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Executives

Mitchell Hersh - President and CEO

Barry Lefkowitz - EVP and CFO

Michael Grossman - EVP

Analysts

Craig Mailman - KeyBanc Capital Markets

Michael Bilerman - Citigroup

Jonathan Habermann - Goldman Sachs

John Guinee - Stifel Nicolaus

James Feldman - UBS Investment Research

Nick Pirsos - Macquarie

Mack-Cali Realty Corporation (CLI) Q4 2008 Earnings Call February 12, 2009 10:00 AM ET

Operator

Good day, everyone, and welcome to the Mack-Cali Realty Corporation Fourth 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

Thank you, good morning everyone and thank you for joining Mack-Cali's fourth quarter 2008 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 would like to review some of our results and activities for the quarter and what we are seeing in our markets, then Barry will review our financial results and Mike will give you an update on our leasing results.

FFO for the quarter excluding certain non-cash items was $1 per diluted share. This compares to the FFO of $0.89 per share for the same period of last year. In the fourth quarter, there were a couple of notable non-cash items.

We recognized non-cash impairment charges included in equity and earnings from unconsolidated joint ventures of $0.48 per share. Also in the quarter, was $0.11 per share of a non-cash gain resulting from the reduction of certain other obligations.

The non-cash impairment charges result from our seven building joint-venture with SL-Green, which we affectionately refer to as the B properties, and the suspension of construction on the Boston Filene's project.

FFO for the quarter after taking the non-cash impairment charges and non-cash gain into effect was $0.63 per diluted share. We did have some solid leasing activity during the quarter with the total of approximately 568,000 square feet of lease transactions.

Our portfolio ended the quarter at 91.3% leased, slightly down from last quarter’s 91.8%. Rents rolled down this quarter by approximately 1.6%, compared to last quarter's 1.8% roll down.

In our core markets in Northern and Central New Jersey, we had roll ups of 2.4% and 1.3%, respectively. And for the year, we have a rent roll up portfolio-wide of 1.5%. Our leasing cost decreased during the quarter with tenant improvement allowances and commissions for the quarter totaling $2.64 per square foot per year, compared with last quarter's $3.46, and so our out-of-pocket costs have been manageable.

For 2009, remaining rollovers are just 6.8% of our base rent, or approximately $40 million. Our portfolio continues to outperform most of the markets where we operate with our leased rates exceeding market averages in Northern and Central New Jersey, in Westchester and in Washington, D.C. And we are pleased that even in these challenging markets, we have maintained our competitive advantage and our market leadership.

Nevertheless, despite our outperformance, there is a great deal of uncertainty in the business sector. This lack of clarity has caused some paralysis on the part of tenant decision making with respect to employment levels and corresponding office space needs.

And frankly, we don't believe we have seen the worst of this economic downturn. So we expect the markets to remain challenging and the economics of lease transactions to remain very competitive at least over the near-term.

While the quarterly retention rate was a bit lower at 56.7% than our customary rate of some 60% to 70%, this was due to several important strategic transactions, particularly with Shaw Engineering and Daiichi Sankyo, which effectively extended our long-term leases in other facilities and resulted in additional space and strategic relationship-driven transactions with these fine tenants. And of course, we will continue to concentrate our efforts on keeping our properties well leased into the future.

This past quarter the company closed on a $240 million mortgage financing from the Northwestern Mutual Life Insurance Company and New York Life Insurance Company on our Harbor Side Financial Center Plaza 5 property in Jersey City. The proceeds from this loan were used to pay down outstanding borrowings on our unsecured revolving credit facility.

You may recall that back in November, the company purchased $100.3 million in principal amount of its 7.25% senior unsecured notes, which are due to mature March 15, 2009, few weeks from now, and thus we completed a successful tender offer.

I am also pleased to mention that Mack-Cali recently obtained a $64.5 million mortgage financing from Guardian Life Insurance Company of America. Two separate mortgage financings with the same lender. These properties included 100 Walnut Avenue in Clark, New Jersey and our three building complex, One River Centre on Newman Springs Road, at Red Bank, exit 109 on the Garden State, Parkway.

Some of our notable leasing transactions during the quarter included Thompson, a provider of video solutions for the media industry. Thompson signed transactions in several components totaling 67,000 square feet at 2 Independence Way in Princeton, New Jersey.

Thompson now leases the entire office building in our Princeton Corporate Center. In Cranford, Paragon Computer Professionals, a provider of management consulting and information technology solutions signed a variety of transactions for renewals, totaling over 22,000 square feet at 25 Commerce Drive. And thus this 67,750 square foot building is now approximately 89% leased.

The Daily Record, a daily newspaper serving Morris County, New Jersey signed a brand new five-year and two-month lease term for over 17,000 square feet at 6 Century Drive in Parsippany in our business campus. This 100,000 square foot office building is now almost 95% leased.

This year we have already completed some notable lease transactions in 2009. Harsco Corporation, a long-term tenant in Paramus, New Jersey, who is a worldwide industrial services company, signed a 10-year renewal for 22,000 square feet at Mack-Cali Center II. This 348,000 class A office building along the Garden State Parkway is now 89% leased.

Palisade Capital Management, another long-term tenant in relationship. Palisade is an investment management services firm, renewed its lease for almost 17,000 square feet for a five-year term at One Bridge Plaza in Fort Lee, New Jersey. This 200,000 square foot class A office building at the foot of the George Washington Bridge is now about 82% leased.

In addition to the leasing news, we have other positive news relating to our properties. Mack-Cali continues to be recognized not only for our financial performance, but for our expertise and property management.

