Mack-Cali Realty Corporation
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Good day, everyone, and welcome to the Mack-Cali Realty Corporation’s Third Quarter 2018 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Michael J. DeMarco, Chief Executive Officer. Please go ahead, sir.

[Mike DeMarco:]

Thank you, operator. Good morning, everyone, and thank you for joining the Mack-Cali Third Quarter 2018 Earnings Call. I’m Mike DeMarco, CEO of Mack-Cali. I am joined today by my partners, Marshall Tycher, Chairman of Roseland, our multifamily operation; David Smetana, our CFO; and Nick Hilton, our EVP of Leasing. On a legal note, I must remind everyone that certain information discussed in 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. We filed last night our supplemental for this quarter, and we’ll be releasing a revamped investor deck this coming week in preparation for next week’s NAREIT meeting. We look forward to see you there. These combined presentations will reflect the ongoing transformation in Mack-Cali’s portfolio and more importantly with NOI composition. We will be referring to key pages in our supplemental during the call. And please contact David, my partner in any further suggestions as to content. As we’ve done before, we’re going to break our call down to the following sections. I’ll make some brief opening remarks. Nick will discuss some office leasing, performance and our view of the markets going forward. Marshall will provide insight to our multifamily operations. David will then recap our operating results, and I will close the floor for questions. We had another successful operating quarter, as we delivered extremely positive results for the first time in 2018. And 2018 has turned out to be relatively good year for us in this strong quarter of leasing on the Waterfront and our lease of a multifamily and with the groundwork for the remainder of 2018 and well into 2019. Our individual asset distribution strategy, which David will go over in his remarks that substantial behind us and now we have solely focused on leasing beverage in operations. For example, leasing on the Waterfront and its certain assets had great momentum this quarter, towards the [indiscernible] which Nick will go into detail as these proposals and we obviously got some great numbers coming in. We believe the next quarter will be equally as good and possibly even better and we look forward to 2019. 2019 is shaping up well as tenants accepting the new product that we’ve delivered and as far as we ramped cafeterias, lobbies, mining packaged and improvements were made to the Waterfront and also for creating a sense of place at all our assets. We believe our assets will be really well received the 2019 as these projects that are coming to close, but in the remainder of 2018 we’ve substantially done a lot of leasing for the year and that was basically looking at just getting net absorption in the last quarter. We’ve got new deals coming at some very attractive rates with some great names that will change the way people view our portfolio. Moving forward, just to note, we have very low explorations for 2019, 2020, 2021 if you assume that the Flex business has gone, which is something we’ve been working on it and we believe we’ll have a completion too in shorter way. We only average with our remaining office portfolio about 625,000 square feet almost in a $11 million plus portfolio, so it’s about 6% less. It says all time close for us to deal with. Looking back when we started the team, the first year was 21%, then it was 18% and 14% always double digits relatively high numbers. This year we expect Nick will go over in detail to do almost 2 million square feet of leasing, a projection at the beginning it was 1.2 million square feet in change. The market is definitely picked up for us, will benefit from us. We can actually catch in on that and achieve some great results. We’re very happy we’ve been able to deliver the right rates, haven’t have to increased concessions and we’ll be getting some great tenants. Regarding multifamily. Marshal will go over this his points in detail, but we had a very, very good quarter for leasing at RiverHouse 11 is now stabilized, soon behind that will be sent into place plus 145 Front Street. Thereafter or by the end of the year, like the most beginning of the first quarter 2018. The only activity we have lagged is the hotels, which expected revenue will be opening this November, Pre-Thanksgiving and the autograph will be open in late first quarter of 2019. Last week one of the most important topics leverage is going to come down. We’ve talked about before, we do have some trades and what happened in the next several months to get us down to an acceptable level, this is the high point of leverage for us. It’s going to be downhill from there. We committed to it as is on board. I’d like a turnover Nick for answering questions. Nick?

[Nick Hilton:]

Thank you, Mike. I’m excited to say was a great quarter for the leasing department across our entire portfolio. As we look at our leasing results, we signed just over 816,000 square feet of transactions in our Waterfront, Core and Flex assets ending the quarter at 84.2% leased. Of those transactions, approximately 454,000 square feet were new leases and we’re also able to capture over 362,000 square feet of in-place renewals. Across these segments, our rents on Q3 deals rolled up 9.9% on a cash basis and 30.9% on a GAAP basis. This quarter’s transactions we committed $5.50 per square foot per year of lease term, which was largely a result of our early renewals and expansions in our Waterfront portfolio. Examining our results by market, the waterfront continued its positive momentum from the end of Q2, shortly after we completed the 132,000 square foot e-trade renewal and expansion, which was discussed on last quarter’s call. We signed a renewal and expansion with SMBC for 111,000 square feet in Harborside 2. Another sizable transaction also included the renewal and expansion of First Data for over 80,000 square feet 101 Hudson. In all, we completed over 389,000 square feet of transactions on the Waterfront with a cash roll up of 12.7% and a GAAP roll up of 41.1%. As we look to the fourth quarter, we are currently in negotiations with numerous new tenants on the Waterfront totaling approximately 190,000 square feet, which will further drive our vacancy lower and continue the positive response we’re seeing in the market. Our suburban portfolio also remained active in the third quarter. Specifically, we had over 221,000 square feet of leasing. Some of the most significant transactions included the trustees of Princeton University for over 67,000 square feet in Princeton, and the renewal and expansion of investor savings bank for over 56,000 square feet in Short Hills. The outlook for our suburban portfolio continues to be stable through the fourth quarter and we’ll be looking to close roughly 153,000 square feet of additional transactions before the end of the year. With that, I’d like to turn the call over to Marshall.

[Marshall Tycher:]

Thanks, Nick. Roseland’s third quarter was highlighted by delivery and extraordinary leasing success of RiverHouse 11, a 295-unit community in Port Imperial. Property commenced leasing activities in July, and today, is 95.6% leased. Moreover we raised rents eight times during this initial opening. We have four additional lease-ups totaling 917 apartments from our 2018 deliveries, including Portside Phase 2 on East Boston Waterfront, which has also had tremendous success and is currently 73% leased. The majority of unleased inventory, there are affordable units awaiting residential approvals. Signature Place, a 197-unit apartment community in Morris Plains. New Jersey is currently 86 percent leased. We were targeting stabilization to Portside and Signature Place by years end. 145 Front Street, a 365-unit project, there is an integral component of the revitalization of downtown Worcester, Massachusetts. We delivered in phase 1, the first quarter and phase 2 in late second quarter. Phase 1 is currently 67% leased and overall project is currently 49% leased. And finally Metropolitan Lofts, a 59-unit community in Morristown, recently stabilized at 95%. Roseland’s lease-up portfolio from these 2018 deliveries is 74% leased in total is highlighted on page 34 of the supplemental. Upon stabilization, we forecast NOI after debt service from this portfolio of $14.5 million. We anticipate the opening of our 372-key dual flag hotel with the fourth quarter opening of the 164-key residents in and late first quarter delivery of the 208-key autograph collection. These hotels will serve as a cornerstone amenity for the port Imperial offering excellent access to Hudson Yards with the exceptional views of the Manhattan skyline. Upon stabilization, the hotels are projected to generate $9 million NOI after debt service. At quarter’s end, Roseland’s stabilized operating portfolio had a lease percentage at 96.4% as compared to 97.4% last quarter with Roseland’s same-store portfolio experiencing a 1.2% increase in NOI on a GAAP basis. Additional third quarter highlights include the acquisition or prudential’s majority ownership in the 412-unit Marbella in Jersey City. In addition to eliminating our last significant legacy subordinate interest, the acquisition will enhance Roseland’s market-leading position in Jersey City and translating to a gross asset value of a 4.62 cap rate. The construction started on Chase III, the next phase of development in our Overlook Ridge community, where we currently own and operate 1,386 stabilized apartments. This $100 million project has 326 units; refinanced in the $52 million construction loan. And finally, the construction started on building nine in Port Imperial, adjacent to the recently stabilized at RiverHouse 11. This 313 of projects is in close proximity to New York Waterway ferry terminal with a 12-minute commute to Hudson Yards and $142 million project will be financed in the $92 million dollar construction loan. We were targeting two strategic construction started through the end of this year. We have started site work on 233 Canoe Brook in Short Hills. One of the premier suburban towns in New Jersey, these 200-unit repurposing projects associated adjacent to Mack-Cali’s 150 JFK parkway, the mall at Short Hills and the Canoe Brook Country Club. Our second remaining start is 25 Christopher Columbus, a 718-unit signature development in Jersey City. [Indiscernible] will commence in the fourth quarter and growth in construction late in the second quarter of 2019. As detailed on Page 7 of supplemental, we estimated residential NAV of approximately $1.84 billion. After accounting for Rockpoint participation, Mack-Cali share of NAV due approximately $1.58 or $15.71 per outstanding Mack-Cali share. We have materially improved the composition for NAV with 84% of value along the Hudson Riverfront and on metropolitan Boston markets. On Page 37 of our supplemental, we included residential calculator, we’re talking at typical residence net income availability after tax and rent based on living in Manhattan versus Jersey City. I encourage you to take a look, the numbers speaks for themselves. As stated previously Roseland's platform is self-funding operation as we have excess capital sources availability including undrawn capital from to Rockpoint to complete our active construction projects and fund our target construction starts. I will now turn the call over to David.

[David Smetana:]

Thank you, Marshall. I would like to touch on the few financial highlights before handing it back to Mike for closing remarks. We reported core FFO per share for the quarter of $0.43 versus $0.57 in the prior year. The year-over-year decrease is due mainly to move-outs of tenants on the Waterfront and lost NOI due to asset sales from our disposition program. We reported $0.42 of NAREIT FFO and had a $0.01 per share of non-recurring item employee separation cost that’s added back to arrive at core FFO of $0.43 per share. Same-store cash NOI declined by 6.5%. The decline driven by move-outs in our Waterfront portfolio, partially offset by lower real estate tax expense. We are tightening our cash same-store NOI guidance to a range of minus 11% to minus 14% for the year, better than our previous guidance due mainly to lower real estate tax expense estimates and we strongly favor the high end of that range or the minus 11%. Touching on the Waterfront move-outs, hopefully for the last time, ICap was our last major expiration over 50,000 square feet on the Waterfront. ICap vacated 90,000 square feet in Harborside Plaza 5 on August 31. We believe our office EBITDA has bottomed with the last of the major move-outs occurring in the third quarter combined with the extremely positive leasing results we have just reported. Shifting the transactions. We sold three office properties and two transactions during the quarter for a total of $32 million gross proceeds at a blended cap rate of 7.8% and $139 per square foot. On the disposition front, we expect another $40 million to $100 million of sales for the remainder of the year to wind up our disposition program, with available net proceeds to pay down balances on our line of credit. The $63 million reduction from the previous midpoint of $400 million is due to a large land parcel in the $40 million to $45 million range slated for Q4 that now looks like it will creep into 2019 and the vacant office building is scheduled to be sold to the occupier that also now looks to be a 2019 close. Turning to the balance sheet. As expected net debt-to-EBITDA was 10.0 times this quarter and as expected this will be the peak for this metric. Tough new leasing activity was robust in the quarter, tenant work needs to be completed before space is handed over and GAAP rents commence. We continue to see the greatest driver in the reduction of our net debt-to-EBITDA metric through the reletting of our Waterfront assets. At market rents, we estimate a 1.4 times reduction to our current net debt-to-EBITDA upon reaching stabilized occupancy of 92% on the Waterfront. Looking at our debt stack, our 2019 maturities are very manageable. We have one unsecured debt obligation with an initial maturity in 2019, our $350 million term loan. We have given notice to our bank group on electing the use of the first of two one year extensions. The remaining maturities totaling $408 million you can see on Page 21 of the supplement are mainly construction loans, and successful multifamily properties. These will be converted to permanent financings and all have extension options. There’s also a $26 million permanent loan due in 2019 that secures a property currently under contract to be sold. Lastly, we have tightened our FFO guidance for the year by a $0.01 at both the bottom and top end to a $1.81 to a $1.85 per share. With that, I turn it back over to Mike for closing remarks.

[Mike DeMarco:]

Thank you, David. In closing, I think was set up to have a good 2018 the fourth quarter is looking to be very strong for us in all fronts. As my colleagues have all commented, we have the lot of projects in motion as always, and I feel very comfortable that we’ll be accomplishing all goals. We believe, we can have a better 2019 and 2018 for the simple fact of momentum is with us. We’re feeling the question tight portfolio. We able as Nick pointed out, the lease up and renewal what we have the higher rates we had thought beginning of the year. As David pointed out, we are deleveraging in due course throughout 2019 and a demand overall is growing. Capital improvements are being very well received and we finished up on the CapEx budget started three years ago, we want to start a small set going forward of the few buildings that we fund to casual and we think that yield additionally improve [ph]. Our focus obviously has been on the Waterfront. We’ll see as an in the next coming months make some move to consolidate holdings, we have a much clearer concise story which will give us a better thesis to going forward. As I’ve commented on before there are lot of companies looking to being in metropolitan area, some of them can’t afford the actual New York rents and it’s spilling over to New Jersey. But a number of serious conversation with firms based in its been want to be on the Waterfront from our point of view of attracting the right talent, the operations, equating right brand. That all being said, we still a lot of work ahead of us. We have a plan that we started three years ago when we took over as a team, we’re varying end of it. I think we’ve accomplished almost all objectives and as I said earlier, we feel very strongly the 2019 even 2020. We will be announcing in Investor Day in early – January 2019, I hope you can join us. Details be forthcoming, we look forward to seeing you all at NAREIT next week. With that, I’d like to take some questions. Operator, first question, please.

[Operator:]

[Operator Instructions]. Thank you. Our first question today comes from John Guinee from Stifel.

[John Guinee:]

Great, thank you. Mike, There’s some must be some very, very good reporters at Bloomberg, because they always come up with information about sales and all that sort of thing, company sales. Any comment on is there a real live in writing offer?

[Mike DeMarco:]

Well, John, now this is an earnings call, so we’re not really supposed to talk about M&A matters, but it’s a very good question. It’s very timely. I’m a board member on the CEO, everyday, I come to work and check to see if my phone works, my e-mail works as most of you know and John, do you know, particularly I answer my own phone. We've had board meetings. We've had this conversation long before we had this conversation in John's letter. We know of no bid. It's not a factual comment that we received an offer and we just created anyone making further offer of having conversations with us. And anything we are actually hoping to be where it's appropriate. The board has been more than adamant on that subject. So we've had our conversations with Bloomberg. We’ve obviously responded with no comment but I appreciate your question but no, John, no active bids. And I’ll also point out that there was something in the market, you would hear from x number of bankers, we’ve done financing package, we’ve raised equity. We haven't had any confirmation of that subject.

[John Guinee:]

Okay, great. Nick, David was very was very kind to say that to get the water – when you get the Waterfront from – 74% leased to 92% occupied, that's worth 1.4 turns on the leverage. How long does it take to lease up that 950,000 square feet?

[David Smetana:]

John, let me go first and then Nick is going to jump in. We've had very good acceleration. And we don't have a really good quarter essentially a couple of thousand square feet of net absorption. So we think we are going to end the year on a very positive note. The big question is the larger tenants we have at least half a dozen names of people who over 200,000 some as large as 500,000 that is circulating. If we just get one even at 250,000, that obviously will make it a much more accelerated but since that conversation and I will ask Nick's point of point of view should be able to do between 300,000 to 200,000 square feet a year. So hopefully 2019 is as good as 2018 was. So we’ll get another halfway there and we will finish up in 2020. Nick, please give your comment.

[Nick Hilton:]

Well, right in line, Mike, with exactly what you said. We are averaging about 300,000 or at least we are projecting about 300,000 to 400,000 square feet a year. The tours and the amount of proposals we are negotiating on right now is falling right in line with that to be able to make those numbers as well. Michael J. DeMarco – Mack

[Mike DeMarco:]

Nick, also talk to John about the fact that the quality of tenants has really changed so we only used to see financial and now that moving to some of the categories we’ll be about to talking around.

[Nick Hilton:]

Absolutely. Yes, to Mike's point, we are seeing everything from electronics, consumer products, of course, we always have financial services, but they just makeup a portion of it, not just the overwhelming majority. Fashion and even some HR outsourcing companies as well. So it's really running the gamut and it’s…

[Mike DeMarco:]

[Indiscernible]

[Nick Hilton:]

And co-working as well. It is really showing that the market is attracting more than just the financial services and the connectivity to downtown Manhattan. But really attracting a wide base.

[John Guinee:]

And then David if you go to – if you start with a 10 times net debt-to-EBITDA and you take out – reduce by 1.4 turns I don’t have my calculator with me but I don't think that gets you down to what the industry expects. Is there anything else going on that will get you down to what, whether we like it or not, the industry expects? And then I'm assuming that you're going to run the residential portfolio at a higher leverage, any sense for where you want to get to on the office portfolio?

[Mike DeMarco:]

John, I'll do this first for David. One thing that's missing is the flex sales which we expect to do in the next few months. Brings you down at one full maybe a little bit more than one full turn so that takes you down 2.5, today it’s 2.5, which would get you from 10 to about 7.5. If we get we're lucky on some other asset sales we get to a more manageable number. The way we're going to split is above all, John. It will be office, it will probably 6.5 or less and multi is going to run higher. We feel the risk in the company has always been on the exogenous side of the office business as evidenced by the move outs and the multi could have a higher leverage. We feel today we actually have much better balance sheet from a risk point of view as to our credit providers than we did even when we started in 2015 when we were at 3x. I'll let David, please, jump in.

[David Smetana:]

So John, to be just exact on my words, so the 1.4x we view as our largest debt-to-EBITDA reduction and what I'm really trying to say there is we are not an office company that's 94% or 95% occupied running at 10x. So we should do something now or even contemplate diluting our shareholders. I'm just trying to illustrate for people that we have some runway on the EBITDA side there. As Mike said, slightly behind the 1.4x would be a Flex transaction which would get you about a turn. We will talk about this more at the Investor Day. But we really do feel the office below 7x in multi-family, the mortgage is running about 12x, we've actually created a safer debt stack than an unsecured suburban office company that runs 7x, 8x on an unsecured financing basis.

[John Guinee:]

Great. Thank you very much.

[Operator:]

We will now take a question from Manny Korchman of Citi. Please go ahead.

[Manny Korchman:]

Thanks. Good morning, everyone. Mike, in your release, you talked about getting tenants to our projects and we are pleased to see the conversion. When we look at the stats, at least what closed in the third quarter and a little bit in the second quarter, most of it was renewables, expansions of existing tenants with a little bit of new tenants. So are you talking about sort of other tenant demand that Nick brought out when he answered the previous questions or is there something else that you meant in that comment?

[Mike DeMarco:]

I think what we are seeing overwhelmingly, Manny, and I'm going to have a question for you at the end, is we are seeing a different type of tenant coming over. And fashion started about three years ago. So Tory Burch is in the market, Palmer [ph] a few other names out there. And then you've seen more tenants start to come through. So we are getting those types of tenants. They have bought that whole – Whole Foods is looking for tenancy in the marketplace. We have [indiscernible] is looking for tenancy in the marketplace. We have those names which we feel very close to a number of those tenants which I think you will see coming out hopefully in the fourth quarter if not early in January which is what I was really referring to. But as Nick pointed out, we could see some a similar kind of companies, drug companies, pharmaceutical companies and general companies. They're getting larger, larger formats, about 1.5 million square feet hoses out which is really good for us even if we got 10% conversion, that's a pretty good chunk. It's 15% of what we're trying to do of what's remaining. We got 30% obviously will be an excellent year. We’re going to emphasize a point that we've made in previous calls. The Waterfront albeit not in 2017 average from 2010 all the way through now around 300 plus thousand square feet of absorptions here, but we just got back on track which 2018 will be – we feel pretty good that we can get most of it done by 2019 if not into early 2020.

[Manny Korchman:]

And then Nick, those other types of tenants that you talked about whether it would be fashion or technology or whatnot, where else are they looking? If you got 1 million square feet of proposals out, if you don't get the 1.5 million square feet which I don't think you will, where those tenants end up? Is it in New York? Is it Brooklyn? Is it in the suburbs?

[Nick Hilton:]

It’s a mix and it’s something we actually discussed on previous calls too. So, it’s a mix from tenants looking from Manhattan, looking at the waterfront. So, they would also be checking other Outer Boroughs, whether they’re a midtown or downtown tenant, checking other areas within Manhattan and including the waterfront. We also have a good, actually historically, good view right now of tenants looking from western New Jersey actually looking at the waterfront, really focused on how they can retain and attract people. I mean it’s really, it’s quite surprising. So, where else are they looking? It depends on where they’re coming from to answer your question. So, if they’re coming from Manhattan or looking in the Outer Boroughs, if they’re coming from western New Jersey, we are competing, sometimes even just with ourselves, with some of our other suburban products.

[Marshall Tycher:]

Manny, a little bit more specific, there is a project [indiscernible] we do the half on the roadside emphasized project. Where should we compete with them [indiscernible] was coming out of Meadowland, they didn’t want to cross over the route three barrier. Last year, we competed with New York that has not gotten as much as many inquiries lately. But last year, they got [indiscernible] Hackettstown, which we were very close to doing a deal with it. So really look, if you want that experience. But I think people have found out that that most of them will get you to millennial based. It gives you a better transportation, but not – not getting what you want. One thing that we do is we draw a map. It’s kind of pretty good for people in the presentations and very tight. We can show you within 40 minutes of commuting, how much you can get to mass transit, drive very subway [indiscernible], and it’s a really good map. That’s what we’re – that’s what we’re really working with.

[Manny Korchman:]

Thanks.

[Operator:]

We will now take a question from Steve Sakwa of Evercore. Please go ahead.

[Steve Sakwa:]

Thanks. Good Morning. Mike, I was just wondering if you could elaborate a little bit more on the Flex sale. I know that that’s something you’ve been talking about for a while and I think even sort of had a process that was running. Is this the entire 3.7 million square feet that you sort of outlined in the supplemental? Is this a subset of it and is this something that you think will close by year-end or is this more of a 1Q 2019 event?

[Mike DeMarco:]

Excellent question, Steve. What we did this we put the portfolio out with HSF within seconds because you want to see if we could sell it in one piece, sell it in multiple pieces. We will sell a piece in 2018. We feel comfortable that [indiscernible] those also will be discussing the rest of the sale. We have a bit of we can accomplish that with. Strategy with allows us to then enable us to do a 1031. Just to reiterate what we said before we will hit our NAV number that was targeted in the presentation there will be a discount as we think today. We will use $300 million to basically pay down debt which is John as one full-time. The other $250 million is going to be put into replacement because you have a large 1031 and that asset. We’ve identified an excellent multi family asset with it I think we can purchase in our core market and will make our Waterfront strategy stronger. So we have an exit on the flex business and do water subject to board approval tomorrow [indiscernible] you have a replacement asset, you will have a paydown of debt and I think we are well on to accomplish the goals that we articulated early in the year, Stephen.

[Steve Sakwa:]

Okay. And then if we sort of just turn to the multifamily business, just sort of trying to look at kind of broad figures here. If you sort of look at 2019, what are your expectations in terms of number of projects and sort of capital to be spent on the multifamily development business in 2019?

[Mike DeMarco:]

So let’s look at that question [indiscernible] that you gave it. The composition should be at the percentage of Mack-Cali’s total business just slightly less than 40%. Some on the high 30s maybe even touch 40 depending upon the growth in income, which is a for change of 2015 when it was less than 7% to 8% well, five times. Albeit at a obviously we put on leverage in order to do that. We won’t be settling on how this contract out one of our projects for Park Square this will start to trim the bottom of the multifamily portfolio as we proven we can trend our new office size. We have a couple of joint ventures in the DC market that we’ll be working to exit over time. We also will be selling some of the sites that we’ve identified as suburban, true suburban sites as a portfolio as we complete the land application process. That leaves you with very core strategy which we think we can effectively achieve the highest results. That is the continuation of the [indiscernible] more than it was real, which we had excellent results. We will obviously have re-lock in West New York and Jersey City. The capital needs are on those projects have laid out in the presentation. We will be doing our equity raise at Roseland in order to satisfy those. We will have enough capital to go forward to complete the next 30 months or 36 months worth of projects which is what we normally do. So when you look at from a composition point of view, this company is going to dramatically change, used to be 297 assets or 122 in the book today. You give it the flex business you’re down to 40 and change, of that, you want a number of buildings in the multifamily business going from partial subordinated joint venture the plethora of ownership entities to really just consolidated, essentially wholly-owned or controlling and it’s going to be a much cleaner story. Does that answer your question, Stephen?

[Steve Sakwa:]

Well, I just want to – I’m just kind of – just maybe, now pin you down to an exact number but just in rough figures what do you think you’ll spend next year in multifamily development sort of a range.

[Mike DeMarco:]

I think its in the book. I’m going to get the page for you in one second. It’s actually – we have a capital for it. Next year is not that big for us. The big thing is when we start the jobs for the projects in Jersey City. So on Page 40, Stephen, there is a page on in construction what we expect to spend in capital and projected going forward. So 2019 is we have $39 million left. Total capital development cost is $180 million, debt is $141 million. 2020 is $149 million; almost all of it is debt, no equity. And the size that we will start in 2018 in the fourth quarter on Canoe Brook and then Christopher Columbus Drive which is going to be a long-term job and in 2019, it’s a Project eight which is outside our window and the second phase of Urby.

[Steve Sakwa:]

Okay.

[Mike DeMarco:]

If you want, we can do it [indiscernible] after the call, if you like.

[Steve Sakwa:]

Yes. Now I’ll circle back. Thank you.

[Mike DeMarco:]

Thank you.

[Operator:]

We will now move to a question from Michael Lewis of SunTrust.

[Michael Lewis:]

Mike, you have a Mike, you gave a very clear answer to John Guinee’s first question about a bid or I guess that’s really no bid. It’s a delicate topic, but can you comment – give a little more color may be on what you think Mack-Cali will be two years from now? I mean, do you think it will still have multifamily subsidiary? I know you’ve talked in the past about that maybe not being ideal. Do you think the company will still be public? Do you think you will still be working there?

[Mike DeMarco:]

Mike, I really love your questions. I really do. Like another version of a diary with little softer tone. Putting aside as a common by the way. Three questions. The multifamily business, I believe is becoming an integral part of the Mack-Cali business. We are trying to create a Waterfront concert. If it doesn't work out, we know. We don't trade for them two years NAV. I will strongly advocate that we disembowel the company and basics of the pieces off. Every quarter, every day, every week, every month we come and basically say, how do you make a clean more concise because I believe that simple sales. Your second question is I think Mack-Cali will be public. I answered the first question because they're really tied together, right, because the multifamily business 40% and growing, if you really exit that business is really not much less than the office business. It will consist of probably 20 buildings, six or seven on the Waterfront and probably 15 or 20 in the suburbs. We should easily sell-off and I think you'll get great results on. The third question is it's my board decision still working on that. I actually enjoy my job, I actually love coming in I think it's the old phrase that John F. Kennedy once said, that happiness at work was the full use of your powers along the lines of excellence. I love coming to work. It's what I try to do. But any other questions, Mike?

[Mike Lewis:]

Just one more for me. You talked about the Flex portfolios. I was just wondering if there is any update kind of the tax consequences on the strategy to shield those taxes. And you talked about splitting in over a couple of years. I mean, it probably may be still early to put any numbers around. What might impact that?

[Mike DeMarco:]

No, no, we have the coverage. So we’ll do a piece of 2018 that will get done the rest will be in 2019, we won't pay taxes. That piece we have a deep, deep both in game that's our product [ph] in addition to the unitholders but really our problem because we are going for 25 years, we will shorter be filing assay it is going to be a great addition to our portfolio, it made complete sense, it will give small lead on the residential portfolio side. I won't be playing suburban building that John complained about or worry about. But it will allow us to basically have a cleaner story. And I think when you look at it sometime in the next several months, you'll say, hey, this is a much easier story. And when we do the tour in January, people get a chance to be fresh, so they'll say they've been spending their time well. Leasing has really changed. The assets have been upgraded. It's still New Jersey, can't change that. But the core results which people crossed over, [indiscernible] right? The cash numbers and gap number is as good as anybody on the segment. The fourth quarter should be as good or better and we have a really big built in game – sorry, built in lease up numbers my predecessors did a lot of deals in the low 30s we are doing them in the mid 40s you've got to love that trade every single day. That's what I want to go to work every day. I get to redo the urgent deals.

[Operator:]

We will now take our follow-up question from Manny Korchman of Citi. Please go ahead.

[Michael Bilerman:]

Hey, its Michael Bilerman here for Manny. Mike, you referenced, when you said that if you still have a job to the board, I'd like you to sort of give some views as to whether do you think the board is the right team right now to manage the company going forward? And I say that because it out of the 10 members of your board have, been on the board for 18 years actually a little bit over 18 with an average age of 75, I'm not trying to be an ageist. But they've been in that seat for a long time. It’s outside of view and got put on a couple of years ago this probably, probably almost long tenured word in the industry. There was an article in the journal that talked about that today in a pretty negative light. So can you talk a little bit about the board composition and whether you think that there’s risk there if changes are not made?

[Mike DeMarco:]

Actually I really like my board. I think they’re a talented group of men and women, one woman, obviously, nine men. I was added to the board also, so that changes digital composition. Rebecca was added the year before me. Obviously I have the greatest respect for my Chairman, my lead Directors or my Committee Chairman, they’re really talented people and their ethics are not to be challenged, right. They really don’t have a reason to be on the board. This is a very, very wealthy group of individuals. Not everyone, but of the most people you preferred Michael have done very well in life there. Thankful for what god has given them. So they are not doing for the board fees, and I think they do it because they believe they’ve done good stewardship. Also, I think I find it very talented. I’ve been representing boards and walking into a boardroom since I was in my late 20’s, which is a long time ago, like 30 years. This is a talented group. I’ve also worked for a company which is the second longest which is Vornado they’ve also talented group, right. And there are number of boards similar to that. I know the subject, we talked about it. They realized well often a few years and they are with it, it will be a topic we’ll discuss tomorrow because it’s estimated. But if you ask me on a direct basis, which I’ve always proven to be a – I often say is a very direct upfront that guy. Is this board a hindrance in doing what we do know? No, this board talented, yes. Are they helpful? Yes. Are there people that you can get on the phone and discuss a subject? Absolutely. I could admit that there is a tenure problem, right? 18 years is a long time. There’s a reason why people judge these, but it’s not my call, but if you ask me, I’ll say it a second time. No matter if they perform and I mean a hindrance to anything I’ve tried. Given how much we’ve done Michael and how much we’ve changed, hard press to say, that they just don’t – that they don’t embrace change.

[Michael Bilerman:]

Ultimately, the proof is in the pudding, right. And if the stock is where the stock is, at this point, perhaps fresh perspectives are needed in the boardroom and if the board itself was not willing to do it, you obviously run the risk that someone else could come about, right. Shareholders are not happy given where the stock closed. You rather do it on your own terms then for someone else to do it, right?

[Mike DeMarco:]

But I would argue that the perspective, we’re up about 20% when took over as a team, right? We return to dividend, so it take three years, we got 9%, 10% and nine slash 10 IIR, which is not exactly bad. We’re undervalued, but undervalued because we’ve created a lot of value over time. Will also hold the leverage, but it was a massive transformation. You’re hard pressed to look and say that we didn’t embrace the problems that we’re setting in front of us. Now the choice is whether you sell yourself or operate yourself and I recognized that day that truth. And as I always said, my number one job is to work for the shareholders. I’m an NAV guy. That’s why we talk NAV and we live NAV because end of the day proof is in the pudding. You start with cash, you end with cash. But you’re 100% correct. There’s a reckoning coming in, I recognize it. We work toward that and no one’s taking their job or their responsibilities lately. But I do appreciate the comment.

[Michael Bilerman:]

And then I just want to make sure I understand the comments you made on this offer or not offer. I think you said there’s no active bid today. Does that mean there was an approach to members of the board before? Or are you’re saying, you are categorically saying absolutely no purchase remitted to any member of the board about a potential sale.

[Mike DeMarco:]

What I will say is this, my knowledge, which I have attend every meeting. I'm not as good as for many conversations, that I mean direct conversations with every member, there has been no written or oral bid that I will tell you as an investment banker made that conversation. Has someone said to us and [indiscernible], which you guys should go private, as you just did on the phone with us, Michael, yes. We often get that conversation. You should go private. Great, that's really lovely. I’ve said this earlier, my phone works, I answered it, my e-mail works, right. Categorically, no written offer or no verbal communication, no banker came and said, here's how we'll do it. This is what goes so and so forth. And people made comments to the way you did, yes. You find them to be successful enough that we should react to it. You can do the check [indiscernible] I can sell the company to [indiscernible].

[Michael Bilerman:]

So the flip side of that is so do you think the company should run a process? Do you think you should do a track sort of go down the road of what you're doing now, but also go out there and pertain what it…

[Mike DeMarco:]

I was an M&A banker. And I made my stock in trade. I am running a process. I list every quarter, detailed summary of the assets and cash flows. So someone can make an informed decision about what we're worth versus what we're trading. No one, and I mean, no one is more transparent in Mack-Cali, right. And I'm one of the more easy to people to get on the phone and have a conversation with, right? Also by the way, I want to finish. The one thing that we do that other companies haven't done and we don't seem to get enough credit for it, but I want to credit that. I have a different job, right? Let me put this way simply, we handle our problems straight up every single day in a direct manner. You tell me a list of things that we've avoided or haven't done. I'll be happy to deal with it. We want to get that out of the business at a segment of lines, get out of joint ventures, take the pain of selling assets, restructure. I am down $16 million in overhead since I took over, over 325 individuals. This is not a shop that’s sitting around waiting for phone call.

[Michael Bilerman:]

Right? Just last question, just not related to governance. Just relating to the three big renewals…

[Mike DeMarco:]

I have a question, by the way, since you've been on the phone. I want you to tell me what you and Manny wore for yesterday’s Halloween. That's what I want to know.

[Michael Bilerman:]

Is that your question?

[Mike DeMarco:]

What do you wear for Halloween yesterday? Manny also…

[Michael Bilerman:]

Yes. I was an analyst in a suit. I carried the Mack-Cali’s supplemental as I was trick-or-treating, that’s my…

[Mike DeMarco:]

You’re on a role play. You’re on a role play. What's your last question, please?

[Michael Bilerman:]

So on the three renewals, so when was E-Trade, Sumitomo and First Data? When were those leases scheduled to expire originally?

[Mike DeMarco:]

First Data has five or six years left on it. It was deal that we had done. Michael, we had expanded First Data, when I first got here from one to two floors. That was like three years ago. It was a 10-year deal. And then when I get to go the third floor, I mean, we took them all the way out. What E-Trade was, basically, I have two years left, right? It was 2021 exploration. One interesting thing on Sumitomo. Sumitomo had three to four years left and they went out another 15. At the end it was 18 years left but not lease now. It’s a really long-term commitment to us, which is relatively the roll up. So they all expanded and extended but in different times. So just to summarize, First Data had six left, Sumitomo had four left and E-Trade had two left and they wanted to…

[Michael Bilerman:]

And these were – you didn’t renew leases with them or you blended and extended? Just to understand the dynamics of economics.

[Mike DeMarco:]

So it’s a combination of both. You’re actually doing new deals, Michael, on each individual space. Broker gets a different commission and it’s extrapolated differently and then you extend and a blend the remaining deals to cover that term. But it’s done in segments. So each one would have liked. So E-Trade had three different parts, Sumitomo had two parts and then First Data had also two parts to it.

[Michael Bilerman:]

Okay, all right. Thanks guys.

[Mike DeMarco:]

Have a great day.

[Operator:]

As there are no further questions in the queue, I would now like to turn the call back over to your host today for any additional or closing remarks.

[Mike DeMarco:]

I hope everyone had a great Halloween with their children yesterday. I know we did. I wish everyone comes back and see us at NAREIT next week, but I’ll have a conversation with you and thank you for your time and attention today.

[Operator:]

Ladies and gentlemen, this will conclude today’s conference call. Thank you for your participation. You may now disconnect.