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Mack-Cali Realty Corporation (NYSE:CLI)

Q3 2008 Earnings Call

October 30, 2008 10:00 am

Executives

Mitchell Hersh - CEO and Director

Michael Grossman - EVP

Barry Lefkowitz - EVP, CFO

Analysts

Jordan Sadler - KeyBanc Capital Markets

Michael Bilerman - Citi

Sloan Bohlen - Goldman Sachs

Mitch Germain - Banc of America

Sheila McGrath - Keefe, Bruyette & Woods

John Pierce - UBS

Chris Haley - Wachovia

Nick Piersos - McCleary

Operator

Good day, everyone, and welcome to the Mack-Cali Realty Corporation third quarter 2008 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.

Mitchell Hersh

Good morning and thank you for joining Mack-Cali's third quarter 2008 earnings conference call. With me today are Barry Leftovitz, 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 seeing in our markets, then Barry will review our financial results and Mike will give you an update of our leasing results.

FFO for the third quarter 2008 came in at $1.02 per share. As compared to $0.93 per share for the third quarter of 2007. Considering the overall economic conditions, I'm pleased to report that we had a solid quarter with some significant leasing accomplishments.

We had over 1.1 million square feet of lease transactions and our portfolio ended the quarter at 91.8% leased, slightly down from last quarter's 92.3%. Rents had a slight roll down this quarter by 1.8%, compared to last quarter's 6.5% roll up. The roll downs were throughout many of our markets, and largely based on a number of strategic transactions.

Similarly our leasing costs rose slightly this quarter, with TIs and commissions for the quarter at $3.46 per square foot per year, compared to last quarter's $2.86 per square foot per year but again, largely due to a number of strategic transactions in our Morris County and Hudson County marketplace.

For the remainder of 2008, we face lease rollovers that are quite manageable. They comprise only 1.2% of the base rent of the company, or just under $7 million, and in 2009, our lease rollovers constitute 7.4% of our base rent. So we have very manageable lease rollovers over the next few years.

Unfortunately as I've stated on prior calls, we don't believe we've seen the worst of the economic conditions, and so we expect that our markets will remain very challenging and the economics of lease transactions will remain very competitive.

We certainly will continue to concentrate our efforts on keeping our properties well-leased, and certainly our tenant retention rates of over 72%, demonstrate that.

Our portfolio continues to outperform most of the markets where we operate, with leased rates exceeding market averages in Northern and Central New Jersey, Westchester, suburban Philadelphia and Washington, D.C., as well as downtown Manhattan.

Nevertheless, despite our outperform acne there is a great deal of uncertainty in the business sector as we all know. Tenants are simply reluctant to make long-term strategic office space commitments because they don't know what their employment picture will look in the ensuing years, and so more clarity is required in the economy.

With that being said, we're pleased that even in these most-challenging times and markets we have maintained our competitive advantage and our market leadership. As you may have noted from this morning's earnings release, we have some especially good news to report which further solidifies our balance sheet and financial strength.

The Company just two days ago closed on a $240 million mortgage financing from Northwestern Mutual Life Insurance Company and New York Life Insurance in partnership on our Harbor Side Financial Center Plaza Five property in Jersey City.

The proceeds of this loan, again $240 million, have been used to pay down outstanding borrowings on our unsecured credit facility, and essentially what's occurred is that this financing repays our maturing $300 million senior unsecured bond which matures in March of 2009.

Today our outstanding line balance is roughly $95 million on a $775 million unsecured revolving credit facility that doesn't expire until effectively June of 2012 with extensions and in addition to that credit facility we have a $75 million overnight note program. And so the company has ample liquidity and even wit this secured financing, our unencumbered asset pools remains at almost 85%. And so we have access to additional secured financings for further liquidity in the future.

Looking back at some of our notable leasing transactions during the quarter, first and foremost Arch Insurance Company a division of Arch Capital Group, a provider of property casualty and specialty insurance, signed a new 15-year and six month lease for almost 107,000 square feet at our Harbor Side Financial Center Plaza 3 in Jersey City.

In suburban Philadelphia Keystone Mercy Health Plan and Amerihealth Mercy Health Plan, providers of personal insurance coverage, signed five-year lease extensions totaling over 303,000 square feet at our Airport Business Center in Lester, Pennsylvania. This transaction extended their leases through April of 2020.

We also signed a renewal of 52,000 square feet at Strawbridge Drive in Morristown with defense contactor Lockhead Martin Corporation. Strawbridge is a 74,000 square foot building that's almost 99% leased, and it's in Morristown Corporate Center.

DAB Robbins North America, national insurance and risk management service, signed approximately 58,000 square feet, a renewal for 10 years, at our 9 Campus Drive, at our Mack-Cali Business Campus in Parsippany, New Jersey. This 156,000 square foot office building is now approximately 94% leased.

In addition to this leasing news we have some other positive news to highlight. Mack-Cali continues to be recognized for our expertise in property management and tenant service. I am pleased to tell you that just this evening Mack-Cali Soundview Plaza in Stanford Connecticut will be receiving the office building of the year, the TOBE award, from the Connecticut chapter of BOMA.

For Gatehole Drive, located in our Mack-Cali Business Campus in Parsippany, New Jersey, has earned the United States Environmental Protection Agency's prestigious Energy Star award, a national symbol for superior energy efficiency and environmental protection. Our property management teams are currently working to achieve this important designation so vital to our nation and additional buildings throughout our portfolio.

With respect to our 2009 guidance noted in this morning's press release, you'll not that our 2009 mid-range of $3.35 is approximately 3.7% below our midrange 2008 guidance, which was $3.48 cents when first provided a year ago.

Of course, this reflects our conservative view of perhaps slight occupancy loss in our portfolio through the difficult climate in 2009 and certainly doesn't account for any special non-recurring items which resulted, frankly, in $0.21 per share in earnings in 2008, based on the latest release and guidance set forth today.

And so as has been our practice we maintain a conservative posture and a careful and disciplined posture in both our assessment of the marketplace and our assessment of the earnings stream. Now I'll turn the call over to Barry, who will review our financial results for the quarter.

Barry Lefkowitz

Thanks, Mitchell. Net income available of common shareholder for the third quarter of 2008 was $22.6 million or $0.34 a share, versus $23 million a year earlier and $0.34 a share. For the nine months ended September 30th, 2008, net income available of common shareholders amounted to $55.9 million or $0.85 a share as compared to $92.6 million or $1.38 a share for last year.

FFO available to common shareholders for the quarter amounted to $82.1 million or $1.02 a share, versus $77.5 million or $0.93 a share in '07. For the nine months ended September 30th, 2008, FFO available to common shareholders was $228.2 million or $2.83 a share versus $220.9 million or $2.67 a share in '07.

Other income in the quarter included approximately $8.2 million of lease termination fees. Third quarter last year had lease termination fees of about $8.5 million. For the nine months of this year, termination fees totaled approximately $9 million as compared to $9.5 million in '07.

Same store net operating income which excludes lease termination fees, increased by 0.6% for the third quarter of '08. On a GAAP basis and for the nine months increased by 0.5%. Same store net operating income on a cash basis increased by 0.1% for the third quarter of '08 and for the nine months increased by 1.5%.

Our same-store portfolio for the third quarter was 29.2 million square feet and our same-store portfolio for the nine months of '08 was 28.5 million square feet. Our unencumbered property pool at quarter end totaled 239 properties aggregating 25.8 million square feet of space, which represented at that time about 88.3% of our portfolio.

As Mitchell mentioned earlier, we just completed a $240 million mortgage financing secured by our Harbor Side Plaza 5 property. The financing, which was provided by Northwest Mutual and New York Life as calendars has a term of ten years with 30-year amortization and bears interest at 6.8%. The proceeds of the loan were used to reduce outstanding borrowings under our $775 million unsecured credit facility, bringing the current outstanding under the facility to 95 million.

After the mortgage financing, our unencumbered property portfolio now totals 238 properties, aggregating 24.8 million square feet of space, which represents 84.9% of our portfolio. At quarter end Mack-Cali's total undepreciated book assets equaled $5.5 billion and our debt to undepreciated assets ratio was 40.6%.

The Company had interest coverage of 3.6 times and fixed charge coverage of 3.1 times for the third quarter and interest coverage of 3.4 times and fixed charge coverage of 2.9 times for the nine months ended September 30th of '08.

We ended the quarter with total debt of approximately $2.2 billion which had a weighted average interest rate of 5.78%. We are providing 2009 FFO guidance for the first time. Our 2009 FFO guidance range of 325 to 345 of FFO per share assumes at the midpoint leasing starts of about a million square feet for the year versus scheduled lease expirations of about 1.9 million square feet. End of the year occupancy for 2009 about 2% the 9/30/08 levels and we also included a reserve of approximately $3 million for the uncertainty regarding the Lehman Brothers space in Georgia City.

Please not 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-calie.com are our supplemental package and earnings release which include the information required by regulations G as well as our 10Q. Now Mike will cover our leasing activity. Mike?

Michael Grossman

Thanks, Barry. In the third quarter, we signed 118 transactions totaling 1.1 million square feet. Quarter-to-quarter decrease of 50 basis points in our space leased was primarily the result of a few large block expirations in our suburban Philadelphia, Maryland and Westchester County properties, combined with a decrease in new and expansion space transactions as compared to our two-year average.

Our New Jersey and remaining suburban portfolios held occupancy this quarter. Leasing costs of $3.46 per square foot per year of lease term reelect a number of strategic transactions. Lower costs in the first half of the year bring our year-to-date average down to just over $3 per square feet. Our rent roll down of 1.8% can be attributed this quarter more to the makeup of our outgoing space than to changing market conditions.

A few of our larger transactions absorbed space that had in place rents above market. Without these deal, the mark to market was effectively flat and in line with our more recent results. Going into the fourth quarter, tenants representing 7.4% of our base rent are expiring next year. We are actively addressing our rollover has served us well and bolstered our portfolio against current market conditions.

Our major markets are showing mostly modest vacancy increases in the third quarter. Direct asking rents have remained flat or increased slightly year-to-year, but we expect they may be coming down as we move through the cycle.

