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Mack-Cali Realty Corporation (NYSE:CLI)

Q4 2007 Earnings Call

February 14, 2008 11:00 am ET

Executives

Mitchell Hersh - President and CEO

Barry Lefkowitz - EVP and CFO

Michael Grossman - EVP

Analysts

Jordan Sadler - KeyBanc Capital Markets

Sloan Bohlen - Goldman Sachs

George Arbuck - Merrill Lynch

Jamie Feldman - UBS

Susan Berliner - Bear Stearns

Michael Knott - Green Street

Michael Bilerman - Citi

Mitch Germain - Banc of America Securities

Operator

Good day everyone, and welcome to the Mack-Cali Realty Corporation's Fourth Quarter 2007 Conference Call. Today's call is being recorded. At this time I would like to turn the conference 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 fourth quarter and year end 2007 Earnings 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 are seeing in our markets. And then of course, Barry will review our financial results, and Mike will give you an update on our leasing results.

FFO for the fourth quarter of 2007 came in at $0.89 per share, as compared to $0.87 per share for the fourth quarter of 2006. Our occupancies increased during to 92.7%, which is up from last quarter's 92.9%, reflecting strong leasing activity of over 1.1 million square feet.

Rents for the quarter rolled down by about 1.9%, compared to last quarter's 0.8% roll up. However, this roll down was in fact skewed by a handful of transactions that in fact were very beneficial to Mack-Cali, and I'm going to discuss some of those larger transactions in a few moments.

Our tenant improvement and commission expenses for the quarter were $2.82 per square foot per year, compared to last quarter's $2.98 per square foot per year. While the economics of lease transactions remain very competitive, we are managing to deal with tenant's concessions and actually move them in a positive direction.

I do want to point out that in the quarter Mack-Cali again outperformed our markets with respect to occupancy in our portfolio. In almost all markets where we operate, including Northern and Central New Jersey, Westchester, Suburban Philadelphia and Washington D.C., we continue to maintain a competitive advantage.

Despite some modest improvements in the quarter, there still has not been much positive absorption in the market that would indicate a broad recovery. In fact, as in every business, we are concerned about the economic downturn and outlook and how long this period will last.

We have seen some effects of an economic downturn resulting in slower leasing activity over the last couple of months, and of course the uncertainty and lack of clarity in the overall economy, REIT and decision.

For the first quarter of 2008, we are facing some sizeable lease expirations, most notably 163,000 square feet in changes at the Hewlett-Packard building in Capital Office Park in Greenbelt, Maryland. And while we model that acquisition and transaction with Hewlett-Packard vacating, we are concerned about the level of demand that we are seeing in the market. But having said that, for the remainder of 2008, we face roll-overs of just 6.8% of our base rent, or slightly more than $40 million, clearly manageable within a company of this size and fortitude.

Going back to results for the fourth quarter, we did have some significant leasing transactions. I alluded to them with respect to the roll-down. At 101 Hudson Street, our Trophy asset in Jersey City, an AIG subsidiary, National Union Fire Insurance expanded its base by over 77,000 square feet. And if you think back to the original 311,000 square feet that we took back from Merrill Lynch, or that we assume they would vacate upon lease expiration when we acquired the building, we now have only 49,000 of that 311,000 feet remaining un-leased in the building.

Also at the Jersey City waterfront at the Harborside Financial Center, we signed a long-term lease renewal for over 137,000 square feet with a very significant Japanese bank. We extended the lease out to August 31st of 2019, thus further stabilizing this prime asset and prime complex which is now almost a 100% leased 99.6%.

In the Westchester, Xand Corporation leased almost 90,000 square feet for about 10.5 years at Mid-Westchester Corporate Park, a transaction that included 44,000 square feet of new space and a renewal for the remainder of this space.

One of our pharmaceutical tenants has expanded by over 40,000 square feet in Bridgewater, and signed a lease term exceeding 10 years. They also extended their recently signed new lease with us of 68,000 feet by an additional year to be co-terminus with the expansion, now a term through 2018.

With regard to our stock buyback program, during the fourth quarter we purchased approximately 2.6 million shares of outstanding common stock at an average price of about $35.54 a share for a cumulative total of $93 million. For the entire year in 2007, we purchased about 2.9 million shares of our own stock for a total approximating a $104 million. And so, out of $150 million board authorization, we purchased about $104 million of our own stock.

Now, our evaluation was considering the significant decline in our stock price, coupled with our strong revenue stream, strong balance sheet, dividend yield and high quality assets, plus the limited number of accretive investment opportunities available in today's marketplace. We felt that this stock purchase was an excellent investment for us.

Now I'd like to review just a few facts before turning the call over to Barry, who will review in some detail our financial results. But I did see some analysts' reports this morning and some questions about various matters, and I would like to take this opportunity to address a few of them.

Obviously, and not to be redundant or at the risk of being redundant, we are seeing a very significant lack of clarity in the economy. Most of the news that's evolving is bad news. Every day another piece of it is affecting the capital markets; the credit crunch, the lack of liquidity in the system, concern about employment, concern about Wall Street employment, and what effect that might have on occupancy. So we've taken a very careful look, as we always do traditionally, at our income stream and at the credit quality of our tenants, to do everything we can to ensure the highest caliber of revenue stream to benefit the company and our shareholders.

