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

Executives

Mitchell Hersh – President and CEO

Barry Lefkowitz – EVP and CFO

Michael Grossman – EVP

Analysts

Sloan Bohlen – Goldman Sachs

Jordan Saddler - Keybanc Capital Markets

Sheila McGrath – KBW

Michael Bilerman – Citi

Jamie Feldman – Bank of America/Merrill Lynch

Michael Knott – Green Street Advisors

Jim Sullivan – Cowen and Company

Mack-Cali Realty Corp. (CLI) Q3 2011 Earnings Conference Call October 27, 2011 10:00 AM ET

Operator

Good day everyone and welcome to the Mack-Cali Realty Corporation Third quarter 2011 Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead sir.

Mitchell Hersh

Thank you, operator. Good morning everyone and thank you all for joining Mack-Cali’s third quarter 2011 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 generally seeing in our market, then Barry will review our financial results and Michael give you an update on our leasing results. We had a solid quarter here at Mack-Cali. FFO for the third quarter were $0.73 per diluted share. As you’ve seen in the press release, we did have significant leasing activity during the quarter totaling almost $1.25 million square feet of lease transactions. There were 136 transactions of which approximately 300,000 square feet were new and the balances were renewals.

This reflected in an end of quarter occupancy of 88.2%, which was slightly up from $88.1 million last quarter. This also reflected a 78% retention rate and so far year-to-date in 446 transactions. We released almost 3.5 million square feet of which (indiscernible) square feet are a new transactions with a balance, renewals, and retained. Rents for the quarter roll down by approximately 3.4% compared to last year’s 9.1% roll down and so of course that’s favorable. For the balance of 2011, remaining rollovers are just 1.4% of days rent or about $9 million. For 2012, we faced rollovers of approximately 10.3% of base rent or about $63 million. Our leasing cost for the quarter were $3.40 per square foot per year down from last year’s $4.02 per square foot per year and we so hope that is reflective of a trend.

Clearly despite a challenging environment, our portfolio continues to outperform virtually every market and which we operate. With our lease rates exceeding market averages in Northern and Central New Jersey, in Westchester, and in Washington D.C. And certainly while we anticipated a particularly challenging third quarter, we did see the leasing activity that I just mentioned in very stable occupancy results. And so, we’re optimistic that in fact we will build on occupancy in the fourth quarter.

Our activities in the quarter included the previously announced development or Wyndham Worldwide, the second phase of their headquarters at (203,000) square foot class A building in our Business Campus in Parsippany New Jersey. This will be constructed adjacent to Phase I obviously and we’ll total a development for Wyndham Worldwide of over 450,000 square feet.

Leasing activity during the quarter included the following. Xand Corporation was a provider of datacenter infrastructure and business continuity solutions, signed lease renewals totaling almost 90,000 square feet at our Mid-Westchester Executive Park in Hawthorne, New York. The transactions included renewals for their entire 47,000 square foot promises at 11 Skyline Drive and for 44,000 square feet at 17 Skyline Drive. This 14 building office flex part is now 98.2% least.

Prism Color Corporation of printing Services Company joined a 37,000 square foot lease renewal at 31 Twosome Drive in Moorestown, New Jersey. The 84,000 square foot office flexibility located in our Moorestown West Corporate Center is now 100% least. HQ Global Workplaces, a provider of workplace solutions signed two new leases with us. They become a very big part of the Mack-Cali family throughout our portfolio. They signed a 21,000 square foot least at our magnificent 101 Hudson Street in Jersey City, New Jersey and a 15,500 square foot lease at 50 Tice Boulevard in Woodcliff Lake in Bergen County.

101 Hudson Street which is a premier (trophy) $1.2 million square foot waterfront property along the Gold Coast is approximately 87% lease today and 50 Tice 235,000 square foot class A asset in Bergen County is now over 89% least. Capsugel, a manufacturer of drug delivery systems, signed a new lease for 28,000 square feet more or less at 412 Mt. Kemble Avenue of 475,000 square foot class A office property in Morris Township, New Jersey.

On another note, Mack-Cali continues to be recognized for its expertise in property management, tenant services and superior energy performance.

During the third quarter, Mack-Cali added the following buildings to its growing list of properties that have grown new or recertified ENERGY STAR Designations, 20 Commerce Drive in Cranford business part in Cranford, New Jersey as well as 555 and 565 Taxter Road in Elmsford. In addition, several of our properties were recognized only this week by New Jersey (indiscernible) Chapter. These assets included 5 Wood Hollow, Liberty Corner at 106 Allen Road and Eisenhower/280 Corporate Center.