8 Campus Drive, a superb asset located in our Mack-Cali business campus in Parsippany has earned the United States Environmental Protection Agency's prestigious Energy Star Award, the National symbol for superior energy efficiency and environmental protection. Our property management teams are currently working to achieve this important designation for a number of additional buildings throughout our portfolio.

I would also like to comment on our debt maturities over the next few years. I already mentioned the fact that we have a senior unsecured bond that matures next month, March 15th. The tender offer redeemed approximately one-third of that. And so $200 million matures through the remainder $200 million on March 15.

In 2010, we have two senior unsecured notes. One at $150 million, and another at $15 million totaling a $165 million in senior unsecured. And $150 million pooled life insurance company mortgage, that we have every expectation of extending.

In 2011, we have approximately $300 million in senior unsecured. And so without additional liquidity support, which of course we firmly believe will begin to become available through various mechanisms and means as the economy improves, as the credit markets go up, and as free cash avails itself. We are comfortable in managing these maturities through our free cash flow and our line of credit, which with our expansion option doesn’t mature until mid 2012.

With respect to guidance, we have left the previously stated range of $3.25 to $3.45. Clearly, while the business climate remains under pressure, we have benefited from our conservative approach, and we have also benefited from interest savings. And so fortunately, we feel that we have strong credit underlying our income stream, and at this juncture are comfortable with the previously stated guidance.

With respect to the dividend, dividend policy will be adopted at our Board meeting in March. Obviously, we are clearly studying dividend policy in light of all of the world's events, and we will address that at our Board meeting in March.

And so now with all of that, I will turn the call over to Barry who will review in detail our financial results for the quarter.

Barry Lefkowitz

Thanks, Mitchell. On account of a couple of items that I will discuss in a minute, we had a net loss for the fourth quarter of $4.1 million, or $0.06 per share versus net income of $15.8 million, or $0.24 a share for the same quarter last year. For the year, net income amounted to $51.7 million or $0.79 per share, as compared to a $108.5 million or $1.61 per share for last year.

FFO for the quarter amounted to $50.9 million or $0.63 per share versus $73 million or $0.89 per share in 2007. For the year, FFO was $279.1 million or $3.46 per share, versus $293.9 million or $3.56 per share for '07.

Included in net income and FFO for the fourth quarter was $38.9 million, or $0.48 per share of non-cash impairment charges as well as a non-cash gain of $9.1 million, or $0.11 per share. FFO for the quarter excluding these non-cash items was $1 per share. This compares to the $0.89 for the same quarter last year.

Net income excluding these items was $0.31 per share as compared to the $0.24 per share for the same quarter last year. The $0.48 in impairment charges resulted from write-downs on two of our joint ventures, $0.33 per share on our Mack-Green/Gale joint-venture and $0.15 a share are related to our Boston Downtown Crossing venture. These amounts are included in the equity and earnings among consolidated joint ventures for the period.

As to the non-cash gain, you may recall that back in 2004, we acquired a couple of assets from AT&T for cash and the assumption of some leases AT&T had with third-parties. At that time we estimated the cost associated with satisfying these leases and recorded the amount as other obligations on our balance sheet.

The majority of the assumed lease obligations have now matured and the final ones mature through May of this year. Based on our current estimate, we anticipate that all the obligations will be satisfied for $9.1 million less than we originally recorded.

As a result, we recognized a non cash gain of $9.1 million or $0.11 per share in the fourth quarter. Other income in the quarter included approximately $334,000 in lease termination fees. Fourth quarter last year had lease termination fees of $570,000. For the year, termination fees totaled $9.4 million as compared to $10.1 million in '07.

Same-store net operating income, which excludes lease termination fees, increased by a 0.5% for both the fourth quarter and full year of '08 on a GAAP basis. On a cash basis, same-store net operating income decreased by 1.3% for the fourth quarter, and increased by 0.7% for the full year.

Our same-store portfolio for the fourth quarter was $29.2 million square feet and our same-store portfolio for the year was $28.8 million square feet. Our unencumbered portfolio at year end totaled 238 properties, aggregating 24.8 million square feet of space, which represents 84.9% of our portfolio.

In late October, we closed on a ten-year $240 million mortgage with Northwest Mutual and New York Life. The loan is secured by our Harbor Side Plaza 5 property and bears interest at 6.8%. Later in the quarter, we repurchased to a tender offer just over $100 million of our $300 million 7.25% senior unsecured notes, the remainder of these notes mature next month.

More recently we completed a $64.5 million mortgage financing Guardian Life. The ten-year loan bears interest at 7.25% and is interest only for the first year with 30-year amortization thereafter.

At year end, Mack-Cali's total undepreciated book assets equaled $5.5 billion, and our debt-to-undepreciated asset ratio was 40.6%. The company had interest coverage of 3.2 times and fixed charge coverage of 2.5 times for 2008. We ended the year with approximately $2.2 billion of debt, which had weighted average interest rate of 5.87%.

Currently, we have $208 million drawn on our $775 million revolver, and approximately $103 million of cash on hand. We are reaffirming our previous 2009 FFO guidance of between 3.25 and 3.45 per share.

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.

Now Mike will cover our leasing activity. Mike?

Mike Grossman

Thanks, Barry. In 2008, our consolidated portfolio produced 499 transactions totaling $3.8 million square feet. This compares with our 2007 totals of 519 deals of 4.3 million square feet.

Our leasing velocity slowed in the second half of the year, particularly in the fourth quarter. The number of deals completed each quarter remained steady throughout 2008. The full square footage leased is related more to the size of the transactions and to how many deals we have completed. On average, we signed smaller deals for shorter terms than in the recent past.