The public space has yet to become the major factor it was at the beginning of the decade. With the exception of northern New Jersey, Manhattan and Washington, D.C., sublease space availability has dropped in all the markets since this time last year.

Despite the fears of a slowing economy and increased delays in securing lease commitments, our leasing teams remained focused and on task with keeping our buildings while occupied. Mack-Cali's dominant market presence and attractive well-located buildings coupled with the depth of our experience in our leasing groups provide and edge that will allow us to continue to outperform our market. Mitch?

Mitchell Hersh

Thank you. In closing, I'd like to offer a few additional thoughts. I think it merits revisiting what I've said in our recent conference calls. You've heard me loud and clear to say that Mack-Cali certainly has sufficient resources to pursue new opportunities and new acquisitions.

However, we didn't like what was happening in the financial markets; we didn't think that the deal opportunities that we're coming to market with the pro forma estimations of rent growth made sense for us to pursue ad we weren't anxious to spend capital just for the sake of growing our portfolio.

Certainly the extraordinary events of the past several months have made us very satisfied that we were right in staying so focused and so disciplined. We are positioned today with a very diverse group of properties, a portfolio with higher occupancy than our peers and with comfortable lease terms.

We are not highly leveraged like some of our brethren in the commercial real estate industry and in fact we estimate completing 2008 based on our CAD calculations with approximately $11 million in free-cash-flow. And so we're in a particularly enviable position.

At some point we'll see growth in the economy, we'll see a rise in consumer and corporate confidence, less fear in the marketplace and once again we will see job growth. At that point this company, Mack-Cali, will be poised to take advantage of opportunities in the marketplace. But until then we will remain very cautious, very disciplined and very liquid. Thank you and we'll now take your questions. Operator?

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) We'll take our first question from Jordan Sadler of KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Good morning, Mitch.

Mitchell Hersh

Morning.

Jordan Sadler - KeyBanc Capital Markets

Just a quick question on positioning this time versus last time. I'm just curious how you feel your portfolio will perform in the downturn that's in front of us versus maybe where you were last go round.

Mitchell Hersh

Well, when you say last go around, are we talking about the 9/11 period?

Jordan Sadler - KeyBanc Capital Markets

Yes.

Mitchell Hersh

Yes. I think that we have an extremely diverse composition within our tenant base and that speaks for itself in our supplemental, you can see the diversity throughout. So, I believe that that diversity and the cash flows that result from it, put us in a stronger position, quite frankly, than what we've seen previously.

The situation with Lehman Brothers, of course, was distressing from many points of view throughout the global economy, not only at Mack-Cali, but certainly we expect a little bit of pain from that, but, fortunately the government, for right or for wrong in terms of overall strategy and the way they may be implementing the tarp, has stepped in, in a variety of different ways now to try to stabilize the financial marketplace.

And, so I think that while we haven't probably even broached the recessionary period that's going to occur as a result of many, many different factors, our portfolio will perform well. I do expect that it will be relatively static in terms of occupancy, as I said, perhaps a slight downturn, nothing material.

We think that, generally speaking, we have limited credit risk. You know, again, who would have ever thought, with regard to the Lehman Brothers, but I would venture or estimate at this point that we think our credit risk is limited.

And, so if I were to stack side by side the portfolio now versus in 2001, and remembering that we recycled $1 billion worth of capital and moved 4 to 5 million square feet out of relatively thin weaker markets in the southwestern part of the United States into a much deeper macro economy, I think this time we stack up better and our balance sheet is certainly stronger, in my opinion and our liquidity is greater than it was in that period of time.

Jordan Sadler - KeyBanc Capital Markets

And, as it relates to Lehman, the reserve, it sounds like you took this year, Barry, for next year rather, was three million bucks, and I'm curious how that stacks up versus their -- in the supplemental it says you got about 6 million, or doubled that exposure.

Mitchell Hersh

I can address that. Lehman leases from us 207,000 square feet at 101 Hudson, however about 144,000 square feet of that demised premise is sublet on a long-term basis to a variety of tenants that entered into attornment agreements with us as the landlord, at the time of the subleasing. So, our net exposure to Lehman Brothers is 134,000 square feet, which on an annualized rent basis is $3.4 million, or approximately $0.04 a share.

At this point, Lehman Brothers or through Barclay's, is paying all of its obligations, has not rejected or taken any action with respect to the lease, the 134,000 square feet, and frankly has just sought bankruptcy court approval to extend the notice date, or the decision date, on all executory contracts, of which leases are a part.

So, it's unclear to us what the actual picture is. Both the when, how much and what will happen on that roughly $3.4 million per annum exposure. So, that's exactly where we are with the Lehman situation.

Jordan Sadler - KeyBanc Capital Markets

And, to the extent that you had to release this space in Jersey City.

Mitchell Hersh

Well, fortunately, I would tell you that the only good fortune is that Jersey City remains probably among the most active markets in the metropolitan area for all the obvious reasons that we've talked ad infinitum about on these calls, in terms of infrastructure, transportation.

And 101 Hudson happens to be, along with some of our new recent development product, like Plaza 5 at Harborside, among the finest assets that there are. And, so, of all markets if I had to take the infliction of pain that's where I would want to take it and that's the building that I would want to take it in. So, we're optimistic, but at this point, as I said, the lease is in full force and effect and all financial obligations are current.

Jordan Sadler - KeyBanc Capital Markets

Any other financial services exposure in Jersey City that you feel is at risk, either because of roll of --

Mitchell Hersh

Well, I haven't talked to Henry Paulson lately, or Dr. Bernake, but I would think at this point that of all the majors, which constitute the primaries tenancy within our portfolio, particularly at the Waterfront, that they're all, hopefully, fall in the category of too big to fail, in accordance with policies laid out by the Treasury and the Fed. So, we're as sanguine as you can be in what is clearly an economic and financial tsunami.

Jordan Sadler - KeyBanc Capital Markets

And, finally, on Citigroup's upcoming role downtown.

Mitchell Hersh

We've retained the services, we're finalizing an agency agreement with a brokerage firm who has vast success, both with us in Jersey City and downtown, and we're marketing under a major marketing effort that space.

I guess the market certainly will be competitive, but there are not a lot of large blocks of space downtown, and certainly not in a class A building, like 125. We can be competitive; we will be competitive on rate. There are all kinds of incentive programs, the downtown employment program that provides very significant employment benefits for moving new employees' downtown.

In comparison to the New York City landscape, the operating expenses on the building and our basis in the building will allow us to be competitive and aggressive, and I assure you I will be in trying to refill that space, but it's very early in the process at this juncture.

Jordan Sadler - KeyBanc Capital Markets

It sounds like -- so, Citi's out, can you --

Mitchell Hersh

I will tell you that Citi has until tomorrow, actually, to exercise their renewal option, but I am not optimistic that they will do so.

Jordan Sadler - KeyBanc Capital Markets

Okay, can you just remind us of what the in place rent was there?

Mitchell Hersh

About $39 a square foot, fully loaded, plus or minus.

Jordan Sadler - KeyBanc Capital Markets

Thank you.

Mitchell Hersh

You're welcome.

Operator

We'll take our next question from Michael Bilerman with Citi.

Michael Bilerman - Citi

Good morning, Irwin Guzman's on the phone as well. I want you to spend a little bit more time on guidance. You had $0.91 when you exclude the lease term fee for this quarter, so I guess you had about $3.64 in terms of a run rate.

Now, I know you have $0.04 from the Lehman, and if you were to take 200 basis points off of your NOI today, I'd assume it's the full year, that's about $0.10. So, I'm still having a hard time, and I know you want to be conservative and I know it's the right thing to do, but I'm just trying to reconcile where you are today to get to an $0.81 to $0.86 run rate for next year.

Mitchell Hersh

Well, we also had some G&A expense reductions that -- so, we brought our G&A down by about $4.5 million on an annualized basis. We also had some real estate tax refunds of 3 or $4 million that we don't, at this point, know whether in fact they will be recurring.

We've taken some, shall I say, conservative points of view with respect to some of our joint venture income, including our hotel, which by the way is magnificent, but, everybody recognizes in the face of a competitive hotel environment where occupancies could be falling as a result of business contractions and less tourism, partially due, frankly, to the stronger dollar now, everything goes around as we see.

We've taken a little bit more of a conservative viewpoint towards 2009. And, we'll see, again, I shouldn't use the expression it's only 3.7% less than where it was a year ago, because everybody would like to see it in the positive direction, but, again, we're in the midst of an economic paralysis that's occurring in corporate America.

Other than some of the boutique industries and maybe some of the service industries that might benefit from the distress that we're seeing in the marketplace, in helping the government intermediate this financial tsunami, we're generally seeing reticence, almost unilaterally.

And, pretty much whomever I talk to, my peers in this industry, certainly in the metropolitan area, are seeing paralysis, generally speaking, about making strategic decisions. Everyday you're reading about job loss, whether it's from Qwest, whomever it's from, every day there's another signal that job diminishing is occurring out there. And, so, I think, and I know I've always sort of been accused of being too conservative, but I think this in fact is the time to be conservative.

Michael Bilerman - Citi

I know, and Mitch, I completely agree with you. I want to make sure that I understand how you get from today to, at least what your guidance is showing, and I guess when I build up all the pieces, and I know it's the right thing to be conservative and that's what we want you to be, but I just want to make sure that I can get to those numbers.

Mitchell Hersh

There's $0.25 worth of income in 2008 that we don't know for sure that will recur in 2009. Chances are some of it will.

Michael Bilerman - Citi

But, that was $0.12 of lease term fees, right? The other $0.09 of it, you're saying that G&A will now go back to $50 million after --

Mitchell Hersh

Yes, I mean, G&A reductions were $0.045 a share, you had --

Michael Bilerman - Citi

And, why won't that continue into next year?

Mitchell Hersh

Yes, well, I mean, we brought down G&A to a run rate that we think is sustainable running through 2009. So, I'm not sure that we'll see material deviation from that, and, again, we expect we'll probably see some additional tax, real estate tax refunds, but we're not 100% sure.

If we do some additional leasing similar to the Arch Insurance deal, which I think as possible, we should see some lease termination fees that will help us pay for that new tenant and that represented almost $0.13 a share between the AICPA and other lease termination fees that we saw throughout the year. So, that $0.25 a share is sort of an unknown factor right now, and that's the difference.

Michael Bilerman - Citi

Yes, I'm still coming up a little bit short, but I guess if you beat that, I guess that would be a good thing. I think Irwin has a question as well.

Irwin Guzman - Citi

Yes, Mitch, could you spend a little more time talking about Jersey City, specifically? You mentioned some of the advantages of the much lower rent, relative to New York, and the infrastructure that's there.

But, how much risk do you see from the consolidation that we're seeing in financial services and how that could impact back office requirements, and sort of what you see in terms of sublease space in Jersey City over the next couple of years?

Mitchell Hersh

Well, it clearly is a little bit hard to predict. I would expect that the narrow space that we have, for example, should remain. I mean, there's every indication that Banc of America is going to leave that intact, almost as a self operating subsidiary as their brokerage and investment banking arm.

The Lehman situation we already talked about. AIG, for example, notwithstanding any of the other issues that surrounded AIG in its recent Sunday night situation, what we have in our portfolio, throughout our AIG portfolio, are operating insurance companies, operating and casualty insurance companies.

And, those firms, I'm not aware of any notion of consolidation, if anything, frankly, the government is talking about capital injection in the insurance industry.

So, ICAP, PLC, Garban, recently the CEO of ICAP was on CNBC, indicated that Lehman, for example, in all their inter broker dealings represented only 5% of their revenue base, that's how broadly diversified they are, and that the company is performing well, and there were no indications that there would be consolidation in that area.

You know, you recall, over the last five or so, maybe six years, certainly five, we've seen some fairly significant consolidation in electronic trading, between TD Waterhouse, and AMERITRADE, and some of the electronic trading houses. So, I don't know that there will be continued consolidation, and we certainly haven't heard of that.

So, we've continued to see, in Jersey City, a pretty good mixture of insurance, the insurance industry, Arch, AIG, National Union Fire, etcetera, etcetera. Fairly stable, in terms of financial services, we haven't seen a dramatic shift one way or the other, and, some good diversity in terms of Forest Laboratory's just having taken additional space.

And so, obviously, I don't know exactly what the future holds, but I think at this moment I'm pretty comfortable with the fact that subleasing space should not inundate that marketplace. I see no indication of that, and frankly there are a couple of large requirements that are New York centric.

Whether they move, whether they bifurcate, whether they end up on the Waterfront, I don't know, but there's still some pretty good levels of activity, considering the Waterfront as new tenants, and they're primarily New York City centric.

Irwin Guzman - Citi

Thanks, Mitch

Mitchell Hersh

You're welcome.

Operator

We'll take our next question from Sloan Bohlen with Goldman Sachs.

Sloan Bohlen - Goldman Sachs

Good morning, guys, Jay's on the line as well. Just a question on guidance, maybe asked a little bit differently from Michael's question. Mitch, you talked about occupancy may be declining just slightly next year. What assumptions are you guys making for what your renewal rates and where you think rents go next year are?

Mitchell Hersh

We think that rents will be generally were they are today. I mean, the marketplace has been very competitive, particularly the suburban marketplace. So, our projections and estimates are based on what we're seeing in the marketplace today.

I don't believe that there will be deterioration for the quality tenants that we see, even in flight to quality, in terms of our asset base, and our estimates are fairly conservative. So, if we should see more rapid re-growth in the economy then I anticipate, at this point, I think there's only upside in the rents.

Sloan Bohlen - Goldman Sachs

Okay, and do you expect further decline from the renewal rent rate, much like you saw this past quarter?

Mitchell Hersh

No, again, the principle reason that we had roll down was we had situations, for example, in Harborside, where, and this Arch deal, where I think the deal today is a very competitive deal in the older section of Harborside, on the average of a $36 or $37 gross rent over the term, but we had tenants paying $43 a square foot, because they were old leases that had escalations.

So, that situation was a large part of the roll down that you saw in the quarter. Generally, if you take out these few strategic specialized deals we would have almost been flat, maybe a tenth of a percentage point roll down, which gives me further confidence that we've kind of reached the floor in the rents.

Now it's not so much a question of are tenants renewing, because tenants that are operating businesses don't want to go anywhere. The last thing they want to do is take on new obligations, have distractions, and all sorts of things that are associated with moving, IT costs and everything else, to save a dollar or two.

They're more concerned with staying in place and trying to get a better handle on what the picture for their business growth will be in the future. So, I'm pretty comfortable with our projections.

Sloan Bohlen - Goldman Sachs

Okay, and lastly on the Harborside 5 refinancing, what was the LTV on that?

Mitchell Hersh

The loan-to-value was approximately 57%. The banks, or the insurance companies, which were co-managers, co-leaders, they did the deal equally, Northwestern and New York Life, and we've had long standing relationships with both firms over many, many years. So, I think the sponsorship, the asset quality, and the income stream were all very important.

The loan to value was about 57%. They, on $29 million of NOI, valued the building at about $420 million. So, the loan was conservative and the all in rate, which we locked many, many months ago, on a handshake actually, is 6.8%. Which, by the way, the maturing senior unsecured bond that we have coming due on March 14th of 2009 has an all in cost of 7.4167%, plus or minus. So, this in fact is a lower cost of capital than the unsecured bond coming to its maturity.

