Veris Residential Inc (VRE) 2010 Q3 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation Third Quarter 2010 Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Good morning. And thank you for joining Mack-Cali's Third 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 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. Then Barry will review our financial results, and Mike will give you a quick update on our leasing results.

Before I review the specifics of the third quarter, however, I would just reiterate what most of you already know, and what you have undoubtedly heard on other earnings calls. The headwinds in the economy remain quite stiff. And there has been little progress made, as we all know, in restoring employment in the nation. Naturally, this affects all of our businesses. Without dwelling on prognostications, let's hope that greater clarity will soon exist, at least in the political arena; and that economic recovery and employment gains will take hold.

As I have said over the last several years, an economic recovery will ultimately take shape. However, it will be a deliberative and slow process. I'm proud that Mack-Cali has positioned itself well to navigate these waters.

And now I'll talk about our results. FFO for the third quarter of 2010 was $0.69 per diluted share. We had some significant leasing activity in the quarter, totaling over 1.1 million square feet of lease transactions. We ended the quarter at 89% leased, up slightly -- 10 basis points -- from last quarter's 88.9%.

Our leasing costs were somewhat higher in the third quarter, as you've seen in the filings, reflecting the quality of transactions we have done, and generally with longer leases. I will tell you that generally concessions have stabilized in our markets.

For 2010, remaining rollovers are approximately 1.7% of base rent, or $10.3 million. And for 2011, we face rollovers of 9.8% of base rent, or $60 million.

Despite the 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, D.C.

We are seeing, as indicated by the volume we've completed this quarter, some significant leasing activity both in connection with renewals and new tenants. Our retention rate of 74% reflects the fact that tenants prefer to stay in place, as I have said many times, particularly with a high-quality landlord and in high-quality assets.

However, the decision-making remains slow, in particular because of the economic uncertainty that exists. Our new tenants generally reflect the flight to quality, both in terms of sponsorship and asset quality.

Now, let's look at some of the activities in the quarter. On September 30th, we announced a new 15-year-and-two-month, to be exact, 37,500-square foot lease at our 125 Broad Street building in downtown Manhattan. The lease was with IAVI, the International AIDS Vaccine Initiative, initially fostered by Bill Gates. The full floor space will serve as the organization's New York City headquarters.

You may have also noticed that just this morning we announced the signing of a new 10-year-seven-month lease with TMP Worldwide Advertising & Communications, the largest independent firm focused on recruitment, advertising and communications. This was again for a full floor of 37,500 square feet at 125 Broad Street in downtown Manhattan.

So these transactions demonstrate that we're experiencing leasing momentum at this premiere property. Today we have over two million square feet of activity for the remainder of the space, and we're hopeful that we'll be announcing transactions in the near term.

Some notable leasing transactions that we've outlined in our quarterly filings include the following -- in one of the largest transactions done in the state of New Jersey this year, we signed a lease renewal with TD Ameritrade at our Harborside Plaza 4A building in Jersey City. This lease for almost 190,000 square feet secures this location as a TD headquarters location through 2020. The building is 100% leased.

Optical Distributor Group, a distributor of soft contact lenses, signed a transaction of almost 41,000 square feet -- part renewal, part expansion -- at our 4 Skyline Drive building in Mid-Westchester Executive Park in Hawthorne, New York. Transactions -- the leases now run through 2023. And this 81,000-square foot office flex building is now 100% leased.

Turner Investment Partners, an investment management firm, signed a 63-month renewal for 40,000 square feet, more or less, at our 1205 Westlakes Drive in Berwyn. This 130,000-square foot office property is approximately 87.5% leased today.

In Washington, Radio Free Europe, an independent international news and broadcast organization, signed a 12-year lease renewal for 27,000 square feet, more or less, at 1201 Connecticut Avenue Northwest. This 170,000-square foot asset is 100% leased.

And finally, Nextel of New York, a well-known provider of wireless and wireless communication services, signed a renewal for 30,000 square feet at 565 Taxter Avenue, in Taxter Corporate Park in Elmsford, just over the Tappan Zee. This 171,000-square foot building is approximately 93% leased.

As in past years, Mack-Cali continues to be recognized for its expertise in property management; for customer care. This quarter, Mack-Cali received the TOBY Award from the New Jersey chapter of BOMA, in the [100-to-0.25 million-] square foot category for our 325 Columbia Turnpike building in Florham Park, New Jersey.

Let me turn to a few factoids, if I may. You've seen in the press release issued this morning that with respect to guidance, we've tightened our 2010 guidance -- the range now at $2.78 to $2.82. We've raised the low end of our prior guidance, now that we have a clear picture of the remainder of the year.

And we've introduced 2011 full-year guidance with a range of $2.75 to $2.95, reflecting our view of the coming year, accounting for what we view as the challenges of the leasing environment and some of the alacrity with respect to the financial and capital markets and our ability to access those markets.

With respect to cash flow -- from a CAD perspective, we expect to finish the year at about $30 million cash flow positive from the standpoint of CAD calculations, with an occupancy range in approximately the same zone as I've presented today.

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

Thanks, Mitch.

For the third quarter of 2010, net income available to common shareholders amounted to $13 million, or $0.16 cents a share; as opposed to $19.1 million, or $0.24 a share for the same quarter last year. FFO for the quarter amounted to $64.3 million, or $0.69 a share; versus $75 million, or $0.81 a share in '09.

Other income in the quarter included approximately $639,000 in lease-termination fees as compared to $533,000 for the same quarter last year. Same-store net operating income, which excludes lease-termination fees, decreased 7.2% on a GAAP basis. And on a cash basis, same-store net operating income decreased by 7.5% for the third quarter.

Our same-store portfolio for the quarter was 30.8 million square feet. Our unencumbered portfolio at quarter end totaled 236 properties aggregating 24.3 million square feet of space, which represents approximately 79% of our portfolio.

At quarter end, Mack-Cali's total un-depreciated book assets equaled $5.7 billion, and our debt-to-un-depreciated asset ratio was 38%. The Company had interest coverage of 2.7 times and fixed charge coverage of 2.6 times for the third quarter of 2010. We ended the quarter with approximately $2.2 billion of debt, which had a weighted average interest rate of 6.81%. Currently, we have approximately $80 million in cash and no outstandings on our $775 million revolving credit facility.

As Mitchell mentioned before, we've provided 2011 FFO guidance for the first time. Our 2011 guidance range of $2.75 to $2.95 of FFO per share assumes [at] the midpoint leasing starts of 2.3 million square feet for the year versus scheduled expirations of 2.6 million square feet, and includes G&A at about $34.6 million for the year.

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 includes the information required by Regulation G as well as our 10-K.

Now Mike will cover our leasing activity. Mike?

Thanks, Barry.

At September 30th, our consolidated portfolio was 89% leased, up from 88.9% at June 30th. During the quarter, we signed 147 transactions totaling 1.1 million square feet, including 320,000 square feet of new leases. The 790,000 square feet of renewals and other tenant-retention transactions produced a retention rate of 74% of outgoing square footage.

As a measure of demand across our portfolio, new lease inquiries during the third quarter were consistent with what we'd experienced throughout the year. The number of leads is down slightly compared to the same period last year, but square footage is on par. Our most active regions remain in northernmost New Jersey; some markets of Bergen and Hudson Counties adjacent to Manhattan, which have been above last year's levels each quarter this year.

We have approximately 440,000 square feet, or 1.6%, of our lease space expiring in the fourth quarter. 2.6 million square feet expires in 2011, representing 9.8% of leased space. These expirations are more heavily weighted in the first half of next year.

Looking at our markets -- Class A overall vacancy rates continue to fluctuate. Both Northern and Central New Jersey saw modest vacancy increases during the third quarter. Westchester County New York made up the 60-basis point loss it saw in the second quarter and added another 60 basis points of absorption on top of that, to produce a 120-basis point reduction in vacancy.

Washington, D.C. also had a 120-basis point improvement in vacancy rates, thanks in part to expansions by government agencies. Downtown Manhattan's vacancy increased by 310 basis points, primarily as a result of the anticipated 1.5 million square feet returned to the market via consolidations by Goldman Sachs.

Fluctuation also continues when reporting Class A direct asking rents in our markets. After D.C. rents fell $2.85 a square foot in the second quarter, they increased by $1.63 in the third. Despite vacancy increases, asking rents in downtown Manhattan increased by $2.47 per square foot. Third quarter asking rent changes in our other markets were minimal.

Comparing year-to-date leasing activity within our markets to the same period last year, volume is up over 27% across the regions in which we operate. The largest increases were in suburban Philadelphia, Fairfield County, Connecticut and Washington, D.C.

During the third quarter, the percentage of overall availability represented by sublease space fell in all of our markets except for suburban Pennsylvania, which increased slightly. Across our Northeast markets, sublease space averages approximately 14% of total availability, down from 17% in the second quarter.

Mitch?

Thanks.

In closing our prepared remarks, I would just say that while we all anxiously await a more vibrant economy, we here at Mack-Cali will continue to work very hard securing new leases and renewal leases with the highest-credit quality tenants that we can, as evidenced by our announcements this quarter. We firmly believe that other opportunities will undoubtedly arise during the next period of time. And given the anchor in our financial measures and our financial flexibility, we will be ready to take advantage of those opportunities.

With that, operator, I'll now open it to questions.

(Operator instructions) Jamie Feldman, Bank of America Merrill Lynch.

Thank you.

I was hoping to dig into the assumptions underlying the 2011 guidance. I was off the call briefly. So if you already did, please let me know, and I'll move on. But can you just provide same-store NOI, your occupancy assumption and your leasing spread assumption?

Yes. Jamie, all we really talked about was the leasing challenges going into next year, and that we reflected in our guidance and in our modeling, if you will, approximately 100 basis points of potential occupancy loss.

With respect to same-store -- I mean, that fluctuates quarter to quarter. The 5% to 7%-ish range is probably what we're going to see through 2011. Some of that's a reflection of, for example, utilities. The consumption was up over the last quarter, rates have remained fairly stable, labor costs have modestly upticked as a result of some of the union labor contracts. And so we frankly see a lot more of the same moving through next year. But having said that, we're comfortable with the guidance that we've introduced today.

We have, as everybody is aware who's participating in this call, a significant tranche of unsecured debt -- actually, a small tranche in December of $15 million, and then a $300 million -- almost 8% -- piece of debt coming due in March. And so our refinancing of that -- and we're looking at a variety of alternatives. And we're not today going to commit as to our posture with respect to refinancing, other than to say that we have the liquidity and the financial wherewithal to easily deal with that maturity. But clearly, that is part of the savings and thus the earnings potential for 2011.

So I don't see real dramatic shifts in the tone of the portfolio. I think with respect to market conditions and rents, I think we're kind of rolling along at the bottom right now. I don't see increases generally in concession packages; in some markets they are significant, and they haven't necessarily diminished. But I don't think that they're going to increase. So that's generally the basis of the guidance that we introduced today.

And the same-store NOI of down 5% to 7% -- is that on a cash basis, or GAAP?

Yes, I mean, it's not -- it's only marginally different. It's 7.2% last quarter on GAAP and 7.5% on cash. And on similar -- on roll-downs, if we take 125 Broad Street out of the equation for the moment because of the anomalies that exist in Manhattan right now, in downtown, we're looking at roughly 7.7% on a GAAP basis and another 300 basis points on a cash basis for last quarter.

So we hope that those roll-downs moderate. But we don't see material changes moving through 2011.

Okay.

And then, Mitch, in the past, you had talked about potential acquisition activity from sellers that may want to own Mack-Cali stock.

Yes --

Can you give us an update on any progress along those lines?

Yes, I can tell you that we're working on a few things right now. I'll be the first to admit that the process is rather painful. Because some of these opportunities that we're looking at have secured debt, which -- that whole process of assumption of debt and so forth is very painful. And it seems like transactional people have a lot of time on their hands, so that makes the -- protracts the process even more.

But we do have a couple of things in the works, and we're hopeful of being able to move forward with those situations. More to come, hopefully soon, on that. And we are also at least in preliminary dialogue with one of our tenants about build-to-suit expansion opportunity, which clearly will be an accretive transaction for us.

Okay.

And then finally, Barry -- a question for Barry -- based on your guidance, what does that -- what does that mean for AFFO next year?

For AFFO, we anticipate that it will be somewhere in the range of free cash flow that we had this year -- maybe, call it, $20 million, somewhere in that zone.

Okay.

Before incremental.

Incremental --

Jamie, just to give you the percentages on that -- I mean, we estimate a CAD or AFFO payout ratio in 2010 of about 85%. And if 2011 generates the leasing activity that we expect, it'll be in the low 90% range. And again, as Barry stated, the free cash flow will be somewhere in the $15 million to $20 million range.

Okay. Thank you.

You're welcome.

Our next question comes from Michael Bilerman, Citigroup.

Yes, good morning. I'm here with Josh Attie.

I guess going into next year on the operational front, shouldn't there be, I guess, the same-store -- I think you're saying down 7%, which is what it was year-to-date, where you've had some of the roll-downs and the givebacks? I would've thought that as you move into next year -- especially given the very light lease roll and the leasing velocity that you've been able to accomplish --that the same-store year-over-year starts to be less bad. And so, I don't know if you can sort of build up the --

Well, if you look at -- if you look at the last -- the quarter that we're reporting on today -- I mean, from a percentage basis, revenues were only slightly diminished -- 1.7%. But expenses were up, as I said, particularly as a result of utility expenses. They were up 16% for the three-month period, primarily due to consumption. And so that's a little bit difficult to predict.

So if we're talking about generally flat to modestly down on the revenue side, and expenses keep trending the way they are, it will reflect itself in a slightly negative same-store going forward.

[Right], but just not -- I would, I guess --

I hope it's less. I hope it's in the 5% range, sort of as a maximum. These things are very, sort of, hard to predict quarter to quarter because of the anomalies particularly in things like utility usage. But a year ago, I think we talked about the 5%-ish range, and generally, we're trending that way. And so that's what I would say will be the case for '11.

Right. And then, just -- the simple math -- if you're running right now annualized of -- call it $2.78 -- and I know you said just on the bond coming due in February, assuming somewhere in the range of 5% depending on duration. Obviously, you could go a little bit shorter, you can be below 5% and, depending on what other instruments you may want to use, maybe above. But that's probably, call it, $0.10 -- you'll be at $2.88, which is pretty much generally in the midpoint, offset by some same-store decline. Is that effectively the way we should be thinking about your guidance for next year?

Yes, again, I -- it's premature to know at this point exactly what our strategy will be with respect to the refinancing, other than we all agree that our cost of debt is going to be substantially lower on that tranche, on that $300 million tranche, regardless of how we choose to deal with it.

So I think that you're correct in that respect. I mean, if I look at the nine month of -- again, getting back to the heart of your question, we were modestly down in revenues, 2.8% over the nine months; and on a GAAP basis, down about 6% on a same-store over nine months.

And so again, at the risk of redundancy -- if we trend in that direction, plus or minus, going through 2011, and have the savings on refinancing that $300 million tranche, that's all part and parcel to the midpoint zone of the $2.75 to $2.95, which is not -- which is only pennies away from what you're talking about --

Right. And --

-- $2.88, $2.85.

Right. And sounds like none of the other assumptions -- whether it be management income, your lease-termination fees, the G&A -- all of that seems to be in line with '10. There's no other sort of things that are happening. So when you step back from it, you got good growth heading into next year. And your leasing velocity has been strong. You have low lease roll. And while things are certainly difficult out there, you have pretty decent momentum.

Yes. Well, we appreciate that, and we concur. I mean, I did point out that into our modeling we have built in a slight loss of occupancy, simply because we've gone tenant-by-tenant. And we know who our known move-outs are and so forth. And we've -- but we've reflected that in the guidance that we put out today. So we're comfortable right now.

Mitch, this is Josh. Can you talk about the lease economics at 125 Broad Street, and specifically what type of concession packages you offered to sign those leases?

Yes. As I've stated on many calls and many discussions relative to 125, we obviously need to meet the market, the tone of which has been said by others to some extent. I would tell you that the leases are long. And so they're good, secure-credit tenants that have anchored everything that we've accomplished so far in the asset and all of the activity we're looking at with high-credit quality tenants.

The average rents are in the low 30s -- low to mid 30s on average. And depending on the length of lease and the particular circumstances, the TI packages run in the range of $65 to $75-ish per square foot. And they're all kind of the same. Maybe you see even a couple with slightly higher rents -- the $85-a-square foot zone.

So you have the opportunity. They are -- certainly, financially capable, strong landlords like Mack-Cali are in a position to deal with these economics from a cash perspective -- the TI and commissions, which are more reasonable in New York than they are in other jurisdictions that we operate in. But you have the opportunity to amortize those costs over long periods of time with good quality credits.

But that's generally the economics that you see down there, exactly as I've described. The operating costs are relatively modest -- in the $16- to $17-square foot all-in, fully escalated, with taxes, et cetera. So you can figure out the net effect of rents pretty easily from that.

The overhang -- first of all, literally we're -- I don't know how many deals will make, but we've responded to well over two million square feet of RFPs. We've done numerous showings, and responses and counterproposals, et cetera. And so I think we'll [pick off] a few more deals. Some of them are fairly large -- let's just say in excess of 100,000 square feet. So we're feeling good about the level of activity that we see.

But generally, all the economics are about the same. Because everybody knows what the market is, and there's an overhang there at 85 Broad Street. And a lot of the tenants that we're seeing are not necessarily downtown-centered. They are -- we're seeing some midtown tenants that are -- at least for the purposes of a gut check and a barometer, and a way to deal with their existing landlords -- they're checking out downtown pretty carefully.

So that's the situation. And I'm confident that we'll continue to make good progress in leasing momentum there.

Okay, thank you.

You're welcome.

Sheila McGrath, KBW.

Good morning.

Mitch, I was wondering if you could give us some insight of what would have to change, for either Mack-Cali or the environment, for you to have a more aggressive external growth outlook. Is your --

(Inaudible)?

Is your acquisition team looking a product, and you're [just missing] out giving pricing? Or you're not interested in buying?

Well, of course, we're interested in organic and external growth and acquisition opportunities. Frankly, there has been very little in terms of transactional activity. But the type of activity that I alluded to before -- in response to the first question -- is not marketed stuff; it's a relationship-driven transaction. And we are also marketing some properties of a couple of joint venture assets.

So we have a pretty good handle on what pricing is, at least in the suburban markets that we operate in. And I can tell you it's very low 7% -- good lease quality in the asset; very high-quality asset, with transaction or sales prices far in excess of a replacement cost.

So we continue to look at opportunities. But we're going to be very, very cautious and careful. And there just hasn't been a lot that has come to market of the quality that we would be interested in, or in the markets that we would have interest in.

And you recall two years ago, everybody was talking about opportunities of a lifetime in terms of distress. And I would tell you that nothing really has emerged in that arena -- certainly nothing that we've seen in terms of really being able to take advantage of some of the financing difficulty.

Now, perhaps as we see debt maturities continue moving forward in both the securitized debt arena, CMBS and secure mortgages held on balance sheets of banks, we'll see some more. But we've -- Sheila, I must tell you that it's absolutely astounding how few opportunities have come to market in this environment.

Okay, thank you.

You're welcome.

Jordan Sadler, KeyBanc Capital Markets.

Thanks, good morning.

Could you maybe flesh out the leasing expectations a little bit more from a -- just maybe the expected retention rate for next year? It usually -- or at least this year, year-to-date, I think you're in the 62% range. I think you're sort of similar to where you were last year. So retention rate?

And then, just that leasing -- total leasing number -- I think you said 2.3 million square feet, which is like, I don't know, 600,000 square feet a quarter. You seem like you do more like one million feet a quarter, typically, [to me,] over the last few years. So, just maybe reconcile that for me.

Yes. Well, just looking at 2011, you're correct with the number at, more or less, 2.2 million square feet. The way we do it is we go tenant-by-tenant. And we think we know who's moving out, for whatever reasons -- they've either shut the lights off or they've consolidated, or they've done other things. And it's a fairly substantial percentage of expirations. So we have a lot of new business activity -- a lot of wood to chop, as they say, to maintain our occupancy.

We have clearly seen the trends towards stay-in-place on the part of tenants who have no reason to do otherwise, other than to explore and examine the market to see what economic opportunities there might be. But at the end of the day, they do not want to move, they do not want to disrupt their businesses. They want to stay with a financially capable landlord that they don't have to worry about. And they don't have to worry about the bank or anybody else coming in and taking over the asset, or having third-party management.

And so you've seen that evolve into a very positive trend in our retention rate -- 74% over the quarter; 62% on average -- for the year-to-date. And I expect that that will continue as we move through 2011. You've seen significant tenants, like the one I mentioned down at Harborside, extend their lease for in excess of five years. Really not very significant economic denigration, if you will. We gave them a little bit of a concession, which was a fair exchange in connection with having one of the world's largest banks as an anchor tenant down there in almost 200,000 square feet.

So that's kind of the picture that we see going forward --

But are you -- do you expect a slowdown in sort of the volume that you guys have done historically, just like on a quarterly basis? Or am I looking at a different -- is it 2.3 --

But part of the million feet -- and we're very proud of the fact that we accomplished it -- consistently, one million, 1.1 million, 1.2 million -- lot of hard work. But part of it our future expirations that go out two and three years. And like the bank I just talked about -- I mean, they don't have an expiration for four years.

But we do this for a living; we don't do this as a hobby. And we anchor our portfolio and our revenue stream where we see the opportunity to do so, and not have to put big dollars into TI. And so what if we take a few percentage points, on a roll-down basis, off the table? But we don't have to worry about the income stream for 10 years.

Okay, [I follow you].

And so that's part of the million-plus per quarter that you see.

So of the 2.6 million square feet square feet rolling, it's fair to say that maybe 1.6 million or 60% will get renewed, and then you get new leasing that you're estimating --

Right.

-- or baking in, of another maybe --

Yes.

-- 700,000 --

Right, exactly.

Okay.

I think that's fair.

That helps. Thanks.

You're welcome.

And then, as it relates to the investment activity -- I assume there's none in guidance.

Nothing in guidance. We have zero built in.

And where -- are the markets -- it sounds like there's some stuff that's brewing for certain, but maybe not imminent. But are the markets -- your existing core markets -- is it Manhattan?

Can you repeat that question?

Where is the investment activity? I said --

Oh.

-- you get stuff brewing, but there's nothing in the --

No, no, it's -- I don't -- let's just say it's in one of our existing markets that's important to us. Given the dearth of activity out there, I'm not -- I don't want to identify it right now, but it's in an important market for us.

Okay. And a build-to-suit opportunity for you -- that I assume would be in like a Jersey City -- is that safe? Or is it --

It's in one of our suburban locations. And we are also examining -- or in discussions with another tenant down in Jersey City. I don't have clear enough visibility on that, other than we've had a series of discussions with the tenant who is metro New York-centric. And a large part of that discussion is also the benefit that they would derive under the Urban Transit Tax Hub Credit in New Jersey, which provides very, very significant economic benefit in addition to all the other entitlements -- the [BEEP] and so forth in New Jersey -- in connection with a new lease.

If you're within a certain distance of a rail line -- which of course we are in Jersey City, both in terms of the light rail and the [PAT] -- it's a little too early to call that. The other situation is a suburban situation with an expanding tenant.

That's helpful.

And just, on a build-to-suit -- I mean, I understand the tax benefits. Is it safe to say that's probably what gets a build-to-suit over the line economically, given sort of the vacancy that's out there, and maybe the -- how competitive an existing sort of --

Yes, well --

-- vacancy could be?

I mean, I think generally speaking, the rents in most markets don't justify new construction, unless there are some extraordinary circumstances, like a tenant that just clearly has an expansion need. But if you're looking at a Jersey City situation, by way of example, and you're talking about the need with new construction to have rents that are in the high 40s on a gross basis going in, there are opportunities in the marketplace that make that difficult to achieve, in terms of existing inventory.

So with some of these entitlement and incentive programs, it effectively reduces the cost to the tenant because of the employment that they bring to the region, to be more in parity with the rents in the existing inventory. And the advantages are providing brand new product that's -- the kind of build-to-suit floor plates that are large, et cetera. So that's the only way, really, that new development can be justified today.

Thanks for all the color.

You're welcome.

Chris Caton, Morgan Stanley.

Hi, Mitch. I had a quick follow-up on what Sheila was asking about, with regard to dispositions. I think maybe one of the assets you're selling is 100 Kimbell in the Gail Kimbell JV?

Yes.

I wonder if you -- did you look at buying out you partners there?

And then second, how do the economics work on a sale there? The Q articulates a waterfall. You're carrying it, I think, at $1.2 million on the balance sheet. So is there -- will you be seeing cash in the fourth quarter from that? And is that potentially more? Can you give us a little color there?

Yes. Well, first of all, obviously, we thought about the acquisition. But given the fact that we're fiduciary there, and the fact, frankly, that the pricing -- since I was very intimately involved in the negotiation -- and it's not done yet, but we're hopeful that it gets done -- is a little bit too high for us. It's -- I kind of alluded to the pricing level, and it's more suitable for a different investor constituency, at the pricing level that we're achieving, than it is for us, in addition to all the potential conflict issues.

With respect to the waterfall, they're -- having acquired our interest in that asset through the acquisition of the Gail Company -- you know, we have -- we're a minority partner, but we do participate in the promote. And so, there will be cash coming out of that -- frankly, very satisfactory level of cash, provided the deal closes, which -- we're hopeful it will close before the end of the year.

And is your balance, your $1.2 million -- is that your interest in the equity, at 8.3%? Is that how I think about that?

Yes. Yes. As we've indicated in our filings, it's been sort of an interesting path that that asset has followed. Originally, when we acquired it, it was a $47 million mortgage. We were able to buy in that mortgage at a discount, a $7 million discount. And so -- and then we refinanced the asset again, with a $32 million mortgage -- that's a LIBOR-based mortgage that is pre-payable. And so that gives us the flexibility -- all of that was with a strategy to sell the asset.

And so, that's the history. And the $1.2 million does reflect our equity in the asset, which you corrected state, at 8.3%. And in addition to that, of course, we manage the asset, and we have some fee income as a result of that.

And then the last question on the deal is -- if I add the $32 million loan, plus -- call it $15 million of equity -- if I capitalize the $1.2 million at a 8.3% interest -- does that get me to about a $38 million -- excuse me -- $48 million book basis that would be the basis for calculating the preferred return?

I think that's about right, plus or minus. You are pretty much on the money.

Great. Thanks very much.

You're welcome.

Michael Knott, Green Street Advisors.

Hey, guys.

Mitchell, can you just reiterate that roll-down number? I didn't see it in your written disclosure. And I thought when you mentioned a 10% to 11% number earlier, that may have been excluding 125 Broad?

It is excluding 125. I talked about 7.7% on GAAP and 10.5% on cash. If we're to include 125 with the deal that we announced in the quarter, it was 7.8%, slightly more on GAAP; and about 12% on cash.

Okay, thanks for that. And then --

You're welcome.

-- want to come back to your CapEx comment in the opening. You said it was -- your leasing costs were somewhat higher. But when I look at your year-to-date from last quarter, I think you were in the $2.70 per foot-per year range. And for this quarter, you're at $4.80 per foot per year. That's a pretty big jump. And I just -- and it looked like it was kind of across a lot of the different markets, not just attributable to 125 Broad. Can you just talk about why that figure jumped so much?

Yes. Sure. We -- well, 125 was obviously an expensive deal. And I talked about some of the metrics that support the market in downtown. And so that was about $8.60 a square foot a year. And so that was an expensive transaction. But we had a few suburban, small transactions that were expensive.

We also provided an allowance in connection with the Harborside deal that I talked about before, that was a little bit more money than the ordinary. So it was just a combination of close to a 200,000-foot deal -- securing that long-term lease down in Harborside that was in the $7 range, and the downtown deal that kind of skewed the numbers from a scale perspective. The other deals are small. They're in the 3,000- to 10,000-foot range -- that [or] higher numbers.

Do you expect that we'll get back down to a number with a 2 in front of it?

Yes, I think the numbers will certainly normalize. If we do a lot of leasing downtown at 125, those are going to be expensive transactions, as I indicated. But other than that, I think deals are kind of -- will normalize, or the costs will normalize.

And then, just lastly, you mentioned that you expect rents to continue rolling down next year -- kind of in the same range, I think I heard you say. Is that just because the portfolio remains above market? Or do you expect market rents to continue trending down, or do you think --

No.

-- market rents will kind of flatten out, or flatten --

Yes. I think market rents have generally flattened out. I think that the -- I talk about same-store and the expenses being somewhat unpredictable, and that's why I talk about the same-store NOI remaining slightly pressured moving forward.

But I think that rents are generally -- have kind of flattened in this trough. Concession packages seem to have flattened out. I mean, like I said, downtown we know what the market is. And we're in a strong liquid position to be able to meet the market. And that's what I see, in terms of our visibility, moving through 2011.

Thank you.

You're welcome.

George Auerbach, ISI Group.

Great, thanks, good morning.

Morning.

Mitch, with your stock trading in the mid to high 8% cap rate range, and implied sort of $150-a-square foot range, what are your thoughts about using the cash on hand and the positive cash flow in the portfolio to buy back stock here?

Yes, somehow I knew you were going to ask that question.

Look, we're not interested in using our liquidity for that. We have done that in the past. We're not interested in shrinking the size of the Company. We think that the world isn't changing so fast. And those that have the gold are going to have opportunities moving forward. I mean, there are just too many refinancings that need to take place in the marketplace, with sponsorship that is underwater as a result of lowered rents, lowered revenue streams, much stricter underwriting on the part of any lenders that exist in the marketplace.

And we think that the day of reckoning, at some point -- and I can't tell you it'll be wholesale or wide-scale -- but it will be there. And that's what we want to use our liquidity for. And we're going to be patient to do that.

Okay, thanks.

And just a technical question -- the portfolio was 89% leased at quarter end. What was the economic occupancy?

It was exactly 87.5%.

And has that been sort of a consistent spread over time --

Yes.

-- (inaudible)?

Yes. It really is quite consistent.

Okay. Thank you.

You're welcome.

Jordan Sadler, KeyBanc Capital Markets.

Hi. I apologize if I missed this. Just on investments -- and as a follow-up to George's question -- it sounds like you need to have capital available to sort of capitalize on opportunities that you may be seeing in the market. But earlier, you said that it hasn't necessarily -- that there's been a dearth and not a flood, per se, of really attractive opportunities so far. If we were to see you do a transaction, given sort of where the market's at, would we expect initial -- it to be initially accretive relative to your cost of capital? Or how are you thinking about underwriting it?

Wouldn't do it -- we wouldn't do it otherwise, unless there was a very near-term situation or lease that had provided maybe some extremely short-term dilution. But from our perspective -- and look, I know that other -- some of our peers view the world differently, and have a different view towards owning certain assets, sort of at any cost -- we wanted to build our concentration in certain markets, and we've identified those as the D.C. metro area and the New York City metropolitan area. And we're not going to do anything that's going to put pressure on the Company and deal in speculation.

And a lot of that that was done in 2005 to 2007 by lots of landlords and sponsors proved to be disastrous. And so we're going to be mindful of our cost to capital, of the anticipated returns on the part of equity -- which we all know is much higher than debt cost today -- and do it in a predictable way. We're not going to buy air. And that's how we feel about it.

Do you have a view on New York City rents, given what you're seeing downtown, maybe --

Look, I know that there's a lot more expertise in terms of landlords who have major concentrations in midtown and so forth. But from my perspective, and in all the discussions I have with the brokerage community, which are frequent and often -- and those that are preeminent in that marketplace -- it seems that they're relatively flat, they really haven't moved rents -- not materially.

And there's a lot of musical chairs. There's a lot of lateral movement. There's really not been substantial growth in terms of needing space.

So, I mean, I hope that there is some degree of structural inflation on a modest level moving forward that'll begin to lift rents, and that the supply-demand balance will contribute to lifting rents simply on the basis of supply and demand. But right now, I mean, just -- I don't think that rents have really moved. I think some of the sublet space has been taken off the market. There are many fewer large blocks of space. But right now, I don't see the demand occurring that would justify rent increases.

And that's pretty much, I think, what the brokerage community is seeing in all the transactional activity in the city.

Thank you.

You're welcome.

Rob Salisbury, UBS.

Hey, Mitch, good morning. It's Ross Nussbaum here with Rob.

Morning.

Did you guys take a look at 70 and 90 Hudson that Hartz Mountain was selling?

No, that was not a marketed transaction. But I am familiar with the specifics of it.

How do you think the value -- it looks like it went for about $375 (inaudible) --

Yes. The --

-- those are --

Right.

-- fully occupied to create tenants. But how do you think that compares to what you think value is for your assets there?

I think it's certainly well-located property. They're a little bit different property types than what we have -- 101 Hudson, and Plaza 5 -- our 40-story, plus or minus -- 35-, 40-story towers -- so little bit different in terms of the type of asset.

The replacement cost -- let me put it to you this way. The cost to develop carrying land at sort of our basis -- which is very low cost in Jersey City, along Harborside -- would be somewhere in the $425-a-foot range for the kind of product that we build. And that includes TI allowance of $45-ish a foot and a commission, or $40 a foot and a commission. So it's in that $425 to $450-a-foot range. So that might give you some measure of comparison to the -- and answer the question of how do I view it. I mean, the replacement -- that traded at, as you say, $375 -- from our perspective, that would be a discount to the replacement cost.

Thank you.

But it's a very different kind of asset.

At this time, we have no further questions in the queue. I would like to turn the call back to Mr. Mitchell Hersh for any additional or closing remarks.

Well, I would like to thank you all for joining us on today's call. We hope you found it to be productive, and we look forward to reporting to you again next quarter and to seeing many of you at NAREIT. Thank you.

This does conclude today's Conference. We thank you for your participation.