For the full year, the average term of our transactions was 5.6 years. In the fourth quarter, the average was 3.8 years. There are also fewer new deals in the market and based on volume, our 160,000 square feet of initial transactions is about 60% below our eight quarter average.

30 basis points of the 50 basis point drop in our percentage leased, and our lower than normal tenant retention percentage was the result of several strategic transactions from previous quarters. As an example, 18,000 square feet was contractually surrendered by a Global Engineering firm, which expanded by almost 100,000 square feet and renewed another 40,000 long-term at three properties in Central New Jersey and Suburban Philadelphia.

By the end of 2008, we managed our 2009 rollover down to 6.5% of space leased, which is not heavily weighted in any one quarter. In the fourth quarter, we saw 20% fewer new prospects in the market in the same period last year.

And first quarter lead activity for new deals is equally slow. In our market, some of the largest increases in availability last year were recorded in the regions that had the lowest numbers to start with, in Manhattan and Washington DC. The availability rates in these markets are around 10%.

New Jersey has demonstrated some resilience, but vacancy is still around 20%, and asking rents fell by about $2 per square foot during 2008. Suburban Philadelphia, Westchester County, New York, and Fairfield County, Connecticut have vacancy rates in the mid to high-teens.

Sublease space is playing an increasing role in the office space markets. Our own portfolio remained stable in this regard where we have consistently had anywhere from 4% to 5% of our inventory available for sublet for several years.

In some of our suburban markets, sublease space increased by 25% to 45% in 2008, the exception with Central New Jersey, where the space available for sublease decreased by 40% during the year.

Whether we are competing with direct or sublease space, finding that attributes such as our stability, reputation and ability to fund tenant improvements for credit quality tenants distinguish us from the competition and a more important than ever, in this economic climate.

Our leasing teams of talented professionals, many of whom have experience in leasing our properties through recessionary cycles, are working diligently to accomplish our objectives. Mitch?

Mitchell Hersh

Thank you, Mike. In closing, I would just like to offer a few additional words, I certainly don't in any respect minimize the severity of the economic downturn that we are all experiencing on a global basis, whether it is good or bad, I have lived through a variety of cycles including the 70s and see a lot of parallels and some sorts of events that are unparallel and unprecedented.

The frozen credit markets continue to plague the economy. There is a lack of confidence on the part of businesses and investing new capital and new employment, and thus it's impacting every business throughout the land.

With respect to our business that being commercial office real estate, I can tell you that clearly tenants would generally prefer to stay in place. They want fair transactions, but if you can accommodate their needs, and you have to strengthen stability of a Mack-Cali, are the very happy to remain with you.

Our size coupled with our extensive land bank, our campus type developments that offer huge amenities, offer tenants flexibility, provide those needs for our tenants. We are clearly seeing a flight to quality not just in buildings, but also clearly an upgrade in land lord quality as I mentioned a moment ago.

We are hoping to continue to be the beneficiary of the trends that are evolving with respect to tenants wanting to make sure that their landlords are equally, if not stronger that they are in terms of financial flexibility. We are well positioned with superior properties. Our portfolio has higher occupancies than most of our peers. Many of our peers within our markets, and we offer comfortable lease terms.

We remain committed to investing capital in our properties. We have the wherewithal and the commitment and the human capital and talent to do that. And the fact is that we own the bulk of our properties unencumbered, and so we have a variety of forms of access to capital if the credit markets remain as paralyzed as they have been.

At some point, we will see a rise in consumer and corporate confidence. At some point we will see job growth again. And at that point, Mack-Cali will be well poised to take advantage of growth opportunities. But until then, we will do our best to keep our portfolio as fully leased with the highest grade tenants that we can. We will be careful and cautious with respect to our balance sheet, and we will see what opportunities emerge and evolve as the economy improves.

And with that, we will now take your questions, Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Jordan Sadler from KeyBanc Capital Markets

Craig Mailman - KeyBanc Capital Markets

Hi. It's Craig Mailman here for Jordan.

Mitchell Hersh

Hi.

Craig Mailman - KeyBanc Capital Markets

Can you give an update on the Mack-Green/Gale JV. And given the impairment in the upcoming debt maturity, whether we could expect some assets be handed back?

Mitchell Hersh

Well, we have taken an impairment charge that we have talked about and as we have reported, and that is based on a determination that the estimate of the future cash flows generated by the properties are less than the book values of the total properties.

Clearly there is a mortgage coming due in May, I believe it’s May 9th through Gramercy Capital of slightly in excess of $90 million. And while I am in some level of discussion with Gramercy, concerning the potential of extending that loan on its face and by its terms based on debt service coverage of the joint-venture, which obviously includes SL Green as an equal partner is not entitled by right to extend the mortgage.

The properties as you may recall we invested in, and that's part of the impairment charge that we have taken. Capital for building improvements for tenant, installations and leasing commissions. And our partner has elected which is within its purview not to further invest capital in the properties for the installation of tenants and commissions and various leasing expenses.

And given that fact, we have elected not to invest further capital in those properties, which total about 880,000 square feet in seven properties in a variety of different submarkets. And so that’s what I can tell you factually, and we will see what we will see.

Craig Mailman - KeyBanc Capital Markets

What do you think the joint-venture may look like going forward? Just in terms of the residual stabilized returns?

Mitchell Hersh

I am at a bit of loss to be able to respond to that question. Again, not at the risk of being redundant, it's a troubled.

Craig Mailman - KeyBanc Capital Markets

It is natural, what it will look like.

Mitchell Hersh

I can't answer that right now.

Craig Mailman - KeyBanc Capital Markets

Okay.

Mitchell Hersh

There are a lot of moving parts

Craig Mailman - KeyBanc Capital Markets

Yeah. No, understood. I appreciate that. Just moving on to leasing, could you just give an update on the Lehman situation and maybe how the progress is going on back on some of the Citi space?

Mitchell Hersh

Yeah. Let's address Lehman first. Lehman, obviously filed and they have sought extensions on acting on a number of their, or I guess on all of their executory contracts and most of their retained contracts. The name on the door of the space at 101 Hudson says Barclays.

A large component of the space that Lehman had actually retained, which was only half as you my recall they had leased about 207, 000 feet, and they had already sublet to other viable creditworthy tenants who all executed deployment agreements, so they at some point will likely to become our direct tenants.

And Lehman retained about 100,000 square feet. About a third of that is a datacenter which is fully operational and supported by personnel. And so at the moment, Lehman/Barclay the actual funds have come to Barclays are hold with respect to all of their obligations and up to Mack-Cali.

And it's a little premature to determine and it's certainly outside of our control to determine what ultimately they will do with that lease other than, again it a sort of full deck data center that was recently renovated after the bankruptcy. So, they have invested capital that being Barclays and it is fully operational, that's what I can tell you about 101. And with respect to, I think you asked about the Citi space.

Craig Mailman - KeyBanc Capital Markets

Yes.

Mitchell Hersh

When we, shortly after we acquired the asset, I had variety of discussions with the Global Head of Real Estate and facility staff at the corporate level to talk about their ongoing expectations with regard to 125 that was March of '07. And so that was in the phase of what I would call the first contraction in terms of employment that Citi publicly announced as a matter of fact that happened to coincide contemporaneously with the meeting. And so, it was at that point that our expectation for the Citi renewal notwithstanding the economic efficacy of that facility was unlikely and we began to softly market the space.

Last October 31st, or at some point this past October, the option that Citi had to renew their lease officially expired. And it was at that point that, we could only for the first time publicly begin to market the space, because they had effectively declined their extension or their renewal.

So, we are actively doing that. We have had a considerable number of showings from midtown tenants and from downtown tenants. The space is extremely efficient, well done. It's pretty much occupied, but for two floors out of their 330,000 feet.

Lease expires in about a year, just under a year. And the property given our bases is pretty affordable. So, I'm encouraged frankly, notwithstanding the pretty significant downdraft that's occurring in Manhattan. I'm encouraged by the level of showings and interest for large blocks of space. And I'll keep you posting on it beyond that.

Craig Mailman - KeyBanc Capital Markets

Okay. And just going back to Lehman, are you still expecting the $3 million reserve in '09, is that still in the guidance?

Mitchell Hersh

We have been very careful with respect to our assessment of that situation and we have reserved certain events in the lease. And I think the number is about right, and we hope to be surprised to be upside on that, but until we have absolute certainty on the plans for the ongoing entity, presumably Barclays we are going to keep that reserve in place.

Craig Mailman - KeyBanc Capital Markets

And then just lastly, JPMorgan has an expiration this year, any update on that?

Mitchell Hersh

You are talking about in Harbor Side? Yeah, no update other than Jersey City, in general, while, all markets have quite it down considerably. The affordability issue is still something aside from anything else. That's very attractive in Jersey City.

So we have had a pretty good level, and we are talking to a couple of Harbor Side tenants now in space that's adjacent about expansion into that space. So hopefully in the next couple of months, we will have much better outlook for that space.

Craig Mailman - KeyBanc Capital Markets

Great, thanks guys.

Mitchell Hersh

You're welcome.

Operator

Moving on, we'll take our next question from Michael Bilerman from Citi.

Michael Bilerman - Citigroup

Good morning.

Mitchell Hersh

Good morning.

Michael Bilerman - Citigroup

Mitch, just going back to the Mack-Green joint-venture, when you talked about SL Green helping our capital commitments and leasing cost, that was just in relation to the assets secured by the $90 million Gramercy note?

Mitchell Hersh

That's right.

Michael Bilerman - Citigroup

That you share that this is sort of equal power, or equal decision making, sort of both have to agree to do everything?

Mitchell Hersh

Yes that’s correct. It’s a sort of [Union] embassy.

Michael Bilerman - Citigroup

Now you have said they have decided then you decide it. Was there a difference in opinion on relating to the assets?

Mitchell Hersh

Well as part of the acquisition of the Belle Mead portfolio, these properties were bifurcated for the very specific reason that the occupancy or roll over potential within the properties was somewhat more challenged then what I will call our wholly owned remaining properties throughout the portfolio. So what we did was we bifurcated these properties, we entered into a 50-50 joint venture with SL Green and Gramercy placed this $90 million and minus $1 million mortgage, and we meaning Mack-Cali provided a facility up to $10 million to the venture to fund and remember this was back in May of 2006.

The tenant improvements and leasing costs and we expanded that and we are benefiting from cash flow in the joint venture and we got to the point where in connection with any further or perspective leasing we needed additional capital in the joint venture. And SL Green elected which was their right and obviously the joint venture partnerships and limited partnerships provide very squeeze down rights and so forth but they elected not to fund and which was within their rights and purview and given the fact that they did that, given the fact that there is a looming mortgage that’s maturing through Gramercy capital, I elected on behalf of our partnership not to fund.

Michael Bilerman - Citigroup

And that the book value of the asset related to the mortgage is coming due, is what?

Mitchell Hersh

While we have written down to what basically means the mortgage amount.

Michael Bilerman - Citigroup

And then the other assets that are remaining in the venture?

Mitchell Hersh

There are no other assets -- well there is one building in the venture that’s not part of that mortgage, but the remainder of the assets, we call them wholly owned. There is a limited partnership interest of 3.5 percentage points that SL Green have to have an interest in along with a lot other limited partners, that’s why Belle Mead was formed originally and when SL Green took the majority equity interest in the Belle Mead portfolio/Gale, a number of years prior to our acquisition, they retained that residual interest, it's mostly for partnership reasons, tax reasons etcetera.

So those are fine, I mean those are part of our core portfolio and the occupancies are relatively strong. Few of the assets have secured financing on them and some don’t. But this particular venture was formed with a very reason that was our expectation that we would have some leasing challenges given a variety of factors. Given lease maturities at the time we bought the properties or that we form the venture given some sub-market issues etcetera. So, the fact that they were more challenged than what I am calling the wholly owned assets was know to all at that time.

Michael Bilerman - Citigroup

And these assets, if you want you can figure out.

Mitchell Hersh

I am happy to own them going forward if it's under the appropriate economic terms period.

Michael Bilerman - Citigroup

You mentioned that the dividend policy in terms of discussion with the Board. You obviously right now are effectively covering the dividend from cash flow plus or minus a little bit, but effectively covering it. Can you just share with us, the most recent Board discussions, I know it sounds like you have another one coming up? But just where your mindset is in relation to the dividend?

Mitchell Hersh

Well I would tell you that I and the remainder or balance of the Board are concerned with the general lack of liquidity in the markets, the fact that the access to capital was somewhat limited and they are not withstanding all the bank CEOs appearing in Washington. It doesn’t appear to be a lot going on in terms of commercial real estate lending. We have been successful in both due to good relationships and due to superior properties and being able to do some secured mortgage financing at 50% loan-to-value. And that’s reasonable cost of money.

I think the good thing is that given our franchise and stability etcetera, we can’t do those and our unencumbered asset, where we can’t do those types of financings. I think they bode well for reflecting on the value of some of our assets. If you look at 50% loan-to-value and then you look at the mortgage amounts like Harbor Side at $240 million in proceeds, 50% means it's a pretty valuable asset.

So, all of that is good, but we are concerned that there is a general lack of liquidity in the marketplace and so, part of our thinking and discussions relative to dividend policy are that in this unprecedented period of uncertainty, capital preservation is something that is very high on our list of items of focus. And beyond that, obviously there is the IRS ruling. There have been some several companies that have availed themselves of utilizing the mechanisms pursuant to the IRS ruling. And that’s another topic of discussion. But I would tell you that any determination of the dividend beyond what I just said is pretty mature.

Michael Bilerman - Citigroup

Maybe it's the last one on guidance. Without the impairments you would had about a $1 and I think you mentioned there is some real saved tax benefits.

Mitchell Hersh

Benefits of credits and some real estate tax credits and successful appeals and there were a few other sundry issues that comprised that $0.11.

Michael Bilerman - Citigroup

$0.11 obviously so it takes it to about $0.89. And that would obviously if you don’t do anything, it will take you over your high-end and effectively within your guidance you are just staying relatively conservative given everything you said.

Mitchell Hersh

That’s right. And like I said in before, we have been the beneficiary of interest rate that have been favorable, first of all, of course, we did the tender. So, we were able to save some money back in the fourth quarter on our bonds and that’s something we are always going to continue to look at. And LIBOR was a lot lower than our earlier estimates and modeling. So, but right now, we are trying to be conservative, because we don’t know where LIBOR is going to go, and we don’t know what our cost of funds in general are going to be.

Michael Bilerman - Citigroup

Thank you.

Mitchell Hersh

You're welcome.

Operator

Moving on, we will take our next question from J. Habermann from Goldman Sachs

Jonathan Habermann - Goldman Sachs

Hey, good morning.

Mitchell Hersh

Good morning.

Jonathan Habermann - Goldman Sachs

Question for you, just following up on Michael's last question there on guidance, but can you talk a bit about where you stand on the debt rolls, for the lease rollovers for 2009, 2010 because 6.8% rolls in '09 and it sounds as though at this point, roughly $40 million. But your staying tenants will likely stay put, so just trying to get some thoughts there. It sounds like retention they actually runs up a bit versus where you were in Q4?

Mitchell Hersh

You know, J, part of that, let me go through the numbers first just to restate them, the '09 rollover is about 6.8%, that’s $40.1 million and the tenant rollover as we sit today were actually as of 12/31/08, it's slightly less than 11.6% or $68 million and change in tenant. Some of the retention reduction if you will, was due to those strategic transactions that I talked about. We have pretty good idea certainly for the remainder of 2009 as to what tenants are doing, tenants with maturing or expiring leases and so we think our modeling is pretty conservative and reflecting that about half of our maturing or expiring leases for the remainder of '09 are move outs and that has nothing to do with the landlord it has to do with changing business plans, it has to do with, in one case we built the new building for a tenant and it was all part of the strategic plan that they had. So that will be an '09 event and things of that nature.

So, we have a pretty good sense, we think, given the marketplace and sort of erring more to the downside than the upside, because there aren't too many upside surprises these days that our guidance in our modeling is reasonable and conservative given the expirations I have just talked about certainly for '09 and what we know at this point, or what we think we know.

Jonathan Habermann - Goldman Sachs

So to get to sort of the lower end that 325 range and obviously you have the impact of refinancing, but can you walk us through occupancy, same-store and rents?

Mitchell Hersh

Well, I would say that same-store is going to be about flat, in general. And occupancy, we expect to be very frank, that we are going to lose a little, because of what I have just said about expiring leases with no move outs. There is not a lot of activity going on in most of our markets and I would tell you J, I know that the New Jersey marketplace has particularly has been focused on because of its guilt by association if you will for the financial and securities markets or securities industry. But I do think that we have a pretty diversified pool of tenants supporting our income stream if you look through our filings you can see that in almost every aspect of the economy and we have pretty good distribution through MSAs and so forth. But what I would also tell you is that we do business and have portfolios and part of our franchise exists from Washington DC to Boston at this point, and most markets are pretty much the same.

Jonathan Habermann - Goldman Sachs

Mitch, you had mentioned Central New Jersey you had rent rollup, but I noticed occupancy was down 100 basis points. Any thought there on the market? It sounded like it was one of your stronger markets but just looking through the numbers it looks a bit weaker?

Mitchell Hersh

Well I would say it’s probably not, it’s probably one of the stronger markets. The reality was that in our Horizon business center in Hamilton township we locked some occupancy, because one of our tenants who I think might and then this is my speculation might ultimately be in a very strong growth position, because their infrastructure and engineers and that’s all part of the stimulus plan that’s just been passed by Congress for roads and bridges, etcetera. They needed to consolidate and expand their operations closer to the Philadelphia area and we were able to accommodate them basically by them giving up a little bit of space in horizon some 38,000 feet I think, we were able to have them enter into a long-term lease in Strawbridge in two buildings totaling about a 100,000 feet and retaining 18,000 feet in Hamilton. So, it’s not as black and white as it would seems J.

But my comment to you was that and I think it’s important to reflect this that most of our markets and you may want to characterize them as primarily suburban versus urban or New York versus Non New York City. Most of our markets are operating the same and that is there generally traffic is off, generally even in the Washington Metroplex right now, notwithstanding all the talk about economic stimulus and everything else that’s been discussed in Washington.

The GSA hasn’t been out in the marketplace for space. Many of the consulting firms that ordinarily benefit from these programs and NASA and National Health and FDA and all the others haven’t been out looking at space. And so most of the markets have remained pretty soft, pretty quiet in terms of tenant demand right now and that’s almost universal.

Jonathan Habermann - Goldman Sachs

And you have mentioned obviously that the TI’s have remained fairly static at this point. Can you give us a sense of what your competition is doing I would say especially more of the private owners, how to mention they are not putting a lot of CapEx in at this point?

Mitchell Hersh

I think clearly, you are going to see a lot of capital constrained ownership, particularly given the fact that a lot of the securitized loans don’t really begin to mature until the latter part of '09 into the ensuing years, '09, '10 and '11, but in 2010. I believe it's going to be extreme pressure in terms of refinancing because there has been a devaluation of real estate both emotionally, psychologically and pragmatically in terms of diminished income streams.

And that by its very nature raised its leverage levels. And in the face of underwriting standards being increased and more disciplined on the part of capital providers, leverage just by this devaluation has now risen. And so, I believe that there is going to be lot of pressure in the market place which is also going to result in this flight to quality that I referred to before in terms of who your landlord is.

And we have demonstrable and empirical evidence of that being on the sort of forefront of tenants concern. They want to know that when they enter into a lease, they can do it in a fluid comfortable way, that their landlord’s obligations to them both in terms of concessions. However, you want to count that whether it's pre-rent or tenant improvement dollars, you can get funded to brokers who want to know they can get paid. And particularly those landlords or owners who are primarily secured debt borrowers.

With all of this looming in front of them, to get SNDAs now approved to financial institutions through lenders that are satisfactory to tenants, where tenants know that if at the end of the day there was some level of transition to use a delicate word in the property that they are fully protected, very difficult today. And in CMBS world it's almost impossible, because you have special servicers on all of these loans. And with all of the respect any of your or our friend who might be special servicers, they only punch computers. They don’t talk to you, they have no fore balance, rights, they can't help you, they can only tell what the document says and what you have to do. And I will give you an example of that. We had one asset that was part of our Belle Mead portfolio this is the wholly owned this is not the B properties that when we bought it we assumed the mortgage.

The mortgage was the CMBS mortgage, was entered into by the former owners, we had nothing to do with it. It was a balance sheet bank that sold the loan into cyber space in the CMBS world. And we were in a position to do an extension with a sub-tenant for virtually the entire building, just call it over 100,000 foot building. And the special servicer under the formulas that they had in the mortgage determined that the sub-tenant who would become our direct tenant in three years, that the sub-tenant’s credit was not as strong as the over tenant which we didn't necessarily agree to.

So, they denied approval of the lease unless we posted additional collateral in the form of a letter of credit behind that lease. Now we worked very hard, our leasing team, to get that extension that brings that lease way out into the 20 teens with what we believe to be a very strong credit. It's a non-recourse loan, but the mortgagee or the servicer to the mortgagee exercise its rights to protect the collateral by requiring this.

And I would tell you, that you are going to probably see a lot more of that kind of thing. And unless you have the wherewithal as the owner to be able to post the letter of credit, you are going to have to let the deal go down. And that’s a short-term view in my opinion to operating real estate. So, there is all kinds of events that are going to curve as a result of this liquidity prices that we are in and we haven't even touched the surface of it. But that’s the real time thing that just happened over the last couple of weeks.

Jonathan Habermann - Goldman Sachs

That’s helpful. And then in terms of, Barry, just last question on G&A, is that the run rate you think going forward?

Barry Lefkowitz

Yes, we are expecting in our model about $11 million a quarter, or $44 million for the year of SG&A roughly.

Jonathan Habermann - Goldman Sachs

Okay. Great. Thank you all.

Barry Lefkowitz

You're welcome.

Operator

Moving on, we will take our next question from John Guinee from Stifel.

John Guinee - Stifel Nicolaus

Hi, thank you. Very quickly, if we are looking at the Mack, Gale, Green financial statements correctly, is it basically a $277 million of total liabilities on about $880,000 square feet of assets?

Mitchell Hersh

Yes, that’s the blend, that’s because as I said before, there is a small residual interest that was carried for tax reasons on the part of the prior owners into this new entity. That does not reflect in bifurcation or an isolation that the B asset properties that we have been discussing, it does not reflect the properties in isolation that we took the impairment on. That's a blend of all of the properties that we bought from SL Green what we call the Belle Mead portfolio and the Gale Company.

John Guinee - Stifel Nicolaus

That total portfolio and aggregate was about 880,000 square feet.

Michael Grossman

It's 880,000 feet, seven assets in total.

John Guinee - Stifel Nicolaus

Sounds like a lender is in trouble, doesn't it?

Michael Grossman

I render no opinion on that. I am just presenting the facts John.

John Guinee - Stifel Nicolaus

All right, thanks have a good quarter.

Michael Grossman

Thank you very much.

Operator

Moving now we'll take our next question from Jamie Feldman from UBS.

James Feldman - UBS Investment Research

Thank you very much. I guess, just bigger picture, I was hoping you could comment on your view of just the health of businesses in your core markets. And I do not know the best way, but I guess if you could just say maybe kind of what inning do you think we are in terms of business closures and bankruptcies?

Michael Grossman

It is excellent question, we monitor this in a variety of different ways Jamie, we have of course our traditional accounts receivable which we are extremely active on and if we kind of know where we stand. We also adopted policies over the last year, where you know when I kind of looked at the overall situation and we had pretty big entity here where we were funding a lot of tenant improvement work in extras and kind of acting as the bank. And I am not questioning the credit that was behind it on tenants. But we changed our modified policy about a year ago. Where deposits have to be placed, on any large construction projects, interior construction projects that sort of thing.

So we monitor that but we also have a number of other different databases to kind of get to the question that you are asking. One is an email sort of all inclusive to the people that need to see to be part of this discussion of tenant own notice email which identifies changes in behavior on the part of either through direct discussion between property managers and office managers, the facilities managers, it monitors parking lots where we see deviations in the number of cars for any extended period, and so that kind of gets us aware of a potential issue or a problem and then we have another list which our tenants of concern, another database where tenants have either actually asked us for some relief. But we anticipate that they will and then we have our sublet area, but most of the sublet which is a little over million feet throughout our portfolio is credit tenants that have for some period of time had for strategic reasons excess space.

It does not really involve in the large measure these smaller to mid-sized businesses that have experienced problems. And so if I look at the tenant seeking relief, I would tell you and we constantly are very vigilant about making sure that we know everybody within our portfolio and that it’s a multi tiered responsibility on the part of the leasing reps and the property managers.

That in total represents significantly less than 1% of our income stream or our revenue stream in the company. And we expect that while these tenants and I personally been involved in some as recently as yesterday, have come and said I have this business, I think it’s viable, I am a 10,000 foot tenant or I am a 2,000 foot tenant, in Westchester the one yesterday. They have been on this list for some time and we in through communications, we knew there were some issues.

They have a viable business model, they have liquidity issues, their credit lines were pulled by the banks because there are a small business. They provide vital care to the community and the owner of the business contacted me directly, said that this I believe needs comes from the top in your organization and here is my circumstance, can you help me.

And we are going to help this person, this entity because they are a valued long-term tenant, they are experiencing difficulty now. And I believe that when things, and hopefully if things get better, and hopefully they will. They will pay us back whatever relief we give them now to help them get their business through this period of crisis.

So, this goes sort of throughout the entire portfolio that we have this tenant seeking relief and lease obligations, but as I said quantifying it, it’s less than 1% of our revenue stream. The tenant notice is that's more sort of exigent circumstance where one day, let's say a satellite office, a sales offers and I am just going to use a hypothetical, that's a 7500 foot tenant of a national insurance company will, the facilities manager will notify property management -- onsite premises property management that they would like to speak to them. And they would tell them that it's a Tuesday and on Friday they are shutting down the office.

And they are laying off all of their employees, all but one or two. And that has happened in a number of circumstances and it's horrific to watch this. But these generally are good credits where the tenants and they even reiterated not that they have to because the lease documents speak for themselves that they intend to honor the lease in every aspect including but not limited to the financial aspects.

But because of business pressure they are closing down operations and they are laying people off. And that is, as I say, it's more exigent, it happens maybe since the last, I would say month of 2008 into this month happening frequently. But by and large, it's with pretty good credits. And so we are more concerned about of course the people that are being laid off and how that's going to impact their lives. How that's going to impact the community and of course how that's going to ultimately impact us, because it certainly lessens the probability that that office gets reopened and that whenever that lease expires that it will be renewed. And so we try to build all of this into our modeling and our thinking. But the truth is that there is a lot happening everyday in reaction to this economic downturn that is very difficult to plan for.

James Feldman - UBS Investment Research

That was very helpful. Thank you. And based on your experience in the market, I mean, how long do you think -- it sounds like these kinds of events are accelerating. How long do you think we can, before we stabilize or get a better feeling for the floor that businesses have finally adjusted themselves and kind of prepared for the new world?

Michael Grossman

The reason I [pumped] on any assessment is remember back in other cycles, and as I said I have been there, done that and I have seen the differences in the 70s when we are going to have, I think as a result of this stimulus, we are going to have some slowing of credit and it's going to go to the consumer first in the form of some stabilizing of housing which absolutely needs to happen, and it all improves settlement and it will improve the lot of the consumer which will ultimately infiltrate into the economy.

