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Mack-Cali Realty Corp. (NYSE:CLI)

Q2 2010 Earnings Call

July 29, 2010 10:00 am ET

Executives

Mitchell Hersh - President and CEO

Barry Lefkowitz - EVP and CFO

Mike Grossman - EVP

Analysts

Sheila McGrath - KBW

George Auerbach - ISI Group

Craig Melman - KeyBanc

Sloan Bohlen - Goldman Sachs

Michael Bilerman – Citi

Michael Knott - Green Street Advisors

Jim Sullivan - Cowen and Co.

Jamie Feldman - Bank of America

Operator

Good day everyone, and welcome to the Mack-Cali Realty Corporation Second Quarter 2010 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 operator. Good morning everyone, and thank you for joining Mack-Cali's second 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'd like to review some of our results and activities for the quarter and what we're seeing in our markets generally. Then Barry will review our financial results and Mike will give you an update of our leasing results.

FFO for the second quarter of 2010 was $0.71 per diluted share. We did have some significant leasing activity in the quarter, the total of in excess of 1.3 million square feet of lease transactions.

Of these transactions, over 400,000 square feet were new leases and over 900,000 square feet were lease for renewals. Our retention rate within our portfolio was 71.4%, indicative of a business environment where tenants clearly preferred remain in place, with high caliber landlords and high quality assets.

Overall, we ended the quarter at 88.9% lease, up slightly 10 basis points from last quarters 88.8%. However, rents did roll down this quarter by 11.2%, compared to last quarter's 8.1% roll down, further demonstrating that fundamentals remain under considerable pressure.

Our leasing cost for the quarter were $2.30 per square foot per year, down from last quarter's $3 per square foot per year. For 2010, remaining rollovers are 3.4% of base rent or just under $22 million. And for 2011, we face rollovers of 10.9% of base rent or about $66.6 million.

Despite a challenging environment, 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 West Chester, in Suburban Philadelphia and in Washington D.C. And all of that indicates that Mack-Cali continues to be the preferred provider of office space in our key markets. We are more than pleased that we continue to expand our relationships with existing tenants and welcome many new businesses to our portfolio.

Some of our more notable leasing transactions during the quarter included the following: we signed a new five year four month lease with Hanul Corporation, the lease is for 96,000 square feet at our Mack-Cali Airport Center located at 200 Riser Road in Little Ferry, New Jersey, adjacent to Teterboro Airport, this 286,000 square foot building is now 100% leased. This Cellco Partnership transaction commonly known on doing business as Verizon Wireless. They signed a new five year renewal for over 63,000 square foot of full building at 51 Imclone Drive in Branchburg, New Jersey.

We also did a strategic transaction with all state insurance company, totaling approximately 62,000 square feet and involving our 65 Jackson Drive building in Cranford Business Park, 36,000 square feet at our 1325 Campus Parkway in Wall Township, New Jersey, 4,500 square feet at Mack-Cali Center Four in Paramus, New Jersey and 4,000 square feet at our at our Capital Office Park in Greenbelt, Maryland.

And as previously announced in one of the largest lease transactions in 2010, certainly in the New Jersey market place. We signed with National Union Fire Insurance Company of Pittsburgh, a subsidiary of AIG a renewal for almost 272,00 square feet at our magnificent 101 Hudson Street, in Jersey City extending the lease now through April of 2018.

Year-after-year Mack-Cali is recognized for it's expertise in property management customer care as well as for our energy conservation efforts. This quarter a number of our properties received the Energy Star designation, an award given by the United States Environmental Protection Agency and the United States Department of Energy, signifying excellence in a building's energy performance and efficiency.

Our buildings in Norwalk, Connecticut, Woodcliff Lake, two buildings in Paramus, and two buildings in Elmsford, New York received this prestigious award.

With respect to our earnings guidance as you see in the press release, we've tightened the range now to $2.73 to $2.83 per share.

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

Barry Lefkowitz

For the second quarter of 2010 net income available of common shareholders amounted to $18.7 million or $0.24 per share, as compared to $20.4 million or $0.28 a share for the same quarter last year. FFO for the quarter amounted to $66.1 or $0.71 per share versus $76.5 million or $0.87 a share in 2009.

Other income in the quarter included approximately $611,000 in lease termination fees, as compared to $774,000 for the same quarter last year. Same store net operating income which excludes lease termination fees decrease by 7.1% on a GAAP basis and on a cash basis same store net operating income decrease by 6.5% for the second quarter.

Our same store portfolio for the quarter was $29.3 million square feet, our unencumbered portfolio at quarter-end totaled 236 properties aggregating 24.3 million square feet of space, which represents approximately 79% of our portfolio.

At quarter end we had total undepreciated book assets of $5.7 billion and our debt for undepreciated assets ratio was 37.8%. We had interest coverage of 2.8 times and fixed charge coverage of 2.7 times for the second quarter of 2010.

In April, we retired a $150 million of unsecured notes using cash on hand. We ended the quarter with approximately $2.2 billion of debt, which had a weighted average interest rate of 6.81%.

Currently, we have approximately $115 million of cash and no outstandings on our $775 million revolving credit facility. During the quarter, we exercised our extension option on the facility for one year bringing the maturity date to June 22, 2012.

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 or our supplemental package and earnings release which include the information required by Regulation G, as well as our 10-Q.

Now Mike will cover our leasing activity.

Mike Grossman

At June 30, our consolidated portfolio was 88.9% leased up from 88.8% at March 31. During the quarter we singed 141 transactions, the 1.3 million square feet of leasing volume breaks down to 403,000 square feet of new leases and 903,000 square feet of renewals and other tenant retention transactions. As a measure demand across our portfolio, new lead activity year-to-date through the second quarter was up last year's total for the same period by 18% on number of leads and 5% per square footage.

Notwithstanding this decrease, increase for space in the New Jersey sub-markets of Bergen and Hudson counties adjacent to Manhattan remain above last year's levels. We have approximately 895,000 square feet expiring through the end of the year, this represents 3.2% of our least space.

Looking at our markets, Class A overall vacancy rates continue to fluctuate. While, Northern and Central New Jersey produced positive absorption in the first quarter with Northern New Jersey state flat in the second quarter. While Central New Jersey's vacancy rate increased 120 basis points.

Middlesex and Union counties in Central New Jersey, produced the largest vacancy increases there. Westchester County, New York's vacancy increased by 60 basis points while Fairfield County, Connecticut's [rate] decreased by 40 basis points. Suburban Philadelphia vacancy improved by 30 basis points and Prince George's County, Maryland's vacancy increased by 220 basis points, as tenants there continue to downsize and return space to the market.

Comparing leasing activity within the markets to last quarter's results, volume is up almost 18% across the regions in which we operate. The largest increases were Northern New Jersey; Westchester County, New York; Fairfield County, Connecticut; and Washington DC. Class A direct [asking rents] decreased in all of our markets, except Prince George's County, Maryland during the quarter. Largest drops were seen in Washington D.C. where rents fell $2.85 per square feet and Fairfield County, Connecticut where they decreased by $1.30.

Second quarter asking rent declines in our other markets were minimal. During the second quarter the percentage of overall viability represented by sub-leased space cell in all of our markets, except Central New Jersey and Suburban Maryland, which increased slightly. Across all markets, sub-leased space still averages approximately 17% of total availability.

Mitchell Hersh

In closing, while market fundamentals remain under considerable pressure, given the lack of meaningful job growth or corporate expansion, Mack-Cali was able to maintain our high portfolio occupancy rate. In fact, 10 basis point higher than the previous quarter and as well the company maintains it's enviable position as a cash flow positive company. We attribute this success to our ongoing commitment to offering a superior product, strong sponsorship and unmatched tenant first philosophy imbued within the organization.

I want to now open up the floor to questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Sheila McGrath with KBW. Please go ahead.

Sheila McGrath - KBW

Mitch, you did mention and I guess, we all realized there seems to be no pickup on the job horizon. And I'm just wondering what your outlook is on external growth opportunities. Because it seems like internal growth is going to be under pressure in the near term. So are you looking at acquisitions right now? Has that picked up at all since the beginning of the year?

Mitchell Hersh

Let me respond to that. As I have mentioned on previous call, a clear strategic goal of the company is to get involved in platform expanding ventures. And I think I have talked about the fact that we clearly have looked to assist in providing elegant solutions, as I call it for operators in the Metropolitan Washington area as well as the Metropolitan, New York, New Jersey area and that goal hasn't changed. Well, nothing, of course, at this juncture have been finalized or ready to talk about in specific detail.

We have been involved in a number of situations that confirm with those strategic goal. So, I think external growth will partially be fueled by those types of transactions. And I'm optimistic that we will get something done in the near term and as well I can tell you that again while nothing is being finalized or inked we are in discussions with both several of our existing tenants as well as some prospectively new tenants in the market place about development opportunities, built pursuits of course not speculative development I can tell you that the water front New Jersey city certainly remains an active area in terms of major metropolitan area users, again primarily in that market financial services that are looking for the state of the art brand new large floor plate installations that they cant otherwise achieve in certain sub markets and as well of course looking at the overall incentive that the state might provide or you know you saw this morning a discussion about a major accounting firm that was looking at incentives in New York city while we see the same sort of activity along the water front in large volumes.

And as well as that we are talking with several of our existing tenants that all are working to expand at this juncture because they have an optimistic view of their particular industries going forward and so we are in some discussions regarding additional built to suit activities utilizing our land inventory so that’s where I see the external growth going forward and its really optimistic particularly on again the platform expanding side of the equation

Sheila McGrath - KBW

Okay, one quick question on debt maturity in early 2011, you have 300 million coming due at seven and three quarter coupons. Where do you think you could get a 10 year deals on today?

Mitchell Hersh

Yes, we think based on what we’ve seen and ten year deal if you were to print today and again I’ll for the moment not talk about the issue that with the rating agencies and part of thin ray that hasn’t yet been resolved with respect to disclosure issues with that forward for example encountered in a bond deal for, we think that its got a five handle on the deal for 10 year print today. So you know clearly we have two pieces of debt $15 million trench at the end of this year unsecured debt. And a 300 million of 2011 that range at almost 8% all [in corp] and so there is a clear efficiency and risk economic risk that we can get out of refinancing net debt, so we are looking at that really carefully right now.

Operator

Thank you and our next question comes from George Auerbach with ISI Group. Please go ahead.

George Auerbach - ISI Group

What’s your expectation for leasing velocity in the back half of the year relative to the first half?

Mitchell Hersh

Well, to be very candid, we’re out there I think that I talked very clearly about the blunt and extent situations that we were working at and obviously AIG and all state and Meridian Health were part of those equations. We accomplished those that’s why in anticipation of that I was guiding to the lower end of our range. I think all of that came to fruition. And now we are out there blocking and tackling to accomplish as many renewals, plus new leases, for example on 125 Broad Street we have a lease out right now for a full floor, we have a lot of potential deals in the Hopper the diner at125 Broad Street. It’s hard to say what the velocity will be, clearly there is a this general malaise in the economy. It’s no secret to anybody that everybody talks about lack of confidence and all of the initiatives in Washington, including healthcare and FinReg and the continual deleveraging that’s going on in the global community about its impact on decision making and job growth. Today, there was not a particularly rosy job picture that came out at 8:30 this morning.

So, what I can say is that I think that the 71.5% more or less retention rate in our portfolio is indicative of the psychology of businesses and corporate users today. That while we may experience some continued pressure on rents and fundamentals as a result of all of the things I just said, and the fact that tenants are looking at options along with their brokers to assess what’s available in terms of economics in the marketplace. At the end of the day, they don’t want to move. And unless they are being consolidated, or they are going out of business, or they are changing their business model materially, they want to stay in place. And what it results in, is meeting the market on economics.

And so, again looking at the remainder of the year we only have a small percentage of our base rent in our square footage expiring, 2011 is the challenge. It’s another 3-4 million square feet to deal with. And hopefully, the tone and the clarity of the economy will began to really have some legs at that point and settle in. I certainly know that the New York City landlords are talking about stabilization, and the fact that there are more than, if not nascent more than nascent signs of stability occurring and job growth. And we are hopeful that, that really takes hold, it’ll be a slow recovery George. This picture that we are in is very different than prior downturns because of all of these Washington initiatives, and the global aspects of this downturn, and the global deleveraging. So this is going to be a slow, methodical, long recovery, but hopefully we are now at a pivotal time where it’s an inflection point. And we’ll begin to see some improvement in the jobs picture, which obviously will result in increased demand within our portfolio. That’s my macro view and my micro view.

George Auerbach - ISI Group

Right. I guess, would you say that the uncertainty, though, among tenants makes them less likely that you'll be able to increase the occupancy in your own portfolio over the next six or 12 months?

Mitchell Hersh

Yes, I think that. First of all I am very proud of the fact, and all of us at this company of our accomplishments in the face of a fairly difficult economy. And 89% while its not where I’d like it to be, I’d like it to be 99%, is I think a pretty nice achievement in terms of where we are with respect to this economy, and the jobs picture and the unemployment picture. So I don’t have any false expectations of seeing unrealistic spikes in occupancy. I think it’s going to be slow, a regaining of occupancy over the next number of quarters. And I am optimistic about it. But, I don’t think its going to go from 89%, to 300-400 basis points in the course of the year.

George Auerbach - ISI Group

And lastly, just a question on straight-line. The straight-line in FAS income fell by about $1.5 million sequentially. Is the second quarter figure a good run rate going forward?

