Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Mack-Cali Realty Corporation (NYSE:CLI)

Q1 2010 Earnings Call

April 29, 2010 10:00 AM EST

Executives

Mitchell Hersh – President and CEO

Barry Lefkowitz – EVP and CFO

Michael Grossman – EVP

Analysts

George Auerbach – ISI Group

James Feldman – Bank of America Merrill Lynch

Michael Bilerman – Citi

Jordan Sadler – KeyBanc Capital Markets

Michael Knott – Green Street Advisors

Chris Gay – Morgan Stanley

Operator

Good day everyone and welcome to the Mack-Cali Realty Corporation first quarter 2010 conference call. Today’s call is being recorded.

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

Mitchell Hersh

Good morning, everyone, and thank you for joining Mack-Cali’s first quarter 2010 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 generally seeing in our markets. And then, Barry will review our financial results and Mick will give you an update of our leasing results.

FFO for the first quarter of 2010 was $0.72 per diluted share. We did have some significant leasing activity in the quarter, totaling approximately 803,000 square feet of lease transactions. We ended the quarter at 88.8% leased. And, of course, that’s slightly down from last quarter’s 90.1%.

However, of that 130 basis point down, a 100 basis points is attributable to the expiration of the Citigroup lease at 125 Broad Street in Downtown Manhattan. It should be noted that we anticipated that lease expiration. We knew that they would not renew that lease and we are very actively working on some hopeful lease transactions.

Rents rolled down in the quarter by approximately 8.1%, compared to last quarter’s 10.5% roll down. Our leasing cost for the quarter were $3 per square foot per year, down from last quarter’s $3.69 per square foot per year, some slight improvement in those metrics. For 2010, remaining leased rollovers are approximately 5.4% of base rent or about $33 million. And for 2011, rollovers are about 11.6% of base rent or approximately $72 million.

Despite a challenging environment, our portfolio continues to outperform most of the market in which we operate. With our leased rates exceeding market averages in Northern and Central New Jersey, in Westchester, in Suburban Philadelphia, and in Washington DC.

Mack-Kali continues to be the preferred provider of office space in all of our key markets. We are pleased that we have continued to secure renewals with our existing tenants, very high-grade corporate tenants, and as well attract new tenants to our portfolio.

Some of the notable leasing transactions during the first quarter included the following. We signed a lease with FedEx for the entire building at 600 West Avenue in Stamford Executive Park. We are certainly pleased to have attracted this world renowned courier service to this 66,000 square foot office flex building in Stamford.

Par Pharmaceutical, a public company, a developer, manufacturer and marketer of generic drugs and innovative proprietary pharmaceuticals for specialty markets, signed a five-year lease renewal for approximately 60,000 square feet at our premier 300 Tice Boulevard in Woodcliff Lake, New Jersey. This exceptional 230,000 square foot building is now 96% leased.

We also signed a renewal with Telcordia Technologies, a developer of fixed, mobile, and broadband communication software and services. This renewal for 39 months is for approximately 48,000 square feet at our One River Centre, Building Two in Red Bank, New Jersey, at Exit 109 on the Garden State Parkway. This 120,000 square foot building is now 93% leased.

You will recall that we announced back in January a refinancing of a $150 million secured loan with the Prudential Insurance Company of America. VPCM, which is a wholly-owned subsidiary of the Virginia Retirement System, joined Prudential as a co-lender, and thus establishing a new relationship for us in the capital markets. This loan which matures January 15th of 2017 carries an interest rate of 6.25% and continues to be secured by seven properties in our Bergen County, New Jersey, portfolio.

As has been the case, year-after-year, Mack-Cali continues to be recognized for its expertise in property management as well as our ongoing energy conservation efforts. This quarter, a number of properties were honored with the Energy Star designation, from several buildings in Tarrytown to Paramus to Parsippany and Fair Lawn, New Jersey, Roseland, New Jersey, and more recently, our building at 125 Broad Street in Downtown Manhattan. These awards of course are given by the United States EPA and the United States Department of Energy and are given for excellence in a building’s performance and efficiency characteristic.

As well, this quarter, Mack-Cali was name Best Manager of 2009 by the Mid Atlantic Real Estate Journal for the exceptional job that the property management team of Mack-Cali business campus in Parsippany did and they do day-in and day-out. And finally, in Monmouth County at 23 Main Street in Holmdel, we received Office Building of the Year designation from the New Jersey Chapter of BOMA in the Corporate Facilities category.

As you have seen in the press release, we have reaffirmed our prior guidance range of $2.70 to $2.90 per share. However, we continue to see situations where particularly in larger corporate users, they remained focused on cost cutting, which of course results in employment loss, job cutting, and they continue to look for space consolidation and restructuring in what I would call a tenant’s market.

Usually, it seems almost programmatic. The space reductions range in the 10% to 15% exchange for which long-term renewals are provided with some immediate economic concession.

