Veris Residential Inc (VRE) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation fourth quarter 2010 conference call. Today's call is being recorded.

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

Thank you, and good morning, everyone. And thank you for joining Mack-Cali's fourth 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.

In reflection, 2010, albeit a challenging year, was a good year for Mack-Cali. We leased over 4.4 million square feet for the year, exceeding 2009 by over 1.2 million square feet of leasing. And, with all of that leasing activity, we finished the year 2010 with free cash flow as defined by CAD standards, with an excess of $32.5 million. The leased percentage for the year is 89.1%, pretty solid, I would say for a business that's dependent on jobs and growth of corporate industries. And, all at the same time, emerging from the deepest economic downturn since the Great Depression.

We believe that these results are a testament to the excellent property locations and asset quality of the Mack-Cali portfolio, our strong tenant relationships, our unparalleled property management and customer service, the financial strength of sponsorship of Mack-Cali and, generally, the Mack-Cali team of dedicated, caring and hard-working professionals. We also sold two joint venture assets in the fourth quarter. Princeton Forrestal Center, a nine-building complex that we sold to Investcorp, and 100 Kimball -- a 175,000 square foot joint venture office building in Parsippany, sold to CB Richard Ellis Investors.These joint venture sales were not only profitable to Mack-Cali, but also take yet another step in simplifying the business model, as well as reducing our G&A costs.

And now, I'd like to review some of our results and activities for the fourth quarter specifically, and what we're seeing in our markets. And then, Barry will review our financial results as you've seen this morning, and Mike will give you an update on our leasing results. FFO for the fourth quarter was $0.69 per diluted share, excluding a $0.10 per share non-cash item, and for the year ending December 31, 2010, our FFO totaled $2.81 a share. As I mentioned, we had some significant leasing activity, and in the fourth quarter that totaled in excess of 1.2 million square feet of lease transactions. We ended the quarter at 89.1% leased, as well as the year 2010. And, that 89.1% was actually up slightly from last quarter.

Rents, however, rolled down in the quarter by 7.7%. However, this compared to last quarter's roll down of 12%. And so, we're beginning to see some stabilizing effects in the market. Our leasing costs for the quarter were $3.75 per square foot per year, down from last year's $4.28 per square foot per year. And for the year, our leasing costs averaged $3.36 per square foot per year. Lease rollovers for 2011 are approximately 9% of base rent, or about $55 million.

We do have a challenge ahead of us moving into 2011. But, despite a challenging environment, our portfolio continues to outperform most of the markets where we operate. With our leased rates exceeding market averages pretty much throughout northern and central New Jersey, Westchester, suburban Philadelphia and Washington, D.C. By the year end, we did see some significant leasing activity in both renewals and new tenants. This, despite continued uncertainty in the overall economy, and clearly, as we all know, a lack of significant job growth.

As far as activities are concerned, we've already announced the five-year lease renewal with Verizon for the entire 95,000 square foot, 600 Horizon Drive Call Center and Data Facility in Horizon Business Park in Hamilton Township, New Jersey, a building that we built for them in 2002, lease now runs through 2017. Some additional notable leasing transactions that we've included in our filings include, Sumitomo Mitsui Banking Corporation, who is a global financial services provider. They signed a renewal totaling over 71,000 square feet at Harborside Financial Center. Harborside Plazas 1 and 2 are now 100% leased. In Princeton, Novo Nordisk, a global health care company specializing in diabetes care, signed a new lease for 48,000 square feet at our 500 College Road in Princeton, New Jersey. Where I mentioned briefly on our last earnings call that Deloitte also signed a long-term, 10-year lease for almost 47,000 square feet in the same building. And so, we're making exceptional progress in re-tenanting that building.

In Roseland, law firm Brach Eichler signed a 13-year renewal for 41,000 square feet. They tell me they're going to be taking some additional space as well, in all probability. At 101 Eisenhower Parkway, in our Eisenhower 280 Corporate Center in Roseland, this 237,000 square foot, class A building is now almost 92% leased. In Morris Township, at our Kemble Plaza complex, 412 Mount Kemble Avenue, we've made some good progress in leasing as well. ProSight Specialty Insurance signed a almost 11-year lease for over 40,000 square feet in the quarter. And, in addition to all of that, last month we signed a 10-year lease extension with the Bank of Tokyo-Mitsubishi, BTMU, as it's known as, for over 137,000 square feet at Harborside Financial Center, Plaza 3, extending this lease through 2029. This 725,000 square foot building is now 96% leased.

As in years past, we at Mack-Cali continue to be recognized for expertise in not only property management, but as well in superior energy performance. This quarter, we received the Energy Star designations which, as you know, are awarded by the US EPA and the Department of Energy, for three facilities, 106 Allen Road in Bernards Township, New Jersey, 1 Executive Boulevard in our South Westchester Executive Park in Yonkers, New York, and 570 Taxter Road in Elmsford, New York. And shortly, we will be announcing additional Mack-Cali properties that have received the Energy Star designation, which we're very proud of. We are also working on several leads initiatives in a number of our facilities.

With that, I'll now turn the call over to Barry, who will review the financial results that you've seen posted in our filings this morning. Barry --

Thanks, Mitchell. I'll briefly run through the financial results of the Company for the quarter and for the year.

FFO, before items, for the fourth quarter in 2010 was $64.2 million or $0.69 a share. For the full year, FFO, before items, was $261.3 million or $2.81 a share. In the fourth quarter, we recorded a non-cash impairment charge of $9.5 million or $0.10 a share, related to our property at 2200 Renaissance Boulevard, King of Prussia, Pennsylvania. Other income in the quarter included approximately $484,000 in lease termination fees, as compared to $195,000 for the same quarter last year. For the full year, lease term fees were $2.1 million, compared to $2 million in 2009. Same store net operating income, which excludes lease term fees, decreased by 6.9% on a GAAP basis for the fourth quarter of 2010, and for the full year decreased by 6.4%. On a cash basis, same store net operating income decreased by 7.1 % for the fourth quarter and 7% for the full year. Our same store portfolio for the quarter was 30.8 million square feet, and for the full year was 29.1 million square feet.

At December 31, Mack-Cali's total undepreciated book assets equaled $5.6 billion and our debt-to-undepreciated ratio was 37%. Excluding the effects of the non-cash item previously discussed, the Company had interest coverage of 2.8 times and fixed charge coverage of 2.7 times for the fourth quarter of 2010, and interest coverage of 2.8 times and fixed charge coverage of 2.6 times for the full year. We ended the quarter with approximately $2.1 billion of debt, which had a weighted average interest rate of 5.97%. Our unencumbered portfolio at year end totalled 236 properties, aggregating 24.3 million square feet of space, which represents approximately 78.5% of our portfolio. Currently, we have approximately $263 million of outstandings on our $775 million revolving credit facility.

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 matters 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, Michael will cover our leasing activity. Michael--

Thanks, Barry.

Our consolidated portfolio ended 2010 at 89.1% leased, up 10 basis points from September 30. The 1.2 million square feet of transaction signed in the fourth quarter, brings our total leasing activity for the year to over 4.4 million square feet, compared to 3.2 million square feet in 2009. Of our total 2010 leasing activity, 1.5 million square feet was represented by new leases. Our 2011 rollover is 2.4 million square feet, or 8.8% of our leased space. Expirations are slightly weighted in the first two quarters of the year between 600,000 and 700,000 square feet rolling in each quarter. Class A overall vacancy rates decreased slightly in all of our markets during 2010, with the exception of downtown Manhattan, which increased by 220 basis points. Percentage of overall vacancy, represented by sub-lease space, continues to decline in all of our markets and now averages approximately 13% of overall vacancy, down from 20% at this time last year.

Mitch?

Thanks, Mike.

In closing our prepared remarks, I would just tell you that we will certainly continue to work very hard to lease up our buildings. As well, we will keep a watchful eye out for strategic opportunities as they present themselves. I'm actually not sure when that will happen, but clearly we will be ready with both the human capital, the talent if you will, and the financial capital and capacity, when in fact it does.

With that, I will now take your questions. Operator?

Thank you. (Operator Instructions)

We'll now take our first question from Joshua Attie with Citi.

Thanks, it's Josh Attie and Michael Bilerman. Can you just update us on what the underlying leasing and occupancy assumptions are behind the guidance?

Sure. The first quarter, in particular, this year is going to be a pretty challenging period. We have projected an occupancy loss. We have no moveouts occurring in the first quarter of 2011. And so, we anticipate, in our modeling, that we're somewhere around an occupancy of -- in so far as modeling is concerned, about 86%-ish through the year, on average. That's what's contained in our projections and our modeling. We hope we do a lot better than that.

And, what does that assume for leasing? I'm sorry, what does that assume for leasing assumptions?

Well, again, you're talking about the economics of the leasing assumptions?

Or volume?

Yes. Well, the volume we've been doing right now, we have about 3 million square feet expiring throughout the year plus or minus. We've been doing, as you saw last year, 4.4, so in excess of a million feet a quarter. We project that we're going to be slightly less than that this year per quarter, or annualized as you prefer.

I know it's early, but how has the activity been to date?

The activity has been off to date. The markets have generally been sluggish. The space calls have trended down, even from a year ago. So, I would tell you that the markets are generally quiet, in general.

Okay. Thanks. And can you just remind us -- I don't know if you said in this in the prepared remarks, but the fourth quarter lease termination fees?

We have -- (technical difficulty)

Did you get that, Josh?

No, I --

I'm sorry. $484,000 for the quarter, and that's compared to $195,000 year over year for the fourth quarter.

Thank you.

You're welcome.

We'll go next to Jordan Sadler with KeyBanc Capital Markets.

Thanks, good morning.

Good morning.

I just wanted to run through -- a quick follow-up on the leasing expectation. You said 86% average occupancy is sort of the expectation embedded in guidance for the year. Is that relative to the 89.1% that you ended the quarter at?

It's cash -- it's income in place leasing. So, there's a spread there of 150-ish basis points between occupancy and leased percentage.

Okay, so you'll be --

The 89.1% would compare to 87.3%. That gives you an order of magnitude of how 86% would be an occupancy of somewhere around 87% to 87.5%, versus the 89%.

And for the full year, you're assuming the 87%?

Yes. I mean, it averages out. It blips in each quarter, based on known moveouts, based on the expirations, but I'm giving you the average for the year.

Were you trying to say that 1Q would be the low point? You said it would be because of known moveouts?

I think the first quarter is going to be the most challenging quarter of 2011.

And then, just moving on to transactions. You didn't sound as optimistic as you had on maybe some previous calls, in terms of the ability to put some cash to work and source some acquisitions. Can you maybe just give us some color, from what you're seeing, on the investment front these days, and maybe update us on anything you have in the works?

Yes, we're still not seeing a lot of investment opportunities, investment sales-type opportunities. We continue to work with several companies in the Mid-Atlantic region that are looking at various opportunities where it could help them re-capitalize their businesses. I think, right now for stabilized income-producing properties, there's a lot of competition. The pension funds and the private REITs and, to a lesser extent, private equity are bidding pretty hard for what's available in that sector. And, I think they're overpaying in some instances. I mean, they're paying above-replacement costs. They're disregarding, in some instances, rollover and the kind of traction in the market that might be behind it to be able to deal with and absorb the future rollover risk.

So, to the extent we've seen those sorts of opportunities, we've actually sold into it, and a couple of joint venture assets that we've sold, but, we're not a buyer. Because, I guess we understand the markets too well and we want to make sure that our constituents and our shareholders are well-protected into the future. So, right now it's been limited and I would tell you that there might be some opportunities to buy some debt, although, there haven't been a lot.

I think until -- if we are indeed in an economic recovery -- for the moment, ignoring the most critical issue, certainly, as it relates to real estate, which is jobs, which we haven't seen. If we're in the beginning stages or the nascent stages of a real economic recovery, then we are clearly at that point going to see the banks and the financial service companies doing better. This is kind of counterintuitive, but as they do better, they'll be able to deal with many of the non- or under-performing loans on their books, their real estate loans, and be able to perhaps move those into more of a sales mode. And, right now, because of the capital requirements in the banks and the fact that they don't want to take further losses, they already have very difficult situations, particularly with residential real estate, single-family residential or multi-family, we haven't seen a lot of activity. Certainly not a lot of activity that is attractive.

We still expect that we will be able to do one or two build-to-suits. We have one that's pretty far advanced in terms of lease documentation. Those are accretive. Those are high single-digit yields with impeccable credit behind them. So, we'll put some land to work in that respect. Beyond that, our tentacles are out there, but there's just not a lot available.

Given the escalation of pricing, is there an opportunity to be a little bit more opportunistic on the sales side?

The answer is that, again, the type of product that's perhaps attractive at this point to the investor constituency, as I've identified them in the earlier comment I made to you, are core properties in strategic regions for Mack-Cali where we don't want to lighten our positions because of our competitive advantage, and the quality of the assets, and the relationships that we have on a strategic basis with some very large tenants. We don't want to take in partners, because joint ventures, from our experience, are cumbersome, complex and we like to be in control of our own destiny. So, there may be anecdotally some smaller assets, or here or there and in selective areas that we are looking at for sale. But, I don't want to lead you to think that it's of scale.

Okay. Thank you.

You're welcome.

We'll go next to Sheila McGrath with KBW.

Yes, good morning. I was wondering if you could talk about real estate taxes in the quarter. They were lower than we had expected and lower than a year ago and I'm wondering if that dip down is sustainable.

Interesting question. We benefited from some settle-ups and where we've been working on a couple of situations for several years, actually. That's how long many of these situations take. It's very hard to predict. We think we have a few remaining situations in 2011 that we haven't factored in to any of our modeling, because there's a high degree of uncertainty when it comes to settling up real estate tax and certiorari appeals.

With regard to whether they're sustainable. The difficulty that we have, among anything else, is knowing what municipalities and municipal corporations are thinking in terms of tax rate, to mitigate against some of the lower assessments that they've been exposed to as a result of what's happened in both residential and commercial real estate, and the lowered income streams, in many instances, in commercial real estate. So, it's an area of operating expense that we do the best that we can in terms of being on our game relative to appeals, relative to good comps, but it's hard to predict because, to some extent, it's outside of our control.

Okay. And then, on 125 Broad Street, could you just discuss any activity there and also, kind of trends on concessions at that property?

Yes. The activity level is good. It takes a long time to get deals done today, to be very candid with you. Almost irrespective of what market you're talking about. It's a more methodical deliberative world that we're living in today to get decision makers and corporate leadership to make decisions. We do have a lease out for a full floor right now, that I expect will get signed imminently. We have made some good progress already, as we've reported, some tenants that will be moving in shortly -- TMP, IAV. As I said, we have a full-floor lease out, I'm pretty sure that gets signed pretty imminently. And, we have a couple of situations that are in the 250,000 square-foot range. That basically would take out the vacancy, but I don't know that they make.

We're active. We're in the game pretty good. The tenants -- there are several of these situations -- love the building, we know what we're competing with in terms of 85 Broad, Goldman's old building and other vacancies on the east side. I think the economics are, at this point, kind of at an inflection point. It's low to mid-30 averages. You're looking at packages that are somewhere in the $75 to $85-ish per foot, the year free. That's kind of where the market is and I haven't seen it change. It certainly hasn't eroded from that. It's just now a matter of some of these users. Also, most of this is either consolidation of multiple facilities or even some mid-town movement, still looking at cost and pricing sensitivity. It's not a lot of growth. We're still not seeing organic expansion, as we all know, because there have been fits and starts in financial services but not too much elsewhere in terms of private sector job growth right now. So that's what we're seeing.

Okay, thank you. Just one last question on leasing spreads for the quarter.

Yes. Well, with respect to the fourth quarter, we were down cash 7.7%, a little more on GAAP. If we take out Broad Street -- 125 Broad -- we were down 6.7% cash. And, the reason I -- obviously, that market has been, downtown has been under extreme pressure, price compression, as a result of what's occurred in the great recession. So that's why I'm providing you the separate number. It gives you a better sense of the balance of the portfolio.

I would tell you that NOI is going to be continued to be pressured in the down 5% to 7% range, in terms of near-term visibility, 2011-ish. Roll downs are going to be in that range, somewhere in that zone. If I look at the average lease spread in the portfolio, I'm still looking at 10%-ish, in terms of expiring leases to what the reality of the market is, and that's what we've built into our modeling. We're pretty conservative, but we're pretty realistic.

Thank you very much.

You're welcome.

We'll go next to Steve Sakwa with ISI Group.

Good morning. I guess a couple questions. First Mitch, I saw that you sold about 10 properties in the portfolio lease, according to the data on page 12. I guess you mentioned two of them specifically, some of the JV's. Could you just talk a little bit about pricing? It looks like you sold about 700,000 feet over 10 buildings, so they might have been smaller-sized assets, but anything you could talk about price per foot or cap rates?

I can tell you that, first of all, that there's a bit of an anomaly here. Princeton Forrestal Center actually consisted of nine buildings, and it was about 500,000 square foot, mixed-use facility on Route One in Princeton. So, that's nine out of the 10 right there. And, it's really, you know, one aggregated transaction.

The pricing that -- that's a very complex situation because it's mixed-use. It had retail, some office, some upscale office, a couple hundred thousand feet of office. It had a huge modern-age health facility, spa, and so it's very difficult to peg that. But, that was in the high single digits, almost touching double digits.

On the other hand, the office building in Parsippany was -- and I commented on the last call about that transaction -- that was about a 6.9% free and clear trade. The price per square foot was very lofty. It was well over replacement cost, close to the mid-$300 level. And, that was buying an income stream for a minimum-- with a good credit, for a minimum of a little over nine years.

Okay. Secondly, within your guidance, what are you assuming, if at all, in terms of terming out the line of credit? I thought, when you had tendered for the bonds or paid those bonds off, that you were going to put on the line of credit and potentially do a new fixed-rate deal. One, is that still in the cards? And if so, what do you think about timing?

Here's what I would say about that. We reported and discussed today the fact that we have about, give or take $270 million, $250 million out on our line. The line, the facility allows us to be very facile and it's -- you can't beat the price at 55 over LIBOR. I would tell you that -- and, I'm not trying to be vague, but this is what I'm going to say to you. That, my job, among anything and everything else, is to make sure that we maintain our financial flexibility, both opportunistically to raise capital, and to maintain balance sheet flexibility and also to mitigate leverage in the Company.

And so, having said that, we look at the entire universe of what is available to us in the public markets. And, based on that, we will make decisions and I, in concert with the Board, will make decisions that provide for all of those elements of flexibility and appropriate leverage levels, in our minds, to allow us to have capacity and to allow us to be opportunistic. Because, we do think that -- not to be redundant or, at the risk of redundancy -- as the world strengthens, and as the economy strengthens and, perhaps as some of the geopolitical risk lessens, the banks will be more interested in doing transactions that can be value-added to this Company. Long way around your question, but I hope it answers it.

Okay. Just two more. On, I guess, 55 Corporate Drive, the Bridgewater construction project, what is the expected return on that?

The return on that is going to be slightly in excess of 9%, free and clear as I call it, or un-leveraged. At the end of the year, we had $38 million in the deal. We'll be all in somewhere just under $51 million. We're looking at different opportunity sets with respect to what we want to do with a 15-year net lease with a brand new building with an exceptional global credit.

Okay. And then, last question. I just wanted to tie back the things you talked about on leasing, both occupancy trends or leased percentages, the roll downs. So, it sounds like you're saying that you're modeling maybe down 130 basis points on occupancy, and rent spreads could be down 10%. If you combine those two, I guess I wouldn't think that NOI is down five to seven. So, am I missing something or does that math actually get you down five to seven?

Well, you know, I wish it were all that scientific. I guess, at the beginning of 2010 we talked about the state of the world and we projected or predicted that NOI would be pressured somewhere in the 5% range, or maybe we said 3% to 5%. I think -- not that I want to see this. I'd love to see positive NOI trends a lot more than the analysts would like to see it. But, I would say that 5% bogey, unfortunately, is where we are right now, down five-ish. Maybe it's slightly sub that -- maybe it's three to five, but that's about where we are.

And that's a cash NOI expectation?

Yes.

Okay. Thank you.

You're welcome.

We'll go next to John Guinee of Stifel Nicolaus.

Great. Thank you. Mitchell, you probably know the leasing side of this business as well as anybody. How long do you think it takes the Company, on a sort of a base case scenario, to get back up to 94%, 95% stabilized occupancy? Is this, at best, 100 bps a year in occupancy gain? Can you actually get 200 or 300 a year in occupancy gain? What does it take to get back to the good old days?

I don't know that we'll see the good old days, John. It's good to talk with you. Look, we've clearly seen a paradigm shift. We're seeing in the office business some new-age notions of things that we have seen in history and, I tend to believe history, to some extent, repeats itself. Some discussion of less square feet per person. Clearly, work at home, telecommuting, and we've seen that before and it hasn't worked. Corporate America likes to be communicative and interactive. So, you know, we've seen that experimentation before and it kind of gravitates back to a normal -- a new normal goes back to the old normal.

It could take a little bit longer this time around. You'll see some product that comes out of the market because of obsolescence and the lack of sponsorship ability to reposition assets, because technology awareness of environment, green, whether it's leads or Energy Star is very important. It's on the conscience of corporate America today. So, having said all that, it could take a little bit longer this time. But, we've been involved in many sectors over our history of the real estate markets, and what you see in office markets, although it's a capital intensive market, when markets begin to move, they move relatively quickly and the ability to price and profit is relatively quick.

The office market has been extremely pressured because of the employment loss, no question. I think when it comes back, those companies that are well-positioned with strong sub-market positions, in great places with high-grade assets, will be able to leverage off those positions pretty quickly and move pricing. And, I guess, net net the profitability in the office business can be a lot more than it can be in a lot of other sectors of real estate, once you begin to see that momentum. But, it could take a couple years because of all of these ingredients.

Do you think a good base case would be 200 basis points of occupancy gain a year, starting in 2012?

Look, I think that 2011 is clearly a year that we have to reach a point of inflection. In 2012, you have a presidential election. If our current administration hasn't demonstrated that they can create jobs as we move closer to 2012, we all know what the consequences and ramifications of that are going to be, at least in the political arena. So, I tend to think that 2012 is going to be a much stronger year. As we move into 2012 because, if nothing else, the presidential election.

Okay. Thanks.

You're welcome.

We'll go next to Sloan Bohlen with Goldman Sachs.

Good morning. Just a question on the acquisition environment. Obviously, you guys are looking at opportunities. Can you maybe just touch on what types of returns you'd be looking for? Whether you'd be willing to buy lease-up opportunities, or whether it's a particular market that you're looking at?

We've been, with respect to markets, Sloan, we've been kind of concentrating on the Mid-Atlantic region in terms of the opportunity set that we have been looking at. Although, that's not to say we wouldn't do anything in the metropolitan area. Clearly, New York remains of interest to us, but it's very expensive, to the extent anything is available there. Although there's some debt positions you could buy, that's pretty much not our cup of tea, at least not on the size of those positions.

Look, our cost of capital on a blended basis is in the high single digits, depending on exactly how you cut it up. If you look at just the expected returns on an equity basis, they're higher than that. I think anything that we would do needs to be able to demonstrate in the modeling that it can reach 8% or 9%, free and clear, in a reasonable time horizon, legitimately. I mean, we look at a lot of underwriting and we pass on it because it's air.

Right now, we think we understand the markets really well. We have good linkage to the brokerage community and the user community, the tenant community, so we have a good sense of demand. So, when we're looking at a value-added opportunity, we look at it fairly pragmatically in terms of what we think we can build the yield to. I just don't see the point for us, at least, of buying assets that, even if you want to perceive them as quote/unquote legacy type assets, at sub those types of returns because it's dilutive and you can never work your way out of that dilution.

Okay. And, by saying - - sub those returns, do you mean to say that there's assets that are on the market that are seeing bids, that are coming at below those returns? Or, that's just your --

We put a couple of bids in on buildings that are in sub markets that we operate in. And, for two or three years, they are stabilized, reasonably well-stabilized with a lot of rollover going forward. So, I tend to think in some instances, there's not an alignment of motivation among the different buyer constituencies, the purchaser constituencies. Because, when we look at it, we look at what's the demand in the marketplace, and what's the probability and the practicality of being able to refill the rollover, knowing that some of the space is dead empty. Although it's leased, it's not occupied.

And, that's how we look at the world. And, we say that if we can't achieve this, what I'll call cost of capital, whatever it is, 8%, 9%. I don't feel comfortable about achieving that, given the empty space and the non-occupied space in the building and the rollover in a couple years. I mean, it looks great now, but what's it going to look like as those leases burn off? Then we'll pass on it. There have been some opportunities that we walked away from, because they were just too expensive factoring in the reality of being on the ground and having to lease these buildings.

Okay. Maybe just switching to one other topic on 125 Broad. If you can, comment at all on Oppenheimer. Apparently, they are shopping around at 85 Broad. Maybe if you could talk about what it is that they're looking for in their overall, New York City portfolio. And then, the competitiveness of 85 Broad relative to what you guys have at 125.

Look, I don't think I should speak to that situation directly. I, frankly, had a long conversation with the number two person in Oppenheimer on Monday. I will tell you that 85 Broad has certain characteristics, like a trading floor, with a lot of infrastructure, that is attractive. I wish you guys at Goldman Sachs would expand enough to go back there and take it off the market. But, having said that --

That might be tough.

There is that infrastructure that, in certain instances, is very attractive to a particular user base. I will say as well, as we're coming in to this new normal, there are companies that are looking at the overall cost of occupancy and -- I don't think we should be talking about Oppenheimer specifically. They're a tenant of ours. I'm in real-time dialogue with them. But your question with regard to 85 Broad is, that's a particularly attractive component, that infrastructure, to a certain grouping of tenants.

Okay. I appreciate the color. Thanks, Mitchell.

You're welcome.

We'll go next to Michael Knott with Green Street Advisors.

Hello, Mitchell.

Hello.

Question for you. Can you just update us on Downtown Crossing, and maybe more broadly with sort of an update on your intentions or desire to continue to expand in Boston. I know that was something you were talking a little bit about in the last couple of years.

Yes. Well, the update is that we are working with -- we're waiting actually to hear back from a couple of very substantial residential developers. The last round between the partners for Vornado, JP Morgan and us were discussions with a couple of these very significant, multi-family residential developers, repositioning a very large part of the project above the retail to apartments. The city, clearly, is very incentivized to work with us. So, we're waiting there.

As you know, Sandeep was a very significant part of our team at Vornado, and he -- clearly, now at GGP, his priorities are a bit changed, understandably. So, we're kind of regrouping on that basis as well. In December, we had a number of real-time situations that are still under discussion with these residential developers and several anchor retail tenants on multi-level retail. So, that's where we are right now. There's really nothing more I can say on that.

In so far as Boston, I certainly have interest. I think, before we do anything else in Boston, we need to get something done at Filene's, Downtown Crossing, and then we can look at Boston again.

Okay. Thank you.

You're welcome.

We'll go next to Steve Boyd with Cowen and Company.

Thanks. Mitch, I was hoping you could share some of the details and thought process behind the Bank of Tokyo lease extension at Harborside.

Sure. Nothing wrong with having a AAA credit, that's a global credit, anchoring a facility to 2029. They are paying really nice rents for that extension period. They're very attractive to us. We are putting some money into both tenant work that they need, and some infrastructure that they are paying us a fair rate of return on that is not only benefiting their space but the entire Harborside 1, 2, and 3 complex -- or 2 and 3 complex, with respect to electrical switch gear, redundancy, emergency generation of power. So, we think that it's benefiting the entire complex as well as them.

They are in a situation where notwithstanding their attractive cost of capital, they were interested. They did two deals. They did the deal with us and they re-upped in mid-town. They've expanded with us as well, approximately 25,000 feet that, although it's not included in this longer-term extension, they are seriously considering doing that and more -- potentially taking even more space.

So, it built on a great relationship with an international global company of extreme financial strength. It provided exceptional, positive economics for us. I mean rents, you know, in the mid-40s in plazas 2 and 3. Together on a mutual basis, from a cost perspective, we are improving the infrastructure in that complex.

Okay.

That's our motivation.

Just so I understand, was the extension done at the existing rental rate? Or, did you accept a slightly lower rate?

We didn't accept a lower rate. We provided rent increases for the future period.

Okay.

No, I mean, their motivation was they needed infrastructure improvements for a variety of reasons. There was a limited amount of capital that they were able, from a corporate perspective, to invest at the present time. So, some of it we're advancing -- they're amortizing it in their lease, they're paying us back. Which is, you know, infrastructure, and some of it is a tenant allowance.

All right. Great. Thank you.

You're welcome.

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

Thank you. I guess, first off, Barry, did you talk about where you think FFO will be in your dividend coverage for next year -- I'm sorry, AFFO.

He did, I think, talk about FFO. We restated our guidance.

I'm sorry, AFFO.

Next year, it's a push. If we do all of the leasing that we anticipate, which puts us at the ranges that we talked about before, which is the 86%-ish or 87.5%, on an occupancy basis. Next year is roughly a push.

So, you mean you're just covering the dividend?

Yes, well, yes. From a CAD perspective, it's somewhere zero to $10 million down, purely from a CAD or AFFO perspective at the 2011. That's our best estimate right now.

You mean a zero to $10 million shortfall from the dividend.

That's right.

Okay. And then, Mitch, I know on recent calls you talked about the governor of New Jersey and the impact he's having on the economy. Can you talk a little bit about what you saw this quarter, in terms of the impact from that, but also just maybe sectors or sub-markets within your portfolio that are surprising you either to the upside or the downside, in terms of fundamentals and demand?

Well, I think I would sum it up by saying that there's -- many corporate leaders are becoming believers in the fact that Governor Christie is going to do what he says he's going to do in terms of trying to improve our lot, relative to the legacy costs, the pension costs and shortfalls, the budget in the state and to improve the regulatory environment. So, I think at this point, companies that may-- I don't think we're losing companies to other jurisdictions now, where perhaps for a period of years we were. We lost some companies to the borderline states in Pennsylvania, not so much New York, you know. I haven't seen too many reverse migrations into the city. But, we have lost some.

I think, now they're kind of giving him a pass and saying he's already taken action with respect to some of the taxes that are painful. He's promised to lower the corporate income tax in the state, and maybe do more with lowering other taxes, including the income tax. So, I think at this point things are kind of stabilized. And I don't see any kind of flight out of the New Jersey. If anything, Christie has been somewhat aggressive. He's gone to Chicago and intends to go other places and other jurisdictions and states that have extreme budget problems, and say, come to New Jersey. Which, we haven't been able to say in a long time, because it's a better, business-friendly environment. So, from the perspective of perception, he's clearly made an improvement, and I've talked with enough corporate leaders that they believe it and I believe it. So, that's a positive.

With respect to expansion, we're in the early stages of an economic recovery that has yet to display or result in job growth. We all know that there hasn't been a lot of expansion. There has been consolidation over the last few years and industries that are important to not only New Jersey but Pennsylvania; the pharmaceutical industry, and research and development. So, that's still going on as well. While we don't see a lot of demand as a result of the fact that we haven't seen job growth or organic growth within a lot of companies, we certainly are at a point of stabilization right now, I think.

Are there any sub-markets or sectors that, in the fourth quarter, showed more signs of life than you had expected, or the opposite?

I think that Morris County has shown resilience, as evidenced by the few transactions that we announced as part of our filings. I wouldn't say that there's any real anomalies or aberrations. Bergen County has continued to be a little more quiet than it has historically been. The Princeton markets, we did, I think, great between a couple of deals; the Deloitte deal, the Novo deal, and a few others. In general, the markets are relatively static at this point, nothing extraordinary. The waterfront, we've been doing terrific down there; Sumitomo, I talked about BTMU. We have some other things going on with a couple of insurance companies down there. There hasn't been anything extraordinary happening in most of our sub-markets. Been a little bit more of the same but a better tone, certainly, with respect to the administration in New Jersey.

Okay. Thank you.

You're welcome.

We'll go next to Robert Salisbury with UBS.

Yes, thanks. Good morning. I'm here with Ross Nussbaum. Just wanted to circle back on the guidance range, as we think about property OpEx next year. What's the expectation for utilities and real estate taxes? Then also, is there going on to be impact, do you think, in the first quarter, from all the snowstorms?

Well, I hope those are done. Margins have compressed a little bit, and our guidance for 2011 reflects our best estimate of those margin compressions that used to be close to 70% and, you know, they're closer to 60% than they are to 70% these days. Snow removal costs have been extraordinary. I hope we're pretty much done. But, we've modeled in plus or minus $1 million in non-recoverable in that zone for 2011. We hope that that's sufficient in terms of the coverage.

I talked about the real estate tax issue before. It takes a while whether the reduction -- and, I actually did see your note asking about the sustainability of the diminished real estate taxes. It's hard to predict, because we have a number of -- you can imagine with 277 properties, we have files of tax appeals going on. And clearly, valuations have come in as a result of income streams being diminished. But, we don't know in all cases what municipalities and townships and counties, for that matter -- with respect to their tax rates, and how that might offset what we believe we can accomplish.

I would tell you that 2011 should still be a good trajectory for us in terms of real estate taxes, keeping them under control and, hopefully enough where we'll see some positive side expense reductions. We're pretty sure of that, but I qualify that with what I've just said, the caveats I've just said. Utility usage, rates have stabilized. It's a matter of consumption. And the winter has been extreme. Certainly not only snow removal, but aside from natural gas, most of the buildings are electric heat. It's a question of how does that all average out and what kind of summer do we have in 2011, from a consumption perspective. But rates have stabilized. So, I don't mean to avoid your question, but I have to qualify the answer with all of these factors.

Sure, yes. Clearly, a lot of unknowns. I guess I was just curious, embedded in the guidance range.

The guidance -- what we embed in there is historical performance on a very conservative basis. We don't model in, unless we can take it to the bank and book it, we don't model it.

Yes, makes sense. And, my last question, I think I heard that the portfolio is now about 87% occupied, 89% leased. How does that stack up with the historical average, looking over the last few years?

The spread has increased probably 25, 30 basis points between occupancy and lease. Interestingly, historically, when that spread has widened, it's always demonstrated -- I'm not sure there's a correlation, but as we have seen that spread widen historically, we've seen an improvement in occupancy. That has been the history of the 14 years as a public company at Mack-Cali. So, maybe that's a good thing right now, that 25 basis point increase in spread.

That's what I suspected. All right. Thanks, guys.

You're welcome.

At this time, there are no further questions. I'll turn the call back to Mitchell Hersh.

Okay. Well, I want to thank everybody for joining us today. We, again, think that 2010 was a very good year for Mack-Cali, lots of challenges out there, but we're up for it. We certainly are optimistic about 2011 and we look forward to reporting to you again in 90 days. Everybody have a good day. Thank you.

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