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Mack-Cali Realty Corporation (NYSE:CLI)

Q4 2012 Earnings Conference Call

February 7, 2013 10:00 AM ET

Executives

Mitchell Hersh - President and Chief Executive Officer

Barry Lefkowitz - Executive Vice President and Chief Financial Officer

Analysts

Jordan Sadler - KeyBanc Capital Markets

Michael Knott - Green Street Advisors

Michael Bilerman – Citi

Steve Sakwa - ISI Group

James Sullivan - Cowen Group

James Feldman - Bank of America Merrill Lynch

Operator

Good day everyone and welcome to the Mack-Cali Realty Corporation Fourth Quarter 2012 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

Thank you operator and good morning everyone. Thank you for joining Mack-Cali’s fourth 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 would like to review some of our results and activities for the quarter and what we are seeing in our markets, then Barry will review our financial results. As you have seen from the press release issued this morning, FFO for the fourth quarter of 2012 was $0.66 per diluted share, and for the year ending December 31st, 2012, it was $2.67 per share.

We had healthy leasing activity with a total of 1,147,000 square feet of leased transactions, including 375,000 plus square feet of new leases within that total. Our tenant retention was 59.3% of outgoing space, and we ended the quarter at 87.2% leased, slightly down from last quarter’s 87.5%.

For the full year, we signed 546 lease transactions, totaling approximately 4.1 million square feet, and that total included 1.4 million square feet of new leases. Our full-year tenant retention rate was just under 59% of outgoing space. Rents on renewals rolled down this quarter by 4.4% on a cash basis compared to last quarter’s 5.9% cash rollup, again a very cyclical number that’s reflective of a particular transaction in any one quarter.

However, for the year, we had an average rental down 3.4%. Lease rollovers for 2013 are 10% of base rent or approximately $60.4 million. Our leasing costs this quarter were $4.11 per square foot per year, up from last quarter’s $3.03, again reflective of particular transaction. For the year 2012, our leasing cost averaged $3.56 per square foot per year.

In spite of challenging environment, our portfolio continues to outperform most of the markets where we operate, with our leased rates exceeding market averages in northern and central New Jersey, in Westchester, in suburban Philadelphia and in Washington D.C.

While the fourth quarter was a defining quarter for Mack-Cali, with our acquisition of Roseland and committed strategy to diversification and expansion in the multi-family sector, it was up without its challenges. Continued uncertainty surrounding the deficit, healthcare reform and individual and corporate tax policy played both corporate America and consumers alike. And then, along came Superstorm Sandy, further disrupting business reeking havoc on the infrastructure. We at Mack-Cali are fortunate to have largely been spared serious property damage, with the exception of our building at 125 Broad Street in Downtown Manhattan, which was essentially out of service for about three weeks due to the flooding and wind damage.

I am proud to say that our property management teams were up to the task of ensuring the safety of our assets and ensuring the comfort of our tenants and our multi-family residents. As we discussed on the last call, last quarter, we closed on our acquisition of the real estate interest and development and management businesses of Roseland Partners, marking a fundamental step in a strategic diversification for Mack-Cali, wherein multi-family residential will be a key component of our growth strategy.

In addition to acquiring the development and management businesses, Mack-Cali acquired joint venture interest in six operating multi-family properties, totaling 1,769 apartments, one condo residential property, totaling three units and four commercial properties, totaling approximately 212,000 square feet, 12 in-process development projects, which include nine multi-family properties totaling 2,149 units, new garages totaling 1,591 parking spaces in the first of which garage 45 [ph], totaling 850 out of that total, just about to complete, and two retail properties totaling approximately 35,000 square feet, as well as interests or options in land parcels, which may support approximately 6,000 additional units, approximately 736,000 square feet of commercial space, and a 321-room key hotel (inaudible).

The locations of the properties layer in with the Mack-Cali footprint, extending from New Jersey to Massachusetts, with the majority along the waterfront in New Jersey, in particular, at its flagship development at Port Imperial in Weehawken and West New York. During the quarter, we sold Moorestown corporate center on Strawbridge Drive in Moorestown, New Jersey. We sold the three building 222,000 square foot office complex for approximately $19.4 million, continuing our plan of recycling capital out of non-core assets. We have several additional initiatives to sell non-core assets as reflected in our filings and these include 16 and 18 Sentry in Blue Bell, Pennsylvania where we will also retain a residual carried interest without any capital exposure going forward, 51 Imclone in Branchburg, New Jersey, which we will be finishing in contract and sell to a major telecommunications company, happens to the tenant in the building, plus additional small assets in Clifton, New Jersey, as well as, as I say, those properties that are held for sale in our filings that were filed with the SEC today.

We will redeploy this capital into our multi-family expansion. This quarter, we have already announced the acquisition of Alterra at Overlook Ridge IA in the Metro Boston for approximately $61.3 million. Simultaneously, we agreed to acquire Alterra IB for approximately $88.7 million sometime in the early spring when the loan that currently encumbers in property opens for repayment. The luxury multi-family properties contain 722 rental units in the master-plan community at Overlook Ridge in Revere and Malden, Massachusetts. Properties that I mentioned are being acquired from prudential joint venture. Roseland developed these properties in the mid-2000 and continues and has done so to lease and manage them. Properties offer resort-style amenities and are in ideal location in the metro Boston market.

