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Mack-Cali Realty Corp. (NYSE:CLI)

Q4 2011 Earnings Call

February 9, 2012 10:00 am ET

Executives

Mitchell E. Hersh – President, Chief Executive Officer and Member of the Executive Committee of the Board of Directors

Barry Lefkowitz – Executive Vice President and Chief Financial Officer

Analysts

John W. Guinee, III – Stifel, Nicolaus & Company, Inc.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Jordan Sadler – KeyBanc Capital Markets

Joshua Attie – Citigroup

David Anderson – Green Street Advisors

James Feldman – Bank of America/Merrill Lynch

Sloan Bohlen – Goldman Sachs & Co.

Operator

Good day and welcome to the Mack-Cali Realty Corporation Fourth Quarter 2011 Conference Call. Today’s conference 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 E. Hersh

Thank you, operator. Good morning everyone and thank you for joining Mack-Cali’s fourth quarter 2011 earnings conference call and year end 2011 call. With me today is Barry Lefkowitz, Executive Vice President and Chief Financial Officer.

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 generally what we’re seeing in our markets, and then Barry will review our financial results. As we reported this morning generally, it has been pretty much steady as she goes, which we consider in these extraordinary times to be a very good thing.

FFO for the fourth quarter of 2011 was $0.68 per diluted share, and for the year ending December 31, 2011, it was $2.80 per share.

We did have an active quarter including leasing activity of about 774,000 square feet that included almost a quarter of a million square feet of new leases and the balance renewals. Our tenant retention was about 73% of outgoing space for the quarter. We ended the quarter at 88.3% leased up slightly from last quarter’s 88.2%.

For the full-year, we signed 572 transactions, totaling over 4.2 million square feet and of that, 1.2 million square feet were in new leases. The 3 million square feet of renewal transactions produced a full-year tenant retention rate of 68% of outgoing space. Further testament to the fact that tenants would rather remain in place with strong landlords.

Rents roll down in the quarter by 7.2% compared to last quarter’s 3.4% roll down. And for the year, we had a rent roll down of 6.2%, obviously this fluctuates quarter-to-quarter, but the trend is still a challenging market.

Lease rollover for 2012, are approximately 10% of base rent or slightly in excess of $62 million. I assure you we’re working very hard to accomplish renewals and new leases, the deal with the lease expirations in 2012 and beyond.

Our leasing costs for the quarter were approximately $3.30 per square foot per year down slightly from last quarter’s number of $3.40. For the year 2011, our leasing costs averaged $3.80 per square foot per year, pretty much market conditions prevailing throughout our marketplace.

Despite a challenging environment, our portfolio continues to outperform virtually every market in which we operate. With our leased rates exceeding market averages in Northern and Central New Jersey, Westchester, Washington D.C. and of course, doing extremely well along the waterfront.

While we did anticipate a particularly challenging fourth quarter with known expirations and move outs, we saw a solid leasing activity and in fact, as stated before, we’re able to slightly increase our occupancy rate. As far as activities for the quarter are concerned, we previously announced during the quarter that we entered into a joint venture with Ironstate development company to develop luxury multi-family rental towers on the Jersey City Waterfront, north of Plaza 5 and Harborside.

The first phase of the project will consist of a streetscape retail level and a parking pedestal, which in turn will support two high-rise towers including approximately 630 apartments in each tower.

In total, we anticipate building 2,500 units in four towers at harbor side into that two principle phases of that, we currently anticipate about 21% of the units as studio apartments, 62% as one bedroom and the balance as two bedroom. We’re very excited about this project. The project will be built on land owned by Mack-Cali within our harbor side financial center. We have a great partner, we’re well along in the process with big city agencies, and we anticipate at present a fourth quarter 2012 ground breaking and expect residents to take occupancy in these magnificent towers two years or sooner there after.

Also as previously mentioned in the quarter, we are working with a number of our land sites repositioning one right now in Morris County, New Jersey, taking a 30 acre parcel that’s zoned for office and research, and converting that to big box retail. We have a signed letter of intent for a major retail tenant finalizing the lease documents while moving forward with the planning process in what I might add is a very receptive community to see land put to work and tax ratables created.