Moving on to some of our financial activities during the quarter as we announced just last week, we refinanced our unsecured revolving credit facility with a group of (indiscernible) lenders. Our facility was arranged by JPMorgan Securities and Merrill Lynch, it’s a $600 million unsecured facility expandable to a billion dollars. It carries an interest rate equal to LIBOR plus 125 basis points and a facility fee up 25 basis points. That’s a four-year term with a one-year extension option.

The receptivity of this facility in the marketplace clearly demonstrates the financial community’s continued confidence in our company. As noted in our press release this morning, we’ve restated 2011 full year guidance tightening the range to 227 to 281 and for the first time presented 2012 full year guidance, a range of 250 to 270 per share. This reflects slightly lower occupancy trends through 2012 of about one percentage point.

At this point, I’ll turn the call over to Barry who will review our financial results for the quarter and provide a little bit color on the guidance that I just mentioned. Barry?

Barry Lefkowitz

Thanks, Mitchell. In the third quarter of 2011, net income available to common shareholders amounted to $20.5 million or $0.24 per share as compared to $30 million or $0.16 per share for the same quarter last year. FFO for the quarter amounted to $72.9 million or $0.73 per share versus $64.3 million or $0.69 per share in 2010. Included a net income in FFO for the quarter ended September 30, 2011 was approximately $6 million or $0.06 per share in net real-estate tax refunds.

Other income in the quarter included approximately $674,000 in lease termination fees as compared to 639,000 for the same quarter last year. Same-store net operating income, which excludes lease termination fees increased by 2.4% in a GAAP basis and 3.7% on a cash basis for the third quarter without the effect of the real-estate tax refunds, same-store net operating income decreased by 3% on a GAAP basis and 1.9% on a cash basis for the third quarter.

Our same-store portfolio for the quarter was 30.8 million square feet, our encumbered portfolio at quarter end totaled 237 properties aggregating $24.5 million square feet, which represents about 78.6% of our portfolio. At September 30th, Mack-Cali’s total undepreciated book assets equaled $5.7 billion and our debt undepreciated assets ratio was 33.2%. We had interest coverage of 3.3 times and fixed charge coverage of 3.2 times for the third quarter of ’11.

We ended the quarter with approximately $1.9 billion in debt, which had a weighted average interest rate of 6.52%. As Mitchell mentioned, last week we closed a new credit facility with this syndicate of 20 banks with a capacity of $600 million with borrowing price at LIBOR plus 125. The term is for four years with a one-year extension option and the facility has an according feature to expand to $1 billion.

Currently, we have $95.5 million outstanding on the $600 million revolver. We have now arranged the FFO guidance for 2011 to 277 to 281 per share. We have provided initial guidance for 2012 in the range of 250 to 270 a share. At the midpoint, our assumptions include leasing starts of 2.3 million square feet for the year versus scheduled exploration of 2.7 million square feet.

End of 2012 occupancy about a 100 basis points below our September 30, 2011 level of 88.2%. Short-term borrowing rate averaging 1.75% for 2012 and payoff of maturing bonds to the line and no terming out of the debt until the end of the year. No acquisitions resumed in our guidance at the midpoint and assume development in the model includes continued construction of the previously announced Phase II headquarters for Wyndham Worldwide and Parsippany New Jersey which is expected to come online in the first half of 2013.

Please note that under SEC Regulation G concerning non-GAAP financial measures such as FFO we are acquired 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 on our supplemental package and earnings release, which includes the information required by Reg G as well as our 10-Q.

Now, Mike will cover our leasing activity. Mike?

Michael Grossman

Thanks, Barry. Our consolidated portfolio was 88.2% lease at September 30th as compared to 80.1% at the end of the second quarter. Third quarter leasing activity in our portfolio totaled approximately $1.2 million square feet including 280,000 square feet of new leases. Our tenant quarter was 78.4% of that growing space.

Our remaining 2011 rollover is approximately 350,000 square feet or 1.2% of our leased space. In 2012, expirations totaled $2.7 million square feet representing 10% of leased space, the 2012 expirations awaited in the third quarter with reminder evenly divided over the balance of the year. The percentage of overall vacancy represented by sublease base continues to decline in most of our markets, but still averages about 12.4% of overall vacancy.

Mitchell Hersh

Thanks Mike. In closing our prepared remarks, I would just say and reiterate that with the ongoing uncertainty in the economy and clearly a lack of meaningful job growth to this point. Our goal is to continue to remain focused on procuring and securing as many new leases and renewals as we can to keep our portfolio as fully occupied as we can. We think we’ve done it in a smart way made some pretty good economic transaction in the marketplace and we believe that would premier assets that are extremely well located along with the team of professionals that represent this company and service our tenants.