Operator

We'll take our next question from Mitch Germain, Banc of America.

Mitch Germain - Banc of America

Hey, good morning. What's your assumption for the Greenbelt? Is that included at all in guidance if there will be some lease activity there?

Mitchell Hersh

Very little, most of what we're seeing in Greenbelt are smaller transactions. What's occurred down there, basically, is that the government has frozen virtually all spending in defense and other programs. I guess pending, number one, the financial issues or the melt down that's occurred, and the priorities that now exist in government allocation of resources.

But, I think until there's a new precedent in office, and Congress is reinstated, you won't see appropriations. A lot of what drives that marketplace and fuels that marketplace are a variety of government spending programs, and the consultants that serve those industries. Whether it's defense, whether it's the IRS growing its operation, all of the Prince George's County employment, or large portion of it, is tied to those types of programs.

So, unfortunately, because of the presidential election and the fact that the entire Congress is up for reelection, we've seen a cessation of that sort of demand. And most, again, of what we're seeing are smaller firms related to, in one way or another, boutique situations or the federal courthouse which sits right next to the campus, which is full of activity at this point.

Mitch Germain - Banc of America

Great, and you mentioned about 200 basis point decline in occupancy, is that related to any specific region or is that just kind of more general throughout your portfolio?

Mitchell Hersh

You know, I would tell you that the regions that I think are under most pressure are in fact Greenbelt, as we've just discussed, and parts of suburban Philadelphia. Whether it's Blue Bell, and we haven't seen much velocity there, and I don't expect it to pick up.

Merck having announced that they're laying off 9,000 people, and Unisys contracting, and just the general conditions in the capital markets for securities type firms, which have been large employers, Vanguard and the spillover effect. I would say those are the markets that are, out of all of our markets, are under the most pressure right now.

Mitch Germain - Banc of America

Okay, and just last question. Any specific tenant type industry that you've seen of more so of a pull back? I guess everyone's pulling back these days, but --

Mitchell Hersh

You know, I think it's almost across the board. Like I said before, we, year-to-date have lost 760,000 jobs, and just last month 159,000 jobs in this country. Every industry is under pressure to preserve capital and to reduce expenses, because top line growth, pretty much across the board, is a big question mark right now.

So, you know, we haven't seen much within our portfolio in terms of what I would call shadow contraction. We have, maybe, 5% of our in place wholly owned portfolio that, in one form or another, is available for sublease or otherwise empty. But, all you're hearing in the corporate community is expense reductions, employment reductions, so we're being conservative until we see a brighter horizon.

Mitch Germain - Banc of America

Thanks.

Mitchell Hersh

You're welcome.

Operator

We'll take our next questions from Sheila McGrath from Keefe, Bruyette & Woods.

Sheila McGrath - Keefe, Bruyette & Woods

Good morning. Mitch, you mentioned that the Plaza 5 mortgage was negotiated a while ago, I was just wondering your thoughts on if you think you could get a deal of that size done now?

Mitchell Hersh

I have to be, it's going to sound like I'm boasting, but I think a great deal of the fact that this was done on a literally I was on the telephone with the head of mortgage finance for New York Life and Northwestern and locked the rate on the telephone, and that's got to be two months ago, I would guess, a month and half to two months ago, and they honored every aspect of the transaction.

And, we didn't even have the paperwork done for another 30 days. We completed the commitment and so forth and that basically, were in fact the loan documents, because everything was addressed in the commitment.

Do I think that can be done today? I would tell you that in our discussions there's almost every reason that every capital provider is either looking to increase the cost of that capital or reduce the principle, because of the uncertainty in the marketplace.

So, I think that our sponsorship, the quality of our assets and our tenants, and our track record, in one case, with one half of that partnership, 30 plus years, was a big part of being able to get that transaction done, and having the confidence that once we effectively shook hands over the telephone on the rate that we weren't going to see a discussion of spread widening or similar.

But, I will tell you right now, Sheila, that in discussion with those same lenders, the universe has changed in terms of spread today. If we were to look for that same sort of financing today or secured financing, spreads have already changed in that period of time.

Sheila McGrath - Keefe, Bruyette & Woods

Okay, and with that in mind, on the '09 maturity, you could put that on the line now? And, then, would you probably go back to the secured market again?

Mitchell Hersh

Yes, we're looking at a couple of much smaller secured transactions that would essentially make up the differential, the 60 million plus or minus the differential. And, we're going to look at a few others on a similar scale, and if we think that the cost of capital and the loan to value and so forth, and we think in one case that we're pretty close to a deal.

But, we feel really comfortable that we have, effectively, between the 775 and 75 million overnight program, that we have in excess of $700 million of liquidity available to us.

Sheila McGrath - Keefe, Bruyette & Woods

Okay, and last question, you look like you're covering your dividend, but just in the new environment, the capital constrained environment, what are your thoughts on the dividend?

Mitchell Hersh

You know, we look at that all the time. From, obviously, cash flow is paramount. Naturally there's a requirement to pay out a certain amount annually to meet the tax obligations for REIT status and, we stress the portfolio, we stress the cash flows, and we've recently had a very full discussion at the board.

We do that in September, and more frequently in these unusual, extraordinary times. So, at this point we paid out $0.64 a quarter, we expect that our cap payout ratio is approximately 95% year end 2008.

Our current modeling suggests it will be 97ish%, based on what we think will be leasing activity and Incremental CapEx that we put back into the buildings for '09, and we will continue to look at our dividend and our coverage and cash flow ratios as we go forward, and that's what I can tell you.

Sheila McGrath - Keefe, Bruyette & Woods

Okay, great. Thanks, Mitch.

Mitchell Hersh

You're welcome.

Operator

We'll take our next question from Jamie Feldman with UBS.

John Pierce - UBS

Hi, this is actually John Pierce, I'm standing in for Jamie today. I was hoping we could get an update on the development pipeline, specifically the Windham build to suit, what yield you're expecting and then maybe an update on the Boston Filene's project, how that's progressing.

Mitchell Hersh

Yes. With regard to Windham, we anticipate effectively a delivery of possession date of February 1st, upcoming, February 1st of 2009. And, the cash-on -ash, obviously it's all cash, it's all equity, with a fully loaded land contribution based on the allocation of developable land on the campus, will yield us approximately 8.5% on costs.

Again, fully loaded including all of our internal and external costs of the project. So, we're very pleased with that development, it's coming along extremely well. Windham is doing very well; they've obviously made different transitions within their own business to reflect market conditions and some of hotel-ominium businesses, like everybody else in the world, there adjusting.

But, the core company's doing fine, I maintain personal contact with Steve Holmes, the CEO, and so, everything looks to be completely on track with respect to delivery of that. Regarding Boston, right now that's fairly fluid.

As you know, we are a minor participant, let's say we have 15% of the deal, JP Morgan Asset Management has 35%, Vornado has 50%. Clearly, as has been written, the financing markets, particularly for a largely speculative type development, are challenging to say the least, although basically if we move forward with the full project the hotel element is really pre-sold on delivery after construction of the core and shell.

A lot of the retail is leased, and we do feel that there is a reasonably buoyant office market of there. But, the capital markets have been very, very difficult, the financing has been clearly difficult.

So, we are considering our different options, actually spoke with Vornado and JP Morgan yesterday frankly, and we may elect to phase in the project which we can do both physically and technically. Until the world looks like it's a better place with respect to financing, but it is very real time with respect to looking at our different options for that project.

John Pierce - UBS

Okay, thanks, and I know it's a ways out, but the 2010 unsecured maturity, I was wondering, looking that far ahead, do you guys have plans for how you to address that? Whether you'd take it on the credit facility like the maturity next year, or whether you'd look to refinance it.

Mitchell Hersh

Well, you know, we have $165 million that comes due in senior unsecured in 2010 with an interest rate of 5.5%, and then we have a couple of mortgages, which frankly the larger mortgage is a small pooled portfolio mortgage, with, again, another life insurance company that we've dealt with for 30 plus years. So, we're confident that we'll get that one redone at its principle level.

So, the question mark would be the senior unsecured (inaudible). I have to, let's say, hope that the commercial markets, in terms of the ability to issue public debt will return long before 2010, and that the global economy is on a much better footing.

So, I hope we'll be able to look at the unsecured markets for public debt, but it's a long way away, and we have a lot of flexibility, particularly given this mortgage that we've just done.

John Pierce - UBS

Okay, thank you.

Mitchell Hersh

Your welcome.

Operator

We'll take our next question from Chris Haley with Wachovia.

Chris Haley - Wachovia

Mitch, good morning.

Mitchell Hersh

Good morning.

Chris Haley - Wachovia

On the Filene's project, did you say that there was pre-leasing on the retail side?

Mitchell Hersh

Well, Filene's is a significant part of that, and returning to the site, and there is other, let's say, letters of intent or the ability to enter into leases, and a number of different retail leases that, frankly, Vornado's been leading the charge on that.

So, the answer is, yes, this appears to be a pretty good environment with respect to the ability to complete the retail, and, as I said, if we elect to move forward with the entire project we have a deal that we can implement with respect to a presale of the hotel component roughly at cost.

But, we're looking at different options right now, Chris, because of the difficulty in the financial markets, and the options are either go ahead with the complete project and take whatever we think we can get out of the financing markets, and we do have some commitments that are what I would call more than soft commitments but not quite hard at this point.

We could do that, we could build the project out of equity, which is highly unlikely, you know, it's plus or minus the $700 million project. We could phase the project, which is something that we're looking at now, to develop only a part of it out of equity, which we all feel would be very manageable.

Or, we might consider other alternative which might include mothballing the project until the financial markets open up. As I said, these are real time discussion that we're having with Vornado and JP Morgan right now.

Chris Haley - Wachovia

Thank you for that, and your disclosure, I think it's about a $700 million project, if I recall, and the total amount of money in the project, what we're hearing, is about just a little under $200 million.

Mitchell Hersh

It's more like $160 million. That's the land and all of the costs incurred to date, but we'll give you an exact figure, for demolition and all the soft costs.

Chris Haley - Wachovia

I'd be interested if you could offer some color, as specific as you'd like to get, or unspecific as you'd like to get, as in how much would that be related to the lodging, the retail, and the potential office component, if you were to downsize the project. Because, I seem to recall that this is one of your largest development projects that you've had.

Mitchell Hersh

Yes, well, first of all, again, $100 million of the capital expanded to date was for the site, and the rest of it, as I said, which I think is about $60 million in terms of commitment or expenditures to date, is for demolition, you know, hard and soft costs.

If we were to phase the project, and again, I don't want to speak for Vornado or JP Morgan, because these are real time discussions, and we're 15% of the deal, although we all have to agree upon these major decisions, that we might look at phasing it as small as just the retail component, or part of the retail component. But, it's hard to say at this point what we're going to do, but there will be clarity of what we're going to do, certainly in the fourth quarter.

Chris Haley - Wachovia

Okay, I thank you for that.

Mitchell Hersh

And, I might add too, just for what it's worth, that I'm told that the total commitment to date might be as high as $184 million, for all in, everything. But, the point I want to make is that the construction costs, as a result of, believe it or not, demand destruction in Asia and other parts of the world for commodities like steel, have already shown that the cost of the development will be less, that there's a more competitive environment because there's so little construction going on.

But, again, the fourth quarter will reflect on what our intentions are as a unified partnership between the three of us.

Chris Haley - Wachovia

Okay, that's helpful, and in your '09 guidance, are you including any reserving for that, or are you including any expensing of overhead, or any interest on that that would contribute?

Mitchell Hersh

No.

Chris Haley - Wachovia

Okay. Last question, on organic growth expectations or same store, could you comment on what you thought 2009 organic growth metrics would look like?

Mitchell Hersh

Pretty flat, I mean, we look at the same store, which is basically our entire portfolio at this point for the year 2008. On a GAAP basis it's about a half a percentage point, and that's a guess, an estimate to the end of the year, and cash of about 1.5%. So, I would say it's certainly not going to exceed those numbers in 2009; we're looking at a slight diminution, frankly, of occupancy.

Chris Haley - Wachovia

Right, you had indicated, I think Barry mentioned, 200 basis of occupancy loss year-end to year-end, and seeing where the markets are based on Michael's comments, what would you expect to see in terms of organic revenue growth year over year, looking at the components of same store revenue and expenses? I'd be interested if you could offer any color on that.

Mitchell Hersh

I think if you look at a NOI projection, we're thinking that there could be a $7 or $8 million loss of net operating income. It's not more buoyant than I think it is at this point. In other words, if we're strictly on projection, based on the guidance that we put out today, it could be $6 or $7 million, plus or minus or so of NOI reduction.

Chris Haley - Wachovia

Right, okay, that's very helpful, thank you.

Mitchell Hersh

You're quite welcome.

Operator

We'll take our next question from Nick Piersos (ph) with McCleary (ph).

Nick Piersos - McCleary

Thank you, but all of my questions have been answered.

Operator

We do have a follow-up question from Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Thanks, I didn't catch this. What do you have in terms of lease termination fee expectations in next year's guidance?

Mitchell Hersh

It's almost nothing, I mean, we carry another income category of a couple million bucks. So, it's really minor. Again, if we, for example, back fill the remainder of the AICPA stays similar to what we did with Arch that was an $8 million plus or minus lease termination fee.

And there's, call it an equal amount of space, slightly more space that we're working on a couple of transactions. So, it might be more material, but right now it's almost a negligible number in our guidance.

Jordan Sadler - KeyBanc Capital Markets

Okay, and, just in terms of tenant discussions, have you seen an increased level of discussions with tenants looking to give back or maybe reduce the amount of space they have exposure to?

Mitchell Hersh

Yes, nothing more than anecdotal. We have dealt with certain situations, a couple of the renewals were for slightly less space, because tenants, on some of these renewals, wanted to rationalize themselves, and be in a stronger fighting weight position for tough times. And, so we did go through a couple of situations where we saw 25% reductions in there space. But, no, other than anecdotally, there's nothing looming out there.

Jordan Sadler - KeyBanc Capital Markets

Lastly, any commentary that you could provide on the Mack-SL Green joint venture and how that's progressing from a lease up prospective?

Mitchell Hersh

Well, the wholly owned portfolio is about 90%-ish, plus or minus, eighties. The joint venture is about 72%, which is the 880,000 square feet, so it's suburban product in tough markets, with very little demand right now. So, that's what's going on.

Jordan Sadler - KeyBanc Capital Markets

Okay, thank you. That's about it.

Mitchell Hersh

You're welcome, take care.

Operator

It appears there are no further questions at this time. Mr. Hersh I'd like to turn the conference back over to you for any additional or closing remarks.

Mitchell Hersh

Well, I want to thank you all for joining us on today's call. I'm hopeful that the information that we've provided and the discussion has been forwarded and helpful. And, we look forward to reporting to you again next quarter. Thank you very much, have a good day.

Operator

This concludes today's conference. We thank everyone for their participation. (Operator Instructions)

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Source: Mack-Cali Realty Corporation Third Quarter 2008 Earnings Call Transcript
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