The lending institutions and there are many fewer than they were previously because you had all of the these various companies, financial companies, GE capital and GMAC and Ford Motor Credit all these lending agencies in the past that have either cut back on lending to the consumer or have stopped lending.

And so credit is going to remain tight for a period of time. No matter what the government does. But they have got to get it back into the hands of the consumer and in businesses. When the circumstances, I talked about, the small business in Westchester. This small business had $200,000 in [alliance]. And aside from all the other financing that they hypothecated, everything they had try to not have to make that contact because they are honorable people about some rent relief.

Their lines were pulled, the small regional bank, up in Westchester pulled their lines. Obviously, they had a right to do it, based on the agreement. So, I think that there is a lot going on now that’s different than prior cycles.

So, my best estimate is that this is going to be long period of adjustments. The markets will flow up, probably not until much later in the year. There will be a lot less leverage. This is a huge deleveraging of the global economies balance sheet. And there will be some resuscitation at some level that probably will only begin at the later part of the year.

I'm not confident necessarily that the job growth that we are going to see is going to result in much demand for office outside of the fortunate fact that we have some of these infrastructure tenants etcetera. We have pharmaceutical tenants that are expanding, particularly the Asian companies. And so we will see some of that from a company perspective, but the other thing we are going to see at some point and it's probably two three years away, is hyperinflation that will result from the quant economics theorem that's been espoused and provided to the economy. And so I think also as a landlord and a real estate operator, you need to be pretty careful about protecting yourself. So that you can deal with that inflation when the economy comes back and when liquidity comes back into the market and take advantage of it. Because if you can take advantage of it, it will greatly enhanced property value and so we are kind of looking at lots of macro events that will impact us. But I think the fact that without necessarily any help, a company can get through the next three years, 2, 3, 4 years without having to access capital outside of what is controllable is a good place to be.

James Feldman - UBS Investment Research

Thank you very much for that.

Mitchell Hersh

You're welcome

James Feldman - UBS Investment Research

And then finally, can you just give an update on where Downtown Crossing stands, you took a writedown in the quarter, what does it look like going forward.

Mitchell Hersh

A couple of things have happened. We designed a couple of different scenarios for the project, I should say redesigned, where we can do things like eliminate the residential component, and the Gale International and [Warnedo] have had a number of meetings with the municipality with Boston. And I think that generally they support all of those goals, because they want to see, or they would like to see all aspects of the previously designed project proceed, they understand the realities of the marketplace right now.

But given the fact that there was virtually no construction financing available for the project, the partnership chose to do what it did as reflected in our filing. Today, the site is basically marked all, the write-down basically brings it down to a land value, that's supportable by appraisals et, cetera, on a reasonable basis. And the expectation is that at some point, hopefully it will be reactivated, and that's not an accounting statement. That's a reflection of optimism that when the credit begins to thorn -- the issue was using your capital. We were confident of the project. We actually had the hotel pre-sold, we had a variety of retail leases, and it looked like we were driving in the direction of some major office leases. But in the phase of the fact that the lending community shutdown, because they still viewed the project as highly speculative, we obviously did not want to use precious capital to build the project without absolute certainty of the final result and without knowing that for every dollar expended, we would have a dollar behind it from the capital markets.

And so that’s why we took the action we took. And right now it was some level of foundation work. These are two historic buildings, so they needed to be cleaned up a little bit, and some demolition work done, that was all done, and there is a nice, clean fence around the site right now.

James Feldman - UBS Investment Research

Okay. Thank you very much.

Mitchell Hersh

You are welcome.

Operator

We will take our last question from Nick Pirsos from Macquarie

Nick Pirsos - Macquarie

Good morning, thank you. A quick question for Mike, I think you mentioned in your remarks that you saw a 20% of your prospects in the quarter. How does that track versus prior downturn, it’s both in magnitude and duration?

Mitchell Hersh

I'll answer that. If I can.

Nick Pirsos - Macquarie

Sure.

Mitchell Hersh

I have to tell you, one of the ironies of this whole situation is that there was never a bubble in the suburbs. And the markets have always reflected I would say almost never less than a double-digit vacancy from a statistical perspective.

I would however add to what I would call equilibrium, and particularly when the .com and the Internet explosion occurred, so some of the suburban markets howered around 10% or 11% statically, and then when it imploded, they slowly and gradually have risen, and now they are back to high-teens and to the 20% mark.

So I guess the point I am making is that in these predominant suburban markets, we have never experienced the bubble, and thus hopefully we will experience a complete bubble bursting, if you will, and a serious compression in rents. Rents have moved in the suburban markets for the last 20 to 25 years, no more than 20% to 30%.

And so they are back to their historical, the lower quadrant given the vacancies in the marketplace. The good thing is that there hasn't been a lot of new supply, so inventory has remained stable. And again I believe that those properties that are held in the hands of strength in terms of financially flexible landlords that have strong franchises will be the beneficiaries. But the answer to your question is, it tracks, it is on the higher end of historical performance, but it's not unusual in the suburban markets.

Nick Pirsos - Macquarie

Great, thank you.

Mitchell Hersh

You're welcome.

Operator

That will conclude the Q&A session for today. I would like to turn the conference back over to Mr. Hersh for any closing or final remarks.

Mitchell Hersh

Well, thank you operator. And I would like to thank all of you for joining us on today's call. I hope it was helpful and insightful, and we look forward to reporting to you again next quarter. Have a good day everyone.

Operator

Thank you. That will conclude today's conference. We thank everyone for their participation. Have a wonderful day.

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Source: Mack-Cali Realty Corporation, Q4 2008 Earnings Call Transcript
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