We clearly expect to be at fore front of the eventual market recovery given the fact that there is been virtually no new supply added to the market place. As well and as I previously discussed on the last earnings call we are advancing a planned, residential development down at harbor side along the waterfront New Jersey City, we are working diligently to complete our joint venture agreements which we expect to be done immediately at which time we would then announce our partnership. We have been working aggressively with the city and the redevelopment authority in advancing, the planning for this proposed residential development. We would probably expect Phase I to be somewhere in the neighborhood of a $400 million project of which Mack-Cali would have 85% of the economics, little too early to predict the completion date. But it’s something that clearly is on the horizon for us and so with that we will conclude our prepared remarks and the open the floor to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Sloan Bohlen with Goldman Sachs.

Sloan Bohlen – Goldman Sachs

Hi, good morning. Mitchell, could you may be give a little bit more color on what’s your guys return expectations would be for the development New Jersey City. And then in addition to that Barry whether you guys have taken a look at what the construction financing market looks like for something that magnitude?

Mitchell Hersh

We expect a return on a stabilized basis, and on leverage basis of approximately 7% on that development it’s a little too early to discuss the financing other than to say that we know that construction financing in the 60% range is available for these types of project and permanent financing that is as well available more in the 75% range, somewhere and again we’re in a ever changing world than in evolving world, particularly I guess today with the potential EU solutions but somewhere around 5.5% including amortization. So that’s what the world looks like as we speak.

Sloan Bohlen – Goldman Sachs

Okay. And thoughts even just initially on what the time to stabilization would be on projects like that?

Mitchell Hersh

Well we’re hopeful that it’s in a three year time range from where we are today.

Sloan Bohlen – Goldman Sachs

Okay. And then one other question on Jersey City, the Brookfield sale of the Newport Tower, can you maybe talk a little bit about where you saw pricing was for that asset what was the underwriting for what you think the underwriting might have been for winning better

Michael Grossman

Bob we’ve of course we underwrote it and took a very careful look at it. I believe that the asset was acquired at approximately a 5% yield. And close to what we can develop new product for. Again it was a high quality asset but still 20 years old. And had some issues with respect to termination options and part of tenants and other things that we underwrite very carefully in our we’re thinking and what market exposure might be at the time of termination options in the term of expiration. So clearly our pricing wasn’t in that zone for that asset when three blocks away we have approvals in place to build similar size asset for roughly the same pricing level and presumably coming into a stronger market when we would continue to doing that. So that’s where I think the pricing was about 375 million the new launches to again some of the tenant leases but that’s between that the purchaser which was a Canadian pension fund/REIT and Brookfield.

Sloan Bohlen – Goldman Sachs

Okay. And then just one question if I could on guidance. Barry you talked a little bit about the occupancy assumptions. Can you talk about maybe what your rent expectations or lease rent spreads are for your leases next year? And then maybe any just general color on early negotiations with those renewals.

Barry Lefkowitz

The assumptions that we made with respect to the, we see rents pretty flat at this point. I mean, so we don’t see any deterioration in the marketplace the midpoint of guidance reflects of the fact that when you do have a bit of our valley particularly in the mid part of the year with some expirations in the ramp up of replacement tenants will not the full impact so we’ll not be fully felt in 2012. So that’s really what we see in terms of how we established the guidance each point of occupancy is close to $0.08 per share. With respect to velocity in the marketplace we have certainly challenges are ahead of us in 2012. We have a couple of larger expirations that I know that the analyst community or have asked about we’ve talked about and it’s been in some of your notes they are at the very end of 2012 and we have some midyear expirations in the 75 to 100,000 food range.

And so we have to do lot of leasing through 2012 and then again towards the end of the year. What we’re seeing right now is sort of a flat maybe slightly up year–over–year, tenant call or demand a lot of the space requirements many of the space requirements are of the smaller variety. So, we have lot of deals to do we do space call analysis every week. And we see more of the 10,000 food variety then we do the 25,000 food verity these days some of the demand is being generated as hopefully as make sound by the pharmaceutical industry. And the variety of industries that are either in marketing or drug type industry. So, that’s composes a lot of what we’re seeing in the marketplace today. Up in Bergen County we do have a few potential, let’s say interested parties in the larger block of space that will expire in Mack-Cali center six at the end of 2012 which is the place we would lease.

We already have finalized or in the process of finalizing about a 35,000 square foot sub tenant who will become our direct tenant in that building, it’s about a 254,000 square foot building, but there are a couple of tenants that we have been talking to that are significant, looking at corporate consolidation in that area. So you know it’s a mixed bag, market vacancies have remained pretty stagnant throughout most of markets that we operate in. I mean give or take percentage point up or down on a year–over–year or quarter–over–quarter basis they remain in the mid to high teen even couple of them low 20% of vacancies if you include everything in the wash. So that’s kind of what we’re seeing. We think that concessions have generally matched out.

At this point you’re looking at free rent somewhere in the zone of a month, a year give or take you’re looking at $3 to $4 square foot leasing cost unless it’s a large longer–term lease and then obviously we’re putting a little bit more capital into it with respect to New York city 125 Broad Street. We have just come to an agreement on another half a floor with a major new insurance company. We are doing, we are preparing the lease as we speak, so when we have 1/4 remaining in that building and again I talked many times about the economics of those transactions mid $30 close deals with $16 to $17 operating and we’ve tighten up on the concession a little bit but they’re still pretty flossy and in the $70 food zone plus commissions. So that’s kind of what we are seeing in the market right now. We again at the risk of redundancy the midpoint guidance for 2012 is more a reflections of slightly lower occupancy trending through the year and about the kind of rents that we’re seeing today.

Sloan Bohlen – Goldman Sachs

All right, I appreciate it. Thank you.

Mitchell Hersh

You are welcome.

Operator

Moving on, we will take our next question, comes from Jordan Saddler from Keybanc Capital Markets

Jordan Saddler - Keybanc Capital Markets

Thanks good morning, just wanted to dig into the VanDom development, congratulations on that you have mentioned that on the last call so good to put that to bed. Are those tenants coming from within the portfolio or is that coming from outside, is there an expansion or reduction net of space, just a curiosity.

Mitchell Hersh

Right now VanDom lease another building site from the new headquarters building that we built from them, it’s about 146 foot building, so clearly if and when they would take that building and move into the new headquarters in the early part of 2013 or the mid part of 2013. It represents a gain of about 55,000 square feet. VanDom is in fact a growing company as you know and so their plans are to continue to grow the company and to continue to locate people at the headquarters location at the privileged model coincidently. They are introducing Steve Homes at a launch, who is the of VanDom made the deal with if you will so there are growing company there are international worldwide company and we will see how it goes.

Jordan Saddler – Keybanc Capital Markets

Okay. And then you mentioned pharmaceutical expansions I was just curious you have the relationship with Sanofi and there has been following sort of the merger, some speculation that they are looking for significant square footage up in the Boston/Cambridge area, do you know happen to know if there if that will be a relocation or net expansion and just any commentary on sort of their position in your portfolio?

Mitchell Hersh

I don’t know. We have just commenced a 15-year lease with Sanofi on 200 and 4,000 square feet, which is part of their corporate headquarters location. Sanofi does occupy other leased facilities in the Bridgewater area, those leases which are probably a year from expiration or so could be the ones that they are talking about in connection with the Cambridge location. But in so far as we know we have the headquarters location. There is absolutely no plan to relocate that headquarters that I am aware of. They have just invested considerable capital in moving 1000s of people into the Bridgewater location. So, beyond that Jordan, I don’t know what they are thinking right now.

Jordan Saddler – Keybanc Capital Markets

Okay, that’s fair. And then you touched on some of these larger tenant expirations, two ways, for instance, you’ve got something progress potentially. Can you comment on as we try to get a handle on what’s going to happen over the next year or two? IBM has a 250,000 square foot expiration leased for 150, Prentice-Hall is reportedly moving into Hoboken, New York. Can you comment on those basis in particular?

Mitchell Hersh

Well, first of all, the first look at the Prentice-Hall situation is obviously more of a 2015 event, because it’s end of year 2014 expiration. So, it’s a little to – it’s somewhat premature to read the tealeaves on that beyond they are announced or they discussed relocation into Hoboken and New York City. So, that’s a bit away right now in terms of timing. The IBM situation, the expectation based on discussions with them is they were going to backfill some of their corporate-owned facilities up in Westchester and not extend that lease for that quarter of the million square feet, again end of 2012 expiration, but they haven’t confirmed that.

I mean, we have had these discussions with them and they do have some specialized installations in the building, but the expectation is that they are going to leave based on the preliminary information. The advantage that we have with respect to that asset in particular is that it’s located in the heart of the medical college in Westchester medical facility. So, you have the medical school and the entire health centre epicentre up there. They have - clearly the medical college has expressed serious interest in a significant amount of space in the building and we are advancing those discussions with them, because it’s the buildings right in the heart of their campus.