Right now in the securities industry, this would include securities, commodities and other financial service industries, which represent in total about 19.5% of our annual base rent. We've looked out on an annual basis over the next ten years as to what impact lease expirations and roll-over would have on our portfolio. In 2008, 0.34% of our revenue stream, our base rent revenue stream is centered in the financial service industry.

In 2009, 1.67% of our base rent is centered in the financial services industry. And so, while I certainly share your concerns and the concern of the entire nation and the global economy as to what is going on out there, we feel a sense of confidence and comfort that we have an extreme level of diversity within our portfolio, and that we are not particularly susceptible to any particular segment of the economy and changes in employment that could alter the picture.

With respect to our guidance, we've reaffirmed our guidance as you've seen within the current range. Yes, we've reflected very positive results in terms of our same-store growth rate. This is a reflection of the fact that our leasing teams and our entire team has worked very hard to put leases in place to build our occupancy. We are finally reaping the benefits of many of those occupancies over the last year by finally collecting rent from high credit quality tenants, which is now being reflected in our same-store cash and GAAP operating metrics. And so, while a lot of positive things have happened to us over the course of the last year in the face of a declining or an economic downturn, including the repurchase of our own stock on an accretive basis because it's a great investment, we've held our guidance within the current range because there is a lot of uncertainty looking out over the course of the year.

As I indicated before, many of the metrics that we use, the velocity of conversions on deals, and the number of space showing, is not providing enough clarity for us to alter those metrics at the present time.

Of course there is always the question about external growth strategies and what we look at in terms of been an acquirer. For the moment, I’ll talk about asset acquisitions and then later in my discussion, after when I conclude, I will talk about the bigger picture.

Right now we’re not buying anything. When I look at the financial picture I see that our current FFO yield based on our stock price is just under 10%, and our dividend is 7.2% based today’s trading. We’re not a buyer. There is a lot uncertainty out there, and there is a lot notable transactional activity occurring where highly-leveraged purchasers who used very aggressive and lost the underwritings, may have in fact set the bar for premium pricing.

Right now we’re more than content to have ample capacity to continue to gain and have an understanding of appropriate underwriting and metrics in the marketplace and to put that capital, both human and financial capital, to work at the appropriate time, and that time is now.

Regarding the cash picture for the company, in the quarter, we basically broke even on a free cash flow basis. For the year, we expended some $67.5 million in capital for building improvements and tenant improvements and leasing commissions.

We finished the full year 2007 at slightly below breakeven in terms of free cash flow. We don’t anticipate much of a change through 2008, given the flatness in conditions. We don’t have clarity on exactly how much leasing we are going to do through the year. There may be a slight decline on a quarter-to-quarter basis, in our occupancy rate, I already talked about some notable vacancies that we are dealing with, but hopefully at the end of the year, we will have the good fortune of keeping our occupancies roughly in the range that exists today. We will be happy to spend another $60 million or $70 million to keep our properties pristine, pay for tenant improvements and leasing commissions, and hopefully finish the year in a similar cash position as we are concluding 2007.

And now, I am going to turn the call over to Barry, who will review our financial results for the fourth quarter. Barry.

Barry Lefkowitz

Thanks, Mitchell. Net income available to common shareholders for the fourth quarter of 2007 was $15.8 million, or $0.24 a share, versus $67.4 million or $1.7 per share for last year. For the year ended December 31, 2007, net income available to common share holders amounted to $108.5 million or $1.61 per share, as compared to $142.7 million or $2.28 per share. The major differences between the two years, is that we had some substantial sales of assets and gains that we recognized in ’06 which didn’t repeat in ’07.

FFO available to common shareholders for the quarter amounted to $73 million or $0.89 per share, versus $68.2 million or $0.87 a share in ’06. For the year ended December 31st of 2007, FFO available to common shareholders was $293.9 million or $3.56 per share, versus $290.5 million or $3.73 per share in '07.

Other income for the fourth quarter of 2007 included approximately $570,000 in lease termination fees. Fourth quarter of last year had lease termination fees of $3.8 million. For the year 2007, we had termination fees of $10.1 million, as compared to $6.9 million in '06.

Same store net operating income, which excludes lease termination fees on a GAAP basis, was up 6.5% for the fourth quarter of '07 and for the year increased by 2.5%. Same-store net operating income on a cash basis increased by 7.7% for the fourth quarter, and for the year was up 4.9%. Our same-store portfolio for the fourth quarter was 28.5 million square feet, which represents about 97.6% of the portfolio.

Today, we have about $291 million outstanding on our credit facility. Our unencumbered portfolio at the end of the quarter was 238 properties aggregating 25.7 million square feet of space, which represents about 87.7% of the portfolio.

At quarter end, Mack-Cali's total un-depreciated book assets equaled $5.5 billion and our debt-to-un-depreciated asset ratio was 40.2%. Our debt-to-market cap ratio was 44.4%. We had interest coverage of 3.3 times and fixed charge coverage of 2.8 times for the fourth quarter. We had interest coverage of 3.3 times and fixed charge of 2.9 times for the year ended 2007.

We ended the quarter with total debt of about $2.2 billion which had a weighted average interest rate of 6.8%. Also, I would like to note that during 2008, we have very minimal debt maturities. We have roughly $12.5 million which comes due in the mortgage in August of '08.

