Veris Residential Inc (VRE) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to the Mack-Cali Realty Corporation Third Quarter 2011 Conference Call. Today's call is being recorded.

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

Thank you, operator. Good morning, everyone. And thank you all for joining Mack-Cali's Third 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 what we're generally seeing in our markets. Then Barry will review our financial results, and Mike will give you an update on our leasing results.

We had a solid quarter here at Mack-Cali. FFO for the third quarter was $0.73 per diluted share. As you've seen in the press release, we did have significant leasing activity during the quarter, totaling almost 1.25 million square feet of lease transactions.

There were 136 transactions, of which approximately 300,000 square feet were new and the balance were renewals. This reflected an end-of-quarter occupancy of 88.2%, which was slightly up from 88.1% last quarter. This also reflected a 78% retention rate. And so far, year-to-date, in 446 transactions, we've leased almost 3.5 million square feet, of which close to a million square feet are in new transactions, with the balance renewals and retained.

Rents for the quarter rolled down by approximately 3.4%, compared to last quarter's 9.1% roll-down. And so, of course, that's favorable.

For the balance of 2011, remaining rollovers are just 1.4% of base rent, or about $9 million. For 2012, we face rollovers of approximately 10.3% of base rent, or about $63 million.

Our leasing costs for the quarter were $3.40 per square foot per year, down from last quarter's $4.02 per square foot per year. And so we hope that is reflective of a trend.

Clearly, despite a challenging environment, our portfolio continues to outperform virtually every market in which we operate, with our lease rates exceeding market averages in Northern and Central New Jersey, in Westchester and in Washington, DC. And certainly, while we anticipated a particularly challenging third quarter, we did see the leasing activity that I just mentioned and very stable occupancy results. And so we're optimistic that in fact we will build on occupancy in the fourth quarter.

Our activities in the quarter included the previously announced development, or Wyndham Worldwide -- the second phase of their headquarters, a 203,000-square foot Class A building in our business campus in Parsippany, New Jersey. This will be constructed adjacent to phase one, obviously, and will total a development for Wyndham Worldwide of over 450,000 square feet.

Leasing activity during the quarter included the following -- Xsan Corporation, who is a provider of datacenter infrastructure and business continuity solutions, signed lease renewals totaling almost 90,000 square feet at our Mid-Westchester Executive Park in Hawthorne, New York. The transactions included renewals for their entire 47,000-square foot premises at 11 Skyline Drive and for 44,000 square feet at 17 Skyline Drive. This 14-building office/flex park is now 98.2% leased.

Prism Color Corporation, a printing services company, signed a 37,000-square foot lease renewal at 31 Twosome Drive in Morristown, New Jersey. The 84,000-square foot office/flex building located in our Morristown West Corporate Center is now 100% leased.

HQ Global Workplaces, a provider of workplace solutions, signed two new leases with us. They've become a very big part of the Mack-Cali family throughout our portfolio. They signed a 21,000-square foot lease at our magnificent 101 Hudson Street, in Jersey City, New Jersey; and a 15,500-square foot lease at 50 Tice Boulevard, in Woodcliff Lake, in Bergen County.

101 Hudson Street, which is a premier trophy 1.2 million-square foot waterfront property along the Gold Coast, is approximately 87% leased today. And 50 Tice, a 235,000-square foot Class A asset in Bergen County, is now over 89% leased.

Capsugel, a manufacturer of drug delivery systems, signed a new lease for 28,000 square feet, more or less, at 412 Mt. Kemble Avenue, a 475,000-square foot Class A office property, in Morris Township, New Jersey.

On another note, Mack-Cali continues to be recognized for its expertise in property management, tenant services and superior energy performance. During the third quarter, Mack-Cali added the following buildings to its growing list of properties that have earned new or recertified Energy Star designations -- 20 Commerce Drive in Cranford Business Park, in Cranford, New Jersey; as well as 555 and 565 Taxter Road in Elmsford.

In addition, several of our properties were recognized only this week by New Jersey's BOMA Chapter. These assets included 5 Wood Hollow; Liberty Corner, at 106 Allen Road; and Eisenhower/280 Corporate Center.

Moving on to some of our financial activities during the quarter -- as we announced just last week, we refinanced our unsecured revolving credit facility with a group of 20 very prestigious lenders. Our facility was arranged by J.P. Morgan Securities and Merrill Lynch. It's a $600 million unsecured facility, expandable to $1 billion.

It carries an interest rate equal to LIBOR plus 125 basis points and a facility fee of 25 basis points. It has a four-year term with a one-year extension option. The receptivity of this facility in the marketplace clearly demonstrates the financial community's continued confidence in our Company.

As noted in our press release this morning, we have restated 2011 full-year guidance, tightening the range to $2.77 to $2.81; and for the first time presented 2012 full-year guidance -- a range of $2.50 to $2.70 per share. This reflects slightly lower occupancy trends through 2012 of about one percentage point.

At this point, I'll turn the call over to Barry, who will review our financial results for the quarter and provide a little more color on the guidance that I just mentioned. Barry?

Thanks, Mitchell.

For the third quarter of 2011, net income available to common shareholders amounted to $20.5 million or $0.24 per share, as compared to $13 million or $0.16 a share for the same quarter last year. FFO for the quarter amounted to $72.9 million or $0.73 per share, versus $64.3 million or $0.69 a share in 2010.

Included in net income and FFO for the quarter ended September 30th, 2011 was approximately $6 million or $0.06 per share in net real estate tax refunds. Other income in the quarter included approximately $674,000 in lease termination fees as compared to $639,000 for the same quarter last year.

Same-store net operating income, which excludes lease termination fees, increased by 2.4% on a GAAP basis and 3.7% on a cash basis for the third quarter. Without the effect of the real estate tax refunds, same-store net operating income decreased by 3% on a GAAP basis and 1.9% on a cash basis for the third quarter.

Our same-store portfolio for the quarter was 30.8 million square feet. Our unencumbered portfolio at quarter end totaled 237 properties aggregating 24.5 million square feet, which represents about 78.6% of our portfolio.

At September 30th, Mack-Cali's total un-depreciated book assets equaled $5.7 billion, and our debt-to-un-depreciated asset ratio was 33.2%. We had interest coverage of 3.3 times and fixed charge coverage of 3.2 times for the third quarter of '11.

We ended the quarter with approximately $1.9 billion in debt, which had a weighted average interest rate of 6.52%. As Mitchell mentioned, last week we closed a new credit facility with a syndicate of 20 banks, with a capacity of $600 million, with borrowings priced at LIBOR plus 125. The term is for four years with a one-year extension option, and the facility has an accordion feature to expand to $1 billion. Currently, we have $95.5 million outstanding on the $600 million revolver.

We have narrowed our range of FFO guidance for 2011 to $2.77 to $2.81 per share. We have provided initial guidance for 2012 in the range of $2.50 to $2.70 a share. At the midpoint, our assumptions include leasing starts of 2.3 million square feet for the year versus scheduled expirations of 2.7 million square feet.

End-of-2012 occupancy -- about 100 basis points below our September 30th, 2011 level of 88.2%, short-term borrowing rates averaging 1.75% for 2012, and payoff of maturing bonds to the line and no terming out of debt until the end of the year. No acquisitions are assumed in our guidance at the midpoint. And assumed development in the model includes continued construction of the previously announced phase two headquarters for Wyndham Worldwide in Parsippany, New Jersey, which is expected to come online in the first half of 2013.

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 at our website, at www.mack-cali.com, are our supplemental package and earnings release, which includes the information required by Reg G as well as our 10-Q.

Now, Mike will cover our leasing activity. Mike?

Thanks, Barry.

Our consolidated portfolio was 88.2% leased at September 30th, as compared to 88.1% at the end of the second quarter. Third quarter leasing activity in our portfolio totaled approximately 1.2 million square feet, including 280,000 square feet of new leases. Our tenant retention in the quarter was 78.4% of outgoing space.

Our [remaining] 2011 rollover is approximately 350,000 square feet, or 1.2% of our lease space. For 2012, expirations total 2.7 million square feet, representing 10% of lease space. The 2012 expirations are weighted in the third quarter, with the remainder evenly divided over the balance of the year. The percentage of overall vacancy represented by sublease space continues to decline in most of our markets but still averages about 12.4% of overall vacancy.

Mitchell?

Thanks, Mike.

