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

Mack-Cali Realty Corporation (NYSE:CLI)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

Mitchell Hersh - President and CEO

Barry Lefkowitz - EVP and CFO

Analyst

Jamie Feldman - Bank of America

Michael Knott - Green Street Advisors

Craig Mailman - KeyBanc Capital Markets

James Sullivan - Cowen and Company

Steve Sakwa - ISI Group

Josh Attie - Citi

Operator

Good day everyone and welcome to the Mack-Cali Realty Corporation second quarter 2012 conference call. At this time, I'd like to turn the conference over to the President and Chief Executive Officer, Mr. Mitchell Hersh.

Mitchell Hersh

Good morning, everyone, and thank you for joining Mack-Cali's second quarter 2012 earnings conference call. With me today is Barry Lefkowitz, Executive Vice President and Chief Financial Officer.

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

First, I'd like to review some of our results and activities for the quarter and generally what we're seeing in our markets, and then Barry will review our financial results. FFO for the second quarter 2012 was $0.62 per diluted share.

As you'll note from our press release, we did have solid leasing activity, totaling almost 940,000 square feet of lease transactions during the quarter. And that figure included 338,000 square feet of new leases. Our tenant retention was 58.1% of outgoing space, reflecting a continued trend of downsizing and adjustments in businesses that are throughout all of the sectors that we enjoy within our portfolio.

We ended the quarter at 87.6% leased, very slightly down from last quarter's 87.9%. Rent on renewals rolled down this quarter by 3.1% on a cash basis compared to last quarter's 3.7% cash roll down, reflecting the fact that I do believe we're sort of at the bottom of the trough. And now it's just a question of how long it will take to accelerate and increase demand in the service-based economy and add employment.

Remaining lease rollovers for 2012 are just 4.1% of base rent or slightly less than $26 million. Our leasing cost for the quarter were $3.10 per square foot per year, down from last quarter's $3.85 per square foot per year. Again, at the risk of redundancy reflecting the fact that I do believe we are in a trough right now and sort of at the bottom.

Despite a challenging environment, the statistics bear out the fact that our portfolio continues to outperform virtually every market in which we operate. Our lease grades exceed market averages in Northern and Central New Jersey, Westchester, Suburban Philadelphia and even Washington D.C.

Looking at some of the activities during the quarter, as previously announced just a short time ago, we entered into a ground lease with probably one of the most coveted retail tenants, doing business at least in the North East, Wegmans Food Markets. This ground lease will be at a sight that's undeveloped in Hanover Township, New Jersey, Morris County, located at Sylvan Way and Ridgedale Avenue.

Wegmans plans to construct an approximate 140,000 square foot store on a finished pad that we will be delivering. And certainly, this is not only a great opportunity to put our strategically located land bank to use in a very diverse manner. But I can't tell you about how many communications I have received, excited about the fact that Wegmans will be a very welcome addition to the community and to the county. As well as Wegmans will have probably 35,000 or 40,000 square feet of ancillary retail on the balance of that sight. All will be in the form of ground lease structures as currently anticipated.

And now turning to some of the leasing during the quarter, several of the notable transactions that we've outlined in our quarterly filings include the following. As we previously announced, the Bank of Tokyo-Mitsubishi, BTMU, a subsidiary of Mitsubishi UFJ Financial Group, signed a 100,000 square foot expansion at Harborside Financial Center Plaza 3, along New Jersey City waterfront.

This expansion now brings the banks presence at the waterfront in Harborside to approximately 262,000 square feet on a long-term commitment. The building, Plaza 3, as we refer to it is about 726,000 square feet and it's 97.3% leased with this expansion.

MD On-Line, a provider of electronic data interchange solutions, signed a new lease for 33,000, at 6 Century Drive at our Mack-Cali Business Campus in Parsippany. Relocating and expanding around slightly less than 10,000 square feet at another one of our properties in the Campus, reflecting the fact that certain segments of the economy are expanding, certainly in the technology and electronic data type solutions.

And we were witnessed to and are participant in a rapid expansion. And given our presence in that sub-market and at the Business Campus, we were able to easily and seamlessly accommodate a tenant's rapid expansion, which is part of the philosophy of our company to have deep presence in markets and deep relationships with our tenants, so that when they expand or contrary when they need to contract to deal with business conditions, we're there as their partner.

Up in Westchester, Bunge Management Services and international agribusiness and food company, signed a lease renewal for 66,000 square feet at our 50 Main Street Tower, in White Plains. This 309,000 square foot office building, located in Westchester Financial Center at the Train Station is now in excess of 85% leased.

Also in Westchester, MyPublisher, a provider of custom photo book software and printing, signed a new lease for 40,000 square feet at 8 Westchester Plaza in Elmsford. The 67,000 square foot office/flex building located in what we call our Cross Westchester Executive Park is now 100% leased. This expansion also reflects at least good fundamentals occurring in parts of the economy related to technology and digital marketing and sales.

In the medical arena, Sterling Medical Services and medical supply distributor happens to be a subsidiary of McKesson Corporation, signed a lease renewal for the entire 49,000 square foot office/flex building located at 2 Twosome Drive in Moorestown West Corporate Center in Moorestown, New Jersey.

Moving on to our financial activities, during the quarter we completed the sale of $300 million in 10 year senior unsecured notes at a very favorable interest rate of 4.5%. The net proceeds, which by the way was upsize, the deal was upsized that was over-subscribed were used primarily to repay outstanding borrowings.

And then we subsequently redeemed early for cash, $95 million of 6.15% notes that were due in December of this year and $26 million of 5.82% notes due in March of 2013, thus taking the positive arbitrage in our favor even after incurring about $4.5 million of prepayment cost. These successful financing trends actions clearly enhanced our financial flexibility and solidified the strength of our balance sheet moving forward.

Certainly, on another note, we continue to be recognized for our expertise in property management and superior energy performance. Earlier in the quarter, we announced that three of our New Jersey properties received Energy Reduction Awards from the New Jersey chapter of BOMA. These awards went to our Bridgewater Building, Mack Bridgewater 1, 8 Campus in Parsippany and 10 Mountainview in Upper Saddle River.

Another great achievement in running our buildings efficiently, helping to reduce our carbon footprint, and the cost of operating our buildings for both the benefit of the Mack-Cali stakeholders and our tenants.

Some of the other things going on in the company include the fact that we yesterday closed on the sale of our building at 95 Chestnut Ridge Road in Montvale to an end-user. Our 47,000 square foot office building built in the 1970s that will serve as the corporate headquarters for a company moving from Hackensack, New Jersey, AP Industries.

We are nearing completion of the due diligence phase of the sale of our 3 Strawbridge Office Buildings in Moorestown, New Jersey. They're under contract and have about two weeks left on due diligence. But I do believe that our transaction will move forward. You'll recall that those buildings total about 225,000 square feet. They're about half vacant at this point. And the sale price will be in the order of magnitude of about $90 a foot in what historically has been a challenging market for Class A office in South Jersey.

With respect to our exciting multi-family rental apartment, development project at Harborside project, we now call URL for urban ready living. We have made some adjustment in our phasing of the project. We would now have reduced the Phase 1 development to one tower on the notably most pedestal.

We've increased the height to 69 stories. Again, mirroring the image if you will, and from a height perspective of the Goldman Sachs building. Probably we will parallel that building and being the tallest in the state of New Jersey, certainly along the waterfront and the Skyline and Vista along the waterfront. All of this is available now on our website.

The first tower will be a $230 million project, totaling 766 apartment units with a variety of choices from studio apartments to micro studio apartments, and then of course one bedroom and two bedroom apartments. The project is on track for a late fall groundbreaking, more to come on announcing that. And we're hopeful being in a position of closing a financing on the project before year's end.

And so we're certainly excited about moving forward with our transformation if you will, into the multi-family sector. I am sure that certainly all of the analyst on the call have nodded a roughly $3 million expense item in our G&A, which consist of transactional cost in connection with a larger initiative that I have alluded to in prior calls, that we believe we are nearing completion of, that would significantly enhance our presence and expand our diversity into the multi-family apartment arena.

Not too much more that I can say on that, other than I'm extremely optimistic about moving that transaction and bringing that across the goal line in the very-very near future.

With respect to guidance, you see that we've raised our guidance that previously had 250 to 260 range per share and we have raised that and tightened it up well, what's about a $0.10 spread, but raised it to 252 to 262, reflecting a run rate for the next two quarters of about $0.61 a quarter going forward. That's our view of the world right now.

We did achieve slightly higher topline revenues this quarter, certainly The Bank of Tokyo-Mitsubishi transaction, which was a very exciting transaction for us. And we are worked on it for a long period of time to get the approval out of Tokyo to move forward and certainly that's a benefit to us.

But we are still conservative and not yet convinced that there is a lot of clarity in the corporate world among multinational companies and domestic corporations about expanding there business plans and expanding employment, thus resulting in enhanced and increased office occupancy.

I think the election as probably all agree will be very pivotal. It will be very important to see what some of the policies and cost of doing business will be in the future. And then companies hopefully will make decisions about capital spending, which include their largest cost, which is the cost of employment.

And clearly it's been a long period of time. We all want to get back on the tract of economic growth in this country, which has been challenged for some extended period of time. So there you have it. That's a brief summary of what we've done in the past quarter, some of the opportunities that we're looking at moving forward.

And now, I'll turn the call over to Barry, who will review our financing results for the quarter in more detail. Barry?

Barry Lefkowitz

Thanks, Mitchell. For the second quarter 2012 net income available to common shareholders amounted to $10.1 million or $0.11 a share as compared to $17.3 million or $0.20 a share for the same quarter last year. FFO for the quarter amounted to $62.1 million or $0.62 a share versus $69.1 million or $0.69 share in 2011.

Other income in the quarter included approximately $1.3 million in lease termination fees as compared to $1.1 million in the same quarter last year. Included in G&A for the second quarter is $2.5 million incurred in connection with exploring potential acquisitions.

Same-store net operating income, which excludes lease termination fees decreased by 0.3% on a GAAP basis and 0.2% on a cash basis for the second quarter. Our same-store portfolio for the quarter was $30.6 million square feet. Our unencumbered portfolio for the quarter ended, totaled 237 properties, aggregating 24.5 million square feet of space, which represent about 79% of our portfolio.

At June 30, Mack-Cali's total undepreciated book assets equaled $5.7 billion and our debt-to-undepreciated asset ratio was 33.9%. We had interest coverage of 3 times fixed-charge coverage of 2.9 times for the second quarter of '12.

We ended the quarter with approximately $1.9 billion in debt, which had a weighted average interest rate of 6.32%. Currently, we have $50 million outstanding on our $600 million revolving credit facility.

On April 19, the company completed the sale of $300 million of 4.5% 10 year senior unsecured notes. These notes were priced at 99.801% to yield 4.525%. Net proceeds were used primarily to pay down our credit facility.

On May 25, 2012, we redeemed our 6.15% bonds due December 15 of '12, totaling in $94.9 million and our 5.82% bonds due March 15 of 2013 totaling $26.1 million. We recognized a charge of approximately $4.4 million related to the early prepayment of these bonds. We adjusted our range of FFO guidance for 2012 to 252 to 262 a shared to reflect second quarter actual results.

Please note that under SEC Regulation-G concerning non-GAAP financial measures such as FFO, we're 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 Regulation-G as well as our 10-Q. Mitchell?

Mitchell Hersh

Thank you, Barry. At this point, I'd like to open the call to questions. So operator would you set up the queue.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Jamie Feldman with Bank of America.

Jamie Feldman - Bank of America

I was hoping you guys can talk a little bit about your conversation with financial services tenants on the harbor front and even around your other markets. Just kind of what are they thinking about their current space usage and the risk of downsizing their space?

Mitchell Hersh

I think that financial service firms at this juncture are being very cautious. They are looking at consolidation within space that they control. They are very cognizant of space utilization in terms of density. And I think the general trend and the general discussion is one of caution.

We don't see at this point a much expansion and certainly in what I would call the domestic financial service companies. The European banks and companies, obviously, have their issues that we all read about, whether its LIBOR issues that's effecting some of the more significant banks over in London.

And so I would tell you that it's pretty rare at this juncture to see expansion within that sector. And I think they're very price conscious. You just recently saw the fact that at the World Trade Center, that several of the Silver Screen buildings have effectively been halted in terms of their construction, one at the eighth level, one at the foundation level. And that's simply because there are no tenants around to fill very expensive buildings at this point.

So I think the combination of lack of clarity going forward. All of the issues surrounding Dodd-Frank have weighed heavily on that industry transaction or fewer. You're seeing some of the large banks or large institutions like Goldman Sachs, announce new bank, new activity, more invested in global wealth management, because there are fewer transactions in the investment banking community available right now. So that's exactly what we're saying, Jamie.

Jamie Feldman - Bank of America

I mean in your portfolio what do you think there is in terms of excess capacity?

Mitchell Hersh

I think that we're not without risk in the sense that. For example, we know of a 68,000 foot use that's a component of one of the bulge brackets banks in one of our suburban locations. It had several years remaining on their lease. They're moving their people down to the waterfront on Jersey City side, to consolidate in space that they currently lease not from us, but from a friendly-competitor along the waterfront, because they need to distill their work force, if I could use that word. And they need to take advantage of space that they currently have as a long-term liability on there P&L.

So we've seen some of that. But I would say that in Jersey City, our cost of operating and our rent cost and the fact that we have some of the newest best space in terms of advantage, allows us to be very, very competitive. So I think we have opportunity down along the waterfront.

But in some of the suburban locations, I'm giving you a case in point where that reflects the attitude of financial service companies, at least anecdotally. And I don't think they want to pay big rents at this point. I don't think they can justify it, because of the lack of transactional activity and that's putting some of the newer development projects at some level of the risk.

Jamie Feldman - Bank of America

And then can you walk us through your largest expirations over the next year and kind of let us know where they stand?

Mitchell Hersh

Down in Plaza 5, and this would be a third quarter issue, we have a large tenant about 112,000 foot tenant that their lease is expiring and that's the definite vacate. I would tell you a lot of activity on that space. This is a financial service tenant that is National Financial Services actually.

And we have a lot of activity on the space more in the service and technology sector, looking at the space. And we also have a global financial company bond into dealer that is looking at some expansion, because of the contiguity of their space. And the fact that it's Plaza 5 it's virtually a brand new building.

We have mostly I would 10s, 12s, 15, 17,000 foot definitive vacates in our host and variety of locations throughout the suburban portfolio. These are traditionally activities that we deal with everyday of the week.

In Short Hills we have a fourth quarter event, where KPMG, his lease is expiring. They've been in the building actually since the day we built it and completed the building in 1980. And they are moving to another location.

And the reason they're moving to another location is simply what we've seen in the accounting sector for quite frankly. Probably more or so then in a lot of other disciplines and sectors, is a mantra for space sharing and hoteling. And so they have to rebuild there space.

We're seeing a little bit more firms, but we've seen a lot of it in accounting firms. They have to restack their space to accommodate much greater densities, six, seven, eight people per thousand.

And so what you're going to see at least in some other locations is the cost of enabling that kind of thing, whether it's adding parking or whether it's adding HVAC capacity to a building to accommodate those densities is going to be a sort of a phenomenon. And that we're going to see in the office arena going forward.

These are corporate mandates at least at several of the Big Four accounting firms. And so that's why they're leaving. It's about 84,000 square foot lease. I can tell you right now, we're pretty active on discussion for about 40,000 feet of that with a new tenant. And so we'll deal with it, it's not something that's immediate, but it's a 2012 expiration.

Operator

We'll take our next question from Michael Knott, Green Street Advisors.

Michael Knott - Green Street Advisors

Mitchell, can you just talk about maybe the revised cost and unit count of the revised phasing at the multi-family development?

Mitchell Hersh

We had talked about close to $400 million for Phase 1. And we have a very, very unique design. We brought in the architect from Amsterdam. And by the way this is all available now on our website. And I credit our Vice President of Marketing, Ilene Jablonski, who has done a fastidious and superb job of integrating all of this on our website.

So our architect Concrete in Amsterdam has been working very, very closely with our consultants. And the original phase had two towers on a relatively confined pedestal. And we had always a slight concern that footprint of these two towers might be a little closer than we would have liked. The Phase 2 has always been two towers, but it's a much larger footprint for the pedestal.

So what we have done is we've made the decision for a variety of reasons. We felt that the absorption of fewer units would obviously occur much more quickly if we reduced the unit count in Phase 1.

We are seeking a particular federal financing, a HUD financing, that is very sensitive to absorption and unit mix and unit count. And so we felt that a much better solution, much more sort of financeable would be to go to one tower on Phase 1 with all the same amenities, all the connectivity of urban ready living that we've been emphasizing in this project.

And so we now have a 69-storey tower with same parking ratio, which is about 0.4 and we have 766 units, 25% of which will be studio. The average studio apartment will be 467 square feet. Although, we are putting in or including I should say, of that those 188 units.

We're going to have a smattering of what we call microstudios, which are about 400 square feet. You may have seen Mayor Bloomberg, advocating this whole concept of at least in New York City of micro spaces, and they were talking about 280 square feet, which is like a big closet.

So 25% studio, 59% one bedroom averaging 630 square feet and the balance 16% two-bedroom averaging 871 square feet. So the biggest population will be in the one bedroom's and in the studios. And we are on track with our development, our constructions drawings, wind testing, and all of the elements and we expect to be in the ground literally and figuratively later this year.

Michael Knott - Green Street Advisors

The $400 million was about the same as before for Phase 1?

Mitchell Hersh

Phase 1 was about $400 million. It's now $230 million Phase 1.

Michael Knott - Green Street Advisors

And then can you just talk maybe a little bit about the strategic considerations for this transaction you're talking about? And maybe any rough sense of size or timing?

Mitchell Hersh

Well, I wish that either this call could have been a week or so later or vice-versa. So there's a limited amount that I can tell you at this point without violating selective issues, disclosure issues, et cetera. I can again emphasize the fact that the expensing of the deal cost, which is of course an accounting treatment requirement would kind of tell you that it's a large transaction.

And it will further our objectives, my objectives and shared by the Board, to diversify the company, to transform the company, to be a very large player in the multi-family for rent arena. I could tell you that the geography of what we're talking about is very friendly to us. It's very compatible to the geography of our office holdings.

And this opportunity as well as becoming a prolific operator and developer in the multi-family arena, would enable us and allow us to very comfortably put some of our own land inventory to work, not unlike what we've done with the Wegmans, but in the multi-family arena. And also some adaptive reuse, where as I've talked in prior calls about the fact that just certain assets may have a better future life as being something else other than in office building. And so beyond that, timing is unfortunate, but there's really not too much more I can tell you right now.

Michael Knott - Green Street Advisors

But it sounds like this is going to be transformative and sounds like your are more skeptical or downward on sort of long-term prospects of office and that's why you want to diversify?

Mitchell Hersh

I think that the office business for high-quality operators, and high-quality assets and high-quality locations. And the definition of high-quality operators is how we see ourselves at Mack-Cali, tenant focused and the well capitalized. Enabled to deal with rather significant capital needs, and retenanting office buildings and keeping them fresh, and technologically efficient and proficient.

So it's not been a dollar on the office market. I think selectively there are markets that have remained difficult and probably will remain so, even as the economy begins to regain some traction. And that's partly due to paradigm shifts and demographic shifts, and the trend to transit oriented and urbanization, in some instances for the new millennium worker.

We operate in a world right now that's consolidating. And New Jersey, for example, the pharmaceutical industry continues to consolidate. And its not so much that the performer companies are big space leasers and mostly they own their owned facilities, and their facilities, their corporate campuses are not even a competitive threat if they decided to vacate them and lease them to third-party tenants.

But it's all the other service providers that conglomerate and aggregate around companies like the Big Pharmas that are taking less space and have fewer employee needs right now, because of some of these consolidations. And frankly it's the same in financial services.

You see, financial services, even if it's a city oriented, New York City or other gateway city orientation. If they're in a downsizing contracting mode, well, that's certainly going to affect the law firms, and the accounting firms and all the other service providers that are doing business with them.

So again, it's not being downward, it's being clear thinking. And I think somewhat visionary about how office space will evolve with a growing economy going forward. There will be a need for high-quality sub-urban campus locations that are well located, that are located near public transportation, and near affordable housing, with good school systems, et cetera.

There are other instances where that may not be the case. However, having said that, with regard to the multi-family sector and even though it's been hot, and valuations are at very, very significant numbers, and cap rates are low, et cetera. There remains what I would say an insatiable demand in certainly urban areas or Class A urban areas, transit oriented urban areas for work force typce housing that is affordable.

Family formation is occurring much later. The for-sale single-family housing market has really not improved. I mean every day you see some new statistic and it's bouncing around up and down. But most young people still don't qualify for mortgage loans, even though mortgages are some 3.5%, they can't get them.

And they partly can't get them, because they have such significant student loans and don't have the deposits to put down. And so we see a continuation of demand in the affordable, extremely well-design and well located sector of the multi-family of arena for rent arena.

So we're going to balance things going forward. We're going to sell more office properties. And I think forgetting reasonably good numbers, even though they're not huge deals, which is $25 million worth of sales with Moorestown. But we're getting reasonable numbers.

And we will deploy that capital that we otherwise would have invested in tenant improvements and commissions in areas that commanded three to five-year leases or seven-year leases with cancellation after five or five-year leases with cancellation at the three. And we'll put that in hand to local entrepreneurs that have more local presence if you will, in small micro markets. And we'll do a lot of that selling going forward.

So we're going to try to balance things. Hold office profit where we think it meets to all of the criteria that I've just talked about. And look to dispose of it where we make it into something else, that be a residential or potentially retail or something else, where we don't think it has good prospects going forward.

Operator

We'll take our next question from Jordan Sadler with KeyBanc Capital Markets.

Craig Mailman - KeyBanc Capital Markets

It's Craig Mailman here for Jordan. Mitch, maybe just a follow-up on the repurposing of land for multi or retail. Have you guys started to formerly kind of go and try to rezone some of these plots or identified asset or land plots that you want to convert to multi?

Mitchell Hersh

I am imminently intending to do that at least on one significant site. We have obviously done setting the Wegmans situation aside on another site.

Craig Mailman - KeyBanc Capital Markets

Is that in New Jersey or another one of your markets?

Mitchell Hersh

It's in New Jersey.

Craig Mailman - KeyBanc Capital Markets

I guess as you think about kind of transforming the company be more multi, is that 30% to 40% still kind of a good number you think over the next five to seven years or is that still formulating?

Mitchell Hersh

No. I think that's a good number.

Craig Mailman - KeyBanc Capital Markets

And then, just separately the mix piece that you guys have with wins are up on the Stanford portfolio. I know that maturities are coming up soon. Is there any increased clarity on maybe what the borrower is going to do?

Mitchell Hersh

The borrower believes that they have conformed and complied with the net operating income test to get their first one-year extension. The First Mortgage G is revealing that. And we will obviously comport as a lender with the First Mortgage G. I could tell you that it's being reviewed right now and certainly that's in any day situation.

Craig Mailman - KeyBanc Capital Markets

And then just lastly, on the guidance, was there any change to the underlying same-store assumption?

Mitchell Hersh

No. Again the guidance reflected the actual results in the quarter. The topline results were slightly improved. It's a great thing. But it was a little anomalous that in a sense that we're very fortunate to make that Bank of Tokyo transaction, which had a lot to do with it.

Operator

We'll take a next question from James Sullivan with Cowen and Company

James Sullivan - Cowen and Company

Mitch, I wonder would you can tell us regarding the yield on the Wegmans ground lease, part 1. And part 2, the incremental 40,000 square foot ground lease, if you can give us some indication as to where the yields will be on that?

Mitchell Hersh

Well, I'm going to put it in this context. I'm going to say that we have a carrying basis on the land. And that carrying basis is depending on how you cut it. And to the extent we had capitalized, we no longer do so, but we had capitalized the expenses on the land when were permitted to do that.

It would reflect that that piece of ground is at least carried on the books for somewhere in the range of $30 million. And with the Wegmans lease and the incremental lease, if you were to assume that it has a value of say free and clear cap rate of 6.5%. Thus, as good as it is, retail is always a little vulnerable.

It would demonstrate that the transactions together with the cost of delivering the pads that we have to do and the brokerage fees that we would pay, which are not huge. But that these land sites will now be profitable to us.

James Sullivan - Cowen and Company

And on that current lease, is there some provision or what kind of provision will there be for increases in the rent on the lease?

Mitchell Hersh

The rent increases every five years.

James Sullivan - Cowen and Company

Can you assure that's the size of the increase, 10%?

Mitchell Hersh

10%, yes.

James Sullivan - Cowen and Company

On New Jersey City residential, what are your thoughts about the initial yield there?

Mitchell Hersh

6.8% to 7%, depends on locking up the financing that we've been working on. I think that it certainly have an impact, but we're talking about an interesting program that has 40 year amortization through the HUD guarantees. Our expectation is to deliver on an un-leveraged basis, however, at close to a 7% yield.

James Sullivan - Cowen and Company

And are there any thoughts, once that financing has put in place with regarding risk mitigation as to your capital position, now your're thinking about a partner?

Barry Lefkowitz

It's quite possible we would do that.

James Sullivan - Cowen and Company

And regarding the cost incurred in the second quarter associated with the transaction which you've alluded to, does your guidance for the second half of the year includes some additional cost or not?

Barry Lefkowitz

Yes, which is another reason that we're being somewhat cautious and careful about the good day run-rate going forward for the next two quarters.

James Sullivan - Cowen and Company

And then finally from me, again, regarding refinancing activity, you do have some sizeable high coupon 2014 maturities. And can you just remind us if any of that is pre-payable and what your thinking as about addressing that?

Mitchell Hersh

Well, we have $100 million tranche '13 of unsecured and its 4.6% on secured $100 million. In '14, we have $200 million, that's pretty long way away and that's 5 and 8. So '13, other than the $100 million is a pretty quiet year in terms of any secured financings that we have. But they totaled like $19 million. '14 is a little more active for us mortgage financing, it's about $135 million and $200 million in unsecured.

So we just did a ten-year deal at 4.5% I don't know exactly, where the deal could be done today. Treasuries are 50 basis points, of 45 basis points, tighter than when we thought we were in nirvana, when we have sold 1.96% treasury. Now, they are $145 million and $150 million. But I don't know where spreads would be, but nonetheless, the note is 4.6% a year from now. So it doesn't make sense, do anything there.

James Sullivan - Cowen and Company

And in terms of the 2014, is it just too early to look at to at something?

Mitchell Hersh

That's too early. The yield maintenance would be severe. Right now, we're drawn on our line, somewhere around $50 million, and so we have enormous capacity and no where near enough warehousing if you will, to enter the bond market right now.

Operator

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

Steve Sakwa - ISI Group

Mitch, my questions have been answered. It was on Wegmans.

Mitchell Hersh

Thanks.

Operator

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

Michael Knott - Green Street Advisors

Mitchell, just a follow-up on another question that was recently asked about any change in same-story guidance, you said no. And I think the prior guidance was minus three to minus five?

Mitchell Hersh

Yes.

Michael Knott - Green Street Advisors

You guys are plus two for the year, so does that imply a pretty ugly second half?

Mitchell Hersh

No, we were kind of looking at it consistent. Our second quarter of GAAP analyzed, its down three-tenth of percent and cash is down two-tenth of a percent. The first quarter was anomalistic. Its 4.8% up on cash and 3.8% but if you look back on the first quarter, you saw major declines in operating expenses. So utilities were down 18.5%, operating service were down 16%.

Then moving into this quarter, the quarter that we've just completed, the second quarter, utilities were still down 13%. We don't know if that trending is going to continue, because we've already seen actually huge increases in natural gas has gone from $2 a ton to $3 which is huge.

So we don't know exactly what the story is going to be with that very hot summer, so far. So we're going to see electricity cost increase, so we're concerned about that in our thinking, and in our modeling and have services have basically normalized. They still remain a slightly negative trend because of union contracts and so forth. Maybe we're being a little too conservative in saying 5% but certainly it's going to trend down about 3%.

Michael Knott - Green Street Advisors

But that you're saying that's on the same basis, or apples-an-apples with the plus 2.2% for the year-to-date period. You're not sort of adjusting 1Q to get to your 3.25% down.

Mitchell Hersh

Absolutely not.

Michael Knott - Green Street Advisors

And then can you talk for a second, I think we saw something that your multi-family partner is building another project, right near your development with them. Can you talk about that?

Mitchell Hersh

Our multi-family partner, which is Ironstate formally as Applied this building a project. While they hit, they had an old partnership down at Liberty Harbor by the Marina, it's sort of near us. But it's kind of a different location. It's not in the Transit line. That's an old partnership. It's a much smaller project and it includes a boys club and a girls club in Jersey City. It's a very different kind of project. It's located right at the Liberty Harbor Marina.

It's a partnership they've had in effect and they weren't able to get it off the ground because of whatever reasons, so for a couple of years. But it's a small project.

Michael Knott - Green Street Advisors

And it's not terribly competitive with your project.

Mitchell Hersh

I actually don't view it as quite frankly the same market as we're going to be in.

Michael Knott - Green Street Advisors

And then for the total development there, I think in the past you talked about Phase 1 and Phase 2 totaling maybe almost $1 billion but now Phase 1 is less dollars, that means the total is less now.

Barry Lefkowitz

We adjusted that to more like $750,000 to $800,000 or $800 million rather on the prior call. Because it look like Phase 1 was with the two towers it was actually $400 million before un-rounding, it was about $380 million. The subsequent two towers will be in equal size to the one that we've just talked about. So we're talking about still three quarters to $1 billion for the project.

Operator

We'll take our next question come from Josh Attie with Citi.

Josh Attie - Citi

Just going a little bit further on the multi-family, I guess, the transaction that you're working on, I guess as you think about, you obviously have the Jersey City project but making a bigger foray into multi-family and becoming a diversified company. The stock already trades at a discount to NAV. Don't you think that complicate things a little bit further, potentially adds more volatility potentially as going into a marketplace that's maybe slowing there growth.

I'm just curious why not just keep focusing on the core sell assets on your sell assets and buyback stock or sell the entire company if it's not achieving the right value. I'm just trying to put all the pieces together.

Mitchell Hersh

Well, you and I have had this conversation at least sufficiently in the past. I believe that our relationship and our land positions both in terms of what we can redeploy or repurpose in the future for product type that's other than office is an extremely valuable asset.

We will be doing something with a group, I'll just call it, that have the same philosophies that will be aligned completely with our goals and objectives to build and operate and also fairly significant initial batch of operating multi-family product in the best locations that have similar footprint, similar overlay as the company does.

The office business in general is a inexpensive business. No secret, we've talked about, I'm sure you have with every other landlord or REIT. The cost of turning over tenants is expensive and if you can achieve the rents to make that profitable, certainly the public sector of the office business has the liquidity and the capital availability and financial flexibility to do that.

But I believe that there will be a better growth trajectory in the multi-family sector in the places that we will be with this transaction. And I believe that it's completely possible and credible and viable to merge those interest with our core business of owning and operating the Class A office asset, and even expanding frankly our ability to offer 24/7 environments where people will work, play and have families, et cetera.

And initially the self-side may have some a concern over the fact that we're not in a tight enough box, because after all that's what you like to do with the companies. You'd like to put them in a tight box, so that they are pure plays, and I understand that. But we're going to make money at what we're doing here, and we're going to selectively sell product and use that capital and allocate that capital for the best growth opportunities going forward.

At this point, we have no intention of selling the company. We have no intension of buying back stock. We have every intension of moving forward in the manner that I have described on this call. And some will like it and some won't. Some will write unfriendly analyst note, but at the end of the day, I believe we're going to make a lot of money.

Josh Attie - Citi

But you're going also look at how the share price performs since that announcement, and that's not analysts that's shareholders voting with their feet.

Mitchell Hersh

I think the share price has certainly kept pace. Certainly, I would say outperformed the general suburban office owner in general, if I look at the most the widely-traded names or those with similar volumes of trades. So I think that the stock has performed okay.

I'd like it to perform better, but I think that it will take a level of understanding, it will take a level of demonstrating performance and articulating very specifically, what the opportunity said is with this multi-family diversification. So that's what it is.

Josh Attie - Citi

If you are $5 dollar company today, how do we think about the incremental pieces and timing of incremental multi-family? You talked about Jersey City being at 50, but that obviously is overtime and in multiple phases. With the potential partner coming in, how should we think if there is re-entitlement of existing land, two multi-family and then there this multi-family transaction? How should we think about, how large you'd become, how quickly you'd become more multi-family or a split?

Mitchell Hersh

Unfortunately, I can't go into too much detail and it's not for reasons of avoidance, its reasons of following SEC and governance procedures, because of where we are in connection with this transaction. So I simply can't go into more detail than to say to you that over the five to seven year period that we have talked about on this call, I would expect this company to be 30% to 40% multi-family. So you look into the map.

Operator

We'll take a next question from Jamie Feldman with Bank of America.

Jamie Feldman - Bank of America

Mitch, sticking with the transformation theme, what do you think within the organization has to change? I mean, the DNA has been really has been as an office landlord. So to transform to so much multi-family, kind of how do you reengineer the organization?

Mitchell Hersh

At the risk of sounding like, I'm being evasive. With what we're doing, very little integration other than systems reporting will be required.

Jamie Feldman - Bank of America

And then thinking through your development project in Jersey City, what are your thoughts on competitive supply coming in line around the same time, it seems like there is several projects that are in process there?

Mitchell Hersh

Yes. There are several projects in process. The average occupancy rate along the coast line in New Jersey is 97% to 98%. And the cost of apartments in the high quality brand new product is $40ish a foot. You go to Brooklyn and now you're hovering at $60 a foot, and if you go to New York City, you are exponentially higher than that.

So unless the metropolitan area is going to stop growing and unless the new millennium worker isn't going to be hired by any of vast businesses that are doing business in the gateway cities. We don't see any end to demand, right now and affordable demand in Jersey City. So I think that we will compete extremely well with whatever is currently planned to be developed along the waterfront.

Operator

That concludes today's question-and-answer session. At this time I'll like to turn the conference back Mr. Hersh for any additional closing remarks.

Mitchell Hersh

Thank you very much. Again in closing, we ended the quarter in a very strong position. We had a lot of leasing activity. We are very excited about the opportunities set that I've talked at length about on the call in the multi-family sector and arena. We know that we need to demonstrate our success in that diversification and we're prepared to do it.

And we think we're going to be doing it with the best and brightest, as we move along. So while we certainly maintain a very, very laser focus on being the office landlord of choice in the markets in which we operate and a stable partner for our tenants that is extremely well capitalized and financially flexible. We are equally excited about moving the company forward in this multidimensional direction. So thanks for joining us. And we look forward to talking with you all in the near future. Good day.

Operator

This concludes today's conference. We appreciate your participation.

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

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

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

Source: Mack-Cali Realty's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts