenants that were under serious financial pressures when their credit was cut off and their lines were shut down.

We've worked with them. They're paying in some cases a restructured rent to us, and we haven't had any real emergence of new situations, no emergent situations of distress. So that's why I said in my quote in the release that I'm beginning to see at least what might be the stabilizing before or the point of inflection.

I certainly don't see velocity. I don't see demand. Space showings still are off of their peaks, certainly better than they were in the height of what everybody thought would be the destruction of the financial service sector or the financial system. But there's no real velocity out there right now. There's still a lot of caution, and there's a lot of pressure on pricing from a landlord's perspective because of the amount of inventory and the musical chairs that's going on right now.

Okay. And then finally, I knew in the past you've talked about what you call dignified solutions or acquisitions using a p unit. Can you give us an update on how that --?

I've been spending a pretty fair amount of time in a couple of situations in the market set. I previously identified the metropolitan New York market and the DC market. And there are a couple of situations that I would consider to be viable at this point. I've been able to build pretty good chemistry synergy with the principals.

The interesting thing, Jamie, is when you look at some of these private situations, because those are the sponsorships that I'm talking too, it's certainly not the publics at this point, it's almost incredulous what you see in terms of capital stack issues, the layers of financing that was done in connection with asset acquisitions in the '05 to '07 timeframe.

Super mezzanine positions of the equity and then of course the senior debt positions almost all of which are in many instances underwater, and so the caution that needs to be undertaken is to know, to be very clear in the intrinsic value and if that can be established then to work through the capital stack issues to try to have everybody understand that something is better than nothing.

But I would say that there is a -- you know, when you talk about commercial real estate or the refinancing risk, to the extent that I have been involved in these explorations, I'll use that word, in these two different markets, it's remarkable how buoyant the investment and pricing levels got in some of these areas and some of the potential pitfalls as a result of that.

So we're trying to work through it. We're trying, but these are not easy transactions. They require a lot of work. And everybody has to really be very realistic in their expectations, because when you get a mezzanine holder for things, they got their control and the keys to the kingdom. They could take the house of cards down, and nobody will have anything except the lender, the senior lender, will end up with an overleveraged piece of real estate that has a lot leasing risk and a lot of capital requirements going forward to be able to compete in the marketplace.

And that's a very general broad answer to question. But I think that's an appropriate characterization of almost universally what I'm seeing in what I would say the mid-sized sponsorships that were either operating private equity funds or just proprietors that brought in external money to capitalize a lot of investment activity at the peak.

Okay. Thank you.

You're welcome.

We'll take our next question from Michael Bilerman at Citi.

Great. Mitch and Barry, good morning.

Good morning.

I wanted to go a little bit deeper into guidance to try to reconcile a couple of things. You reported $0.72 in the quarter. You're indicating based on somebody's restructuring that that's maybe taking down to the lower end. So let's call the lower end 270 to 275 for a second. That would out your quarterly run rate at $0.66 to $0.68 relative to the $0.72 that you reported in the quarter.

That equates to $4 million to $5.5 million of quarterly loss FFO or annually $16 million to $20 million, which is 3% to 4% off of your income levels, your base rents. You have paid back the bond in April with cash. So that's accretive, but let's just put that aside.

Something is not adding up. Relative to where you are today, same-store was down 3%. Your forecast for the year is flat to down 5%. So, NOI on a sequential basis shouldn't get that much worse, save for the restructurings of 150,000 square feet is not that much. So can you help me bridge the gap in the numbers?

Right, we'll try to do that, Michael. Some of the issues that surround -- you know, there are lots of moving parts, obviously. We had the benefit of a tax appeal that helped us in this quarter. It was almost $0.02 a share. We have had some G&A reduction, but the loss of Citigroup obviously is a very significant loss to us. It's $12 million or $13 million on an annualized basis of income.

But that's already in the first quarter?

No. The lease ran through the first quarter -- through one month, one full month of the first quarter. So it was only partially offset in the first quarter. So that has to be considered. We have a couple of these situations, as I alluded to very candidly about restructuring potential, that could result in $0.02, $0.03, in upcoming quarters that are hard to predict.

I mean I've got handshakes on these deals. But you're going through a labyrinth of corporate bureaucracy, in some cases, the government's involvement, in some of these companies now, so they take a long time.

So there is a little bit of a lack of predictability on some of the restructuring. We don't know exactly that we'll continue to benefit as we have over the last year in some of the utility costs, because the winter was a hard winter. We don't know what the summer is going to look like. Last summer, it was temperate. We had lower usage of -- unfortunately, some of that is due to vacancy, but just in general, the temperature swings were less.