Please note that under SEC Regulation G, concerning non-GAAP financial measures such as FFO, we are required to provide an explanation of why we believe such financial measures are relevant and reconciled into net income. This is available on our website at www.mack-cali.com, or our supplement package and earnings release, which include the information required by Regulation G as well as our 10-K. Now, Mike will cover the leasing activity.

Michael Grossman

Thanks Barry. Thanks to a solid leasing performance across all our major markets, we achieved a 50 basis point increase in the lease space for the fourth quarter, which enabled us to close the year at 92.7%. This is the highest percentage leased since the third quarter of 2004 and 70 basis points above our fourth quarter '06 results.

For the year we signed 519 transactions, representing 4.3 million square feet. The 1.1 million square feet leased during the fourth quarter was consistent with previous results, but it will be challenging to stay in that level of leasing volume given the current economic conditions.

We retained 88.8% expiring square footage in the fourth quarter and 71.7% of expiring space for the full year. The $2.82 per square foot per year for the quarter and the $2.72 for the full year, occupancy costs were significantly below 2006 levels, despite highly competitive markets.

The 1.9% roll-down for the quarter was skewed by a handful of large transactions, but as Mitch noted, was very beneficial transactions for the company. Moving with four deals with the highest impact from the calculation resulted in a 0.8% rent roll-up. This is a better management of the bulk of our leasing activity, which was composed of transactions of 10,000 square feet or less.

For the full year 2007, we averaged a 0.2% roll-down overall. Expirations for 2008 and now for 7.2% of space leased, about 30% of which will expire in first quarter of year and 6.8% of rent.

Thanks to our continuing early renewal efforts, 2009 expirations amounted to only 9% of space leased and 8.9% of rent.

As a measure of activity within our markets, the total numbers of space showings during 2007 in Mack-Cali buildings was nearly identical to 2006, both overall and on a market-by-market basis. The total square footage was down about 12%, due to smaller on average potential tenants in our New Jersey properties.

The total square footage of our showings in another market was consistent with 2006. Stability characterized our markets in the fourth quarter, according to Cushman Wakefield statistics.

Westchester and Fairfield achieved slight reductions in Class A overall availability during the fourth quarter, while our major markets experienced smallest increases. Class A direct average estimates were nearly unchanged in the fourth quarter across our major markets.

Looking at the full year 2007, our New Jersey markets remained stagnant. Consolidation among the major pharmaceuticals contributed to a 70 basis point gain in vacancy for the year. Conversely, the markets in our portfolio have benefited from recent expansions among mid-size farms.

Fairfield County and suburban Philadelphia stand out with 240 basis point decreases in vacancy in each of those regions. Our other markets achieved smaller decreases in vacancy in 2007.

Speculative construction continues to be restrained with only a moderate activity occurring in our New Jersey markets. There is less than 1 million square feet of unspoken for new office construction scheduled to be delivered within the next two years representing less than 0.6% of the total space in the market.

As I mentioned, class A direct asking rents generally held steady for the fourth quarter, compared to year ago asking rents, which increased modestly by approximately $1 per square foot, or just over 3% on average across our major suburban markets. The current economic climate will solely provide challenges for us in 2008, but with our well-positioned portfolio and strong leasing capabilities, we will work to continue to significantly outperform our markets. Mitch?

Mitchell Hersh

Thanks Mike. Before we open the lines to your questions, I just want to make a few further comments in closing. I want to reiterate that our outlook remains very cautious considering today's economic environment. However, we navigate through this period of uncertainty with strong occupancies as evidenced by our report today with strong credit quality behind our occupancies in our revenue stream, a strong balance sheet, and no near-term debt maturities.

We are carefully watching the market and we'll continue to focus on effectively managing our properties, and ringing out efficiencies and efficacies wherever we can. As I've said before, we continue to believe that there will in fact be opportunities. We have a strong balance sheet in the capital to act on those when opportunities do in fact arise

Concerning speculation in the market place about larger transactions, I think we've seen a lot of change occurring in the market place, and a lot of lack of clarity with respect to what opportunities might be available. I thought I would just make a few comments. I think as evidenced overtime, we don't necessarily subscribe to the notion that bigger is necessarily better. Our goal, as demonstrated over the last many years, has been focused on continuing to upgrade our portfolio, and to try to harvest value over time when opportunities emerge. Especially in times like these, I can tell you that we won't stress either our human capital or our financial capital.

That's not to say that we won’t look at every opportunity that's available in the marketplace very carefully, to continue our role as market leader, and to continue to create value for our shareholders. But, whatever opportunities we take advantage of, will need to be very compelling and need to demonstrate that it can produce and create value for our shareholders.

So with that, we'll open the floor to questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we'll go first to Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Thanks and good morning. Mitch, I had a question regarding the sort of opportunistic side of things. You made some commentary that it sounded like you are not necessarily a buyer today understandably, and I was just curious as to what we could think about and what you might be looking for where you might become more opportunistic or would look to invest -- what is it you are looking for essentially before you would put money to work today?

Mitchell Hersh

Good morning Jordan. Again, I think that there will be a subset of opportunities that will emerge as a result of some of the aggressive underwriting that's been done with particularly highly leveraged either funds or individual players and investors in the market.

Obviously, the capital markets and the credit markets for sure are largely shutdown. The debt markets for investment-grade rated credit in the unsecured markets are shutdown largely, so certainly this realm of employing high leverage with underwriting and anticipated dramatic rent growth will provide some opportunity.

I think we will continue to use basic metrics with respect if it's in asset, replacement crossed comparisons, I mean we are prolific developer when the time is right, and we have the expertise. So we understand what valuations are with regard to new development and what the cost of development is. So, that will be a metric. We'll need to understand if it's a more stabilized asset, what the opportunities for growth are, setting sort of a floor and a bar again, using basic metrics of not so much cap rates, but how we can grow the income and how that might be accretive to the company and what sort of market share penetration does it afford us etcetera. Can it help us become more significant and more competitive and have an advantage in a particular sub-market or market.

So I think that’s one element I think with regard to any sort of larger transactions. We’ll need to understand what the risks are with respect to the human capital side the integration side. I think we’ve demonstrated through the -- for example the Gale acquisition that we remained focused that gave us the ability through that acquisition to enhance our market share, to enhance certain lines of business if you’ll within our markets and do so at an appropriate valuation.

So there are lots of things that will be going into the equation, probably the least of which will be looking at internal rates of return on highly speculative reversion cap rates and highly speculative growth in rents in a marketplace that almost today outside of very few is universally relatively dormant.

I guess the message is we’re going to be real careful and we’re going to look at every opportunity very, very carefully to see what it can do for our shareholders and our franchise to be beneficial. And frankly, I am not, I don’t know that this will go anywhere, but we’ve seen some renewed interest on the part of, some, significant private players in our market base right now that are interested in at least looking at OP unit transactions on because they so highly value the Mack-Cali currency, but clearly at this depressed stock price we’re going to be very, very careful in that regard as well.

So I guess the message is we're, I’ve been through this before, I’ve been through a lot of cycles, this one is different, because it impacts so many different aspects of the world economy in terms of currency, arbitrage, in terms of lack of transparency, there isn’t net. Fortunately we haven’t seen impacts right now to any significant degree in the commercial markets other than the fact that many, many debt holders are unable to refinance their debt.

Many, many debt holders who have -- who participated in CMBS financing don’t have services that they get even talk to in this environment, because of the way that debt was sliced and diced. So we will be real careful Jordan and I think, the frame of reference is that this is not the first economic downturn that I and my team have been through and I expect that we will emerge sensing that there is some level of opportunity and it crystallize over the coming months?

Jordan Sadler - KeyBanc Capital Markets

From a market perspective are you -- should we assume that the New York plans would be incrementally accelerated or maybe put to the side?

Mitchell Hersh

Well, we'll continue to look at opportunities within the New York City marketplace, but I wouldn't basically take a position one way or the other. I still think, as though many, many others including the analytic community that the New York Cafe Center has been somewhat barrier constraint and so remain a vital market and a vibrant market. There are naturally significant concerns about what the financial service industry does with respect to employment and how that might affect service employment and other sector that are interdependent and what that's going to do occupancies and is going to put somewhat space back on the market in New York and how's that going to affect rents and underwriting, but and I don't mean to abasing, but we're going to look at every opportunity that emerges.

We're not a buyer of -- certainly at this level of trophy assets on the avenue, that's not been our profile. It's never been a stated goal. And I suspect that there will be some opportunities that more conform with the highly leverage guys and I'm not talking about the notable situations, I'm talking about there are many of those situations, but we're going to be real careful about the underwriting and how we feel about the continuum of an income stream on a property specific basis.

We are kind of in unchartered waters right now, with the confluence of all of these events that are occurring in the economy, and when you have a federal reserve and a treasury department that are struggling for ways to deal with the economic fallout right out, it's a time to kind of sit back and watch and wait and be very, very comforted in the notion that you are not pressured to do anything either in the equity or the debt side of the business.

Jordan Sadler - KeyBanc Capital Markets

Do you think you would try to raise capital through some asset sales here or do you think that's on the [sidelines that did]?

Mitchell Hersh

First of all, the availability of liquidity in the market other than very rare instances is almost non-existent today. Certainly, if you wanted to do secured financing, you could do that and no matter how good the underlying credit is or the sponsorship, today you are looking at a 50% to 60% leveraged level, plus or minus, maybe in the higher end in the case of a Mack-Cali to be able to do secured financing. And so the equity component is very significant, and the type of assets that we might consider disposition of, to continue to upgrade our portfolio without sacrificing market share or our ability to build into an economy that's regaining strength in the future in terms of new development.

The type of assets, are not appealing to the sovereign wealth nations and they are more akin to the leveraged buyer, who is largely out of the market. And so, why take the risk of failed execution, coupled with a demoralized management team with respect to those portfolios at this point in the cycle. I don’t think the risk reward equation is there right now.

Jordan Sadler - KeyBanc Capital Markets

Thanks for the color, Mitch.

Mitchell Hersh

You’re welcome.

Operator

We’ll go next to Sloan Bohlen in Goldman Sachs.

Sloan Bohlen - Goldman Sachs

Good morning guys. Mitch, just a quick question on guidance. I was wondering if you could maybe elaborate about what uncertainties you are kind of baking in, what are the main risks you guys see, is it single tenant risks or people giving back space, whether that will be there, the Hewlett-Packard lease or other tenants that you are looking at?

Mitchell Hersh

Yeah, I think the risk is not so much a risk as much as it is a timing element. Yes, as I pointed out before, it's quite conceivable that there will be fluctuation in our occupancy as a result of some of these larger vacancies, and demand is slow to replace those tenants at the Greenbelt, Maryland right now, demand is slow in some of the larger blocks of space. We haven’t seen the kind of velocity that we saw a year ago, and so I guess, we lack clarity on timing of when we’re going to regain or stabilize the occupancy at the current level and when we’re going to start collecting income on it, and we think that right now it’s a little bit of muddle picture. We feel that certainly the range of guidance, given some recent activity, as you know we talked about in terms of stock repurchase and so forth, is comfortable for us. And over the course of the year, we'll have more clarity on that.

Sloan Bohlen - Goldman Sachs

So is it fair to say that it's more about leasing up the vacancy you currently have in the portfolio as opposed to we haven't seen sublease space coming on the market or people actively talking about giving back space?

Mitchell Hersh

Yeah, I could tell you right now that but for one discussion on the waterfront property and it's not significant, and it is a financial service tenant in a correlated industry. Nobody is talking to us right now about given back space or putting block of sublease space to any degree into the market. So it is strictly about being able to deal with our vacancy and having dealt with that vacancy, we will be able to collect the cash income as opposed to GAAP reporting.

Sloan Bohlen - Goldman Sachs

Okay. And just one quick question on Jersey City, you kind of alluded to it, but you guys had fairly strong leasing in that market, particularly with financial services tenants, the competitive year has also signed a lease with the financial service tenant. Can you just characterize what the talks with those types of tenants are given the pending layoffs potentially in Manhattan?

Mitchell Hersh

Again, I can reiterate the fact that we have just completed some very significant transactions. We have in 101 Hudson Street where we purchased the asset, I guess now three years ago this month we have moved rents from at that time the underwriting standards of 28 and change a foot to close to $40 a foot.

So there clearly is a dimension at the marketplace, that still sees a significant value in locating in the Jersey City waterfront; taking advantage of some of the incentive program, our business employment, the [beat the brat] retention agreement, the urban enterprise zone and still looking across various parts of the river, at range that exceed the ones I just recited by multiple and still get high quality real estate and a dynamic community where things are happening and it's got cash and so forth.

So we have been able to do quite well along the waterfront, there was a transaction announced there within the last few days of a major financial service firm that signed a very significant lease not our property along the waterfront, because we have no vacancy, but a very significant lease and the generating factor in that, particular transaction and we were involved, we just, we couldn't accommodate the space, I guess that's a good thing, was the economic disparity between being located in midtown and being located in midtown west, which is the waterfront.

So the waterfront area remains pretty healthy right now, but there is an overwriting concern I think in the minds eye of the financial service community as to, will there be layoffs and what impact is that going to have on currently leased space.

Now, again, we just signed up between the two transactions I talked about, well over 200,000 square feet within the last month of both renewals and new incremental absorption on the part of, one is an insurance company and the other one is a global bank. And so I can't imagine that they took that space unless they were committed to occupying it as oppose and having thought that through carefully and deliberately as opposed to being so vulnerable and thinking from day-to-day that they might have the sub-leases.

So we are pretty comfortable with where we are in terms of our waterfront properties right now.

Sloan Bohlen - Goldman Sachs

Okay. Thank you. That's helpful.

Mitchell Hersh

You are welcome.

Operator

We'll go next to [George Arbuck] with Merrill Lynch.

George Arbuck - Merrill Lynch

Hi, good morning everyone. Mitch, does your '08 guidance assume that the Greenbelt asset remains vacant through '08?

Mitchell Hersh

I hope it doesn't remain vacant through '08, but assumes that by the time we get it leased and get it rent paying, '08 pretty much gone.

George Arbuck - Merrill Lynch

Okay. And what you are expectations for overall portfolio occupancy in '08?

Mitchell Hersh

It's hard to predict. I would tell you that next quarter or the quarter we are in actually, as a result of some of these expirations, it could decline slightly, in fact, it probably will, but I would hope that we are roughly in a zone of where we've been over the last few years, with a 9 certainly in front of our occupancy at year end. No matter what happens

George Arbuck - Merrill Lynch

Okay. And finally across your portfolio, what is the average contractual bump-up on your in-place rents?

Barry Lefkowitz

I am not sure exactly what the average is. We look to achieve anywhere between $0.5 and 3% depending on what we can accomplish on an annualize basis, and naturally some of these rent increases are aggregated in five year increment, so plus or minus and along the waterfront properties, more traditionally there annual bumps in that zone, in that range.

George Arbuck - Merrill Lynch

Great. Thanks so much.

Barry Lefkowitz

You are welcome.

Operator

We'll go next to Jamie Feldman with UBS.

Jamie Feldman - UBS

Great, thank you. I guess, I will follow up on some of the last question. So in terms of '08 guidance your assumption for leasing spread?

Barry Lefkowitz

Flat.

Jamie Feldman - UBS.

Flat? Okay.

Barry Lefkowitz

We basically, other than you saw the fact we are roughly at, what I would call, market-to-market. But these larger transactions, which really shore-up the portfolio, and certainly the waterfront portfolio. We are actually slightly positive, but anybody who tells you in this environment, other than in anecdotal instance or rare circumstance, that rents are going up, I'd really question that.

Jamie Feldman - UBS

It sounds like your same-store growth faced an income rent bump and then offset by whatever occupancy decline you may have.

Barry Lefkowitz

Yeah, pretty much.

Jamie Feldman - UBS

Okay. In terms of, I guess back on the growth issue, how does maybe built to development market look pressure core market where there any RFPs out there that may begin construction in '08 or even '09, as we are looking out?

Mitchell Hersh

I would say largely the answer is no. There are a couple of situations that are being evaluated actually by the tenants right now in the Parsippany marketplace that are working with us. This is one way or the other; I would expect will result in continued opportunity for Mack-Cali, in considering a built-to-suit in the campus versus some other options within the campus. But there is such a high degree of uncertainty in the economy right now that -- it's largely not a topic of discussion today.

Jamie Feldman - UBS

Okay. And then staying on development. Can we have update maybe on the Filene’s Basement project?

Mitchell Hersh

Well as you know, we have a 15% position in that development. We are very encouraged with recent discussions with potential lenders, the construction financing element is being lead by our partner Vornado Capital Markets Group, and they are working or I should say we are collectively working, but they are leading that to put together a club if you will to provide something in the order of $500 million to $550 million of construction financing the project is somewhere around at $710 million or so project, and all the approvals and so forth have been obtained. And there is actually work going on, on the site, some of the work with respect to the historic building and the Filene’s Basement building. So its forging ahead and we have a finite capital commitment at this juncture and we are hoping that we'll be able to put this financing package together.

Jamie Feldman - UBS

And what about on demand side?

Mitchell Hersh

A lot of demand frankly on -- still there is no real new office product available outside of the financial district, this is adjacent to it. It's the next opportunity in Boston. We're seeing a fair amount of demand on the part of law firms. We're looking at net rents plus or minus in the $50 range in terms of the price talk right now. We are working with our partners, Vornado, J.P. Morgan and Gale International on the possibility of a pre-sold hotel, although that has not yet been finalized, and that would be roughly between 250 rooms and 260 rooms, still a little bit fluid in terms of how the design can evolve. And Vornado is working on a whole variety of different opportunities in the retail sector, lot of interest in the remaining retail space outside of the Filene's Basement.

So, I would tell you that demand is strong and we are very optimistic about that project. And frankly, just in terms of Boston itself, we have properties upon the northern quadrant in partnership with JP Morgan, the Route 93 portfolio. We have seen not withstanding all of the issues in the economy. There still continues to be a driving demand in the biotechnology cargo predominantly. And the elements of pharmaceuticals that are more focused on biotech and research. So, we are pretty encouraged with what we are seeing up in Boston right now.

Jamie Feldman - UBS

Okay. And then finally, two quick modeling questions for Barry. The other income was higher than we expected and operating expenses were below. Is there anything one-time in nature in there?

Barry Lefkowitz

No, we still continue to have other income in the $3.5 million to $4 million range as the way we modeled it. Obviously, it could be a little bit higher and a little bit lower in each of the quarters. And in terms of operating expenses, generally they have been holding a little higher than they were last year, but principally we are seeing most of the growth in the operating expenses related to utility cost.

Jamie Feldman - UBS

Thank you very much.

Barry Lefkowitz

You are welcome.

Operator

We'll go next to Susan Berliner with Bear Stearns.

Susan Berliner - Bear Stearns

Good morning. Barry, I was wondering if you talk about, I know you have a decent amount outstanding on your bank line and what your plans are for refinancing or if you are just going to keep it on your line?

Barry Lefkowitz

Well, at the present time, we have a $775 million credit facility. We have about $291 million drawn. That credit line has roughly 3.5 years left to run with another one year extension option, and as I mentioned before, we have virtually no maturities this year, we have a $300 million bond that's' comes due in March of next year. So at this point in time, we are evaluating what we might do if we see the debt markets open up and we can see some reasonable activity there, we might go to the unsecured market. We will also look at the mortgage market for a term out, but we’re not pressured to do anything in particular at this point.

Susan Berliner - Bear Stearns

Great thanks. And Mitch if I apologize if someone had asked this before I had hop off for one second, the investment you made last quarter which was kind of an opportunistic investment in a competitor. Can you just update us to where you guys stand on that?

Mitchell Hersh

Sure. There is no change in that investment. I would tell you that it’s about even, maybe slightly in the money at this juncture and so no change at this point.

Susan Berliner - Bear Stearns

Great, thank you.

Mitchell Hersh

You’re welcome.

Operator

We’ll take the next question Michael Knott in Green Street.

Michael Knott - Green Street

Hey guys. Hey Mitchell, can you just update us on the Gale/Green acquisition that you had done back in I think ’06?

Mitchell Hersh

Okay. We talked about the joint venture which element of it?

Michael Knott - Green Street

The portfolio acquisition.

Mitchell Hersh

Yeah, we’re managing the portfolio. We’ve all the issues that impact the markets are effecting, the varying degrees, the assets within that portfolio. And so there’s not much new, we’re still on it with SL Green. And we’ve some financing on it with Gramercy which was part of the acquisition of financing, but there’s really no change Michael.

Michael Knott - Green Street

Has it performed up to your expectations.

Mitchell Hersh

It's performed, let's put it this way we bifurcated those properties into a joint venture because there were higher risk properties with respect to occupancies. And so I think, we did the right thing, certainly for Mack-Cali shareholders by doing that, and I think SL Green, understands that we are doing the best that we can to rebuild expirations within the portfolio. We've had some successes with [Arc Pharma] and some others in transactional activity or leasing activity and some of the properties are relatively quit now. So I think it in fact has performed up to our expectations and that's why we joint ventured it.

Michael Knott - Green Street

And did part of that portfolio I guess sold during the quarter, it look like in the --

Mitchell Hersh

Yeah, that is Troy, Michigan and Naperville. We effectively, other than a nominal interest for structuring reasons at no economic participation in that and so may have been a little bit confusing, I notice that in one analyst report that talked about some expenses of $30 million, basically that all related to the sale of Naperville and Troy, which was done at a loss below book basis, but had no impact on Mack-Cali.

Michael Knott - Green Street

Okay. And then can you talk about your expectation for possibly utilizing the remaining balance of your share repurchase authorization and how you might think about that activity relative to other capital allocation opportunity?

Mitchell Hersh

Yeah, I indicated before that we are not pressured to do anything. We're operating with earnings guidance within a range as has been indicated several times on the call. We're in a fairly flexible position with respect to our balance sheet, out plus or minus $300 million on the line. So we have probably all pooled on a credit basis or a debt basis another $500 million, $600 million, $700 million without even looking at mortgage financing on any of our assets, which are largely unencumbered, I think our unencumbered pool is 91% plus or minus. So capital is not an issue right now, but we are going to utilize it very wisely, and it's also very affordable frankly, because borrowing on the line today at spreads over LIBOR, certainly using our bid facility is a pretty efficient debt instrument right now in the marketplace. But and not to repeat Barry's comment to Susan Berliner, but if we see some level of efficiency in the unsecured markets and no risk of execution per se, we are going to go in that direction at some point.

But with regard to the stock buyback, I think we have demonstrated a commitment and a confidence level by investing a $104 million up to the end of the year. It's accretive, we are happy to have invested in the company, we still have this marginal amount of $46 million that we can invest, but right now in a illiquid environment, where again credit markets, debt markets have shut down and what you have is, what you have right now with no sun on the horizon in terms on when these markets are going to open up. We're going to treat every dollar of our available capacity as extremely precious, and at some point maybe that will result in more buybacks and may be it will result in utilizing capital for other things. But right now, it's resulting in a lot of patience with no pressure to do anything.

Michael Knott - Green Street

Okay. Thanks a lot.

Mitchell Hersh

You are welcome.

Operator

We will go next to Michael Bilerman with Citi.

Michael Bilerman - Citi

Hi, Mitch and Barry. Just going back to the stake that you bought last quarter. Going through the 10-K, it looks like the value went down by about $800,000, so about a 16% decline in the fourth quarter relative to where you bought it. And I am just wondering, are you really regretting buying back your own stock that you saw value, you obviously bought the small stake as you perceived some value. Why not be more aggressive and continue to buy more if it was down so much?

Mitchell Hersh

Okay. First of all, congratulation Michael on your new role in Citigroup.

Michael Bilerman - Citi

Thank you.

Mitchell Hersh

You're welcome. You kind of broke up on the question, but I think its centers around the investment in the securities investment that we made in another company that reflected an $800,000 loss because it runs through the equity. Is that right?

Michael Bilerman - Citi

Yes.

Mitchell Hersh

As with any of these companies -- any company that has securities on their balance sheets, it's sort of in an ephemeral market-to-market, and that's all that's a reflection of. I can tell you that generally speaking as of, let's say yesterday, we were about neutral or slightly in the money on that investment. The investment was made clearly for strategic reasons, a seat at the table type of thing, because of distractions and other matters that have affected everyone, including that particular company. I haven't had the opportunity of having that seat at the table, and if that persists, I will make a decision as to what to do with that investment at the appropriate time.

Michael Bilerman - Citi

Right. A question just on G&A. What was the big spike in quarter and what is the outlook for next year?

Barry Lefkowitz

It was just -- basically with bonuses and chewing up some of the accruals around the compensation plans.

Michael Bilerman - Citi

Okay. And then Mitch, as you reflect on -- you had your comments about wanting to being conservative in this environment which I completely make sense in that. Are you going to be very cognizant of the underwriting and what things should be priced? As you reflect now on your purchase of 125 Broad, if you were having to purchase that asset today and you are went in there, a low 4 initial cap rate yield, would anything change?

Mitchell Hersh

I think our basis in the asset is attractive. I think that the all-in rents are well under today's market. So, I am satisfied with that acquisition. I am concerned about the overall tone of the New York City marketplace, given the dominance of financial services. In the first lease, that's expiring and the building have a little more than two year or about two years remaining. I talked to the tenant. I think that tenant is you. And at this point, I am getting the proverbial -- we don't know what tomorrow is going to bring, let alone two years from now, but the comfort that we have is that all of the comp leasing that’s been done in around 125 has been done at $15 to $20 a foot, if not more than the rate in that particular lease. So, we are pretty comfortable with our bases.

Michael Bilerman - Citi

But you said if you a better asset came to market today, you were buying [Audio Disturbance]

Mitchell Hersh

You're pulling away.

Barry Lefkowitz

Can you repeat the question, you broke up.

Michael Bilerman - Citi

Sorry. If the asset came to market today and where do you think that asset would trade, even if you borrowed something else, you think that it would still be pertaining --

Mitchell Hersh

I mean, assuming that a trade could be done in this environment with respect to the capital constraints that exist on potential purchasers, clearly we’ve see nothing but price appreciation since we bought the asset and not to be forgotten the fact that it was part of a strategic transaction with SL Green where we traded an asset that we didn’t particularly view as core, for almost the same pricing metrics on a per square foot and a cap rate basis. So, that’s certainly needs to be viewed as part of that overall transaction. But for the one year since we've owned it more or less, we’ve seen nothing but a rise in prices. Actually, there is a changing, evolving situation in New York now.

Michael Bilerman - Citi

Right. That I completely understand. Okay, thank you.

Mitchell Hersh

You are very welcome.

Operator

We will go next to Mitch Germain with Banc of America Securities

Mitch Germain - Banc of America Securities

Good afternoon. Mitch the Greenbelt asset, I apologize if you already addressed that, I jumped off for a second. Re-leasing, do you think that it's consistent with your overall mark-to-market or do you think that it might lease up lease down?

Mitchell Hersh

One good thing about Greenbelt and that whole line of marketplace the rents don't move much one way to other and when we underwrote the acquisition, we had enough knowledge to at least assume in the underwriting that they were going to vacate the building, because it was discussion at that time about a consulting contract that they had with the component of the government that wasn't potentially going to be renewed.

In that marketplace, you're looking at mid $20 rent, it reminds me anecdotally of West Chester. Good times, bad times the rents are always mid 20s plus or minus. So I think we'll be fine there, just a question of seeing little more demand and as I alluded to that impacting our view of guidance you may have jumped off the call at that point as a result of when we might actually see cash rent out of that particular releasing.

Mitch Germain - Banc of America Securities

I got that point, okay. And what about [Cali] does it requires any specific capital cost?

Mitchell Hersh

No nothing more than traditional, standard TI cost.

Mitch Germain - Banc of America Securities

Okay, great. And specifically in any of your markets are you seeing any increase in the concession package.

Mitchell Hersh

The answer to that is no, actually if you look -- let me kind of bifurcate the answer. If you look at our statistics we have certainly been driving down the cost relative to TI packages, TI commission packages on a per square foot annualized basis. So we've met some reasonable goals in that area, that's not to say that certain markets aren’t weaker than others. For example, frankly the Princeton market has remained difficult sluggish market and the cost, the TI packages and concession packages there are probably greater, I think than virtually any other market that we operate in New Jersey. So you have to look at each on its own.

Mitch Germain - Banc of America Securities

Great. Thanks guys.

Mitchell Hersh

You are welcome.

Operator

And we have a follow up from Jordon Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Hi, guys. Just on this marketable security stake. You said you wanted to have exceeded the table. Is this distress situation?

Mitchell Hersh

No. It's a strategic situation where my view was that there were aspects of a particular company that could be incrementally beneficial to Mack-Cali. It's not a distress situation and frankly don't, well, I guess I shouldn't say they are not in the public sector, but it's not a distress situation.

Jordan Sadler - KeyBanc Capital Markets

And earlier you spoke of sort of investments looking to sort of focus the portfolio and/or upgrade the quality of portfolio in an environment like this or in more difficult environment if you'd invest opportunistically with this and also there is no change to sort of this investment. Are those in sort of the same context, would this be an upgrade to the portfolio and has anything changed in terms of your view of this type of investment?

Mitchell Hersh

This particular investment would be an enhancement of the portfolio in markets or sub-markets that we currently have certain positions in, so it would be an enhancement, the quality of the assets would fit within the definition of Class A assets from within our universe, and there were also certain other synergistic elements to the company that in terms of a few various business areas that I felt could be strategically beneficial. I don’t know what more I can tell you on it other than it fits within the pattern of what we’ve been doing.

Jordan Sadler - KeyBanc Capital Markets

That’s helpful. And have you been in contact with the other management team?

Mitchell Hersh

Yeah.

Jordan Sadler - KeyBanc Capital Markets

Okay, so [you're hedged]?

Mitchell Hersh

Yes. But I am not suggesting for a moment that, that’s going anywhere. But the answer is, yes, I’ve had some contact with the counterpart.

Jordan Sadler - KeyBanc Capital Markets

But you are basically going to hold this position just in case something happens or if something still -- this is not fully resolved or played out at this point.

Mitchell Hersh

Not fully resolved and I am undecided.

Jordan Sadler - KeyBanc Capital Markets

Okay, that’s helpful. Thank you. My other question was just as it related to the Jersey City, and the lease is signed during the quarter. When did those leases commence during the quarter? Was it October 1st or is there just a significance for modeling purposes? I'm curious.

Mitchell Hersh

I think in both instances they commence in the first quarter, in the period we’re in.

Jordan Sadler - KeyBanc Capital Markets

Sure. In the first quarter of ’08, right?

Mitchell Hersh

Yes.

Jordan Sadler - KeyBanc Capital Markets

That’s helpful. Thank you.

Mitchell Hersh

You’re welcome.

Operator

And there appear to be no further questions at this time. I would like to turn the call back to Mr. Hersh for any additional or closing comments.

Mitchell Hersh

Well, thank you all for joining us on today's call. I hope you all found that informative. The interaction is very helpful to us and we look forward to reporting to you again next quarter. Have a good day.

Operator

Again that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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Source: Mack-Cali Realty Corporation Q4 2007 Earnings Call Transcript
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