So, that’s what I can tell you at this juncture relative to Skyline. And again with respect to promise Paramus, which I talked about a little bit before, we have a tenant that they by all indication are going to go to direct with us on a 11-year lease and we have some level of activity on the larger scope, whether these transactions happen too early to tell, but we do see some level of activity there.

Jordan Saddler – Keybanc Capital Markets

And lastly on the Credit Suisse one, any comment?

Mitchell Hersh

Well we are finalizing the transaction with another existing tenant that we think will take up a large part of the Credit Suisse space.

Jordan Saddler – Keybanc Capital Markets

Last question on the residential, just curious about the fundamentals in Jersey City, specifically along the waterfront, what you are seeing in terms of market vacancy, market rent trends for residential?

Mitchell Hersh

Well, again it depends on the product, but we expect to achieve rents in a $40 foot range, market vacancies particularly along the waterfront for rental housing are very low. There seems to be an insatiable demand or workforce or workplace type housing, smaller units averaging even sub 1000 square feet, 850 square feet. And there are other projects that are being planned. We have an absolutely premier location. We are right along all of the master and public transportation systems with the light rail and the water ferries and the past as well as of course the vehicular access.

So, we have tremendous view carters, tremendous location, amenities that continue to expand in the community and we are going be careful in the sense that our current planning is for three phases of residential development totaling if we build it all out somewhere between 1,800 and 1,900 units over an extended period of time. But at the present time, given the residential rental market, given all of the issues that you are very familiar with regarding home ownership and demographic trends and the difficult and affordability with respect to single-family home ownership and obtaining mortgages and all the things that all the (pundits) talk about all day long on the media – on the business channels. We think we will do extremely well with a very high-end product along the waterfront.

Jordan Saddler – Keybanc Capital Markets

And that $400 million is excellent, this is incremental?

Mitchell Hersh

The land is going into the venture at $30 a square foot in FAR, so it includes the imputation of the land. And that’s a rough number at this point.

Jordan Saddler – Keybanc Capital Markets

Okay, thanks Mitch.

Mitchell Hersh

You’re welcome.

Operator

Moving on we will take our next question from Sheila McGrath from KBW.

Sheila McGrath – KBW

Yes, good morning. Mitch, external growth via acquisition still is not a meaningful part of your strategy. Would you say it’s because of the lack of assets for sale in the market, are you participating in putting in bids and not successful?

Mitchell Hersh

The answer is we have put in bids. We have underwritten a number of assets including Newport. Right now, 10 Exchange Place is on the market, which is adjacent to our harbor side facility. And I would tell you that certain yields and pricing levels given what we know about markets and given exposure sometimes I’d rather be the competing landlord than paying 5% free and clear and replacement costs are above in areas where you really can’t build anything like Jersey City.

Then just step up and pay up, because there is no growth. And so it might make a nice splash to buy a million square foot building one day headline, but you can’t get any real economic benefit out of it other than more market share. So, you need to be very, very careful and we bid on metropolitan plaza down in the Meadowlands. And you have such an abundance of capital, the wall of capital that sometimes pays a dear price without understanding all of intricacies of the marketplace. Sometimes they are more of institutional funds involved and they do things that we simply won’t do to, because they are not economic.

And so that’s why, I mean, we have been called into the second rounds, if you will, of biting on a couple of assets. And there is just a threshold at which the flatness of the yield opportunity, the risk involved in understanding tenants and their growth patterns and their termination options, just you don’t have caused us not to see the value in what we have seen so far in the marketplace.

Now, whether that will change? I mean, it seems to me that underwriting standards at least on the part of mortgages have only gotten increasingly more difficult. And so we are hopeful we don’t like to see the stress and we have all talked about this for three years and haven’t seen a lot of it. But with our liquidity and our fortress balance sheet, we think that at the appropriate time we will be able to step into some situations that require expertise as well as capital and that’s what we are trying to do. Look I am sure our money is as good as anybody else’s. We could have paid 5% for Newport and owned it, but we didn’t choose to do it at that economic basis.

Sheila McGrath – KBW

Okay. And real quick on the real estate tax run-rate, would you say that in fourth quarter we should see the level of bounce back up to what it was in second quarter?

Mitchell Hersh

Yes, I mean, the third quarter was a settlement and it was an anomaly from that perspective. It was a great result for us largely led by (Tony Crook) who is our Senior Vice President of Finance who orchestrated that sort of the whole (indiscernible) appeal issue and we would expect now a more normalized run rate if you will on that.

Sheila McGrath – KBW

Okay, thank you.