So there are these variables that could impact us and push us down to the lower end of the guidance range. And I want to be very, very open about suggesting that that's a possibility.

Well, I guess if we go through the specifics, on the restructurings, when you talk about a $150,000, well --?

Well, I've got one right now, Michael, that's in progress or process that I think I have a deal. And that one in and of itself is a $0.02 reduction.

But you're saying that you're losing a $150,000, that's your contraction or is that --?

Contraction.

That's the number. So you're talking with tenants that if -- if you go through your math of saying these tenants are going to contract 10% to 15%, you're talking about 1.5 million square feet of your portfolio, you contract, you lose that rent and then the rent goes down?

That's not exactly what -- I'm not saying it's portfolio-wide. I'm saying that there are a number of anecdotal situations that could total by early immediate contractions, stopping the rent on space in exchange for a longer-term restructuring, could result in a couple of 100—call it a couple of 100,000 feet of income that was originally anticipated to be fully supported by cash flow in our original guidance of $2.70 to $2.90. And as a result of more recent discussions, following originally putting that guidance out, these situations have emerged.

Right.

That would result in reductions that are going to push us to the lower end.

And that $0.02 to $0.03, that's an annualized number or that's --?

It could be potentially -- it could happen in several quarters throughout the year.

Right. And then just in terms of G&A, the G&A did seem low this quarter at $8.4 million. What is --?

Our run rate for G&A right now is $8 million a quarter, $32 million going forward, plus or minus.

So that should stay relatively firm.

Correct.

And then the tax, because the first quarter tends to be a low in a line margin quarter anyways. So I guess I would have thought that even if you had the tax benefit, call it $2 million or $1.5 million in the quarter, you would've picked some of that up by the back-half of the year just based on your operating margin improving just under normal seasonality?

Yes, in the quarter we had $400,000, for example, less in budget, in leasing, in executed leases than our original model as a result of just the market conditions.

So there are these variables. And things can change, but this a pattern that I've seen. And I still want to be—I want to disclose everything that we're seeing in the markets right now.

Was the assumption always to refi the $115 million bond deal that came to you in April on the line for the year, or is there something else that was in previous guidance versus current guidance?

No, there's no change in that we were sitting with cash today of about $115 million. We anticipated paying that off. Obviously there's a very fertile market right now in the debt markets, but there's no reason to do anything that at this juncture, given the lack of use of proceeds. So we have a lot of capacity right now.

And I expect that if we needed more, we could certainly attract capital. But right now, we are just kind of sitting where we are. There is no change, none of that alters guidance. None of that was dilutive in any way, that wasn't reflected in the original $2.70 to $2.90 that we put out.

All right, but that's going to improve. Sequentially, you're going to pick up $0.015 to $0.02 from taking $150 million that -- call it a little north of $5 million down to earning nothing, or paying nothing. So that's going to be accretive to your sequential numbers.

Yes, but look, we're going to go through -- yes obviously any leasing that we do after, what I would call the midpoint of this year is not going to -- first of all, it's only going to be straight line income. It's not going to reflect any cash flow generally with the, you know, down time and so forth.

So we're very cautious about leasing projections, going through the year. Look, we might get lucky, I'm hopeful in a couple of situations, not the least of which is 125 Broad Street, but it's not going to show us any income throughout the course of the year, and I don't know exactly when the commencement date would be.

So the likelihood is that there won't be a lot of pick up in the leasing percentage this year and so while there might be some incremental accretive gain from the financing or having paid off the financing as a bond that we're talking about, it could be offset by some continued pressure on the occupancy.

I guess when I just put it all together, if you reported $0.72 in this quarter, and let's say $0.02 from the positive on the taxes, you're going to have a positive $0.02 from you staying off the bond --?

To get to the low end, even if you are $0.02 to $0.03 of -- I know you want to be conservative but something -- it just doesn't -- to me it's like you're going to be at the mid point of the high end rather than the low end to the midpoint even with $0.02 to $0.03 of restructuring.

I would just ask you, obviously you could -- you take the information and you analyze it. But I would just ask you to reflect on this discussion, go back and model in the fact that one-third of the first quarter had close to whatever was $13 million, $14 million on an annualized basis of income at 125 Broad street from Citi group that no longer exists and then see where you are with the numbers.

Okay. Building on lease term fees, Mitch --?

