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Mack-Cali Realty Corporation (NYSE:CLI)

2014 Guidance Call

January 08, 2014, 10:00 AM ET

Executives

Mitchell E. Hersh - President and Chief Executive Officer

Barry Lefkowitz - Executive Vice President and Chief Financial Officer

Analysts

Michael Knott - Green Street Advisors

Craig Mailman - KeyBanc Capital Markets

Joshua Attie – Citi

Ron Perrotta - Goldman Sachs

Operator

Good day, everyone, and welcome to the Mack-Cali Realty Corporation 2014 Guidance Conference Call. Today's call is being recorded.

At this time I would like to turn the call over to the President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Mitchell E. Hersh

Good morning everyone and thank you for joining Mack-Cali's 2014 guidance conference call. The first thing I would like to do is to wish everybody a happy and healthy New Year and hopefully it will be a good year for everybody participating on this call.

With me in the room 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 our annual and quarterly reports filed with the SEC for risk factors that could impact the company.

As indicated in the press release the purpose of today’s conference call it is to discuss the earnings guidance that was put out and on our last earnings conference call we indicated that we would have a special call to discuss the particulars of what formed the basis of the guidance, the assumptions made and we will go into detail as to the math.

But I do want to preface our comments by saying that as we move forward with the diversification and transformation of this great company, complemented now by our Roseland team, our Ironstate Development partner in Jersey City, our Keystone partner, now in the Philadelphia suburban markets and potentially other locations with us, and our institutional partners at Prudential and UBS, we will continue to focus on the value and the liquidity of the portfolio and how the portfolio is in fact improving. Naturally as we continue to sell or joint venture non-core assets, assets that for one reason or another don’t fit the continuing strategy of the company, our FFO is affected by that and it’s not a particularly useful metric given the timing of sales and the ability to redeploy capital in both stabilized development projects and operating projects.

I can assure you that we will be very opportunistic and tactical in reinvesting the proceeds that we’ve raised from the sale of these non-core office assets which by the way are all unencumbered assets. And that may mean holding cash as we have demonstrated, until the appropriate opportunities present themselves in connection with either the development of multi-family assets, the acquisition of special situations in the multi-family sector or in the mixed use arena.

The opportunities may include such things as investing pari passu with institutional partners on multi-family development projects we’ve demonstrated and Roseland has a long history of forming these relationships and co-investing in developments within our core markets, our urbanized markets that are forming the core of our new portfolio.

We will take advantage of dislocations in share price. And as part of the program going forward we’ll at some level participate in repurchasing some of our shares pursuant to the board authorized repurchase agreement.

The last point I would make is that the NAV of the company is clearly improving as we strategically sell non-core assets, improve the quality of the portfolio, the quality of the earnings stream in the retained strategically core assets and given the complement of our growing and emerging multi-family portfolio we think that the net asset value of the company will only continue to improve.

So with those opening thoughts Barry will now run through the metrics that have formed the guidance that you’ve seen and then we will take your questions. Barry?

Barry Lefkowitz

Thank you, Mitchell. The company provided initial 2014 guidance in the range of a $1.90 to $2.10 per share in a press release on December 23, 2013. The major assumptions at the midpoint of guidance were sales. We expect non-core office property sales totaling $450 million, a $100 million to close around the end of the first quarter at a cap rate of 6% and an additional $350 million to close at the end of the third quarter at a cap rate of about 8%.

Acquisitions; in addition to the Rahway-New Brunswick acquisitions closed in the fourth quarter of 2013 we assume a $160 million in multi-family acquisitions in 2014 at an average cap rate of about 5.5% closing around the middle of the year.

Development; multi-family development spending will be about a $180 million for the year; $90 million in joint venture equity and $90 million in on balance sheet development.

Core portfolio; core portfolio NOI is expected to decrease about 7%. This decline is primarily driven by 2.5 million square feet of expirations heavily weighted towards the beginning of the year. Of the 2014 expirations 1 million square feet occur in the first quarter. Of this 700,000 square feet expired on January 1, including Morgan Stanley’s 306,000 square feet at Harborside in Jersey City which alone accounts for about half the total NOI decline.

Preliminary year-end 2013 lease percentage is 86% and year-end 2014 is expected to be around 84.5%.

Interest expense; we expect interest expense in 2014 to be approximately $110 million, anticipating the reduction of approximately $13 million. Half of the reduction is attributable to lower average debt balances projected for 2014 primarily using cash on hand to repay $200 million in bonds which mature next month; and the other half resulting from higher capitalized interest from increased investment and development projects.

And finally full year 2014 G&A expense is expected to be about $54 million. 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 are our supplemental package and 2014 guidance press release which includes the information required by Regulation G.

Now I'll turn the call back over to Mitchell.

Mitchell E. Hersh

Thank you. So now you have a specific snapshot of what formed the guidance that was presented to the market. And as I indicated in my comments the timing may be altered on some of the sales and some of the re-deployment of the capital. We will be opportunistic and take advantage of the best opportunities to derive value for our shareholders but we are committed to recycling of the capital that was talked about, that roughly $450 million at the present time in to multi-family and mixed use and by that I mean of course some element of street scape retail as well as potentially some minimum amount of office space merged with some of the re-purposing that we are involved with.

I think it’s best at this juncture to open the floor to questions so that we get a sense of what you need to know that we haven't discussed already. So operator would you open the call to the queue?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will pause for just a moment to allow everyone an opportunity to signal for questions. And we'll take our first question from Michael Knott with Green Street Advisors

Michael Knott - Green Street Advisors

Hey guys Happy New Year. The question for you, for Barry is are there any multi-family properties included in same store?

Barry Lefkowitz

No, not at this point. Same-store is strictly the commercial portfolio at this point.

Michael Knott - Green Street Advisors

Okay. Thanks for that. And then is the 7% down number, if I heard you right, is your same-store NOI forecast, is that cash or GAAP?

Barry Lefkowitz

That’s on a cash basis.

Michael Knott - Green Street Advisors

Okay. And then just thinking through the component pieces there you spelled out the occupancy decline and that’s going to be weighted toward the beginning of the year, it sounds like. Can you just may be touch on operating expenses and rent roll downs that you are thinking about, because the 7% sounds little heavier than what we had expected? My guess was maybe it’s on the operating expense side.

Mitchell E. Hersh

Well the 7% is a reflection. First of all the weighting of the decline in occupancy is as a result of primarily Morgan Stanley and to -- which is 306,000 square feet down at Harborside and to a lesser extent a few other 65,000 to 70,000 square foot expirations one down at Harborside Credit Suisse and another one in a suburban location. So that’s really -- once we’re through with that we don’t have any major expirations through the course of the year and hopefully and it’s our anticipation of both in combination with selling certain assets and potentially outright and some into an extension of our Keystone joint venture that we will be able to build occupancy within the portfolio.

We really haven’t seen much of a delta in terms of operating expenses. They have been relatively stable. No major changes in real estate taxes. We went through a period where we had significant declines based on [tertiary] [ph] activity but I think that’s kind of over with. And so I would say the only variable in terms of OpEx would be in conjunction with snow removal cost and whatever that, the intensity of the seasonal effects are of the weather and that might have some impact on utility usage as well. And lastly, minimal impact as a result of labor agreements, collective bargaining agreements for cleaners and so forth. Beyond that, no real impact on OpEx.

And of course with respect to the G&A figures that Barry cited, the $54 million it’s important to note, as we’ve indicated on our conference call that largely the G&A of the Roseland subsidiary is covered by fees that we generate for development management leasing in connection with the joint ventures.

Michael Knott - Green Street Advisors

Okay. And then just one more question and I’ll get back in queue concerning comments on share buybacks you historically have not been a big proponent of that and just curious how you are thinking about it obviously the stock has declined, but I think your balance sheet has been strained let’s say a little bit from your investment. So just curious how you sort of weigh that opportunity and can you remind us how much authorization you have remaining?

Mitchell E. Hersh

I think from the perspective of attitude it’s not our priority in terms of utilizing capital, particularly when capital is so precious to do major buybacks. But we will be opportunistic. I am not sure I can tell you exactly what that means. The remaining authorization is $140 million. But we’ll utilize it opportunistically.

Michael Knott - Green Street Advisors

Thank you.

Mitchell E. Hersh

You’re welcome.

Operator

And we’ll take our next question from Craig Mailman with KeyBanc Capital Markets.

Craig Mailman - KeyBanc Capital Markets

Good morning guys. I am on here with Jordan Saddler. Mitchell, I was hoping maybe you can give us some additional color surrounding the sales. Do you guys have anything under contract yet on the $100 million or strong indications, are these just sort of place holders?

Mitchell E. Hersh

We have a formal offering out on one asset through a brokerage firm that we are pretty confident, actually it was just released yesterday it's for $0.25 million for asset that has a fresh 15 year lease on it and so we think that, that will have very, very strong demand. I could tell you it already has had strong pre-market demand. We have two assets that we are working with a public execution and they are going through the various filings with the SEC and S-11s to support what they need to do and so those would be sold to a public entity and the balance of the assets that formed this plus or minus $450-ish million have been -- are under due diligence right now by the potential purchaser.

And each asset has been toured and capital needs et cetera have been evaluated and we are going through a refined underwriting with the potential purchaser. These assets likely would be done on the Philadelphia model where they would be sold into a joint venture. We would not have any capital exposure.

We’d obviously get the cash from today’s value and work with the joint venture partner to develop future value of which we would share equally after they get a return on their invested capital they would be highly leveraged as was the Philadelphia portfolio primarily through CMBS financing and we would also have the added benefits of assisting them in some of the leasing efforts and property management efforts. So we have some fee income as we do frankly in Philadelphia.

So I would tell you that we were pretty comfortable that, that quotient of again non-core and non-core for different reasons, like I said, like I talked about in the first one, first asset it's similar to Sanofi-Aventis. We created the value and that we want to harvest the value it doesn’t represent, the asset doesn’t represent future value other than cash flow for the company. So we are pretty comfortable with where we are right now.

Craig Mailman - KeyBanc Capital Markets

Okay, that’s helpful and the 350 is that with an existing party that you have done stuff with and maybe is that New Jersey, D.C. kind of what market [are -- is that within] [ph]?

Mitchell E. Hersh

I would tell you that the markets that we’re selling or considering the sale of these assets run the spectrum of all the markets that we operate in right now, all the markets that we operate office assets in right now. And again different reasons to sell the properties at this point. We expect on average about a 7.5% cap rate. Obviously some are higher, some are lower depending on occupancy and the amount of capital that has to be reinvested in the assets but right now that’s the expectation.

Craig Mailman - KeyBanc Capital Markets

Thank you and then just last quick one. Following the additional asset purchase from Ironstate, any additional opportunities to do more with them maybe Hoboken perhaps?

Mitchell E. Hersh

We have an excellent relationship with the Barry family, David and Michael Barry and Joseph the father interestingly because the world is small in the industry of real estate. The Roseland principals, Marshall Tycher and Carl Goldberg in particular have had long relationships with them as well. So we do talk to them about opportunistic avenues and how we can help each other create value and since we are both so significant in terms of multi-family ownership in similar markets, adjacent markets.

We’ve talked about what the possibilities might be and particularly given some of the focus change they are obviously involved in lodging, they own a couple of the Ws, including the one in Hoboken and so that dialogue is fresh and it’s continuing; whether it will evolve into a bigger platform who knows.

Craig Mailman - KeyBanc Capital Markets

Great, thank you.

Mitchell E. Hersh

You’re welcome.

Operator

We’ll take our next question from Josh Attie with Citigroup.

Joshua Attie - Citi

Thanks, good morning. Do you expect the common dividend to be covered with AFFO in 2014 based on the guidance?

Mitchell E. Hersh

Dividend is not covered by AFFO based on the numbers that we’ve presented today. The dividend is under discussion at the board and so we’ll see whether an adjustment will be made. It would be my expectation and again I don’t want to minimize the importance of the commitment to the dividend but we are in a state of transformation and just as the FFO of the company has to be somewhat less consequential when you are selling assets and attractively diluting your income stream because there is higher and better purpose to transform and re-imagine the company going forward. Similarly the dividend has to be likewise scrutinized.

But the simple answer is we don’t cover it based on our current expectations. We certainly have the capacity to continue it in terms of our balance sheet capacity but it is something that’s topical at the Board right now.

Joshua Attie - Citi

And I guess how do you think about the dividend, does that require you to keep additional cash on hand and is that an impediment to the stock buybacks that you talked about earlier, in terms of the use of the cash?

Mitchell E. Hersh

I don’t -- what we try to do is we’ve always tried to balance the CAD or AFFO so that we’re paying out in the dividend no more than 100% of the cash flow of the company. And that’s sort of been the mantra that we’ve operated under all of these years. Right now the company has enough cash on hand to pay the dividend that we’re going to paying next week which is $30 million as well as payoff the $200 million unsecured note that matures in February.

So we have and obviously for long all of that cash -- we’re undrawn, we’re zero drawn on our $600 million line which has expansion accordion features to bring it to $1 billion. So the amount of cash available to us is not impacting the thought process relative to buying back stock.

We will be opportunistic in buying back some stock but we will also be opportunistic in redeploying cash proceeds from some of the sales or from these sales into building the NAV of the company in the multi-family space.

Joshua Attie - Citi

Well, just thinking about 2014 is obviously a transition year for the company but when you think about the run rate heading into 2015 can you talk about one the backfill opportunities at the Morgan Stanley space in Harborside. And two, you have a big move out at Prentice-Hall in early 2015. And I guess when you think about those two things and also you think about the money you will be investing this year that should, the NOI from those investments should ramp, when we get beyond 2014 and into ’15 considering those issues is the dividend better covered or do you expect there still is a shortfall and there will need to be a reduction?

Mitchell E. Hersh

We’re not going to take incremental steps. If we’re going to make a modification we’re certainly going to be very careful and run our analysis through 2015. In connection with the assets that you’ve described we have a plan as a matter of fact have a major meeting tomorrow with my Harborside team where we are reimagining what the potential of the older section of Harborside can be.

We've budgeted significant funds within our capital expenditures this year to transform that space to be a part of what everybody is referring to as the technology and media industry expansion and so we are moving forward with that. We are going to redo the retail space that's going to – it’s going to blend and really truly be a 24x7 live, work, play environment particularly with our URL Harborside which we have a ground breaking on next week.

And of course we were successful in October in getting a $33 million urban transit hub tax credit to assist us with that project. As far -- and so the answer is we’re well aware of the marketplace. I think we've hired one of the most - more preeminent brokers, commercial real estate brokers, to assist us in not only the leasing but in to address today's work space environment. And so we're confident that we're going to make, as we make these physical changes that we're going to make a lot of progress and headway in refilling that space.

We already have proposals out on more than the Morgan Stanley space, can't tell you we’ll make the deals but I can tell you that New Jersey has been very aggressive. I've been to meetings with the most senior level people in Trenton visiting with our prospective tenants and of course me to talk specifically about the programs that New Jersey has legislated now, it's all done, to attract new jobs and new business in the “new economy” to the State of New Jersey. So that's that one.

As far as Upper Saddle River is concerned we've made a presentation to the governing body. We continue to work collaboratively with the community and the town and we expect to make significant progress in our efforts to be able to reposition and redefine and transform that property on a go-forward basis and potentially with some very unique usage in addition to multi-family. But the reality is that more or less a year from now we're going to lose nine or so million dollars in income on that property for some period of time just as we've lost $13 million from Morgan Stanley for some period of time.

So but that's all been built into the guidance that we've discussed today.

Joshua Attie - Citi

Okay. Thank you very much.

Mitchell E. Hersh

Welcome, sorry.

Operator

Next question is from Ron Perrotta with Goldman Sachs.

Ron Perrotta - Goldman Sachs

Hi. Good morning. Thanks for taking my question. Real quick on leverage, so it seems like if you could give us a little bit of color just on how you expect leverage to trend into next year and whether you have any targets for that for the company on a go-forward basis. It seems like there would be a little bit of an increase if you kind of take the puts and takes of paying down the unsecured debt that comes due in asset sales? Thanks.

Mitchell E. Hersh

Yeah. Well we're an investment-grade rated company, triple BBB flat. We've continued to operate the company on that basis and although our coverage ratios has been somewhat, slightly effected, we're still within the zone of fixed charge coverage running through 2014 of somewhere in the two, averaging around the 2.3 zone. And so while leverage may increase and it certainly would increase if we got involved in for example a large share buyback which we don't plan to do because of among other things to leverage increase that would be associated with that. Right now we're comfortable with our capital facilities and the fact that we can operate as an investment grade rated company at our current rating level.

Ron Perrotta - Goldman Sachs

Okay. Thank you.

Mitchell E. Hersh

You're welcome.

Operator

And with no further questions at this time I'd like to turn the call back over to Mr. Mitchell Hersh.

Mitchell E. Hersh

Thank you very much. We greatly appreciate your taking time out of you day today to participate in this call to get a better understanding of what forms the basis of the guidance that we’ve presented. And we look forward to reporting to you, I guess next month on year-end Q4 2013. Have a good day, everyone.

Operator

Thank you for your participation. This does conclude today’s call.

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