Veris Residential Inc (VRE) 2011 Q4 法說會逐字稿

Good day and welcome to the Mack-Cali Realty Corporation Fourth Quarter 2011 Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Mitchell Hersh.

Thank you, operator. Good morning, everyone. And thank you for joining Mack-Cali's Fourth Quarter 2011 Earnings Conference Call and year-end 2011 call. With me today is Barry Lefkowitz, Executive Vice president and Chief Financial Officer. On a legal note, I must remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the Federal Securities Law.

Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the Company. First, I'd like to review some of our results and activities for the quarter and generally what we're seeing in our markets, then Barry will review our financial results.

As we reported this morning, generally it has been pretty much steady as she goes, which we consider in these extraordinary times to be a very good thing. FFO for the fourth quarter of 2011 was $0.68 per diluted share, and for the year ending December 31, 2011, it was $2.80 per share.

We did have an active quarter, including leasing activity of about 774,000 square feet. That included almost 250,000 square feet of new leases, and the balance renewals. Our tenant retention was about 73% of outgoing space for the quarter. We ended the quarter at 88.3% leased, up slightly from last quarter's 88.2%.

For the full year, we signed 572 transactions totaling over 4.2 million square feet, and of that 1.2 million square feet were in new leases. The 3 million square feet of renewal transactions produced a full-year tenant retention rate of 68% of outgoing space, a further testament to the fact that tenants would rather remain in place with strong landlords.

Rents rolled down in the quarter by 7.2% compared to last quarter's 3.4% roll-down. And for the year, we had a rent roll-down of 6.2%. Obviously, this fluctuates quarter to quarter, but the trend is still a challenging market. Lease rollover for 2012 are approximately 10% of base rent, or slightly in excess of $62 million. I assure you we're working very hard to accomplish renewals and new leases to deal with the lease expirations in 2012 and beyond.

Our leasing costs for the quarter were approximately $3.30 per square foot per year, down slightly from last quarter's number of $3.40. For the year 2011, our leasing costs averaged $3.80 per square foot per year. Pretty much market conditions prevailing throughout our marketplace.

Despite a challenging environment, our portfolio continues to outperform virtually every market in which we operate. With our leased rates exceeding market averages in Northern and Central New Jersey, Westchester, Washington, DC, and, of course, doing extremely well along the waterfront.

While we did anticipate a particularly challenging fourth quarter with known expirations and move-outs, we saw solid leasing activity and in fact as stated before, were able to slightly increase our occupancy rate. As far as activities for the quarter are concerned, we previously announced during the quarter that we entered into a joint venture with Ironstate Development Company to develop luxury multifamily rental towers on the Jersey City Waterfront north of Plaza 5 and Harborside.

The first phase of the project will consist of a streetscape retail level and a parking pedestal which in turn will support two high-rise towers including approximately 630 apartments in each tower. In total, we anticipate building 2500 units in four towers at Harborside in two principal phases. Of that, we currently anticipate about 21% of the units as studio apartments, 62% as one bedroom, and the balance as two bedroom.

We're very excited about this project. The project will be built on land owned by Mack-Cali within our Harborside Financial Center. We have a great partner. We're well along in the process with the city agencies, and we anticipate at present a fourth quarter 2012 ground breaking, and expect residents to take occupancy in these magnificent towers two years or sooner thereafter.

Also as previously mentioned in the quarter, we are working with a number of our land sites, repositioning one right now in Morris County, New Jersey, taking a 30-acre parcel that's zoned for office and research and converting that to big box retail. We have a signed letter of intent for a major retail tenant, finalizing the lease documents while moving forward with the planning process in what I might add is a very receptive community to see land put to work and tax rateables created.

Some notable leasing transactions that we've outlined in our quarterly filings include the following. One called Medical Link, a provider of specialty services to insurance payers renewed almost 58,000 square feet at our 20 Waterview Boulevard, Waterview Corporate Center in Parsippany, New Jersey. This is a long term lease in a building that's 226,000 square feet and now slightly in excess of 99% leased. Ipsen Group, a specialty pharmaceutical company, part of the Tercica Company signed a new lease for almost 33,000 square feet at 106 Allen Road, also known as Liberty Corporate Center in Bernards Township, New Jersey.

This 132,000 square foot building is 93.5% leased and just yesterday received Silver LEED status. So we're very proud of this asset, which we built not too many years ago. Reliant Standard Life Insurance Company signed transactions totaling 26,000 square feet at 7 Skyline Drive in Hawthorne, New York, consisting of a 19,000-square-foot renewal, and the balance in expansion. This 109,000 square-foot building located in our Mid Westchester executive park is almost 89% leased.

Oldcastle BuildingEnvelope Company, a supplier of architectural glass and aluminum glazing systems signed a new lease for the entire 33,000-square-foot 1507 Lancer Drive in our Moorestown, West Corporate Center in Moorestown, New Jersey. And finally, at 125 Broad Street, a building that is virtually full at this point, just a little bit more to go, Axa Insurance Company signed a new lease for almost 19,000 square feet. This is our Downtown Manhattan building, and the building is now about 96% leased with leases out and proposals out to fill the balance.

Moving on to financial activities, as I mentioned on our call last quarter, Mack-Cali refinanced our unsecured revolving credit facility, $600 million facility, expandable to $1 billion, a four-year facility with a one year extension option. And we did this with a group of 20 lenders. The transaction was arranged by JP Morgan Securities and Merrill Lynch, and we think the execution was impeccable and demonstrates Mack-Cali's continued confidence, or the capital market's continued confidence in our Company as illustrated by a very, very good execution on this transaction.

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

Thanks, Mitchell. For the fourth quarter of 2011, net income available to common shareholders amounted to $16.1 million, or $0.18 a share, as compared to $6.6 million or $0.09 a share for the same quarter last year. For the full year of 2011, net income available to common shareholders amounted to $69.7 million, or $0.81 a share versus $52.9 million, or $0.67 a share in 2010.

FFO for the quarter amounted to $68.1 million, or $0.68 a share versus $64.2 million, or $0.69 a share in 2010. For the full year 2011 FFO amounted to $277.4 million or $2.80 a share versus $261.3 million or $2.81 a share in '10. Other income in the quarter included approximately $596,000 in lease termination fees, as compared to $484,000 for the same quarter last year.

For the full year 2011, lease termination fees were $4.529 million versus $2.088 million for the full year of '10. Same-store net operating income which excludes these lease termination fees decreased by 4.2% on a GAAP basis and 3.2% on a cash basis for the fourth quarter. For the full year of 2011, same-store net operating income again -- which again excludes lease termination fees decreased by 3.3% on a GAAP basis and 3% on a cash basis. Our same-store portfolio was 30.8 million square feet.

Our unencumbered portfolio at year end totaled 237 properties aggregating 24.5 million square feet of space which represents 78.6% of our portfolio. At December 31st, Mack-Cali's total un-depreciated book assets equaled $5.7 billion, and our debt to un-depreciated asset ratio was 33.6%. For the fourth quarter of 2011 we had interest coverage of 3.1 times and fixed charge coverage of 3 times. For the full-year 2011 we had interest coverage of 3.2 times and fixed charge coverage of 3.1 times. We ended the year with approximately $1.9 billion in debt, which had a weighted average interest rate of 6.46%.

Currently, we have $200 million outstanding on our $600 million revolving credit facility. We have reaffirmed our FFO guidance for 2012 in the range of $2.50 to $2.70 per share. The midpoint assumes leasing starts of 2.2 million square feet versus scheduled expirations of 2.5 million square feet. End of year 2012 occupancy, about 1% below December 31, 2011 level.

Maturing debt is paid by drawing on our credit line. No acquisitions are assumed, and development in the model includes continued construction of phase 2 headquarters for Wyndham Worldwide in Parsippany, New Jersey which is expected to come on line in the first half of 2013, and the fourth quarter 2012 ground breaking for our multifamily joint venture on the Jersey City Waterfront.

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

Thank you. In closing, I would just like to say that clearly we're committed to our tenants. We are committed to our premier assets that we believe are exceptionally well located and exceptionally well maintained with capital reinvestment. We have a team of outstanding professionals within the organization.

