Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Mack Cali Realty Corp (NYSE:CLI)

Q1 2013 Earnings Call

April 25, 2013 10:00 AM ET

Executives

Mitchell Hersh - President and CEO

Barry Lefkowitz - EVP and CFO

Analysts

Joshua Attie - Citi

Jordan Sadler - KeyBanc Capital Markets

Steve Sakwa - ISI Group

Jim Sullivan - Cowen Group

Operator

Good day ladies and gentlemen and welcome to the Mack-Cali Realty Corporation First Quarter 2013 Conference Call. As a reminder 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 first quarter 2013 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 talk with you about our strategy and changes we’re making in our capital allocation, as well as review some of our results and activities for the quarter and generally what we’re seeing in our markets. Then Barry will review our financial results. While we continue to actively pursue our diversification strategy into multifamily, we certainly remain keenly focused on our core office portfolio.

Clearly, the economic recovery in office has been frustratingly slow. Frankly, there is little new demand in financial, information, banking industries. As we all know governments are shrinking and there is still great deal of uncertainty in the economy, not the least of which sequestration, healthcare reform and the like.

To date, job growth and the demand for office space that it generates has centered around only a few key industries; technology, media, and energy, all of which frankly are somewhat region specific.

In New Jersey, this economic cycle has been somewhat more severe than in past cycles, given that some of its core industries, such as pharmaceuticals and telecommunications have been in retrenchment mode and so why is a multifamily strategy logical at this point in time?

Well first of all, Roseland is the real deal, the best in class. The platform allowed us to put in place expertise to be competitive in the multifamily sector with a very limited capital commitment to build a significant multifamily portfolio through both development and value-added acquisitions. This in contrast to buying someone else’s value creation pipeline.

We control some of the best sites with approvals for multifamily development in urban transit oriented locations with extremely high barriers to entry and lengthy if not impossible approval processes. Particularly in these choice locations in New Jersey, opportunities to develop and acquire multifamily assets are real time, versus the opportunity set in the office sector which will likely be slower to emerge.

The locations and assets that we control has a resident population that often is a renter of choice, not a renter of necessity. The income levels of the demographic often average well above six figures and the rents achieved by our Roseland platform outperformed virtually the entire peer group on an empirical basis. This is due to attention to detail, high quality amenitized assets, and tenant focus; just like Mack-Cali.

As part of our strategic shift, we will continue to improve our capital allocation to improve and enhance shareholder value. At a point that I would term mid-cycle spread equalization, where As and Bs are compressing, now is the time to recycle out of non-core assets and also take advantage of the opportunity to do 1031 exchanges.

In the office sector, we will continue to sell off no-growth assets as well as monetize value creation, such as a sale that is closing today, or an asset in excess of $72 million, a very profitable sale for Mack-Cali. By doing this, we will improve the overall quality of our office portfolio as well.

In some instances such as a planned joint venture with several Pennsylvania buildings, we will continue to retain a carried interest in a joint venture so that without any further capital commitment on the part of Mack-Cali, we will retain the ability and harvest future value in the assets.

Our conservative balance sheet in combination with these asset sales and retaining cash through our recently announced dividend reduction, some $60 million annually in the dividend, will add fuel to our multi-family platform.

Let me now review our results for the first quarter. FFO for the first quarter of 2013 was $0.63 per diluted share. We had healthy leasing activity with a total of more than a 1 million square feet of leased transactions, including, about 246,000 square feet of new leases.

Our retention was 55.9% of outgoing space and this modest percentage is reflective of the demand trends I spoke of before in connection with corporate right sizing and consolidation. We ended the quarter at 86% leased, down from last quarter's 87.2%.

Rent on renewals rolled down by 5.8% for the quarter on a cash basis, compared to last quarter's 4.4% cash roll down. Remaining lease roll-overs for 2013 are only 6.2% based rent or about $37 million. Our leasing cost this quarter were $3.30 per square foot per year down from last quarter's $4.11 per square foot per year.

Despite the challenging environment, our portfolio continues to outperform most of the markets where we operate. With our leased rates succeeding market averages in Northern and Central New Jersey, Suburban Philadelphia, Washington DC and suburban Maryland.

However, we have adjusted our guidance and tightened the range to $2.37 to $2.53, down $0.05 at mid-point to reflect both the top line compression due to occupancy and rent pressure along with some $0.02 or $0.025 of dilution related to accelerating asset sales.

Having acquired the Roseland Platform at the end of 2012, we have accomplished a great deal so far. During the quarter, we expanded our multifamily residential portfolio through the following acquisitions. In January, we acquired Alterra at Overlook Ridge IA in the Metropolitan Boston market for approximately $61.3 million. This luxury multi-family property contains 310 rental units in the master plan community of Overlook Ridge in Revere, Massachusetts.

