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Mack-Cali Realty Corp.

Q1 2009 Earnings Call

April 30, 2009, 10:00 a.m. ET

Executives

Mitchell Hersh- President and CEO

Barry Lefkowitz- Executive Vice President and CFO

Michael Grossman- Executive Vice President

Analysts

Mark Montana- Citi

John Guinee- Stifel Nicolaus

Michael Knott- Green Street Advisors

Jordan Sadler- Keybanc Capital

Operator

Good day everyone and welcome to the Mack-Cali Realty Corporation First Quarter 2009 Conference Call. Today’s call is being recorded. At this time it is my pleasure to introduce the President and Chief Executive Officer Mr. Mitchell Hersh; please go ahead sir.

Mitchell Hersh

Thank you Operator and good morning everyone. Thank you for joining Mack-Cali’s First Quarter 2009 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 statement 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 quarter excluding a non-cash item was $0.88 per diluted share. This is unchanged from FFO of $0.88 per share for the same period last year. Given the deterioration in the commercial real estate market in the Boston Metro Area the company wrote off its investment, about $3.5 million in the Route 93 venture and thus took a $0.04 per share impairment charge.

We had some solid leasing activity over the quarter with 645,000 square feet of lease transactions. Our portfolio ended the quarter at 90.7% leased, down a bit from last quarter’s 91.3%. Of this 60 basis point drop, however, 40 basis points was related to putting the brand new Wyndham built to suit headquarters facility into service. Wyndham Worldwide moved into this quarter of a million square foot brand new building and simultaneously vacated 150,000 square feet at our Mack-Cali Business Campus in Parsippany New Jersey.

Rents rolled down this quarter by about 6.1% compared to last quarter’s 1.6% roll down. In our core markets in Northern and Central New Jersey we had roll downs of 6.4% and 7.5% respectively.

To give you an example of these types of deals that are contributing to these numbers let me give you a factoid about a tenant in Paramus. Harsco Corporation, a long-term tenant in our Mack-Cali Center Two in Paramus exercised the lease renewal for approximately 22,000 square feet. The prior premises consisted of approximately 31,500 square feet thus a reduction in the amount of space occupied by about 30% and a 17.5% roll down in the rents.

The reason I tell you this is because it’s a reflection in historical performance and a testament to a couple of things: the fact that I’ve stated for many, many quarters that over a period of time we were rolling our portfolio back to market equilibrium.

If you look at the average office rents within our portfolio of approximately $24.84 a foot and this deal at $24 starting out with $2.41 per year in leasing cost, total cost for tenant improvements and brokerage fees it’s roughly where that same lease, although a bit larger started out about ten years ago. Thus, this is a reflection in the consistency in the suburban markets, the fact that the markets don’t spike generally speaking and as I’ve said move back to equilibrium within a reasonable measure of volatility.

Our leasing costs over the quarter including tenant improvement work and commissions came in at a total of approximately $2.99 per square foot per year compared with last quarter’s $2.64.

For the remainder of 2009 our rollovers are approximately 4.2% of our base rent or about $24 million. For 2010 rollovers are approximately 11.5% of base rent or slightly more than $68 million and so we feel that our rollovers going forward are quite manageable.

Our portfolio continues to outperform most of the markets where we operate with leased rates exceeding market averages in Northern and Central New Jersey, in Westchester and in Washington DC and we’re pleased that even in these challenging markets and certainly that may be an understatement we have maintained our competitive advantage and our market leadership.

Despite our outperformance however, there continues to be a great deal of uncertainty in the business sector. Businesses remain reluctant to make office space decisions and when they do they’re looking for shorter lease terms generally, lower rental rates and more flexibility. So we continue to concentrate our efforts on keeping our properties well leased with a very fine roster of very high credit quality tenants, who in most instances notwithstanding market conditions would prefer to stay where they are in a Mack-Cali building.

In an effort to preserve capital we announced that our board of directors declared a cash dividend of $0.45 per common share. This new quarterly dividend indicates an annual rate of $1.80 per share compared with the previous annual dividend rate of $2.56 per share. This is expected to result in enhancing our balance sheet by retaining an additional $62 million on an annualized basis based on the current share count.

