Q3 2004 Mack-Cali Realty Corporation Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, everyone. Welcome to the Mack-Cali Realty Corporation third-quarter 2004 conference call. Today's call is being recorded. At this time, I would like to turn the call over to the President and Chief Executive Officer Mr. Mitchell Hersh. Please go ahead, sir.

MITCHELL HERSH, PRESIDENT & CEO, MACK-CALI REALTY CORPORATION: Good morning. Thank you for joining Mack-Cali's third-quarter 2004 earnings conference call. With me today are Barry Lefkowitz, Executive Vice President and Chief Financial Officer, and Michael Grossman, Executive Vice President.

On a legal note, I must remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the Federal Securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the Company.

First, I would like to review some of our results and what we're seeing in our markets. Then review our various activities for the quarter. Barry will then follow with a discussion of our financial results, and Mike will give you an update on the markets and our leasing results.

We had a very positive quarter of leasing with almost 1.2 million square feet of transactions. I am pleased to report that our portfolio ended the quarter at 92.9 percent leased, up from last quarter's 92.2 percent with positive absorption of almost 193,000 square feet.

What we're seeing in our markets generally is businesses taking advantage of the current soft market conditions to either renew leases early -- blend and extend, if you will -- or upgrade their space to our higher quality buildings. And while we have signed over 500,000 square feet of new leases this quarter, we frankly have not been seeing much in terms of overall new demand in the markets. The markets remain a tenant's market.

The economic recovery we started to see earlier in the year seems to have slowed down to some degree. Businesses are still reluctant to add new staff and make long-term capital commitments about office space. We also continue to see the effects of mergers and consolidations and to some extent downsizing within the markets. And with that said, there are a few markets that are doing well.

In Jersey City, for example, demand is strong both from small and larger users. In Morris and Somerset counties activity has improved, and there are some larger users out in the market as we speak. In general, although we are hoping that now with the election over stability and some degree of economic growth will return, we do expect pressures on rents to continue into late next year and into 2006.

Now I would like to review some of our activities and results for the third quarter. We sold a joint venture mixed-use property, Pacific Plaza, in Daly City, California for $143 million. We have now sold all of the projects in California that we had jointly developed with our partner, Highridge Partners. The overall yield on our investment activity on those development projects exceeded 15 percent on an IRR basis.

Leasing highlights for the quarter included the following. A 73,000 square foot renewal with Norris McLaughlin, a major lawfirm at our Mack-Cali Bridgewater project, our renewal with Nextel of New York for over 62,000 square feet at 565 Taxter Road in Elmsford, New York, and a new lease with Ameritrade for a full floor of 36,500 square feet at Harborside Plaza 5 in Jersey City. Plaza 5 is now 73.4 percent leased, and we are in negotiations for leases right now that will fill the balance of that building.

We had to be very aggressive to close leasing transactions during the quarter, and this is reflected by our tenant improvement and leasing commission expenses which were the highest that they have ever been at $3.23 per square foot per year as compared to last quarter's $2.03 per square foot per year, a reflection of the reality of the market.

Our portfolio-wide rolldown was 4.2 percent compared to last quarter's 7.9 percent. Rents in our core Northeast markets declined 4.1 percent this quarter compared to last quarter's 3.3 percent rolldown, and so the rent pressure continues.

Rents in our non-core Southwest and Western markets fell only 7.7 percent compared to 26.1 percent last quarter. But as you know we are continuing to reduce our holdings in these markets and have entered into binding contracts to sell our last three wholly-owned assets in Texas. At the end of the third quarter, our rollovers for the remainder of 2004 were only 1.8 percent of base rent or just $9.5 million. The largest lease expiring in the fourth quarter of 2004 is AT&T's 405,000 square foot lease at 30 Knightsbridge Road in Piscataway.

As you will recall, this building was part of our strategic transaction with AT&T closed on June 1. Renovations to this building, common area improvements and cosmetic improvements will be starting next month, and this will make it more attractive for multitenant use. Next year, 2005, 12.1 percent of our base rent or $63.5 million will roll over with leases expiring with AT&T, Lucent, and Deutsche Bank in New Jersey that totaled about a million square feet. We do, therefore, have considerable leasing challenges ahead of us, and as in previous quarters, Mack-Cali continued to perform well in our core Northeast markets with leased rates generally higher than market averages in each of the markets that we do business in, with the exception of Fairfield County, Connecticut. We exceeded the Northeast market averages by a range of 4.5 to slightly over 10 percent.

After the close of the quarter, we completed our sale of Kemble Plaza 1 in Morris Township, New Jersey. In June we had extended AT&T's lease on this 387,000 square foot property through 2014. This allowed us to position this asset for sale, to take advantage of the very favorable investment sales market, and we sold the property for $77 million, representing a $12 million gain.

Last week we acquired an office property in Moorestown, New Jersey -- South Jersey -- 232 Strawbridge Drive for $8.7 million. We now own three buildings at Strawbridge Corporate Center totaling 220,000 square feet that are approximately 91 percent on average leased. We paid $8.7 million for this asset, and it now brings our total ownership in the …