Mack-Cali Realty Corporation
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Good day, everyone, and welcome to the Mack-Cali Realty Corporation Fourth Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Ashley Cotton. Please go ahead.

[Ashley Cotton:]

Good morning. Thank you, Operator. I'd like to 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 the company's press release, annual and quarterly reports filed with the SEC for risk factors that impact the company.

[MaryAnne Gilmartin:]

Good morning, all. Thanks for joining us. I want to start by once again thanking the entire team for their continued dedication to the company through a very difficult year. We’ve remained focused on the execution of our strategic initiatives, while navigating the challenges of the pandemic. In 2020, we made meaningful improvement on our noncore asset sales and have continued to work to strengthen our balance sheet. We absorbed the pandemic led market disruption on the residential side and are beginning to see signs of stabilization. We made exciting headway repositioning our Harborside campus. Across the company, we showed a willingness to embrace change both in leadership and in the alignment of the company's priorities to ensure continued progress in the years ahead. Following the completion of the work of our strategic committee, of which I was a charter member, when I first joined the Board in 2019, we embarked on a diligent plan to sell all of our noncore office assets and to exit a number of land positions and residential properties outside of our core markets. This initiative was successful in generating $352 million in gross proceeds from noncore office and $437 million in gross proceeds from land and select residential sales, all in 2020. We remain on track to complete the sale of the majority of our remaining noncore office properties by the end of the second quarter. Thanks to the hard work of Ricardo and his team. At that point, Mack-Cali will be the owner of six large waterfront office properties strategically located in an office campus setting and a solid residential portfolio that generates the majority of the company's revenues and net operating income. Regarding our commercial portfolio, we are increasingly optimistic about the strategic repositioning of our Harborside holdings. We believe the corporations will be returning to the office later this year, and then employees are eager to give up their zombie existence and reconnect with old friends and colleagues. On the residential front, we now believe we are at or close to an inflection point. And we are seeing leasing velocity ahead of plan in our newest delivery, the Emery in suburban Boston. We just began two lease ups in attractive new residential communities, the Upton in Short Hills and the Capstone in Port Imperial. We are very pleased with the early traffic and the interest in both.

[David Smetana:]

Thanks, MaryAnne. We reported core FFO per share for the quarter of $0.16 per share, versus $0.44 per share in the prior year. The year-over-year reduction is due mainly to the impact of our suburban asset sales program and impacts from the pandemic on our hotel, parking and multifamily operations. The Waterfront office portfolio had a cash same-store NOI decline of 4.4% largely attributable to less parking income and expense recoveries on the revenue side. Real estate taxes in the fourth quarter of 2020 comped against a low fourth quarter 2019, resulting from lower real estate tax assessments in the Waterfront portfolio in 2019. As Marshall will go into in more detail, the multifamily portfolio experienced similar operating pressures in the New York City metropolitan area that others have reported, but we have seen indications that we may be close to a bottom. Rent collections remain stable in the quarter, averaging 97.1% in our office portfolio and were 99% in the multifamily portfolio. Bad debt expense remains in good shape. Bad debt expense in the quarter totaled $489,000, half of which related to retail tenants in the Roseland portfolio, and we also took a $200,000 write down on straight line rents with $131,000 relating to discontinued operations properties and $69,000 to Roseland retail tenants. On transient revenues, our hotel operations remain limited to the residence in portion of our dual-flagged hotel, which is running above EBITDA breakeven. However, including the closed EnVue hotel, the fourth quarter EBITDA loss was $838,000. We expect both the EnVue and Hyatt Hotels to remain closed for the first quarter, and we'll evaluate reopening later this spring. Parking revenues were off by $800,000 sequentially and remains subdued early in 2021. On the office leasing front, we have 408,000 square feet set to expire on the Waterfront in 2021. As we have mentioned at Plaza 4A, TD Ameritrade moved out of 140,000 square feet of space in January, and will vacate the remaining 44,000 square feet of space at the end of September. That will leave Whole Foods Grocery as the only tenant in the building, and we are already marketing the asset for potential life science use. Keeping in mind a wide range of structures to limit our need to make material capital commitments to the project. Our second largest move out is in Plaza 5 with Natixis, which leases 75,000 square feet of office and 26,000 square feet of storage and ancillary space, all of which is expiring at the end of July. The balance of 123,000 square feet is in various stages of leasing which Ed will update us on.

[Ricardo Cardoso:]

Thank you, David and good morning, everyone. I am pleased to announce that we have completed another busy quarter on executing our strategy of selling noncore suburban office and residential assets. Sales in the fourth quarter for both office and residential totaled approximately $520 million. Despite the early impacts of COVID on the capital markets, the State of New Jersey finished 2020 which is over $2.3 billion in office sales, which is in line with historical volumes.

[Edward Guiltinan:]

Thanks, Ricardo. I've had a busy first 4 months back at Mack-Cali. Despite the pandemic, we've begun to successfully implement new approaches to unlock the potential of Harborside. Based on discussions I've had with tenants, prospective tenants, brokers and other business leaders, especially since the first of the year, I expect the vast majority of companies will return to their offices later this year, with many returning over the summer or shortly after Labor Day. People miss camaraderie, mentorship and collaboration working remotely and companies are frustrated by their inability to establish and maintain their corporate culture we assume. The layout of office space may change and the work week may evolve, but people generally appear to be eager to get back to the office.

[Marshall Tycher:]

Thanks, Ed. In the fourth quarter Roseland's operating portfolio finished at 90% leased, as compared to 89.5% last quarter. Leasing traffic exceeded the same period in the prior year. This leasing momentum continued through January as well. The improved metrics have been a result of the following initiatives

[MaryAnne Gilmartin:]

Thanks, Marshall. When I joined the Board nearly 2 years ago, I believe with the right strategy and leadership, we would unlock unrealized value at Mack-Cali. Thanks to the dedicated and talented team at the company and the inherent strengths of our assets, I believe we are well on our way to achieving that vision. We will now open up the call for questions.

[Operator:]

We will now take our first question from Derek Johnston of Deutsche Bank. Please go ahead.

[Derek Johnston:]

Hi, everybody and good morning. Across all office REITs, we've seen a paucity of leasing activity. And your Waterfront office really has been no exception here. How long do you think it will take business leaders to refocus again on their real estate footprint? And if they do decide to reduce New York City office footprints, do you think your Waterfront assets can actually see in that benefit? Just as a quick example, I think Conde Nast, we've reported recently in the press to be considering a smaller office footprint and did cite the Jersey City Waterfront as an alternative. Are you seeing any of this demand from them or from others?

[MaryAnne Gilmartin:]

I will take that first. Thanks for the question. I will begin by saying that we have a level of activity presently in the Harborside properties that is encouraging, and it's been relatively busy Derek, given that we don't think that there is a lot going on the other side of the river. And we think that has a little bit to do with the desire for companies to remain close to the urban core, but perhaps to be at some standoff distance, but still be well served by mass transit and all the amenities that the Harborside campus brings. So as we retool our messaging, revamp our marketing efforts and continue to reconnect with the brokerage community, we remain encouraged, and there is presently a level of activity of approximately 110,000 square feet of leasing, for which we are trading paper and that is encouraging, but of course we can't be assured that we will complete those transactions. And so we're going to be very modest and careful about predicting. And of course I'm not in a position to comment on the Conde Nast situation as we typically would not comment on any prospective tenants or leasing transactions prior to the lease is being signed. Mack-Cali has the best assets in our location in Jersey City. So I think it's fair to assume that any tenant that's looking for office space in Jersey City would be speaking to us. Ed, why don't you comment about the -- if you'd like, Derek, I'll just let Ed, talk about the return to work mentality and what we're finding on given that more in close touch with all of our current tenants.

[Edward Guiltinan:]

Sure, MaryAnne. Interesting, over the last few weeks we've seen an uptick in in-person tours and in-person meetings, which really has been very rare since the start of the pandemic. We are engaged in conversations with a number of our existing tenants and prospective tenants and have proposals outstanding and as you mentioned we have leases outstanding with several tenants for more than 110,000 square feet of space. It seems like the market has reached a point where tenants are recognizing that it was going to work -- is going to happen this year and they need to be ready for the return to work for the first time or quite some sometimes it seems like tenants are more willing to make real estate related decisions whereas during the early stages of the pandemic, certainly they really shied away from making any decision they had to make except for a deadline driven delay or some other critical need for a decision.

[Derek Johnston:]

Yes. Thank you for the color. That was very helpful. Just switching to the residential, how is the current environment impacted the residential development pipeline or outlook with your land bank? How has the Capstone -- I know it's leasing up, but how is it performing versus underwriting and clearly RiverHouse 9 is basically right behind it? So is the demand there, and how much given lower rents have development yields compressed in these projects? Thank you.

[MaryAnne Gilmartin:]

I'm going to let Marshall take that question.

[Marshall Tycher:]

Sure. So, the first instance, you have few questions here to respond too. So certainly the lease up that we've had to date of the pipeline that we started construction on 3 years ago has gone quite well actually, the Emery leased up completely, Short Hills has leased very well, very quickly at pro forma. The Emery by the way at least over pro forma. Capstone has been a very pleasant surprise, we've been hitting our face rent pro forma and have had a very good traffic and capture percentage for the opening month. But we do give it away in free rent as everybody in our marketplace. And historically, we opened new buildings, you have 1 to 2 months free rent in a normalized market. In this pandemic market those numbers are generally 3 months, but we try to average at 15 month lease. So we have almost a full 12-month runway of market rent being paid by our residents. But to date that has been the case in Capstone, we've opened that up with 90-days, which is what we pro formaed in our cash flow projection. So it's actually exactly where we projected it. And RiverHouse 9 will open the same way, it will open up the 90-days free rent on an average 15-month term. So for us fortunately, we've actually done well, actually as well as we could possibly hope for given the marketplace and opening these new units. Certainly stabilized yields, because of COVID will not be affected in new construction, because all of that free rent is absorbed in the capitalization of the project and on our interest reserve. So as long as we maintain face rent, the stabilized yield on these assets coming out of construction will sustain itself in around 6% -- 6.15% somewhere in that yield, and as we've mentioned with the sales we made this year and what we're seeing with other property sold in the marketplace, cap rates on apartment houses have never been better than they are today. So I think the return spread between new construction and value still is a minimum of 150 basis points. So it's still very, very accretive to build versus buy. Having said that, construction pipeline starts for us at the moment, as we said before, we are waiting for the Board to make a decision on when we want to capitalize new starts and so we’re ready to go with projects. We are selling a few nice strategic land holdings and when it's time to start again, and somebody gives us a chequebook, we'll start again.

[MaryAnne Gilmartin:]

And Derek, I will just round out what Marshall is saying by saying we believe the growth is important. And we strongly believe in the value of the multifamily assets in the markets we build. And so, as we address our debt in our corporate line, we'll do with an eye toward potential growth and unlocking the potential of our very valuable land assets. Once the markets corrected for the COVID impact, we think there's tremendous value there.

[Derek Johnston:]

Thanks everyone.

[Operator:]

We will now take our next question from Steve Sakwa of Evercore ISI. Please go ahead.

[Steve Sakwa:]

Thanks, good morning. I just wanted to first circle back on the suburban assets to make sure ahead. The number of straight, I think you MaryAnne or Ricardo have talked about, I could say it's 2.6 million feet in four transactions that were is a little over $600 million and in the supplemental you list about $3.3 million between the Class A suburban and the suburban, so kind of, leaves about 700 -- or 700,000 feet left for sale, is that right? And is there a, kind of, a rough estimate of kind of value on that 700,000 feet?

[MaryAnne Gilmartin:]

Ricardo?

[Ricardo Cardoso:]

Sure. The $600 million or 2.6 million square feet, our transactions that we have under a hard contract, we are working through a number of other sale transactions there. We are under contract, but not quite non-refundable and others that we are close to executing final PSAs or purchase and sale agreements.

[Steve Sakwa:]

Okay. So is your expectation Ricardo, that kind of remaining chunk would close this year? Or just maybe later in the year? Or do you think that spills over into '22?

[Ricardo Cardoso:]

The $600 million that I mentioned in my earlier will close by the end of the second quarter. We have another, call it a $100 million to $150 million of one-off single transactions that we feel, we will be able to capture a good portion of those sales in the latter part of the year, but it would also trickle -- some of it will trickle into '22 because it includes land transactions also where we're still working through various entitlements to maximize the value of the land before executing a transaction.

[Steve Sakwa:]

Okay, great. Thank you. And then I guess between, Dave's comments on the leasing and Ed again, if I have my facts right, you said there is about 408,000 rolling, but only about 123 that's still kind of up in the air. So kind of implies 270 is moving out. I guess maybe, Ed, could you just comment on the remaining 123 and of the 110,000 where you're trading paper is most of that for the 123? Or is there still kind of a lot of indecision on the kind of remaining '21 explorations?

[David Smetana:]

We are -- as you can imagine we're aggressively speaking to all the '21 rollover tenants in addition to that we're talking to the tenants in the near future beyond '21 that are rolling over. So we are in discussions with a number of the additional '21 rollovers, but the 110,000 square feet of lease transactions that we talked about are separate and aside from those.

[Steve Sakwa:]

Great. And then last question MaryAnne, I guess there was really no comments in your prepared remarks or in the press release just about the full time CEO search. So could you just maybe update us on that process?

[MaryAnne Gilmartin:]

Sure. As you recall, we indicated as a Board that we would be aiming for our first quarter of 2021 announcement and I'm happy to report that an announcement on the permanent CEO is imminent. And so you can expect to be hearing from us soon about that selection.

[Steve Sakwa:]

Great. Thank you. That's it from me.

[Operator:]

We will take our next question from Manny Korchman of Citi. Please go ahead.

[Manny Korchman:]

Hey, good morning, everyone. I've got some questions for each of you here. Ed, can you give us some update on what the New Jersey incentive program actually looks like?

[Edward Guiltinan:]

Sure. The new program is named Emerge, it's a tax credit program that rewards new tenants and retain tenants that's been recently rolled out by the State, number of the tenants that we are talking to are glad that there is finally been a new program put in place and are looking forward to take advantage of it.

[Manny Korchman:]

And then I think you guys mentioned doing life science at one Harborside, is that based on demand you're seeing or tenants have approached you and now you're going to make the space available to them or is that just, hey, life science seems to be a good sector, others are doing it, let's do this too?

[MaryAnne Gilmartin:]

Hi, Manny, thanks for the question. So it's Harborside 4A formerly known as 4A, and we've renamed it Harborside 6. And again, we are looking to diversify the offerings here. So it's everything from pre-builds to large scale single occupancy abilities at Harborside 1. And so in the quest to provide the market more options we studied the life sciences capabilities of that building and did a deeper dive into the potential need for increased investment in infrastructure and it's quite positive because the floor plates are generous and there isn't much by way of that product offering here in the market, and that has proven to be an interesting idea because we’ve been in discussions with a few JV partners in the life science space, and because the building is so well suited and it's effectively available -- 100% available. We will continue to discuss our life science conversion opportunity with partners. And as I indicated last, the partnership concept is important, because of the capital needed to be a true life science offering on the enhanced core and shell. And so we are mindful of the fact that the capital will need to come from somewhere, and therefore we are looking at strategic partnerships.

[Manny Korchman:]

Thanks. Ricardo, where does 111 River fall into the disposition plan now?

[Ricardo Cardoso:]

Right now, we are focused solely on selling of the suburban office assets. We will take -- we will review -- we continue to review our Waterfront assets, right now 111 River, we are not currently marketing for sale.

[Manny Korchman:]

And then finally one for Dave, I told you, I had one for everyone. Dave, you talked about redoing or thinking about redoing the line of credit later this year, I guess. How do you think about that in totality, just given where you're going to end up on the multifamily and office perspective? Are you going to need more equity, just to get things done? Is it going to be a smaller line just help us frame what that new line might look like?

[David Smetana:]

Thanks, Manny. Yes, I hope you frame that. So, I think let's first take a look at Roseland, which is where will mostly be up the suburban office sale. So Roseland is in a joint venture, we use mortgage financing there when we developed most of the equity we’ve is already in the land that we own and control. So a small portion of our new line would be allocated over to Roseland to help them with their kind of general corporate purposes and needs. But the larger line one, I will be very clear, we do not need to put any equity in, it will be secured by our six assets on the Waterfront, four of which are unencumbered. It will be a smaller line and it will be really based more on mortgage metrics and availability, then corporate covenants. So obviously being better at night, our capital needs will be much more modest when we're down to the six office assets here on the Waterfront, Manny, and we'll have separate set asides it within the line for TI and CapEx. So a smaller line secured by the Waterfront with some availability for our Roseland friends and partners, if that makes sense.

[Manny Korchman:]

Yes. Great. Thanks, everyone.

[Operator:]

We will take our next question from Elvis Rodriguez of Bank of America. Please go ahead.

[Elvis Rodriguez:]

Good morning, and thank you for taking the question. MaryAnne perhaps you can share your thoughts on what it would look like to spin off the multifamily business? And then just keep that as core and maybe just sell off the rest of the office in the future. I know you've mentioned potentially the ability to spin it off -- spin off the Roseland business, so you can get proper valuation in the market for what that's worth. So, any thoughts on that would be helpful. Thank you.

[MaryAnne Gilmartin:]

Thanks, Elvis. I've got lots of thoughts on it, but I think the best way to answer that question is we're super focused on the disposition strategy in the suburbs and we are continuing to explore all strategic alternatives, including an entire transaction or partial spinoff of sections of the business. And so I think the best thing for me to communicate to you is that the focus today is to show up the balance sheet and dispose of the suburban assets, while at the same time, the strategic review committee at the Board is deeply engaged in exploring all strategic alternatives and responding to inbounds.

[Elvis Rodriguez:]

Great. And then just one more on the CEO search, will the person be an internal hire or someone from the outside?

[MaryAnne Gilmartin:]

As we’ve indicated, my position here as an Interim CEO, it's always been my intention to pass the baton and I’m excited to be doing that and it is not an internal candidate.

[Elvis Rodriguez:]

Great. Thank you so much.

[Operator:]

And there are no further questions at this time. I would like to hand the call back to our host.

[MaryAnne Gilmartin:]

Thank you all for joining us today. Enjoy your weekend and happy Friday.

[Operator:]

Thank you. That concludes the call. Thank you for your participation. You may now disconnect.