This past quarter the company closed on $64.5 million in secured mortgage financing through Guardian Life Insurance Company of America in two separate mortgage transactions.

The first mortgage for our building in Clark New Jersey along the Garden State Parkway, a 182,000 foot Class A building was for $19.6 million. The second mortgage through Guardian was for our River Center complex, which is a three-building Class A complex also along the Garden State Parkway at Exit 109 for $44.9 million. 1 River Center is approximately 450,000 square feet.

Some of our notable lease transactions during the quarter included the Ayco Company, a provider of financial counseling and education services for corporate executives and employees. Ayco signed a ten-year three-month renewal for 34,000 square feet and some change at 8 Campus Drive in our Mack-Cali Business Campus in Parsippany. Ayco was an existing tenant, another testament to the fact that tenants would like to remain in place with strong landlords and this asset at 8 Campus is 100% leased; 215,000 square feet.

Diebold Enterprise Security, a global security system, very recognizable name signed a seven-year six-month lease for 32,000 square feet, new lease at 3 Westchester Plaza in Elmsford. Located in Cross Westchester Executive Park this asset is a 93,000 square foot office flex building that with this lease is now 85% leased.

Acorda Therapeutics, a biotechnology company signed a three-year renewal, again staying in place, for 46,000 square feet at 15 Skyline Drive at Hawthorne New York. Located in our Mid-Westchester Executive Park 15 Skyline Drive is a 55,000 square foot Class A office flex building that with this renewal is now 100% leased.

[Ecide] Corporation of North America, a research-based human health company who’s building a very strong presence in Bergen County signed a new long-term lease for over 41,000 square feet at our magnificent 300 Tice Boulevard complex in Woodcliff Lake New Jersey. 300 Tice is a 230,000 square foot Class A-Plus office building that is 100% leased.

In other news Mack-Cali was recognized by forbes.com as One of the Nation’s 100 Most Trustworthy Companies. The survey, conducted by the Los Angeles-based financial analytics company Audit Integrity identifies companies that have consistently shown transparent and conservative accounting practices and solid corporate governance and management patterns. We are pleased to be honored alongside many of the country’s leading businesses.

Finally, I’d like to mention our global solution with Gramercy Capital Corp. and SL Green. You may recall that Gramercy is the mortgagee on what we affectionately call the B Properties as part of the Belle Mead Portfolio, a $90.286 million loan where SL Green was a 50% partner of ours. Gramercy extended the maturity of that mortgage for two years to a new expiration date of May 9, 2011.

You may also recall that we took an impairment charge in the fourth quarter writing down our equity to below the mortgage amount totaling approximately $27 million in these assets writing off our investment in the properties.

As part of this global solution Mack-Cali has also acquired SL Green’s 50% interest in these properties as well as its nominal interest in the A Properties, which were the core Belle Mead properties totaling about 3.5 million square feet as well as SL Green’s 50% interest in the to be built Building Four for Sanofi Aventis in Bridgewater New Jersey.

To refresh your recollection of this Building Four is a 205,000 square foot to be build development project under a 15-year net lease with Sanofi Aventis. We expect the unleveraged yield on this project will be close to 10% including our fees.

Total consideration paid to SL Green in connection with redeeming their interest in the B Properties and the nominal interest in the A Properties, the Belle Mead portfolio as well as its 50% interest in the Sanofi to be built project was $5 million.

I’d also like to point out that with respect to the B Properties and the mortgage extension with Gramercy Capital Mack-Cali shall be essentially acting as manager for Gramercy Capital and Mack-Cali shall have no obligation whatsoever to contribute any capital for any costs including operating, leasing costs, commissions, tenant improvements and recurring capital for these properties. Those obligations will remain with Gramercy Capital.

With that I’d like to now turn the call over to Barry to report our financial results.

Barry Lefkowitz

Thanks Mitchell. For the first quarter of 2009 net income available to common shareholders amounted to $12.1 million or $0.18 a share as compared to $14.9 million or $0.23 a share for the same quarter last year. FFO for the quarter amounted to $68.1 million or $0.84 a share versus $70.9 million or $0.88 a share in 2008.

Included in net income and FFO for the first quarter was $0.04 a share of a non-cash impairment charge on a joint venture investment. FFO for the quarter excluding this non-cash item was $0.88 a share. This is unchanged from the $0.88 a share of FFO we had same quarter last year. Net income excluding this item was $0.22 a share as compared to $0.23 a share for the same quarter last year.

The impairment charge of $0.04 a share resulted from the write-off of our investment in the Boston Route 93 Portfolio Joint Venture and that charge is included in equity and earnings of unconsolidated joint ventures on our financial statements.

Other income in the quarter included approximately a half a million dollars in lease termination fees. The first quarter of last year had lease termination fees about $738, 000. Same store net operating income, which excludes lease termination fees decreased by 0.9% on a GAAP basis and on a cash basis same store net operating income increased by 0.3% for the first quarter.

Our same store portfolio for the quarter was 29.2 million square feet. Our unencumbered portfolio at quarter end totaled 235 properties aggregating 24.4 million square feet of space, which represents about 83% of our portfolio.

In the first quarter we completed $64.5 million in mortgage financing with Guardian Life. The ten-year loans bear interest at 7.25% and are interest-only for the first year with 30-year amortization thereafter.

At quarter end our total un-depreciated book assets equaled $5.4 billion and our debt to un-depreciated assets ratio was 41.4%. We had interest coverage of 3.1 times and fixed charge coverage of 2.7 times for the first quarter of 2009. We ended the quarter with approximately $2.3 billion in debt, which had a weighted average interest rate of 5.37%.

Currently we have $365 million drawn on our $775 million revolving credit facility and approximately $60 million in cash on hand.

Please note that under SEC Reg. 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 Reg. G as well as our 10Q.

Now Mike will cover our leasing activity.

Michael Grossman

Thanks Barry. At March 31st our consolidated portfolio was 90.7% leased as compared to 91.3% at the end of last year. In the first quarter we retained almost 47% of our outgoing square footage, which is below our usual 60% to 70%. Without the impact of Wyndham’s space return our retention would have been 57% of outgoing space.

We signed 103 deals in the first quarter. The 645,000 square feet of transaction activity is almost 20% more than our fourth quarter volume but is still below typical levels. Our broader markets have experienced a similar slowdown in leasing velocity turning in first quarter results that were 40% less than the 2008 average.

New leases totaled 243,000 square feet compared to last quarter’s 163,000 square feet. Average lease term on all transactions increased from the fourth quarter’s 3.8 years to 5.5 years this quarter.

As is typical, 85% of our transactions were for smaller deals of less than 10,000 square feet. Unlike last quarter when we signed nothing over 25,000 square feet we did have a number of large block deals Mitch highlighted in his remarks.

We continue to experience downward pressure on first year rental rates but have not seen an upsurge in concessions on improvements and free rent. We averaged just less than one month of free rent per deal signed, which is consistent with several years and our TI costs were in line with previous quarters.

Comparing year to date prospect activity with the same period last year we were virtually flat relative to number of leads and down over 30% when measuring square footage. We’re seeing very few large block users in the marketplace.

Vacancy rates in all of our major markets are up year over year with the largest increase in Westchester County New York at 180 basis points. Vacancy in Northern and Central New Jersey is up only 30 basis points since the first quarter of 2008 although direct asking rents have dropped more than $2.00.

Space available for sublease in our portfolio remains steady at 4% of inventory. In our markets, sublease space represents anywhere from 8.3% of vacancy in Washington DC to 34.3% in Manhattan. Leasing continues to be challenging but our dominant presence, brand and reputation provide us a significant competitive advantage in the market, Mitch.

Mitchell Hersh

Thank you Mike. Let me just give you a few more factoids as I’ve done in previous quarters to give you a measure of what’s going on in the economy. With respect to our Hyatt Regency down along the waterfront in Jersey City, which many of you have been to and it’s a magnificent 350-room facility; occupancies have held relatively stable. We finished the quarter at 77% year over year. That’s about even. It was slightly actually less a year ago but not materially.

Eighty R’s in the hotel however, moved from over $221 a foot year over year to about $165 a room rather, which gives you a reflection of what is happening across the board in the economy. Rev-Par moved from $167 to approximately $127.

With respect to the liquidity and balance sheet capacity of the company adjusting for the new dividend at $0.45 per share and the impairment that we talked about, the $3.4 million writing down our investment in the suburban Boston portfolio; Boston hasn’t been very kind to us since our initial foray. We had an FFO payout ratio of just slightly more than 50% and a CAD payout of about 62% with over $7 million of free cash flow after these adjustments.

In closing, I’d like to offer a few additional thoughts. The credit crisis continues to plague the economy and certainly is having a significant impact on landlords. So when signing leases it’s more important than ever for tenants to align themselves with a landlord who offers strength and stability.

All too often these days landlords are credit constrained and in some instances unable to fund capital improvements and leasing costs and commissions. In a Mack-Cali building tenants know that they’ve chosen a landlord who remains committed to reinvesting capital in its properties and has done so on a consistent basis and has the resources to do just that.

I also wanted to comment on liquidity and access to capital in these markets and the variety of tools, both debt and equity that are available. As I indicated through the dividend modification we have now put ourselves in a position of retaining an additional 60-plus million dollars a year, about $62 million on an annualized basis based on the current share count.

We still see the possibility of doing some additional secured financings although those financings are generally low leverage, time consuming and limit some flexibility quite frankly in your alacrity with respect to responding to tenant’s needs in connection with leasing but we still see some amount of that on the horizon.

But we also believe that we’ll continue to look carefully at accessing all of the capital markets when it’s appropriate, including debt and equity. I frankly don’t want to rule anything out in this world of uncertainty and unprecedented events. We will continue to evaluate the capital markets with an eye towards continuing to reduce the leverage in the company and maintaining our financial flexibility as well as capacity to build on our position and stature as an industry leader.

While generally of course in a defensive posture particularly in these uncertain times we believe that opportunities will arise when there’s more visibility, more clarity and we will and want to be in a position to act quickly and act accordingly.

So with all of that we continue to remain cautious. We will operate conservatively and we will continue to focus our attention on serving the needs of one of our greatest assets, our tenant base. Now we’ll take your questions, operator.

Question-and-Answer Session

Operator

[Operator Instructions]. We’ll take our first question from Irwin [Guvnin] with Citi.

Mark Montana

This is Mark Montana on behalf of Irwin, a couple questions. Regarding your leverage do you guys have an internal limit based on either debt service coverage or debt to under-depreciated assets? I know you quote that often. Or is there really no hard and fast limitation?

Mitchell Hersh

Certainly there are limitations with respect to the covenants and the investment grade rating and the bank line covenants but we don’t have internal limitations. We operate in a relatively conservative fashion. We’ve always been a very modestly levered company from all perspective; debt to market cap, debt to un-depreciated book and coverage ratios, where we post 3.1 or so interest coverage and 2.7 plus or minus on fixed rate coverage.

That’s how we operate; that’s our mantra but there are no specific hard and fast internal guidelines beyond being cautious, careful with a view towards always understanding that there’s a degree of uncertainty in the marketplace.

Mark Montana- Citi

Given some modest retracement in spreads over the last month at least in the indexes do you believe that the 7.3% rate on the mortgages you obtained in January is sort of commensurate with what rating you think you could achieve in the market today?

Mitchell Hersh

If you look back on the Harborside lease, which was almost a quarter of a billion dollars at 6.8% and then what we did in January, which was in the seven handle I would say that that is the market plus or minus a couple basis points either way. But as I said, with respect to secured financings the leverage is quite limited. You’re looking at potentially 50% or less loan to value and value is a big unknown determinant in this unclear environment that we’re in. Generally speaking, these transactions take a long time to complete.

So I would say we’re delighted with what we have done and we think that plus or minus the interest rate is market.

Mark Montana- Citi

Finally, at the mid point your net income guidance increased about 10% quarter over quarter. Is this primarily due to a better than expected first quarter or a bit of a modest uptick in our outlook for the rest of the year?

Mitchell Hersh

You’re talking about net income, not net operating income and that’s a metric that is really based on depreciation and the adjustments there are based on the amount of depreciation.

Mark Montana- Citi

So nothing core?

Mitchell Hersh

Right.

Operator

Our next question will come from John Guinee with Stifel Nicolaus

John Guinee- Stifel Nicolaus

Mitch, nice job.

Mitchell Hersh

Thank you.

John Guinee- Stifel Nicolaus

Two things; one, you might just want to explain to everybody when you talk about limited leasing flexibility with a fixed rate vendor and how they would like to know what goes on with a particular building, explain that in more detail. Then second, can you just walk through your major known move-outs in the next 18 months?

Mitchell Hersh

Yes and I will restate your name is John Guinee. The flexibility issue, although it’s not often talked about it really is an important issue to think about with regard to mortgage financing.

Traditionally lenders have always had the requirement to have an approval right with respect to major leases. So depending on the size of the asset there were barometers and parameters surrounding the size of the deal that the mortgagee would have consent rights to.

As we have seen it evolve in this credit crisis mortgagees or perspective mortgagees have really now demanded almost unilateral approval rights with respect to leases because of at least the thought that maybe at some point they may have to step into the shoes of ownership.

In today’s market as we have seen on almost every day of the week you need to be in a position where you can immediately transact a deal. The markets in some instances are so fluid, particularly with new tenants that are considering relocations and being advised by the brokerage community. You need to know that you can do a deal, you can sign a deal, the tenant needs to know that and their broker needs to know that and then at the end of the day that they’re going to get paid, the broker.

So generally speaking the more time it takes to have to go back to a mortgagee for them to consent to a lease transaction, whether it’s because of renewal rights or extensions in additional space etc. is a little bit cumbersome and that’s a fact. Also the fact that we have the majority of our assets unencumbered with unsecured debt gives us a real benefit and I believe an advantage in the marketplace with respect to the speed at which we can commit to a transaction and actually sign it unconditionally.

With regard to the second question that you had about the major move-outs I would say that the two most material move-outs throughout the next year are State Street, which is down in Princeton, 500 College Road. We have known for a while that State Street was in a contraction mode. It’s about 114,000 square feet and so that’s a second quarter 2009 event but we’re actively engaged in marketing the space and we have some live warm body leads.

The other one of note is the Citigroup expiration, which is roughly a year from now, slightly less than a year from now at 125 Broad Street in Lower Manhattan. We have had a lot of interest. I can tell you we’re short-listed in several good size transactions; that’s 330,000 square feet more or less. There is activity down there.

There is a flight to quality going on, a flight to efficiency because of the floor layout. At about 37,000 square feet are very efficient. They’re actually quite new in terms of their build-out and so that’s an attraction and we can be very competitive because of our basis in the asset and our control over reasonable operating expenses. So we’ve seen a fair amount of activity and I’m really optimistic about executing some deals on that space.

Outside of those two transactions I would say they’re more of the ordinary course of business, anywhere from 10,000 to 20,000 square feet plus or minus throughout the portfolio throughout the next year or so; nothing looming large other then that really.

Operator

Our next question will come from Michael Knott with Green Street Advisors.

Michael Knott- Green Street Advisors

Can you just give us an update or a reminder on the Lehman situation and then also sort of similar to John’s question can you go through the prospects for leasing up any space that’s been vacant for a while, such as the Greenbelt Maryland space?

Mitchell Hersh

Yes. With regard to Lehman just to reiterate; Barclay’s has assumed at this juncture all of the financial obligations of Lehman at 101 Hudson. The plan if you will is that Lehman is moving through its bankruptcy proceeding and the plan at this juncture is that they will assume their lease in bankruptcy for all of the space at the current rental rate. They will shorten the term down on the lease assumption to a minimum of three years and hopefully more than that. As I said, Lehman is moving through its bankruptcy.

You may have read recently, I think yesterday or the day before that there were some issues surrounding their bankruptcy proceeding, challenges from the UK component and that may delay this whole assumption issue. But in the meantime they are in full occupancy and all of the obligations have been assumed by Barclay’s.

Michael Knott- Green Street Advisors

Then anything on any of the vacant space, Greenbelt etc.?

Mitchell Hersh

Yes. Greenbelt we obviously were hoping that there would be more velocity and more demand. We’re seeing a lot of small tenants in the marketplace. We are making some deals down there in the I would say 2500 to 15,000 square foot range. We have yet to see the real traction evolve as a result of the stimulus plan or any of the government related entities.

It has been slow going down there but the properties are exceptional, the complex is exceptional, the amenities and transportation are exceptional and we’re hoping for better traction in the coming days, in particular through some of the stimulus programs and the government programs. Does that answer it Michael?

Michael Knott- Green Street Advisors

Yes, thanks. I know the office portfolio has historically posted a higher occupancy rate than your office [inaudible]. It might be helpful for others and us to remind everyone why that’s the case, why it’s such a disparity in terms of the occupancy rate there.

Mitchell Hersh

We exceed the occupancies in most markets because of a number of things; our franchise, our sponsorship, our financial stability and strength. The fact that we have a tremendous team of human capital that works very hard to keep our portfolio well leased and has great relationships with the brokerage community and in many instances great relationships with the corporate community that does business in our markets.

We’re very active in the community. We’re a community supporter in terms of sponsorships and our name is out there. I think more and more in the face of a difficult economic climate all of these elements come to the fore. Tenants are very concerned and I’ve heard it personally that they want to make sure that their building and that their occupancy is going to be uninterrupted.

They don’t want to have a mortgagee as their landlord or a third party agent. They want to know that at the end of the day quite frankly if the air conditioning goes down they can call the CEO of the company and that’s me or they can send me an email.

Now, we have great property management teams that are on site and every one of these instances that wear Mack-Cali emblems and with the face of the company every day. Chances are that that call never will need to be made because of the reinvestment that we make in our properties and our capability of doing that and our branding and all of these other things.

But they know they have access and that there is this human being at the end of the supply chain if you will to speak to if they have financial difficulty if their circumstances change. That to me separates being an investor and being a real estate professional. Mack-Cali is a team of real estate professionals fully vertically integrated and has all the skill sets necessary to balance finance, technology and management with all of these other factors and in tough environments that makes the difference.

The proof is in the results. The proof is in the fact that we in some instances exceed market statistics by 400, 500 and sometimes 600 or 700 basis points. It’s all due to that fact as well as the fact that the brokerage community wants to make sure that they’re representing their clients appropriately and also that they’re dealing with a landlord that’s financially capable that doesn’t necessarily need to go through hoops with a mortgagee to be able to finally conclude a lease transaction so that the tenant can move in or their space can be built out and the broker can get paid.

So it’s a combination of all these things that really distinguish us from the masses.

Operator

Our next question will come from Jordan Sadler with Keybanc Capital.

Jordan Sadler- Keybanc Capital

I just wanted to double check on the capital plans going forward. I know you guys are among the least leveraged in the office sector but still you have significant maturities 2010 and 2011 looking at the drawing on the revolver and maybe some plans here to do a development for Santa Fe. I’m just curious sort of how you’re thinking about the $300 million maturing in 2010 if you’ve discussed anything with Prudential on that maturity and maybe even looking into 2011?

Mitchell Hersh

I tried to address that a little bit in my comments but I’d be happy to reiterate. First of all, with respect to the 2010 situation there is $165 million in unsecured in two tranches totaling $165 million and $150 million mortgage financing with Prudential that we are in deep discussion with and we have every expectation of extending that mortgage and doing so under mutually satisfactory and beneficial terms.

That’s looking at 2010 and 2011. Obviously we are keenly aware of the $300 million. We think that we’re in a good place relatively speaking. However, having said that and again at the risk of being redundant we’re in a period of time now where sort of all things are on the table and I’m not ruling anything out. There’s uncertainty in the world. The credit markets have remained somewhat frozen and paralyzed.

So kind of living and breathing the business and the capital markets as well as the real estate business my job is to make sure among anything else that we can maintain our flexibility to both opportunistically raise capital, to opportunistically maintain maximum balance sheet flexibility and mitigate leverage in the company.

With that we’re looking at the entire universe and I said it before clearly all of the…

Jordan Sadler- Keybanc Capital

If the three levers you can pull are asset sales, more mortgage financing or equity how do they…?

Mitchell Hersh

Let me just say this that the credit markets are essentially paralyzed so asset sales in my opinion would be the last and least likely situation that you could even consider. The risk of execution even if you were to find buyers is enormous. The pricing needs to be depressed because there is no active investment sales market right now. So out of the bucket that you’ve just kind of offered up that would be the least likely.

Jordan Sadler- Keybanc Capital

Then just clarifying this global settlement with Green and Gramercy what exactly did you get for the $5 million. What was the principle component; was it the rights to the Building Four development?

Mitchell Hersh

What we got was we redeemed their nominal interest in the A properties; it was a nominal interest.

Jordan Sadler- Keybanc Capital

I know what you’re talking about; then the B properties?

Mitchell Hersh

And the B properties we redeemed obviously their 50% interest and then did this deal with Gramercy and we purchased as part of this whole global solution their half interest in a property to be built that we expect we will build on an unleveraged yield basis of somewhere between 9.5% and 10%, which in any market with a 15 year net lease with a company like Sanofi Aventis you can kind of think about the positive arbitrage or the spread between value and value creation just on a sort of any theoretical cap rate basis.

Jordan Sadler- Keybanc Capital

Could you remind us of the deal on that development? Is it to be started at some point in the future; what’s the trigger?

Mitchell Hersh

Yes. We expect to commence construction in the summer of this year and to complete it approximately 14 or 15 months thereafter. The lease is fully signed and binding. The building is designed and priced and so it’s a go.

Jordan Sadler- Keybanc Capital

Would you plan to construction finance it?

Mitchell Hersh

No. Our cost of funds are less than construction financing however, having said that we will explore the markets potentially for financing, at least in permanent financing given the long-term nature of the lease and the stability of the asset. We’re certainly going to look at that avenue.

Jordan Sadler- Keybanc Capital

The expected cost?

Mitchell Hersh

We expect all in to have a cost on 205,000 feet of approximately $236 dollars a foot all in including TI, broker, land, soft, hard etc.

Jordan Sadler- Keybanc Capital

And it’s 100% Mack-Cali.

Mitchell Hersh

One hundred percent Mack-Cali.

Jordan Sadler- Keybanc Capital

Just to be clear did Gramercy take any bit of a haircut on the principle of the B property loan or is that still maybe…?

Mitchell Hersh

The loan principle amount remains at $90.286 million, which is what it was and as I said before there is a coupon rate to the loan. But essentially the properties are cash flowing. They’re in the aggregate about 68% leased. We hope to make more traction with respect to further lease-up but the capital obligations in terms of leasing costs for TI and commissions comes out of the waterfall reserve, which is essentially the cash flow right now in the properties.

We are under no obligation whatsoever to put up any capital and in fact a priority payment out of this capital reserve or this waterfall is to pay Mack-Cali for management and leasing fees.

Operator

Next we’ll take a question from John Guinee with Stifel Nicolaus.

John Guinee- Stifel Nicolaus

Mitchell, just to clarify what I think you’re saying there is the interest on that $90 million loan is junior to the TI’s and leasing commissions needed.

Mitchell Hersh

Yes. There is a waterfall where the priority payments are for operating the properties, paying for the lights and heat as it were as well as the real estate taxes and the payment to Mack-Cali of management and leasing fees and everything else is subordinate to that.

John Guinee- Stifel Nicolaus

My second question is you were voted I think one of the Hundred Most Trustworthy Companies and I think your guidance looks really low. Can you comment on that?

Mitchell Hersh

I’m not sure there’s a correlation between guidance and being recognized as one of the 100 Most Trustworthy Companies. I think that clearly the metrics that Forbes used and their research group was based on predictability, consistency, good corporate governance, patterns of management stability etc.

It was not as far as we were informed based on guidance or occupancy or anything else other than the expectation that we were recognized as a leader in the industry and that’s reflected I think in our occupancies. The question that was asked before about how we are able to out perform so many of the markets that we do business in.

Operator

Gentlemen, at this time there are no further questions. I’ll turn things back over for any additional or closing remarks.

Mitchell Hersh

Thank you very much. I appreciate everybody’s participation in today’s call and we look forward to reporting again to you next quarter; thank you again.

Operator

That does conclude today’s teleconference; thank you all for joining.

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Source: Mack-Cali Realty Corp. Q1 2009 Earnings Call Transcript
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