Operator

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

Michael Bilerman – Citi

Hi, I just want to come back to guidance for a second. So, your 250 to 270 is a quarterly run rate of call it $0.63 to $0.68 with the midpoint being $0.65. You are running basically this quarter and next that about $0.67 on a core basis. I think you mentioned the $100 million bonds that are coming due at the beginning of the year, March going to be floater on the line and that’s probably a good 300 to 400 basis point spread. So, you are looking at it a penny or quarter of upside and it sounds from an occupancy perspective you are heading into the fourth quarter with higher occupancy in the third quarter. And so I am struggling and I know Mitch you talked about some move-outs in the middle of the year, but I am really struggling to see how you go down to this in the lower part the range of 63 to 65 and even how you don’t get to 67, 68 for the full year. Can you help reconcile some of these numbers?

Mitchell Hersh

Sure, Michael. I will give you sort of our quarterly analysis which starts in Q1 of ‘12 at 65 to goes to 68, 65, 64, that actually produces $2.61 at a midpoint at this jointure we think aside from the absolute occupancy and a little bit of a valley that we are going to hit and sort of average 100 basis point decline, we do have about a 3.5% same-store NOI decline.

And frankly, we talked over the course of 2010 at that 3% to 5% range. We tightened it up. We think we are pretty accurate and so far as how we see the world today at about 3.5% down. So, we aggregate all of those factors. You are coming out plus or minus a penny or two at the 260 mid range. Clearly, you are absolutely right hit it right on the head with respect to the bond deal. If we don’t have to, we have plenty of line capacity, there is no necessity to go replace that 100 million in January. And we will keep it on the line at 150 over or 125 over plus our facility fee.

We got plenty of capacity we will see how the bond market moves. And if we do some acquisitions through the course of the year, then we can do an index eligible bond issue at an appropriate level. Right now, nobody knows where that is. We see the same things you see. And the latest pricing clock is at least for Baa2 which is our rating is 3 to 3.25 over the corresponding yield, maybe that will change, because of the EU settlement, some stability in the world. But right now, we are not anxious to be the bellwether in the bond market, but if you factor these things together, I mean, that’s where the numbers are coming out at the moment.

Michael Bilerman – Citi

But I guess what’s happening between this quarter, you are at $0.67, the fourth quarter you are going to be at $0.67, what’s happening the first quarter to then drop down to $0.65 and in that $0.65, it sounds like you are floating the bonds, so the reality is – it’s really $0.03 spread or 3 million bucks. I mean that’s not, it means a big change sequentially. I can sort to get a little bit comfortable that there are some move-outs and you want to protect yourself and you are obviously baking in only 2.3 million square feet of leasing even though you’ve been doing a 1.25 million, but I am just trying to even the starting point seems really, really low.

Mitchell Hersh

Well look, I think we have had this discussion before. We are trying to be – we are a bit conservative, but we are trying to be accurate. We can’t predict expenses. Last year, we got creamed on snow removal and energy cost, because of the severity of the winter. We are trying to be a little bit conservative, but we are trying to be accurate. So, maybe you are right, maybe it’s a penny off for the quarter, you are perhaps a better predictor than we are, but that’s all it is. We are not talking about orders of magnitude that are significant.

Michael Bilerman – Citi

Right. And there is nothing happening in terms of the management company income like all the construction levels or lease termination fees or G&A that would be widely different from what they were in ’11?

Mitchell Hersh

No, no. Our run rate is about 9.25 million on G&A. We see that flat. We see construction. It’s not even worth talking about the differentials there. We might make a little money, but basically it’s more of a service organization. So, you may be right, maybe it’s a penny or two differential but that’s all it is.

Michael Bilerman – Citi

And then what were least termination fees in the quarter?

Mitchell Hersh

The least term in the quarter were pretty low. They were $674,000.

Mitchell Hersh

Okay. And then just lastly dispositions, you talked little bit about the acquisition environment and not wanting to participate effect of those yields and basically just (indiscernible), but does that and your leverage is already extraordinarily low. And so it doesn’t do anything on that, but that doesn’t make sense to be more aggressive at selling assets and buying back your stock if it’s your portfolio, you know the best that you think is trading at a discount, why just certainly have a Chairman that’s familiar with doing leverage recaps and why not do that, why not pursue that sort of strategy.

Mitchell Hersh

Yeah, well. First of all we’re in the business of doing what we do so and we’re not an arbitrage hedge fund where we’re trying to be other things to other people. We were in the business of owning and managing quality real-estate where we have market presence, that’s a meaningful and gives us a competitive advantage. There were clients at the few years ago and I’ve talked about this looking where we’re looking a sale, we were considering some of flex product in South Jersey and the perspective buyer got clip by Avalanche or Tsunami that occurred in the financial markets.