Last week, we announced the December 2012 commencement of several significant multi-family projects including River Park at Port Imperial in Weehawken, New Jersey. That’s being done in joint venture with Prudential, another example of the fine longstanding relationship that Roseland has enjoyed with institutional partners. This project includes a 10-storey, 280-unit luxury multi-family community, the latest rental property developed in the southern portion of Port Imperial.

In our joint venture with a fund advised by UBS Global Asset Management, we commenced construction on the Highlands at Overlook Ridge, a 371-luxury apartment development in Malden, Massachusetts. It’s the latest addition to overlook Ridge master-plan community, which also includes the Alterra that I mentioned a moment ago.

Just last week, I attended the official groundbreaking ceremony, along with the Governor of Massachusetts and the Mayor of Boston, for a Portside at Pier One, part of the planned mixed use community on the East Boston waterfront. This 176-unit apartment project is being done in joint venture with Prudential as well, and I might add a labor of love particularly on the part of Boston and Roseland who have been working together on this project for almost a dozen years, and we are delighted to now see it take shape.

Some of our additional activities that we are involved in with the Roseland at the moment include 196 units that are to be built in Mount Laurel, New Jersey, great suburban community. We are actively engaged in a potential acquisition with an institutional partner in the Metro and D.C. market and we will talk more about that in the coming days. And as well, we are involved in a mixed use student housing project with one of our existing partners at one of the state universities in New Jersey, that will include 446 beds and approximately 75,000 square feet of retail space.

Now, turning to office leasing, notable transactions that we outlined in our quarterly filings include the previously announced Barrie House Coffee Company up in Westchester, the coffee manufacturing and allied product distribution company. They signed a new lease for almost 68,000 square feet at 4 Warehouse Lane in Elmsford, and this 195,000 square feet industrial warehouse building is now about 97% leased.

New Cingular Wireless, also goes by the name AT&T Mobility, and we all know who they are, signed renewal leases in Paramus for 138,000 square feet at Mack-Cali Center 7 on 15 Midland Boulevard and approximately 74,000 square feet of Mack-Cali Center 3 at 140 East Ridgewood Avenue, both in the same vicinity. The 259,000 feet Mack-Cali Center 7 is about 81% leased and the 240,000 square feet Mack-Cali Center 3 is about 92% leased.

AECOM Technology Corporation, a global technology and support services firm, signed several transactions with us over the quarter. They include a new lease for over 91,000 square feet at 125 Broad Street in Downtown Manhattan, thus taking up the bulk of the occupancy of Oppenheimer and lease transactions totaling 71,000 square feet at our 30 Knightsbridge Road in Piscataway, where AECOM has been our tenant for a number of years.

These strategic transactions consisted of a 60,000 square feet renewal and a little over 11,000 square feet expansion at 30 Knightsbridge, which is a four-building office complex, totaling 680,000 square feet, that’s about 93% leased in Piscataway, New Jersey. Also, going back to 125 Broad, the institute for community living, a not-for-profit corporation that assist individuals with disabilities, signed a new lease for 42,000 square feet. And so now, Mack-Cali’s ownership interest of just under 525,000 square feet at 125 Broad Street are a 100% leased, and I would like to point out that the building is 100% back in service, certainly not without its challenges, given the Downtown effects from Superstorm Sandy.

Nestle Waters North America, the bottled water company, signed a lease renewal for 47,000 square feet at 5 Warehouse Lane in Elmsford. This building is located in the Elmsford Distribution Center and the building, 75,000 square-feet is over 97% leased.

Moving on the capital markets activities, during the quarter, the company completed the sale of $250 million face amount of 2.5% senior unsecured notes, due in December 2017. The net proceeds from this sale were used primarily to repay outstanding borrowings under the company’s unsecured revolving credit facility. Also during the quarter, Mack-Cali announced that its Board of Directors authorized the share repurchase program, under which the company may purchase up to $150 million of its outstanding common stock and we purchased about $11 million.

On another note, Mack-Cali continues to manage its properties with a keen eye towards energy efficiency and sustainability in best practices. Earlier in the quarter, we announced that 8 Campus Drive at Mack-Cali Business Campus in Parsippany was awarded the LEED-EB OM Silver certification from the United States Green Building Council, along with our 106 Allen Road in Bernards Township. These were two of the four multi-tenant buildings in the state who achieved this prestigious award. The award recognized maximum operational efficiencies with minimized environmental impacts and carbon footprint impacts.

In addition, during the quarter, Mack-Cali properties continued to be awarded with the energy start designations. These designations given by the United States EPA, Environmental Protection Agency, and the U.S. Department of Energy are national symbol for superior energy performance.

These are great examples of the achievements we have made in efficiently in running our buildings, helping to reduce our carbon footprint and providing cost efficacy for our shareholders and our tenants. And now, I will turn the call over to Barry, who will review our financial results for the quarter. Barry?

Barry Lefkowitz

Thanks Mitchell. For the fourth quarter of 2012, net income available to common shareholders amounted to a loss of $9.2 million or $0.11 per diluted share as compared to $16.1 million in income or $0.18 a share for the same quarter last year. For the full-year 2012, net income available to common shareholders amounted to $4.9 million or $0.47 a share versus $69.7 million or $0.81 a share in 2011. The results for the quarter and for the year include a $0.25 and $0.23 per share respectively of losses on dispositions of rental property and impairments.

FFOs for the quarter amounted to $65.4 million or $0.66 a share versus $68.1 million or $0.68 a share in 2011. For the full year of 2012, FFO amounted to $267 million or $2.67 per share versus $277.4 million or $2.80 per share in 2011.

Other income in the quarter included approximately $787,000 in lease termination fees as compared to $596,000 in the same quarter last year. For the full year of 2012, lease termination fees were $9,253,000 versus $4,529,000 for the full year of 2012.

Same-store net operating income, which excludes lease termination fees, declined by 2.3% on a GAAP basis and by 5% on a cash basis for the fourth quarter. And for the full year of ’12, decreased by 1.5% on a GAAP basis and by 2.2% on a cash basis.

Our same-store portfolio for the quarter was 30.3 million square feet. Our unencumbered portfolio at quarter-end totaled 236 properties, aggregating 24.8 million square feet of space, which represents 80.7% of our portfolio. At December 31st, Mack-Cali’s total undepreciated assets equaled $6 billion and our debt-to-undepreciated asset ratio as 36.7%.

We had interest coverage of 3.2 times and fixed charge coverage of 2.8 times for the fourth quarter of ’12. For the full year of ’12, the company had interest coverage of 3.2 times and fixed charge coverage of 3 times. We ended the quarter with approximately $2.2 billion of debt, which had a weighted average interest rate of 5.86%

Currently, we have $58 million outstanding on our $600 million revolving credit facility. We are firming efforts for guidance for 2013 in the range of $2.40 to $2.60 a share. At the midpoint, our guidance assumes leasing starts of 2.3 million square feet versus scheduled lease expirations of 2.8 million square feet. End of year 2013, occupancy about 80 basis points lower in our December 31st, 2012 level of 87.2%.

Development investments of about 50 million in 2013 for wholly-owned and joint venture projects, including the completion of Phase II for Wyndham Worldwide in Parsippany and the startup of the multi-family residential joint venture at Harborside in Jersey City. Acquisitions of $230 million, primarily for wholly-owned joint venture multi-family properties. And we also, as Mitchell laid out before, are looking for property sales of about 100 million.

Please note that on the 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, reconcile them to net income. Available on our website at www.mack-cali.com or our supplemental package and earnings release, which include the information required by Reg G, as well as our 10-K. Mitchell?

Mitchell Hersh

Thank you, Barry. There is no question whether the market for office space remains a challenge. If you look at the Cushman and Wakefield statistics, which are the statistics that we employ, we would see that in our markets, space showings were off year-over-year by 20%.

If you look at those same statistics from Midtown Manhattan, you will see that space showings with Midtown Manhattan were off by 26% year-over-year and 22% year-over-year for Downtown. And so, I am delighted that were able to backfill 125 Broad Street, with over 130,000 feet of new leases to take the place of Oppenheimer, who we also signed an early surrender agreement with, so that we will help them, accelerate them move into 85 Broad and our new tenants in 125 Broad.

Undoubtedly, most of you have heard from other office companies, about paradigm shifts, affecting demography, urbanization and densification. These trends will undoubtedly sort themselves out over this next economic cycle, which frankly so far has been very slow to add new service and science sector in jobs and build on the employment levels. These are the jobs that are needed to fill office space.

I am, however, delighted to tell you that just this morning, I received the counter proposal from a major metropolitan corporation, who has been looking at the possibility of consolidation, we are now closer to a year, and they have made us a proposal in response to our – responding to their request, to build Harborside Plaza 4, which is a million square feet. They would be leasing that for 20-year term.

I point out that we haven’t signed a lease. At this point, we are merely in discussions, but I guess it approves that if you have land and permits and approvals in high barrier to entry markets where that can’t be replicated or duplicated, a little bit of patience makes a lot of sense. And so, I look forward in advancing these discussions and certainly will keep the market informed.

Our acquisition of Roseland is in response to recognizing these trends, the ones I talked about paradigm shifts, demography shifts, urbanization, transit orientation and expanding and allocating capital into a sustainable real estate sector. That’s reflective of these live style changes and choices.

High-end visionary lifestyles affording rentals of Choice as opposed to rentals of necessity. And providing a life style that affords flexibility. We at Mack-Cali are always working to maintain and where possible, improve our position in all aspects of our business. We have and we will continue to be active in asset management, selling assets that no longer make strategic or economic sense to own and redeploying this capital into the growth of our platform.

I think the discussions today about some of the assets that are held for sale and those that we intend to sell proves that point. We are also committed to repurposing assets where that make strategic and economic sense as well, as well as putting our land inventory to work. Wegmans in Hanover and a contract to sell a large parcel in Princeton to a life style type company are examples of that.

As well, we meaning the management team of Roseland and I have visited with a number of municipalities that discuss rezoning of commercial properties to include multi-family residential and in some cases, mixed use development where you can (inaudible) the uses with some level of retail services.

We certainly remain committed to being the preferred provider of office space within our markets, as well as maintaining a strong balance sheet and being poised to take advantage of opportunities as they present themselves.

And with that, now, we will take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Thank you. Good morning. Mitch, pleased to see some of the announcements this morning and some of the activities you were active and engaged in during the quarter, particularly on the asset sales side. It seems you have embraced the asset management discipline a bit. And I am just curious, $100 million relative to this $5.5 billion entity, not a huge number. What is your propensity or thought process surrounding potentially accelerating that process?

Mitchell Hersh

Well, we have announced in connection with our guidance that we would be looking to dispose of $100 million plus or minus in the course of 2013. So, I think we are certainly on track with everything that we have indicated to the Street. We are looking at our entire asset base from the perspective of, as you say asset management where we have sites that we can develop, that can be in co-habitation with the existing office space and be very high level live, work, play environments. At this moment we’re not interested or looking to dispose off any particular market or sub market, and so we’ll be a little more surgical about it and see how can utilize our asset base to grow our multi-family platform as well as potentially repatriate some capital and utilize it in our growth platform. So, although $100,000 may not be a lot in the context of $5 billion company, we think this one will be an effort that will continue overtime.

Jordan Sadler - KeyBanc Capital Markets

Okay, the other question I have for you, just sort of thought process surrounding Alterra, AMD, [ph]1AB, 1B the markets there revere mold and strategically where you’d looked a potion yourself, vis-à-vis in relative to cities relative to your existing markets with multi-family.

Mitchell Hersh

Well, as I said, the properties, the Alterra properties were developed by Roseland and managed by Roseland. First phase was 2004, the second phase was 2008, Prudential chose to close is its fund, the life of its fund that helps it. We had a tremendous competitive advantage because of the relationship, and the fact that they didn’t see the necessity of a broadly marketed transaction. We felt we got a very fair price of buying the assets that’s somewhere around a 5.4 cap based on current rents and given the financing that we are putting into place having cash on cash yield of 70:30, 70% financing, 30% equity somewhere in excess of 9%.

We’re building right next door to the Alterra site or project in connection with the overall, we expect to be building that to about a 6.7% free and clear. We are seeing rising trends in rent, we also managed [ph]Lenor’s existing apartment complex that had originally been built as for condo self and evolved into rental apartment. So, this particular area, just north of Boston is very strong, we’re approximately 98% leased and as we turn some of the leases over, we have expectation that we’ll see rent growth. And in Boston itself, of course described, we’re building right of the water front in magnificent site East Boston is becoming like the meat packing district or the cell hole of Boston. It looks back on the financial district, there will be cross bay ferry service, it’s almost next door to the airport and the whole area is gentrifying. So we’re very encouraged with our opportunities there. We have great relationship, particularly the Roseland Marshall Tycher in particular the administration up in Boston and as I said this was a 12 year effort to get this project off the ground, it is extremely important to the state and to the city to see this stimulate this project – sort of a stimulative to growth in the air and that is what the Governor of Alpatrick and Mayor Menino along with several (inaudible) and state legislators took their time to come to this ground breaking. So, we think it makes eminent sense to expand into that region. It so happens I think Boston is probably doing a little better than most of the other gateway cities in terms of some economic vitality and so we are happy to be there. We’re also actively engaged in finishing a transaction of notable size in the metropolitan DC market place which has been a home to Mack-Cali assets for many years. So, it is not new to us and this asset is in a great location and we have a great unusual opportunity and it is big. We’re bringing in a partner one of the names that I mentioned in my discussion, but for the moment will be until we finish crossing all the Ts there is not much more I can say about it. So, the footprint, the geography, the overlay is perfect from the Roseland perspective as to how it layers into the Mack-Cali footprint.

Jordan Sadler - KeyBanc Capital Markets

The DC one is multi as well?

Mitchell Hersh

DC is multi.

Jordan Sadler - KeyBanc Capital Markets

Last question on the multinational corporation that may looking at a potential build, I know it is early days, but we don’t see a lot of, we say there is consolidation, we don’t see as much expansion activity here on the east coast yet. And given the context of sort of your dialogue in the quality here, what is the nature of this company? Is this is a major extension or expansion and would they be coming out of Manhattan or what should be the nature of that.

Mitchell Hersh

The nature of it is just a consolidation as all know the larger multinational companies have been looking to create more justification of their space in order to do that you need real and do it in a serious way and I consider a million square foot user a serious user. You need to have a new product built for you. You have heavier burden on all your systems in the building, air conditioning, elevator systems, the number of bathrooms, alarm the line and this was being going on for about a year. I have talked on many earnings call about both the excitement and the disappointment. Not seeing some of these transactions come to for a wish, we do our dog and pony shows and make our presentations to large casts and broker a sophisticated brokerage representing these companies and they’ve all many of them have come to harbor site to over the last couple of years. The talk about the potential of consolidation. This appears to be very real, it is very real time. I literally got my response to a proposal that I sent back to them on a Saturday on October 2013, I got it today.

It is very serious, the numbers are very real and that is what I can tell you, I am not at liberty to divulge who the company is other than to say what I have said.

Jordan Sadler - KeyBanc Capital Markets

Will it be a consolidation out of Manhattan did you say? We’re just in the, largely out of Manhattan.

Mitchell Hersh

Okay, thank you. Largely out of Manhattan.

Jordan Sadler - KeyBanc Capital Markets

Okay, thank you.

Operator

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

Michael Knott - Green Street Advisors

Hey Mitchell, asking you about the brandy wine sale of Prince & PikeI think it was an 8.5, cap rate of $150 for food. Two questions on that, a) did you put in a bid for that and then, b) do you have any thoughts on what that 8.5 cap suggest about the value of your suburban New Jersey portfolio.

Mitchell Hersh

Just put in a bid and look at the due diligence, wasn’t offered a package on it, but a portion aware of the sale. I think unstabilise assets in suburban, that stabilize being reasonable periods of time remaining on leases, not unusual amounts of roll over or that sort of thing 8 to 8.5 on a kind of typical low rise suburban asset is realistic when you get into the more urban centric assets, campus typesetting as well that cap rate compresses to some extent certainly I would think that assets for example on the waterfront, you’d be in a 6 to 6.5 range and similar range cap rates for long term leases, net leases with high grade credit even if they are suburban type assets. So, for the plain vanilla stuff 8/8.5 and then for the stuff that is – assets that are either unleased or with lots of vacancy potential in the near term given the amount of capital that you would have to invest. The cap rates are in my opinion become meaningless. It is all a matter of what you can find somebody who is willing to pay for the bones and willing to take the risk of releasing going forward. The markets have been extremely sluggish as I indicated.

Michael Knott - Green Street Advisors

Right okay, thanks for that and then a question on further capital allocation, sounds like you obviously have been busy and sounds like you have more deals to come, just curious on your thought on – your interest in pursuing entity level deals, there is a certain entity in the DC region that you’ve owned securities and before that has began the CEO transition. Do you have any interest in sort of furthering entity type deals or you feel like you’re kind of full right now after Roseland.

Mitchell Hersh

Yes, well I mean that entity that your telling about is – yes, everything you said is what I have read and they are looking to sell their medical building unit which is not adventurous to us, but we do have a lot on our plate, but we have a huge amount of capacity, we are looking at the potential of a couple of entity style transactions frankly in more in the multi-family sector right now and we’ll see how that shapes up over the coming month.

Michael Knott - Green Street Advisors

Okay, thanks.

Mitchell Hersh

You are welcome.

Operator

We’ll take our next question from Joshua Attie with Citi.

Michael Bilerman – Citi

Yes, good morning, I am actually Michael Bilerman. Mitch, just going up that point, I guess what would the sizing be of these type of entity level transactions?

Mitchell Hersh

I got a package literally yesterday, again something that we’ve been working on for a while, but yesterday, we’re talking about several thousand apartments, lot of it is new development, but sites that are approved. So, I would think it is on the order magnitude of that sort of thing, it is certainly not on the order of magnitude of some combination with an existing multi-family (inaudible).

Michael Bilerman – Citi

How do you, if you just step back from it, how do you think about your sort of past capital in going into the multi-family business. If you look at where your multiple is, you look at where your implied cap rate is? Your sort of miles away from flair, multi-family trades.

Mitchell Hersh

Yes, multi-family trades are 20 times earnings and they buy a lot of property 2.5 to 3.5% free and clear, as you call it on the street operating yield.

Michael Bilerman – Citi

I would cut that absolutely I don’t think that is correct. I think a lot of the multi-family companies are buying at or above where you just bought Opera and they are developing pretty high yields even higher were you developing next Alterra and that (inaudible) and that is where the acid values are and their stocks trade there for a reason.

Mitchell Hersh

Well, I haven’t seen those deals, but you see more of that universe. We think that if we can build the mid to high 6 percent range in place rents today and appropriately finance the product which in today’s world and today’s universe eminently possible we’re doing it right now and have good cash on cash yields and in the cases we bring in partners, limit our capital and put some capital in on a parrot pursuit basis and generate fee income in managing, leasing and development that makes sense for us.

Michael Bilerman – Citi

But I guess you didn’t take off there for a second right? There is no doubt that the Fanning Fredie Financing is available you to get that 9% cash on cash, but as an entity level if you look at Mack-Cali in your strong desire to keep a strong balance sheet, something that you’ve done over time. You’ve raised a lot of equity to keep that leverage low bringing in $150 million of assets with $110 million of debt is going to raise overall corporate leverage and so how do you effectively equitize the balance sheet with what is now becoming – you look on page 30 of your in process development and when you sold out some acquisitions in the budget which little bit offset by $100 million of disposition, but leverages move enough and in your equity not affording you that the cost to finance it. I am struggling with how values being created.

Mitchell Hersh

First of all leverage is not materially moving up, it’s a model to move somewhere around 38% plus or minus 39%, so we have a lot of room on the leverage side of the equation. We think that both the combination of having some of the best sites in our geographic footprint including office sites that can add and layer in multi-family development are something that a lot of other companies in the space can’t do. So, we think a combination of the best sites in the best locations, the ability to repurpose an asset based rather than necessarily sell it or give it away because the street wants to see a lot of asset deployment and management. We can create a lot of value and I am hopeful that our multiple will expand as a result of a combination of all of these things. So that we can raise equity at some point. Time will tell, but we’re in a growth sector with the best and brightest in terms of our team and to have not done anything given the fact that the office markets in general have been soft, remained soft, both suburban and urban matter of degree that it was inappropriate strategic diversification for the company. I am sure that as with most things we can debate pros and the cons and you can take your view of it.

Michael Bilerman – Citi

If we look on page 30 of the supplement of the value creation pipeline, (inaudible) for that unconsolidated of that $805 million of total cost, what is Mack-Cali’s share of that cost?

Mitchell Hersh

If you look at foot note four in the filing you’ll see that we have very little share of the cost. All the joint ventures are laid out for roughly $900 million worth of capital and you’ll see that the Mack –Cali investments are extremely minimal. I suggest that you carefully study foot note for and then we can continue this discussion either online or offline or at a line, but you should read that.

Michael Bilerman – Citi

(inaudible) page 30, there is not footprints on that. So, have to go to a different document.

Mitchell Hersh

It is in the financial statements and in the 10-K and go to footnote four.

Michael Bilerman – Citi

Okay, thank you.

Mitchell Hersh

You’re welcome.

Operator

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

Steve Sakwa - ISI Group

Thanks. Mitch, since the office is still a pretty large component. I just like to focus back on that for a minute. I think you said that your occupancy was going to be down about 80 basis points this year. If I recall I think last quarter that number might have been 40 basis points, is that correct and if so what is accounting for the incremental slippage from 3Q to 4Q?

Mitchell Hersh

Well, first of all have had a few disappointments on some of the expected renewals that have not occurred. We are also making some adjustments because of the sales that are either those assets listed for sale or held for sale including some of the assets that I described today on the call that we will be disposing them. So, there are some adjustments taking place, but the reality is that some of the transactions that we had hoped to achieve haven’t occurred and some that we had anticipated having occurred already have been put on hold. It is the nature of the business particularly in this environment. There is no other science to it.

Steve Sakwa - ISI Group

Okay and if you try and look out and talking to tenants that may have explorations in 2014 or 2015, the question is do you continue to see sort of slow bleed on the occupancy or do you 2013 marks the bottom?

Mitchell Hersh

2013 and 2014 are both challenging years and so in 2013, we have a total of 2.8 million of role and we know that roughly half of that is out the door based on what they are telling us now and so we’ve got a lot of wood to chop and work to do and 2013 is a tough one and rather 2014 is of similar proportion. So, tenants plans change and we’re working hard to get commitments as early as we can.

Steve Sakwa - ISI Group

Going back to some of the questions that you’ve got on a capital deployment and asset sales, have you contemplated maybe dramatically selling a lot more of the company and making some sort of special dividend. If you think that there is a real disconnect between where the (inaudible) and the acid dye of the company. Were there tax considerations that really preclude you from doing that?

Mitchell Hersh

You know the nature of contributing properties and there rose tax complications in doing that and as (inaudible) is part of the public company, you need to be cognizant of that. So, it is not something that we’ve considered and sort of a first time have actually heard the concept, but its an interesting thought.

Steve Sakwa - ISI Group

And lastly on the apartment, how far are you willing to expand the footprint? It is basically DC the Boston and that is it or new envision is multi-family portfolio going further than that.

Mitchell Hersh

No, DC to Boston is what we have targeted and of course that doesn’t preclude lots of different locations within that footprint. There is in Pennsylvania, potentially (inaudible) as I have indicated, but that is the define mid-Atlantic to North East.

Steve Sakwa - ISI Group

Okay, thank you.

Operator

We will take our next question from James Sullivan with Cowen Group.

James Sullivan - Cowen Group

Good morning, just a follow up on stage question regarding the leasing prospects. I wonder looking at the sub markets that appear that no other New Jersey in Westchester were the ones it the most of over the last 12 months in terms of occupancy. Is there anything particularly negative about those markets that is causing that or is it simply the exploration scheduled for the last year?

Mitchell Hersh

Look, I think the exploration schedule, but dismiss is very slow and on the office side of the equation. Most of luck what we see within the market are musical chairs, tenants taking advantage of opportunities to either potentially reduce the mammoth space to create better stacking efficiency at lower cost. There is very little new business activity, I indicated the space showings that are off by 20% year over year and it is not New Jersey alone, it is pretty much every market that we’re familiar with. There is a lackluster amount of vitality in the business community right now, certainly as it relates to office space.

James Sullivan - Cowen Group

Shifting focus a little bit here in terms of sources. There are a couple of joint ventures out there that the company has had money invested in for some time, which may or may not be coming to an end or potential source of capital. I was thinking about downtown crossing for example in Boston and I know there was one small JV interest, I think that was sold in early January. What are the prospects are for pulling cash back from those joint ventures. Is there anything in the model for 2013.

Mitchell Hersh

It is not really in the model we have per se, we have an agreement with Vornado. We meaning, JP Morgan and Mack-Cali who now are one side of the 50% partnership to be bought out of that project. They have an option. They are working with their partner Millennium to resuscitate and reshape the development of filings that was also in the newspaper recently within the last week or so. Their option expires in May. We have every indication that they are going to go ahead and buy us out and that will be at par.

So, yes, there will be capital coming back as a result of that. Our 50% interest with JP Morgan of which is 70% - 30%, JP and ours is $45 million. We have an agreement in principle that we are finalizing to be bought out of our remaining residual interest in the Xanadu development with Colony Capital. That surrounding ground, it’s very complicated in the capital spec nature and it’s not subs native in terms of the size with Mack-Cali but it could represent over sometime about $8.5 million to us. Property is being sold to the Gramacians [ph] to trip five to continue the expansion of their development at Xanadu. So we have a few of those types of situations where capital could hopefully will be coming back to us.

James Sullivan - Cowen Group

Okay. Then turning to the development projects that were announced. I think you mentioned a 6.7% yield over Oak Ridge. I don’t recall if you have provided any yield guidance for the River Park at Port Imperial or port side at pier one?

Mitchell Hersh

We thought that we provided in the press release, we are checking right now.

James Sullivan - Cowen Group

I think you just remind me, I have the release in front of me that doesn’t have it.

Mitchell Hersh

Well, anyway, the yields are very similar. When we bought the existing product it was about 5.25% on the existing product. The development yields are all expected to be 6.5% plus on an unleveraged basis. We expect any cash that we put in of which is very little in those joint ventures, almost none, that our cash will generate at least 9% if not higher, cash on cash returns.

James Sullivan - Cowen Group

So, just to be clear, when you look at these developments versus based on in place rents as you put it the current market rents and where cap rates are in existing product, you are looking at before fee income, I am assuming, you are looking at something like 15% to 20% spread in terms of value creation? Is that fair?

Mitchell Hersh

Well, before fee income, if you are looking at the repositioning, well, I’ll give you an example, the asset that we are buying in DC, right now the rents are approximately $2.11 a month a foot, and when we are done repositioning that and we’ve modeled in to the kind of cap rates that I have indicated to you, the repositioning dollars we expect $2.75 in rents. So, that’s kind of spread.

James Sullivan - Cowen Group

Sure. Yes, I am thinking really about three Roseland JVs and two in Boston and the one in New Jersey that are listed in the press release, the $242 million of developments, there you are looking at about a 15% to 20% spread to market cap rates in terms of value creation. That’s fair.

Mitchell Hersh

Right. If you are looking at say building to 6.5% call it and selling at 4.5%.

James Sullivan - Cowen Group

Sure. That is even higher. In terms of fee income, I am not sure, Barry, if you have provided this in the guidance before but what kind of number are you projecting for 2013 and the model for fee income from the joint ventures?

Barry Lefkowitz

From the joint ventures themselves? I don’t have it from the joint ventures but in the aggregate we are looking at fee income close to about $25 million out of the whole RPC platform, which includes third party and development fees, from third parties also.

James Sullivan - Cowen Group

And that’s only including what is existing or announced, I am assuming?

Barry Lefkowitz

That’s including what’s existing and announced and what we know is going to be coming on line over the –

James Sullivan - Cowen Group

Okay. And then finally from me, on the asset sales, you talked about $100 million in this call, I think in the prior call you were talking about $75 million. So, it seems to be an increase, maybe I am wrong, but what is the overall cap rate you are projecting?

Mitchell Hersh

Well, the cap rate on the $75 million is for a single asset and that we are expecting somewhere in the low 6% range. The remaining sales are more sort of a $100 type per square foot considering the fact that they are pretty empty buildings. So the cap rate really becomes somewhat irrelevant.

James Sullivan - Cowen Group

Yes, they are priced on a per pound basis.

Mitchell Hersh

Correct.

James Sullivan - Cowen Group

Okay, very good. Thank you.

Mitchell Hersh

You are welcome.

Operator

We will take our final question from James Feldman with Bank of America Merrill Lynch.

James Feldman - Bank of America Merrill Lynch

Alright, thank you. Mitch, I was hoping if you could talk a little bit more about like the organization impact of bringing Roseland into the Cali organization. Can you talk about maybe some of the changes we are going to see at the home office? And then, give an update on how things are going? And then also just talk about – you had a lot happen this quarter, how do you think about the risk of everything going on and how you are mitigating that risk, both to the balance sheet and just to the organization in general?

Mitchell Hersh

That’s a fair question. I would say the least concern is the integration. The Roseland platform is virtually self-sustaining, self-sufficient. Obviously, there is an integration of systems and protocols and policies but they operate independently. The governance of the organization is by me as the Chairman and the CEO. We have executive committee meetings. We rotate executive development and finance at the committee meetings. They have continued to operate aside from the structural changes and the impact of additional systems data.

As an independent organization we have just gone through probably one of the more difficult 10-K assemblages, kudos to our finance group and our legal group and our outside auditors for working so under such stress, so I think we may be the first 10-K filing out there and certainly the office space was filed this morning. That articulates in great detail all of the joint ventures and frankly all of the risk factors that we can anticipate in connection with this transaction.

So, I would say that you will see a very little change in the complexion of Edison versus Roseland and so forth because of the way we had structured this. As you know and the nature of your question suggests that business combinations and company style combinations ordinarily bring integration risk and that in so many instances is a recipe for failure. We were very very careful in this instance to make sure that that could not happen.

Relative to the balance sheet, we are extremely cognizant and sensitive of maintaining the strength of our balance sheet, maintaining our investment grade ratings, and we have a very good handle on how much additional leverage we can employ. We are taking steps to bring in institutional partners, particularly those that have done business so frequently with the Roseland platform in some of these larger, chunkier assets, so long as we can get the same benefit of (inaudible) preferred returns, and so that’s what we are doing and we are also benefitting from the fee income. There is no question that we would like to be able to issue equity at some point, the price of our stock right now doesn’t permit it, but we certainly would have – we have a great opportunity set, we would have a greater opportunity set if we had more liquidity in the form of equity capital. And so that’s our goal.

I personally think that the most sophisticated investors and certainly those that understand real estate have applauded this strategic diversification as an early step and a bold move to diversify the company into a sector that continues to show sustainable growth. So that’s what we have done. I am certain that among those that applaud us there are those some of whom we have heard on this call that have opinions otherwise.

So, it’s my goal to many of you have received an invitation to come out and meet the management team from Roseland, take a tour of the superior assets that they have built and they continue to manage and we have various ownership participation in. I know that unfortunately you won’t be able to be there, but your associate will. The investors and the analyst can judge for themselves the quality of the professionals that have now become a very significant part of Mack-Cali.

James Feldman - Bank of America Merrill Lynch

Okay, thanks. So just to be clear. So, it sounds like that we are going to keep the Roseland office open, the one near Short Hills?

Mitchell Hersh

I am going to keep it open until we move them to our office building in Short Hills and then redeploy and repurpose the site that the Roseland building sits on, just in case you live in Short Hills. I know you live in Livingston. We got much bigger plans for that site.

James Feldman - Bank of America Merrill Lynch

Okay. I know you are kind of painting with the broad brush what’s going on in the suburbs, can you maybe give a little bit more color on Connecticut versus Westchester and any improvement there, or there really is just across the board not getting better?

Mitchell Hersh

It’s not getting better really, it’s kind of a gearbox that’s in neutral. We are not seeing a lot of new business leads in Westchester, we are not seeing it in Connecticut. I mean, I am not trying to be pessimistic or negative, but other than some of the tech companies and some of the tech sector we are seeing very little new business on the larger scale. There is still small entrepreneurial firms, law firms, that sort of thing that are taking space and moving around, but there is more contraction today than there is business development or business growth and thus you have the occupancy pressure. It doesn’t materially vary from market to market. It really don’t.

James Feldman - Bank of America Merrill Lynch

Okay. And then finally, can you just talk about – we are hearing from some of the suburban office landlords that there is an uptick in capital flowing into their markets. Are you seeing that at all? Any increased interest or any downward pressure on cap rates?

Mitchell Hersh

I see in most of the markets. The entrepreneurial private funds that are interested in buying a product – value added type products. Money is hard to raise in that sector but there is some level of it available and that’s why we are able to sell some of these assets that I talked about. As far as the well-leased yield investors, there are plenty of them for that sector, no matter where it is, whether it’s in suburbia or in the middle of mid-town Manhattan because their yield place and the cost of money is very low and there is a lot of international money as well that’s looking to find a home in the United States in safe, secure assets. So, there is, I think, somewhat of a bifurcation in the capital flows into the office sector.

James Feldman - Bank of America Merrill Lynch

Okay, great. Thank you.

Mitchell Hersh

You are welcome.

Operator

We have one follow-up question with Michael Knott with Green Street Advisors.

Michael Knott - Green Street Advisors

Hi, Mitchell. If I can just ask one more question on the Jersey City potential tenant. Obviously, downtown leasing economics are a little tough right now just as evidenced by the $7 per foot per year on some of your leases at 125 broad, but I presume the tenant you are talking to of that size are probably looking at World Financial Center as well. Can you just maybe give us a quick view of how your economics would compare to what they would be paying at World Financial?

Mitchell Hersh

Well, I can tell you that our economics would be in the mid to slightly above mid $40 initial rents on a gross basis. Our expenses down there are on the order of magnitude of $12.5 give or take, including without and that’s without any special real estate tax treatment. So, that gives you a sense of what we are looking at. I don’t want to speak for Brookfield property or (inaudible) Port Authority or anybody else. You can gauge whatever you think those rents are, but I think that we are probably 30% less costly, if not more.

Michael Knott - Green Street Advisors

Okay. And then, on the topic of buybacks, I think you ended up at about $10 million if I remember the number correct, can you just maybe refresh us on your thinking of how you ended up there at 10 or 11, whatever the number was as opposed to zero or 20 or something more, just how you thought about it?

Mitchell Hersh

Well, to be very candid, I mean, you know that I have not been a proponent over time of buying back stock. I thought that at the time we were doing Roseland buying back stock would demonstrate that we were allocating capital to buyback an investment in our strategy, which was the diversification strategy. We stopped at about $11 million. Recognizing that until the rest of the market embraces this strategy a little more. We have to be cautious about how we spend capital or allocate capital going forward. So that’s kind of the only science to it, but we are shareholder friendly.

Michael Knott - Green Street Advisors

Okay. Any updated thinking in terms of the longer term waiting between office and multifamily?

Mitchell Hersh

We are anxious to continue to expand the residi [ph] platform. It’s too early to predict percentages, but I could tell you that outside of potentially this very, what could be enormously exciting opportunity that down in Jersey City on the Plaza 4 office, the bulk of the allocation capital is going to go into multifamily.

Michael Knott - Green Street Advisors

Okay, thank you.

Mitchell Hersh

You are welcome.

Operator

At this time there are no other questions in the queue. At this point, I would like to turn the call back over to Mr. Mitchell Hersh.

Mitchell Hersh

Well, thank you, operator. I want to thank all of you for joining us today. I thought it was a very informative call. We are clearly excited about the opportunity set in front of us with our new Roseland team working in tandem with keeping our office portfolio as fully leased with the highest level of service that we can and that we pride ourselves on. We are delighted that after tremendous effort on the part of our finance, accounting, legal and outside auditor team that we are able to get our 10-K filed this morning, a lot of work as you will see if you scan through it, as a result particularly of the Roseland acquisition. So we are proud of our accomplishments in all areas. We certainly look forward seeing many of you at the investor tour the morning of the 27th and I sent out invitations yesterday, our marketing team did that. Also for those who can’t attend or unable to attend we look forward to reporting to you again next quarter. Thanks and have a good day.

Operator

That concludes today’s conference call. Thank you for your participation.

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