Mitchell Hersh

I would say yes.

George Auerbach - ISI Group

Well, I guess, how much of the lower guidance range, then, is due to maybe slightly lower GAAP revenue? Was that a bit of an issue?

Mitchell Hersh

No, I think that the guidance adjustment again, was predominately a result of some of these long-term lease extensions that resulted in some initial drag. And from a straight line basis, kind of re-marking some leases to market when these renewals kick in, in a couple of years. So, but that’s overdue too.

Operator

Thank you. And our next question will come from Jordan Sadler with KeyBanc. Please go ahead.

Craig Melman - KeyBanc

Good morning. It's Craig Melman here for Jordan. Maybe we could talk about 125 a bit. I know you touched on that you guys have a full lease out, or at least for full-floor out. But just looking, the downtown alliance for that report, saying that there's been about 800,000 square feet of leases so far in Q3, and others that are in the works, maybe you could just touch on, or the disconnect on that activity, and what you think has prevented you guys from capturing some of it?

Mitchell Hersh

Well, first of all we’re certainly seeing our share of activity. But, number one I will tell you there are a lot of tire-kickers in the market that are examining the marketplace, I think merely in an effort to renegotiate it with their current landlords. We do have a lease out for a full floor with a very high quality credit. Right now, we are seeing a lot of activity, and I am optimistic some of the deals that have been done downtown have dragged the market down in terms of pricing. I don’t think they had to be priced at think levels that they were, but they were very, very aggressive pricing. Other issues that confront some of the deals downtown are the fact that some of these long-term leases, first of all FASB 13 is the accounting practice for leases with cancellation options, and some of these long-term leases that have been talked about in the marketplace have cancellation options. And so, there is a lot of subjectivity in terms of how you are permitted to report on the FASB 13, whether you bulk up income in the initial period of the term, or whether you straight line income over the full term. So some of those issues surround some of the larger transactions that have been talked about downtown.

So the bottom line is, I don’t think we are missing anything. We have a magnificent building at 125 Broad. We have a great cotenant in the building. In terms of our tenants, Oppenheimer, the PBA, the new ones that we’re working with right now, and Solomon and Cromwell. And I think some of these decisions that have been made downtown, or in many markets, I don’t want to just isolate downtown, but certainly you’ve asked about downtown, have been purely economic decisions and some have been demographic decisions. There are some differences between the east side and the west side in terms of accessibility depending on employee demographics relative to mass transit systems, public transportation systems. And that’s contributed to some of the decision making. But I think that we’ll see our share. We will meet the market in terms of pricing. As I said I am a little disappointed in some of the deals that have been downtown in terms of other landlords, because they have pulled the market down significantly, and I think below where it needs to be. We’ll get the building leased.

Craig Melman - KeyBanc

And I guess, just a follow-up. You mentioned the aggressive pricing downtown, the Healthfirst lease at 100 Church. We've heard rent in the low 30s, 15 months free, and $70 TIs. Is that one you think might just be below-market, and you guys weren't willing to get that aggressive to land a tenant? Or was that more of a demographic type decision that you had mentioned?

Mitchell Hersh

First of all I’m not going to comment specifically on the Healthfirst lease. I wasn’t the CEO of Healthfirst making that decision, so I can’t tell you what drove it, but I can tell you clearly that they certainly were interested in our building, and I know we were among a short list of buildings that they were considering in the final analysis. Most of the deal downtown, given the economics of many that have been done, are in the low 30s, again some of them, maybe not all of them but some of them have the cancellation issues that I elucidated on a moment ago. Most of the deals downtown that we are seeing at TI and leasing commission packages that aggregate to at least a $100 a square foot.

Fortunately, our building is extremely well run, and our expenses are on the low side, in the $15-$16 range. So that gives you a reflection or an indication of where your net rents are.

Craig Melman - KeyBanc

All right, great. And then, just lastly you had mentioned now that you have AIG done, Allstate, Meridian. Are there any more of those type of blend-and-extends in the pipeline? Or were those the biggest? Then, if you could, just a little bit of color on the AIG lease, in terms of rent roll-down?

Mitchell Hersh

Well, the answer to your question is yes I think in large measure those transactions that you mentioned are the ones that were the large ones that in fact effected our view of guidance et cetera. So I don’t see any major situations in the near term. The AIG situation in, my view is not only good economics for the company and its stakeholders, but I think strategically it was a very, very smart thing to do. Because, AIG has clearly indicated that they are consolidating more jobs into the Jersey City, and they would like to be under one roof. And while on the near term, and again nothing’s for sure until deals are done, but on the near term they need obviously to deal with some of their own operational costs which probably every business and company in the United States is looking at, because they can’t grow top line revenues today, they can only cut expenses.

And by that spurt of co-operation and providing them a great deal of optionally or flexibility is a better word to be able to take more space as other leases matured in that building. I think it solidified almost 300,000 square feet of an end of 2012 maturity. It cost us no add up pocket, except for a brokerage commission, and taking back some space for them, which obviously reflects in a drag on earnings, but no cash out of pocket, except for a commission. And then kind of resetting their rent at the commencement, which is reflected by the way of course in all of our reporting in the straight line basis. Resetting their rent in 2013 to a slightly reduced roughly 13% or 14% reduction in their current all-in escalated rent.

So I think it was a good deal for us and a good deal for them. And a continued demonstration of the fact that I believe this company will owe, and that I believe it will always be run for the long-term. And to anchor our portfolio and our revenue strain with the strongest corporate quality tenant that we can attract and build relationships with. So, and we did the same thing with Meridian Health, a major healthcare provider. And the hospital system in Central New Jersey did the same thing with Allstate, one of the largest insurance companies in the United States. And that’s what you got to do, today to harmonize with what’s going on in the economy.

Operator

Thank you. And the next question comes from Sloan Bohlen - Goldman Sachs. Please go ahead.

Sloan Bohlen - Goldman Sachs

I may have missed a little on this on some of the leasing trends or stats. But maybe if you could run us through just what the mark-to-market was on renewals? And then, is there any differential between just regular mark-to-markets on renewals at expiration, versus those early blend-to-extends that you're doing?

Mitchell Hersh

Again I’ll just review, the roll-down for the quarter on a cash basis was 11.2%. Obviously the NOI on a cash basis was down 6.5%. With respect to market-to-market view of the world, the average rent within our office portfolio today is $24.90. The average rent done in the second quarter was about $21.75, plus or minus just office not the flex. So that resulted in about 12% roll-down. So I think that’s a view of what you can expect over the next several quarters.

Sloan Bohlen - Goldman Sachs

And are you seeing, on those early renewals I think you talked about three million to four million square feet rolling in '11. First, how much of that you think could happen in '10, if you could pull it forward? And then, would you expect it to be at that negative 12% mark-to-market?

Mitchell Hersh

I think that rent is pretty much across the board. I guess the good news is that they’ve only come in 10%-15% versus half price in some other places like Midtown, New York. But, I don’t have an expectation given the demand drivers today and the aggressiveness on the part of the brokerage community, coupled with the perception that commercial real estate and landlords in general are acquiescent, because of vacancies. So I don’t have confluence or combination of all those factors tell me that we’re not going to see a rapid change in the economics, in the environment, because tenants and their brokers are very aggressive because they think they can be. And frankly, they can be in this environment.

Operator

Thank you. And our next question will come from Michael Bilerman – Citi. Please go ahead.

Michael Bilerman – Citi

Could we spend a little time on, I guess, the guidance? And there's a lot of bad feedback on your speakerphone. But put that aside. You've lowered your guidance. Last quarter, you came out and you said you'd be at the lower end of your range. And clearly, with today's decline, that's what you've targeted in the new range. I think what's difficult to sort of bridge the gap is you're sort of at the $0.71, $0.72 for the quarterly in the first half of the year. Your guidance would assume that you drop down to $0.65 to $0.70 per quarter in the back half, which would be a pretty meaningful drop off in numbers. So can you just help us figure out how you get to the lower end of your numbers, and even to the high end of your range? Because it would seem that your trajectory would take you to the high end and above.

Mitchell Hersh

Well look, at this point our midpoint is about $2.78, which would reflect in run rates that are $0.67-$0.68 for the ensuing two quarters. Clearly occupancy is a concern and a drag, and so we’ve modeled in a slight loss of occupancy, not terribly meaningful but every percentage point of occupancy is $7.5 million. And we are at this point not bullish and cautious about where our occupancy is going to be. I hope it stays where it is and goes up but we're not confident enough about it at this point. We have a lot to do and millions of square feet of expirations to deal with over the remainder of the year, and then certainly into next year.

So we've modeled that in our thinking and that's kind of created the low end of the range. Yes, we're at $0.71 this quarter but we think the run rate going forward is the numbers that I've recited, which are 67, 68, in that range due to decline in occupancy and lower revenues. And the other side of the equation is while I am reasonably confident on the expense side that real estate taxes will stabilize, we had a little bit of an anomaly this quarter due to some particular situations that they had risen.

But we don't know at this point where utilities are going to be. We've had a particularly brutal heat wave this summer, and it's only half over, half through. So we don't know where utility costs are. We do know that the winter was a brutal winter in terms of snow removal costs. So that's kind of moving around. And so, to the extent we can fix and control those costs by locking rates and so forth, we do so.

So our view and I know we kind of, Michael, have had this debate for a few quarters now is that this is a fair representation of where we believe we are in the world right now. I guided down in my discussion last quarter, because I was personally in the middle of all these deals that I talked about and was hopeful that we would get them done, which we did do. And so, I think the range and the run rate is appropriate given what our expectations are in terms of revenues and occupancy, and they go hand in hand, obviously.

Michael Bilerman – Citigroup

Right but at the same time, sequentially, that would mean a $3 million to $4 million reduction in FFO, going from $0.71 down to $0.66 to $0.68, $0.67, $0.68, which is at the midpoint. That still seems $3 million to $4 million when your quarterly NOI is, call it, $107 million, $110 million. And obviously, third quarter always has a little bit higher utilities, but that still seems like a really big sequential decline, all else being equal, right?

Mitchell Hersh

Yeah. Well, Michael, look, I respect your thought process on this. And believe me, I'm not happy about this but the three months ended June of '10 to '09, we had operating income of $54.8 million in '10 and almost $58 million in 2009. So I think our view, while again, I'm not sanguine about it, I'm not happy about it, is that we're going to continue to experience this potential decline in operating income and in revenues, and therefore, in FFO going forward. And it's just not realistic from my perspective, although as much I'd like to, to think otherwise.

Michael Bilerman – Citigroup

Okay. Well, I guess we'll just leave the numbers. You keep on beating, also, so there's that aspect. But we'll just agree to disagree. And then secondly, can you give an update, you've talked about acquisition opportunities the last few years, entry into Manhattan and expansion to D.C. Where do things stand today on that?

Mitchell Hersh

As I commented to Sheila McGrath, I'm fairly optimistic that one of these platform expanding opportunities is close to emerging. I don't want to lead anybody astray. Deals or not deals until their completely inked and funded, but I'm optimistic about the situation. You're going to have to forgive me but I'm not going to provide any detail at this point because it's premature. But I think, clearly, I'm not wavering from our strategic goal to get something done, which could impact one or both of the markets that you just mentioned.

Operator

Thank you. And our next question comes from Michael Knott with Green Street Advisors. Please go ahead.

Michael Knott - Green Street Advisors

I have a question on the mark-to-market you gave, saying 12% might be what you could expect to see over the next couple quarters. That [indiscernible] of the portfolio overall. I know you don't have any Jersey City rolling. I'm just trying to get a sense for what you think your overall mark-to-market is compared to that 12%, and if that has worsened over the past three months.

Mitchell Hersh

I'm not sure it's worsened but it may have taken a slight dip down. At this point, if I look across our expirations, and as you correctly mentioned, there's very little expiration in Jersey City, which is a high rent district obviously. So looking at it conservatively, if we're saying that somewhere at a $22 average in across the suburban portfolio, lot of stuff is in Westchester, lot of the aspirations.

And there's been a lot of rent pressure in Westchester. Lot of deals done in Westchester that are on the face, ten-year deals with cancellations after 3 years. We know the forensics of the markets pretty well. So I think that looking at a $22 average rent and expiring rents of 25 factoring in where we have all these expirations is probably realistic over the next several quarters. So yeah, I think that 10% to 12% mark-to-market is unfortunately where we are right now.

Michael Knott - Green Street Advisors

Okay. And then what's your outlook? Do you think that's as low as it gets, or do you think there's potential for further downdraft in your markets?

Mitchell Hersh

No, I don't see any further downdraft. As a matter of fact, I see a little bit of the ability to push back. As I said, it reflected in our retention rates. Our tenants want to stay with us and want to be with us. I think the issue is clearly you've got a lot of churning going on out there. You also have tenants that are downsizing it. So they'll renew but if they have 40,000 feet, maybe they only want 30,000. And so, that's impacting the overall net effective economics of the transactions as a result of that. But I think that we're kind of clearly at the bottom. As a matter of fact, I think concessions have stabilized at this level and, maybe even in some instances, improved. So my view is we're kind of rolling along the bottom right now, Michael.

Michael Knott - Green Street Advisors

Okay. And then, if I can just, I guess, somewhat go back to what Michael Bilerman was asking about, if I remember, last quarter, I think the midpoint of your prior guidance was $2.80, and now I think the midpoint is $2.78, so it came down $0.02. I know the extent you were talking about it on the last quarter's call, was the $0.02 change in guidance, was that sort of a better outcome than what you may have sort of thought at that time?

Mitchell Hersh

I guess the answer is yes, slightly. Our view of midpoint sort of last quarter was $2.77. And again, these deals hadn't been completed, so I wasn't completely certain. But I knew that they'd be a drag to some extent on earnings. So I think you might say we did $0.01 better in our view than our view of the world exactly this time last quarter.

Michael Knott - Green Street Advisors

Okay. And then, my last question is, in your markets, do you feel like the potential accounting changes for tenants, for lessees over the next few years, do you feel like that is going to potentially impact behavior and maybe cause some tenants to want to buy or own, rather than lease, office space?

Mitchell Hersh

No, no. I've been in this business and game long enough. Years ago, when capital leases have always been issues with companies, and they would do fair market value tests, and also some accounting metrics test to ensure that the length of the lease that they knew they wanted to be long-term facility and get the best economic efficiencies out of them or by having the longest term. They would do tests to make sure that instead of a 20-year lease, it was18 so that they didn't bump up against capitalizing their leases.

The accounting pronouncements are not good for our bus, period, in terms of how corporate America needs to look at an account where leases of expensing versus consolidating, if you will, on their balance sheets. But it is no different in our markets unilaterally or universally from Washington to all of them with submarkets that we operate in than anybody else in this business, period. And that's my view. Companies will still lease and they'll work with the new regulation and deal with it.

And they may have to take on the expenses now as liabilities as opposed to expensing, but it will be built into their balance sheet and coverage tests and coverage ratios. And it's not in my opinion, in any way, going to result in wide-scale acquisitions on the part of corporate America preferring to own their real estate rather than lease it. I don't see that changing. And I certainly don't think we're any different than any other landlord or sponsor in this business.

Operator

Thank you. And our next question comes from Jim Sullivan with Cowen and Company. Please go ahead.

Jim Sullivan - Cowen and Co.

Mitch, at the risk of beating a dead horse in terms of 125 Broad, I'm a little confused. You've indicated that you've had pretty good activity, number one, in terms of interest. Number two, you've suggested that some of the more recent high-profile transactions at 4 New York and 100 Church are not reflective of the pricing for 125 Broad.

Mitchell Hersh

No, let me clarify that I didn’t mean to suggest that if that’s what you took from my comments. What I suggested, and again I am not defining specific transactions, but handwriting sort of on the wall, is that a number of this transactions done downtown have dragged the economics in the marketplace down, below where I think they needed to be. And I did say, and I will restate clearly, that given, it’s always my view that we need to meet the market, and we will meet the market on transactions. All I am suggesting is that I just think that several of the deals done downtown, including some renewals because the brokers are out there, you get a sense at some point, whether a deal is real or imagined in terms of whether a tenants wants to really just beat up its landlord and stay where they are. So this doesn’t only impact, or is not impacted by some of the new deals announced, it’s impacted by some of the renewals.

The market is top market down there; the economics of the transactions today are exactly as I articulated. Low 30s on average, some of the lease terms vary, some of them have cancellations that needed to be factored in, and if they cancel you get your unamortized tenant TI and leasing commission dollars back, and that’s pretty much it. And you don’t the benefit of GAAP accounting because your tenant leaves way before the phase lease term, and the economics they range anywhere from $60 to $90 a foot in TI, depending on the specifics of the transaction plus a commission. That’s what it is, and so we will meet the market. Part of the decision making is stay in place and just attack your landlord, and part of the decision making is demographic, but it’s not really economic, at this point.

Jim Sullivan - Cowen and Co.

The second question, Mitch, on downtown some of the deals, particularly at 4 New York, involve some publishing companies who are moving from midtown to downtown. And there's been some suggestion that what we're seeing is a trend that is going to continue, if not grow, and that we'll be seeing a lot more of that. Now, in terms of your discussions with potential new tenants at 125 Broad does that reflect the changing composition of the tenant base for that part of downtown?

Mitchell Hersh

I would say in part, it does. We are seeing more perspective interest on the part of media type firms I'll use that sort of loose definition, than we have previously seen. But we are also seeing a lot in terms of insurance companies that are down there and some that aren’t down there, some that are more midtown focused. And also infrastructure type companies, engineering companies you just saw the AECOM-Tishman situation. It's consolidation of some downtown tenants that are part of the lists of RFPs that we have corresponded to.

Jim Sullivan - Cowen and Co.

Okay. And then, a final follow-up question from me regarding FAD. Your FFO numbers in the quarter were pretty much in line with what we modeled. But your FAD results were significantly ahead as a result of the lower leasing costs. And that obviously reflects the nature of the leasing that you did in the second quarter. Should we be looking at that second quarter per-foot number as an anomaly, with the likely trend line being back to what it had been previously?

Mitchell Hersh

I will tell you what I think at this point based on our best analysis, is that on a full year basis, again this projects what we think today, we'll have a CAD ratio, payout ratio of somewhere between 90% and 91%. We’ll have spent probably $65 million on TI and building improvements that are reflected in CAD computations. And that would give us a substantial free cash-flow for the year at that 90% to 91%. So, however, you put that into your model. That’s what we think right now.

Operator

Thank you and our final question comes from Jamie Feldman with Bank of America. Please go ahead.

Jamie Feldman - Bank of America

A follow-up to Jim's question on TIs, or on CapEx as we think about next year and the lease roll, do you think that $65 million is a good number? Or do you think you'll be higher or lower?

Mitchell Hersh

If I look back in history, and I am not really doing that now because I don’t have the numbers in front of me, but I think that we over the last couple of years have anticipated that those expenses, the TI commissions and building type improvements to be in the $70 million to $75 million range. So given the slide (inaudible) of reduction in leasing activity, this year we are projecting $65 million. So I think its going to be some where in that $65 to $75 million range. That’s the best information I can give you right now.

Jamie Feldman - Bank of America

Okay. And then, are there any large leases we should be keeping our eyes on for next year?

Mitchell Hersh

There are no mega deals. They are of all shapes and sizes right now, but nothing mega.

Jamie Feldman - Bank of America

Okay. And then, following the lease restructuring you've telegraphed and completed if you walk your portfolio, what would you say the utilization is now, from your existing tenant base?

Mitchell Hersh

You know it’s quite good actually. The direct subletting basis hasn't really changed it’s in that 4%-5% of portfolio. You know there some shadow spaces in terms of where we have done renewals, and like I said before tenants that were just thrown out. A number 40,000 few renewed for 30 and so there’s a 10,000 square foot sluggish space to deal with, which might conceive of a shadow space even thought it is reflected in our vacancy.

There is no real significant underutilization; I talked about Morgan Stanley previously and kind of rebuilding occupancy in their space down at Harborside, and similar financial firms looking at major consolidation opportunities, including the water front. Merrill Lynch have built their occupancy I think they have about 800 people in 101 Hudson Street. And if I look through most of our portfolio and most of the parking lots, it’s a pretty good parameter it’s certainly in suburban real estate. I would tell you there is no significant underutilization. I would tell you that certain industries are under a lot of pressure. If I look at, for example law firms, we have our share of law firms throughout our portfolio.

They up scaled way back; they have had significant layoffs, right up to the partner level. And I am not defining New Jersey versus New York versus Pennsylvania, I mean in general, and because of the fact that their revenues have been so significantly impacted. So you might see law firms, then again I don’t want to paint the brush to broadly, but we are seeing that as an industry right now if you will that’s under a lot of pressure. And clearly, probably one of the hand cold that’s underutilizing space. While we are thinking how they want to utilize space going forward.

Jamie Feldman - Bank of America

Okay. And then, a question for Barry, the $300 million of unsecured you have coming due next year, how are you thinking about that?

Mitchell Hersh

Well, in our comment and I don’t want to, I’d certainly have Barry respond, but I commented on it before. The question was asked, if we refinanced that today in the 10 year market what would the trend be? And we think that it would have a five-handle on it, based on spreads and treasuries today. So it would be 5.5% versus almost 8% which is crossed today.

What I will tell you is that, we are looking at it very carefully. We are long cash right now in the company about $115 million and were undrawn on our credit facility it’s $775 million which has a cost of money to us of 1% based on our LIBOR plus 55, plus or minus. So, we are looking at our options right now, and will probably see something happening in the not so distant future, but we are still evaluating what our best opportunity is. Obviously, the small piece of unsecured the $15 million is sort of non-sequitur right now, we will just pay that off in December. But the 300 that’s February 15 of 2011, we are looking at what we can do, what we might do early, strictly on an economic modeling benefit basis. And that might involve using some line capacity and using some cash. So that’s what I could tell you right now.

Operator

And that does conclude today’s question and answer session. I would like to turn the conference back over to Mr. Hersh for any additional or closing remarks.

Hersh Mitchell

Well, thank you very much for joining us on today’s call. It’s been a pleasure, and we look forward to reporting again to you next quarter. Have a good day.

Operator

And that does conclude today’s conference, thank you for your participation.

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Source: Mack-Cali Realty Corp. Q2 2010 Earnings Call Transcript
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