And I can tell you that largely, I mean I’m not talking about our peer group in the REIT industry or Canadian pension funds that our third-party managers to buy (trophy) assets and manage them for them to kind of product that we would be selling is the identified buyer of that kind of product would be a leverage private operator. And that sort of leverage doesn’t exist today in the banking market or the insurance company market. We just went through reify of a small asset or JPMorgan is our partner.

We have a minority interest in an asset of pristine asset. If I tell you what the banks put us through to for a simple loan. The underwriting is severe at least and I am talking for assets that our $25 million to $100 million or $25 million to $50 million, I’m not talking about billion dollar assets were a pension fund just like to check or we just like to check. And so that the execution risk in putting anything up for sale and getting into the – if I showed you the list of acquisitions from every market that we operate in and from Washington D.C. in the suburban markets surrounding Washington up through the markets up in the metropolitan New York area that have failed. The executions have failed. The assets have comeback to market because the buyers can’t get financing on them, but there are still through expenses.

And so to put anything up for sale, you’re taking a large risk of execution. And I don’t think that the timing is right, but again I’m not buying back stock, so that’s not going happen, but I am not adverse to selling non-core assets when I think the deals can get done on a reasonable basis and I just don’t think with area. I’m given you real time example of a ridiculous exercise with a huge promotional lender with great sponsorship, but the fear of (Finlay) in that frank and everything else that phasing these banks today for the leverage buyer is creating, I believe the huge optical and that’s we don’t want to be in the middle of it right now.

Michael Bilerman – Citi

When you see product spend they pay just a billion one for non-encumbered portfolio and they’re getting $100 million of loans against it. I think they appears to be some level of lending out there that would supported and just more trying or I mean you won’t be or but the stock trading in the 9% employee cap rate is the certain assets that you think in portfolios with more than well sell from that is very easy under leveraged to buy back stock, but we can save it for another day and here before.

Mitchell Hersh

Thanks.

Operator

We’ll now take our next question from Jamie Feldman from Bank of America/Merrill Lynch

Jamie Feldman – Bank of America/Merrill Lynch

Thank you and good morning.

Mitchell Hersh

Good morning.

Jamie Feldman – Bank of America/Merrill Lynch

Given your guidance, can you talk a little bit about what it means for FFO and then dividend coverage both at the high end and the low end?

Mitchell Hersh

Yeah. This year 2011 based on what we expect to spend throughout the end of the year, we’ll probably plus or minus flatted to slightly negative more less, not a big number one way or the other and that’s obviously always a variable in 2012, we expect that, we could be if we do as much leasing to maintain the sort of occupancies that we’ve built into guidance, and spend all of the money and all the reserves that we’re projecting and chances are we won’t spend all of the reserves, credit reserves and so forth. But if we did we probably be somewhere at the current dividend level of down $25ish million at the end of 2012, and for $6 billion company it’s not such a serious thing.

Jamie Feldman – Bank of America/Merrill Lynch

Okay. Either sense of way before it’s comfortable again what point you said to reveal the dividend?

Mitchell Hersh

Yeah, while we talked about it at every September Board meeting third quarter. I think and I just had that same discussion that I just have with you in September. So we’ll talk about it next September, we’ll see where it’s trending. I don’t think there is any issue at that level with respect to the dividend.

Jamie Feldman – Bank of America/Merrill Lynch

Okay. And then just a follow-up, I just want to make sure you said leasing spreads were minus 3.4% in the quarter is that correct?

Mitchell Hersh

Yes, that’s right.

Jamie Feldman – Bank of America/Merrill Lynch

Okay. And then I know you’ve said your same-store outlook for next year. But what are you thinking in terms of leasing spreads for next year?

Mitchell Hersh

Well, I think that the leasing spreads, there were again as always the anomalies and the situation, they would probably, would have been down close to 7%. But we had some benefit of the Vandom transaction that particularly the economics of that mitigated against some of the roll down. So I am guessing that is 6%, 7% down.

Jamie Feldman – Bank of America/Merrill Lynch

Okay. And then did you say if the apartment building you think it would be about 400 million?

Mitchell Hersh

Phase I, somewhere in that range.

Jamie Feldman – Bank of America/Merrill Lynch

Okay, all right. Thank you.

Mitchell Hersh

You’re welcome.

Operator

Okay. Now we’ll take our next question from Michael Knott, Green Street Advisors.

Michael Knott – Green Street Advisors

And so this carries, if you feel like the uncertainty among tenants is still as high as it had been?