Our property management teams are exceptional. We have strong tenant relationships, and the financial strength to deliver on all of our commitments and to take advantage of opportunities such as those that we've discussed in this call. We will continue to work very hard to lease up our buildings and to maintain occupancy at the highest levels with the highest quality tenants that we can. And with that, we'll take your questions. Operator.

John Guinee with Stifel.

Hello. Two questions, Mitchell. First, essentially you guys are very reluctant to acquire, very reluctant to dispose, clearly just running the core portfolio, and on a normalized basis it was $2.80 FFO in 2010, $2.70 in 2011, midpoint is $2.60 for 2012. Couple questions. So why the reluctance to actively recycle the portfolio? And then two, where do you see the conditions such that this $0.10 a share the decrease in FFO subsides?

Well, John, I guess if you want to sell your portfolio or parts of your portfolio for land cost, you can do that, and some other companies are doing that for various strategic reasons. I can't imagine that there are economic reasons to take such significant book losses on your portfolio. You're seeing deals busted every day that you pick up a real-estate rag or The Wall Street Journal, because leverage is so difficult to acquire in this market, and underwriting standards so strict. And on top of all that you have significant equity requirements for both the acquisition and the leasing costs. So it isn't so easy to get a good execution on selling what you deem to be the saleable part of a portfolio. As I imagine you would consider it. So that's number one.

Number two, with regard to the earnings situation, this economy has gone through the greatest recession since the depression. There are a few markets in the industry, in some coastal more urbanized centers that are doing a little better, not nearly as well perhaps as perception would hold. I know you hold very high perception of some of those, because I've seen all your notes talking about it. And at some point, there will be a point of inflection, and those landlords that are well capitalized with a strong franchise and market recognition, the ability to acquire even if it's through the form of debt and other means, and reposition assets and in some cases, change them, change their use. But at some point there will be an economic inflection point where the trajectory will turn positive, or this country has a lot bigger problems than our $0.10 a share in earnings. And when that happens, that positive trajectory, our financial and human capital strength will propel this Company forward.

So, we don't take a short term view, and we don't take a fatalistic view, as you're suggesting. And we're going to look to the future, utilize our land, utilize our asset base, and utilize our resources to regain some of the lost ground and then to grow well beyond that in the future. So I hope that answers your question, John.

Okay. And then just a follow-up. I'm just running through, and as you know, my concern with your portfolio is once these big tenants vacate, it's just tough to back-fill them in this environment with sort of a shift in tenants and employer's desires. Can you kind of walk through Prentice Hall, Toys "R" Us, Credit Suisse, AT&T --

You know John --

(multiple speakers) on up. Kind of what you expect with these near-term expirations.

You know something, John, I'm not going to do that. If you want to call back, we can have a discussion about those. I know you've had several discussions with my organization about those expirations. This is a tough business right now. And states and other jurisdictions are throwing money in the form of corporate welfare to try to attract and retain employees in their jurisdiction. So in a couple of cases, we're getting tagged a little bit with that.

I don't know if you're playing an I got you game here, but we know what the challenges are in front of us and we're up for the task. If we have to hold some vacancy for awhile, if we have to turn a small office building into something else because it makes more sense, we're going to do that, and we have the economic resources and the vertically integrated talent team to accomplish it. So, I'm not going to belabor the call with all the negativity that you want to pervade here today. We'll do what we have to do. And if you'd like to call back and have a discussion about those specific transactions, I'm happy to do it with you.

Okay. Maybe late in the day. Thanks.

Sheila McGrath with KBW Investments.

Yes, Mitch could you just remind us on the 2012 expirations what you had in the guidance? I think you did -- you or Barry did outline that before.

We had about 2.5 million feet of expirations and we had 2.2 million of starts.

And then I'm wondering what your thoughts are on potentially tapping the unsecured debt market and given where things stand today, where do you think pricing on a 10-year money might be for Mack-Cali?

It appears that the markets, the spreads have tightened nicely. The 10-year -- remember, just sort of as a preface, that as a rated credit in the unsecured markets, there's an index eligibility factor which means that you should be doing a quarter of a billion dollar minimum size execution. So, today we're drawing $200 million on the line. We have no maturities looming in front of us. We have another $100 million at the end of the year in unsecured, but we are doing some other things that might make it more logical for us to consider some sort of an execution in the public debt markets.

