Veris Residential Inc (VRE) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation first-quarter 2011 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 first-quarter 2011 earnings conference call. With me today are Barry Lefkowitz, Executive Vice President and Chief Financial Officer; and Michael Grossman, Executive Vice President.

On a legal note, I must remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release, and annual and quarterly reports filed with the SEC for risk factors that could impact the Company.

First, I'd like to review some of our results and activities for the quarter and generally what we're seeing in the markets. Then, as is custom, Barry will review our financial results, and Mike will give you a brief update on our leasing results.

FFO for the first quarter of 2011 was $0.70 per diluted share. We did have some significant leasing activity in the quarter. You recall that we indicated that, due to scheduled lease expirations and known move-outs, there would be some pressure on occupancy.

We were pleasantly surprised, if you will, with over 1.1 million square feet of lease transactions. We worked very hard to get that accomplished. But given the lease expirations and the known move-outs, we did lose a bit of occupancy in the quarter, from 89.1% to 88.2% at the close of the first quarter.

Rents in the quarter rolled down by approximately 6.2%, which is an improvement from last quarter's 7.7% roll-down. And so maybe there is some firming and bottoming occurring in the market.

Our leasing costs for the quarter were about $4.23 per square foot per year, up slightly from last quarter's $3.75, but really attributable to some very excellent transactions that we were able to accomplish in our Harborside premier complex down on the waterfront in Jersey City, as well as 125 Broad Street downtown, where of course the leases in general in both of those locations are very long-term leases and require a bit more capital.

For 2011, we have remaining rollovers of about 6% of our base rent or about $36 million. And for 2012, we face rollovers of about 11% of our base rent or slightly under $69 million.

And so despite a challenging environment, our portfolio continues to outperform most of the markets where we operate. Our leased rates, as evidenced by the report this morning, exceed the market averages pretty much everywhere we do business, and certainly in northern and central New Jersey, Westchester, suburban Philadelphia, and even Washington, D.C.

And so, again, at the risk of some redundancy, while we did anticipate a challenging quarter due to the scheduled lease expirations, we did see solid leasing activity. We did see tenants make long-term commitments to space. All good signs, and we're certainly hopeful that this will continue.

As previously announced, we did complete several significant lease transactions during the first quarter. As I mentioned on last quarter's call, the Bank of Tokyo-Mitsubishi, a subsidiary of Mitsubishi UFJ Financial Group, signed a renewal for over 137,000 square feet at Harborside, in our Plaza 3 on the waterfront. Harborside is virtually fully leased.

The Bank of Tokyo signed a lease expending its commitment through August of 2029. And in connection with that transaction, we funded approximately $5 million, at $36.50 a square foot, to have them rebuild electrical and mechanical infrastructure in the building, and that was the purpose of that allowance. The rents are full. The rents are in the high 30s, rising through the balance of their term to approximately $45 a square foot.

At 125 Broad Street, we successfully concluded the lease with Wilson Elser, and they signed a full floor lease, 37,500 square feet. And we're making very good progress on the remaining space at 125 Broad Street. That lease is out now for four floors.

In Paramus, we successfully concluded a renewal with Movado Group, the watchmaker. They signed a renewal, five-year renewal, for over 90,000 square feet at our Mack-Cali Centre II at From Road in Paramus.

Several additional leasing transactions during the quarter included Jefferies & Company, another waterfront tenant. Jefferies is, as you well know, an investment bank, and a distinguished one at that. They signed a new lease for almost 63,000 square feet at 101 Hudson Street, and also extended the term on about 56,000 square feet at Harborside Financial Center, Plaza 2.

Right now, our 101 Hudson Street, a magnificent building along the waterfront, is almost 88% leased, and that's after the scheduled lease expirations of several Lehman Brother floors. And we have a nice Q, looking at the available space in that building.

In Morris Plains, in Morris County, New Jersey, Fiserv Solutions, an information technology provider, signed a renewal for an entire building, 75,000-square-foot building -- 250 Johnson Road in Morris Plains, along our lake, Mack-Cali Lake.

In Monmouth County, Lomurro Davison, a very distinguished law firm, signed a lease renewal for about 27,000 square feet in our Monmouth Executive Center in Freehold, New Jersey. And that was an eight-year renewal from their current expiration, which is several years away.

As we announced back in February of this year, we completed a public offering of approximately 7.2 million shares of common stock, including the green shoe. That netted the Company proceeds of over $227 million. We utilized those funds to, at the time, primarily pay down our debt. We brought our line to zero at that point, and further deleveraged the Company, improved all our coverage ratios, and brought what we'd like to think of as a pristine balance sheet to a fortress balance sheet, allowing us to have the liquidity when we see transactions out there that are worth doing. And we are, obviously, talking about a number of initiatives in the metropolitan New York area as well as the metropolitan D.C. area, and we'll kind of see how that goes over time.

As in the past, we have focused on green initiatives. We have focused on corporate consciousness and corporate responsibility towards conservation, sustainability, energy utilization reduction, both from a cost-of-occupancy and a bottom-line perspective and to be, of course, good citizens in the world that we live in, that's much more focused on a carbon footprint.

And so this past quarter, we continued to add to our vibrant and growing list of properties that have earned Energy Star designations -- Berlin, Pennsylvania; Stamford, Connecticut; several in Morris County, in Parsippany; and our own headquarters here in Edison, in Metropark. And these Energy Star designations are earned when a commercial facility averages a basically 35% energy utilization reduction. We are also focused on obtaining LEED-EB, which is Existing Building designation in the LEED category, for several of our assets at the present time.

So with that, I will turn the call over to Barry, who will review our financial results for the quarter, and then I'll come back to you with a few more comments. Barry?

Thanks, Mitchell. For the first quarter of 2011, net income available of common shareholders amounted to $15.7 million or $0.19 a share, as compared to $14.5 million or $0.18 a share for the same quarter last year.

FFO for the quarter amounted to $67.3 million or $0.70 a share, versus $66.5 million or $0.72 a share in 2010. Other income in the quarter included approximately $2.2 million in lease termination fees, as compared to $354,000 in the same quarter of last year.

Same-store net operating income, which excludes lease termination fees, decreased by 8% on a GAAP and cash basis. I'd like to note that last year's first quarter included net real estate tax refunds of approximately $1.9 million. If you adjust those out, same-store net operating income would've decreased by 6.3%.

Also in the past quarter, you may recall we had a fairly severe winter. Our snow and other related costs were up $1.8 million. And if you factored those out from the numbers, our same-store net operating income would've decreased around 5%.

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 about 78.5% of our portfolio.

At March 31, Mack-Cali's total undepreciated book assets equaled $5.6 billion, and our same -- and our debt to undepreciated asset ratio was 33.4%. We had interest coverage of 3.3 times and fixed-charge coverage of 3 times for the first quarter of 2011.

We ended the quarter with approximately $1.9 billion in debt, which had a weighted-average interest rate of 6.55%. Currently, we have $51 million in outstandings on our $775 million credit facility.

We've affirmed our guidance for 2011 for FFO of $2.61 to $2.81 per share.

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

Thanks, Barry. Our consolidated portfolio was 88.2% leased at March 31, as compared to 89.1% last quarter. Leasing activity in our portfolio exceeded 1.1 million square feet this quarter and produced a tenant retention rate of 62.4% of outgoing space.

Our remaining 2011 rollover is 1.6 million square feet or 5.8% of our leased space. We have approximately 630,000 square feet rolling in the second quarter.

In our markets, Class A overall vacancy rates remained essentially flat quarter to quarter, and improved slightly in most markets since the first quarter of 2010. Westchester County, New York, improved by 160 basis points year over year; and Washington, D.C., reported a 350-basis-point improvement.

The percentage of overall vacancy, represented by sublease space, continued to decline in all of our markets but still averages approximately 13% of overall vacancy. Mitch?

Thank you, Mike. In closing the prepared remarks, I would just tell you that -- and I probably don't need to tell you that we continue to work very hard to sign leases with tenants both on a renewal basis -- our retention rate is quite strong. Tenants really don't want to move. And we've tracked new tenants as a result of flight to quality, the security and stability offered by having a landlord such as Mack-Cali.

And I think as we begin to emerge from very difficult economic conditions in the nation -- see the awakening of spring, if you will -- we will see better prospects out there to be able to not only stabilize our portfolio, but certainly begin to see some growth and some absorption occurring as market conditions firm.

I mentioned that we are in discussions with several initiatives in the metropolitan New York area and the metropolitan Washington area. Naturally, these situations take a lot longer than one could imagine. Generally speaking, decision making in probably every aspect of the C-suite, and every other part of corporate America, moves much more slowly and more deliberately because of the uncertainty that exists in the marketplace and the volatility that exists. But I'm cautiously optimistic about some of those aspects.

I certainly was very pleased to see the announcement by Boston Properties of selling their portfolio, Carnegie Center, because at the price that was indicated and the cap rate that was indicated, it certainly validated the value of high-caliber, Class A office properties which typify what Mack-Cali is all about -- a large presence, a strong franchise. So if you liken that transaction to the multiple locations and portfolios and aggregations of very high-quality assets that we own and manage in this company -- might give you a sense of -- a better perspective on value in suburban real estate in particular, or at least in that case, in particular.

From a financial metric perspective, we did issue the equity. We pay out a very healthy dividend, now totaling almost -- about $180 million a year, almost a 100 million share count.

And with that, with what we spend on tenant improvements and reinvesting in our assets, we're still cash flow positive. Certainly from a cap perspective, we're quite liquid in that sense. And so we will hope to be able to take advantage of an opportunity set with this liquidity and with our alacrity moving forward.

With that, I will now be pleased to take your questions. Operator, would you set up the queue, please?

Thank you. (Operator Instructions). And we'll take our first question from Michael Bilerman with Citi.

Mitch.

Hi.

You talked a little bit about the BFT sale, which obviously at a -- call it 6.5%, 6.7% cap rate in your eyes, sort of validates the value. Doesn't that perversely, then, make it more difficult for you to be an acquirer if that's where the pricing is? You clearly are not going to be buying it at those cap rates, because you would be buying back your stock and make cap before you'd go out and buy assets, or should be buying your stock back and make cap before you buy assets at 6.5%. So I'm just trying to figure out how you --

Well, yes, first of all, I would liken that transaction more to a company-style transaction. Obviously, if you look back at the origins of that portfolio, it was a family who created it, who then sold it to a REIT and then effectively repurchased it.

We own land next to that Carnegie Center, that's approved for 750,000 feet of development, including a hotel. If you just kind of look at that real estate -- and it's very high-quality real estate, but it is 25 years old on average -- we can put up new product in that marketplace for pricing levels that are very similar to what was paid. So we can certainly develop new product into increasing demand in that marketplace.

I see that, just in general, Michael, the underwriting is difficult. We sold the joint venture asset in Morris County, which we talked about at least one earnings call ago, if not two. Similar issues that the stabilized asset -- and by the way, Carnegie, as it was reported, is I believe 84% leased at this point. So there's, I guess, some leasing to get done there.

But for stabilized assets for kind of coupon-clipping, there's a lot -- there's a wall of capital out there that's driving pricing levels up, or so far has driven pricing levels up and cap rates down. I don't know what interest rates and inflation are going to do to all of that.

But you still have the ability, in a company like Mack-Cali, to build. We have 11-plus million feet of land inventory, and we can be building brand new product to meet the test -- the do-more-with-less mantra that corporate America has evolved -- at very competitive levels. So that's one aspect. And we are talking right now about a couple of company-style deals where I think the pricing, at least from my perspective, is reasonable and more attractive.

But I'll tell you, Michael, generally, being involved, for example, in trying to get some stuff done, if you will, in New York City -- and I'm still optimistic about it -- it's almost a little scary seeing the underwriting. It almost feels dj vu -- we're back to 2005, '06, and '07, with some of the underwriting and the notional thought process that rents are going to hit the sky again; those trees are growing to the sky.

So you need to be very careful. And we'll get our share of acquisition opportunity based on what I think we can accomplish, things that we're working on now. And we'll also have the opportunity, I believe, to build into an improving marketplace as well.

Right, but if I remember, the size of the D.C. and New York things, these were in the couple-of-hundred-million-dollar sort of range, and if I dial back to the equity raised earlier this year, at least your commentary was more worried about inflation, worried about interest rates, beginning a fortress balance sheet, really just protecting -- hunkering down, rather than these acquisition opportunities becoming more in light.

Yes, well, I agree with all that. I am concerned, and when the Fed came out today and said that GDP growth was only 1.8% and that they're -- he came out yesterday, in Bernanke's speech, and said -- yes, inflation is a risk, and the consumer is getting whacked as a result of fuel costs and food and staples. We're in a very volatile period of time.

And I do think that there are going to be inflation pressures and that there could be interest rate movement, and likely there will be. And I thought it was a very appropriate time to de-lever the Company further and be prepared.

We could easily put several hundred million dollars to work and then put some leverage on that, and it becomes multiples of several hundred million dollars. And those are the things that we're looking at now, but we're going to be careful in how we do it. And having the capacity and the liquidity and the flexibility, given that equity raise and our balance sheet and our capacity, is a very comforting element right now.

Okay, thank you.

You're welcome.

And our next question comes from Sheila McGrath with KBW.

Yes, good morning. Mitch, you mentioned potential opportunities in the New York and D.C. area. Are you sticking to your suburban focus, or do you plan on venturing back into CBD locations? And, also, are these opportunities portfolio or single assets?

The New York-centric opportunity is New York City. And there's not too much I can say about what we're working on currently, but the goal is to partner up with a very esteemed private operator and get some repositioning opportunities that are not necessarily broadly, or as broadly, marketed as some of the transactions that you've read about -- your typical kind of buying at the auction block type of thing. So that's what that's about.

And what we're looking at in D.C. is being part -- in the D.C. metro area is more suburban, and it involves helping to potentially recapitalize a private company, and, as I said, more suburban.

With respect to your question about urban or CBD versus suburban, I think we remain a very focused preeminent suburban owner-operator, but not at the exclusion of taking advantage of perhaps not only diversity but, to some extent, demographic and paradigm shifts that right now seem to have a little more focus in urban areas, urban revitalization.

There are a litany of programs available, incentive programs. States are -- despite the budget and deficit problems in state governments, they realize that in order to retain companies and grow jobs, they need to be very, very competitive. And there are incentives, between New York and New Jersey and Pennsylvania, and New York and New Jersey and Connecticut, between those states, etc., that are vying for all of these opportunities.

Fortunately for us, we have the ability to put new product into Jersey City, which is a market that I think will continue to demonstrate demand and qualifies for at least these New Jersey incentives -- the Urban Transit Hub Tax Credit, the thing that Panasonic just -- the program Panasonic got involved in, in Newark. And so you will see, to some extent, our building concentration in some of these urban areas. Some of the young, creative talent, and the talent pool, wants to be in areas like Jersey City because of the cachet and the public transportation and the housing stock that's available.

And so for us it'll be some of -- all of the above. But we remain very focused on what this franchise has become and what our mission is, and that's to have the best, highest-quality product in the best suburban markets and to layer onto that a level of diversity and incremental expansion in some of the urban core areas.

Okay, great, and one quick question. Could you give us the metrics on the mark-to-market on renewals -- renewal rents?

Yes. Well, I mentioned in the call that from a cash basis, the rolldown was about 6.2% on a GAAP basis. It was 4.8%. In general, I would say that there's still that 8% to 10% mark to market, if you take average rents that exist in the portfolio and look at the transactions that we've been able to accomplish. But mark to market is a tough thing and looks at a point in time, so it's a little bit hard. What I can say more broadly is that there seems to be a bottoming occurring in the markets. We see that because the net effective rents have stabilized and the net effective rents are after all of the concessions, whether it's free rent or DI allowances. And that seems to have stabilized, which is obviously a very good thing. With respect to where I see the portfolio this year and into the near-term future with respect to NOI compression, it's probably in the 3% to 5% range. Clearly, we got as did everybody else in our business whacked with excess costs in snow removal. It's just incredible to have to spend $8 million in a season on snow removal. And higher utility costs because of the severity of the temperate conditions that we had. But I would say that 3% to 5% down on NOI, in-store NOI, and 8% to 10% on mark to market on the portfolio.

Jordan Sadler, KeyBanc Capital Markets.

Thank you. I just wanted to follow up again on the Boston Properties transaction. But you sort of mentioned it in terms of a validation of pricing, which I obviously acknowledge. I'm just curious about the opposite side of it, maybe what Boston Properties might have been thinking and just watching what some of your other peers in the public REIT sector seem to be doing in terms of disposing of suburban (inaudible -- technical difficulty).

I get it, Jordan. So let me respond. I can't tell you exactly what Boston Properties was thinking because I'm not the CEO of Boston Properties, but I can tell you that clearly if I look at their strategy as they express it openly and publicly, it's the gateway cities. And so, the suburban markets, at least from what we've seen, sharing markets was never their real focus. But that's my opinion. You would have to ask them. And so, I don't think that -- I'm guessing, but I don't think that their sale of Carnegie Center represented a lack of -- a strategic change. I just don't think that was ever really a major part of their strategy as they enunciated all the time. I have seen other companies talk about selling some suburban properties and moving into more industrial type properties. We all know who they are. I'm not sure where those suburban properties are because I really don't know and I haven't seen them describe the location. I'm not sure if they're in Milwaukee or they're in tighter, higher barrier to entry markets.

But I would tell you that high-quality suburban assets, while perhaps slightly out of favor as a result of the economic conundrum that has existed and the fact that New York City in particular and maybe Washington to a lesser degree, and maybe even San Francisco seems to be improving, at least we all saw the same articles on Silicon Valley and maybe West L.A., but beyond that, the economy has been in the doldrums. And so, some of these cities, a combination of a weak dollar and tourism and other aspects, a financial gateway city like New York City, I think it's a great place, and I think you'll see spillover. And I think that affordability will become an issue, and if the underwriting that I've been seeing and looking at really becomes a reality -- big if, but if it happens and rents spike as quickly, you're going to see companies and C-suites say -- hey, what are we doing here? We can draw a very well-educated workforce. Having the young creative set, whatever that young creative set is called these days, X Generation or whatever, is important, but at some point, they have families and quality of life becomes an issue and being able to educate your kids without spending $30,000 a year for each kid to go to nursery school. All those things become important.

And so maybe we've gone through a very rapid demographic shift as a result of the economic downdraft that we've all been living through for close to four years, certainly 3.5 years. But I wouldn't write things off so quickly. I think that there's a raison d'etre that many of these high-quality suburban communities were created to foster a certain quality of life, a certain cost structure associated with being able to house your workforce and run your business.

So I don't feel that there's a rationale and impending need to make any strategic shifts as you've alluded to. I think that the company, at least the one that I think you're talking about, has been involved in many, many different markets, particularly in the industrial sector, and maybe to a far lesser degree the office sector, and has made a determination that they can do better by buying, building, owning and managing warehouses. And that that was a strategic decision that they made, and there's no question that the office business is a capital intensive business. The industrial business less so, until you have to put roofs on these big buildings. That's pretty expensive. And pave those huge lots. But that was a strategic decision that they made. So I certainly would not encourage anybody to sound alarm bells because of the fact that there have been these sales in the marketplace. And yes, I do think that they absolutely validate certainly the one I alluded to down at Carnegie the fact that this is very valuable real estate. And if you own it in a large position in good type sub-markets with a great franchise, it's even more valuable. And that's how I feel about it.

My other part of that question was you mentioned there's a wall of capital interested in stabilized coupon-clippers basically looking for yield. Is there an opportunity, given the pricing, to raise capital that way, maybe pairing some of the less strategic or less core properties within your portfolio, recycling?

Yes, I think recycling certainly the bottom tier of the portfolio is something that we have talked about and will continue to look at. I'm not sure -- the joint venture aspect on that sort of thing is not something we would be interested in. It's complicated and so forth. But we have certainly considered the recycling of some of the assets. But most of the activity that's occurred, if it's not buying effectively a franchise like a Carnegie Center, you've seen a lot of the private REITs and that sort of money come into the market and make investments. Again, that's redundant, but coupon-clipping, not too many leasing challenges, just hiring a third-party asset manager to take care of the asset. And they're not interested, at least at this point, in buying a portfolio of call it underleased assets that require a lot of value added, at least in the suburban markets. And so, we haven't seen that opportunity set emerge yet. So that's where it's at.

My last follow-up is kind of on the acquisitions or the investment opportunities. It seems like you're seeing some pretty crazy underwriting in terms of growth expectations and product valuation, from your commentary. Yet at the same time, it seems like your transaction activity seems more imminent, particularly given your equity deal or capital raise a couple months ago, so you've got this fortress balance sheet. How do you execute in some of these hot markets, or hotter markets, where the wall of capital is? How do you get pricing that's better than outrageous?

Yes, of course, I understand. What we're trying to get accomplished is to work -- and admittedly, we've talked to a number of these types of private operators who are well regarded, who have let's say a more realistic, certainly optimistic but more realistic, view of underwriting standards and who seem to be able to source opportunities because of the fact that they have been able to execute quickly. They have the teams in place. And to have a reliable capital partner like Mack-Cali enhances their ability to execute. And with the connectivity -- I'm not saying they would be at a huge discount, but on the margin I think the pricing will be better. And the people are knowledgeable people that have demonstrated enough of a knowledge base to me where I have confidence in their judgment.

In another case that we're looking at, which is not New York City-centric, it's a great company with great assets. A private company. And they need help. They took on too much debt, and they're a well-regarded franchise, but they need help. And once again, through our wherewithal and our capacity, provided we get the right protections in terms of prefs and so forth, it's something that we might very well step into and try to give them the help that they need to reposition a portfolio. And frankly, with the capital structure as I envision it, we will be getting a discount to value because of the assistance that we can provide. So that's pretty much the only way you can do it today. I mean, there are I guess certain companies that are investing in debt positions and others that are investing in subordinated debt positions or mezzanine positions with the goal of ownership, but that's not what we're doing.

Okay, thank you.

You're welcome.

John Guinee, Stifel Nicolaus.

You guys have been very, very honest and straightforward on the realities of leasing B product in 20% vacant markets, and it seems to me that when you read between the lines, the realities of life is that this is a core portfolio that isn't going to change much. It's probably going to be the same 30 million square feet in five, ten years from now. So when you drill down and you look at [20-odd %] vacant markets, you know the day-to-day realities of leasing this space. As I recall, the rents are the same now as they were ten years ago, while operating expenses have come up. And any chance -- assuming what you see is what you get, we're dealing with a 30-million square-foot portfolio. It's not going to change. Any chance that these rents move up on a net-effective basis any time in the next five years?

I hope so, John.

We all hope so. [We like you.]

Thank you. Look, what you say is not without merit or logic. I mean, the markets have been tough. But back in the early '90s, the world had come to an end, and everybody wrote off commercial real estate and suburban markets, or maybe at that time the cities were done until they came back, and the suburban markets were done until they came back. And so, there's -- look, there's such a lack of clarity as to where we're going as a competitive global participant or participant in the global economy. It's a little different this time. There's a globalization that didn't exist. There's technology that didn't exist that changes the need for space and the efficiencies and so forth. All of that's true. But there's also cyclicality, and there will be in my view opportunities as more product changes hands, if only due to forced lenders finally clamping down and the Fed changing their policies about lenders writing off bad debt, which I think is happening now. And it will tighten up markets. It will give professional operators like Mack-Cali the opportunity to consolidate more in some of these markets. There will be some functional obsolescence in some of the real estate that's then going to be 35 or 40 years old and didn't get tender, loving care in capital. So there will be some assets that absolutely won't be competitive.

And I think the markets will tighten, particularly the better sub-markets, the well-located sub-markets, where pricing power will return certainly to an operator like a Mack-Cali professional real estate owner and operator, and we will be able to improve our margins. Right now, we have been through a period, and we're still in it but I think it's ebbing at this juncture, of absolute extreme fear on the part of corporate leadership, whether it's a corporation or a professional service firm. Fear. The credit markets shut down on them. The economy shut down. And everybody has over-reacted and nobody can see where this light is at the end of tunnel. So all of a sudden, the new paradigm shift and the new metaphor is the suburbs are gone, everybody's moving back to the city. Now, I don't know how you're going to take a stock of 500 million square feet of suburban real estate and all the people that work within that real estate, from Washington to Westchester, and get them into the city when there are only ten trains a day. And how the demographics will shift.

So I think that -- I'm not minimizing what you're saying, but I think it's a little bit of a strong reaction to essentially say the end is here. We will have pricing power as the tone of the marketplace improves, as corporate decision-makers and business leaders feel better about their prospects going forward. We'll be able to push back a little bit and improve our margins. And that's what I believe.

Thank you.

You're welcome.

Steve Sakwa, ISI Group.

Mitch, I just wanted to follow up on the leasing question. You obviously did a lot of leasing in the first quarter, but you continue to lose occupancy. What is your forecast for the portfolio occupancy at the end of '11 and perhaps at the end of '12?

Well, at the end of '11, all things being equal at this point, I would say we're going to lose another percentage point of occupancy, sort of worst case. That's what I believe is currently projected as worst case. 2012 is too early to tell. It's pivotal. We do have a number of renewals that we're working on in '12, and it's too early to call them right now, so I really can't predict. I don't think there will be wild swings either way in 2012. So that's what I can tell you right now.

Okay, thank you.

You're welcome.

Michael Knott, Green Street Advisors.

I'm just wondering, Mitchell, if you can comment on the recent Jersey City sales, and were you looking? Was that price way above what you were maybe willing to pay at a further stronghold there? I think it was maybe $375 a foot, but I'm sure you know the details better than I do.

Well, I'll tell you what I know. I happen to have been with Emanuel Stern last night at a charity function, and I asked him about it. Hartz Mountain, Stern and family, they owned it. And they have made some strategic adjustments in their real estate portfolio where they want to get involved a little more in multi-family residential, and so they felt that part of capitalizing what they want to accomplish in multi-family residential, it was a good time to monetize some of their higher-quality assets. And I guess that was all concurrent with somebody coming to them with an investor who said that they wanted to put some money to work on the waterfront, and the moon and the stars aligned with Hartz's change in strategy, in diversity. It's primarily -- it is family money, and it's an enormous portfolio of properties and industrial activities that they have in that family. And it wasn't really a competitively bid situation. Somebody came to the table effectively through a third party, through a broker, but it wasn't really a bid situation. And the Stern family said it met their goals and objectives, and so they sold it.

You recall, I'm sure, when we built Harborside Plaza 10 for Schwab and Schwab never took occupancy -- it was the early part of this decade -- and we sold that building because of my concern about the Schwab situation. And we continued to manage it and so forth with the new owner at that time, which was iStar Financial. And we sold that building for $326 a square foot, which was obviously not too different from the price on the two Hartz buildings. So that's what I can tell you about it. That's why they did it, and they anecdotally shared a little concern about one of their tenants that had some near-term exposure that's consolidating in one of our buildings, and so they saw some challenges in that regard. And they thought it was a good opportunity for them to achieve several objectives. And I'm sure if Manny Stern were sitting next to me, he'd tell you that everything I just said is exactly correct.

Do you think the $375 is higher than what you would have been willing to pay?

The answer is for that product, yes. Because it's not quite the kind of product that we have. It's what I would call more mid-rise than high-rise. I'm talking on the waterfront. So it's kind of at the push point. So that's what I can tell you.

That's helpful. And then just one more question. It sounded like you said we're kind of deja-vu in terms of '05, '06, '07, and that sounds right. I wanted to see if you could just maybe compare and contrast for me your point of view with respect to allocating capital. I seem to recall during that time period, Mack-Cali was doing some acquisitions here and there, and I think you were buying some stock in Car America and [Wash] REIT at different points in time. But at this point, you seem more conservative than back then. Can you just maybe comment on whether you think that's right and maybe why that might be the case?

Well, perhaps a little more conservative in terms of building balance sheet capacity. There have not been a lot of transactions available. There have been some closely held transactions, as I said, like the two Hartz buildings. A few buildings here and there that for one reason or another we didn't want to reach for. But if you look back over the last two or three years, there have been very few transactions, per se. No distress. Obviously we all recognize that that never happened. I mean, there's been a building here or there that we have bid on and bid sincerely, but some of the private money, particularly for the stabilized stuff, which is really the only product we've seen come to market, has been very, very aggressive. As far as opportunities to pay the fee or the cost of entry, like I thought we were doing with Car America, we haven't seen those opportunities.

And quite frankly, in the public real estate markets, notwithstanding the issues surrounding difficult fundamentals -- I mean, on the one hand, difficult fundamentals, and on the other hand, really super-elevated underwriting, particularly in some of the gateway cities, the stock prices have all been doing really well. So there hasn't really been an opportunity to engage in that. There doesn't seem to be an interest on the part of anybody I know, notwithstanding some speculation, in combining companies. Nobody really I guess believes that you can really achieve any synergy, at least in these types of companies, by combining them, and in fact put companies at risk because of assimilating cultures and so forth. So we've been through a period of three to four years where it's kind of been static. I'm perfectly willing to put money to work if I can understand how it's supposed to make money on it. And I think we're at that point. We're getting to that point in potentially a couple of these transactions that I'm talking about, these joint ventures. And I hope to be able to put some money to work, a couple hundred million, at least. So that's the reason. I just think we've been in a period of very static activity.

Thank you.

You're welcome.

James Feldman, Bank of America.

Barry, I was just hoping you could guide us through the assumptions behind the guidance. I know you didn't change the number, but I think I heard Mitch say on the call 3% to 4% down for same store, or 3% to 5%. And I think last quarter, you were at 5% to 7%. Can you just update us on occupancy, same-store NOI, leasing spreads, kind of what you guys are thinking?

I guess we've given you the assumptions for what we see same-store, and I guess I can add a few more things. We're looking at lease starts of about 2 million square feet, as compared to lease scheduled explorations of 2.5 million. And we expect occupancy to drop from where we are today around 100 basis points. That's basically what's baked into our mid-point of guidance.

Okay. And then the same-store, that's on a cash or GAAP, or is it the same?

It's roughly the same. As I mentioned before, the first quarter we had some anomalies in our comparison periods. But generally, around that 5% number.

Okay. And then the leasing spread guidance, what was that again?

It was 8% to 10% down.

On a cash basis?

Yes.

So I guess it looks like you've improved your same-store outlook. Your leasing spreads look a little bit worse than last quarter, and your occupancy I think looks a little bit worse. Is that right, or no?

No. Occupancy is unchanged from the guidance we had given at the end of last year for the full year of 2011.

We said that we could lose approximately 200 basis points in occupancy in our last call for the year, and give or take, that's where we think we're going to be, Jamie.

Okay. I guess my question is what's driving the slightly better outlook for same-store?

I don't think it's slightly better. I think perhaps we -- I thought we said roughly 5% down in the last call. I think there was some confusion in some of the questions regarding rent rolldown versus same-store, and that's where that 5% to 7% number emerged, as I call. We believe if you -- it's almost kind of simple math if you look at 8% to 10% mark to markets or rolldowns and 10% expiring. The math would show you that you're roughly 5% down on your same-store, and obviously, that's not adjusting scientifically for expense changes. So that's why we provide the range. But to be clear, we think that unfortunately we're going to experience a period of continued rent rolldowns. They have improved slightly, but they are in that 6%, 7% range, and of course, that will vary quarter to quarter. On a mark to market basis, which is a much less scientific approach, it's somewhere around 10%, and if you aggregate the lease expirations, the loss of occupancy and the economics as I've just articulated, that combines to provide an established rolldown in our same-store NOI of approximately 3% to 5%.

Okay, thank you.

You're welcome.

We have a follow-up question from Michael Bilerman.

Hi. It's Mark [Montan]. I'm here with Michael. I just had a question on the construction services and (inaudible) services. Extrapolating out the 1Q run rate on a net basis, you get to maybe a $6 million annualized number, versus last year at call it $11 million. I'm wondering if you're expecting a ramp in that as 2011 --?

Yes, we had a big project through our Gale Construction Company subsidiary that was coming to closure in the New Jersey Manufacturers headquarters building. Net-net is we make a little money on that service and that company. They are a great support arm for our development group, and they do enough third-party outside business to pay for themselves and make us a few dollars. They have a very good reputation in the marketplace. So kind of what you see as revenue and expense are almost balanced, and that's been the pattern in Gale Construction.

Right. And the 1Q run rate is a fair assumption to (multiple speakers)?

Yes, it's fair.

And then one more on the lease term fees of $2.2 million, obviously jumped up a bit. Is it -- ?

And I'll tell you why. Because we had the opportunity to make a deal, which is about half of the total, where a tenant was -- to give you a sense of the strange world we live in, as I was trying to articulate before -- was willing to give us that space early that I think we need for another tenant, an existing tenant, to grow into. And for their own purposes, they were willing to pay us almost 90% of their lease obligation. Somewhat extraordinary, but they were willing to do that for their own reasons, and so we put that term fee in. It's about half, a little more than half, of the total.

Okay, great. Thank you.

You're welcome.

We have no further questions in queue at this time. I'd like to turn the call back over to our moderators for any closing remarks.

Yes. I would just like to thank all of you for joining us on the call today. I appreciate your time, and we certainly look forward to reporting to you again next quarter and I guess seeing some of you before that at NAREIT. Thank you and good day.

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