Then in April this month, we acquired Alterra IB, the second segment of Alterra for approximately $88 million. This multifamily luxury property contains 412 units and both were developed by Roseland in the mid and late 2000s. Alterra is a wholly owned asset of Mack-Cali.

In March, we marked our entry into the Washington DC multifamily market, where we entered into joint venture with a fund advised by UBS and acquired the 828 unit multifamily property, Crystal House in Crystal City section of Arlington, Virginia for approximately $262 million.

This a value-added acquisition where we are very confident on the ability to continue to lift rents in the existing facility, the two 12 story towers as we do cosmetic improvements and as well we bought both the fee on the ground and the development rights on the property for another 295 units of multifamily residential.

As we have discussed previously, we have active developments with institutional joint ventures at Port Imperial in Weehawken and west New York, New Jersey, in East Boston, Massachusetts. We have also commenced construction on the first phase of the Overlook 2 project in Malden, Revere, Massachusetts and will soon commence construction on projects in Moorestown, New Jersey and Eastchester, Tuckahoe in Westchester County, New York. As well, we are in zoning states for projects in Wayne, New Jersey and Freehold, New Jersey.

With respect to repurposing Mack-Cali assets, we are increasingly active. We are under contract right now to sell a 28 acre parcel in West Windsor, commonly known as Princeton, New Jersey to a lifestyle company. This is monetizing our land inventory where alternative uses such as retail amenities, frankly to office buildings and its occupants make more sense in today’s economy than holding the land for future office development. This is similar to what we've done with the Wegmans transaction in Hanover New Jersey.

Repurposing for multifamily and mixed-use is also taking shape, part of the initial strategy of the Roseland acquisition. We have developed preliminary plans for multifamily and mixed-use conversions on one of our Essex County New Jersey properties, a Bergen County New Jersey site and two parcels of Mack-Cali owned land in Westchester New York.

We are evaluating many other properties for incremental additive and repurposing of the assets to include multifamily, including the overlay zoning in several communities that will give us future rights to develop multifamily residential.

Regarding our strategy of recycling our capital out of non-core assets, already in the second quarter we have sold 19 Skyline Drive in Hawthorne New York. We sold the sold the vacant five-story 248,000 square foot building to New York Medical College for about $16 million more or less.

This asset would have likely required reinvestment of more than $20 million to take it to stabilization depending on demand driving the marketplace. So clearly it made more sense to sell asset to the neighbor and redeploy the capital into our initiatives.

We have six additional properties on the contract for sale in various stages of due diligence. Most have already cleared due diligence, and we expect to have closings in the upcoming quarters. We are also evaluating many additional assets for recycling capital and that we also expect to talk about in quarters to come.

Turning to office leasing, we have had some significant success but I am not sure that they necessarily reflect a trend in the market. In Suburban Maryland we signed a long-term lease with & Associates. Interestingly, Bozzuto is a very well respected diversified residential real estate company dealing in a multifamily sector perhaps some synergies there over time.

We signed a lease for over 74,000 square feet in our capital office part in Greenbelt, Maryland to serve as the new headquarters for Bozzuto & Associates. We have a long list of renewals that I’m proud to say we accomplished in the quarter and you can refer to our filings and press releases for more details on those renewals.

And notably, low holding corporation of financial services firm signed a new lease for over 22,000 square feet at 125 Broad Street and Downtown, Manhattan and I’m pleased to tell you that this lease now bring our condominium interest in net building of 525,000 square feet to 100% occupancy.

On another note, Mack-Cali continues to manage its properties with a keen eye toward energy efficiency and sustainability best practices. The earlier in the week we announced that 105 Eisenhower Parkway in Roseland, New Jersey was awarded a LEED-EB OM Silver certification from the United States Green Building Council.

This building now joins 106 Allen Road in Bernards Township and 8 Campus Drive in Parsippany as just a handful of multi-tenant buildings in the entire state of New Jersey to achieve this prestigious award. Obviously the award recognizes maximized operational efficiencies with minimized environment impact.

During the quarter we also have continued to be awarded, Energy Star designations in our properties recognizing superior energy performance and all of this combined allows us to create efficiently running buildings and we can do our part in reducing the carbon footprints of our assets.

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

Barry Lefkowitz

Thank Mitchell. For the first quarter 2013, net income available to common shareholders amounted $11.6 million or $0.13 per diluted share as compared to $25.8 million or $0.29 a share for the same quarter last year.

FFOs for the quarter amounted to $63 million or $0.63 a share versus $74.5 million or $0.74 a share in 2012. Other income in the quarter included approximately $965,000 of lease termination fees as compared to 6.8 million for the same quarter last year.