There are several situations that we are working on currently that we believe will certainly have long-term benefits to our portfolio by eliminating roll-over risk in the future, by securing the income stream of a number of our properties with the highest quality corporate credit, doing business in the global economy. However having said that, these restructurings will potentially exert pressure on our earnings particularly on a near-term basis and that would tend to move the earnings to the lower end of our guidance range.

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

Barry Lefkowitz

Thanks Mitchell. For the first quarter of 2010, net income available to common shareholders amounted to $14.5 million or $0.18 a share as compared to $12.1 million or $0.18 a share for the same quarter last year. FFO for the quarter amounted to $66.5 million or $0.72 a share versus $68.1 million or $0.84 a share in 2009.

Other income in the quarter included approximately $354,000 in lease termination fees as compared to a $0.5 million for the same quarter last year. Same store net operating income which excludes lease termination fees decreased by 2.8% on a GAAP. On a cash basis, same store net operating income decreased by 0.4%.

Our same store portfolio for the quarter and full year was 29.2 million square feet. Our unencumbered portfolio at quarter end totaled 236 properties, aggregating 24.3 million square feet of space, which represents approximately 78.6% of the portfolio. At quarter end, we had total undepreciated book assets of $5.9 billion and our debt to undepreciated asset ratio was 39.9%. After retiring a $150 million bond that came in due in April of this year, that ratio came down to 38.3%.

The company had interest coverage of 2.7 times and fixed charge coverage of 2.6 times for the first quarter of 2010. We ended the quarter with approximately $2.3 billion in debt, which had a weighted average interest rate of 6.7%. On April 15th, the company retired a $150 million of unsecured notes which came due using cash on hand. Currently we have approximately a $115 million in cash and no outstandings on our $775 million revolving credit facility.

Our 2010 guidance range in unchanged of $2.70 to $2.90 of FFO 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 reconciled into net income available in our website at www.mack-cali.com are in our supplemental package and earnings release which includes the information required by Regulation G as well as our 10-K.

Now, Mike will cover our leasing activity. Michael?

Michael Grossman

Thanks Barry. At March 31st, our consolidated portfolio was 88.8% leased, down from 90.1% at December 31st. Our 803,000 square feet of leasing volume consisted of 308,000 square feet of new leases and 495,000 square feet of renewals and other tenant retention transactions. As a measure of demand across our portfolio, new lead activity in the first quarter was of last year’s first quarter totals by 13% on a number of leads and 4% per square footage.

Inquiries for space increased in the Northern most New Jersey submarkets of Bergen and Hudson counties adjacent to Manhattan, as well as our Suburban Philadelphia market. Our other Suburban markets were off last year’s first quarter totals slightly. As mentioned in the quarter, our 2010 rollover was weighted in the first and fourth quarters of the year. We currently have approximately 1.5 million square feet expiring in the remainder of 2010, representing 5.3% of our leased space.

Looking at our markets both Northern and Central New Jersey, experienced positive absorption in the first quarter. With less space being returned to the market, these upticks occurred even though leasing activity was flat in Northern New Jersey compared to 2009’s average and off by 30% in Central New Jersey.

Northern New Jersey’s vacancy improved by 90 basis points, primarily as a result of a 280 basis point occupancy gain in Morris County, and Central New Jersey's vacancy improved by 30 basis points. Westchester County, New York's vacancy increased by 110 basis points, Suburban Philadelphia’s vacancy rates stayed flat, and Prince George's County in Maryland improved by 170 basis points. Westchester County, New York, and Fairfield County, Connecticut, and Suburban Philadelphia, all posted moderate increases in leasing volume over the 2009 average.

Asking rents varied a little across our markets during the quarter. Sublease space as a percentage of overall availability declined in all markets except Washington DC and now averages approximately 17% of overall vacancy.

Mitch?

Mitchell Hersh

Thank you. Before I open the call up to questions, I just like to recite a few of the factoids that I traditionally talk about on these calls. First of all, I would make the point that the same store NOI will probably continue to be under pressure certainly this year. We would anticipate that it would be in the negative range potentially of 0% to 5% down through the course of 2010.

I might make note that although this first quarter reflected a GAAP NOI of minus 2.8%. If we were to adjust for the exclusion of the Citigroup situation at 125 Broad Street, it would be minus 0.8%, which is a dramatic lift in that reduction; I would point that out, because I think that would give you some perspective on the blended portfolio outside of our one building in Manhattan.

As well, I think in general, we have continued to benefit in the area of real estate taxes. We are actively and aggressively challenging (inaudible) reviews and almost throughout our portfolio. We all know that municipalities as well state governments are all under pressure. And so, clearly these situations take some time, but we have benefited from some tax appeals.

We continue to benefit from utility cost savings both in terms of generally usage and rate. This quarter ended up to be almost a 7% reduction in utility usage. But unfortunately, the quarter also reflected about a 3.5% reduction in property revenues which is obviously a reflection of some occupancy loss in the portfolio.

The real positive aspects are that we continue to reflect a positive cash flow for the quarter on a CAD basis, which for us our CAD payout ratio was about 77.5%, and that less dividends reflected about a $12.7 million free cash flow from a CAD calculation perspective, and that’s after spending that $10 million in the quarter on tenant improvement costs and leasing commissions.

We expect for the year to the extent we are able to use our crystal ball that while occupancy may continue to be under some level of pressure, we will hopefully – and I say hopefully, because it will reflect a good leasing velocity, spending total about $64 million for the year on tenant improvement costs and leasing commissions. And still reflects a positive cash flow of on a CAD basis of somewhere around $18.5 million at yearend. And so, we are in an enviable liquid position.

I would also submit that we continue to evaluate our portfolio on a market-to-market basis and clearly the rents continued to be pressured by market vacancies and by diminished demand, and we will certainly probably talk more about that in the Q&A. But we think that right now on a market-to-market basis as to the extent we can create a science out of this that our portfolio is probably somewhere around a 107% or a 108% of market, so that it is not a material markdown on a market-to-market basis throughout the bulk of our portfolio.

So with those few additional elements, I would now like to open the call to questions. Operator, if you would be so kind.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from George Auerbach at ISI Group.

George Auerbach – ISI Group

Good morning.

Mitchell Hersh

Good morning.

George Auerbach – ISI Group

Mitch, can you give us some color on the leasing prospects at 125 Broad Street? And also, give the amount of competing supply downtown, what is your outlook for that rents at that space?

Mitchell Hersh

Well, I can tell you that the market is under significant pressure. The competing properties in general would include former Goldman Sachs place and 100 Church, although that’s more of a West side focus. 125 Broad Street is an extremely high-quality assets and it does have a great deal of infrastructure. But having said that, again, it’s a very competitive market with diminished demand particularly as a result of the financial services industry being under continued pressure from a variety of areas not the least of which is employment contraction.

We do see a lot of not-for-profits, we see technology companies, insurance companies still in the marketplace looking for consolidation. There is a lot of old product downtown as there is no probably almost everywhere throughout the isle of Manhattan. And so it’s an opportunity for tenants to consolidate. We are working on a couple of transactions now and I am not going to be too specific, because we are competing for these situations where I think we can make some significant inroads to our plus or minus 290,000 square feet of vacancy in that asset. The rents today I would say on a – most of the leases are long-term leases, 15 to 20 years, some are 20 years with cancellations after 15 years, some level of modest payment for the unamortized portion.

Operating expenses are about $16, $15, $16 more close to $16 and $15, including taxes in the downtown market. And I would say that the average rents are somewhere in the $35 plus or minus range on a growth basis, plus electric in that market today. But I would also tell you that in order to facilitate leasing in that market, you are looking at legitimate tenant improvement packages of, and reflecting on all the potential transactions that we are involved in anywhere from $65 to $90 a square foot, whether or not they need, if you follow me, and commissions on top of that. So you are looking at $100 type packages to install a tenant that’s got good quality credit on what is – let’s say on average a 15-year lease would somewhere a $35 average rent with a $16 expense stuff.

Did that give you the information you need?

George Auerbach – ISI Group

Yes, that’s very helpful.

Mitchell Hersh

Good.

George Auerbach – ISI Group

Barry, I am sorry if I missed it. But did you give the rental spreads on the leases signed during the quarter?

Barry Lefkowitz

Well, yes, we did. We – in terms of the same store, we said that the gap is down 2.8%. And on a cash basis, we are down 4%. And we were down 8.5% -- 8.1% on cash for the roll down and 9.4% on gap for the leases done in the quarter.

George Auerbach – ISI Group

Thanks. Sorry, I missed that. And finally, Mitch, last year you were appointed to Governor Christie's economic transition team. Can you discuss some of the initiatives that the Governor and your Subcommittee are considering to track and grow the business base in New Jersey? And also when you are seeing these initiatives could have an impact on employment growth?

Mitchell Hersh

Yes, absolutely. I think the Governor has done an exceptional job so far in continuing to maintain a non-point message about being business friendly. That includes Lieutenant Governor, Kim Guadagno, who will in addition to her roll as Lieutenant Governor Service Sectary of State and the economic czar. And here primary mission right now is to reduce the regulatory hurdles in connection with doing business in New Jersey, the cutting out the red tape. And that includes not only issues that surround building and even with small businesses adding on to a small factory.

But it includes regulatory environment affecting pharmaceutical companies and others in terms of them getting a necessary permits for their scrubbers and all the other equipment that they use in research from the EPA. So there is a very strong initiative in terms of reducing regulatory red tape. The Governor is focused on reducing the tax burden. There has – he has sent the message with resolve that there will be no reinstatement of the surcharge on the wealth tax for a lack of a better expression and he will veto any legislation that might attempt to impose a higher income tax with the most significant aspect of that being small businesses.

I would say that as a nation, 70% of our economy is results from the efforts of small business in terms of employment and economic activity. And many of those companies and businesses are formed in either Subchapter S or LLCs that are taxed the principals and proprietors are taxed on a personal income tax basis. And the Governor is very, very focused on not reestablishing that tax.

He has taken dramatic action against what I would say a union organized labor and only in terms of legacy cost and trying to reduce the cost that are imposed on pensions and areas that continue to strain the economy and not only in New Jersey, but just about every other state in the country. So he is pretty clear on point, on message. I will tell you that in speaking with corporate leadership and many management teams, they are feeling a lot better about the message that’s being sent and some of the initiatives and early actions being undertaken by this Governor.

Some of the other things that we did in addition to immediate tax policy in – at the transition committee level are more long-term benefits, connecting higher education with the economy, creating inducements and incentives to maintain intellectual capital in New Jersey. We do have some very fine higher educational institutions. I am proud to be on the Board of the second largest university in the state, Montclair State University.

And the interconnectivity between some of the vibrant industries such as pharmaceuticals or technology, and these universities, they are nexus, if you will is another initiative to keep intellectual capital in New Jersey and offer further inducements to have young people, the new age, the new norm workforce stay in New Jersey, rather than migrate to other parts of the country by providing incentives and inducement, and likewise, reciprocally providing it to businesses that engage. And so there are lots of different real positive messages that are being sent.

All of the programs that have been developed, the – as of right programs such as the Business Employment Incentive Program or the Urban Transit Tax Hub Credit remain enforce, the EDA, the Economic Development Authority is very anxious to attract new business to the state. So the early read and the long answer to a short answer is the signs and signals are pretty good and business is reacting in a positive way at this juncture.

George Auerbach – ISI Group

That’s great. Thank you very much.

Mitchell Hersh

You’re welcome.

Operator

We will take our next question from James Feldman at Bank of America Merrill Lynch.

James Feldman – Bank of America Merrill Lynch

Thank you and good morning. Mitchell, you had commented that some lease restructurings and early renewals could take you at the lower end of your guidance range. Can you give a little bit more color on the magnitude of these kinds of deals and the likelihood that basically that they are really going to happen?

Mitchell Hersh

Yes. Nothing is for sure until it’s signed. But there are a couple of situations what I have seen over this period of time is clearly there is a sentiment, almost universally as far as I can see that given the fact that there is excess supply that the markets have been generally under such pressure that it’s a typical tenants’ market, the commercial real estate brokerage community has to make a living, and so they are out there engaged with tenants, corporate America, making sure that they educate their clients to the back that there are potentially some economic benefits that they can derive in this sort of a tenants’ market.

And particularly where we have what I would call a long-term strategic relationships with some of the larger corporate users in the insurance industry that comes to mind, they are looking at working with us to facilitate some of their corporate strategies which has over the last couple of years have certainly been cost cutting, cost shedding, they have reduced their headcount, their employee headcount. And where they have three, four, five, six locations with us, we have been working these strategies to look at each of their locations with their representatives.

And there are situations where frankly they need to expand and situations where they need to contract or diminish some of their physical plant and their headcount. And naturally, they are looking for some upfront benefit as well whether it’s simply taking 10% of their space in aggregate or 15% of their space in aggregate and cutting off the income stream through us, so stopping the bleeding on their side. And thereby having done that, it minimizes our upfront cost, the TI expenses are low.

And so, pretty much all we are paying for is maybe a small cosmetic upgrade at most a brokerage commission and in exchange for which we will get seven, eight or so year lease extensions. And there are a couple of those situations that are what I would tell you are in more than serious discussion.

In the aggregate, what does it amount to? I don’t know, maybe a 100,000; 150,000 square feet through the portfolio that sort of would have an immediate or a near-term reduction in rent revenue to us. But certainly on a long-term and from a cash management perspective are great benefits to the portfolio.

So that’s – there to some extent Jamie, the – a lot of what you are seeing in the market is simply a result of perception and tenants or their representatives believe that they can seek accommodations from landlords, especially the well capitalized landlords, and they are out there doing it, because they can do it. So that’s kind of what we are experiencing right now.

James Feldman – Bank of America Merrill Lynch

Okay. And then can you also comment on what you are seeing from small businesses? Are they – things still getting worse, are they kind of flattening out, are they starting to get a little bit more active?

Mitchell Hersh

I wouldn’t say they are getting more active. I would say that we are not getting too many calls where people are ringing the fire bell right now. There seems to be what I would say a stable – it’s stabilizing in some businesses. Some of our Westchester tenants were under a serious financial pressures when their credit was cut off and their lines were shutdown.

We have worked with them, they are paying in some cases a restructured rent to us, and we haven’t had any real emergence of new situations, no emerging situations of distress. So that’s why I said in my quote in the release that I am beginning to see at least what might be the stabilizing before or the point of inflection.

I certainly don’t see a velocity, I don’t see demand, space showings are still are off of their peaks, certainly better than they were in the height of what everybody thought would be the destruction of the financial service sector or the financial system. But there is no velocity out there right now. There is still a lot of caution and there is a lot o pressure on pricing from a landlord’s perspective, because of the amount of inventory and the musical chairs that’s going on right now.

James Feldman – Bank of America Merrill Lynch

Okay. And then finally, I knew in the past you have talked about what you call dignified solutions or acquisitions using a p unit. Can you give us an update on how that –?

Mitchell Hersh

Yes, I have been spending a pretty fair amount of time in a couple of a situations in the markets that I previously identified the metropolitan, the New York market and the DC market. And there a couple of situations that I would consider to be viable at this point have been able to build a pretty good chemistry synergy with the principles.

The interesting thing Jamie is when you look at some of these private situations and – because those are the sponsorships that I am talking to, it’s certainly not the publics at this point, it’s almost incredulous what you see in terms of capital stack issues, the layers of financing that was done in connection with asset acquisitions in the ’05 to ’07 timeframe, super mezzanine positions, the equity, and then of course the senior debt positions, almost all of which are in many instances underwater.

And so the caution that needs to be undertaken is to know to be very clear in the intrinsic value. And if that can be established, then to work through the capital stack issues to try to have everybody understand that something is better than nothing. But I would say that there is a – when you talk about commercial real estate what all the refinancing risk, to the extent that I have been involved in these explorations, I will use that word, in these different markets, it’s remarkable how buoyant the investment and pricing levels got in some of these areas and some of the potential pit rolls as a result of that.

So we are trying to work through it, we are trying – but these are not easy transactions, they require a lot of work and a lot – everybody has to really be very realistic in their expectations, because when we get a mezzanine holder who thinks they got their control and the keys to the kingdom, they could take the house accords down and nobody will have anything, except the lender, the senior lender will end up with an overleveraged piece of real estate that has a lot of leasing risk and a lot of capital requirements going forward to be able to compete in the marketplace.

I know it’s a very general broad answer to your question, but I think that’s an appropriate characterization of almost universally what I am seeing in – what I would say the midsized sponsorships that were either operating private equity funds or just proprietors that brought in external money to capitalize a lot of investment activity at the peak.

James Feldman – Bank of America Merrill Lynch

Okay, thank you.

Mitchell Hersh

You’re welcome.

Operator

We will take our next question from Michael Bilerman at Citi.

Michael Bilerman – Citi

Great. Mitch and Barry, good morning.

Mitchell Hersh

Good morning.

Michael Bilerman – Citi

I wanted to go a little bit deeper into guidance try to reconcile a couple of things. You reported $0.72 in the quarter. You are indicating based on some of these restructurings hat that’s maybe you get taking down to the lower end. So let's call the lower end $2.70 to $2.75 for a second. That would put your quarterly run rate at $0.66 to $0.68 relative to the $0.72 that you reported in the quarter. That equates to $4 million to $5.5 million of quarterly loss FFO or annually $16 million to $20 million, which is 3% to 4% off of your income levels, your base rents.

You have paid back the bond in April with cash, so that's accretive, but let's just put that aside. Something is not adding up. Relative to where you are today, same store was down 3%; your forecast for the year is flat to down 5%. So NOI on a sequential basis shouldn't get that much worse, say for the restructurings about a 150,000 square feet is not that much. So can you help me bridge the gap in the numbers?

Mitchell Hersh

Yes, right, we will try to do that, Michael. The – some of the issues that surround – there are lots of moving parts obviously. We had the benefit of a tax appeal that helps us in this quarter, it was almost $0.02 a share. We have had some G&A reduction, but the loss of Citigroup obviously is a very significant loss to us. It’s $12 million or $13 million on an annualized basis of income.

Michael Bilerman – Citi

But that’s already in the first quarter.

Mitchell Hersh

No, the leased rents through the first quarter – through one month, one full month of the first quarter. So it was only partially offsetting the first quarter. So that has to be considered. We have a couple of these situations as I alluded to very candidly about restructuring potentially that could result in $0.02, $0.03 in upcoming quarters they are hard to predict.

I mean I have got handshakes on these deals, but you are going through a labyrinth of corporate bureaucracy, in some cases, the government's involvement, in some of these companies now, so they take a long time. So there is a little bit of a lack predictability on some of the restructuring. We don’t know exactly that will continue to benefit as we have over the last year in some of the utility cost, because the winter was a hard winter, we don’t know what the summer was going to look like.

Last summer it was temperate, we had lower usage, unfortunately some of that’s due to vacancy. But just in general, the temperature swings were less. So there are these variables that could impact us and push us down to the lower end of the guidance range. And I want to be very, very open about suggesting that that’s a possibility.

Michael Bilerman – Citi

Well, I guess if we go through the specifics, on the restructurings, when you talk about a $150,000 –?

Mitchell Hersh

I have got one right now Michael that’s in progress or process that I think I have a deal. And that one in and off itself is a $0.02 reduction.

Michael Bilerman – Citi

But you are saying that you are losing a $150,000, that's your contraction or is that –?

Mitchell Hersh

Contraction, contraction.

Michael Bilerman – Citi

That's the number. So you are talking with tenants that if –

Mitchell Hersh

Yes, I am.

Michael Bilerman – Citi

If you go through your math of saying these tenants are going to contract 10% to 15%, you are talking to about 1.5 million square feet of your portfolio, you contract, you lose that rent and then the rent goes down.

Mitchell Hersh

No, that’s not exactly what I am – I am not saying it’s portfolio wide, I am saying that there are a number of anecdotal situations that could total about by early, immediate contractions, stopping the rent on space and exchange for longer-term restructuring. It could result in a couple of hundred – call it couple of hundred thousand feet of income that was originally anticipated to be fully supported by cash flow in our original guidance of $2.70 to $2.90. And as a result of more discussions following originally putting that guidance out, the situations have emerged.

Michael Bilerman – Citi

Right. And that –

Mitchell Hersh

That would result in a reduction that are going to push us to the lower end.

Michael Bilerman – Citi

And that $0.02 to $0.03, that’s annualized number or that’s –

Mitchell Hersh

It could be – potentially it could happen in a several quarters throughout the year.

Michael Bilerman – Citi

Right. And then just in terms of G&A, the G&A did seem low this quarter at $8.4 million. What is –?

Mitchell Hersh

Our run rate for G&A right now is $8 million a quarter, $32 million going forward plus or minus.

Michael Bilerman – Citi

So that should stay relatively firm.

Mitchell Hersh

Correct.

Michael Bilerman – Citi

And then the tax, because the first quarter tends to be a low in a line margin quarter anyways. So I guess I would have thought that even if you had the tax benefit, call it $2 million or $1.5 million in the quarter, you would have picked some of that up by the back half of the year just based on your operating margin improving just under normal seasonality.

Mitchell Hersh

Yes. In the quarter, we had $400,000 for example less in budget – in leasing, in executed leases than our original model as a result just the market conditions. So there are these variables. And look, things can change, but this is a pattern that I have seen. And I still want – I want to be – I want to disclose everything that we are seeing in the markets right now.

Michael Bilerman – Citi

Was the assumption always to refi the $115 million bond deal that came to you in April on the line for the year or is there something else that was in previous guidance versus current guidance?

Mitchell Hersh

No. There is no change in that. We were sitting with cash today of about $115 million. We anticipated paying that off. Obviously there – it’s a very fertile market right now in the debt markets, but there is no reason to do anything that at this juncture given the lack of user proceeds. And so we have a lot of capacity right now and I expect that if we needed more, we could certainly attract capital. But right now, we are just kind of sitting where we are. There is no change, none of that altered guidance, none of it was dilutive in anyway that wasn’t reflected in the original $2.70 to $2.90 that we put out.

Michael Bilerman – Citi

Right, but that's going to improve. Sequentially, you are going to pick up $0.015 to $0.02 from taking $150 million that – call it a little north of $5 million down to earning nothing or paying nothing. So that's going to be accretive to your sequential numbers.

Mitchell Hersh

Yes. But, look, we are going to through – yes, obviously, any leasing that we do after what I will call midpoint of this year is not going to – first of all, it’s only going to be a straight line income, it’s not going to reflect any cash flow generally with the downtime and so forth. So we are very cautious about our leasing projections through the year.

Look, if we might get lucky, I am hopeful in a couple of situations not the least of which is 125 Broad Street, but it’s not going to show us any income throughout the course of the year and I don’t know exactly when the commencement date would be. So the likelihood is that there won’t be a lot of pickup in the leasing percentages here. And so while there might be some incremental accretive gain from the financing or having paid off the financing bond that we are talking about, it could be offset by some continued pressure on the occupancy.

Michael Bilerman – Citi

Right. I guess when I just put it all together, if you reported $0.72 in this quarter, and let's say a $0.02 from the positive on the –

Mitchell Hersh

Taxes.

Michael Bilerman – Citi

On the taxes, you get – you are going to have a positive $0.02 next quarter from you staying off the bond. To get to the low end, even if you are $0.02 to $0.03 of – I know you want to be conservative but something – it just doesn't – to me it's like you are going to be at the midpoint of the high end rather than the low end to the midpoint even with $0.02 to $0.03 of restructuring.

Mitchell Hersh

I would just ask you, obviously you could take – you take the information and you analyze it. But I would just ask you to reflect on this discussion, go back and model in the fact that one-third of the first quarter had close to whatever was $13 million, $14 million on an annualized basis of income at 125 Broad Street from Citigroup that no longer exist and then see where you are with the numbers.

Michael Bilerman – Citi

Okay. Building on lease term fees, Mitch –

Mitchell Hersh

They were negligible. Not negligible. I mean there were $350,000 for the quarter.

Michael Bilerman – Citi

Okay.

Mitchell Hersh

We don’t see any major situations there.

Michael Bilerman – Citi

Okay, thank you.

Mitchell Hersh

You’re welcome.

Operator

We will take our next question from Jordan Sadler at KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Thanks, good morning.

Mitchell Hersh

Good morning.

Jordan Sadler – KeyBanc Capital Markets

And not to beat a dead horse on the blend and extend deals. But just out of curiosity, are these and you may have mentioned this, are these low TI deals which is typically –

Mitchell Hersh

Yes. I did mention it. Generally, they are fairly low TI deals. They – most – mostly, I mean they vary clearly. But most of them are more cut, very low – I am working on one situation now which is significant, it could be as I said a couple of cents a share. But in exchange for which in addition to a decent term on the renewal, there is no TI, it’s just the commission.

So I would say in general from a cash management and cash flow perspective, they are efficient unfortunately because of the pressure that exists in the markets and the sentiment perception with the help of commercial brokerage community that these deals can be done at this junction. There is some loss of revenue on the top line to the portfolio because they have taken back space early. But you have to feel your way through those situations.

Jordan Sadler – KeyBanc Capital Markets

And thanks for the clarification and sort of the increased transparency on the market-to-market, I think you said about 78% portfolio.

Mitchell Hersh

Right.

Jordan Sadler – KeyBanc Capital Markets

I assume though that's – the deals you are probably working on are 2010 to 2012 type expirations. Tenants you want to keep so probably bigger in size who are considering their options. Is it possible that the marks that some of these leases are above, even further above market than sort of the portfolio average, just given the sort of the vintage of these leases?

Mitchell Hersh

Our – today, based on our view of this, we have an average in place gross rent of $24.35 on the consolidated portfolio. And in our view of the average market rent is $22.58. I know it sounds odd, but it’s an aggregate of so many different markets and numbers. So that would reflect a market-to-market of down 7.3%.

Now if I look at – we talked about the quarterly rollup and roll down and we talked about the NOI rollup and roll down and while there was an improvement this quarter over last quarter, last quarter was 10 and change and this quarter was 8.1% on a cash basis, 9.4% on gap.

I look at every deal that we are doing – I mean the reality is that in most – I think we are reaching a point in the portfolio based on the vintage as you call it of the leases where we are kind of reaching the new norm if you will that we have rolled through the bulk of leases that are – we are rolling through over the next two years, leases that are – were five to 10-year leases that had the – that had good face base rents, call it some of the suburban markets in the mid 20s, $25, $26 with base years that are now five to seven years old. So you move those rents up from their original face amounts by anywhere from 15% to 20% based on escalation cost – operating cost escalations.

And now we are doing those deals some with more capital, some with less capital in terms of TI. And we are rolling them back to the face rents that existed when we did them five to seven years ago. And so they reflected in absolute numbers of 15%, 16% reductions or roll downs in these deals. So I think we have a – I think that we have modeled this correctly and that the expectation if it’s not 7.3%, it’s 10%. But there is not a dramatic market-to-market roll down in our portfolio and so far as we can see.

And as I am hopeful at this juncture, while we are not seeing a lot of demand in the marketplace, I think that the pressure is not getting any worse, it’s less bad in terms of leasing concessions and things, what’s being asked for on the part of tenants they are getting a little more realistic, at least their representatives are. And so that from this point, we may not have a great acceleration, but I think the downside is extremely limited.

Jordan Sadler – KeyBanc Capital Markets

Okay. And then following up I think Michael, in his prepared comments mentioned that new lead activity was down 4% square footage, 13% in terms of the number. Can you just clarify that? Is that year-over-year and is that a typically a good leading indicator?

Michael Grossman

The – there were some anomalies in that number, but that 13% is a year-over-year first quarter.

Jordan Sadler – KeyBanc Capital Markets

Okay. Is that concerning to you? Is that typically a good leading indicator? Some of your peers are talking about an acceleration in activity at least.

Mitchell Hersh

Yes, I have to tell you something it should only happen. I am not seeing that. We see our tenants and I think that there is a very strong bond and loyalty and great relationships in many cases, CEO to CEO in these situations. And the tenants are feeling a little more comfortable in extending out leases and in some cases in exchange for some immediate benefits. But we are not seeing a lot of traction on the demand side and not a lot of expansion that’s for sure.

I mean expansion is much more anecdotal than anything else. But we are seeing a lot of loyalty even in for example Jersey City, where we had a couple of situations in 101 Hudson, where tenants were subtenants of major financial institutions that really could not have afforded that building. And they are staying with us, they are moving towards little bit different price point in the older portion, the Harbor Side Financial Centre 2 and 3. But it’s not incremental growth and that’s the concern.

And how could there be when you have the situation in Washington with financial regulatory reform that’s evolving and all of the uncertainty and unknowns that exist in terms of the limitations on the banking and financial service industry which is a big part of the nucleus of the New York metropolitan market, particularly New York City, how could these companies be bold enough other than on an anecdotal basis to be expanding right now when they don’t know what the shape of their business is going to be depending on how Washington votes over the next week or so. So that’s what we are seeing. We are certainly not seeing buoyancy and any kind of return to exuberance that I can tell you.

Jordan Sadler – KeyBanc Capital Markets

Okay. That's fair. Thanks for the color.

Mitchell Hersh

You’re welcome.

Operator

We will take our next question from Michael Knott at Green Street Advisors.

Michael Knott – Green Street Advisors

Hi Mitchell, I was just wondering if you can comment generally on your current take on acquisition opportunities. I think you commented on it a little bit earlier, but just wondering if you can give a little more color. And then also within that, are you looking at the Manhattan deals that have been in the market recently and you have been underwriting those? Thanks.

Mitchell Hersh

Hi Michael. With respect to Manhattan, the few assets that have come to the market are generally not within the appetite end if you will of the public companies, whether it’s us or I would submit the New York center – centric companies. These are yield place, 340 as long-term leases with good quality credit behind them.

You are going to see international money coming in to in the likelihood is that those will be the buyers for the few that exist. But I am not sure that we are not going to see another leg down in terms of pricing. I mean you may have these few anecdotal situations, they make price fairly full, they may – I hope the market doesn’t read these things wrong in anyway share performance, start pushing pricing and leverage again as a result of the few anecdotal transaction. I am really concerned about that.

As far as the acquisition environment, beyond that, there are a number of situations that are controlled by special servicers that they maybe looking to put into the marketplace. But our view is to take this opportunity and not to be redundant and not to be glib about it and try to build – continue to expand our platform by doing the what I would say the more long-term beneficial transactions which include either partnering or requiring good names in the marketplace that can help us grow in the few markets that we think we are king of underweighted in and I identified those markets before.

Look, we see little more, few more assets, the suburban type assets in Oshkosh, Pennsylvania and other places that are beginning to come to market. Too early to tell what the pricing levels will be, but they are of little interest to us at this point, because I think that capital is still scarce and I think that we – and it’s not I think we are – our strategy clearly is to try to do these platform building exercises and use our capital judiciously to help us expand our platform in the areas I talked about.

Michael Knott – Green Street Advisors

Okay, thank you.

Mitchell Hersh

You’re welcome.

Operator

And we will take our next question from Chris Gay at Morgan Stanley.

Chris Gay – Morgan Stanley

Hi, we have touched on – I guess you have touched on it a couple of times in the last few calls. But could you talk about Samsung and what their latest claims are there? I think that expiration is coming up pretty soon.

Mitchell Hersh

Yes, the Samsung building has a June expiration to the lease. It also has a June maturity on the mortgage. We are in the process and have been of providing a deed back to the mortgagee for the facility. I have talked to – it's got to be over a year about this situation if not longer about our efforts to try to do something preemptively.

We cannot ever get the attention of the mortgagee because of all the issues that they are dealing with and notwithstanding that fact that ended up that Samsung did a lease in an empty next door, they needed more space ultimately than we were able to provide in any event in the building and the economics were unrealistic for us given the capital structure in the building. The building had originally been acquired as part of the Belle Mead portfolio. It did have mortgage on. And we – so that’s where we are in that situation.

Chris Gay – Morgan Stanley

Thank you.

Mitchell Hersh

You’re welcome.

Operator

And it appears we have no further questions at this time. I would like to turn the conference back over to Mr. Hersh for any additional or closing remarks.

Mitchell Hersh

Thank you, operator. Well, thank you everybody. Although this quarter our occupancy rate dropped due primarily to the anticipated Citigroup lease expiration. And clearly while off demand remains sluggish as we have talked about on the call due to the uncertainty surrounding the economic recovery and general trends with respect to job growth, with the lack of job growth in the United States at the present time.

Notwithstanding those facts, we are cautiously optimistic that the fundamentals will begin to stabilize as I talked about, we are beginning to see at least a little more clarity from the tenant’s perspective on what they think their needs are going forward and it requires flexibility and an exchange and a reciprocal attitude towards a give and take between the landlord and the tenant, and those are some of the activities that we are involved in today.

But having said all of that, there it is very, very eminently clear that tenants continue to seek out landlords with financial strength and stability, companies and sponsorships that have proven track records that are leaders in the industry. And for those reason among many others, we are confident of our ability to continue to navigate through these unchartered waters and to have ourselves take advantage of opportunity at the appropriate time that will be a long-term benefit to the company.

And so with that, I once again thank you all for joining us on today’s call. We look forward to seeing some of you at NARI in Chicago and of course reporting once again in three months. Thank you. Good day.

Operator

That does conclude today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mack-Cali Realty Corporation Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts