Mack-Cali Realty's (CLI) CEO Mitch Rudin on Q1 2016 Results - Earnings Call Transcript

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Mack-Cali Realty Corp. (NYSE:CLI) Q1 2016 Earnings Conference Call April 28, 2016 10:00 AM ET


Michael DeMarco - President and COO

Tony Krug - CFO

Mitch Rudin - CEO

Marshall Tycher - Chairman, Roseland


Manny Korchman - Citigroup

John Guinee - Stifel Nicolaus

Vincent Chao - Deutsche Bank

Jed Reagan - Green Street Advisors

James Feldman - Bank of America Merrill Lynch


Good day everyone and welcome to the Mack-Cali Realty Corporation First Quarter 2016 Earnings Conference Call. Today's call is being recorded.

At this time, I'd like to turn the call over to Michael J. DeMarco, President and Chief Operating Officer. Please go ahead sir.

Michael DeMarco

Thank you, operator. Good morning everyone and thank you for joining the Mack-Cali 2016 first quarter earnings call. This is Mike DeMarco, the President of Mack-Cali. I am joined today by my partners Mitchell Rudin, CEO; Marshall Tycher, Chairman of Roseland; and Tony Krug, CFO.

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 assurances that the anticipated results will be achieved. We refer you to our press release, annual and quarterly reports filed with the SEC for risk factors that could impact the company. As always, we look forward today to an open dialog about our results and plans going forward.

We filed expanded disclosure about operations in two supplementals, one for Mack-Cali office portfolio and one for Roseland Residential Trust, our residential subsidiary. We will be referring to key pages on those supplementals during this call and as always, we’ll continue to provide the best disclosure of our operations, strategy and results.

We're going to break the call down into following sections. Tony will recap our operating results for the quarter. Mitch will discuss our office leasing results and our view of the markets; and then Marshall will provide an overview of the multifamily operations. I will then close and provide an overview of our capital markets activities, and comment on our views of our guidance and strategic plan before we take your questions.

As disclosed last night, our results show yet another excellent quarter. Our hard work over the last year has shown real results quarter-by-quarter as we look to complete our announced transformation. As stated before, this is a long process and while we have accomplished a great deal in less than a year, we have and will continue to show steady and meaningful improvement quarter-by-quarter.

As we stated the last quarter, we are well aware of the four primary concerns regarding operations and plan to update you on this, as we work to unlock the full value of the company.

One, the success and execution of our operating plan is based on a number of real estate, capital market activities. Leasing, sales, acquisitions, equity raises and development. We have clearly made tremendous progress on a number of these fronts, as disclosed over the last month.

Two, we are over-levered; we are working toward reducing our net debt-to-EBITDA ratio in 2016, we truly value financial flexibility. We repaid this quarter, $63 million of debt at a substantial discount last week and plan to pay down the Prudential loan of $142 million in November of 2016, with sales proceeds. The total reduction will be approximately $205 million of high course debt being eliminated in 2016. We have a clear path, which is shown in the supplemental, to reducing leverage over the next several quarters.

Three, we have a complex story; we believe our story gets more transparent every day. We have started a process to simplify the complexity to realize our potential value. The activity at Roseland and Port Imperial, bought in the Prudential transactions and our completed dispositions of acquisitions on making our story more transparent and easy to understand.

Four, when New York slows down, New Jersey will suffer. Our current results and robust leasing over this past quarter, as well as the general market activity, do not support the logic that New York is slowing down, and therefore, New Jersey will suffer. The results in cash and GAAP roll-out this quarter are going to be the best we achieved in quite a while, and higher than many of our competitors over the last three years.

Our current activity, as Mitch will outline in detail, is excellent. We have outlined our progress in our supplemental, and we will go into further details in our prepared remarks.

I will now turn the call over to Tony, who will go over our quarterly results.

Tony Krug

Thanks Mike. With respect to earnings, as indicated on page 8 of the supplemental, core FFO for the quarter was $49.1 million or $0.49 per share, as compared to $43.1 million or a $0.43 per share for the quarter ended March 31, 2015. For the current quarter compared to last year, the growth in FFO per share resulted primarily from increased base rents and significant lower net property expenses in the current quarter.

We reported net income for the quarter of $62.2 million or $0.69 per share, as compared to net loss of $2.5 million or $0.03 per share for the quarter ended March 31, 2015. Included in net income for the quarter ended March 31, 2016 was $61.5 million of net gains from property related transactions.

As shown on page 23, same store NOI was up 11.4% on a GAAP basis and 7.7% on a cash basis for the quarter, ahead of our expectations and due to both federal leasing results and significant expense savings.

Total company G&A for the quarter was $12.2 million, worth $9 million for the office public company and $3.2 million for our R2 subsidiary. We will continue to focus on G&A expense, as we streamline our portfolio.

Turning to our financial statistics, as indicated on page 22, our total indebtedness at quarter end was $2.3 billion, with a weighted average interest rate of 4.95% down from 5.22% at year end, and we expect to reduce that further, as we move forward in 2016.

Net debt-to-EBITDA annualized for the quarter was 7.41 times. We had a fixed charge coverage ratio of 2.4 times for the quarter, and interest coverage of 2.9 times.

Our $600 million credit facility had $90 million drawn at quarter end and $20 million drawn as of today. We will draw on the line to fund some of the opportunities that Mike will cover in his capital markets overview. Also, I would direct you to page 5 in the supplemental, where we provide a sensitivity analysis on the potential impact on net debt-to-EBITDA, based on some of our planned steps.

I will now turn the call over to Mitch.

Mitch Rudin

Thanks Tony. Our lease space at March 31, 2016 increased to 87.2% up from 86.2% at year end. The 1% increase, primarily resulted from positive leaps in absorption of 0.8% and disposition activity of 0.2%.

Let's turn to the leasing results for the quarters indicated on page 10 of the supplemental; we signed 82 deals totaling 1.1 million square feet, of which 386,000 were for new leases and 738,000 were from renewals. This represents a 48% increase over the activity for the same period last year, and an all time high for this portfolio.

Amongst our significant transaction was Bank of America Merrill Lynch, which renewed 335,000 square feet and expanded by 53,000 square feet at 101 Hudson Street in Jersey City. The tenants lease was originally set to expire in 2017. But it wasn't alone; we also signed four other leases in Jersey City, each in excess of 34,000 square feet. Apart from Jersey City, other notable new leases were signed with the Hackensack Meridian Health System for 61,000 square feet of Metro Park in Edison, and Ferrero USA for 50,000 square feet in Parsippany.

Additionally, Securitas Electronic Security signed a 32,000 square foot renewal across Westchester Executive Park in Elmsford, New York. Our success on the Waterfront and in Metro park, in which we are achieving all time high rents, is where we are acquiring 101 Wood in Metro Park and 111 River in Hoboken, as Mike will discuss later.

Leased rates for first quarter transactions rolled up 9.5% on a cash basis and 18.4% on a GAAP basis. The discipline that we have established on our messaging has paid off, as we are doing larger, more accretive transactions. The average size of our lease transactions has increased by 122% and the average term by 34% from the first quarter of 2015.

You will see on page 32, that our 2016 is quite manageable; expirations are quite manageable. We have 1.2 million square feet expiring evenly across the remaining three quarters. Our view today, is that we are likely to retain about half of these expiries. We believe we can clearly achieve year end occupancy of at least 90%.

Progress continues on our 2017 roll-over, as we updated on page 6. I am pleased to announce that this week we signed a renewal, which reduces our 2017 roll-over by almost 100,000 square feet.

Looking at the markets, the activity on both the Waterfront and in Parsippany continues to be very strong. At the Waterfront, we gained 4.2% in space leased this quarter, finishing at almost 91%. We have almost 1.5 million square feet of leases either out or in active negotiations, and could be in the mid-90s by year end. Jersey City is on a roll, and is on its way to becoming New Jersey's largest city, as well as one of the best mid-sized cities in the U.S. There is not a week that goes by without a favorable article, where it is the new hotspot for people to live; and we are certainly benefitting from this positive perception.

We also had a 2.8% gain in percent lease in our Parsippany market in the first quarter. Other areas where our core properties are performing very well, include Short Hills, Metro Park, Princeton and Monmouth, all with occupancy at approximately 90% or higher. Also, New Jersey, has one of the lowest unemployment rates in the country, decreasing by 200 basis points over the last year, to 4.3%, and we are benefitting from that momentum.

Our flex business continued its consistently strong performance in the first quarter, GAAP rents rolled up 15% on over 150,000 square feet of activity, and leasing costs were held at $2.50 per square foot for each year of the term.

As for Manhattan, as Mike noted earlier, while leasing activity for the first quarter was down from last year, it was still above the first quarter historical average; 6.6 million square feet versus the average of 6.2 million square feet. Asking rents rose by over 2% and the expectation is that both activity and rents will increase this year.

Lastly, we added additional analysis on New Jersey that provides perspective on whether there could be a slowing of growth in the upcoming quarters.

I'd like to refer you to page 7 of the supplemental. The analysis captures the fact, that a good number of our tenants are using our space at a density of six per 1,000. At this level of occupancy, the tenant could pay rents 20% higher and still have the tax offsets, that [indiscernible] to 100% of the rent.

I will now turn the call over to my partner, Marshall.

Marshall Tycher

Thanks Mitch. I'd like to give a brief overview of Roseland, our multifamily division. As Mike mentioned, we filed an expanded supplemental this quarter, to help promote a better understanding of our residential business. To further facilitate disclosure, transparency and capital flexibility, on December 31, we formed Roseland Residential Trust, as a distinct subsidiary from Mack-Cali.

Roseland Residential Trust will execute all of Mack-Cali's residential activities, including the buildout of Roseland's current residential land portfolio, the repurposing and conversion of non-strategic Mack-Cali office assets into luxury apartment communities, and the sourcing of new marketplace development acquisition opportunities. Roseland has grown from an initial Mack-Cali investment over 2012 of $115 million to a current NAV of over $1.1 billion. 91% comprised of wholly-owned or joint venture interests, 76% concentrated in New Jersey Waterfront and Greater Boston region, and over 80% in operating and in-construction communities.

As reflected on page 9 of the supplemental, we have achieved growth across multiple financial metrics over the last three years, and envision continued substantial growth over the next three years.

As of March 31, 2015, our portfolio was comprised of 5,640 operating apartments, 2,680 operating apartments under construction, which includes the recent start of 295 unit River House at Port Imperial. 1,610 additional apartment starts in 2016 and remaining land development portfolio of 9,200 apartments.

I'd like to share additional activities that we undertook during and after quarter's end, that both expanded and simplified our portfolio ownership. First, we acquired UBS senior 50% interest in Chase One, for 371 unit recently stabilized apartment communities at Overlook Ridge, the Roseland Masterplan Community five miles north of Boston in Walden. The subordinated interest that we carry on our books of 2.3 million was valued by UBS at 11.6 million. When applying our promoted value, we acquired UBS in interest and an effective 5.7 cap rate. In the first quarter, we closed on a $72.5 million long term permanent loan facility, which created a 14% initial return under that invested equity.

With the first quarter of acquisition of Chase One and the third quarter construction start for the adjacent 290 unit Chase Two, coupled with Roseland's ownership at Alterra, the company now owns 100% of 1,385 apartments at Overlook Ridge, with future development rights for approximately 750 units.

Two, we acquired Prudential's senior interest in Portside at East Pier. The 175 unit apartment community located on the East Boston Waterfront, at an effective 5.18% cap rate, including our promoted interest. Once the 296 unit Portside Phase Two, now under construction is completed, the Portside project community will operate as a 471 unit single apartment community, generating apartment efficiencies for both.

Three; we acquired Prudential's 25% subordinated interest in RiverTrace, a 316 unit stabilized apartment community on the Hudson Waterfront in Port Imperial, which we own in joint venture with UBS. Further modifications to this partnership interest are under ongoing discussions, and will be this future subject matter at our next report.

Four, we acquired our Land Partner's interest in the five Waterfront development parcels at Port Imperial as well as their ownership in the Port Imperial Garage and Port Imperial Retail. And finally, in the first quarter, we started RiverHouse 11 at Port Imperial, a 295 Unit development, with the acquisition of our Land Partner's interest, this will be a wholly-owned development.

As highlighted on page 13 of the supplemental, we have made significant progress on our repurposing activities, including the fourth quarter 2015 start at Signature Place, the third quarter 2016 scheduled start of 150 monument at Bala Cynwyd, where we have received preliminary and final site plan approval, and the near term start of 233 Canoe Brook Road, next to the mall at Short Hills, which now has zoning approvals in-hand for 200 apartments and the 250 key full service hotel.

As part of the Short Hills redevelopment, we will be remodeling our adjoining 250,000 square foot office building at 150 JFK Parkway. The combined office hotel and apartment community will be one of the premier mixed use developments in North New Jersey. We are working in five municipalities, on nine potential Mack-Cali office sites for redevelopment, which we will report on as future progress.

Looking forward in 2016, we are scheduled to deliver 1,182 units to the market, including our Marbella II in May. A 311 unit residential tower, which we own 24%. QuarryPlace in Tuckahoe in the third quarter, 108 unit property where we own 76% and URL at Harborside in the fourth quarter, a 763 unit, 69 storey residential tower, of which we own 85%. The opening of Marbella II and URL will further advance our leading presence in the Jersey City market.

Notwithstanding our recent achievements, we continue to engage in discussions with joint venture partners to convert our remaining subordinated interest and operating assets to [indiscernible] 7 joint ventures, which will correspondingly improve our residential cash flow.

I will turn the call back over to Mike for some closing remarks.

Michael DeMarco

Thanks Marshall. Moving on to guidance, we expect full year 2016 FFO to be in the range of approximately $2.04 to $2.10 per share. We are raising the bottom of our range and moving the target guidance at this time to $2.07, and expect second quarter FFO to be approximately $0.52 to $0.54 per share.

With only one quarter under our belt, we will be aggressive to change the top end of the guidance range [indiscernible] this time. However, we will say, that we feel very comfortable with the target of $2.07 and believe that $2.10 is clearly achievable if we have continued success.

As indicated on pages 18 to 20, some updates on the 2016 assumptions are as follows; the percentage release is increasing to a range of between 89% to 91%. Our leasing activity is increasing, and as Mitch commented, the waterfront is strengthening greatly, as is Metro Park and Parsippany. We achieved 90% on occupying Waterfront core and [indiscernible] portfolio this past quarter.

Two, we are increasing our same store NOI projection, by providing disclosure on both our original and post sale portfolio, in order to give better analysis. We are driving rent in all assets. We achieved great results this quarter, as indicated in page 23 of the supplemental. For the post-sale portfolio, we expect to achieve 8% to 9% on GAAP and 4% to 5% on cash.

Three, non-core asset sales at 750. We are ahead of scheduled in achieving planned results. The blended cap rate on sales for the year should be approximately 6.5. To-date, we have closed on $300 million, with $135 million planned to close in the next 60 days, and the remainder throughout the rest of the year.

Four, on acquisitions; as announced we agreed to purchase 111 River Street in Hoboken, New Jersey, and 101 Wood Avenue in Metro Park for approximately $317 million, and three smaller assets for $34 million, for a total of $350 million.

Our net earnings on a GAAP basis is approximately $0.09 accretive for full year and $0.03 on a cash basis. Any other acquisitions, if any, we will be highly selective in the future.

Five; we assume we raised approximately $350 million of joint venture equity for Roseland by the end of the second quarter to early quarter this quarter. The marketing process is underway, we have had a number of interviews and discussions. We will have a further update, hopefully on our next call.

Six; corporate financing; last week we repaid $63.3 million of secured debt on four New Jersey properties at a substantial discount. That loan was accruing a rate of 10.2%. Additionally in November, we plan to repay the 6.33% of $142 million secured loan, with anticipated sales proceeds. You should also take note, the sources [indiscernible] on page 21, as we give you an update for the core activity; and let me conclude, prior to taking questions with the following; our efforts and commitment to unlocking value is starting to take hold. This is a one process, the transformation is having a positive impact. We look forward to keeping you up-to-date on our continued progress, as we move ahead.

Now I'd like to turn the call for questions. Operator, first question please.

Question-and-Answer Session


[Operator Instructions]. And we will take our first question from Manny Korchman with Citi.

Manny Korchman

Good morning everyone. Mike, if we think about the 111 River Street acquisition, you bought that from Equity Commonwealth. Their strategy is different than yours, and that they are selling their assets, they are sitting on a cash. You have chosen to reinvest some of the dispositioned cash in assets. Why the latter versus the former? Why not just take the cash from selling assets, pay down the debt today and sort of not acquire?

Michael DeMarco

We sweat at that question. I am going to give you an expanded answer, Manny, if you would allow me? People wonder about our acquisition profile, what we are looking at. We only underwrote four deals last quarter. We purchased each one of them. We get presented with numerous opportunities to invest money. There is no shortage of books coming across our desks. When you hire as many brokers as we have in order to undertake the sales process, you could only imagine people coming to you with ideas for reinvestment.

Regarding your question, which is, as always, an excellent one; we looked long and hard what our thoughts could be for the use of proceeds on the sale of, particularly 125 Broad, which we closed two days ago.

111 River presented itself, is owned by Equity Commonwealth, as you both know. It is in our wheelhouse. We have excellent success on the waterfront in the past several quarters. We looked at what we could repay in debt which has -- a lot of it has high cost of coupons, which come due, the latter part of this year, and most of it next year, which has a little bit of a window for us. And felt it was appropriate to look at both 101 and 111 as a source of or use of proceeds.

I have a humorous story as always, which is part of my personality. I got a call yesterday from David Helfand, as people may or may not know, Dave and I both attended -- were happy to attend University of Chicago. He is President of the -- I guess, CEO of Equity Commonwealth. He called me up, and he said, you know Mike, congratulations, I think you are doing a great purchase, so on and so forth, which is all really nice.

The next call I got was from Sam Zell; Sam Zell called up and he said Mike, congratulations on purchasing this deal. I said Sam, it doesn't work that way. The way it works is, I am supposed to say congratulations to you. You are supposed to say good luck to me. You have the cash, I have the building. He agreed with me. He also felt that, and I pointed out to him, that he was going a different way with his strategy. And he said, absolutely, because this is not a building that we choose to sell, other than the fact that they are making a call in the market. They [indiscernible] it's going to be a good one for you over the long term, and I said that you have an excellent strategy going forward.

With that, that's my answer to your question.

Manny Korchman

Maybe if we could just spend one more minute on that asset? What's the profile there that you think that owning it or sort of controlling the market benefits you, versus just buying the building that's leased?

Michael DeMarco

The way the Waterfront works, Hoboken has a little less than 2 million square feet, maybe 1.8 million; so maybe you could round it to two. The rest of the waterfront has about 18. Some of it is in Weehawken and some special first buildings done for trading. The rest of it is in Jersey City. We look at this building, which is built by a colleague of a competitor of ours, SJP, and had been owned by JP Morgan and Equity Commonwealth. Excellent building. It’s the world headquarters of John Wiley, which had done a recent renewal, leasing on the market, so there is some roll-up the evidence of [ph] long term.

They are in the bottom of the building. The top of the building, basically rolls in the foreseeable future. Some of the leases are underway. We have an aggressive view toward what we think we can achieve there. I will point out that, Rubbermaid, just moved their world headquarters. Two buildings down, paid 51.50, took 100,000 square feet, represented by CBRE which we have a close and personal relationship with, given my colleagues background. We looked at what rents are in that market, we think they are at $48 for our building. We think we can achieve that. We bought it at a 6-7 yield. It’s a leasehold under long term with the Port authority. Very favorable terms. 6-7 versus what we were selling, which was really a five in the first quarter. 170 basis points of reinvestment. As we know, it’s a premium. We have already started soliciting new tenants for those making proposals this week in particular. Just what our business model is.

As I said in the press release, we own a quarter of the Waterfront now. You can't have a buy for the waterfront, our commitment to it, and pass up on one of the best building. I have said this repeatedly, and I meant every word of it, we will only look at deals, if they add into the top 10 of our assets. We get shown a tremendous amount of product from brokers, that would be highly accretive to us. Nine-cap, 10-cap deals, buildings and markets that we really don't want to be in, which would manufacture [ph] earnings. This is not the case. This is a good long term hold.

We view this, Mitch and I, view this is another $3 billion in our portfolio. After 101 Hudson, after [indiscernible], this should be the third best building.

Manny Korchman

If we think about the new NAV disclosure that you provided in your supplementals, somewhere -- we are seeing $33 and $36 a share. You compare to where the street is closer, $26. How much time have you guys spent looking at the delta between what you think your NAV is, and where the Street has you. Maybe, if you can highlight some of the big pieces that you have seen; is it Roseland that people are thinking about incorrectly? Is it just the cap rates that people are applying? So what are the biggest differences?

Michael DeMarco

The amount of time we spend is 168 hours a week, which is literally every hour, and probably goes across my mind when I am sleeping. We have a goal, we still own a limited amount of options, given our initial stock price. We thank everyone for their commitment to us, and their support, as we get closer and closer, we have more options now in front of us, closing that gap. And I have also said this repeatedly, now we can look at certain other things, as we get through the next stage of sales proceeds, and other objectives that we could achieve.

Roseland, we think is a disconnect until we prove out that value. We think there is a clear disconnect to us on suburban assets, which we think we can improve on over time. I don't take it personally, when people ourselves the way they did, when we were 82% leased. Then we took over, 11 months ago. But as we have increased, almost 500 basis points of occupancy over the last 11 months, and increased cash flow almost 20%, I think that's what shows up in the numbers. And that's why I think we can either close that gap, through a series of income producing, transformational moves, or some capital markets activity, which people have given us advice to in the past.

Manny Korchman

Thanks Mike.

Michael DeMarco

Thank you.


And we will take our next question from John Guinee with Stifel.

John Guinee

Hey Marshall, can you talk a little bit more about the potential redevelopment? What sort of income erosion happens when the existing office assets go out of service, and you have to revalue the parcel just for the dirt? And how much is sort of NAV destruction is there, before there is NAV creation with that portion of the overall Cali strategy?

Marshall Tycher

Great question. We have two different activities in the repurposing. One is, actually not impacting the office buildings or NAV at all, and that is when we take up excess parking fields, and create new apartment product on excess parking fields and replace that parking with garage structures for the office. And that's over half of the activities included in that, most particularly for example, the Short Hill site. So in that instance, we are not impacting NAV at all, and strictly, it's purely an enhancement.

The other side of the repurposing activity is basically a monthly review with Mack-Cali's team on which office buildings are vacating in the suburbs, where the NAV is dropping on Mack-Cali's book precipitously anyway. And in those instances, we are analyzing the redevelopment opportunities and we are valuing the redevelopment going in to our multifamily pro forma, pretty much at the book value that Mack-Cali has written down the office building too. If it's not something like that, then it surely doesn't impact -- doesn't get into our Q.

So I would tell you in both instances, either there is no impact at all, or the transformation happens at a decreased book value, because of the vacancy factor in the office building, and it being an antiquated property, that would be sold anyway.

John Guinee

And then, next question, and maybe it has so many moving pieces, I have lost track; but you mentioned -- Mike, you mentioned three small assets, $34 million acquired. Can you give us more detail on those three assets for $34 million?

Michael DeMarco

Sure. We bought the bottom of a building that we own in White Plains, that was owned by Pace University. So we felt it was like $10 million to $12 million and buy that building to get the bottom back, so we can control the whole building, and therefore if we sell in the future, well obviously, get to better proceeds for having cleaned up the strategy.

And as part of the Bank of America transaction, with the renewal, we consolidated their operations from New York into Jersey City. As part of that consolidation, we picked up two beautiful prime buildings in New York and New Jersey that are basically special purpose-built and we have a discussion with the tenant to fully rent them ongoing, so we kind of knew what we are getting into, when we purchased them, and that was like 22 in change. So that's the $34 million.

John Guinee

So essentially, BofA offloaded how many square feet in New York to you?

Michael DeMarco

147,000. We paid about $140 a square foot for a building that value the replacement costs [ph] about 350. Its over improved, its state of the art security, backup generation, parking, actually couldn't built it -- sort of less than $45 million.

John Guinee

Great. Okay, thanks a lot.

Michael DeMarco

Thank you.


And we will take our next question from Vincent Chao with Deutsche Bank.

Vincent Chao

Hey, good morning everyone. Just wanted to go back to the same store performance and the outlook. Just curious, [indiscernible] roadmap, I know we said its very early in the year, so you don't want to get too aggressive. But it implies some steep deceleration of about 1.5% to the midpoint. Just curious, is that the right way to think about the back half here, or is that more sort of just taking a conservative view to start off?

Michael DeMarco

Its two things, it really depends on -- we have three different portfolios Vincent, as we talked about. Four, if you think about what we are just selling, but that obviously really dissipated over the course of the year. So the flex business is a steady grower, and I think we gave you enough data on that. If you can look at that, it’s a quarter-by-quarter business that rolls over, that we are able to increase on a pretty much programmical [ph] basis, not a problem.

The Waterfront is moving quickly. When Mitch and I took over, one of the deals we approved, was $31 from Brown and Harman, that space, if rented today, would be mid-40s or low 40s. so you can just see the improvement level of that. So as we go out of Jersey City, which has a lot of our expirations for 2017, you can see we are picking up steam in that submarket. Literally went to [indiscernible], with a three, when we began. So low threes to low fours.

The amount of disparity we have in our suburban portfolio runs at [indiscernible]. Things like Metro Park, where we had underwritten rents on an acquisition we did. 333, the first one we made last year at $32. We just achieved a deal of $35 in the building we sit in, and $35 in the building that we just purchased, which is 333. And that's like a 12% to 14% increase, which is strengthening of the market.

We see other improvements in Parsippany and obviously Princeton and Metro Park and a few other markets. So it’s a lot of submarkets. The supplemental gives you data as to how we are performing. But we view it as what we could have announced today, and said okay, let's take a mid-step approach. We will raise the bottom of the range, keep the top the same, increase the target, but give expectations that we think, if we have continued success, we will achieve top end of the range at least.

Vincent Chao

Okay. Yeah, and I think my question is more about the same store side with product plays as well. But to ask a technical question maybe, interesting, occupancy, same store both GAAP and cash all increased by 100 basis points at the midpoint. But just given free rent periods and downtime, things like that, I would have thought that cash would have lagged a little bit? Is there something else going on, earlier commencements or something like that, that's driving the cash up the same as GAAP?

Michael DeMarco

We instituted some differences in how do we do renting now. So we no longer get free rental renewals. What previously was management, they always gave free rent. So people would always try to hold two things, they would try to hold occupancy, and they would try to hold the face amount. We don't look at either one of them, we look at the cash flow coming in over the course of the deal and discount it. So we don't get free rent, as it costs. We can't roll down rents for us, they won't be accepted, and growth rate has to be about 2%, or we won't accept the deal.

So those three parameters, by themselves, are focusing us a certain rewind, that didn't exist before, to show up in our cash flow growth. That's a technical answer. Did that answer your question?

Vincent Chao

That did. Thank you.

Michael DeMarco

You're welcome Vincent.


So we will take our next question from Jed Reagan with Green Street Advisors.

Jed Reagan

Hey, good morning guys. It sounds like the Jersey City office pipeline, we think it's still looking strong. To what extent that's driven these days by the price point differential versus Manhattan just reaching a tipping point or is the tenant now taking more advantage of the New Jersey tax incentives, and then just -- to what degree are you seeing some migration to Jersey City from maybe suburban areas of Jersey?

Mitch Rudin

Hi, its Mitch. So first welcome, it's good to hear from you and to have you.

Jed Reagan

Thank you.

Mitch Rudin

It’s a combination of two things; the rent differential continues to grow, and that spread has been significant. So that we are not only seeing growth out of relocation from Manhattan, we are seeing growth out of Manhattan that can't be satisfied there.

The second part of it, and this may seem a hard to believe, but that -- notwithstanding having perhaps the most sophisticated real estate professionals in the country, people fully didn't understand the Grow New Jersey program, and the previous program which was converted in three years ago, the state of New Jersey had some missteps with it, where they didn't actually fund some of the commitments that they had made; and when Mike and I started, there was a carryover to that.

The current program, as we outlined on page 7 in the supplemental, explains that this is in corporate income tax credit program. And people have now woken up to the value of it. So for the example there, so if you pick a number, we are charging $40 in rent with an anticipated occupancy, your rent can be nominally zero, and zero is pretty attractive.

I'd also like to just give you one other vision; we talked about the amount of current activity, which of course, was reduced in the last quarter because of the deals that we signed, but that we also anticipate this summer. We so far have identified approximately 500,000 square feet of tenants, potentially growing to 800,000 square feet that are going to be entering the market in Jersey City. So thanks.

Jed Reagan

Okay, thanks. I guess, related to that, you are making some headway on 2017 expirations, but seems like there is still quite a bit of work left. What are some of the lumpier expirations that you are most focused on, and could you peg at this point, what percent of that overall exposure is, or definite move-outs at this point?

Mitch Rudin

As we said on the last call, we anticipate getting up into the mid-90s on occupancy. We are at various levels of discussion with the tenants that we have there, and remain optimistic about those discussions. Also, as we said before, given the changing nature of the tenancy that's moving to New Jersey, our preference is not to renew all the tenants that we have. Can't tell you which one, will find the seat at the table. But as we go forward, and with all the demand that we have, we will look to be not only renewing, but expanding with new tenants, and then hopefully we will have some announcements for you next quarter.

Jed Reagan

Okay. Sounds good. And just last one for me, can you walk through the economics for the Metro Park acquisition? What kind of upside might be there, and then what sort of the general thesis on that investment is?

Michael DeMarco

Jed, this is Mike DeMarco, and also welcome. Mitchell talked was one of the key markets we chose to really focus on, after the waterfront, and [indiscernible] has two major trainlines. The intersection of about five highways, probably one of the best located submarkets in New Jersey.

In particular, it’s the land of labels. If you drive the streets here, you will see Siemens, Investors Bank, Provident, E&Y, couple of engineering companies, and Daiichi-Sankyo, who is a big drug company.

We just recently did a deal, which Mitch outlined for Hackensack with Meridian, which were actually moving. We rented our own space. So we are taking our headquarters, and as we previously announced, we are moving -- half of it to fund off [ph] the Jersey City, their back half is going to Parsippany, which is a commitment to that submarket for us.

We were able to achieve $35, 2% growth, 10 year deal in relatively low concessions. We also did a renewal behind us in a building we had purchased last quarter, with symbol of [indiscernible] terms. So we rented about 70,000 square feet of the 400,000 we owned in the last quarter. So we had pretty good data, as to the strength of the submarket.

Those two buildings are inferior to the one that we are buying. 101 Wood is in a better location. It’s a slightly larger building. Totally remodeled, has every state of the art communications, backup generation, refurnished cafeteria, conference rooms, gyms, and achieves rents in excess of what we get.

The in place rents in that building were $28, because they have been rented through their 2009 to 2011 phase. In the next few years, we will get the ability to roll those rents up significantly. We have actually one empty for the building is about 88% occupied, with the ability to rent [indiscernible] we are actually actively engaging in, and believe we can substantially improve the cash flow almost immediately.

So we bought a better quality building, and the two that we owned. It’s a market we clearly knew. We had -- recent transactional data was [indiscernible] towards where we could rent that. And we ran the numbers on it, and the IRR and initial cash flow came into where we thought, was a good use of proceeds, given our choices of capital markets discipline.

Jed Reagan

And you are disclosing initial yield at this point in time?

Michael DeMarco

Yeah it's about -- once we get through, it's about a six gap yield. And as I said, as we went up the empty space, it will get a little higher.

Jed Reagan

Great. Thank you guys.


And we will take our final question from Jamie Feldman with Bank of America.

James Feldman

Great. Thanks and good morning. I guess, focusing on the multifamily side, maybe if you could give us some thoughts on supply risks across some of your markets, and where you think we are in the cycle, I guess focusing mostly on Jersey City?

Mitch Rudin

Good morning. Jersey City has had a lot of product, but it has continued to have some substantial rent growth. The two properties -- the two stabilized properties we have in Jersey City, Monaco and Marbella, for the last 12 months, have had a rent growth of over 5%. The most recent comp opening in the marketplace, 70 kilometers was renting -- opened up at -- $45 and $46 is leasing 70 apartments a month, and has raised their rents up to a little over $51 a foot.

So far everything that has been delivered in Jersey City has been leased at that pace, and the existing marketplace, including our assets, as I mentioned, has had a real rent growth.

I think the remainder of 2016, there is 4,000 units coming to Jersey City to be delivered. In that marketplace, maybe rent absorption is set at 70 units a month, will be 50 units a month. But at this point, I don't think the misleading percentage or perception is, that because 13,000 units have been permitted or submitted, it means they are all going to start. And I don't think that's going to be the case.

So I think we have to be cautious, and look at the -- each building as we go. Rents are continuing to grow and lease-up absorption has been excellent, and I just don't that 2016 pipeline for delivery is going to have any impact on rents or absorption.

James Feldman

Okay. And where do you think the governors are other starts away from you guys?

Mitch Rudin

Well most of the sites are in the primary submarkets in Jersey City are owned by fairly sophisticated developers, and well capitalized. I think if they continue to see good metrics, they will have starts, and if they look at it slip, they will slow up. It gets hard to predict what everybody is going to do. We are opening up Marbella II this coming month, just anecdotally. We have signed 45 leases in advance of opening to corporate providers, just under $45 a foot. And we have a significant waiting list of people, I suspect will sign 50 or 60 leases in the first month at $46 a foot. So in a property that size, it will be the third leased before we even get past the first month.

I think people are going to continue live in product until they see it slow, and then they will stagger their starts and stretch them out a little bit more.

And certainly, what we are going to be doing, we have a number of future starts in our portfolio in Jersey City, and we are going to watch. And if we see absorption continue and growth continue, then we will make a start; and if we don't, we will wait.

James Feldman

Okay. And then, are there other markets you guys are in, where you are more concerned about supply?

Mitch Rudin

The Greater Boston market, so far, has held up well. It has had historic number of starts in the whole metropolitan region for the last few years, and has also sustained good occupancy, good absorption and good rent growth. Our community, north of the city, Overlook Ridge has grown 4% or 5% over the last 12 months as well.

Most of the submarkets are -- New Jersey submarkets have all maintained 97% lease, 96% occupancy. Not a lot of product being delivered in any of those submarkets. So those should continue to do well.

Most of the supplies coming on in the last two years has been well absorbed and rents have grown at different rates, but have grown. So right now, at this moment, I think there has been a lot of discussion about too much product coming on. But so far, nothing has actually reflected in the absorption or rent growth.

We just have to watch, I mean, we own the sties, we control our own destiny as far as starts, and we have a program for what we intend to do, and if we see a submarket that doesn't mandate a start, then we will hold up. So far, nothing has indicated that.

James Feldman

Okay, that's helpful. And then, can you guys talk about the capital markets in general? Like what are you guys seeing in terms of cap rates, either on dispositions or I know you have talked about some of the deals you have done, but just generally over the last six months or so, a view on how those markets are holding up?

Michael DeMarco

I think the markets continue to be relatively strong, but have slightly abated since the credit market has a little bit of discombobulation through the CMBS, the back-end part of the CMBS, the mezz and the big pieces on pricing, the way they did say 15 to 18 months ago. So you see a pretty full list of people looking at deals. I mean, Hoboken has six or seven bidders, that went in the second round with us. I would expect that, you see more discipline in the marketplace. So that's people just acquiring, because financing is cheaper. The cost of debt is actually the same for the AAA or the senior piece that it was last year, maybe even slightly tighter, given the fact that rates started a little bit lower.

I think that you will see a decent amount of activity in our market, of people buying and selling assets. I know that there is a few buildings out there that are sizable, that are trading at a credit [indiscernible] leases. It remains a good healthy market, I would say probably not as flat as it was, let's say a year ago, Jamie.

James Feldman

Okay. And where would you say, cap rates are -- have moved for -- either primary or secondary type assets, that you guys are looking at?

Michael DeMarco

I think the cap rates on the waterfront are what we indicated on our NAV, and we obviously had competitors where we are looking at to buy on 111 River. The [indiscernible] 70 to 90 Hudson, which traded also in those same ranges, 70 Hudson was a little cheaper, because it was empty, but 90 which is a full building, was in the 6.25 range, in the 6% range.

I think in the suburbs, you will see deals done in the ranges that we indicated, probably the 8%, 8.5% range, [indiscernible], stuff like in Metro Park or Short Hills, we trade in the 6s, because of the nature of the markets and where people want to be, and the rents they will pay. I think you are asking about the subprime or the sub-stuff, still trades, still there are people out there who buy buildings, we seem to get a number of them looking at our assets, that are ones that we want to dispose off.

So I think the range of [indiscernible] more sticky, and I think the financing ability has been a little bit more softer.

James Feldman

Okay. Thanks. And then finally, I think you said -- you expect to retain 50% of the 1.2 million square feet that expires in 2016, and still get to 90% occupancy? Can you talk about that space, prospects to backfill?

Mitch Rudin

Jamie, you are talking on 2016? It's mostly smaller deals. You are dealing 10,000, 15,000 and under the indications we have had, plus the amount of leasing -- new leasing velocity makes us highly comfortable. There is no one transaction one way or the other that's going to impact that.

James Feldman

Okay. All right. Thank you.


And we have no further questions. I would now like to turn the conference back over to Michael DeMarco for any additional or closing remarks.

Michael DeMarco

Thank you all for joining us. Talk to you again in 90 days. Have a wonderful day. Bye.


And this concludes today's conference. Thank you for your participation. You may now disconnect.

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