So, we think that a 10-year piece of paper right now, which is the question you asked, would be somewhere in the $4.3 million, $4.4 million all-in cost, or all-in coupon in today's market, and a five-year deal would be somewhere around $3.75 million in today's market, or lower. We're looking at all of that. The 10-year has probably come in by a full percentage point over the last two months or so in terms of the spread compressing.

Yes. No it's compelling. Last quick question. I know it is a small interest for you but I'm just wondering if you had any update thoughts on your Boston joint venture now that Millennium, it was in the paper that they're going to be involved?

Right. Although we still have some paperwork to execute, but given the fact that somebody released it to the press the other day, we're in the process of redeeming our interest, selling our interest with our partner JP Morgan back to Vornado. And I think that was -- if it wasn't reflected in that article, that's what's in process and part of what's happening now.

Okay. Thank you.

Jordan Sadler with Keybanc Capital Markets.

Good morning. I just wanted to run through, Mitch, you started to describe the multifamily development with a little bit more detail. Did you say ultimately it's expected to be 2500 units?

Yes. It's been a little bit of a moving target. We have been refining the design, and we have also brought in -- let me just say it's a very interesting concept. But total, it's about 2500.

Okay. And it'll be all for rent?

Yes.

Okay. And what's the total expected cost, and is the relationship in terms of economics the same on the new bigger planned project?

Yes the -- our partner is 15% of the deal. There is a very, very slight promote after achieving certain very significant returns to the joint venture. We're sharing in fees in terms of development and management. All of the pre development expenses are being paid by our partner as part of the transaction, and the total square footage is not really changing. The number of units has increased due to the efficiency that we have created in the design, teaming up our architect who is based here in the United States, with our consulting architect who is based in Amsterdam. We think we'll have the most unique product in the marketplace.

It seems like it's heavily weighted toward studios and one-bedrooms. With no three-bedrooms. Is that a decision based on sort of the availability in that market, or just sort of where the expected demand is coming from?

We believe that the demand, as demonstrated on an empirical basis, is clearly in the -- it's a level of affordability. And we've already talked about the projection for $40 rents based on the marketplace today, and that's what we've pro forma'd. We really haven't factored in or modeled in rent increases. The marketplace, first of all, it's primarily the upwardly mobile, young professionals and the emerging activity that's occurring in the economy with respect to publishing and media and some of the things taking up some of the slack in financial services. But most of these apartment dwellers who in part are reluctant to buy homes, the household formation is forming later as a result of the economic downturn and pressure that we've had, and they look at absolute cost. If, you know $3,500 a month, $4,000 a month.

That's really how the marketplace has evolved. And the more efficient, better organized design for the smaller units, the 600 to 1,000 square foot type units presents a much more affordable opportunity for the marketplace and the demand that's there today. The two-bedroom, there are some family -- some family formation, and so you have some level of two-bedroom. Beyond that you just wouldn't build a three-bedroom apartment in that marketplace. It's not affordable, and there's no demand for it.

The -- I assume you'd need to build more parking if you're doing more units, or is that --?

The parking -- first of all, the ratio, the maximum is a half a car per thousand. And so that's number one. And all of these communities, particularly the Waterfront communities, don't encourage parking because of the availability of mass and public transportation. But we have plenty of parking given our office product and some of our residual land inventory, and we're also looking at some new technologies which we haven't necessarily decided upon. But some of the parking systems that are available today with much an improved technology.

Right, right, okay. The total cost, though, is still expected to be in the $400 million range? Or I would imagine it would need to go up a bit.

No. We don't anticipate that it is going to go up a bit. That was for the first phase. Ultimately -- it's ultimately potentially a $1 billion dollar project, if everything gets built out.

Right. Okay. Thanks, Mitch.

Joshua Attie with Citi.

Hello thanks. Mitch, can you elaborate on something you touched on earlier in your prepared remarks, opportunities to put more of your land sites to work?

We are -- I mentioned a retail repositioning that we're doing at the present time. We are at early stages of looking at similar opportunities in a couple of our other land positions. And then, of course, you have the multifamily residential, which I would consider to be a significant use of existing owned land inventory in a very efficient way.

So, is the retail a new development that would be built on land that you own, or it's part of an existing building?

No, it's raw land, and it would be in the form of ground leases where we would just be delivering a pad.

And can you give us a sense of, you know, the size, either the size of the project or how much land would you contribute?

No, at this point, I mentioned it's a 30-acre site that we're involved with right now, and we have a letter of intent with a major retailer and we expect that it will be a very nice return to us in the form of ground rent, but that's really all I'm prepared to say.

Okay, and if I could ask one more question, I think in the Q and A earlier, you had mentioned potentially redeveloping some of your office assets for a higher and better use if large tenants were to move out. Can you talk a little bit more about that?

No. It's just a consideration at this point where we have a couple of assets that may have better opportunities and higher economic opportunities and yields to be repositioned given the change in some of the demographics. But, no, I'm not prepared to talk specifically.

You mean repositioned as office or repositioned as other property types?

Repositioned as either, given some of the trends that are emerging.

Okay, thank you.

Michael Knott with Green Street Advisors.

Good morning, this is actually David [Anakin]. Just a quick question for you on 10 Exchange Place. I would be interested to see if you guys looked at that and your thoughts on how the pricing there, I believe it was $3.80 a foot, compared to where some of your assets would trade.

Yes. Of course we looked at it. It's right next-door to our Hyatt and to our Harborside complex. You know, it's a nice building. It's a little bit older vintage. It was a mid '80s building. And -- but clearly a nice asset. And it has -- when we underwrote it, it has a very significant component of what I affectionately refer to as zombie space. Where big banks have leases and they don't have people. And so we had a real concern with respect to rollover, and leasing costs and leasing probabilities with respect to some of that space over the next couple of years. Given that with the pricing level, we thought that we could make a lot more money by, for example, doing our residential development right nearby, and right along the light rail. And so that's what we focused on.

With respect to the valuation, I would tell you that, give or take 10%, well, you know, adding more or less 10% to that number, that per square foot number that you recited, we could build brand-new product at half a block away from that on land that we've preserved that's not going to be converted to residential. In our Plaza 4 building, which would be that 1.2 million square feet, plus or minus, and big floor plates, trading floors if necessary, which that building doesn't have, 10 Exchange doesn't have, and all of the accoutrements of brand new sustainable and grain development. Which is hard for a 30 year old building to adapt to in some instances. So we think that the pricing clearly justifies and kind of validates the value, if you will, of what we own down on the Waterfront.

You remember it wasn't too many years ago that we bought a magnificent building that I consider to be certainly among the top couple in the entire Waterfront area, and that's 101 Hudson. And we paid $262 a foot for that building. So, the fact that new construction is roughly $400 million, and that's what they paid for this building, certainly, in my view, validates the value of what we own down in Harborside and 101 Hudson.

Great. Thank you. And just another follow-up question on downtown. Just looking at the lease economics for the deal that you did down there, just kind of the math works out to maybe CapEx per foot per year that's about 20% of the base rent that you're getting there. Still -- how is that market looking? I know you're 96% leased, but is your sentiment overall that there's still an anchor on rent, on coming supply on the west side? Or is there -- is that pretty much market what you just signed this lease at? And has that moved from where it was before? Can you just give some overall color on where that market is?

You know the demand on the east side has increased, and if you look at our tenant roster between Axa, Connecta, CAN, General Ray, Iavi, Hershfield Ruben, I mean we have an exceptional roster of tenants that we have been able to have support our income stream at 125. The market -- the general rents haven't really changed, and, you know, one would think to some extent it's a function of supply and demand. There's been consolidation among some of these larger users into our building. We have been able to diminish the capital requirements by approximately $20 a square foot in the last few deals that will fill out the remainder of 125. And so we're looking at $80-ish dollar packages versus what not too long ago was a $100 package. And so I think we'll be done. The rents still kind of hovered in that high $30's range, with reasonable increases over 15 or in some cases 17-year leases.

As far as the west side, clearly the jury is not out yet. The asking prices for those assets, and the new construction is very high, and certainly I don't want to pile on to all the negative publicity concerning the cost of the trade center, but just the other day I had a meeting with the head of facilities for one of the largest banks in the city, in the metropolitan area, but headquartered in the cities. Looked at those assets and don't feel that the infrastructure is as full as they would have anticipated. So, I don't know. There's a lot of space that's coming available down on the west side, and there's a lot of new inventory. But I guess the good thing is that across the river at Jersey City and Harborside and 101 Hudson, to the extent that we have any availability, we're a much more affordable alternative to the west side, and on the east side we'll be full.

Great. Thank you for that color.

Jamie Feldman with Bank of America Merrill Lynch.

Great. Thank you. Could we just go back to the residential development for a second? I guess the first question is, you chose Ironstate. How did you come about choosing them as a partner?

Well, like you would any partner. You know them, you get to know them, you kind of validate and verify each other's reputation, their success in the marketplace, how people are held in regard and how they're respected in the communities in which they do business, both with the governmental agencies, with the tenants that they serve. And the financial community, and some of the professional community that work very closely with the development groups. And so that's the qualitative aspect of -- and the quantitative, from the perspective of choosing a partner that has significant financial resources. And all of that went into the compound that created the partnership. Does that answer it for you, Jamie?

I guess more just what was it that you liked about Ironstate when you were assessing all those qualities?

They're not institutional, they're creative, they have done some fabulous creative work in residential development, in hotel development. They own the W down in Hoboken. They own Pier Village in Long Branch, New Jersey, which was a diversification for them. They know -- the creativity versus the institutional mind-set was a significant factor. I think that -- how do you distinguish yourself in the marketplace? What kind of product do you want to bring to the market? Just another cookie cutter, or do you want to do something different, yet cost efficient. And there was nobody that impressed me with -- and I'm not saying that in any denigrating or derogatory way to anybody else who's in the business of multifamily residential, but that aspect of these people as well as their character impressed me enough to join forces here to build this fabulous project.

Okay. Thanks. And then as we're thinking about, now that you have an agreement in place, can you talk a little bit more about the actual numbers? Like what you expect to --.

No, I think we'd be prepared next quarter to talk more about specifics and actual numbers.

Okay. And then what about just ball park like what kind of yields you think you'd be willing to do? I'm just trying to think about that versus what you can get in other areas.

We are very optimistic that our yield on this will be plus or minus 7%, on an un-leveraged basis.

Year one?

After the staple -- year one it will stabilize.

Okay. And then back to a comment you made before, which was -- Mack-Cali is kind of positioned with a good balance sheet and when the recovery comes you guys will be in a good spot. Where do you think we are in that cycle? I mean what do you -- based off one quarter and conversations you're having with your tenants and just how does the mood feel versus earlier this year, or earlier last year and what's making you feel good, what's making you feel bad about where we are in the cycle?

I think where we are in the cycle is there's still extreme apprehension and tenuous behavior among corporate and business decision makers. I think there has been very little in the way of workforce expansion in permanent high-end jobs, although anecdotally there's a little more evidence of it these days. I think the election will play a pivotal part in the mood and the atmosphere and the certainty and finality of whatever decisions are made next November. I know that's a long way away, and nobody feels that more than we. But I don't think you will see major business expansion take hold until they know who's going to be -- everybody understands who's going to be occupying the White House. And whether we're going to continue to have gridlock in Congress because of entitlement programs and so forth.

I can tell you that I talk with companies that, like yours, that have not invested in technology in many years, and they need to. And -- but there's a reluctance to expend capital until there's a clearer picture of what's happening in the economy. And so I think largely we probably have kind of we're in this valley right now. We're rolling at the point of stability. But I think acceleration is going to be based on all of the above, the things that I've just said. And then you'll see spending. I think clearly some of the technology companies that -- the Facebooks, the Googles, it's hard to understand how they make money sometimes, but they're adding employment and hopefully that will continue. And many of those companies have indicated that they wish to expand in this part of the country, including discussions about Amazon coming into New Jersey in a big way, if they can work out the sales tax issues. There are lots of those discussions happening, but there's also an apprehension.

You do have the overhang of the EU situation. And clearly I think at least most economists believe that the European economy in general is going to fall into recession if it's not already there. Although, you talk to people who go to Europe, and it kind of belies that fact given some of the area where construction and development is occurring. But assuming that we don't have too severe an impact from the European Union situation and overhang. Which, remember now it's not -- Europe uses goods and products like everyplace else, and they buy technology. And a lot of that technology is from domestic United States. It's not from Bangladore and Mumbai. That's where they put people; it's not where they buy product.

So, it could have an impact and could slow down the economic recovery in the United States. That's an unknown. But in my opinion, the election is also very, very prominent in the thinking of business leaders and what they want to do in terms of expanding their headcount. Which, of course, is the largest component of overhead.

And then on a similar question though, thinking about New Jersey specifically and the risk to Christie maybe having higher aspirations, has the mood changed there also? Talking to brokers, people are getting more and more excited about what could change in New Jersey. Has that slowed down? And is that needing just a headcount?

Look, I think the leasing velocity that has -- there's a little higher velocity, there's a little more action. It hasn't translated into positive rate pressure at this point, but I think the perception and view of Christie and the administration is positive. Look, some of the decisions they've made have been to our detriment, like the Pearson situation. But in general I think that it's viewed as a much more proactive administration. He has raised the issue now of lowering the income tax rates, which on a personal basis and on a sub chapter S corporation and LLC basis drill down through business, through the business community, because of the method of taxation on a personal basis. And that's been very well received. There have been all kinds of comparisons about tax load and tax burden on states and where companies want to deploy work forces because of that. So I think that he's improved the tone and sentiment of New Jersey. No question we have a long way to go. But so does most everyplace else right now.

Okay. One last final question. You're looking at this residential development, or you've got this contract for residential development. You're talking about doing some higher and better use to retail. Is this a sign that maybe going forward we could see Mack-Cali become more of a diversified reed rather than just suburban office and office focused?

Yes.

Do you have a sense of what the opportunity set is to transform the portfolio?

Too early, but I can just kind of put in perspective a $1 billion project, and now admittedly, over a number of years in Jersey City, you look at a company that's $6 billion or $7 billion, that's a pretty good chunk.

Right. But I guess beyond what's in the pipeline now.

Well, I guess what I'm trying to say is that we have complete confidence in our ability to enter into diversified product within doing it the right way, executing with, if necessary, the right partners to further diversify the portfolio. All I'm trying to illustrate is that, the project in and of itself could be 20% of what the company is today. So if you can -- if we can think and extend that thinking out to a growing company, a substantial part of the income stream could be in diversified product in the future.

Right. And then so do you think as you enter into new types of properties, or new sectors would that take you outside your current geographic focus?

No. I think that given our footprint from the Mid-Atlantic region up to the northeast, there's plenty of opportunity.

All right, thank you.

Sloan Bohlen with Goldman Sachs.

Hello. Good morning. I just have a question on lease expirations versus new starts for next year. You mentioned 2.5 million square feet. Do you guys have a view of what you think the retention on that 2.5 million square feet is going to be? Just trying to get a sense of how much is renewal versus how much is new leasing.

Of the 2.5 million, approximately 1.5 million is out the door.

Okay. Is there a timing over the course of a year that we should expect? Or is there --

You know it's weighted more to the end of the year, on the larger expirations.

Okay. And the prospects, or say the mark to market on that 1.5 million square feet, do you guys have a sense for that?

I believe that -- this is a hard number, because it's in such diversified product throughout the portfolio, diversified markets, et cetera. But 10%, 10%, 12% would be my guess.

Okay. And then just one quick question on the real estate taxes picked up in the quarter. I just wanted to get a sense of is that a good run rate from the fourth quarter going forward or was there something unique in this particular quarter?

No, we had the one sort of gain that we had on some tax tertiary appeals but I don't -- what you're looking at is we think a pretty good run rate going forward.

Okay. All right. Thank you guys.

And at this time there are no further questions. I'd like to turn it back to our speakers for any additional or closing remarks.

Well I want to thank all of you for joining us today. We look forward to continuing to update you on some of the exciting activities that we talked about, and we'll look forward to seeing many of you at the various industry functions and then meeting again on next quarter's call. Thank you, and have a good day.

And this concludes today's conference. We do thank you for your participation.