Mitchell Hersh

Yes, I do actually. I mean it looked there are always exceptions to the rule. But there is still a lot of apprehension in the economy. I think that obviously the events of the day could change attitudes a little bit. But to be very candid with you Michael, I think that the election is an overwriting concern and issue and unfortunately we’re not going to have clarity on that one way or the other or another year. And so I think that there will be more of a tip going in terms of decision making as evidenced by the $1 trillion sitting on corporate balance sheets that nobody wants to put the work right now.

So, I think the election is a serious concern and I don’t want to go into die a try bout the disfunctionality of Washington and so forth. But he’s a feeling that you’re not going to see wide spread or wholesale expansion of businesses largely in general until there is a more of a ballot painted in terms of the political landscape. And what it’s going to mean towards taxes and so forth. Certainly at this point the investment banks and financial institutions have stepped back a little bit couple of them have announced some staff reductions in investment banking and I’m not talking about Bank of America, I’m not talking about more recent announcements that impact particularly the metropolitan, New York place. So we’ll have to see how it goes. But because the EU seem to have settled the debt issues for the moment, the phones is not ringing, we’re tenants that are willing to make commitments. I mean it’s going to be a slower process.

Michael Knott – Green Street Advisors

Okay. And then any update on some of the comments you’ve given in the past about making platform acquisition. I think potential in the DC metro area?

Mitchell Hersh

We’re not trying to do that and those discussions while there are not as heated up as I would like them to be. There is still serve on the back (indiscernible) and I think the big question what will access the capital be not unlike what I discussed before about the private leveraged owner/buyer. And I don’t think anybody clearly wants to see control of their company if they don’t have to and so, we are still talking and but like everything else is moving slowly.

Unidentified Company Speaker

And then the Michael Bilerman’s question about share buybacks and your view on financing levels for perspective buyers, you feel like the extent to start chase at a high employed GAAP rate that’s sort of empower with private market values with the GAAP rates are higher because of the financing issue or is your version to buybacks still going to based on just the idea that you don’t want to shrink your capital base and you are does not interested at any price in the public market buyback sort of opportunity.

Mitchell Hersh

Yeah, well I don’t want to shrink the capital base, I mean once you’ve moved in that direction, it’s very hard to turnaround. I think there are similar events impacting the marketplace. I could tell you that certainly the banking community at large as evidenced by our credit facility and the rating agency believes that valuations are stronger than some of the recent transactions that somebody alluded to one of those transactions before black storm and I don’t know enough about the comment on it, but we clearly believe that values for the corner real-estate we own with quality of income that we have and presents in branding that we have here that we are under priced and undervalued in the public market, but that doesn’t mean we’re going shrink our capital base.

Michael Knott - Green Street Advisors

Okay thanks.

Operator

And moving I’ll take our final question from Jim Sullivan, Cowen and Company.

Jim Sullivan – Cowen and Company

Yes, I just have one quick question and maybe I missed it earlier, but the joint venture – the residential joint venture the land that would be contributed to that joint venture. Is that on our balance currently and does our guidance for 2012 assume the capitalization of that and when does that begin.

Mitchell Hersh

Yeah, the land zone frame we are on a balance sheet, there is no effect or impact in our 2012 guidance from the residential or contemplating residential development.

Jim Sullivan – Cowen and Company

So is that mean that you would not be capitalizing your – the value for that land or you book on that land?

Mitchell Hersh

Well, first of all we don’t know at what point or which point the project will commenced because going through an approval phase and what will occur is we will get a joint venture credit for the amputation of land based on the FAR or the developable area of each phase of development at the $30 of square foot when we all contributed the joint venture, but that won’t happen until we get full approvals on the project.

Jim Sullivan – Cowen and Company

Okay. And what would be the likelihood, what quarter do you – would you expect if things are going, according to plan that we would get approval for Phase I.

Mitchell Hersh

Yeah, I’m hopeful, that it happens in 2012, but it’s clearly going to take probably towards the end of the year for that to happen based on the complexity of all variety of approvals that are needed. It’s an approved use, but it’s just a complicated development.

Jim Sullivan – Cowen and Company

Sure okay.

Mitchell Hersh

May be in the third quarter sort of best case.

Jim Sullivan – Cowen and Company

Okay. Thanks.

Mitchell Hersh

You’re welcome.

Unidentified Company Speaker

Operator, is there any other questions?

Operator

Not at this time sir.

Mitchell Hersh

Okay. Well in that event, I want to thank everybody for joining us on this earnings conference call today and we look forward to seeing many of you at NAREIT and then getting together again the end of year conference call shortly thereafter. Thank you. Have a good day.

Operator

Thank you. That will conclude today’s conference. We 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's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts