Mack-Cali Realty's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: Mack-Cali Realty (CLI)

Mack-Cali Realty Corporation (NYSE:CLI)

Q1 2014 Earnings Conference Call

April 24, 2014 10:00 a.m. ET

Executives

Mitchell E. Hersh – President & CEO

Anthony Krug – Acting CFO and CAO

Carl Goldberg – Co-President

Gabriel Shiff – EVP of Finance

Analysts

Jordan Saddler - KeyBanc Capital Markets

Jamie Feldman - Bank of America Merrill Lynch

George Auerbach - ISI Group

Vincent Chao – Deutsche Bank

Michael Knott – Green Street Advisors

Operator

Good day and welcome to the Mack-Cali Realty Corporation First Quarter 2014 Earnings 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

Thank you, operator. Good morning everyone. I want to thank you for joining Mack-Cali’s first quarter 2014 earnings conference call. With me today is Tony Krug, as you know is Acting Chief Financial Officer and Chief Accounting Officer. And joining us from our Roseland subsidiary Carl Goldberg, Co-President and Gabe Shiff, Roseland’s Executive Vice President of Finance.

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 first quarter and what we’re generally seeing in our markets. Then Tony will review our financial results. Before I discuss the results I want to quickly mention this winter’s weather conditions which I am sure everybody is aware of. Extended winter freeze conditions resulted in record electricity demand and reduced natural gas production and distribution disruptions in our core Northeast markets. As you can imagine, utility cost far exceeded our budget. The spike in electricity rates we experienced during the first quarter was not anticipated and had a significant financial impact on our first quarter results.

Importantly, we believe this was a unique situation and rates have begun to return to more normalized levels. We remain well positioned with strong assets and a solid balance sheet for the remainder of the year. We are advancing our ongoing portfolio transformation and income diversification through asset sales and by executing on our multifamily strategy. We remain very focused on creating long term value for the Mack-Cali shareholders.

Now let me walk you through the quarter’s results. FFO for the first quarter of 2014 excluding certain non-recurring items was $0.46 per diluted share. During the quarter, we signed a total of 645,000 square feet of lease transactions which included over 220,000 square feet of new leases. At 2014 rollover was heavily weighted in the first quarter including the anticipated lease explorations of Morgan Stanley and Credit Suisse at Harborside in Jersey city along the Gold Coast. These explorations aggregated 371,000 square feet.

The Harborside explorations contributed to a tenant retention rate of 32.1% of outgoing space and we ended the quarter at 83.6% least which was down from last quarter's 86.1% least. To add some perspective, the first quarter explorations roughly equal the total square footage rolling for the remainder of the year. The first quarter equaled the rollover for the remaining three quarters of the year.

Rent on renewals rolled down in the quarter by 3.9% on a cash basis roughly equal to last quarter's 4% cash roll down. Remaining lease rollovers for 2014 are only 5.6% of base rent or approximately $30 million. Leasing cost for the quarter were a little more than $3 per square foot per year down from little more than $4 in the last quarter. Despite the challenging office leasing environment, our portfolio continues to outperform in most of the markets in which we operate. With our lease grades exceeding market averages in central New Jersey, Westchester County, Manhattan, and Washington D.C. During the first quarter and beyond, we remain intensely focused on transforming Mack-Cali and executing on our plan to diversify the company into the multifamily sector.

We will continue to re-deploy capital from non-strategic asset dispositions into our growing multifamily platform and Mack-Cali is well positioned to take advantage of today's growing demand for luxury rental apartment homes in well located amenity rich areas.

And now I will discuss some of our recent activities. In February, we announced that Mack-Cali entered into agreements to form joint ventures with Keystone property group whereby Keystone will acquire several office properties owned by Mack-Cali throughout Northern New Jersey, New York, in Westchester, and in Stamford Connecticut. This transaction which we expect to close in the next few months is an important step in the company's diversification into multifamily and as we continue to retain minority interest in these properties, we have the benefit of participating in any upside value creation by partnering with KPG.

Consistent with our focus in the second quarter we acquired the 220 unit multifamily community Andover Place in Andover, Massachusetts the metropolitan Boston area for a purchase price of approximately $37.7 million. Andover Place offers residents spacious well appointed apartments in a very strategic location with extremely high barrier stand tree. Our Roseland subsidiary will be upgrading the property and offering residents an enhanced amenity package and we expect to increase the yield on this investment over the next several years.

Just today we announced the sale of 22 Sylvan Way in Mack-Cali Business Campus in Parsippany, New Jersey for $96.6 million to Griffin Capital Corporation. Griffin also assumed $7 million in future tenant improvement allowances and commission obligations yielding approximately $415 a square foot. 22 Sylvan Way was developed in 2009 pursuant to a long term net lease to service the headquarters for Wyndham Worldwide Corporation, a leading hotel and hospitality chain. Due to the long term lease with Wyndham this was an excellent opportunity for Mack-Cali to monetize the value of this classy corporate headquarters’ asset.

I have already commented on the 645,000 square feet of leasing for the quarter. I would refer you to our supplemental for specific lease transactions throughout our portfolio. Along the Gold Coast at Harborside, we are readying our construction to transform the common areas of Harborside Plazas one, two and three to conform with the millennial age and the new way in which companies do business. If you visit Harborside, you will also see heavy equipment on our URL site where we have commenced construction getting ready to drive piles.

And now I will turn the call over to Tony who for the first time as CFO will review our financial results for the first quarter. Tony.

Anthony Krug

Thanks Mitchell. Funds from operation for the first quarter 2014 excluding certain items was $0.46 per share as compared to $0.63 per share for the same quarter last year. For the first quarter 2014 net loss available to common shareholders excluding certain items amounted to $0.01 per share as compared to net income of $0.13 per share for the same quarter last year. Including certain items FFO was $0.30 per share and net income was a loss of $0.17 per share.

The quarter was significantly impacted by two items as Mitchell mentioned; the extended winter freeze conditions in our core Northeast markets costs us $0.05 per share net of tenant recoveries. We also took $0.11 per share charge in the quarter related to management changes. Same store net operating income decreased by 17.8% on a GAAP basis and 13.6% on the cash basis for the quarter excluding the $5 million for the harsh winter cost same-store net operating income decreased by 12.4% on a GAAP basis and 7.8% on a cash basis. Our same-store portfolio at quarter end was 27.7 million square feet. Our unencumbered portfolio at quarter end totaled 219 properties and represents 75.6% of our portfolio on a NOI basis.

At March 31st, Mack-Cali's total un-depreciated book assets equaled $5.8 billion and our debt to un-depreciated assets ratio was 38.8%. Excluding the items described earlier, the company had interest coverage of 2.4 times and fixed charge coverage of 2.1 times for the quarter including these items interest coverage was 2 times and fixed charge coverage was 1.8 times.

In the quarter the company repaid its $200 million 5.125% senior unsecured notes that matured on February 15th. We ended the quarter with approximately $2.2 billion of debt with a weighted average interest rate of 5.54%. Currently we have $55 million outstanding on our $600 million unsecured revolving credit facility.

Primarily reflecting results from the quarter, we are updating our FFO guidance for 2014 in the range of the $1.62 to a $1.72 per share. At the midpoint, our guidance assumes end of year occupancy about 60 basis points higher than our March 31st level of 83.6%, development investment of about $117 million for wholly owned and joint venture projects including the start up of Harborside URL multifamily residential joint venture in Jersey City and a majority on development project in Eastchester New York.

Acquisitions of $165 million primarily for multifamily properties including the recently closed Andover Place, Massachusetts 220 unit purchase. Property sales of about $450 million including yesterday sale of our 22 Sylvan Way property for approximately $97 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 earnings release which include the information required by Reg G, as well as our 10-Q. Mitchell?

Mitchell E. Hersh

Thank you very much Tony. Now I am going to turn the call over to our Roseland associates. First Carl Goldberg will give us an update on the repurposing efforts and some of the Mack-Cali properties and then Gabe Shiff will talk about the financial performance of Roseland. Carl?

Carl Goldberg

Thank you Mitchell and good morning. I am going to focus on two areas of the expansion of the Mack-Cali multifamily platform, our repurposing and select sites completing their entitlement process. First on the repurpose sales. The summary of Mack-Cali, Roseland Mack-Cali's ongoing program to rezone the sites of some of the companies non-strategic office assets especially those with access land or underutilized parking facilities.

First we are activating Upper Saddle River on the One Lake Street site where formal request to rezone the 47 acre parcel for a mix use proposal with 240 luxury rental homes has been submitted to the governing body and referred to their planning board for further consideration. Secondly, a Millburn township in Essex County on parking lots adjacent to 150, JFK Parkway including the demolition of the former Roseland headquarters at 233 Canoe Brook Road. On that site, after a series of meetings with municipal representatives including the township attorney and planner, the municipality has embraced the concept plan for 200 luxury rentals and 250 key hotel. The zone change ordinance is being prepared by the township attorney to be introduced at an upcoming council meeting. We are very optimistic about the progress on this particular site and as many of you on this call know Short Hills, New Jersey is one of the most desirable and undeserved multifamily markets in this region.

Thirdly, in the Borough of Morris Plains on a parcel of 250 Johnson Road, initial conversations have begun with the Borough on a purposed zone change to allow for construction of a multifamily rental community on the site of 80,000 square foot office building scheduled to become vacant in July of 2014. Clearly, in our presentation to potential host municipalities we emphasis the benefits of the successful repurposing to all stakeholders that's critical to the entitlement process. These may include on site amenities opened to the entire community, ancillary retail for local restaurants and convenient shopping and most importantly an enhanced ratable for the community to assist them stabilization of local property taxes.

Establishing a template for the repurposing of these types of Mack-Cali assets allows for an expansion of our multifamily platform without the same level of capital outlay as new acquisitions or the purchasing of land for ground up developments. The repurposing program will continue to expand as we look at other Mack-Cali assets especially those as I suggested earlier with excess land or those with underutilized parking facilities that might provide additional rezoning opportunities for the expansion of our platform.

I also want to take a few minutes to talk about two specific development sites that are nearing the completion of their permanent approval process which will also be a part of the expansion of the Mack-Cali multifamily platform going forward. First, we are very excited about the progress of our applications in Freehold Township for 360 units multifamily rental community. We are now in the process of finalizing a municipally endorsed zone change to permit construction. We anticipate to starting that community by the end of 2014. Importantly, this is 100% owned Mack-Cali site.

Secondly, in Morris Town, New Jersey where we have been very active over the last five or six years with the completion of a rehabilitation zone in the area of Morris Town around the Morris Town Green, we are looking to complete the entitlements for 59 unit multifamily rental. This is the last phase of the development of that area need of rehabilitation on an own parcel in Morris Town. This property is owned in a joint venture 50:50 with (indiscernible) Development and we anticipate a fourth quarter 2014 start. We are also very active and continue to be active along the Hudson river waterfront where we anticipate the construction start of a new rental community in Weehawken consistent with our existing approvals that are part of our PD approval in Weehawken Township as we look towards other opportunities along the Hudson river waterfront. We have additional sites in West New York and Jersey City.

Thank you very much and I will turn the call back over to Mitchell.

Mitchell E. Hersh

Thank y you very much Carl. It's a good insight into what’s going on and of course as well we have entitlement process proceedings and (indiscernible) and number of other locations that you will see in our supplemental package.

I will now turn the call over to Gabe to talk about the financial performance of the Roseland subsidiary.

Gabriel Shiff

Thank you Mitch and good morning. Today six quarters since the acquisition of Roseland we are reflecting significant curve of our residential platform to construction starts, excellent lease ups and acquisition activity. Like 2013, the first quarter of 2014, represented continued progress across our three core growth cylinders. The development of our existing land pipeline, the acquisition of strategic operating assets and new development sites, some of which were just referenced, and the continued approval of the synergistic repurposing of the select Mack-Cali properties as Carl just discussed.

During the first quarter of 2014, we commenced construction on two projects; 108 apartment home community in the high barriers entry, lower Westchester County Town. This property is projected to cost $15 million with an anticipated stabilized yield of approximately 6.6%, in addition, the 763 apartment recent start of Harborside URL in Jersey City. At present, the company has a total of 3,426 luxury apartment homes in the Northeast under construction and initial lease up representing approximately $1.3 billion of development cost. From this activity, we anticipate approximately 1,150 apartment homes will be delivered in 2014 including the recent leasing commencement of RiverTrace at Port Imperial, Weehawken and the (indiscernible). These three communities were on average 20% leased at quarter end. In addition, at year end 2013, approximately 850 space garage at Port Imperial opened to full capacity and continues to operate at that level. More specifically, RiverTrace located in the Port Imperial and neighborhood adjacent to existing and future Mack-Cali residential communities as average nearly 30 leases per month since opening in this past challenging winter.

Moreover, this absorption level has been accomplished with limited concessions and market rents per square foot approaching $39. Additionally, The Chase at Overlook Ridge similarly adjacent to existing and future Mack-Cali residential communities has the average over 25 leases per month since opening in this February with the rents of approximately $25 per square foot. The acquisition cylinder of the Roseland platform of Mack-Cali is comprised of operating assets as well as new development sites opportunities. The company's operating property acquisition strategy is focused on projects where the collective skill set of the Roseland platform can add value by asset repositioning in its core geography.

To that end in 2013 we closed on the acquisition of 1,909 apartment homes at a total purchase price of approximately $500 million. Moreover the company has budgeted approximately $40 million in capital improvements on these assets where we believe there is material upside in rent potential given the surrounding demography. As one example of this strategy we are achieving over 15% return to-date on our value add investments at [Tower] by modernizing common areas and units with corresponding rent premiums.

Further as Mitchell mentioned, on April 10th, the company closed on the 220 apartment home and to replace community north of Boston at a cost of approximately $37.7 million. Also subsequent to quarter end, the company entered into agreement to acquire a New Jersey community at a cost of approximately $95 million which we anticipate will close in the second quarter as well. These two properties represent approximately $133 million in new acquisition activity.

Our third cylinder, the fruitful bearing nature of our business combination is the repurposing of select Mack-Cali properties. As just detailed by call in the first quarter we have the approval process unidentified repurposing properties and are hopeful these activities will lead to construction start in the near future. We also continue to evaluate additional repurposing candidates.

Looking forward, over the next four quarters we anticipate continued progress across the platform of multiple growth cylinders including seven projected construction starts representing 1,525 apartment homes and the parking garage at an approximate cost of $507 million. During that same period, we will advance our active construction projects that are already in construction as referenced previously with the delivery of over 1,100 apartments in that same period. Importantly, as the company accelerates it's residential transformation, the residential platform continues to generate fee income from its construction, development and management businesses.

In closing, while we will seek, while we will continue to execute on our legacy joint venture developments, we will seek to increase our ownership positions throughout the portfolio. In this connection, we have recently increased our ownership and participation in two development properties by investing additional capital and we will continue to pursue additional partnership restructurings. Based on the constructions development and acquisition activity just described, the percentage of contribution of residential net asset value and profitability to Mack-Cali will continue to grow through 2014. Mitchell.

Mitchell E. Hersh

Thank you. Very thorough review Gabe. So moving forward, we remain focused on selling our non-strategic assets and we will continue to source out new opportunities on the multifamily front. We look at each opportunity with a keen eye towards building our presence in the multifamily sector in the right demography and right locations and remain committed to being the preferred provider of office space in our current markets.

Mack-Cali is poised to build on the momentum we are generating and I am confident that the continued execution of our transformational strategy will create long-term value for our shareholders. And with that, we will now take your questions. Operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Jordan Saddler of KeyBanc Capital Markets.

Jordan Saddler - KeyBanc Capital Markets

I wanted to just get a sense and I appreciate the overall review is comprehensive, but I guess I am trying to back up a little bit and get a little bit of broader sense coming back to some of the expectations that were laid out originally post the Roseland acquisition and maybe just to refresh on sort of where we stand in the progress. In other words, how long do you expect this transformation to take place over, how long the time period should we expect to take another two to three years or so and is the pace still expected to, are we on pace for the $700 million a year of gross multifamily investment through development and acquisition that you originally laid out or is that moving around? And then ultimately what percent of Mack-Cali should we expect to be multifamily again?

Mitchell E. Hersh

Lot of questions, Jordan but I’ll do my best to encapsulate and answer for you. At first, I would tell you that we are absolutely on track with Roseland performance, both from the prospective of new investments development volume, fee income and general synergies as well as the repurposing. So with that, as a backdrop, we have worked very diligently to look at a three year projection and a great deal of the tail and are comfortable that within that three year timeframe which would include ’14, ’15 and ’16 we borrowing any other sort of platform type opportunities that might emerge you know large scale opportunities that at that point in time the multifamily income would be somewhere in the 25% zone of the income stream of the company. And as I said, that's what we see pretty crisply and clearly in our looking glass today.

Jordan Saddler - KeyBanc Capital Markets

Okay and in financing that, the expectation that asset sales will continue with a similar pace to what we have seen today that it mean is the 450 still a good number or is that expected to accelerated here?

Mitchell E. Hersh

Well, I don’t think we ever suggested that there was a run-rate of 450 in terms of our analysis of thinking. It just so happens that this year and last year in the aggregate we sold about a billion dollars worth of assets that we have them under contract for sale execution reminder part of this year. We’ll look selectively at additional asset dispositions. Right now, our Roseland platform, by virtue of what either has closed or what’s on the contract to close is fully funded. So, at this time, we do not additional capital to fund the platform.

Jordan Saddler - KeyBanc Capital Markets

Okay. Lastly, in terms of the acquisition and over place and the one that's under contract, could you sort give us a little bit of sense of what the going in yields are and/or will be and what the stabilized yields are expected to be?

Mitchell E. Hersh

The initial yield and the instance of handover as well as the New Jersey acquisition, I gave alluded to the initial yield would be in the mid 5% range and there would be slight peaks and valleys as we turn units and customize and upgrade the units. Our expectation and we have a done a very careful study of this and recall that we operated in these markets so we know them very-very well. The ultimate or absolute yield over a couple of year period of time should approach close to 6.3% on leverage on both of those assets.

Jordan Saddler - KeyBanc Capital Markets

Okay, over a couple of years. Okay, I’ll leave the floor, thank you.

Mitchell E. Hersh

Welcome, Jordon.

Operator

And we’ll hear next from Jamie Feldman of Bank of America Merrill Lynch.

Jamie Feldman - Bank of America Merrill Lynch

Great. Thank you and good morning.

Mitchell E. Hersh

Good morning.

Jamie Feldman - Bank of America Merrill Lynch

Can you talk a little bit more about, any changes to your guidance assumptions from what you provided in the fourth quarter?

Mitchell E. Hersh

Again, the guidance, plus or minus penny was sort of met the street expectations. The issues that surrounded the effects on guidance were number one to put in dollars, a $10 million increase in electricity for the first quarter. Of that, approximately half or $0.05 of share out the $0.10 of share is part of the tenant pass-through’s pursuant to our leases but the electricity increase and I am sure we are not alone among property companies, particularly along the North East area or coast as a result of the inability for the utility generators because o natural gas shortages and disruptions. There was inability to produce electricity and they were difficulties in the conveyance of the utilities because of the severe weather conditions. That in combination resulted in again $10 million increase in electricity. So that's the element that was completely unanticipated. As you might imagine with approximately 28 million square feet of same store portfolio primarily located in the North East region. It takes a while to synthesize that and figure out all of the billings and so forth. And as I said now that the weather has largely subsided, although it has still been a unique spring, the rates have begun to stabilize and return to more normal conditions. So we will ensure our—in terms of how we hedge utility cost going forward that given this circumstance, we’ll be very-very keenly aware and protective that this doesn’t affect the company on a go-forward basis. The other is severance payments resulted in a charge of about $0.11 of share all in and so those two elements were the key contributors to the earnings adjustments. And there are other things as to NSL might close would be a penny this way or that way. So we are comfortable at this juncture with the guidance we announced today.

Jamie Feldman - Bank of America Merrill Lynch

I understand that I guess what I am asking is, what’s your current year and occupancy assumption, what is your leasing spread assumptions, what do you think (inaudible).

Mitchell E. Hersh

Yes, Tony commented that our assumption is that we increase occupancy by 60 basis point. Right now, there is about 200 basis point spread between leasing and occupancy due to GAAP reporting and free rent and so forth.

Jamie Feldman - Bank of America Merrill Lynch

Okay and how does your mark-to-market look for the rest of the year?

Mitchell E. Hersh

We have seen same store declines in the 5%, 6% and 7% and that's what we expect for the reminder of the year. I don’t think, we don’t need to put it in vernacular, we don’t need to play catch up to meet the guidance that we put forth today and by the same token we don’t expect material changes or improvements in the market in the near term.

Jamie Feldman - Bank of America Merrill Lynch

Okay and then can you tell us the cap rate on the (inaudible) sale?

Mitchell E. Hersh

Well, I will give a, just to say that its slightly above its 6% cap rate if you take the purchase spreads in 96.6 and the future obligations pursuant to the lease for tenant improvements and leasing commissions of $7 million and depending on how present value that $7 million today, would give you the absolute cap rate but roughly speaking it was a sale in excess of a $100 million and it was 249,000 square feet. So that's the math.

Jamie Feldman - Bank of America Merrill Lynch

Okay, alright. Thank you.

Mitchell E. Hersh

You are welcome, Jamie.

Operator

And next we’ll hear from George Auerbach of ISI Group.

George Auerbach - ISI Group

Great, thanks. Good morning.

Mitchell E. Hersh

Good morning.

George Auerbach - ISI Group

So overall, the leasing volume has been trending down over the last few years as the rates have gone up in your portfolio. Just wondering, what you are doing across the company, what are you telling your leasing people and what you are doing that with taking in that effective rents across your portfolio to try to drive better traffic.

Mitchell E. Hersh

Well, we have a very talented and capable leasing team. I guess, part the velocity decrease is the fact that we have also decreased our portfolio a little bit in terms of some of the asset dispositions. So you might take that into consideration. But we have in selective areas brought in the preeminent brokerage firms to represent us in agencies to not only help with traffic but to ensure that we are seeing every single transaction in every single sub-market that we working in harbor side we have the JLL Scott (inaudible) team and his association with John (inaudible) of the New Jersey office and so between that linkage we have brought in what we conceive as one of the top agencies possible in the region to ensure that we are driving traffic that were seeing every deal in the metropolitan New York area and as you know downtown is an improving environment but it’s also an environment that has a lot of office space now and so everybody is kind of trolling for all of the same deals and New Jersey has some pretty active as of right policies in the New Jersey economic opportunities active 2013 to help bring new jobs and with what we are doing down there in the live, work, play environment as well as transforming again particularly the common areas in the retail (inaudible) space at Harborside will really be very appealing to the tech firms, the advertising firms, the media firms and the information firms that are driving growth in the economy particularly in these urban areas. As far as the suburban markets on a selective basis, we have agencies. Again, to ensure that we're seeing every transaction in the marketplace that no stone is left unturned with regard to how we incentivize and compensate our leasing associates. Large part of that compensation is results oriented, so they are clearly motivated and clearly talented and looking to every possible transaction.

Most of our markets, they've kind of stabilized but they are quite, there is not a lot of demand. In some of our markets, we outperformed our competition like Westchester by hundreds of basis points. It depends on the particular submarket in the competitive set in the submarket. But demand is, as I said is, soft and there is not a lot of economic vitality in general and there is lot of competition.

But so I think we're doing everything that we can that's within our control, we're a very financially flexible and capable entity. We can fund TI packages, which are significant as you know in connection with turning over office space; it's a capital intensive industry. We have continue to upgrade our sticks and bones and common areas most of our asset base. You can walk into numerous of our office, multi-tenant office facility and see magnificent lobbies with state-of-the-art, digital monitors and upgraded elevator systems.

So we've kept our assets up to absolute impeccable condition and we have the financial where with all to do it. The brokers know when they deal with this firm that although they may grouse a little bit occasionally about not getting paid before they leave the door of the company, they get paid and they get paid promptly.

And so we have lots of tools and our tool kit. We have very talented executives in each of our region, leading a very talented team of leasing representatives who have lots of years of history in each of the submarkets with both the brokerage community and the tenant community. It’s a little unfortunate that some of the industries that have traditionally driven jobs, job growth and sustainable jobs within the Northeast corridor have for one reason or another change their shape be a pharmaceuticals or whatever it might be and we're in an active M&A environment. We're in a declining financial service environment in terms of population of employees but we capture certainly our share of the market. Does that answer your question, George?

George Auerbach - ISI Group

Thanks. That was really helpful. I guess just -- I guess one follow-up for me there would be, you mentioned the CapEx costs to be really the office space. Have you laid out the sort of FAB guidance for 2014, mostly per leasing CapEx and I guess just how you think about that for second generation as is space that you're going to lease up and also what your budgeting for space that may have been vacant for a while that you want to (inaudible) up to drive demand?

Mitchell E. Hersh

Yes, we certainly have done that. As you know we've always presented ourselves in terms of free cash flow and on a real cash flow basis which is space that's been they can for more than a year is incremental CapEx that we deduct from our calculation of cash flow some do, some don't, we do. So that we know what our real effective cash flow projection would be for the year on an annualized basis. And what we build into our modeling to 2014 is about $33 million of building improvements about $42 million of tenant improvements.

And then we have incremental CapEx on top of that, which is about another $26 million and that's the key both again spaces that have been vacant for more than a year and certain customized improvements through the assets. So in total, our expectations is that we're going to spend over $72 million in the year on keeping our portfolio fit and trim and up to the highest standard so that we capture as much of the leasing market as possible. Some of the other assets that represent what I would say, for one reason or another non-strategic assets, whether they're from a locational perspective where we only owned for example one asset and just got away and so we have no particular market advantage and similarly in Morris township and even in Westchester where we only owned two buildings in Tarrytown or Stanford where we only have one office building. Those are part of the Keystone pool where they will because of their ability to procure high leverage much more than we would or could do as a publicly traded investment grade rating of real-estate company, we. And so though apply high leverage and have ample capital available to book back into those assets and hopefully by them doing it and by them having creative financing structures ultimately that will result in residual value and which we will share that value with them.

So we've kind of taken the outer ring if you will and contributed to joint ventures. This is the second major joint venture with Keystone in the portfolio that they purchased in suburban Philadelphia, we contributed to a joint venture they had about a 100,000 square feet more or less of leasing in the quarter in that portfolio. And don't forget in addition to the fact that we had $10 million in access electrical charges in the quarter, we had one of the most measurable hostile weather patterns and believe it or not that sometimes prevents people from coming out looking at space and leasing space. So we had lots of things putting up headwinds during the quarter.

George Auerbach - ISI Group

I appreciate the color. Thank you.

Mitchell E. Hersh

Welcome.

Operator

And we'll take our next question from our (inaudible) of Citi Bank.

Unidentified Analyst

Actually, good morning, it's Michael (inaudible). Mitch I just wanted to go off a comment you just made about Keystone doing a little bit higher leverage and being able to invest the asset and taking a little bit higher risks and there is a publically traded rite (ph) that wasn't something that you could do. And I just, I guess I put that and I said well, I guess do you or the Board ever contemplated Cali being a private company to have executed the strategy whether it would be taking assets in unit capital and getting or being a private company and executing the strategic shift in the private format which sometimes the public markets I mean we've recognized public market as an endorsed usual change not just your company, it's a lot of companies. As they go through that transition. So I'm just wondering if that ever rose up to something why to wait someone else, why don’t we just do it ourselves?

Mitchell E. Hersh

Michael, I would thought you would ask a controversial question. I'm only kidding. Michael, we have been looking at every aspect of the business and all alternatives we have spent in extraordinary amount of time with our finance groups and our leasing groups to determine what realistic projections or over the next three years and of course that includes and I commented before about the three cylinders in Roseland and assuming that we don't have any other large scale platform opportunities where we would be in three years.

We also have a very active Board at this point which is fully engaged in reviewing these projections, reviewing where will be, what the leverage looks like what the access to capital looks like we have a new Board member John (inaudible) who engaged as a constructive Board member who has a lot of experience in the industry who I guess was your predecessor at Citi Group that one-time. And so we're looking at the entire universe of maximizing value to our shareholders and I'd say that in a very serious way and of course, the going private scenario is merely one avenue for any company to consider. But there are lots of issues that surround any strategic direction including again access to capital pac issues, distribution requirement all sorts of things, organizational issues and social issues et cetera. So we are looking at everything and we're not closed minded to improving value for our shareholders.

Unidentified Analyst

Has there been an update in terms of the dividend level and obviously with a little bit more pressure given the weather cause in the first quarter. Where do you, has the Board made an update as to where would see dividend policy?

Mitchell E. Hersh

No, the Board regulatory reviews dividend policy. We have not -- traditionally, we've done in the third quarter, we may do it earlier than that this year to begin the discussion and dialogue on dividend policy. So the answer is that's a Board matter as know and we have not began that discussion at this juncture.

Unidentified Analyst

On Sylvan just in terms of purchase price the 96.6 if you go back to your January 15th disclosure in the cash flow presentation you had that being done it 99.8 million. Is there any reason why it was $2.2 million less is that just?

Mitchell E. Hersh

Again if you -- from our perspective on doing the math, the sales was 96.6 million plus $4 million on a present value basis of future obligations.

Unidentified Analyst

So in fact when you showed in the cash flow statement you effectively, it was different from the way you're describing the sales?

Mitchell E. Hersh

I know you got the at a loss on that, because I don't know what you're referring to.

Unidentified Analyst

But it's (inaudible) you put in January 15th has a sale in the cash flow statement at 99.8 million of cash being coming in the door not necessarily (inaudible)?

Mitchell E. Hersh

If that's the case then, it's 96.6 million and plus a value of 4 million in terms of what we would have add to invest in the property had we not sold it.

Unidentified Analyst

And I was wondering is the clarification just on the occupancy, I think Tony had mentioned, so you're expecting 60 basis points increase in occupancy between now and year-end. Is that correct or in fact you get 84.2?

Mitchell E. Hersh

Yes, that's what build into our modeling where we hope to do a lot better than that but that's what we've build into the modeling.

Unidentified Analyst

Now from a sales perspective if you think about Windom sales and the Keystone sales because of assets are more highly leased than with the current portfolio as a whole portfolio occupancy would go down by 10 basis points. I'm not sure I think you still about $120 million left of sales I don't know are those highly leased assets, low leased asses in terms of just trying to understand the math because it would appear though just on the basis now you take 10 basis points down from the sales. And then you still have 3 million square feet rolling in the back half for the year so not only you have to have positive net absorption of almost 200,000 square feet to hit the number and I just seems like a lot in the sort of weak environment?

Mitchell E. Hersh

Acknowledged, but that's what our expectation is the 60 basis point rise just seems like a lot in this sort of weak environment.

Mitchell E. Hersh

Acknowledged but with that’s what our expectation is, the 60 basis point rise by the end of the year. And you are correct on that 10 basis.

Unidentified Analyst

And the sales that you are contemplating in terms of 120 million, how should we think about that in terms of, is it more cap rate, no vacancy or is it low cap rate, solid lease assets like Windom because it could be at both ends of the spectrum?

Mitchell E. Hersh

Are you telling about the reminder of what hasn’t closed in the, I call it $450sh million pipeline.

Unidentified Analyst

Yes, 450 pipeline.

Mitchell E. Hersh

So you have got 231 million in the keystone transaction at an average cap rate of 8.3%, you have got the one that we talked about today, (inaudible) at a low 6%, you have got two Washington assets totaling somewhere around 140 million give or take around 6% and what I forget and we, you know.

Unidentified Analyst

That’s it, may be (inaudible) answers would be the piece and those are currently occupied, occupancy on those is…

Mitchell E. Hersh

Washington is high, mid-90s so I give the—yes mid-90s and the other stuff is around, the keystone stuff is the ranges from 60% to 80% occupied.

Unidentified Analyst

And the last question or comment, I think its really helpful to understand some of the granular detail that (inaudible) went through but I do think there is a mismatch between sort of the lot of the granular details and just the sort of the top down macro prospective and you talked a lot of this sort of three year look and I think what the market is struggling with is trying to figure out where earnings were bottom and you have already put in place a number of growth initiatives that have yet to bear fruit into earnings but will pick over the next couple of years and I think trying to put everything together and understand the progression not only in terms of the earning stream and the cash flow stream but the balance sheet and investment is sort of what the market is missing a little bit in providing confidence and with the stock towards its low, there appears to be something that is lost and I don’t know if you are planning on doing of more full presentation or strategic so that plan on a long bridge basis to sort of walk people through but I think that’s probably something that would be helpful to provide clarity to the street because it’s happening slightly clearly but with the stockiest.

Mitchell E. Hersh

Okay, will do it.

Unidentified Analyst

Thank you.

Operator

And we will hear next from Vincent Chao of Deutsche Bank.

Vincent Chao – Deutsche Bank

Hey good morning everyone just maybe a couple of just quick clarifying questions, in terms of NOI guidance, I think previously was 7% cash down given the tough starts just curious what is the thought is on that number now?

Mitchell E. Hersh

Yes, I alluded to that before, on a same store NOI basis we are some more in this call in average of 6% down that’s projection for the remainder of the year.

Vincent Chao – Deutsche Bank

Remainder of the year, okay. And then on the G&A side of thing, I appreciate the comments about the severance but what is the ongoing savings now that one less…

Mitchell E. Hersh

About $0.04 of share.

Vincent Chao – Deutsche Bank

About $0.04 over the balance of the year or that’s annualized.

Mitchell E. Hersh

Annualized.

Vincent Chao – Deutsche Bank

Annualized. Okay and then just in terms of the asset sales discussions, I mean just still a tough market on a leasing side but just curious how much interest you are seeing for some of the Jersey assets. If that’s change at all if there’s more buyers?

Mitchell E. Hersh

I think that some of the private equity players and most of the covered non-trader rigs are looking more for stabilized cash flow. I think private equity is kind of running out of room in the real estate asset class to acquire product, so I think that that stimulated more interest on their part in what I call more traditional suburban office assets at least in the markets that we see, that we are operating in.

Vincent Chao – Deutsche Bank

Okay, can I take away that interest is sort of someone improving I guess, it doesn’t sound like it’s vastly different.

Mitchell E. Hersh

I don’t see any dramatic shift in it but there is interest particularly in that segment of the capital stay back.

Vincent Chao – Deutsche Bank

Alright. Okay. Thanks a lot.

Mitchell E. Hersh

You’re welcome.

Operator

And we’ll hear next from Michael Knott of Green Street Advisors.

Michael Knott – Green Street Advisors

Hey Mitchell I guess for you and Tony just look like if we combine first quarter with the 6% down on same store life of the rest of the year I think that just down 8 for the full year compared to down 7 previously is that about right?

Mitchell E. Hersh

Yes Michael that’s correct.

Michael Knott – Green Street Advisors

Okay. Thanks. And then just curious when you talked about markets where you are performing better than your tender markets that you are in northern New Jersey was absent from that list just curious can you talk about that market maybe your prospects for releasing space of Harborside and maybe I know there was the new state tax credit I think you previously described as being bringing a gun to a knife fight, just curious if that’s have any impact just curious can you talk about New Jersey in your prospects there?

Mitchell E. Hersh

I think that there urban areas harbor side in particular is one of the most active submarkets that we operate in from the perspective of tenant demand and levels of interest, I will tell you that a lot of the transactions that have been publicly discussed in the press and the media and talking about transacting deals in other buildings other than Mack-Cali buildings are largely just discussion at this point have been very few deals of large scale, some financial institutions in particular deals are still not signed. So, I would say that in general and I probably would, you would probably hear this comment echoed by some of our peers across the river in that area done in New York city that there’s a lot of looking, there’s a lot of talking but there isn’t a lot of transactional completion at this point the state of New Jersey through the EDA has been inundated by New York Metropolitan area companies that are looking to reach shapes themselves in terms of how they do business, the kind of physical space that they have now that companies want to pack a lot more people in less space. So you have physical issues and a lot of assets in terms of system capacity plumbing elevators, vertical transportation and the state and I speak to them regularly and actually the phrase bringing a gun to a knife fight was Tim Lizura who is the President of New Jersey EDA and he spoke at a seminar at Harborside, actually few days after the legislation was signed by the Governor. And so, you have a lot of activity in terms of these companies looking to see how they wanted to do business for the next 10 or 15 years but very few transactions and you have seen all this discussion about the world trade center and now the debate on whether to have the port authority guaranteed the construction financing for staying on world trade center 3, we have all these millions of square feet over there and average sign leases right now and product is largely incomplete at this point. It's 51% of all those buildings.

So things just are moving at a different pace these days Michael but the Harborside, the urban infill areas are still very dynamic as far as leasing velocity and suburban markets still transactions take a long time to get to completion but we have basically a handshake on a deal and access of a 100,000 square feet new tenant, new deal in Paramus. I can't identify the tenant obviously at this point. So, we are in the thick of it. But the markets are moving generally slowly in the office sector.

Michael Knott – Green Street Advisors

Okay. That’s it from me. Thanks.

Mitchell E. Hersh

Thanks.

Operator

And we will hear from Jordan Saddler of KeyBanc next.

Jordan Saddler - KeyBanc Capital Markets

Hey guys! Sorry about that I wanted to just follow-up on the spend at Harborside and sort of scope of work that you are discussing. It sounds like is it upgrading to some of the common areas is it just the lobbies and sort of what's the expected spend there and timeframe?

Mitchell E. Hersh

Well, we are doing, we are sort of doing I don't think Clark will mind if I say this is Brookfield place there. We have – since we have the same architect and we are taking the entire retail arcade, the entry points at the exchange place, path entry which is the southerly entry, the midpoint entries along the exterior promenades and river walks including reconstructing the river walks to be more conducive to lifestyle changes particular in the new millennial workforce. So all the entry points or the [Atria Mario], all the common areas, all the food services will be cool, edgy redone lots of transparency with glass, lots of white and air approximate constructions in cost budget of $15 million to do that. The architect who is respected group is about 70% done with design development drawings and moving into CD stage but we have been pricing and value engineering all along and we expect to begin construction by June.

Jordan Saddler - KeyBanc Capital Markets

Is there going to be – so that’s $15 million of basically base building work and is there going to be some new space created as a result, some new tenant space, some retail space in some of those areas?

Mitchell E. Hersh

Yes, we are – along the arcade we are maintaining what I call the store front sort of limit in order to reasonably control the scope of this renovation. But in the atrium areas, we will bringing in sort of I will allude to the new age reworks, just type concepts so that people have – that they will actually work spaces within these kind of semi private-public areas. So, we will be expanding some of the retail. We will be expanding the food service element within the atrium area, the management office, the Mack-Cali management office that is off of the atrium I Plaza 3 will become part of the common space and probably a food service facility. So yes, the answer is we will be expanding some of the rentable square footage also.

Jordan Saddler - KeyBanc Capital Markets

Okay. That's helpful. Thank you and then maybe one for Gabe on the multifamily, I am kind of curious just – it's good to get the perspective in terms of what you are building, what you are developing but it's also even though it's early stages, we would be interested to understand what the operating environment looks like for you guys and sort of how that feeds into the opportunities that as you guys see it for the growth in multifamily. So what are you seeing in terms of rents on renewals and new leases in terms of bumps and what kind of NOI growth is sort of are we seeing? Is it accelerating, slowing?

Gabriel Shiff

Thank you so much for the question. Our core markets which are all the Northeast, we continue to see rent growth as well as absorption. I mentioned the details stats before, The Chase at Overlook Ridge as well as RiverTrace because despite the very difficult winter, you have heard that we observed ahead of our projection as well as achieving rents ahead of our projection and that is key because we have housing currently in those marketplaces for example the [Altair] acquisition is located adjacent to The Chase at Overlook Ridge as well as our future development pipeline starts within the next 12 months will occur in both of those communities Port Imperial as well as overlook Ridge.

The other markets where we have our holdings or co-holdings are all as Mitchell mentioned previously tend to be urban infill adjacent to Nash transit and we continue to see high demands for these sorts of properties. And just one more last item, in terms of the acquisition that we are doing, they are not solely based on yield as Mitchell mentioned as well. These are value add opportunities and they are all occurring in markets where we currently manage and on the significant portion of the residential apartment communities. So we have a good sense of demography, a good sense of potential. We are focused solely on properties where we believe with our knowledge of those markets where we can improve those rents materially with our value add enhancements. Is that helpful?

Jordan Saddler - KeyBanc Capital Markets

It is, but on an operating basis, what do you – across your operating assets, forget about the development for a second, and lease up for a second, across your operating assets in Jersey City or along the New Jersey waterfront, in the sort of more stabilized assets, what are you seeing in terms of same store NOI growth if you will and the prospect for same store NOI growth for this year? And what are you seeing in terms of renewal spread? So rents on renewal as you are handing customers leases and releasing existing units and/or new releases? So how much is the rent going up?

Gabriel Shiff

Sure. We are seeing rental growth generally in the 3% to 4% in a range which corresponds obviously down to NOI growth as well and similar numbers our utility charges like the portfolio we operate in the same core geographies, we are going to be up for the first quarter this year. They were up so that will impact NOI, but corresponding that with our rent growth, we still will see bottom line NOI growth in our portfolio despite adjacent lease ups we are not seeing an increase in vacancy across the markets. So we have our existing office portfolio, our residential portfolio.

Jordan Saddler – KeyBanc Capital Markets

Okay. And you are not --

Mitchell E. Hersh

Jordan, let me just add one comment to that. I am glad that you asked the question and I am glad that Gabe also responded to the utility usage because in fact no asset class is immune from the effects of this winter and we didn’t even talk about snow removal which is probably $0.02 of the excess and also affecting some of the multifamily. But, yesterday we had a meeting with Ironstate URL partner who obviously has a great deal of product in our markets and they opened up a 48 unit URL which we toured yesterday, partly was sort of the other side of the Jersey City infill location in the center of the Jersey city and the reason that it was – that they purchased it was to use it almost as a laboratory to continue to improve the brand of what we are creating in URL in terms of the amenities, the efficiencies and the desirability particularly by the new millennial worker and the ability for people who don't necessarily want to have roommates because if you are going to be renting in Brooklyn, or in New York City, chances are that it's not affordable for young urban professionals just coming into the workforce unless you have roommates. And so, we are kind of catering to a part of the market that’s not really been focused on and they have 48 unit redevelopment I will call it and the demand literally is out the door, it's 100% full other than two units that we retain or they retain for to showcase as model and the rents have approached $46 a square foot.

It's not located on any public transportation line and it has very limited parking available to it so you can imagine what is happening along the waterfront where you have the access to public transportation in multiple forms both up and down the coast and across and back and forth over the river very path all of that and a much more highly amenitised location. But what they are seeing there since they opened it a year ago about 7% increase in the rents. So, it's very, very strong urban core along the waterfront.

Jordan Saddler – KeyBanc Capital Markets

Okay. Thank you.

Mitchell E. Hersh

You are welcome.

Operator

And next we will hear from (inaudible) of Citi. Please proceed.

Unidentified Analyst

Yes can you hear me now? Okay, great. Thanks. Just for the remaining role the million 3 square feet is there certain retention ratio or have the discussion progressed in terms of retaining a certain size of those tenants in terms of confidence level?

Mitchell E. Hersh

Yes, we have a million 300 and 5,000 square feet. We have definitive move outs of 52%.

Unidentified Analyst

And then the other stuff is still working on in terms of trying to release?

Mitchell E. Hersh

Either they have committed to stay or – and we just haven’t transacted yet or they have indicated that they will probably stay.

Unidentified Analyst

Right. So then you effectively have to just going back through to get the occupancy effectively have to lease up 900,000 square feet of vacancy within the portfolio to get to the target somewhere in that zip code?

Mitchell E. Hersh

Yes, it's to get to the increase of point 6, yes. Somewhere in that zip code and traditionally but for the extraordinary conditions that we faced in the winter and the fact that we diminished the size of the portfolio somewhat we were doing a million square feet a quarter.

Unidentified Analyst

Okay and then just on the multifamily platform, you are clearly progressing along the front on your utilization of sites and the developments and the acquisitions, the structure of the lot of the Roseland partnerships were complex, right? The number of the assets were sliver and preferred equity, sliver equity issuance and the more lever, there are lot of joint ventures, is there anything that you are doing on that front to simplify the leadership?

Mitchell E. Hersh

Yes. Yes. We are – there is not too much we can do about some of the older legacy joint ventures. They are sort of what they are but on a go forward basis, we have been in very, very deep discussion with the principal institutional partners particularly one that starts with the P and the Roseland team has been fully engaged with that partner about restructuring the go forward on all of the assets and frankly might arbitrate here or there so that we can get rid of couple of the joint ventures and Mack-Cali will own 100% of the assets are couple in Port Imperial. But the structure going forward is going to be simplified. It will be basically a 50/50 deal on everything we do, basically pari pasu on overturns and we expect to not only get our promo for adding the value of the hard work for example in Port Imperial that Carl Goldberg has done over 20 years to get the entitlements. But, the increase in land value etcetera is the result of that and we expect that based on our current level of discussion that we are going to be able to monetize that promo at the what I will call the land closing and those are very active discussions. You will not see Mack-Cali enter into any of what I will call the old legacy joint ventures. The reason they exist it was because Roseland didn’t have a balance sheet and so they put the swat equity in, the expertise and the capable development arm and for that and exchange for that rather they got a promoted interest and fee income. But now with the strength of Mack-Cali, we want to have pari pasu returns with these organizations. So yes, we have been very, very engaged in that Michael.

Unidentified Analyst

And then, last one just in terms of the three co-president you know as you embark next year will be the three year period upon which the promo would be measured but also I guess their agreement to stay, that stay agreed to stay for those three years, I guess it – has there been any thought or movement about securing the three longer terms and just share just a little bit about sort of head management team and how this division where Mack-Cali is going the importance of those three principals?

Carl Goldberg

This is Carl Goldberg again. The three of us remain fully committed to the growth of the Mack-Cali multifamily platform. I think Mitchell said very clearly and very accurately at the answers at the call the synergy between Mack-Cali and Roseland property company. Now Roseland Mack-Cali has been extraordinarily strong from top to bottom. I think the personnel chemistry between the three co-presidents as well as the senior leadership and Mitchell Hersh is the CEO as well as the senior executives here has been seamless. And so, I anticipate significant conversations to be very constructive going forward in terms of a longer term commitment by the co-presidents to Mack-Cali. I also do want to add one other comment to your question that’s why I emphasized with the freehold township development that’s coming out of entitlements shortly that 360 unit multifamily community will be a 100% Mack-Cali community and so when we’re doing new land acquisitions and processing them through the entitlement process to create expansion to the multifamily platform, we’re looking for them to be wholly owned a 100% Mack-Cali assets. And so I think you are going to see continued movement in a very short period over the time to a greater percentage of ownership of multifamily assets as they continue to come online in the expansion program.

Mitchell E. Hersh

And the net result of that of course is a simpler story, less complications.

Unidentified Analyst

Okay. Thanks for the color Mike.

Mitchell E. Hersh

Thank you.

Operator

And there are no further questions at this time so I would like to turn the call back over to Mr. Hersh for any final closing remarks.

Mitchell E. Hersh

Well, thank you for joining today’s call, I think it was a thorough and full discussion and we will soon arrange something in accordance with my dialogue with Michael Bilerman who have a more detailed investor day if he will for lack of better term to get into very granular detail of what we were up to with the multifamily transformation. So, I want to thank you again and I look forward to speaking to you if not before next quarter, but I think probably before since we have (inaudible) coming up shortly. Thank you, good day.

Operator

And that concludes today’s conference, I thank everyone for your participation.

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