Mitchell Hersh - President and CEO Barry Lefkowitz - EVP and CFO

Jamie Feldman - Bank of America Michael Knott - Green Street Advisors Craig Mailman - KeyBanc Capital Markets James Sullivan - Cowen and Company Steve Sakwa - ISI Group Josh Attie - Citi

Good day everyone and welcome to the Mack-Cali Realty Corporation second quarter 2012 conference call. At this time, I'd like to turn the conference over to the President and Chief Executive Officer, Mr. Mitchell Hersh.

Good morning, everyone, and thank you for joining Mack-Cali's second quarter 2012 earnings conference 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. FFO for the second quarter 2012 was $0.62 per diluted share. As you'll note from our press release, we did have solid leasing activity, totaling almost 940,000 square feet of lease transactions during the quarter. And that figure included 338,000 square feet of new leases. Our tenant retention was 58.1% of outgoing space, reflecting a continued trend of downsizing and adjustments in businesses that are throughout all of the sectors that we enjoy within our portfolio. We ended the quarter at 87.6% leased, very slightly down from last quarter's 87.9%. Rent on renewals rolled down this quarter by 3.1% on a cash basis compared to last quarter's 3.7% cash roll down, reflecting the fact that I do believe we're sort of at the bottom of the trough. And now it's just a question of how long it will take to accelerate and increase demand in the service-based economy and add employment. Remaining lease rollovers for 2012 are just 4.1% of base rent or slightly less than…

Thanks, Mitchell. For the second quarter 2012 net income available to common shareholders amounted to $10.1 million or $0.11 a share as compared to $17.3 million or $0.20 a share for the same quarter last year. FFO for the quarter amounted to $62.1 million or $0.62 a share versus $69.1 million or $0.69 share in 2011. Other income in the quarter included approximately $1.3 million in lease termination fees as compared to $1.1 million in the same quarter last year. Included in G&A for the second quarter is $2.5 million incurred in connection with exploring potential acquisitions. Same-store net operating income, which excludes lease termination fees decreased by 0.3% on a GAAP basis and 0.2% on a cash basis for the second quarter. Our same-store portfolio for the quarter was $30.6 million square feet. Our unencumbered portfolio for the quarter ended, totaled 237 properties, aggregating 24.5 million square feet of space, which represent about 79% of our portfolio. At June 30, Mack-Cali's total undepreciated book assets equaled $5.7 billion and our debt-to-undepreciated asset ratio was 33.9%. We had interest coverage of 3 times fixed-charge coverage of 2.9 times for the second quarter of '12. We ended the quarter with approximately $1.9 billion in debt, which had a weighted average interest rate of 6.32%. Currently, we have $50 million outstanding on our $600 million revolving credit facility. On April 19, the company completed the sale of $300 million of 4.5% 10 year senior unsecured notes. These notes were priced at 99.801% to yield 4.525%. Net proceeds were used primarily to pay down our credit facility. On May 25, 2012, we redeemed our 6.15% bonds due December 15 of '12, totaling in $94.9 million and our 5.82% bonds due March 15 of 2013 totaling $26.1 million. We recognized a charge of approximately $4.4 million related to the early prepayment of these bonds. We adjusted our range of FFO guidance for 2012 to 252 to 262 a shared to reflect second quarter actual results. Please note that under SEC Regulation-G concerning non-GAAP financial measures such as FFO, we're 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 are our supplemental package and earnings release, which include the information required by Regulation-G as well as our 10-Q. Mitchell?

Thank you, Barry. At this point, I'd like to open the call to questions. So operator would you set up the queue.

(Operator Instructions) We'll take our first question from Jamie Feldman with Bank of America.

I was hoping you guys can talk a little bit about your conversation with financial services tenants on the harbor front and even around your other markets. Just kind of what are they thinking about their current space usage and the risk of downsizing their space?

I think that financial service firms at this juncture are being very cautious. They are looking at consolidation within space that they control. They are very cognizant of space utilization in terms of density. And I think the general trend and the general discussion is one of caution. We don't see at this point a much expansion and certainly in what I would call the domestic financial service companies. The European banks and companies, obviously, have their issues that we all read about, whether its LIBOR issues that's effecting some of the more significant banks over in London. And so I would tell you that it's pretty rare at this juncture to see expansion within that sector. And I think they're very price conscious. You just recently saw the fact that at the World Trade Center, that several of the Silver Screen buildings have effectively been halted in terms of their construction, one at the eighth level, one at the foundation level. And that's simply because there are no tenants around to fill very expensive buildings at this point. So I think the combination of lack of clarity going forward. All of the issues surrounding Dodd-Frank have weighed heavily on that industry transaction or fewer. You're seeing some of the large banks or large institutions like Goldman Sachs, announce new bank, new activity, more invested in global wealth management, because there are fewer transactions in the investment banking community available right now. So that's exactly what we're saying, Jamie.

I mean in your portfolio what do you think there is in terms of excess capacity?

I think that we're not without risk in the sense that. For example, we know of a 68,000 foot use that's a component of one of the bulge brackets banks in one of our suburban locations. It had several years remaining on their lease. They're moving their people down to the waterfront on Jersey City side, to consolidate in space that they currently lease not from us, but from a friendly-competitor along the waterfront, because they need to distill their work force, if I could use that word. And they need to take advantage of space that they currently have as a long-term liability on there P&L. So we've seen some of that. But I would say that in Jersey City, our cost of operating and our rent cost and the fact that we have some of the newest best space in terms of advantage, allows us to be very, very competitive. So I think we have opportunity down along the waterfront. But in some of the suburban locations, I'm giving you a case in point where that reflects the attitude of financial service companies, at least anecdotally. And I don't think they want to pay big rents at this point. I don't think they can justify it, because of the lack of transactional activity and that's putting some of the newer development projects at some level of the risk.

And then can you walk us through your largest expirations over the next year and kind of let us know where they stand?

Down in Plaza 5, and this would be a third quarter issue, we have a large tenant about 112,000 foot tenant that their lease is expiring and that's the definite vacate. I would tell you a lot of activity on that space. This is a financial service tenant that is National Financial Services actually. And we have a lot of activity on the space more in the service and technology sector, looking at the space. And we also have a global financial company bond into dealer that is looking at some expansion, because of the contiguity of their space. And the fact that it's Plaza 5 it's virtually a brand new building. We have mostly I would 10s, 12s, 15, 17,000 foot definitive vacates in our host and variety of locations throughout the suburban portfolio. These are traditionally activities that we deal with everyday of the week. In Short Hills we have a fourth quarter event, where KPMG, his lease is expiring. They've been in the building actually since the day we built it and completed the building in 1980. And they are moving to another location. And the reason they're moving to another location is simply what we've seen in the accounting sector for quite frankly. Probably more or so then in a lot of other disciplines and sectors, is a mantra for space sharing and hoteling. And so they have to rebuild there space. We're seeing a little bit more firms, but we've seen a lot of it in accounting firms. They have to restack their space to accommodate much greater densities, six, seven, eight people per thousand. And so what you're going to see at least in some other locations is the cost of enabling that kind of thing, whether it's adding parking or whether it's adding HVAC capacity to a building to accommodate those densities is going to be a sort of a phenomenon. And that we're going to see in the office arena going forward. These are corporate mandates at least at several of the Big Four accounting firms. And so that's why they're leaving. It's about 84,000 square foot lease. I can tell you right now, we're pretty active on discussion for about 40,000 feet of that with a new tenant. And so we'll deal with it, it's not something that's immediate, but it's a 2012 expiration.

We'll take our next question from Michael Knott, Green Street Advisors.

Mitchell, can you just talk about maybe the revised cost and unit count of the revised phasing at the multi-family development?

We had talked about close to $400 million for Phase 1. And we have a very, very unique design. We brought in the architect from Amsterdam. And by the way this is all available now on our website. And I credit our Vice President of Marketing, Ilene Jablonski, who has done a fastidious and superb job of integrating all of this on our website. So our architect Concrete in Amsterdam has been working very, very closely with our consultants. And the original phase had two towers on a relatively confined pedestal. And we had always a slight concern that footprint of these two towers might be a little closer than we would have liked. The Phase 2 has always been two towers, but it's a much larger footprint for the pedestal. So what we have done is we've made the decision for a variety of reasons. We felt that the absorption of fewer units would obviously occur much more quickly if we reduced the unit count in Phase 1. We are seeking a particular federal financing, a HUD financing, that is very sensitive to absorption and unit mix and unit count. And so we felt that a much better solution, much more sort of financeable would be to go to one tower on Phase 1 with all the same amenities, all the connectivity of urban ready living that we've been emphasizing in this project. And so we now have a 69-storey tower with same parking ratio, which is about 0.4 and we have 766 units, 25% of which will be studio. The average studio apartment will be 467 square feet. Although, we are putting in or including I should say, of that those 188 units. We're going to have a smattering of what we call microstudios, which are about 400 square feet. You may have seen Mayor Bloomberg, advocating this whole concept of at least in New York City of micro spaces, and they were talking about 280 square feet, which is like a big closet. So 25% studio, 59% one bedroom averaging 630 square feet and the balance 16% two-bedroom averaging 871 square feet. So the biggest population will be in the one bedroom's and in the studios. And we are on track with our development, our constructions drawings, wind testing, and all of the elements and we expect to be in the ground literally and figuratively later this year.

The $400 million was about the same as before for Phase 1?

Phase 1 was about $400 million. It's now $230 million Phase 1.

And then can you just talk maybe a little bit about the strategic considerations for this transaction you're talking about? And maybe any rough sense of size or timing?

Well, I wish that either this call could have been a week or so later or vice-versa. So there's a limited amount that I can tell you at this point without violating selective issues, disclosure issues, et cetera. I can again emphasize the fact that the expensing of the deal cost, which is of course an accounting treatment requirement would kind of tell you that it's a large transaction. And it will further our objectives, my objectives and shared by the Board, to diversify the company, to transform the company, to be a very large player in the multi-family for rent arena. I could tell you that the geography of what we're talking about is very friendly to us. It's very compatible to the geography of our office holdings. And this opportunity as well as becoming a prolific operator and developer in the multi-family arena, would enable us and allow us to very comfortably put some of our own land inventory to work, not unlike what we've done with the Wegmans, but in the multi-family arena. And also some adaptive reuse, where as I've talked in prior calls about the fact that just certain assets may have a better future life as being something else other than in office building. And so beyond that, timing is unfortunate, but there's really not too much more I can tell you right now.

But it sounds like this is going to be transformative and sounds like your are more skeptical or downward on sort of long-term prospects of office and that's why you want to diversify?

I think that the office business for high-quality operators, and high-quality assets and high-quality locations. And the definition of high-quality operators is how we see ourselves at Mack-Cali, tenant focused and the well capitalized. Enabled to deal with rather significant capital needs, and retenanting office buildings and keeping them fresh, and technologically efficient and proficient. So it's not been a dollar on the office market. I think selectively there are markets that have remained difficult and probably will remain so, even as the economy begins to regain some traction. And that's partly due to paradigm shifts and demographic shifts, and the trend to transit oriented and urbanization, in some instances for the new millennium worker. We operate in a world right now that's consolidating. And New Jersey, for example, the pharmaceutical industry continues to consolidate. And its not so much that the performer companies are big space leasers and mostly they own their owned facilities, and their facilities, their corporate campuses are not even a competitive threat if they decided to vacate them and lease them to third-party tenants. But it's all the other service providers that conglomerate and aggregate around companies like the Big Pharmas that are taking less space and have fewer employee needs right now, because of some of these consolidations. And frankly it's the same in financial services. You see, financial services, even if it's a city oriented, New York City or other gateway city orientation. If they're in a downsizing contracting mode, well, that's certainly going to affect the law firms, and the accounting firms and all the other service providers that are doing business with them. So again, it's not being downward, it's being clear thinking. And I think somewhat visionary about how office space will evolve with a growing economy going forward. There…

We'll take our next question from Jordan Sadler with KeyBanc Capital Markets.

It's Craig Mailman here for Jordan. Mitch, maybe just a follow-up on the repurposing of land for multi or retail. Have you guys started to formerly kind of go and try to rezone some of these plots or identified asset or land plots that you want to convert to multi?

I am imminently intending to do that at least on one significant site. We have obviously done setting the Wegmans situation aside on another site.

Is that in New Jersey or another one of your markets?

It's in New Jersey.

I guess as you think about kind of transforming the company be more multi, is that 30% to 40% still kind of a good number you think over the next five to seven years or is that still formulating?

No. I think that's a good number.

And then, just separately the mix piece that you guys have with wins are up on the Stanford portfolio. I know that maturities are coming up soon. Is there any increased clarity on maybe what the borrower is going to do?

The borrower believes that they have conformed and complied with the net operating income test to get their first one-year extension. The First Mortgage G is revealing that. And we will obviously comport as a lender with the First Mortgage G. I could tell you that it's being reviewed right now and certainly that's in any day situation.

And then just lastly, on the guidance, was there any change to the underlying same-store assumption?

No. Again the guidance reflected the actual results in the quarter. The topline results were slightly improved. It's a great thing. But it was a little anomalous that in a sense that we're very fortunate to make that Bank of Tokyo transaction, which had a lot to do with it.

We'll take a next question from James Sullivan with Cowen and Company

Mitch, I wonder would you can tell us regarding the yield on the Wegmans ground lease, part 1. And part 2, the incremental 40,000 square foot ground lease, if you can give us some indication as to where the yields will be on that?

Well, I'm going to put it in this context. I'm going to say that we have a carrying basis on the land. And that carrying basis is depending on how you cut it. And to the extent we had capitalized, we no longer do so, but we had capitalized the expenses on the land when were permitted to do that. It would reflect that that piece of ground is at least carried on the books for somewhere in the range of $30 million. And with the Wegmans lease and the incremental lease, if you were to assume that it has a value of say free and clear cap rate of 6.5%. Thus, as good as it is, retail is always a little vulnerable. It would demonstrate that the transactions together with the cost of delivering the pads that we have to do and the brokerage fees that we would pay, which are not huge. But that these land sites will now be profitable to us.

And on that current lease, is there some provision or what kind of provision will there be for increases in the rent on the lease?

The rent increases every five years.

Can you assure that's the size of the increase, 10%?

10%, yes.

On New Jersey City residential, what are your thoughts about the initial yield there?

6.8% to 7%, depends on locking up the financing that we've been working on. I think that it certainly have an impact, but we're talking about an interesting program that has 40 year amortization through the HUD guarantees. Our expectation is to deliver on an un-leveraged basis, however, at close to a 7% yield.

And are there any thoughts, once that financing has put in place with regarding risk mitigation as to your capital position, now your're thinking about a partner?

It's quite possible we would do that.

And regarding the cost incurred in the second quarter associated with the transaction which you've alluded to, does your guidance for the second half of the year includes some additional cost or not?

Yes, which is another reason that we're being somewhat cautious and careful about the good day run-rate going forward for the next two quarters.

And then finally from me, again, regarding refinancing activity, you do have some sizeable high coupon 2014 maturities. And can you just remind us if any of that is pre-payable and what your thinking as about addressing that?

Well, we have $100 million tranche '13 of unsecured and its 4.6% on secured $100 million. In '14, we have $200 million, that's pretty long way away and that's 5 and 8. So '13, other than the $100 million is a pretty quiet year in terms of any secured financings that we have. But they totaled like $19 million. '14 is a little more active for us mortgage financing, it's about $135 million and $200 million in unsecured. So we just did a ten-year deal at 4.5% I don't know exactly, where the deal could be done today. Treasuries are 50 basis points, of 45 basis points, tighter than when we thought we were in nirvana, when we have sold 1.96% treasury. Now, they are $145 million and $150 million. But I don't know where spreads would be, but nonetheless, the note is 4.6% a year from now. So it doesn't make sense, do anything there.

And in terms of the 2014, is it just too early to look at to at something?

That's too early. The yield maintenance would be severe. Right now, we're drawn on our line, somewhere around $50 million, and so we have enormous capacity and no where near enough warehousing if you will, to enter the bond market right now.

We'll take our next question from Steve Sakwa with ISI Group.

Mitch, my questions have been answered. It was on Wegmans.

Thanks.

We'll take our next question from Michael Knott with Green Street Advisors.

Mitchell, just a follow-up on another question that was recently asked about any change in same-story guidance, you said no. And I think the prior guidance was minus three to minus five?

Yes.

You guys are plus two for the year, so does that imply a pretty ugly second half?

No, we were kind of looking at it consistent. Our second quarter of GAAP analyzed, its down three-tenth of percent and cash is down two-tenth of a percent. The first quarter was anomalistic. Its 4.8% up on cash and 3.8% but if you look back on the first quarter, you saw major declines in operating expenses. So utilities were down 18.5%, operating service were down 16%. Then moving into this quarter, the quarter that we've just completed, the second quarter, utilities were still down 13%. We don't know if that trending is going to continue, because we've already seen actually huge increases in natural gas has gone from $2 a ton to $3 which is huge. So we don't know exactly what the story is going to be with that very hot summer, so far. So we're going to see electricity cost increase, so we're concerned about that in our thinking, and in our modeling and have services have basically normalized. They still remain a slightly negative trend because of union contracts and so forth. Maybe we're being a little too conservative in saying 5% but certainly it's going to trend down about 3%.

But that you're saying that's on the same basis, or apples-an-apples with the plus 2.2% for the year-to-date period. You're not sort of adjusting 1Q to get to your 3.25% down.

Absolutely not.

And then can you talk for a second, I think we saw something that your multi-family partner is building another project, right near your development with them. Can you talk about that?

Our multi-family partner, which is Ironstate formally as Applied this building a project. While they hit, they had an old partnership down at Liberty Harbor by the Marina, it's sort of near us. But it's kind of a different location. It's not in the Transit line. That's an old partnership. It's a much smaller project and it includes a boys club and a girls club in Jersey City. It's a very different kind of project. It's located right at the Liberty Harbor Marina. It's a partnership they've had in effect and they weren't able to get it off the ground because of whatever reasons, so for a couple of years. But it's a small project.

And it's not terribly competitive with your project.

I actually don't view it as quite frankly the same market as we're going to be in.

And then for the total development there, I think in the past you talked about Phase 1 and Phase 2 totaling maybe almost $1 billion but now Phase 1 is less dollars, that means the total is less now.

We adjusted that to more like $750,000 to $800,000 or $800 million rather on the prior call. Because it look like Phase 1 was with the two towers it was actually $400 million before un-rounding, it was about $380 million. The subsequent two towers will be in equal size to the one that we've just talked about. So we're talking about still three quarters to $1 billion for the project.

We'll take our next question come from Josh Attie with Citi.

Just going a little bit further on the multi-family, I guess, the transaction that you're working on, I guess as you think about, you obviously have the Jersey City project but making a bigger foray into multi-family and becoming a diversified company. The stock already trades at a discount to NAV. Don't you think that complicate things a little bit further, potentially adds more volatility potentially as going into a marketplace that's maybe slowing there growth. I'm just curious why not just keep focusing on the core sell assets on your sell assets and buyback stock or sell the entire company if it's not achieving the right value. I'm just trying to put all the pieces together.

Well, you and I have had this conversation at least sufficiently in the past. I believe that our relationship and our land positions both in terms of what we can redeploy or repurpose in the future for product type that's other than office is an extremely valuable asset. We will be doing something with a group, I'll just call it, that have the same philosophies that will be aligned completely with our goals and objectives to build and operate and also fairly significant initial batch of operating multi-family product in the best locations that have similar footprint, similar overlay as the company does. The office business in general is a inexpensive business. No secret, we've talked about, I'm sure you have with every other landlord or REIT. The cost of turning over tenants is expensive and if you can achieve the rents to make that profitable, certainly the public sector of the office business has the liquidity and the capital availability and financial flexibility to do that. But I believe that there will be a better growth trajectory in the multi-family sector in the places that we will be with this transaction. And I believe that it's completely possible and credible and viable to merge those interest with our core business of owning and operating the Class A office asset, and even expanding frankly our ability to offer 24/7 environments where people will work, play and have families, et cetera. And initially the self-side may have some a concern over the fact that we're not in a tight enough box, because after all that's what you like to do with the companies. You'd like to put them in a tight box, so that they are pure plays, and I understand that. But we're going to make money at what we're doing here, and we're going to selectively sell product and use that capital and allocate that capital for the best growth opportunities going forward. At this point, we have no intention of selling the company. We have no intension of buying back stock. We have every intension of moving forward in the manner that I have described on this call. And some will like it and some won't. Some will write unfriendly analyst note, but at the end of the day, I believe we're going to make a lot of money.

But you're going also look at how the share price performs since that announcement, and that's not analysts that's shareholders voting with their feet.

I think the share price has certainly kept pace. Certainly, I would say outperformed the general suburban office owner in general, if I look at the most the widely-traded names or those with similar volumes of trades. So I think that the stock has performed okay. I'd like it to perform better, but I think that it will take a level of understanding, it will take a level of demonstrating performance and articulating very specifically, what the opportunity said is with this multi-family diversification. So that's what it is.

If you are $5 dollar company today, how do we think about the incremental pieces and timing of incremental multi-family? You talked about Jersey City being at 50, but that obviously is overtime and in multiple phases. With the potential partner coming in, how should we think if there is re-entitlement of existing land, two multi-family and then there this multi-family transaction? How should we think about, how large you'd become, how quickly you'd become more multi-family or a split?

Unfortunately, I can't go into too much detail and it's not for reasons of avoidance, its reasons of following SEC and governance procedures, because of where we are in connection with this transaction. So I simply can't go into more detail than to say to you that over the five to seven year period that we have talked about on this call, I would expect this company to be 30% to 40% multi-family. So you look into the map.

We'll take a next question from Jamie Feldman with Bank of America.

Mitch, sticking with the transformation theme, what do you think within the organization has to change? I mean, the DNA has been really has been as an office landlord. So to transform to so much multi-family, kind of how do you reengineer the organization?

At the risk of sounding like, I'm being evasive. With what we're doing, very little integration other than systems reporting will be required.

And then thinking through your development project in Jersey City, what are your thoughts on competitive supply coming in line around the same time, it seems like there is several projects that are in process there?

Yes. There are several projects in process. The average occupancy rate along the coast line in New Jersey is 97% to 98%. And the cost of apartments in the high quality brand new product is $40ish a foot. You go to Brooklyn and now you're hovering at $60 a foot, and if you go to New York City, you are exponentially higher than that. So unless the metropolitan area is going to stop growing and unless the new millennium worker isn't going to be hired by any of vast businesses that are doing business in the gateway cities. We don't see any end to demand, right now and affordable demand in Jersey City. So I think that we will compete extremely well with whatever is currently planned to be developed along the waterfront.

That concludes today's question-and-answer session. At this time I'll like to turn the conference back Mr. Hersh for any additional closing remarks.

Thank you very much. Again in closing, we ended the quarter in a very strong position. We had a lot of leasing activity. We are very excited about the opportunities set that I've talked at length about on the call in the multi-family sector and arena. We know that we need to demonstrate our success in that diversification and we're prepared to do it. And we think we're going to be doing it with the best and brightest, as we move along. So while we certainly maintain a very, very laser focus on being the office landlord of choice in the markets in which we operate and a stable partner for our tenants that is extremely well capitalized and financially flexible. We are equally excited about moving the company forward in this multidimensional direction. So thanks for joining us. And we look forward to talking with you all in the near future. Good day.

This concludes today's conference. We appreciate your participation.