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Mack Cali Realty Corp (NYSE:CLI)

Q2 2013 Earnings Call

July 25, 2013 10:00 am ET

Executives

Mitchell Hersh - President & CEO

Barry Lefkowitz - EVP & CFO

Tony Krug - CAO

Analysts

Jordan Sadler - KeyBanc

Michael Bilerman - Citi

Michael Knott - Green Street Advisors

Vin Chao - Deutsche Bank

Steve Sakwa - ISI Group

Jim Sullivan - Cowen Group

Operator

Good day, everyone, and welcome to the Mack-Cali Realty Corporation Second Quarter 2013 Conference Call. As a reminder today's presentation 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. And I thank you for joining Mack-Cali's second quarter 2013 earnings conference call. With me today is Barry Lefkowitz, Executive Vice President and Chief Financial Officer, and for his first earnings call appearance, Tony Krug, our Chief Accounting Officer.

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

First, I'd like to review some of our results and activities for the quarter and what we're seeing in our markets. Then, Barry will review our financial results, and Tony will be available to assist in any Q&A in the financial area.

FFO for the second quarter of 2013 was $0.65 per diluted share. In that number it included some additional revenue, if you will, from some real estate refunds and some adjustments on fair market value liability. That was offset to some degree by our bond transaction done in May, and as you all know the higher than anticipated volume and rate sales and dispositions in the company.

And so, with that, we adjusted our midpoint guidance, which you saw in today's press release to a range of $2.32 to $2.42. Our previous midrange guidance was at $2.45 at our last earnings call.

Within the revenue composition, we had healthy leasing activity totaling over 1.3 million square feet of leased transactions that included in the second quarter 165 leased transactions. So, our leasing teams were working hard and working smart. To conclude 402,000 square feet of new leases, and the balance are primarily renewals, and some older generation space leased as well. This provided a retention rate of 64% of outgoing space. And so, we ended the quarter at 86.2% leased, slightly up from last quarter's 86%.

Rent on the renewals rolled down this quarter by approximately 6.2% on a cash basis, and 5.5% for all transactions on an aggregated basis. The remaining lease roll-overs for 2013 are only 3.9% of base rent or about $23 million. The leasing costs remain approximately at the same level this quarter. They were $3.37 per square foot per year and so they're trending in the same average as the last couple of quarters.

And so, despite a very challenging environment, certainly in the office arena, our portfolio continues to outperform all of the markets where we operate, our leased rates exceed market averages in Northern and Central New Jersey, Suburban Philadelphia, Westchester and Fairfield Counties, Manhattan, Washington, and suburban Maryland, a testament to the franchise and the hard work of our teams.

We have demonstrated our commitment to the strategy of selling or in fact joint venturing select office properties within our portfolio in order to largely sell-fund our diversification in the multifamily apartment sector.

Looking at some of the activities in the quarter, I'm pleased to share with you the fact that during the quarter we sold approximately $136 million of non-core assets. And so, in 2012, and so far in 2013, and I expect this to sort of be the cap at the present time, we've sold or entered into joint ventures to sell approximately $420 million of assets.

In April, we sold 55 Corporate Drive in Bridgewater, a brand new four-story 205,000 square foot property developed for Sanofi Aventis. The property was sold for approximately $72.3 million representing a significant gain to the company of over $20 million. We sold 19 Skyline Drive in Hawthorne, New York for approximately $17 million. This asset is located in the mid Westchester Executive Park. It was purchased by Touro Medical College.

In May, we sold Mack-Cali Airport in Little Ferry, New Jersey, a two-story -- basically an industrial building although part of the building is occupied by Falcon Jet -- that sold Falcon Jet as their corporate headquarters. This asset was sold to a pension fund adviser for $32.3 million.

In Clifton, we sold our only asset in that city for approximately $5.8 million, a 75,000 square foot building. 16 and 18 Sentry Park in Blue Bell, Pennsylvania, a 93,000 square foot building 16 Sentry and a 95,000 square foot building 18 Sentry. These assets were sold for about $19.3 million, and we retain a carry passive economic interest in the properties. The transaction was done with the same group Keystone who is purchasing the balance of our Philadelphia office portfolio. That's a transaction we announced a few days ago.

In Branchburg, New Jersey, we sold 51 Imclone Drive, which is a telephone switch building occupied by a part of Verizon, 63,000 square foot property sold to them.

In June, we recently announced the sale of 40 Richards Avenue in Norwalk, Connecticut, our only asset in Norwalk, 145,000 square foot building for about $16.5 million.

As we had previously announced, already in the third quarter we've sold Liberty Corner Corporate Center in Bernard's Township, New Jersey, 106 Allen Road. This four-story 133,000 square foot property sold for approximately $18 million. Fair amount of vacancy in that asset; our only asset in Bernard's Township in that part of Somerset County and we think it was a good transaction for the company and avoids long downtime and a lot of capital expenditures and leasing costs that would be necessary to bring that build to stabilization.

As we announced last week, a somewhat exciting transaction with Keystone Property Group. We entered into a joint venture agreement or an agreement to form various joint ventures with a fund sponsored by Keystone, very talented group in Philadelphia, to facilitate the sale of our suburban Philadelphia portfolio consisting of 15 office properties and three small land parcels for about $233 million.

We have a very strong relationship with Keystone and its principal Bill Glazer, and this afforded us to do a very exciting and we think value added transaction for both of us. It offers our Roseland subsidy an opportunity to develop additional multifamily properties that are in line with our strategy and reputation for building the best in class in residential visionary lifestyles, if you will, at the gateway to the Main Line in Philadelphia on City Line Avenue we will be able to develop two different properties, one that was previously controlled by Keystone and another that will involve a subdivision of one of the assets included in this transaction.

We'll have the opportunity to take these proceeds and deploy them into our strategic opportunities in the multifamily sector. This joint venture sale, if you will, represents about a cap rate of 9% on recurring income. However, if you strip out due to some large lease expirations that are looming and, frankly, partially unoccupied space, pharmaceutical companies that have sold their businesses in the wave of consolidation in that sector, so certainly no certainty as to renewal probability. So, if you strip out the CapEx and the leasing cost that we anticipate in year one going forward in that portfolio of some $10.50 million to $11 million, the cash flow yield on this transaction is 4.5% on the purchase price on the $233 million purchase price and 5% on the cash, because as you've seen from the release, we will be reinvesting about 10% of the proceeds back into the properties and have a 50% carried interest over certain return thresholds for both Keystone's equity and the Mack-Cali equity. And so, if you look at it from that prospective, the cap rate on the sale is approximately equal, if not lower, than the cap rate on several or the majority of our development projects that are underway in the Roseland subsidiary.

And so, during the quarter, we've moved forward and continued to build our platform in Roseland. We acquired or completed the acquisition of Alterra at Overlook Ridge in the Metro Boston area Revere and Malden, Massachusetts. This second phase acquisition includes 412 luxury rental apartments that were constructed by Roseland along with their partner at the time Prudential.

Our Roseland subsidiary officially broke ground on the 280 unit Riverfront, Riverpark at Port Imperial in Weehawken, New Jersey. We had a grand ground breaking there with the local and state and county officials. The 10-story building that just begun construction is the latest rental property developed in the southern portion of Port Imperial, which as most of you know is a mixed use master plan, water front development spanning two and a half miles directly across the Hudson River from Manhattan.

And so, if you look at the global sources and users, we sold over the recent past or certainly entered into contract to sell about $420 million worth of assets. We have an active pipeline right now that includes in our estimation about $344 million worth of Mack-Cali's share of equity requirements and that's if several transactions that we are working on go forward and we can't tell you at this time that they will, but we are working on several large scale opportunities. And so, in our recent and pending construction starts we have about $72 million of capital needs.

In term of users, we have several acquisitions that -- one that we expect to enter into a contract eminently and another that is under contract that would require about $63 million of equity, and so, between all of that that's about a $145 million. And we have deals that we are negotiating. Again, too early to say with any certainty that we will conclude them but certainly transitions that we're looking at totaling another close to $200 million. And so, we've put ourselves in a position with our asset, recycling, and disposition program of self funding our Roseland business at the present time.

With respect to office leasing, trends remain the same. Retention is strong, I mentioned 64%. Reflecting the fact that most tenants are staying in place, those that have experienced no change in their business plan are staying in their current premises with some refurbishing. Occasionally, there is an expansion. Occasionally, there is a contraction. But generally speaking, those tenants that have enjoyed relationships, long-term relationships with high quality landlords, like Mack-Cali are generally happy to stay in place and naturally we have to meet the market in terms of rent or pricing if you will.

Having said that, again I reiterate that we concluded 402,000 square feet of new leases, that's new business. And so, once again I have to commend our leasing teams for the great job that they have done in economy that we all recognize still faces significant head wins.

Moving on to financial activities, during the quarter we completed the sale of $275 million in 10-year senior unsecured notes at an interest rate of 3.15%. The treasury lock on that transaction in May, I believe it is May 8th, was at the time 1.66%. We've all seen the radical change in or volatility, if you will, in the interest rate environment since having done that transaction, that same 10-year treasury would be some 80 basis points more or less higher today. The net proceeds of that bond offering were used for general corporate purposes, working capital, and repaying some outstanding borrowings.

In addition, we recently announced few days ago the refinancing and expansion of our unsecured revolving credit facility. We had an impeccable execution of this facility. We maintained or retained our accordion feature, which allows us to expand the $600 million facility to a $1 billion, and that facility based on our investment grade rating, allows us to borrow on the facility at LIBOR plus a 110 basis points.

And so, these successful financing transaction certainly enhanced our financial flexibility going forward and being able to support all of the activity that we have between Mack-Cali's office portfolio and our Roseland subsidiaries multifamily portfolio.

With that, I will be happy to turn the call over to Barry, who will review our financial results for the quarter. Barry?

Barry Lefkowitz

Okay. We had a technical problem. So, I will start over again.

For the second quarter of 2013, net income available to common shareholders amounted to $23.1 million or $0.26 per diluted share as compared to $10.1 million or $0.11 per share for the same quarter last year.

FFO for the quarter amounted to $65.2 million or $0.65 per share versus $62.1 million or $0.62 per share in 2012.

Other income in the quarter included approximately $190,000 of lease termination fees as compared to $1.3 million for the same quarter last year. The results for period included $2.3 million or $0.02 per share in net real estate tax refunds as well as $1 million or $0.01 per share benefit from the mark-to-market of the Roseland contingent consideration.

Last year, we had $2.5 million in expense in acquisition cost and $4.4 million in early extinguishment of debt cost.

Same-store net operating income, which excludes lease termination fees, decreased by 1.6% on a GAAP basis and 2.7% on a cash basis for the second quarter. Our same-store portfolio for the quarter was 29.7 million square feet. Our unencumbered portfolio at quarter end totaled 237 properties aggregating 23.9 million square feet of space which represents about 80.3% of our portfolio. At June 30, we had total undepreciated book assets equaled $6.1 billion and our debt to undepreciated asset ratio was 38.8%.

The company had interest coverage of 3.1 times and fixed charge coverage of 2.7 times for the second quarter of 2013. We ended the quarter at approximately $2.3 billion of debt which had weighted average rate of 5.64%.

During the quarter, we issued $275 million of 3.15% 10-year notes which yielded the investors 3.41%. Last week, we extended our $600 million unsecured credit facility for a fresh four-year terms, and based on the current ratings the spread was reduced by 15 basis points to 110 over LIBOR and the facility fee was reduced by 5 basis points to 20 basis points. Currently, we have nothing drawn on the facility.

We adjusted our FFO guidance for 2013 with the range of $2.32 to $2.42 per share.

At the midpoint our guidance assumes same-store NOI declines around 4%, leasing starts of 800,000 square feet versus scheduled expirations of 1 million square feet for the reminder of the year. End of year 2013 lease percentage which reflects completed and anticipated dispositions around 86%, acquisitions of about $230 million primarily for wholly owned and joint venture multifamily projects of which about 180 has closed to-date, sales of about $410 million which include the recently announced to sell our PA portfolio to Keystone, about $195 million has closed to-date.

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 at 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

Thank you, Barry. So, in closing, I hope that you can see that we've continued to demonstrate our commitment to the transition of Mack-Cali from a future office and officeplex space provider landlord of choice in that arena to be equally a landlord of choice in the multifamily arena with our Roseland subsidiary. I've identified the fact that we do have a full pipeline in what we are undertaking right now at Roseland, continue to source new opportunities and at this time we are able to capitalize on those opportunities by self-funding through the disposition program that we've engaged in over the last year and a half or so, very successful in my view.

And so, we're very excited to look at the future. In this transformation, we've moved pretty aggressively pretty quickly to accomplish it and we have a lot to look forward to in the future.

So, with that, I will now ask the operator to setup the queue for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will go first to Jordan Sadler with KeyBanc.

Jordan Sadler - KeyBanc

So if I can get a little bit of clarity on sort of what's keyed up and what's in guidance, you guys went through a few numbers in terms of new investment. I think I'm a little -- I'm more clear on the disposition side, the $410 million essentially Barry you just mentioned with 1.95 close to-date. I'm more sort of interested on the acquisitions that are sort of embedded in guidance. And then, outside of guidance what just overall you kind of -- those numbers, what they are again?

Barry Lefkowitz

Well, embedded in guidance is the dilutive effect, if you will of the sales and disposition program that's been identified totaling a net of about $410 million, a gross of about $420 million. And so, that's all embedded in the current guidance that we provided this morning. In terms of what we have coming on stream, I think our filings have identified all of the development projects that that have currently broken ground and that will contribute to the income stream in the near term.

As I mentioned on the call, under contract on one and about to enter in a contract on another asset, which total about $90 million between the two that would have an impact in 2014. So 2013 right now, is reflective of the income adjustments as a result of the sales that have closed and the Philadelphia sale that we expect to close eminently.

Jordan Sadler - KeyBanc

That $90 million, those are gross value that's inclusive of debt, that's not an equity number and that's your share at a 100%?

Barry Lefkowitz

Our share is a 100%. The equity number is about $63 million. One of the acquisitions, which is a hard contract at this point, it was to our distinct advantage from a pricing perspective to assume it in existing mortgage to avoid a rather significant prepayment that the seller would have had to have provided, it's almost a brand new complex.

Jordan Sadler - KeyBanc

Are these along the water front in Jersey?

Barry Lefkowitz

Are these along? One is on the water front and one is in a transit hub.

Jordan Sadler - KeyBanc

And what type of cap rates are we seeing on apartment acquisitions?

Barry Lefkowitz

Well, the acquisitions, and again, these are both believe it or not relationship transactions. So these will be approximately plus or minus 10 basis points or 6% on an unlevered basis.

Jordan Sadler - KeyBanc

Six caps, okay. Can you -- and so, that's okay. So there's a little bit of delever. And those that $90 million is not obviously affecting this year's numbers in the model or in the guidance, so there is some delivering baked into the revision effectively to guidance. But can you may be give us a little more color on what you're seeing out there as it relates to the additional 200 of deals beyond this first 93 or 90?

Barry Lefkowitz

Yeah, sure. Most of what we're engaged in right now are development opportunities. Development, which is, what I was say is a great deal of certainty in terms of entitlements and tax benefits and that sort of thing. And that's about all I can tell you other than there are in our major metro markets.

Jordan Sadler - KeyBanc

And so, and the cap rate should be in the same range, plus or minus?

Barry Lefkowitz

Yeah, we anticipate cap rates in the range of 6% on a conservative basis.

Jordan Sadler - KeyBanc

And you dry powered today based on a pro forma basis is what?

Barry Lefkowitz

We have cash on the balance sheet of about a $130 million. We have an uncapped $600 million facility.

Jordan Sadler - KeyBanc

And you have some incoming proceeds?

Barry Lefkowitz

Correct. We have $201 million plus or minus coming in, in the near-term.

Jordan Sadler - KeyBanc

And the willingness to sort of utilize the line or to lever up a little bit, can you may be speak to that?

Barry Lefkowitz

Well, we'll utilize to the line if need be. We've a long cash at this point. So we're going to deploy that first.

Jordan Sadler - KeyBanc

Right. That make sense.

Barry Lefkowitz

Oh, sorry. In fact, the delivering as you've mentioned.

Jordan Sadler - KeyBanc

Right. But I mean is -- to these -- what the extent you close basically the first 90 and another 200 and you've got to deploy into the development, are you willing to sort of involve?

Barry Lefkowitz

I will.

Jordan Sadler - KeyBanc

And then, my last question is just on the -- I'm looking at the apartments and I don't know in comparing this quarters supplemental versus last quarter's supplemental on page 15, on the unconsolidated joint venture breakdown. And I'm looking at occupancies and I'm not sure if these are the same numbers, but I see decline in overall occupancy on those seven properties from $93.50 million to $94 million now it's been a 140 basis point declines, pretty consistent across all the properties with exception of may be Monaco. Can you may be give is a little bit of insight there?

Mitchell Hersh

Its seasonal situation. That's all that's reflected there and in fact, we look at that as an opportunity. These are traditional seasonal low drops in the resi markets.

Jordan Sadler - KeyBanc

Okay. And do you know what type of increases you're seeing on renewals?

Mitchell Hersh

We expect 3% increases.

Operator

Our next question comes from Michael Bilerman with Citi.

Michael Bilerman - Citi

Congrats on getting on all the sales done. Just questions on silly, just wanted to make sure I understood what was happening. So about $21 million of current NOI, you talked about $10 million to $11 million of CapEx as you've some vacancies coming, which I think I guess from your 4.5% comment you're effectively deducting the CapEx from the NOI and adding that to the base for the calculation. But what I'm trying to understand is, what is occupancies at 87, how much occupancy is going out, where does that $21 million of NOI go, for the fact that CapEx for a second, just so we can understand how that's trending?

Mitchell Hersh

Yeah. Well, we think that there is, at least from our perspective some wheel vacancy risk in a couple large tenants with near-term lease expirations one in '14 and above '14. And so, if we kind of look at the $10.50 million in order to maintain a trending NOI, if we were fortunate in finding absorption in those assets, we expect we would be spending about $10 million to $11 million on a recurring basis at least for the next few years to keep our current income stream, and as if we could find tenants to absorb that space.

Michael Bilerman - Citi

And that's not dealing with any of the existing vacancy at all?

Mitchell Hersh

What's that?

Michael Bilerman - Citi

That's not dealing with any of the existing, but portfolio is only 87% occupied today?

Mitchell Hersh

Correct, that's maintaining those tenant losses. And so, from our perspective on a cash flow basis, barring any unforeseen miracles, we would expect that it would be costing us $10 million or $11 million a year for the next two years.

Michael Bilerman - Citi

Right. And I guess another way to look at it is, there is 25 basis points of yield just as occurring to the basis as effectively over course of three years, if we're able to maintain the 21 and the 230 gross, up $30 million in three years, you've a $260 million basis what a buyer does with $21 million of income at that point and then, it trends back to a normalize CapEx, thinking about more sort of an IRR, EPS approach basis?

Mitchell Hersh

Yeah. And if that happens then we would able to payoff bulk of our press and sharing 50% of the ups on either refinancing or sales.

Michael Bilerman - Citi

And thinking about the long cash today and some of the opportunities on the apartment side. Can you talk also about the opportunity just in your stock, so when you had announced Roseland transaction, the board had setup a $115 million share repurchase program, last year you had executed $11 million at a price of $28 a share. Obviously, the stock today under 25, and had a hit of low of 23 in June. I guess, how do you think about the opportunity to buy your stock at an attractive price relative to being very aggressive in the transformation?

Mitchell Hersh

Well, I think that the part of the reason that the stock multiple has been so depressed is because of some degree of uncertainty with respect to a company that's in a transitional state. I have on the one hand moved quite aggressively and I think quite profitability in terms of disposing of our, what I will call well non-core or secondary market positions, so that we can fund this transition and create more certainty and reflect that to our stakeholders and our shareholders in both debt and equity that this transformation is working, that we have a full pipeline of opportunity, and that depending on how you view the math.

What we're selling is supporting on an equivalent basis of what we're building or buying in the multifamily resi market. And so, I know that it is a quick fix sometimes to buy your stock back in terms of providing a benefit to your shareholders. The strategy that we have, however, was to demonstrate to the markets and to ourselves that our asset base and our skill set and our relationships in being able to consummate, fairly complex but yet profitable transactions by our seller transactions, could accelerate the transition takeout the uncertainty and fund the wealth of opportunities that we haven in the multifamily sector.

And so, this is a medium to long-term strategy, and a directional change for the company. It certainly evolved as a result of the fact that the way companies use space and the amount of space that they use and the locations of where they use it in the office sector have gone through a pyridine shift and continue to do so and they continue to evolve. And so, that's a long way of saying that the funding mechanism was created to fund and build our platform and our strategic shift not to by our stock back, so that we could provide immediate benefits, this is a long-term gain.

Michael Bilerman - Citi

But does the board -- and I assume with some advice from the management did setup a $150 million plan for a reason and did execute $11 million of that plant at 28 bucks a share. So did something change between then and now, especially with the stock considerably below those levels? What changed in the board or --?

Mitchell Hersh

What changed is that we got -- we entered into a structural change in the company with a great team and a great platform, and the platform that we acquired has been operating in complete synchronization and harmony with us at the core office, the corporate part of the company. And moving quite nicely, seamlessly, aggressively, and building that platform we didn't have that degree of certainty when the board initiated or approved the stock buyback plan. Now, we have much greater opportunities to deploy the capital to build that platform.

Michael Bilerman - Citi

And then, just one other quick one the 6% on the acquisitions, is that a joint in yield or is that a stabilized yield?

Mitchell Hersh

Well, one property, one of those $245ish million about $46 million property is a brand new property that will set the tone for us in an expansion of our waterfront marketplace. That's brand new, it will be delivered to us free and clear of punch lists and any kind of lien and so forth covenants et cetera. And so, that we will be buying what we did there because of the relationship with the seller, the developer seller who we expect will be able to deliver us both some pads and some additional properties that's more of a -- it's not just a one-off transaction, it's a more global transaction, was in the interest of us taking some of leasing risk, we don't think there is much leasing risk.

We basically, present valued the stabilization period and reflected that in the price. We think we can stabilize the asset in about a year, so it's about 100 units or 100 apartments with some retail. And so, we discounted the lease up period, the stabilization period, and we reflected that in the purchase price. And the reason that the seller is doing this deal with us is because of a 40 year relationship with me and they have major holdings. And in today's kind of volatile and erratic environment particularly, in the debt markets and the interest rate environment et cetera, the seller wants to know that he has absolute certainty in the sale and so that's why he is doing that transaction with us.

Michael Bilerman - Citi

So thinking about that both assets?

Mitchell Hersh

The other asset we're buying at approximately 6% and it is stabilized.

Michael Bilerman - Citi

And that is interesting about the point that between those two; the development is how much of that $90 million gross?

Mitchell Hersh

They're equal in term of purchase price, but the one that stabilized comes with a mortgage that was some benefit plus total.

Michael Bilerman - Citi

So each of them is $90 million or they different?

Mitchell Hersh

Each of them is roughly half of $90 million.

Michael Bilerman - Citi

Half of $90 million okay. So as we think about redeployment of proceeds obviously like the $72 million that you've targeted for construction that say late 2014-'15 to when it impacts 45 and the 90 is a - -that will take -- that's probably going to go to 2015 NOI and then it sounds like the $200 million of potential which would cover all of the current cash and the expected proceeds is also likely for a new development. So, there will be just from a modeling perspective at the way the Street understands 2014 is going to reflect much more dilution until you get on the other side in 2015 where some of the reinvestments starts to pay dividends?

Mitchell Hersh

That's right. The opportunity set in the resi sector for us is the development sector and that's where we think -- with the what we're doing and what we hope to be able to do we can build into outsize returns. And so, there will be some period not being long on cash.

Operator

And from Green Street Advisors we'll go next to Michael Knott.

Michael Knott - Green Street Advisors

I'm sorry to make you clarify but it sounds like there was $200 million of potential opportunities that you're working on behind the 90 that you and Michael just went in through it on detail?

Mitchell Hersh

That's right.

Michael Knott - Green Street Advisors

And those would be more '14 closing as opposed to '13?

Mitchell Hersh

Well, notwithstanding the closings, they're development projects although we've modeled or targeted an acquisition target representing that $40 million but the rest are development opportunities that will be '15 income producers.

Michael Knott - Green Street Advisors

And then, can I ask you about Jersey City? Just curious if there's any update on the build-to-suit on that office side that you mentioned in prior quarters and then also just any update you care to share on the development project there Harborside?

Mitchell Hersh

Yeah. State of New Jersey in its infinite wisdom has been somewhat slow and I tell you I've been in constant communication with legislators. The entire incentive program in New Jersey under Grow New Jersey and the Economic Development Agency has reformed and remodeled the entire program, both in terms of grants under what's called the Urban Transit Tax Hub Credit which impacts our ability or impacts the timing with respect with respect to Harborside 7 which is our apartment transaction with Ironstate.

We're ready; we're shovel-ready on that project. There is a significant tax benefit that we expect and have been identified to receive by the EDA of the State of New Jersey as soon as this legislation is passed. It wasn’t in a funding apparently in the last go round and they could only provide funding on a limited basis for two projects of need in any one municipality. That funding was done in March. So, we had to wait for this legislation which every senator and the assembly know and that Ironstate, our partner, knows committed to have it done by June 30. Well, now it's July 25, it's still not done. The governor is ready to sign it, he's stated publicly. That needs to be done.

Now, that program that I'm referring to under EDA is a multifaceted program that affects what we call in New Jersey, the BEIP which is the Business Employment Incentive Program. The BRAG, which is the retention program that's all, being reformulated under this new legislation which will provide even more incentive, if you will, to employers to come to New Jersey and to domicile their workforce in New Jersey.

And so, I hate to say it, but it's like the Federal Reserve. There's a lot kind of in limbo that's waiting for this legislation to be passed. It's frustrating. I can't tell you how many communications I've had in conversations with the legislators who are equally frustrated because as with any political process there's always that want more and etc. I expect it to be done -- I had hoped that it would be June 30; we're ready to break ground on that project. We're done with our budgets. We have a financing commitment that's contingent upon this Urban Transit Hub Tax Credit and assumes the legislation is done; I expect we're good to go.

As far as the office tenants, there's a lot of -- like I said, there are a lot of benefits that are included in this program. Some of the consolidations that you've seen talked about at the, for example, the Hudson Yards across the river where Related is building and potentially others Brookfield, et cetera. Some of those headquarter relocations that are being discussed only include the front office. The operations centers, if you will, are still be New Jersey is still being very seriously considered and it's somewhat dependent on this program and that's a wrong way of saying, I wish I could waive the want but it's politics.

Michael Knott - Green Street Advisors

And then, I'm intrigued of the comment you gave earlier about a 6% cap rate on a stabilized property. Do you think that is a signal that cap rates have moved up for apartments or is that is something of a one-off deal?

Mitchell Hersh

Yeah, I think it's more of a one-off deal, what you still have assets trading in the city; you still have rent growth at least right now. You still have assets in the multifamily sector trading at 3.50, the 4.50. These are opportunities that we've in acquisitions because of a variety of factors, one-offs, like I said the certainty in one, fact that we're taking some lease up risk not a lot and in the other one again that certainty not only to the seller but to the seller's lender. And so, I think we're getting pretty good deals there.

Michael Knott - Green Street Advisors

And then, my last question basically about may be any preliminary thoughts on the outlook for 2014, things don't arrive, do you think it has a negative in front of it? Again, next year I know there's one big move out, sounds like conditions are stabilizing a little bit, just curious any thoughts you have on that question?

Mitchell Hersh

That it's a little premature Mike, we haven't analyzed that yet.

Operator

Our next question comes from Vin Chao with Deutsche Bank.

Vin Chao - Deutsche Bank

Just a follow-up on the cap rate question there, borrowings effectively that's sort of one-off deal, you mentioned financing cost on your last transaction, would be may be 80 basis points higher till today. Have you adjusted your sort of cap rate expectations in any way over the last couple of months?

Mitchell Hersh

Well, let me say this that interest rates have been somewhat volatile. But we've completed number one, the sales program and we're under contract in Philadelphia, but there hasn't been one re-trade, there won't be one re-trade on any of the sales, despite the fact that over that period of time there has been some volatility in the interest rate environment in the, as well as the vendors willing to assume some interest rate risk. So on the sales, we've seen certainty, we've seen clarity and conviction.

On the buy side, if you will, the agencies in the multifamily space are still there. Some of the development projects that we're looking at right now have some unique tax incentive type financing aspects to them. So we don't expect much volatility. We saw a slight move frankly in our financing on Harborside 7, but we've locked in some spreads. With the lender it's a 15-year loan and some floors, to give both the lender and we some comfort that there won't be material adjustment to our pro forma as a result of the volatility.

But naturally, if you see a inflationary spiral, and you're looking at asset classes not only in multifamily, but in every asset class, where if the cost of borrowing exceeds the cap rate you're beginning to have a problem, unless you can move rents to correspond and that's hard to do with long-term leases, it is easier to do in the multifamily space with 12 month leases.

Vin Chao - Deutsche Bank

And just on the suburban side and I'm assuming particularly there in the sales side of things, are you seeing any changes in that market in terms of number of other sellers coming to the market or are you seeing any increase in buying interest from may be a broader set of investors, just curious?

Mitchell Hersh

Yes and no, I mean it depends on the type of asset; the Sanofi Aventis long-term, highly rated investment grade rated credit. You've got fixed income investors, you got private REITs, pensions funds, and you can drive the pricing pretty good on that kind of an investment profile. There has been some increase because there have been fewer assets available at reasonable pricing levels or reasonable cap rates in the urban areas because of the whole concept of more protection, because of demographic shifts, urbanization et cetera, foreign investment coming in, wanting to be in the metro markets that are the gateway cities et cetera. So somewhat of necessity, there has been a little but a larger buying profile in the suburban markets but not materially different.

Operator

And our next question comes from Steve Sakwa with ISI Group.

Steve Sakwa - ISI Group

Mitch, I just had one question. Early on you talked about kind of making some additional revenue or getting some additional revenue and some refunds and I don't think you actually quantified that figure. I just wanted to make sure we're properly adjusting going forward; could you give us that number?

Mitchell Hersh

Well, I think you -- in my first comment about FFO?

Steve Sakwa - ISI Group

Yeah, I think that you sort of suggested that there may be some additional?

Mitchell Hersh

Yeah, we had from our prospective $0.03 an additional revenue in our FFO for the quarter. Part of that was $0.02 in real estate tax refunds, primarily in Westchester and then, about a penny in the earn-out reduction that Barry spoke up in the Roseland earn-out fair market value liability which we could go into more detail, but I think it's kind of like a complicated black shell type of model. So that represented $0.03 above our $0.62 consensus.

Operator

And from Cowen Group, we will go next to Jim Sullivan.

Jim Sullivan - Cowen Group

I just want to go back to the same-store NOI outlook Mitch. And there was some comments made by Barry in terms of the assumptions for the back half of the year. The same-store NOI has reported 3.4% for the first half. So I guess it looks like in Q3 and Q4 we're looking for same-store NOI decline somewhere in the mid 4%. And with the year-end occupancy of I take around 86% was the number that same-store suggest that the worst of the occupancy decline is over. And I know that in earlier question, you talked about stabilization and understanding your reluctance in terms of getting into 2014. But I mean as you sit here today, what the outlook for occupancy ending the year about where it is now, is it your sense that there will be some in terms of occupancy and perhaps, partly because of what you're selling, your stabilization is not to far-off in terms of a existing office industrial portfolio?

Mitchell Hersh

Well, I think that we certainly seeing things stabilize; we haven't seen the rents reverse direction at all. I can give you an example on a 100,000 square foot renewal with a tenant on a GAAP basis. We still had to write down this is a renewal during this quarter, this past quarter. We had to write down 13.5% on a cash basis, 20%, now that's somewhat extreme, but it's reflective of the fact that the tenants, even if they're in occupancy in the market in your portfolio still go out and hire brokers to kind of beat up on the landlord and meet the market, if you will. So, given our same-store and given what we really see in terms of the next two quarters we continue to think that the average NOI production or negative NOI for the year on a full year basis would be 4%. You recall that in our last earnings call for '12 we said 3% to 5%. And we're there, we're at midpoint.

Jim Sullivan - Cowen Group

And shifting focus to the new leases, Mitch, what percentage of those leases have fixed comps in them?

Mitchell Hersh

Well, virtually every lease that we do, let's say, offer a three-year lease has some degree of increase averaging anywhere from a 1.5% to 2% a year. And some of them are on a 10-year, that it will be a five and a five and its somewhat market specific in how you can do that, and the more urban areas we can raise rents annually but in the suburban markets that's not the custom and if it's a 7-year lease it will be the first four years at a number and then second three years or vice versa. That's how it works.

Jim Sullivan - Cowen Group

And may be if you could just help us because as we go forward as the residential segment of the portfolio expands, what are the plans, and I know this doesn’t begin until next year, but what are the plans in terms of reporting same-store NOI? It would obviously be very helpful if you segment that out. Is that the plan?

Mitchell Hersh

That is exactly the plan. We understand the community, if you will, the analytic community needs to see that and that's fully baked into our plan.

Jim Sullivan - Cowen Group

And then a final question from me. In terms of the G&A modeling, the second quarter run rate is that a good run rate to use going forward for the back half of the year or is there anything exceptional in that second quarter that comes up?

Mitchell Hersh

No, that's the perfect, that's the run rate as we anticipate.

Operator

And we do have a follow-up question from Michael Bilerman with Citi.

Michael Bilerman - Citi

Yeah, just wanted to come back, just as we think about rest of the office portfolio for use Philly as the example where you talked about the heightened CapEx and the move outs. How should we think about the rest of your office portfolio in that light? Is it facing the same challenges in '14 and '15? If the Philly would -- as we think about you've been running $70 million, $80 million of total CapEx, and some of these comments about often you see hitting bottom. Do we extract what your comments are in Philadelphia to the rest of the portfolio?

Mitchell Hersh

No, I don't think so, Michael. The reason we're selling Philadelphia is because it was, what I would again say, a non-core secondary market for us. We don't have the competitive advantages in that marketplace to be -- and that's why I think in terms of the best interests of our shareholders will serve by doing this transaction where we could help a entrepreneurial operator build more market presence, for example, in Blue Bell he already owns a 0.5 million square foot, to capture more market share so that he can perform better on that portfolio than we could frankly and compete better with more market presence. And all the things that we do in our core markets he can do there.

And the reason we're retaining 50% of the residual is so that we equally benefit down the road. But I don't expect that to ever impact us in our, what I'll call again, core markets, the Waterfront, Morris County, Northern New Jersey, Central New Jersey, Westchester, these are markets that we have very strong positions in and can do a lot better in terms of competitive set. So, that's my answer to your question.

Michael Bilerman - Citi

Okay, and then in terms of potential future sales, I think you said in your opening comments that this would represent a cap at the present time.

Mitchell Hersh

I have no plans at this time to sell anything else.

Michael Bilerman - Citi

And so, as you think about the sources and uses you've matched it up pretty well for what you have as cash and what's coming in versus uses that you outline in multifamily, what's going to be the decision factor after that's done, right? So, if you're successful at putting a $344 million of capital that you've identified and clearly --

Mitchell Hersh

Mike, I think, yeah, I get it. Look, part of the pressure on our stock has been the concern on the part of the investment community that we're going to issue equity to be able to fund our accelerated growth in the resi platform. With reasonable cushion we've now taken that uncertainty out of the marketplace. And so, that's my response. We have no imminent need to raise equity.

Operator

And we do have a follow-up question from Jim Sullivan with Cowen Group.

Jim Sullivan - Cowen Group

Mitch, one of the question here, you have a fairly sizable high coupon maturity in 2014 and I know that yield premiums, yield on these premiums can be very substantial, but I'm just curious what you can tell us about taking that financing or taking that debt and refinancing it, and how are you thinking about that today and kind of what's the timing? I don't know what the maturity quarter is 2014, but it's a near 7% rate on that. can you give us any update on the plans?

Mitchell Hersh

Yeah, okay, those are mortgages that you're referring to. It's not a --

Jim Sullivan - Cowen Group

Right.

Mitchell Hersh

Piece of debt. I mean, the maturity of that is a year from now. So, those are assets that we'll refinance or you extend those mortgages or renew them.

Jim Sullivan - Cowen Group

So there is no chance here that they would be prepaid?

Mitchell Hersh

They're locked out to prepayment up until 60 or 90 days prior to maturity

Operator

And Mr. Hersh, at this time there are no further questions. I'll turn the call back to you, sir.

Mitchell Hersh

Well, thank you very much. I hope that everyone participating today has found this to be an informative call. We always enjoy the opportunity of discussing what we're doing at the company with you. Exciting times for us in this transformation. And so, I want you to thank you for joining today's call and certainly look forward to reporting again next quarter. Have a good day and a great summer.

Operator

And once again ladies and gentlemen, that does conclude today’s presentation. We thank you for your participation.

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