Some notable leasing transactions that we’ve outlined in our quarterly filings include the following. One Call Medical, Inc., a provider of specialty services to insurance payers, renewed almost 58,000 square feet at our 20 Waterview Boulevard, Waterview Corporate Center in Parsippany, New Jersey. This is a long-term lease in a building that’s 226,000 square feet and now slightly in excess of 99% leased.

Ipsen Group, a specialty pharmaceutical company part of the Tercica Company, signed a new lease for almost 33,000 square feet at 106 Allen Road, also known as Liberty Corporate Center in Bernards Township, New Jersey. This 132,000 square-foot building is 93.5% leased and just yesterday received Silver Lead status, and we’re very proud of this asset, which we build not too many years ago.

Reliance Standard Life Insurance Company signed transactions totaling 26,000 square feet at 7 Skyline Drive in Hawthorne, New York, consisting of a 19,000 square foot renewal and the balance in expansion. This 109,000 square foot building located in our Mid-Westchester Executive Park, is almost 89% leased.

Oldcastle BuildingEnvelope Company, a supplier of architectural glass and aluminum glazing systems signed a new lease for the entire 33,000 square foot 1507 Lancer Drive in our Moorestown West Corporate Center in Moorestown, New Jersey.

And finally, at 125 Broad Street a building that is virtually full at this point just a little bit more to go, AXA Insurance Company signed a new lease for almost 19,000 square feet, this is our downtown Manhattan building, and the building is now about 96% leased with leases out proposals out to fill the balance.

Moving on to financial activity, as I mentioned on our call last quarter, Mack-Cali refinanced our unsecured revolving credit facility, $600 million facility expandable to $1 billion, a four-year facility with a one-year extension option, and we did this with a group of 20 lenders. The transaction was arranged by JPMorgan Securities and Merrill Lynch, and we think the execution was impeccable, and demonstrates Mack-Cali’s continued confidence or the capital markets continued confidence in our company as illustrated by a very, very good execution on this transaction.

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

Barry Lefkowitz

Thanks, Mitchell. For the fourth quarter of 2011, net income available to common shareholders amounted to $16.1 million or $0.18 a share, as compared to $6.6 million or $0.09 a share for the same quarter last year.

For the full-year of 2011, net income available to common shareholders amounted to $69.7 million or $0.81 a share versus $52.9 million or $0.67 a share in 2010.

FFO for the quarter amounted to $68.1 million or $0.68 a share versus $64.2 million or $0.69 a share in 2010. For the full year 2011, FFO amounted to $277.4 million or $2.80 a share versus $261.3 million or $2.81 a share in ‘10. Other income in the quarter included approximately $596,000 in lease termination fees as compared to $484,000 for the same quarter last year. For the full year 2011, lease termination fees were $4,529,000 million versus $2,088,000 million for the full year of ‘10.

Same-store net operating income, which excludes these lease termination fees, decreased by 4.2% on a GAAP basis, and 3.2% on a cash basis for the fourth quarter. For the full year of 2011, same-store net operating income again, which again, excludes lease termination fees decreased by 3.3% on a GAAP basis and 3% on a cash basis. Our same-store portfolio was $30.8 million square feet.

Our unencumbered portfolio at year-end totaled 237 properties aggregating 24.5 million square feet of space, which represents 78.6% of our portfolio.

At December 31, Mack-Cali’s total undepreciated book assets equaled $5.7 billion and our debt to undepreciated asset ratio was 33.6%. For the fourth quarter of 2011, we had interest coverage of 3.1 times and fixed charge coverage of three times. For the full year 2011, we had interest coverage of 3.2 times and fixed charge coverage of 3.1 times. We ended the year with approximately $1.9 billion in debt, which had a weighted average interest rate of 6.46%.

Currently, we have $200 million outstanding on our $600 million revolving credit facility. We have reaffirmed our FFO guidance for 2012 in the range of $2.50 to $2.70 per share. The midpoint assumes leasing starts of 2.2 million square feet versus scheduled explorations of 2.5 million square feet.

End of year 2012 occupancy about 1% below December 31 2011 level. Maturing debt is paid by [joining] on our credit line, no acquisitions are assumed and development in the model includes continued construction of Phase II headquarters for Wyndham Worldwide and Parsippany New Jersey, which is expected to come online in the first half of 2013, and the fourth quarter of 2012 ground breaking for our multifamily joint venture on New Jersey City waterfront.

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 on our supplemental package and earnings release, which include the information required by Regulation G as well as our 10-K. Mitchell?

Mitchell E. Hersh

Thank you, in closing I would just like to say that clearly we are committed to our tenants. We are committed to our premier assets that we believe are exceptionally well located and exceptionally well maintained with capital reinvestment. We have a team of outstanding professionals within the organization. Our property management teams are exceptional. We have strong tenant relationships and the financial strength to deliver on all of our commitments and to take advantage of opportunities such as those that we have discussed in this call. We will continue to work very hard to lease up our buildings and to maintain occupancy at the highest levels with the highest quality tenants that we can.

And with that, we’ll take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And we will go first to John Guinee with Stifel.

John W. Guinee, III – Stifel, Nicolaus & Company, Inc.

Hi, two questions, Mitchell. First, essentially you guys are very reluctant to acquire, very reluctant to dispose clearly, just running the core portfolio. And on a normalized basis it was 280 FFO in 2010 and 270 in 2011, midpoint is 260 for 2012. Couple of questions, so why the reluctance to actively recycle the portfolio? And then two, where do you see the condition such that this $0.10, a share with a decrease in FFO subsides?

Mitchell E. Hersh

Well, John I guess, if you want to sell your portfolio or parts of your portfolio for land cost, you can do that, and some other companies are doing that for various strategic reasons. I can imagine that there are economic reasons to take such significant forecloses on your portfolio. You’re seeing deals busted every day that you pickup a real estate rag or the Wall Street Journal, because leverage is so difficult to acquire in this market and underwriting standards are so strict. And on top of all that, you have significant equity requirements for both the acquisition and the leasing cost. So it ain't so easy to get a good execution on selling where you deem to be the salable part of a portfolio, as I imagine, you would consider it. So that's number one.

Number two, with regard to the earnings situation. this economy has gone through the greatest recession since the depression. there are a few markets in the industry, in some coastal more urbanized centers that are doing a little better, not nearly as well perhaps as perception would hold. I know you will hold very high perception of some of those, because I've seen all your notes talking about it.

And at some point, there will be a point of inflection and those landlords that are well capitalized with a strong franchise in market recognition, the ability to acquire even if it's through the form of debt and other meetings, and reposition assets and in some cases, change them, change their use. But at some point, there will be an economic inflection point where their trajectory will turn positive, where this country has a lot bigger problems than our $0.10 of share in earnings. And when that happens, that positive trajectory, our financial and human capital strength will propel this company forward. And so we don't take a short-term view, and we don't take a fatalistic view as you’re suggesting, and we’re going to look to the future, unitize our land, utilize our asset base and utilize our resources to regain some of the loss ground, and then to grow well beyond that in the future. So I hope that answers your question, John.

John W. Guinee, III – Stifel, Nicolaus & Company, Inc.

Okay, and that just a follow-up, I’m just riding through and as you know my concern with your portfolio is what today’s big tenants vacate is just tough to backfill them in this environment with a sort of a shift in tenants and employers desires, can you kind of walk through Prentice-Hall, Toys-R-Us, Credit Suisse, AT&T (inaudible) kind of what you expect with the near-term explorations?

Mitchell E. Hersh

Yeah, you know something John, I’m not going to do that, if you want it call back, we can have a discussion about those, I know you had several discussions with my organization about those explorations. This is a tough business right now and states and other jurisdictions have thrown money in the form of corporate welfare to try to attract and retain employees in their jurisdiction. So in a couple of cases, we’re getting tagged a little bit with that. But I don’t know what your plan, I got your game here, but we know what the challenges are in front of us and we’re up for the task, if we have this hold some vacancy for a while, if we have to turn a small office building into something else because it makes more sense. We’re going to do that. And we have the economic resources and the vertically integrated talent team to accomplish it. So, I’m not going to belabor the call with all the negativity that you want to pervade here today. We’ll do what we have to do. And if you like to call back and have a discussion about those specific transactions, I’m happy to do it with you.

John W. Guinee, III – Stifel, Nicolaus & Company, Inc.

Okay, maybe late in the day. Thanks.

Mitchell E. Hersh

Welcome.

Operator

And then, we will go next to Sheila McGrath with KBW Investments.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Yes. Mitch, could you just remind us on the 2012 expirations, what you had in the guidance? I think you did, you or Barry did outline that before?

Mitchell E. Hersh

We had about 2.5 million feet expirations and we had 2.2 million of the [starts].

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Okay. And then, I’m wondering what your thoughts on potentially tapping the unsecured debt market and given where things stand today, where do you think pricing on a 10 year money might be for Mack-Cali?

Mitchell E. Hersh

It appears that at the markets, the spreads have tightened nicely. The 10 year, remember just sort of as a preface that as a rated credit in the unsecured markets is an index eligibility factor, which means that you should be doing a quarter of $1 billion minimum size execution. So today, we’ve drawn 200 on the line, we have no maturities looming in front of us. We have anther 100 million at the end of the year in unsecured.

But we are doing some other things that might make it more logical for us to consider some sort of an execution in the public debt markets. And, so we think that a 10 year piece of paper right now, which is the question you’ll ask would be somewhere in the 43, 44 all in cost, all in coupon in today’s market, and a five-year deal would be somewhere around 375 in today's market or lower. So, we’re looking at all of that. The ten-year has probably come in by a four-percentage point over the last two months or so in terms of the spread compressing.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Yeah. I know it's compelling. Last quick question, I know it is of small interest for you, but I’m just wondering if you had any update thoughts on your Boston joint-venture, now that millennium, it was in the paper that they are going to be involved?

Mitchell E. Hersh

Although we still have some paperwork to execute, but given the fact that somebody released it to the press the other day. we're in a process of redeeming our interest, selling our interest with our partner JPMorgan back to Borneo, and I think that was – if it wasn't reflected in that article, that's what’s in process of what's happening now.

Sheila K. McGrath – Keefe, Bruyette & Woods, Inc.

Okay, thank you.

Mitchell E. Hersh

You're welcome.

Operator

And we will go next to Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Good morning.

Mitchell E. Hersh

Good morning.

Jordan Sadler – KeyBanc Capital Markets

I'm just wondering, run through – Mitch, you started to describe the multi-family development with a little bit more detail, did you say ultimately it's expected to be 2,500 units?

Mitchell E. Hersh

Yes.

Jordan Sadler – KeyBanc Capital Markets

Yeah, okay.

Mitchell E. Hersh

It's been a little bit of a moving target. We have been refining to design and we have also brought in – let me just say, it's a very interesting concept. But total it's about 2,500.

Jordan Sadler – KeyBanc Capital Markets

Okay. And it will be all for rent?

Mitchell E. Hersh

Yes.

Jordan Sadler – KeyBanc Capital Markets

Okay. And what's your total expected cost and is the relationship in terms of economics the same on the new bigger planned project?

Mitchell E. Hersh

Yes. Our partner is 15% of the deal. there is a very, very slight promote after achieving some very significant returns to the joint venture. we’re sharing in fees in terms of development and management. All of the pre-development expenses are being paid by our partner as part of the transaction, and the total square footage is not really changing. The number of units has increased due to the efficiency that we have created in the design, teaming up our architect who is based here in the United States with – our consulting architect who is based in Amsterdam. And we think we’ll have the most unique product in the marketplace.

Jordan Sadler – KeyBanc Capital Markets

And it seems like it's heavily weighted toward studios and one-bedrooms, with no three bedrooms. Is that a decision based on sort of the availability in that market or just sort of where the expected demand is coming from?

Mitchell E. Hersh

We believe that the demand as demonstrated on an [imperical] basis is clearly in the – it’s a level of affordability.

And we’ve already talked about the projection for $40 rents based on the marketplace today, and that’s what we’ve (inaudible) we really haven’t factored in or modeled in a rent increase. And the marketplace is, first of all, it’s primarily the upwardly mobile, young professionals and the emerging activity that’s occurring in the economy with respect to publishing in media and some of the things taking up some of the slack in financial services.

But most of these apartment dwellers who in part are reluctant to buy homes, the household formation is forming later as a result of the economic downturn and pressure that we have had and they look at absolute cost, if 3,500 a month, 4,000 a month, and so that’s really how the marketplace has evolved. And the more efficient better organized design for the smaller units the 600 to 1,000 square foot type units presents a much more affordable opportunity for the marketplace and the demand that’s there today.

The two-bedroom, there are some family formation and so you have some level of two-bedroom. Beyond that, you just wouldn’t build a three-bedroom apartment in that marketplace. It’s not affordable and there is no demand for it.

Jordan Sadler – KeyBanc Capital Markets

I assume you need to build more parking, if you’re doing more units or is that…?

Mitchell E. Hersh

The parking, first of all the ratio, the maximum is half a car per 1,000 and so that’s number one. And all of these communities particularly the waterfront communities don’t encourage parking, because of the availability of mass and public transportation. But we have plenty of parking given in our office product and some of our residual land inventory, and we’re also looking at some new technologies, which we haven’t necessarily decided upon, but some of the parking systems that are available today with much and improved technology.

Jordan Sadler – KeyBanc Capital Markets

All right, great. Okay. The total cost that is still expected to be in the $400 million range or I would imagine that need to go up with it?

Mitchell E. Hersh

We don’t anticipate that it’s going to go up a bit. That was for the first phase. I mean, it’s ultimately potentially $1 billion project if everything gets built up.

Jordan Sadler – KeyBanc Capital Markets

Right, right. Okay, thanks, Mitch.

Mitchell E. Hersh

You’re welcome.

Operator

We will go next to Joshua Attie with Citi.

Joshua Attie – Citigroup

Hi, thanks. Mitch, can you elaborate on something you touched on earlier. I think your prepared remarks opportunities to put more of your land sites to work?

Mitchell E. Hersh

I’ve mentioned a retail repositioning that we’re doing at the present time. We are at early stages of looking at similar opportunities in a couple of our other land positions. and then of course, you have the multi-family residential, which I would consider it to be a significant use of existing owned land inventory in a very efficient way.

Joshua Attie – Citigroup

So is the retail and new development that will be built on land that you own or is that part of an existing...

Mitchell E. Hersh

It's raw land, and it would be in the form of ground leases where we would just be delivering the pad.

Joshua Attie – Citigroup

And can you give us a sense of the size, either of the size of the project or how much land you would contribute?

Mitchell E. Hersh

No, at this point, I mentioned it’s a 30-acre site that we’re – dealt with right now and we have a letter of intent with a major retailer and we expect that it will be a very nice return to us in the form of ground rent, but that's really all I'm prepared to say.

Joshua Attie – Citigroup

Okay. And let me ask one more question, I think in the Q&A earlier, you have mentioned potentially redeveloping some of your office assets for higher and better use if large tenants were to move out. Can you talk a little bit more about that?

Mitchell E. Hersh

No. It's just a consideration at this point where we have a couple of assets that may have better opportunities and higher economic opportunities and yields to be repositioned given the change in some of the demographics. But no, I'm not prepared to talk specifically.

Joshua Attie – Citigroup

You mean, you repositioned as office or repositioned as other property types?

Mitchell E. Hersh

Repositioned as either given some of the trends that are emerging.

Joshua Attie – Citigroup

Okay. Thank you.

Mitchell E. Hersh

You're welcome.

Operator

And we will go next to Michael Knott with Green Street Advisors.

David Anderson – Green Street Advisors

Good morning. This is actually David Anderson. just a quick question for you on 10 Exchange Place, would be interested to see if you guys looked at that and your thoughts on how the pricing there, I believe its 380 a foot compared to where some of your assets will trade?

Mitchell E. Hersh

Yeah. We of course, we looked at it, it’s right next door to our Iron and to our Harborside complex. it's a nice building, it's a little bit older vintage, it was mid-80s building, and – but clearly, a nice asset and it has – when we underwrote it, it has a very significant component of what I affectionately refer to as [zombie] space where big banks have leases and they don't have people.

And so we had a real concern with respect to rollover and leasing costs and leasing probabilities with respect to some of that space over the next couple of years. And given that with the pricing level, we thought that we could make a lot more money by, for example, doing our residential development right nearby, and right along the light rail. and so that's what we focused on, with respect to the valuation, I would tell you that give or take 10%, well, adding more or less 10% to that number, that per square foot number that you resided. We could build brand new product at half a block away from that, on land that we've preserved, that's not going to be converted to residential. And our Plaza 4 building, which would be that 1.2 million square feet plus or minus and big floorplates, trading floors, if necessary, which that building doesn't have, 10 Exchange doesn’t have.

And all of the [hachure marks] of brand new sustainable and grain development, which is hard for a 30-year-old building to adapt to in some instances. So we think that the pricing clearly justifies and kind of validates the value if you will of what we own down on the waterfront, you remember it wasn't too many years ago that we bought a magnificent building that I consider to be certainly among the top couple in the entire waterfront area and that's 101 Hudson, and we paid $262 a foot for that building. So the fact that new construction is roughly 400 and that's what they paid for this building, certainly in my view validates the value of what we own down in the Harborside and 101 Hudson.

David Anderson – Green Street Advisors

Thank you, and….

Mitchell E. Hersh

You’re welcome.

David Anderson – Green Street Advisors

Just another follow-up question on downtown, just looking at the lease economics where the [AXA] is it a deal that you did down there, just kind of the math works out to maybe CapEx per foot per year that's about 20% of the baseline that you're getting there. How that market looking, I know you’re 96% leased, but your sentiment overall that there is still an anchor on rent, on comings up on the west side, or is there, is that pretty much in market what you just signed those leases, and is that move somewhere it was before, can you just get some overall color on where that market is?

Mitchell E. Hersh

The demand on the east side has increased and if you look at our tenant roster between AXA, CNA, [general array], IAV, Herzfeld & Rubin, I mean we have an exceptional roster of tenants that we have been able to have support our income stream of 125. the general rents haven’t really changed and one would think to some extent, it's a function of supply and demand. There has been consolidation among some of these larger users into our building. we have been able to diminish the capital requirements by approximately $20 a square foot in the last few deals that will fill out the remainder of 125. And so we're looking at $80-ish packages versus what not too long ago was $100 package. And so I think will be done and but the rents still kind of hovered in that high 30s range with reasonable increases over 15 or in some cases 17-year leases.

As far as the west side, clearly the jury is not out yet, I mean the asking prices for those assets and the new construction is very high and certainly, I don't want to pile on to all the negative publicity concerning the cost of the trade center, but just the other day, I had a meeting with the head of facilities for one of the largest banks in the city, in the metropolitan area, but headquartered in the cities, looked at those assets and don't feel that the infrastructure is as full as they would have anticipated. So I don't know, there is a lot of space that's coming available down on the west side, and there’s a lot of new inventory. But I guess the good thing is that across the river at Jersey City, Harborside, and 101 Hudson to the extent, we have any availability or a much more affordable alternative to the west side and on the east side, we’ll be full.

David Anderson – Green Street Advisors

Great. Thank you for that color.

Mitchell E. Hersh

You're welcome.

Operator

And we will go next to Jamie Feldman with Bank of America/Merrill Lynch.

James Feldman – Bank of America/Merrill Lynch

Great, thank you. Can we just go back to the residential development for a second, I guess the first question is, you chose Ironstate how did you come about choosing them as a partner?

Mitchell E. Hersh

Well, like you would any partner you know them, you get to know them, you kind of validate and verify each others reputation, their success in the marketplace, how people are held in regard and how they’re respected in the communities in which they do business both with the governmental agencies, with the tenants that they serve and the financial community and some of the professional community that work very closely with the development groups. And so that's the qualitative aspect and the quantitative from the perspective of choosing a partner that has significant financial resources. And all of that went into the compound that created the partnership. And does that answer it for you Jamie?

James Feldman – Bank of America/Merrill Lynch

Well, I guess more just – what was it that you liked about Ironstate when you were assessing all those qualities?

Mitchell E. Hersh

They're not institutional, they’re creative. They have done some fabulous creative work in residential development, in hotel development. They own the W down in Hoboken, they own Pier Village, in Long Branch, New Jersey, which was a diversification for them. they know, so the creativity versus the institutional mindset was a significant factor I think that how do you distinguish yourself in the marketplace, what kind of product do you want to bring to the market, just another cookie cutter or do you want to do something different yet cost-efficient. And there was nobody that impressed me with and I'm not saying that in any denigrating or derogatory way to anybody else is in the business of multi-family residential. but that aspect of these people as well as their character impressed me enough to join forces here to build this fabulous project.

James Feldman – Bank of America/Merrill Lynch

Thanks. And then as we’re thinking about now that you have an agreement in place, I mean can you talk a little bit more about the actual numbers like what you expect...

Mitchell E. Hersh

No. I think we'll be prepared next quarter to talk more about on specifics in actual numbers.

James Feldman – Bank of America/Merrill Lynch

Okay. And then what about just ballpark like, what kind of yield do you think, you'd be willing to do. I'm just trying to think about that versus what you can get in other areas.

Mitchell E. Hersh

We are very optimistic that our yield on this will be plus or minus 7% on an unleveraged basis.

James Feldman – Bank of America/Merrill Lynch

Year one, to stabilize?

Mitchell E. Hersh

After the stable – year one, it will stabilize.

James Feldman – Bank of America/Merrill Lynch

Okay. And then do you have extra comment you made before which was Mack-Cali's kind of position with the good balance sheet and when the recovery comes, you guys will be in a good spot. Now where do you think we are in that cycle, what do you [makes up] fourth quarter and conversations you’re having with your tenants and just kind of how does the mood feel versus earlier this year or earlier last year and what’s [thinking], you feel good or was making you feel bad about where we are in the cycle?

Mitchell E. Hersh

I think where we are in the cycle is just still extreme apprehension and tenuous behavior among corporate and business decision-makers, I think there has been very little in the way of workforce expansion in permanent high-end jobs although anecdotally there’s a little more evidence of it these days. I think the election will play a pivotal part in the mood and the atmosphere and the certainty and finality of whatever decisions are made next November, and I know that's a long way away and nobody feels that more than we. but I don't think you will see a major business expansion, take hold until – they know who is going to be, everybody understands who is going to be occupying the White House, and whether we’re going to continue to have great walk in Congress, because of entitlement programs and so forth. And I can tell you that, I’d talk with companies that like yours. That have not invested in technology in many years and they need to, but there is a reluctance to expand the capital until there is a clearer picture of what’s happening in the economy. And so I think largely, we probably have kind of we’re into the valley right now. We’re kind of rolling at the point of stability, but I think acceleration is going to be based on all of the above, the things that I’ve just said, and then you’ll see spending. I think clearly some of the technology companies that the Facebook’s, the Google’s, it’s hard to understand how they make money sometimes, but they’re adding employment and hopefully that will continue. And many of those companies have indicated that they wish to expand in this part of the country including discussions about Amazon coming into New Jersey in a big way, if they can workout sales tax issues. And so there are lots of those discussions happening, but there is also an apprehension. You do have the overhang of the EU situation and clearly, I think at least most economists believe that the European economy in general was going to fall into recession if it’s not already there.

Although, you talked to people who go to Europe and it cannibalize that fact given some of the areas where construction and development is occurring. But assuming that we don’t have its too severe on impact from the European Union situation and overhang, which remember now, it’s not. I mean Europe uses goods and products like, every play sells and they buy technology and a lot of that technology is from domestic United States. It’s not from the [Bangalore] and Mumbai and that’s where they put people. It’s not where they buy product. So it could have an impact and it could slowdown the economic recovery in the United States that’s an unknown. But in my opinion, the election is also very, very prominent in the thinking of business leaders. And what they want to do in terms of expanding their head count, which of course is the largest component of overhead.

James Feldman – Bank of America/Merrill Lynch

And now on a similar question though, thinking about New Jersey specifically and the rest of [Christi] may be having higher expirations. I mean, what has the mood change there also? I know talking to brokers is you’re getting more and more excited about, what could change in New Jersey? Is that slowdown and is that need to…?

Mitchell E. Hersh

Look, I think that leasing velocity that has – there is a little higher velocity. There is a little more action. It hasn’t translated into positive rate pressure at this point. But I think the perception in view of Christi is, and the administration is positive. But some of the decisions they’ve made have been through our detriment like the Pearson situation. But in general, I think that it’s viewed as a much more proactive administration. He has raised the issue now of lowering the income tax rates, which on a personal basis and on our subchapter S corporation and LLC basis drilled down through business, through the business community, because of the method of taxation on a personal basis, and that’s been very well received. And there have been all kinds of comparisons about tax flow, and tax burden on-states and were companies want to deploy workforces because of that. So I think that he has improved the tone and sentiment of New Jersey. No question we have a long way to go, but so does most every plot sales right now.

James Feldman – Bank of America/Merrill Lynch

Okay. Okay and just one last final question. So you are looking at this residential development, or you got this contract for residential development and you’re talking about doing some higher and better use to retail. I mean is this a sign of may be going forward, we could Mack-Cali become more of a diversified REIT rather than just suburban office and office focus?

Mitchell E. Hersh

Yes.

James Feldman – Bank of America/Merrill Lynch

Do you have a sense of what the opportunities that is to transform the portfolio?

Mitchell E. Hersh

Too early, but I can just put in perspective $1 billion project and now admittedly over a number of years in Jersey City. You look at a company that $6 billion or $7 billion that’s a pretty good chunk.

James Feldman – Bank of America/Merrill Lynch

Right, but I guess beyond what’s in the pipeline now?

Mitchell E. Hersh

Well, I guess what I’m trying to say is that we have complete confidence in our ability to enter into diversified product within doing it the right way, executing with if necessary the right partners to further diversify the portfolio. All I’m trying to illustrate is that, that project in and of itself could be 20% of what the company is today. So, if we can think and just extent that thinking out to a growing company, a substantial part of the income stream could be in diversified product in the future.

James Feldman – Bank of America/Merrill Lynch

All right. And then, so do you think as you enter into new types of properties or new sectors, would that take you outside your current geographic focus?

Mitchell E. Hersh

No.

James Feldman – Bank of America/Merrill Lynch

Okay.

Mitchell E. Hersh

I think that given our footprints from the Mid-Atlantic region up to the Northeast, where there’s plenty of opportunity.

James Feldman – Bank of America/Merrill Lynch

Okay, all right. Thank you.

Mitchell E. Hersh

You're welcome.

Operator

And we will go next to Sloan Bohlen with Goldman Sachs.

Sloan Bohlen – Goldman Sachs & Co.

Hi, good morning.

Mitchell E. Hersh

Good morning.

Sloan Bohlen – Goldman Sachs & Co.

I just have a question on lease expirations versus new starts for next year, you mentioned 2.5 million square feet. Do you guys have a view of what you think the retention on the 2.5 million square feet is going to be? Just trying to get a sense of how much is renewal versus how much is new leasing?

Mitchell E. Hersh

Of the 2.5 approximately 1.5 million is out the door.

Sloan Bohlen – Goldman Sachs & Co.

Okay. And is there a timing over the course of the year that we should expect or is there …?

Mitchell E. Hersh

It’s weighted more towards the end of the year.

Sloan Bohlen – Goldman Sachs & Co.

Okay.

Mitchell E. Hersh

On the larger expirations.

Sloan Bohlen – Goldman Sachs & Co.

Okay. And the prospects you’re saying that the mark-to-market on that 1.5 million square feet, do you guys have a sense for that?

Mitchell E. Hersh

I believe that this is a hard number because it’s in such diversified product throughout the portfolio of diversified markets et cetera. But 10%, 12% would be my guess.

Sloan Bohlen – Goldman Sachs & Co.

Okay. And then, just one quick question on the real estate tax has picked up in the quarter. I just wanted to get a sense of – is that a good run rate from the fourth quarter going forward or was there something unique in this particular quarter?

Mitchell E. Hersh

No. No, we had the one sort of gain that we had on some tax (inaudible) appeals. But what you’re looking at is, we think a pretty good run rate going forward.

Sloan Bohlen – Goldman Sachs & Co.

Okay, all right. Thank you, guys.

Mitchell E. Hersh

You’re welcome.

Operator

And at this time, there are no further questions. I’d like to turn it back to our speaker’s for any additional or closing remarks.

Mitchell E. Hersh

I want to thank all of you for joining us today. We look forward to continuing to update you on some of the exciting activities that we talked about. And we’ll look forward to seeing many of you at the various industry functions, and then meeting again on next quarter’s call. Thank you and have a good day.

Operator

And this concludes today’s conference. We do thank you for your participation.

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