I think we're negligible -- you know, not negligible. I mean there were $350,000 for the quarter.

Okay.

You know we don't see any major situations there.

Okay, thank you.

You're welcome.

We'll take our next question from Jordan Sadler at KeyBanc Capital Markets.

Thanks, good morning.

Good morning.

Not to beat a dead horse on that, the blend and extend deals, but just out of curiosity are these -- you may have mentioned this, are these low TI deals with, which typically --

Yes, I did mention that. Generally they are very low TI deals. They most, I mean, they vary, clearly, but most of them are more very low. I'm working on one situation now, which is significant. It's could be the -- as I said the $0.02 of share. But in exchange for which in addition to a decent term on the renewal there's no TI, it's just a commission.

So I would say in general, from a cash management and cash flow perspective, they are efficient. Unfortunately, because of the pressure that exists in the market and the sentiment and perception with the help of the promotional brokerage community that these deals can be done at this juncture. You know there's some loss of revenue on the top line to the portfolio because it's taken back space early. But you've to feel through those situations.

And thanks for the clarification and sort of the increased transparency on the market-to-market, I think you said about 78% portfolio. I assume though that's -- the deals you're probably working on are 2010-12 type expirations.

Tenants you want to keep so probably bigger in size who are considering their options. Is it possible that the marks that some of these leases are above -- even further above market and sort of the portfolio average, just given sort of the vintage of these leases?

You know, our -- today, based on our view of this, we have an average in place gross rent of $24.35 on the consolidated portfolio. And our view of the average market rent is $22.58. I know it sounds odd, but it's an aggregate of so many different markets and numbers. So that would reflect a market-to-market of down 7.3%.

Now if I look at -- we talked about the quarterly roll-up and roll-down and we talked about the NOI roll-up and roll-down and while there was an improvement this quarter over last quarter, last quarter was 10% and change, and this quarter was 8.1% on a cash basis, 9.4% on GAAP.

You know, I look at every deal that we're doing. You know, this -- I mean the reality is that in -- I think we're reaching a point in the portfolio based on the vintage, as you call it, of the leases where we're kind of reaching the new norm if you will. We're rolled through the bulk of leases that are we're rolling through over the next two years. Leases that are -- were five to 10-year leases that had base rents, call it -- some of the suburban markets in the mid-20s, $25, $26 with base years that are now five to seven years old.

So you've moved those rents up from their original face amounts by anywhere from 15% to 20% based on escalation -- operating costs escalations. And now, doing those deals, some with more capital, some with less capital in terms of TI, and we're rolling them back to the face rents that existed when we did them five to seven years ago. And so they reflected in absolute numbers of 15%, 16% reductions or roll downs in these deals.

So I think we have a pretty I think that we have modeled this correctly and the expectations, if it's not 7.3%, it's 10%, but there's not a dramatic mark-to-market roll-down in our portfolio in so far as we can see. And as I'm hopeful at this juncture, while we're not seeing a lot of demand in the marketplace, I think that the pressure is not getting anywhere.

So it's less bad in terms of leasing concessions and what's being asked for on the part of tenants to getting a little more realistic, at least their representatives are. And so from this point, we may not have a great acceleration, but I think the downside is extremely limited.

Okay. And then following up I think, Michael, in his prepared comments mentioned that new lead activity was down 4% square footage, 13% in terms of the number. Can you just clarify that? Is that year-over-year, and is that a typically a good leading indicator?

Yes, there were some anomalies in that number, but that 13% is a year-over-year first quarter.

Okay. Is that concerning to you? Is that typically a good leading indicator? Some of your peers are talking about an acceleration in activity at least.

Yes, I have to tell you something, it should only happen. I am not seeing that. We see our tenants and I think that there is a very strong bond and royalty and great relationships, in many cases, you know, CEO to CEO in these situations. And the tenants are a little more comfortable in extending out leases, in some cases, in exchange for some immediate benefits. But we're not seeing a lot of traction on the demand side and not a lot of expansion. That's for sure. I mean expansion is much more anecdotal than anything else.

But we're seeing a lot of royalty even in, for example, Jersey City, where we had a couple of situations in 101 Hudson where tenants were subtenants of, you know, major financial institutions that really could not have afforded that building. And they're staying with us. They're moving to a little bit different price point in the older portion, Harborside Financial Center 2 and 3.

But it's not incremental growth, and that's the concern. And how could that be? When you have the situation in Washington with financial regulatory reform that's evolving and all of the uncertainty and unknowns that exist in terms of the limitations on the banking and financial service industry, which is a big part of the nucleus of the New York Metropolitan market, particularly New York City, how could these companies be bold enough, other than on anecdotal basis to be expanding right now when they don't know what the shape of their business is going to be depending on how Washington invokes over the next two week or so.

So that's what we're seeing. We're certainly not seeing buoyancy any kind of recurrent to exuberance, that I can tell you.

Okay. That's fair. Thanks for the color.

Welcome.

We'll take our next question from Michael Knott of Green Street Advisors.

Hey, Mitchell, I was just wondering if you can comment generally on your current take on acquisition opportunities. I think you commented on it a little bit earlier, but just wondering if you can give a little more color. And then also, within that, are you looking at the Manhattan deals that have been in the market recently and you've been underwriting those? Thanks.

Hi, Michael. With respect to Manhattan, the few assets that have come to market are generally not within the appetite band, if you will, of the public companies, whether it's us or I would submit the more New York-centric companies. These are yield plays. 340 has long-term leases with good quality credit behind them. You're going to see international money coming in. And the likelihood is those will be the buyers for the few that exist.

But I'm not sure that we're not going to see another leg down in terms of pricing. I mean you may have these few anecdotal situations that may price fairly full, that may -- I hope the market doesn't read these things wrong, in anyway share performance, start pushing pricing and leverage again as a result of the few anecdotal transactions. I'm really concerned about that.

As far as the acquisition environment beyond that, there are a number of situations that are controlled by special servicers that they may be looking to put into the marketplace. But our view is to take this opportunity and not to be redundant and not to be glib about it and try to build -- continue to expand our platform by doing what I would say the more long-term beneficial transactions, which include either partnering or acquiring, you know, good names in the marketplace that can help us grow in the few markets that we think were kind of underweighted and identified those markets before.

Look, we see a few more assets, suburban-type assets in Oshkosh, Pennsylvania, and other places that are beginning to come to market, too early to tell what the pricing levels will be. But they're of little interest to us at this point, because I think that capital is still scarce. And I think that we -- and it's not I think we're -- our strategy clearly is to try to do these platform building exercises and use our capital judiciously to help us expand our platform in the areas I talked about.

Okay. Thank you.

You're welcome.

And we'll take our next question from Chris Gay at Morgan Stanley.

Hi, we've touched on -- I guess you've touched on it a couple of times in the last few calls. But could you talk about Samsung and what their latest claims are there? I think that expiration is coming up pretty soon.

Yes, the Samsung building has a June expiration to the lease. It also has a June maturity on the mortgage. We are in the process, and have been, of providing a deed back to the mortgagee for the facility. I've talked -- it's got to be over a year about this situation, now longer, about our efforts to try to do something preemptively.

We could not ever get the attention of the mortgagee because of all the issues that they're dealing with. And notwithstanding that fact, it ended up that Samsung did a lease in an empty building next door. They needed more space ultimately than we were able to provide in any event in the building, and the economics were unrealistic for us given the capital structure in the building.

The building had originally been acquired as part of the Belle Mead portfolio. It did have mortgage on it. And so that's where we are in that situation.

Thank you.

You're welcome.

And it appears we have no further questions at this time, I'd like to turn the conference back over to Mr. Hersh for any additional closing remarks.

Thank you operator. Well, thank you everybody. Although this quarter, our occupancy rate dropped due primarily to the anticipated Citigroup lease expiration. And clearly while office demand remains sluggish as we've talked about on the call due to the uncertainty surrounding the economic recovery and general trends with respect to job growth or the lack of job growth in the United States at the present time. Notwithstanding those facts, we are cautiously optimistic that the fundamentals will begin to stabilize.

As I talked about, we're beginning to see at least a little more clarity from the tenants' perspective on what they think their needs are going forward. And it requires flexibility and an exchange and a reciprocal attitude towards a give-and-take between the landlord and the tenant, and those are some of the activities that we are involved in today.

But having said all of that, there -- it is very, very eminently clear that tenants continue to seek out landlords with financial strength and stability, companies and sponsorships that have proven track records that are leaders in the industry. And for those reasons among many others, we are confident of our ability to continue to navigate through these unchartered waters, and to have ourselves take advantage of opportunity at the appropriate time. That will be a long-term benefit to the company.

And so with that I once again thank you all for joining us on today's call. We look forward to seeing some of you at NARI in Chicago and of course reporting once again in three months. Thank you. Good day.

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