In closing our prepared remarks, I would just say and reiterate that with the ongoing uncertainty in the economy, and clearly a lack of meaningful job growth to this point, our goal is to continue to remain focused on procuring and securing as many new leases and renewals as we can, to keep our portfolio as fully occupied as we can. We think we've done it in a smart way, made some pretty good economic transactions in the marketplace. And we believe that with premier assets that are extremely well located, along with the team of professionals that represent this Company and service our tenants, we clearly expect to be at the forefront of the eventual market recovery, given the fact that there's been virtually no new supply added to the marketplace.

As well, and as I've previously discussed on the last earnings call, we are advancing a planned residential development down at Harborside, along the waterfront in Jersey City. We are working diligently to complete our joint venture agreements, which we expect to be done imminently, at which time we would then announce our partnership.

We have been working aggressively with the city and the redevelopment authority in advancing the planning for this proposed residential development. We would probably expect phase one to be somewhere in the neighborhood of a $400 million project, of which Mack-Cali would have 85% of the economics. Little too early to predict the completion date, but it's something that clearly is on the horizon for us.

So with that, we will conclude our prepared remarks and open the floor to questions. Operator?

(Operator Instructions) Sloan Bohlen, Goldman Sachs.

Mitchell, could you maybe give a little bit more color on what you guys' return expectations would be for the development in Jersey City? And then, in addition to that, Barry, whether you guys have taken a look at what the construction financing market looks like for something of that magnitude?

We expect a return on a stabilized basis, an unleveraged basis, of approximately 7% on that development. It's a little too early to discuss the financing, other than to say that we know that construction financing in the 60%-plus range is available for these types of projects. And permanent financing is as well available, more in the 75% range, of somewhere -- and again, we're in an ever-changing world and an evolving world -- particularly, I guess, today, with the potential EU solutions -- but somewhere around 5.5%, including amortization. So that's what the world looks like as we speak.

Okay.

And thoughts, even just initially, on what the time to stabilization would be on a project like that?

Well, we're hopeful that it's in a three-year time range from where we are today.

Okay.

And then, one other question on Jersey City -- the Brookfield sale of the Newport Tower -- can you maybe talk a little bit about where you thought pricing was for that asset -- what was underwriting for -- or what you think the underwriting might have been for the winning bidder?

Well, of course, we underwrote it and took a very careful look at it. I believe that the asset was acquired at approximately a 5% yield, and close to what we can develop new product for. Again, it was a high-quality asset, but still 20 years old. And had some issues with respect to termination options on the part of tenants and other things that we underwrite very carefully, in our thinking, and what market exposure might be at the time of termination options and the term of expiration.

So clearly, our pricing wasn't in that zone for that asset when, three blocks away, we have approvals in place to build a similar-size asset for roughly the same pricing level, and presumably coming into a stronger market when we would conceive of doing that.

So that's where I think pricing was -- about $375 million. There are nuances to, again, some of the tenant leases. But that's between the purchaser, which was a Canadian pension fund/REIT, and Brookfield.

Okay.

Then, just one question, if I could, on guidance -- Barry, you talked a little bit about the occupancy assumptions. Can you talk about maybe what your rent expectations, or at least rent spreads, are for your leases next year? And then, maybe any just general color on early negotiations with those renewals?

The assumptions that we made with respect to -- we see rents pretty flat at this point. I mean, we don't see any deterioration in the marketplace. The midpoint of guidance reflects the fact that we do have a bit of a valley, particularly in the mid-part of the year, with some expirations. And the ramp-up of replacement tenants will not be fully -- the impacts of same will not be fully felt in 2012. So that's really what we see in terms of how we established the guidance. Each point of occupancy is close to $0.08 a share.

With respect to velocity in the marketplace -- we have, certainly, challenges ahead of us in 2012. We have a couple of larger expirations that I know that the analyst community have asked about, and we've talked about it, and it's been in some of your notes. They are at the very end of 2012. And we have some midyear expirations in the 75,000- to 100,000-foot range. And so we have to do a lot of leasing through 2012, and then again towards the end of the year.

What we're seeing right now is sort of a flat, maybe slightly up year-over-year, tenant call or demand. A lot of the space requirements -- many of the space requirements are of the smaller variety. So we have a lot of deals to do. We do space call analysis every week, and we see more of the 10,000-foot variety than we do the 25,000-foot variety these days. Some of the demand is being generated, as oddly as it may sound, by the pharmaceutical industry and a variety of industries that are either in marketing or drug type industries. So that composes a lot of what we're seeing in the marketplace today.

Up in Bergen County, we do have a few potential, let's say, interested parties in the larger block of space that will expire in Mack-Cali Center 6 at the end of 2012, which is the Toys "R" Us lease. We already have finalized, or are in the process of finalizing, about a 35,000-square foot subtenant who will become our direct tenant in that building -- it's about a 254,000-square foot building. But there are a couple of tenants that we have been talking to that are significant, looking at corporate consolidation in that area.

So it's a mixed bag. Market vacancies have remained pretty stagnant throughout most of the markets that we operate in. I mean, give or take a percentage point up or down on a year-over-year or quarter-over-quarter basis, they remain in the mid- to high-teen -- even a couple of them low 20% vacancies, if you include everything in the wash.

So that's kind of what we're seeing. We think that concessions have generally maxed out. At this point, you're looking at free rent somewhere in the zone of a month -- a year, give or take. You're looking at the $3- to $4-a-square foot leasing cost, unless it's a large, longer-term lease. And then obviously, we're putting a little bit more capital into it.

With respect to New York City, 125 Broad Street, we've just come to an agreement on another half a floor with a major -- a new insurer, insurance company. We're preparing the lease as we speak, so we'll only have one floor remaining in that building. And again, I've talked many times about the economics of those transactions -- mid-$30 gross deals with $16 to $17 operating. And we've tightened up on the concessions a little bit, but they're still pretty frothy, in the $70-a-foot zone plus commissions.

So that's kind of what we're seeing in the market right now. Again, at the risk of redundancy, the midpoint guidance for 2012 is more a reflection of slightly lower occupancy trending through the year, and about the kind of rents that we're seeing today.

I appreciate it. Thank you.

You're welcome.

Jordan Sadler, KeyBanc Capital Markets.

I just wanted to dig into the Wyndham development. Congratulations on that. You'd mentioned that on the last call, so good to put that to bed.

Are those tenants coming from within the portfolio, or is that coming from outside it? Is there an expansion or a reduction net of space, just out of curiosity?

Well, right now, Wyndham leases another building, aside from the new headquarters building that we built for them. It's about 146,000-foot building. So clearly, if and when they would vacate that building and move into the new headquarters in the early part of 2013 or the mid part of 2013, it represents a gain of about 55,000 square feet.

Wyndham is, in fact, a growing company, as you know. And so their plans are to continue to grow the company and to continue to locate people at the headquarters location. I have the privilege tomorrow, coincidentally, of introducing Steve Holmes at a luncheon, who is the CEO of Wyndham, who I made the deal with, if you will.

So they're a growing company, they're an international, worldwide company. And we'll see how it goes.

Okay.

Then, you mentioned pharmaceutical expansions. I was just curious -- you have the relationship with Sanofi. And there's been, following the merger, some speculation that they're looking for significant square footage up in the Boston-Cambridge area. Do you happen to know if that'll be a relocation or a net expansion? And just any commentary on their position in your portfolio?

I don't know. We have just commenced a 15-year lease with Sanofi on 204,000 square feet, which is part of their corporate headquarters location. Sanofi does occupy other leased facilities in the Bridgewater area. Those leases, which are probably a year from expiration or so, could be the ones that they're talking about in connection with the Cambridge location.

But insofar as we know, we have the headquarters location. There is absolutely no plan to relocate that headquarters that I'm aware of. They've just invested considerable capital in moving thousands of people into the Bridgewater location. So beyond that, Jordan, I don't know what they're thinking right now.

That's fair.

Then, you touched on some of these larger tenant expirations -- Toys, for instance -- it sounds like you've got something in progress potentially. Can you comment on, as we try to get a handle on what's going to happen over the next year or two -- IBM has a 250,000-square foot expiration; Credit Suisse for 150,000; and Prentice-Hall is reportedly moving into Hoboken, New York. Can you comment on those spaces in particular?

Yes.

Well, first of all, the Prentice-Hall situation -- that's obviously more of a 2015 event because it's the end-of-year 2014 expiration. So it's a little too -- it's somewhat premature to read the tea leaves on that beyond their announced -- or the discussed relocation into Hoboken and New York City. So that's a bit away right now in terms of timing.

The IBM situation -- the expectation based on discussions with them is that we're going to backfill some of their corporate-owned facilities up in Westchester, and not extend their lease for that 250,000 square feet, again end-of-2012 expiration. But they haven't confirmed that. I mean, we've had these discussions with them, and they do have some specialized installations in the building. But the expectation is that they're going to leave based on the preliminary information.

The advantage that we have with respect to that asset in particular is that it's located in the heart of the medical college and Westchester medical facility. So you have the medical school and the entire health center epicenter up there. They have -- clearly, the medical college has expressed serious interest in a significant amount of space in the building. And we are advancing those discussions with them. Because it's -- the building is right in the heart of their campus.

So that's what I can tell you at this juncture relative to Skyline. And again, with respect to Paramus, which I talked about a little bit before, we have a tenant that -- they, by all indication, are going to go direct with us on an 11-year lease. And we have some level of activity on the larger scope. Now, whether these transactions happen -- too early to tell. But we do see some level of activity there.

And lastly, the Credit Suisse one -- any comment?

Well, we're finalizing a transaction with another existing tenant that we think will take up a large part of the Credit Suisse space.

Last question -- on the residential, just curious about the fundamentals in Jersey City, specifically along the waterfront, what you're seeing in terms of market vacancy, market rent trends, for residential.

Well, again, it depends on the product. But we expect to achieve rents in the $40-a-foot range. Market vacancies, particularly along the waterfront for rental housing, are very low. There seems to be an insatiable demand for workforce or workplace type housing -- smaller units, averaging even sub-1,000 square feet -- 850 square feet.

And there are other projects that are being planned. We have an absolutely premier location. We're right along all of the mass and public transportation systems, with the light rail and the water ferries, and the PATH; as well as, of course, the vehicular access.

So we have tremendous view corridors, tremendous location, amenities that continue to expand in the community. And we're going to be careful in the sense that our current planning is for three phases of residential development totaling -- if we build it all out -- somewhere between 1,800 and 1,900 units over an extended period of time.

But at the present time, given the residential rental market, given all of the issues that you are very familiar with regarding homeownership and demographic trends -- and the difficulty in affordability with respect to single-family homeownership and obtaining mortgages, and all the things that all the pundits talk about all day long on the media -- on the business channels -- we think will do extremely well with a very high-end product along the waterfront.

And that $400 million is ex the land? That's just incremental?

The land is going into the venture at $30 a square foot, in AFR, so it includes an imputation of the land. And that's a rough number at this point.

Thanks, Mitch.

You're welcome.

Sheila McGrath, KBW.

Mitch, external growth via acquisition still is not a meaningful part of your strategy. Would you say it's because of the lack of assets for sale in the market? Are you participating in putting in bids and not successful?

The answer is we have put in bids. We have underwritten a number of assets, including Newport. Right now, 10 Exchange Place is on the market, which is adjacent to our Harborside facility. And I would tell you that at certain yields and pricing levels, given what we know about markets and given exposure, sometimes I'd rather be the competing landlord than paying 5% free and clear, and replacement costs or above, in areas where you really can't build anything, like Jersey City -- [than] just step up and pay up. Because there's no growth.

And so it might make a nice splash to buy a 1 million-square foot building, a one-day headline. But you can't get any real economic benefit out of it, other than more market share. So you need to be very, very careful.

And we bid on Metropolitan Plaza down in the Meadowlands. And you have such an abundance of capital, the wall of capital, that sometimes pays a dear price without understanding all of the intricacies of the marketplace. Sometimes there are more of institutional funds involved, and they do things that we simply won't do because they're not economic.

And so that's why. I mean, we've been called into the second rounds, if you will, of bidding on a couple of assets. And there's just a threshold at which the flatness of the yield opportunity, the risk involved in understanding tenants and their growth patterns, and their termination options -- have caused us not to see the value in what we've seen so far in the marketplace.

Now, whether that will change -- I mean, it seems to me that underwriting standards, at least on the part of mortgagees, have only gotten increasingly more difficult. And so we're hopeful. We don't like to see distress. And we've all talked about this for three years and haven't seen a lot of it. But with our liquidity and our fortress balance sheet, we think that at the appropriate time we'll be able to step into some situations that require expertise as well as capital. And that's what we're trying to do.

Look, I'm sure our money is as good as anybody else's. We could've paid 5% for Newport and owned it. But we didn't choose to do it at that economic basis.

Okay.

And real quick, on the real estate tax run rate -- would you say that in fourth quarter we should see the level bounce back up to what it was in second quarter?

Yes. The third quarter was a settlement, and it was an anomaly from that perspective. It was a great result for us, largely led by Tony Krug, who is our Senior Vice President of Finance, who orchestrated that -- sort of the whole certiorari appeal issue. And we would expect now a more normalized run rate, if you will, on that.

Thank you.

Michael Bilerman, Citi.

I just wanted to come back to guidance for a second. So your $2.50 to $2.70 is a quarterly run rate of, call it, $0.63 to $0.68, with the midpoint being $0.65. You're running, basically this quarter and next, at about $0.67 on a core basis.

I think you mentioned the $100 million bonds that are coming due at the beginning of the year aren't going to be floated on the line. And that's probably a good 300- to 400-basis point spread. So you're looking at a penny a quarter of upside. And it sounds, from an occupancy perspective, you're heading into the fourth quarter with higher occupancy than the third quarter.

And so I'm struggling -- and I know, Mitch, you talked about some move-outs in the middle of the year -- but I'm really struggling to see how you go down to this -- in the lower part of the range of $0.63 to $0.65, and even how you don't get to a $0.67, $0.68 for the full year. Can you help reconcile some of these numbers?

Yes. I sure can, Michael.

I'll give you sort of our quarterly analysis, which starts in Q1 of '12, at $0.65, goes to $0.68 -- $0.65, $0.64 -- that actually produces $2.61 at a midpoint. At this juncture, we think -- aside from the absolute occupancy and the little bit of a valley that we're going to hit, and sort of average 100-basis point decline, we do have about a 3.5% same-store NOI decline.

And frankly, we've talked over the course of 2010, at that 3% to 5% range. We tightened it up. We think we're pretty accurate, insofar as how we see the world today, at about 3.5% down.

So if you aggregate all of those factors, you're coming out plus or minus a penny or two at that $2.60 midrange. Clearly, you're absolutely right, hit it right on the head, with respect to the bond deal. If we don't have to, we have plenty of line capacity, there's no necessity to go replace that $100 million in January. And we'll keep it on the line at $150 million over -- or $125 million over, plus our facility fee. We've got plenty of capacity. And we'll see how the bond market moves.

And if we do some acquisitions through the course of the year, then we can do an index-eligible bond issue at an appropriate level. Right now, nobody knows where that is. We see the same things you see.

And the latest pricing talk is -- at least for BAA2, which is our rating -- is [3] to [3.25] over the corresponding yield. Now, maybe that'll change because of the EU settlement and some stability in the world. But right now, we're not anxious to be the bellwether in the bond market.

But if you factor these things together, that's where the numbers are coming out at the moment.

But what's happening between -- this quarter, you're at $0.67; the fourth quarter, you're going to be at $0.67 -- what's happening in the first quarter to then drop down to $0.65? And in that $0.65, it sounds like you're floating the bond. So the reality is it's really a $0.03 spread, or $3 million.

I mean, that's not -- it's a big change sequentially. I can sort of get a little bit comfortable that there's some move-outs, and you want to protect yourself. And you're obviously baking in only 2.3 million square feet of leasing, even though you've been doing 1 million a quarter.

But I'm just trying to -- even the starting point seems really, really low.

Well, look, I think we've had this discussion before. We're trying to be -- we are a bit conservative, but we're trying to be accurate. We can't predict expenses. Last year, we got creamed on snow removal and energy costs because of the severity of the winter. We're trying to be a little bit conservative, but we're trying to be accurate.

So maybe you're right -- maybe it's a penny off for the quarter. You're perhaps a better predictor than we are. But that's all it is. We're not talking about orders of magnitude that are significant.

Right. And there's nothing happening in terms of the management company income, like all the construction levels or lease termination fees, or G&A, that would be widely different from what they were in '11?

No. Our run rate is about $9 million a quarter on G&A. We see that flat. We see construction -- it's not even worth talking about, the differentials there. We might make a little money, but basically it's more of a service organization.

So listen, you may be right. Maybe it's a penny or two differential, but that's all it is.

Then, what were lease termination fees in the quarter?

The lease terms in the quarter were pretty low. They were $674,000.

Okay.

Just lastly, on dispositions -- you talked a little bit about the acquisition environment and not wanting to participate effectively at those yields, and basically just stick to being a landlord. And your leverage is already extraordinarily low, and so it doesn't do anything on that point. But does it make sense to be more aggressive at selling assets and buying back your stock?

If it's your portfolio that you know the best, that you think is trading at a discount, why not just -- you certainly have a chairman that's familiar with doing leverage recaps. And why not do that? Why not pursue that sort of strategy?

Yes. Well, first of all, we're in the business of doing what we do. And we're not an arbitrage hedge fund. We're trying to be other things to other people. We're in the business of owning and managing quality real estate where we have a market presence that's meaningful and gives us a competitive advantage.

There were times a few years ago -- and I've talked about this -- where we were looking to sell, we were considering some of the flex product in South Jersey. And the prospective buyer got clipped by the avalanche or tsunami that occurred in the financial markets.

And I can tell you that largely -- I mean, I'm not talking about our peer group in the REIT industry or Canadian pension funds that hire third-party managers to buy trophy assets and manage them for them. The kind of product that we would be selling is -- the identified buyer of that kind of product would be a leveraged private operator. And that sort of leverage doesn't exist today in the banking market, or the insurance company market.

We just went through a refi of a small asset where JP Morgan is our partner. We have a minority interest in an asset, a pristine asset. And if I tell you what the banks put us through for a simple loan, the underwriting is severe, at least in -- and I'm talking for assets that are $25 million to $100 million, or $25 million to $50 million. I'm not talking about the $1 billion assets where a pension fund just writes a check, or a REIT just writes a check.

Right.

And so the execution risk in putting anything up for sale and getting it to the -- if I showed you the list of acquisitions from every market that we operate in, and from Washington, DC and the suburban markets surrounding Washington, up through the markets up in the metropolitan New York area, that have failed -- the executions have failed -- the assets have come back to market because the buyers can't get financing on them. But they're still too expensive.

So to put anything up for sale, you're taking a large risk of execution. And I don't think the timing is right. But again, I'm not buying back stock, so that's not going to happen. But I'm not averse to selling noncore assets when I think the deals can get done on a reasonable basis. And I just don't think we're there yet.

I'm just giving you a real-time example of a ridiculous exercise with a huge commercial lender with great sponsorship. But the fear of FinReg and Dodd-Frank, and everything else that's facing these banks today, for the leveraged buyer is creating, I believe, a huge obstacle. And we don't want to be in the middle of it right now.

Yes, but then you see Blackstone there -- they paid Duke $1.1 billion for an unencumbered portfolio, and they're getting $800 million of loans against it, right? So it's not -- I think there appears to be some level of lending out there that would support it. And it's just more trying to -- I know you want to be an [R], but your stocks trading at a 9% implied cap rate, if there are certain assets that you think -- and your portfolio is worth more than that, well, sell some assets, or even use your underleverage to buy back stock.

But we can save it for another day, and I'll yield the floor.

Okay. Thanks.

Jamie Feldman, Bank of America Merrill Lynch.

Given your guidance, can you talk a little bit about what it means for AFFO and then dividend coverage, both at the high end and the low end?

Yes. This year, 2011, based on what we expect to spend throughout the end of the year, we're probably plus or minus flat to slightly negative. But more or less. Not a big number one way or the other. And that's obviously always a variable.

In 2012, we expect that we could be -- if we do as much leasing to maintain the sort of occupancies that we've built into guidance, and spend all of the money and all the reserves that we're projecting -- and, chances are, we won't spend all of the credit reserves and so forth -- but if we did, we'd probably be somewhere at the current dividend level of down $25-ish million at the end of 2012. And for a $6 billion company, it's not such a serious thing.

Okay. Do you have a sense of where your board is comfortable? At what point do they start to review the dividend?

Yes, well, we talk about it at every September board meeting, third quarter. And I just had that same discussion that I've just had with you in September. So we'll talk about it next September, we'll see where it's trending. I don't think there's any issue at that level with respect to the dividend.

Okay.

Then, just a follow-up -- I just want to make sure, you said leasing spreads were minus 3.4% in the quarter, is that correct?

Yes. That's right.

Okay.

Then, I know you had said your same-store outlook for next year. But what are you thinking in terms of leasing spreads for next year?

I think that the leasing spreads -- again, there's always the anomalies in the situation. They probably would've been down close to 7%. But we had the benefit of the Wyndham transaction that particularly -- the economics of that mitigated it against some of the roll-downs. So I'm guessing that it's 6%, 7% down.

Okay.

Then, did you say for the apartment building, you think it would be about $400 million?

Phase one --

Phase one?

-- will be somewhere in that range.

Okay. Thank you.

You're welcome.

Michael Knott, Green Street Advisors.

Hey, Mitchell, just curious if you feel like the uncertainty among tenants is still as high as it had been.

Yes, I do, actually. Look, there are always exceptions to the rule. But there's still a lot of apprehension in the economy. I think that obviously, the events of the day could change attitudes a little bit.

But to be very candid with you, Michael, I think that the election is an overriding concern and issue. And unfortunately, we're not going to have clarity on that one way or the other for another year. And so I think that there will be more of a tiptoeing in terms of decision-making, as evidenced by the $1 trillion sitting on corporate balance sheets that nobody wants to put to work right now.

So I think the election is a serious concern. And I don't want to go into a diatribe about the dysfunctionality of Washington and so forth. But just have a feeling that you're not going to see widespread or wholesale expansion of businesses -- largely, in general -- until there's more of a pallette painted in terms of the political landscape and what it's going to mean towards taxes and so forth.

Certainly at this point, the investment banks and the financial institutions have stepped back a little bit. A couple of them have announced some staff reductions in investment banking. And I'm not talking about Bank of America, I'm talking about more recent announcements that impact particularly the metropolitan New York marketplace. So we'll have to see how it goes.

But because the EU seems to have settled the debt issues for the moment, the phone's not ringing with tenants that are willing to make commitments. It's going to be a slower process.

Okay.

Then, any update on some of the comments you've given in the past about making platform acquisitions, I think potentially in the DC metro area?

I'm trying to do that. And those discussions, while they're not as heated up as I would like them to be, they're still sort of on the back burner. And I think the big question is what will access to capital be, not unlike what I discussed before about the private leveraged owner/buyer. And I don't think anybody clearly wants to cede control of their company if they don't have to.

So we're still talking. But like everything else, it's moving slowly.

And then, to Michael Bilerman's question about share buybacks and your view on financing levels for prospective buyers -- do you feel like to the extent that the stock trades at a high implied cap rate that that's sort of on par with private market values, but that cap rates really are that high because of the financing issue? Or is your aversion to buybacks still kind of based on just the idea that you don't want to shrink your capital base, and you're just not interested, at any price, in the public market buyback sort of opportunity?

Well, I don't want to shrink the capital base. I mean, once you've moved in that direction, it's very hard to turn around. I think there are ephemeral events impacting the marketplace.

I could tell you that certainly the banking community at large, as evidenced by our credit facility and the rating agencies, believes that valuations are stronger than some of the recent transactions that -- somebody alluded to one of those transactions before -- Blackstone. And I don't know enough about it to comment on it.

But we clearly believe that values for the kind of real estate we own, with the quality of income that we have, and the presence and branding that we have here -- that we're underpriced and undervalued in the public market. But that doesn't mean we're going to shrink our capital base.

Thanks.

Yes.

Jim Sullivan, Cowen and Company.

I just have one quick question. And maybe I missed it earlier, but the joint venture, the residential joint venture, the land that would be contributed to that joint venture -- is that on your balance sheet currently? And does your guidance for 2012 assume the capitalization of that, and when does that begin?

Yes. The land is owned free and clear on our balance sheet. There's no effect or impact in our 2012 guidance from the residential or contemplated residential development.

So does that mean that you would not be capitalizing the value for that land, or your book on that land?

Well, first of all, we don't know at which point the project will commence, because we're going through an approval phase. And what will occur is we will get a joint venture credit for the imputation of land based on the FAR, or the developable area of each phase of development, at that $30 a square foot when we all contribute to the joint venture. But that won't happen until we get full approvals on the project.

And what would be the likelihood? What quarter would you expect, if things go according to plan, that you would get approval per phase one?

Yes, I'm hopeful that it happens in 2012. But it's clearly going to take probably towards the end of the year for that to happen based on the complexity of all the variety of approvals that are needed. It's [an] approved use, but it's just a complicated development.

Sure. Okay.

So maybe it's third quarter, sort of best case.

Okay. Thanks.

You're welcome.

Operator, are there any other questions?

Not at this time, sir.

In that event, I want to thank everybody for joining us on this earnings Conference Call today. And we look forward to seeing many of you at NAREIT, and then getting together again on the end-of-year conference call shortly thereafter.

Thank you. Have a good day.

Thank you. That will conclude today's Conference. We thank you for your participation.