Same store net operating income which excludes lease termination fees decreased by 5.1% on a GAAP basis and 10.2% on a cash basis for the first quarter. Our same store portfolio for the quarter was 29.7 million square feet, our unencumbered portfolio at quarter end totaled 237 properties aggregating 24.8 million square feet of space which represents about 80.7% of our portfolio. At March 31st, Mack-Cali's total undifferentiated book assets equaled $6 billion and our debt to undifferentiated asset ratio was 38.1%.

Company had interest coverage of 3.1 times and fixed charges coverage of 2.7 times for the first quarter of 2013. We ended the quarter at approximately 2.3 billion of debt which had weighted average rate of 5.68%.

Currently we have $217.5 million outstanding on our $600 million revolving credit facility and expect to reduce that by $70 million with the upcoming sale of 55 corporate in coming days. We adjusted our FFO guidance for 2013 with the range of $2.37 to $2.53 a share.

At the midpoint our guidance assumes leasing starts of 1.5 million square feet versus scheduled expirations of 1.7 million square feet for the reminder of the year. To project year end, or lease percentage of 86% which is about where we are today.

Additional development investment of about 40 million for wholly owned and joint venture projects, including the completion of phase 2 for Wyndham Worldwide and Barsiphoni and the startup of multifamily residential joint ventures in Jersey City.

And we also look at additional acquisitions of about a 100 million for the rest of the, mainly multifamily properties for the remainder of 2013. We project property sales of about $215 million of which $25 million have closed to date including work has closed in April and same store NOI down around 5%.

Please note that under SEC regulation G, concerning non-GAAP financial measures such as FFO we are required to provide an explanation of why we believe such financial measures are relevant and reconcile them to net income, available on our website at www.mack-cali.com or our supplemental package and earnings release, which include the information required by Regulation G as well as our 10-Q. Mitchell?

Mitchell Hersh

Operator with that we will now take questions.

Question-and-Answer Session

Operator

Thank you so much. (Operator Instructions). We will go first to Josh Attie with Citi.

Joshua Attie - Citi

Can you talk about some of the larger explorations in the officer portfolio this year and also maybe next year? I think you have Morgan Stanley for 300,000 square feet this year, U.S. Life and also AT&T next year. Maybe just tell us which quarter some of these expire and also what the plan is if are you have opportunities to backfill some of these space or these are redeveloping repurposing opportunities?

Mitchell Hersh

Sure Josh. Relative to the AT&T lease exploration, it is our expectation of entering into renewals immediately. We’ve been working with them for some period of time and we have documentation out to them, lease amendment documentation extending their leases at 30 Knightsbridge. We’ve done extensions now in Paramus. So the AT&T situation appears to be moving in a very positive direction.

Relative to U.S Life which is component of AIG, we are finalizing literally as we speak, a lease renewal with AIG in approximately 74,000 and change square feet in the 180,000 foot building. We have a lease behind that with a new tenant for about 25,000 square feet and we’re in the final throws of lease language on that. So we expect that more than 100,000 feet of that asset will be leased and of course AIG will allow for no downtime essentially on their current lease.

We are also on that property seeking overlay zoning. We have met with the municipal officials and we have formal applications and very favorable indications from them that we will get multifamily overlay zoning and a small modicum of retail zoning since it’s a corner site and a very premier location in Neptune New Jersey. So we will have the opportunity to do other things with that site in the future.

As far as Morgan Stanley is concerned, we have also entered into some extensions with Morgan Stanley, some of the former Smith Barney retail units in a couple of our buildings. We are well along with them on a renewal and frankly a consolidation that will involve more space in Short Hills. And so that’s moving forward in a very positive way. We fully expect to complete that.

In Harborside, where Morgan Stanley has reconsolidated into 1 New York Plaza and so we are in the process of approximately 225,000. We have some of that re-leased but about more or less 225,000 square feet at Harborside that we are actively marketing for lease.

The following year we really have now major explorations of any singular tenancy until frankly the beginning of 2015. And that would be the Prentice Hall Pearson occupancy in Upper Saddle River. We have advanced plans, that we have some interesting multifamily and mixed-use developing concepts for that particular location.

I have personally, along with the Roseland team been working quite closely with an Institution of Higher Education to potentially work with us on the redevelopment of that site. So there is a good deal happening there.

As far as other repurposing, we are in the preliminary stages of entering into applications in Short Hills with our current Roseland headquarters, Roseland Property Company headquarters to repurpose that land in combination with some of our parking lot of the office building 150 JFK into a mixed use multifamily development.

So we have a lot going on and very cognizant of our lease aspirations and have been working in the manner I have indicated to accomplish renewals in most instances and re-purposing for example; in Burton County and the Upper Saddle River situation, where we know that in fact that tenant will ultimately leave the premises. Is that the kind of coverage, Josh?

Joshua Attie - Citi

Yes, I am sorry but if you could just clarify the Morgan Stanley lease?

Mitchell Hersh

Morgan Stanley…

Joshua Attie - Citi

It sounds like you think about 225,000 of that is going to come back to you?

Mitchell Hersh

In Harborside, yes.

Joshua Attie - Citi

Okay, and can you remind us the timing of that; during this year?

Mitchell Hersh

Yes it’s a one year away event.

Joshua Attie - Citi

And one separate question on 55 Corporate Drive based on your comments; it sounds like you are going to sell that in a pretty nice gain versus what you develop to that? Could you remind us what the development yield was?

Mitchell Hersh

The development yield originally was about 9% on leverage approximately. It was a $50 million roughly and it’s being sold through over 72, closing great current today.

Joshua Attie - Citi

And you have an opportunity to 1031 that tax gain?

Mitchell Hersh

That's a wholly owned asset and we have also used our Alterra acquisition in Boston which is wholly owned and reversed exchanges and so we have so far and I expect this to be the case gone forward very efficiently dealt with; contributed assets that have or assets that built in gain.

Operator

Your next question will come from Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

I want to just circle back on the development pipeline a little bit; first I didn’t hear; I may have missed it on Jersey City; the plan with the Iron state development what the is status there. So, an update there would be helpful and then just an general comment surrounding the overall scope and scale of the development pipeline, it sounds like there is a lot of repurposing and obviously there has been a number of starts and what the capacity is and how big do you want to see that gap?

Mitchell Hersh

With regard to the Harborside Plaza 7, URL Development as we call it with Ironstate, actually we are ready to go, we are finalizing all of the bids, hard-lining all the bids and leveling them at this point. We have applied for certain incentives and those I expect and those deal with some legislative issues in the state of New Jersey that I am hopeful will be dealt within the next 30 to 45 days and it’s important to us to see the completion of that exercise and that’s all I am going to say about it before we actually can commence construction on that project that’s about a quarter to a $1 billion project.

It looks like we have locked up very satisfactory, very attractive I should say long-term both construction and permanent financing with a well-respected insurance company provided we can get this incentive from the state and so that’s what I am going to say at this moment about that project.

Other than that, we have about a billion dollars of development with various levels of interest, much of that is our joint venture, opportunities in the Waterfront here at the Waterfront in Boston where the capital commitments on our part are quite limited, actually we would like to put more money to work and we have significant fee income being generated by those joint venture developments in the form of developer fees and then extending onto management leasing fees and so we are concentrating on that most of the financing for those projects is in place, construction loans, to many firms and again primary equity being furnished by institutional partners. In total, it’s including Harborside, I would say, it’s about $1.25 billion in total aggregate development in various stages at this moment.

Jordan Sadler - KeyBanc Capital Markets

It’s helpful and then just one on your 30 million square foot primary portfolio. You made the comment and this has been a case for a while that the office recovery is frustratingly slow and you also had some successes recently but they are not necessarily a trend, and you also did comment about New Jersey being a little bit weaker.

I guess I'm curious, are you seeing anything of a recovery. Obviously there is a lot activity from a construction perspective going on in New Jersey. I don’t know if it’s started to translate into increasing economic activity but also now we saw a job print in New Jersey that looked a little bit encouraging recently. So I am just curious are you seeing anything there on the economic side that sort of could lift your core portfolio?

Mitchell Hersh

Yes, look the jobs statistics that actually I had seen and you were kind enough also to send them to me, certainly a positive statements, but I would tell you that much of that job creation was in the manufacturing and industrial segment of the economy and the leisure and resort and healthcare segment of the economy, which has quite frankly limited impact on the jobs necessary to create more incremental demand in office buildings.

The office building demand or the job picture with respect to jobs being created in the entire metropolitan region, not only New Jersey but New York City is generally flat. We continue to see a lackluster demand however you continue to see flight to quality; I know it is a cliché but it is true; And companies looking to retrench, consolidate, become more efficient, densify occupancy and those are currently the opportunities in the marketplace.

I think that the recovery in the office segment is still going to take a while. Suburbia is a little more stayed than some of the urban centers for the obvious demographic shifts we have talked about in terms of access to public transportation.

We still talk to many companies that are looking to consolidate in suburban locations where we think we have opportunities going forward to acquire or retain their occupancy with us. These are companies that are not interested in moving from their suburban campus locations to high density locations either on the waterfront door in New York City. But it’s slow to come and the job report the other day is a hopeful sign. It gives us generally some cause for optimism and but this will take a while.

Jordan Sadler - KeyBanc Capital Markets

One last one if I may, I noticed that you guys upped the sales activity guidance and I’m curious about the potential to accelerate that and even further, given sort of your commentary and the fact that there seems to be quite a bit of institutional capital that actually is interested in suburban assets?

Mitchell Hersh

I mean the institutional capital really, there is a bifurcation. The institutional capital is more inclined to look at an asset like 55 corporate, where there is an income stream albeit somewhat modest on a yield basis given the pricing levels and the cap rates that are being paid for that sort of long term cash flow from a very high grade corporate grade tenant and we haven’t yet seen a major way of institutional capital in the traditional suburban asset.

There is some. We sold our interest in One Jefferson recently to a private REIT if you want to classify that as institutional capital and that’s in fact a law firm lease that, relatively they had about 13 years running on law firm credit and we got a good price that.

We have another asset being held for sale with a very high end, it’s an industrial building that years ago we converted to a corporate headquarters in part. Part of it is still a warehouse and we have a state pension funds advisor under contract by it at a very good pricing level for us.

But I would say that your more traditional suburban office building with lot of lease rollover risk and lease up risk, the appetite for that is more the entrepreneur, the local private equity players that feel confident that they can get financing and are hoping for some big futures and then hope that they can flip it in three or five years for profit. So there's really a very bifurcated capital market for the suburban type product.

Operator

And we'll now go to Steve Sakwa with ISI Group.

Steve Sakwa - ISI Group

Mitch, I just wanted to see if you and Barry could, I just want to make sure we've got our numbers straight here as it relates to developments spend, acquisitions, dispositions and then kind of what that means potentially for equity or no equity to the extent that you've cut the dividend and have obviously created more additional free cash flow. So if I heard you right, I think you said $40 million of development spend, including your share of JV assets, 100 million of acquisitions and 250 of dispositions, is that.

Mitchell Hersh

215, we said.

Steve Sakwa - ISI Group

215, okay. Would you be able to give us kind of a blended cap rate on that disposition because you are selling some land and some empty buildings which are effectively zero cap rates and then you may be showing some.

Mitchell Hersh

It's part because as I said in my comments that some assets like Sky, Skyline Drive where we didn't want to put the incremental capital in, because it would never make economic sense to do it. It was an empty building that IBM, their lease expired, they moved back to a corporate campus. So a cap rate on that is meaningless and I'm not looking to be glib about it, it's just that I don’t to distort the picture.

Everything has its own value. The cap rate on the sale of 55 corporate was slightly, it's about 6.2% on in place income. So that gives you a picture of what a well leased high grade credit with a very high end asset can command in the marketplace.

I would say that anything else other than to say an average cap rate of 8% or 8.5% on a traditional suburban building would be somewhat distortive because it really depends on the income stream, the leasing risk and the capital needs that could accomplish stabilized occupancy.

Steve Sakwa - ISI Group

Mitch, I appreciate that and I understand I think. What I'm actually trying to help is understand and maybe help the investors, there may be less dilution from your asset sales than people think, because some of the buildings that you're actually selling aren't really throwing off any income today. So if you're going to get cash, you're not going to give up any NOI if people just put a generic 8 in on $215 million, they’re overstating the dilution you may incur from asset sales and I’m trying to really get to how much of your asset sales is kind of non-income producing and how much of it is more stabilized bucket.

Mitchell Hersh

And that’s very fair and I would say to you that out of that total $215 million probably at least a third of it is either under leased or no income in place, like 19 Sky. So, at least a third of it is incremental positive cash flow because it has no NOI in place today.

Steve Sakwa - ISI Group

Okay that’s helpful. so I guess given all that and given sort of where the balance sheet is and the fact leverage is ticked up, how do you think about, do you need equity or are you looking at our capital plan today and saying, with the dividend cut with the accelerated disposition, unless we were too materially accelerate the development pipeline short term that there is no equity need on the balance sheet today?

Barry Lefkowitz

Well, first of all we would like to raise equity at some point. Do we need it? No, not necessarily. We have raised our leverage to 38% from 34% a year ago quarter-over-quarter. So we’ve raised 400 basis points but we still have ample coverage. We’re bringing in cash on these sales, currently with this sale today, with this 140 million or 150 million of cash and a lot of room on our leverage at this point, should we choose to do that.

So the answer is that given the 16 additional cash from the dividend on an annualized basis, we have capacity clearly to more than we have on our plate today. But certainly the goal is that as the investors and with the help of the analysts understanding the strategy and hopefully embracing it, that it will reflect in multiple expansion like some of our strictly suburban office peers have seen and allow us access multiple forms of capital going forward.

Steve Sakwa - ISI Group

Okay and then just last clarifying question. I think you’ve mentioned the kind of $1.250 billion of total multifamily development that’s kind of in the hopper. What roughly percent share is Cali of that, sort of a $1.250 billion.

Mitchell Hersh

Well out of the $1 billion, Mack-Cali is I would say roughly 25% more or less, and we can go through each JV if you want but I would say on average that with no capital requirements, highly promoted interest in what we are doing, the value-added acquisitions where we have done them was, I know we were talking development but the value-added acquisitions are very highly promoted like the one we did in Washington where effectively we get two times our interest, two times our money achieving a modest threshold on IRR.

So I would say that on a $1 billion, 25%ish with literally almost no capital investment, couple of guarantees here and there for completion and land guarantees, that kind of thing. And then on the Harborside project, we own 85% of that. We expect that our financing as it looks today, coupled with what I talked about briefly before about this legislative initiative, should represent about 35% of the total. Plus we are getting a land contribution basis in the partnership of $30 in FAR. So that’s about $25 million on the development. So it very limited equity required on our part.

Operator

Your next question comes from Jim Sullivan with Cowen Group.

Jim Sullivan - Cowen Group

Mitch and Barry I just wanted to be clear I guess on the same property NOI. Previously I think you had talked about a range of down three to down five and I think the new guidance assumes simply down five, it wasn’t a range. Is that the case?

Mitchell Hersh

Yes, we believe that it is going to be closer to five and we tightened up guidance, that’s what we built into it. We’ve kind of tightened up the range, if you will. So I would say at this point it’s going to be closer to five than three.

Jim Sullivan - Cowen Group

Okay, and I believe you said that occupancy, you expect the current level of occupancy to be retained through the balance of the year?

Mitchell Hersh

That’s right. We are hoping to grow the occupancy as we move through the year but it’s somewhat cyclical as you know, so there will be peaks and valleys but we think we have kind of stabilized at this 86 as a low point.

James Sullivan - Cowen Group

Okay and then this is maybe a question; maybe more for Barry but the straight line rent number in the quarter was certainly a good deal higher than we had in our model and I wonder if you could talk to that and maybe give us some guidance as to what the full year straight line number is expected to be?

Barry Lefkowitz

The straight line rent in the first quarter reflected several large leases in Jersey City that were on free rent that burn off, going forward we would expect that number to come down more into the $3million to $4 million range going forward per quarter.

James Sullivan - Cowen Group

Okay and then last question from me, but on Harborside 7 and the correct me if I am wrong Mitch but I thought historically that you had suggested or maybe implied that when the financing would be put in place, there was a possibility perhaps to bring in in some private equity to invest in that project. Is that happening or not; can you give us an update on that aspect?

Mitchell Hersh

It’s premature to talk about that at this juncture. There are moving parts. We finalized the assets in terms of the plants, we are ready to go subject to how our being successful with the initiatives I talked about with the state and completing the financing. Once that can be achieved, we can certainly and we will look at the possibilities of taking advantage of the value creation there and looking at an institutional partner. But it’s something that is premature right now.

James Sullivan - Cowen Group

Okay and then if would just remind me; I saw today that Vornado announced that they had sold their interest I guess in downtown crossing to Millennium. You guys have a share of that; if you could just remind me what the amount of capital that would be coming back to you and the timing?

Mitchell Hersh

It was about $13.5 million. It about pars out for us after everything with all the costs and the impairments and what not. We end up on a valuation basis at a about par.

James Sullivan - Cowen Group

You mean par relative to book?

Mitchell Hersh

Yes.

James Sullivan - Cowen Group

And what's the timing on that?

Mitchell Hersh

That's now. It's done.

Operator

Next, we will hear from Michael Knott with Green Street Advisors.

Unidentified Analyst

(Inaudible) here. Do you see yourself expanding further in to DC metro multifamily?

Mitchell Hersh

Well, we know we are going to expand in connection with the development that we are going to undertake for the plus or minus 295 units. We are looking at another site right now where we have been brought in to look at it from another publically traded company that has asked us to take look at a particular site that they have. They are in a different segment of the property sector and so I would say that the purpose of having gone into that market is to establish a platform and expand.

We are also by the way, somewhat advanced in taking the land that we owned at Capital Office Park where we bought the land. We had an option to purchase it when we bought Capital Office Park from the contributors and we exercised that option at a relatively modest per square foot on a buildable basis and it’s right next to the Federal Court House and we are in the process of seeking zoning approvals to develop number of hundreds of units of multifamily on that site. So that also would be considered in metropolitan Washington marketplace.

Unidentified Analyst

I guess given the defense budget cuts that are coming and high growth ramping up in DC metro particularly and also in Northern Virginia, how did you get comfortable guiding in there?

Mitchell Hersh

I got comfortable by visiting the site on several occasions with my team of Marshall Tycher and his son Jack who live there when he went to school and thus was instrumental in sourcing the opportunity for us and looking at the rent roll and finding that a large percentage of the rent roll consisted of healthcare professionals that are involved in all of the medical centers that surround the area and graduates students in the universities that surround the area that have very young families at this point and really taking a very close look at the income levels and the demographic of who were renting to and who are peers because of the ability to access software and understand what are our peers were doing and found that as much as it’s coincidental that it were interesting that if you look out the window from anything above let’s say the fourth or fifth floor apartments in the two towers you can see the Pentagon, you can walk to the airport, but that we had extremely limited occupancy of anybody who worked at the Pentagon or the airport. And so we felt very comfortable that the interdependency on the defense industry based on the historical profile of that apartment complex was very limited.

Unidentified Analyst

Okay. And I guess on, one more question I am trying to understand your same-store property expenses, I guess this quarter they were up about 6% and they have generally been lower recently but looking back to the mid-2000, you guys have had extended periods where you have got mid-single-digit to high single-digit property expense growth and I am trying to understand just what is driving that? Is there something unique about how your leases are structured that makes you more exposed to expense growth or or any clarity you could give there would be helpful.

Mitchell Hersh

Yes talking about the expenses first of all expenses and how it reflects on the performance and how it reflects on NOI is a result of base year composition number one, and depends on a point in time in which a base year for a tenant is established.

And so if the tenant has a good fortune of having established in a year for example where snow removal is relatively high, they get that advantage and they may never experience escalations as a result of that and therefore that would fall to our bottom-line.

Utility expenses, some were set when utility expenses fell off some. Similar with real estate taxes some real state taxes were set on high basis, some were set when we had the advantage of maximum appeals. So they fluctuate. Operating expenses and services are somewhat dependent. We have labor contracts for example on cleaning with 32BJ and so we have to pay additional contractual labor increases.

If we don’t the ability to call back to a tenant because of its particular base year, obviously that slightly erodes the bottom line. So, there are lots of variables that comprise how we can recover expense increases but the truth of the matter is things are more expensive today than they were in 2000, which is what you refer to and labor increases continue to escalate. That answers your question.

Unidentified Analyst

Yes.

Operator

We’ll now go to Joshua Attie with Citi.

Joshua Attie - Citi

It was helpful to go through some of these development and sort of multifamily acquisitions and how you are thinking about it and it’s sort of good to hear that I guess there is less capital from your share, but as I guess the construction loans and the way the funding is working but I guess, how do you think at the corporate level because as you think about the multifamily deals that you just did, you put on high leverage on those assets because financing available? Obviously at the corporate…

Barry Lefkowitz

Let me clarify that. We didn’t put any leverage on Alterra. We were moving in a certain direction but in looking at that we have a conviction, we’re developing right next to that now on Overlook, the market is very strong there and we believe that our acquisition yield is going to be, let's just say over 6% and our corporate debt if you will is call it 3.75% on a 10 year piece of paper versus a mortgage that’s going be somewhat higher and in the residential set that you’re going to have a number of years of no amortization but interest only payments and no amortization. But the rates are going to higher, so just in the simplistic way of looking at it, you’re looking at a 6 plus yield with a cost of corporate funds of 3% and call it 3.25%.

Mitchell Hersh

They’ve got a good positive spread there.

Joshua Attie - Citi

But I’m just thinking about as you’ve embarked all these developments, obviously while your equity funding may be reduced by the structure, your share of the overall project and eventually there are going to be big construction loans on it. Your share of capital sort of raises.

Mitchell Hersh

Right, I get it. So let me just it with an empirical example. In Washington and again notwithstanding any sort of reports to the contrary, we bought the fee. We bought the ground lease fee when we bought the asset. And so we've got, call it a $0.25 billion asset that we acquired and we're 25% of the capital, and we get a promoted interest to bring us up to 50%. We get a 9% (inaudible) with UBS, we get all the fee income for both the operating management leasing and then development fees as we move into the development.

We placed agency financing on that, through a DUS. Our institutional partner wanted to do seven year financing. They had their own reasons and they were the majority partner. So we obviously did that and we had a good day in the market the day we closed the deal because Cypress was in turmoil and the bond market was strong and we locked rate with Fannie Mae at 3.17%.

So that gives you an example of at roughly call it 65-70% financing, of how you can also be efficient in the secured debt markets in multifamily. Now the wind is sort of at the back of the multifamily sector, and by the way, five years is interest only out of seven year.

Joshua Attie - Citi

Okay as you think about your comment that you'd like to raise equity at some point, but the multiple is not where and I guess your stock price is not where you'd like it to be. You have share repurchase program in place. so that sort of tells the market how you feel about your stock, perhaps you didn’t exercise in the first quarter, but I'm just curious as you think about where the stock trades, what do you think is sort of the main driver. Is it the fact that you believe there's an equity overhang on the stock?

Do you believe that the market not embracing the strategy of what you're doing and how much of it do you think is sort of the suburban office fundamentals that continue to be very weak and, I'm just trying to think about how you're looking at the stock and looking at the multiple and why you think it is where it is?

Mitchell Hersh

I think that the diversification strategy needs to be better understood and that’s why in my commentary today I chose to address the issue of strategic diversification somewhat differently than past earnings calls and I’m hopeful that to those that participated in the call today and to those that will participate in reading the analyst notes that are putout after today’s call that there is a better understanding of the opportunity set and the more rapid emergence of an opportunity set in multifamily and the ability to scale this up.

This is not a hobby. We have scalability here and that they will embrace the mixed property sector opportunities that we have. So that’s one. Yes, the suburban markets have been effected more than the urban markets and being next to New York City, which by the way is no panacea as you know lot of compression and lot of vacancies.

You can go to avenue of the Americas today and find seven blocks of space and access of 100,000 square feet. So there is lot of pressure in that market. I spoke to one of the preeminent brokers this morning in New York City on a 28,000 foot deal. He told me that it’s taken four months so far to get to the final lease comments and he personally spent four hours at a meeting yesterday in the city with city lawyers that bill at $1,000 an hour to try to get a 28,000 foot lease done in New York City in a premier building.

So there is no panacea anywhere in this business right now but being geographically next to New York City has I think negatively affected our multiple, because the perception, and to some extent the reality, I admit that because we see it along the waterfront, the demographic shift to more urban occupancy transit, mass transit, public transportation is quite real, particularly for young professionals and the companies that have expanded technology media, that’s their workforce, the echo boomers, the new millennium sort of workers and so I think that’s affected our multiple more than its affected our peers.

We operate pretty good sized portfolios in the same markets that some of our peers in the public REIT universe operate in. We compete for the same tenants and so it’s a mystery to me why their multiples are so much better when I know their economics cannot be better; because we compete for the same tenants in the same markets on the same deals.

So that’s what I could say to you, I am hopeful that as we articulate this story, as we put more wins on the board, more successes in connection with both disposition of non-core assets to bring in capital as we do more accretive incremental capital allocation going forward, that the markets will continue to embrace or will embrace that and then our multiple will expand and that we will have another form of capital available to us.

Joshua Attie - Citi

And then just last, just a question on, I guess it ties to the capital side, and certainly appreciating enlarging the deficient (ph) program up to $215 million in order to fund some of the uses that you have already started this year. Are you sort of thinking about maybe, sort of testing the market with more assets, so that if it takes more time for the market to turn around to where you think it should, that you can fund this growth that you want to do and have the assets at the ready to do it, so that you are not going to get yourselves in a further box about having opportunities that you view as very attractive but not having access to equity capital to fund it.

So test the market with $500 million of assets and pull the trigger if you need to, or else an equity overhang becomes even larger when we enter 2014, and you have another $200 million to $300 million of acquisitions or development that you want to embark on, on the multifamily side. So I'm just trying to think about where your head is at in terms of dispositions in lieu of common equity and what will be, very low multiple high cap rate today?

Mitchell Hersh

Yes, I think it’s an extremely intelligent question. We are looking at some significant, what I will call portfolio disposition opportunities. We have to be careful. There are lots of moving parts to those sorts of acquisitions, but we have identified certain of our, what I will call asset acquisition group that we think that we can generate what I'll call a programmatic acquisition opportunity in some of our secondary markets; and when I say secondary it's not that I am calling them inferior. I am saying secondary in terms of our core.

What we are not looking at selling is Jersey City. We are not looking at selling our major presence in for example Parsippany, Morris County; places where we really have dominant positions and can help shape markets as they begin to recover but we are looking at those opportunities and we may have term delusion as we are doing frankly in connection with some of the sales that we have, that are occurring right now, in exchange for the opportunity to have a comfort zone relative to the capital that we have available to us, so that we can fund our program in the multi-family space, that we can properly fund the capital needs of our rather significant office portfolio and hopefully this will all coalescent and gel into the market understanding that we are doing the right thing.

Operator

And gentlemen with no further questions at this time, I would like to turn the call back over to you for any final and closing remarks.

Mitchell Hersh

Sure. Well, thank you everybody. I hope everybody felt that this was a thoughtful earnings call, with a lot of exchange of ideas and that we have more clearly articulated the strategic diversification and the opportunity set that exist in what we're doing. We think it's immense.

So in closing we are going to keep doing what we are doing. We are committed to being the best in class office space provider within our markets. We are certainly looking at consolidating some of our markets and we will continue to have the capital available to us to provide solutions and keep our assets in the best of class condition, while simultaneously building on our diversification strategy in multifamily. And there, again, at the risk of redundancy, we have the best in class in Roseland.

And so, thank you all for joining today's call and we certainly look forward to reporting to you again next quarter and seeing many of you at Norte (ph) in Chicago in June. Thank you again. Good day.

Operator

And once again ladies and gentlemen, that does conclude today’s call. Thank you for your participation and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mack Cali Realty Corp CEO Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts