Mack-Cali Realty Corporation
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good day, everyone and welcome to the Mack-Cali Realty Corporation Third Quarter 2015 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Michael J. DeMarco, President and Chief Operating Officer. Please go ahead, sir.

[Mike DeMarco:]

Good morning everyone and thank you for joining the Mack-Cali 2015 third quarter earnings call. It's a beautiful today in Edison, sun shining. This is Mike DeMarco. I am joined today by my partners Mitchell Rudin, CEO; Tony Krug, CFO; and Marshall Tycher, President of our Roseland Subsidiary. 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. We had an excellent quarter and we have made good initial progress on our announced transformation. However, as we've stated in the past, it's a long journey to be able to produce consistent exceptional results for our shareholders. We look forward today to an open dialog but our results and our plans going forward, as and when we know, we file and expanded disclosure operations in two supplemental, one for Mack-Cali and one for Roseland, our partner subsidiary. And as we said from the point of our arrival at Mack-Cali, we strive to provide the best disclosure for operation, strategy and results. Today, we're going to break the call into following sections; Tony will recap our operating results for this quarter, provide guidance for the remainder of 2015 and 2016 full year. Mitch will then discuss our office leasing results and our views of the market. And Marshall will provide an overview of our multifamily operations and a plan to raise equity at the soon to be formed Roseland Residential Trust. I will then provide an overview of our capital market activities and plans before we take your questions. I'd now like to turn the call over to Tony, who will go over the quarter's results. Tony?

[Tony Krug:]

Thanks Mike. We reported our third quarter results last evening. We also included our detailed supplemental packages for Mack-Cali and Roseland subsidiary both of which will -- we will continue to enhance over time. With respect to earnings, FFO for the quarter was $51.5 million or $0.51 per share as compared to $48 million or $0.48 per share for the quarter ended September 30, 2014. For the nine months ended September 30, 2015, FFO equaled $141.1 million or $1.41 per share as compared to $128.5 million or $1.29 per share for the same period last year. For the current quarter compared to last year, the increase in FFO per share resulted primarily from $0.03 of equity and earnings from refinancing proceeds received from a joint venture; increased net real estate tax appeal proceeds of $0.02; partially offset by $0.02 of additional general and administrative expense due to separation costs in the quarter. This results in core FFO per diluted share for the fourth quarter of $0.48. We reported a net loss for the quarter of $126.9 million or $1.42 per share as compared to net income of $2 million or $0.02 per share for the quarter ended September 30, 2014. For the nine months ended September 30, 2015, net loss equaled $94 million or $1.05 per share as compared to net income to $37.8 million or $0.43 per share for the same period last year. The net loss in the quarter and year-to-date period was solely due to $164.2 million of impairment charges on properties currently being considered for sale, which is part of a recently announced strategic initiative. Same-store NOI was up 6.5% on both the GAAP and cash basis for the quarter ahead of our expectations and due to better leasing results and expense savings. I want to discuss our G&A in the following manner, Mack-Cali has steady state business and for our Roseland subsidiary a high growth business with $2.3 million of G&A in the quarter. G&A for the quarter was $13.7 million in the aggregate for both, $11.4 million for the office public company and $2.3 million for our multifamily subsidiary. D&A for the office public company therefore was 1.1% of total assets, 7.8% of total revenues and 14.2% of NOI. Excluding this quarter one-time charge off $2 million of severance cost, G&A for the office public company was 0.9% of total assets, 6.5% of total revenues and 11.7% of NOI, second quarter G&A for the office public company was 0.9% of total assets, 6.5% of total revenues and 12.2% of NOI. Turning to our balance sheet, our total indebtedness at quarter end was $2 billion. Net debt to EBITDA for the quarter was 7.2x, fixed charge coverage ratio of 2.6x for the quarter and interest coverage ratio of 3.1x. A $600 million credit facility has $35 million drawn at quarter-end and we've drawn the line to fund some of the opportunities that Mike will cover in his capital markets overview. Moving on to guidance, we're updating 2015 guidance and introducing guidance for the full year 2016. We expect the fourth quarter FFO to be approximately $0.42 to $0.46 per share for a full year 2015 FFO of $1.83 to $1.87 per share. This incorporates the impact of our plans on demolition of various vacant tenant spaces and the acquisitions in dispositions we will discuss. For 2016, we are providing initial FFO per share guidance in a range of $2 to $2.10 based on following these options. Percentage leased increasing from 85.8% at September 30, 2015 to 87% at year end 2016. Same-store NOI increasing 1% to 2% on a cash basis and 2.5% to 3.5% on a GAAP basis. Non-core asset sales of between $400 million and $500 million in the first half of the year at estimated cap rates of between 5% and 5.5%. In addition, we have about $300 million of sales in the pipeline for late 2016 and early 2017 at estimated cap rates of between 8.5% and 9%. Acquisitions in core New Jersey markets including Jersey City Waterfront, Metropark in Edison properties in our existing business campus in Parsippany and a multifamily acquisition in the Boston suburbs. Development expenditures are assumed to start -- we assume we're going to start 10 multifamily projects between now and the end of 2016, project costs for these starts estimate to be approximately $800 million, in addition there are three construction projects started in third quarter 2015 with total estimated project cost of $260 million. On average all these projects are financed with 65% secured debt and some with JV partner equity. We assume we raised approximately $300 million of JV or entities level equity by the end of the year. In additional financing activity we began the process of obtaining a $300 million five-year unsecured term loan with all in interest rate in the 3% range, floating swap to fixed. Proceeds from the loan are used to -- to be used to repay our January 2016, $200 million 5.8% bonds. Balance of the term loan proceeds will be used to repay any outstanding borrowing under our $600 million credit facility and to handle additional [debtors] [ph] as they occur in 2016. Multifamily development deliveries in 2016 will be comprised of the first phase of Harborside URL, although initially a slight drag on earnings during lease up late in 2016 and into 2017, our 85% share of URLs FFO will contribute up to $0.10 [indiscernible] pre-share and earnings when stabilized in 2018. Marbella 2 in Jersey City, New Jersey and our Tuckahoe project in Westchester, New York will both begin contributing to earnings in 2016. I will now turn the call over to Mitch.

[Mitch Rudin:]

Yes. It's Mitch. Thanks Tony. First, let's turn to the leasing results for the quarter. We signed 94 deals totaling 956,000 square feet, 361,000 of that came from new leases and 595,000 from renewals. Year-to-date, we have completed 355 leases totaling 3.1 million square feet of which 852,000 were new leases and 2.2 million square feet were renewals. This represents the highest year-to-date leasing activities since 2005. Significant transactions in this quarter include new leases with Brown Brothers Harriman & Co. for almost 115,000 square feet in SunGard Financial, 41,000 square feet both in Jersey City and 54,000 square foot lease with KPMG and Short Hills, New Jersey and the renewal of 141,000 square feet with the GSA in Washington. Our lease space increased to 85.8% up from 82.3%, it is our intension over the coming quarters to drive that number higher as we pursue the initiatives that we will be discussing shortly. In addition, we will continue to strengthen our relationships with the brokerage communities in both New York and New Jersey which have been underway since we started. Lease rate roll up for all transactions was a positive 2.8% on a cash basis and 6.7% on a GAAP basis. Lease spreads for renewals were up 3.7% on a cash basis and 7.7% on a GAAP basis. Based on our analysis and initiatives, we believe strongly that we can continue to improve our occupancy over the next five to six quarters by selling buildings that are underperforming driving up the occupancy in our existing buildings and selectively adding buildings that have superior occupancy. We have just 273,000 square feet expiring in the fourth quarter and as of today we now have only 86,000 square feet that is vacated. We're already working on a number of new leases that total more than 85,000 square feet and expect to wind up with flat to higher occupancy by year end 2015. Looking forward, if we sell the bottom of our portfolio over the next five to six quarters and our occupancy stayed at today's level when we complete our sales by late 2016, we will have a portfolio that has been trend upgraded and possibly approaching 90% occupancy. As we look to 2016, our expirations are very manageable, 1.7 million square feet and spread evenly across all four quarters. Our view today is that we are likely to retain 70% or more leaving us with 514,000 square feet to back them. In 2017, we expect that roll-over significantly in Jersey City, while ours to increased rents in some of our best buildings. To-date, we have proactively transacting on approximately $450,000 square feet of the 2017 roll and early at a net roll up of rents which will be announced next quarter. These efforts bring our total exposure to 3.4 millions square feet to 2017. We are highly likely to exceed 3.0 million square feet of leasing this year, therefore, 2017 is not a daunting number for us. One initiative that we are pursuing now is that demolition of vacant tenant space totaling 600,000 square feet in the fourth quarter to better position in market, our existing inventory. This is not something that we have done previously but the demo will allow us to properly show the space in this various size configurations prior to leasing. Since we don't have tenants in place, we were taking a charge of $3 million, the majority of it in the fourth quarter with some carryover into the first quarter. With that said, the space will be more marketable and the cost of the demolition can be recouped more quickly. We are also launching a pre-built office program that will accelerate our leasing philosophy. We will initially construct 75,000 square feet of pre-built office space that will allow to rent and offer tenants a quick turnaround to occupancy. This program will be continued as the initial build outs are absorbed. Our efforts to make strategic capital -- strategic picture like these and other improvements, we have announced will bear fruit as perspective tenants realize that we are open for business. Looking at the markets, the activity on both the waterfront and Parsippany has been and continues to appear very strong. We will likely get close to 90% for the waterfront and possibly mid-80s for Parsippany by year end 2016. Our other markets continue to be strong, Short Hills, Metropark, Princeton [indiscernible], all with occupancy at approximately 90% or higher. Our exposure to Paramus North Bergen, our weakest market is looking manageable for 2016. Lastly, four flex business a strong and steady performer that is consistently trended rents and increasing 4% per annum and it has been approximately 90% occupied for the last five years. To reiterate Mike's initial comments, the journey to our success is long, the development execution of our plans are critical to that journey and we are committed to successfully transforming Mack-Cali. It will take some time but we're confident that we have the right team and the ability to unlock the value of our portfolio. I will now turn this call over to my partner Marshall.

[Marshall Tycher:]

Thanks Mitch. I'd like to give a brief overview of Roseland, our multifamily division. As Tony mentioned, we filed and expanded separate supplemental this quarter which continues to provide a better understanding and disclosure of our business. The platforms wholly-owned joint venture portfolio is comprised of 2,240 operating apartments, 378 units under lease up and 2,075 units currently under construction. In addition, we have 3,026 operating apartments in subordinated joint ventures. Further, we have a pipeline of approximately 10,900 apartments of plan development which includes select repurpose Mack-Cali office buildings, the first of which is projected to start in the fourth quarter of this year. We also managed an additional 3,800 apartments for third parties most of which we built over the years and so to retain management. At quarter's end, our 2,240 stabilized operating apartments were 95.5% lease and lease up absorption at Station House on Second Street -- Second and Eighth Street on Washington DC exceeded 20 units per month resulting in a quarter end lease percentage of this community at 56.9% Our current construction program is 2,075 units in production including three projects comprised of 3,093 units and hotel keys that can commence construction in the third quarter. We will begin deliveries from our construction portfolio in the first quarter of next year with the opening of Marbella 2 in Jersey City. From our 10,900 apartment land inventory, all of which is owned and controlled, the envision starts at 484 units in the fourth quarter and approximately 2,100 apartments in 2016. I would like to say here some additional activities we undertook during and after quarter's end. We reached an agreement with our partner UBS to purchase their senior 50% interest in Chase I, 371 unit recently stabilized apartment community at Overlook Ridge, Roseland master plan community five miles north of Boston. Our subordinated interest that we carry on our books were $2.3 million was valued by UBS at $11.6 million, therefore, when applying our subordinated interest, our purchase of this Class A asset represents a 5.7 cap rate and our leverage yield will exceed 14% on $20 million of net capital invested. With the acquisition of Chase I and the third quarter construction start at the adjacent Chase II coupled with Roseland's ownership at Alterra, the company will own a 100% of the 1,385 apartments at Overlook Ridge with future adjacent development rights. We continue to make progress on our Short Hills repurposing project including a projected residential start in 2016, coupled with a sale of the adjacent hotel site. Additionally, as part of the project, we will be remodeling our Short Hills office building by expanding it's café and creating a fitness facility and conference center. When we have completed the combination of apartments, hotel and offices, it will be one of the premier mixed use developments in Northern New Jersey with a value in excess of $300 million. In the quarter, we also topped off URL at Harborside in Jersey City. At 69 stories, it's truly a spectacular project. We expect that we will commence renting on October 2016. The project is ahead of schedule and on budget. We expect based on today's rents the URL will be delivered at a 7.25 stabilized yield or better. We have a strong history to delivering our projects on time and budget and find reception to our product in the marketplace to continue to be superb. As previously discussed, we will make Roseland a private REIT held by Mack-Cali on November 15, 2015, which will enable us to raise capital in that REIT as a standalone entity. We have engaged Eastdil Secured and Wells Fargo to handle that assignment. Mike will discuss that in more detail in a few moments. I will turn the call back over to Mike for closing remarks.

[Mike DeMarco:]

Thank you, Marshall. I wanted to outline all our capital markets in capital investment plan before we open the call for questions. We obviously have a number of activities that we have mentioned in this call so far. We made significant progress in the last seven weeks since our Investor Day, on the financing side as Tony mentioned, we are working with Bank of America, Wells Fargo and JPMorgan to raise $300 million five-year term loan that will be initially floating that we will swap to a fixed rate loan. This would take out of $200 million unsecured bond offering maturing in January and also provide funds for the mortgages maturing in 2016. It's also important to note this will allow us to keep our line of $600 million essentially undrawn and the reserve for activities that we tend to happen during that course of that year. We will finance a Chase I acquisition with a seven year loan for its $72 million at a rate of 3.625%, expect to have that acquisition and loan closed in the first quarter of 2016. As Marshall mentioned, we engaged Eastdil Secured Wells Fargo that raised $300 million or more and the direct investment on Roseland Residential Trust. Mack-Cali would likely attribute to demand dollars from our sales program and the new investor would likely contribute $300 million. Based on that math, the formal investment will be common equity with no promoters subordination of Mack-Cali's equity; the new investor with owned units or shares approximately 20% of the Roseland platform. The marketing for this opportunity will commence in the fourth quarter. It is only one of our options, I would like to stress to finance our Roseland platform, we still have the options of joint venture equity whether options of selling future assets at Mack-Cali and obviously we have the options of doing additional debt. We would like to keep all options open and execute at the highest level. In addition to the Chase I acquisition we announced that we are in discussions to purchase two office buildings. You may ask why we're purchasing two office buildings and we have good reasons for that. Both in our opinions -- in hands on NAV over time. First, the contract to purchase the building adjacent to the building that we occupy at 333 terminal, it's direct upon our headquarters 195,000 square feet, its 92% occupied with an excellent amount of tenants, the prior owner had done a significant capital improvement and essentially a first-class assets. That building combined with our building will give us 400,000 square feet and it will be considered transit already market and a little bit of a campus. We intend to exit this building from our occupancy and reposition ourselves someplace in our portfolio likely Parsippany. With that as a case but allows us to re-merchandise these two assets, combine them, basically improve them and achieve highest rents in the marketplace. The cap rate of the building that we bought was about 6.5% on the income in place. It was $53.1 million. The second building is more unique of what we're trying to do is in Parsippany, it's a 147,000 square feet; we're purchasing it for $10.3 million or $70 per square foot. It's directly middle of the two other buildings that we own in Parsippany. It is also a Class A building. It was owned by an institution that is selling it vacant to us. We assume we can raise it up very quickly we're in current conversations for tenant for half the building and we may occupy the remaining square footage while we have other tenants that has special interest. The conversion of this asset from vacant to value enhancing should be relatively quick with a reasonably high payout. The economic deals are very easily understand base price is $70 assuming $60 per square foot with tenant improvements which is a lot of money for us to spend to secure a top tenant. Commissions of 15 -- $5 for amenities in the entire complex which is 450,000 square feet between the three buildings we own as a grouping and that's a $2.25 million, we're in for that one building for $150 per square foot. If rents are $29 which we know based on the other two buildings that we own are expenses are also $9 which we know for the two buildings that are adjacent and then that is $20 on a $150. What we're attempting to do here is not to have what's done to us in the past which our competitors buy the buildings in our market we would pass the reset buy they would enjoy this opportunity on a NOI basis and we rent it at the levels that we couldn't match. That activity is not going to happen in the future for this management team. We will likely combine our Mack-Cali and Roseland operations into one location in the future. We haven't figured out that plan we'll probably announcing in the fourth quarter thereby lowering our cost and releasing valuable space in our two best markets which is Short Hills and Metropark. Regarding our sales activities, we've hired six brokerage firms to execute on these properties. We basically hired the entire industry. We expect to achieve the cap rate of 5% to 5.5% in the more valuable assets which is the first things to go which resulted more interest rate sensitive which roughly half of the total plan dispositions of about $800 versus $400 million, the back half is done in a latter part of the year, gives us a change to asset manage those assets we expect that the range will be 8.5 to 9 and we've had excellent initial interest from assets that we have expressed interest in selling. We tend to execute these sales over the five or six quarters, get it done quickly and have the entire process completed by the first quarter of 2017. Obviously, we will inform you of this opportunity of our progress. Regarding our guidance, I'd like to stress a few points, one was our strategy, this is balance sheet mutual and people think we're actually adding debt or growing up in assets, it's not our intention. We will be fixing all the new debt obligations. For the fourth quarter guidance you'll be wondering why the core is less than the interest that we expressed. As Mitch said, we're taking in charge which should have done in previous periods, our prior management didn't do that, it's a little bit of an accounting game that we will not be planning in the future. And the one other thing we are thinking of doing which we have not got approval yet is getting a 41K program for our employees and who are obviously working very hard to achieve our results. That could be a $0.01 charge. So the $0.03, $0.01 take off the $0.48 gets you to $0.44, in fact we intend to make this same about of money in the fourth quarter as we did this past quarter on a core basis. Look at the full year guidance as Tony expressed, we gave you assumptions that we think we can beat and exceed they're actually reasonable assumptions. Regarding 2017 we expect to be in a much better position than we are in 2016 for a number of reasons we outlined. Therefore, we realized that we have exiting from a NAV story and hopefully entered into the growth rates of our earning story. With that, I'd like to turn it over, one other question, we've made steady progress in all of this repositioning activities we're finalizing our plans and we'll give you more to disclosure in the fourth quarter. Operator, we're ready for questions.

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from Manny Korchman from Citi.

[Manny Korchman:]

Good morning, guys. Mike and Mitch may be -- sorry I hear that, as you think about acquisitions in your criteria for acquisitions, how are you weighing those may be specifically in Jersey City, how you are thinking about the Hudson -- the Hudson street assets [indiscernible] market?

[Mike DeMarco:]

We've mentioned this before -- those are assets that would fit into our portfolio that would be obviously top five buildings if we were able to acquire them. We're carefully looking at all our choices, and we said that our acquisitions to expand upon my comments with balance right, we have a capital need for Roseland, which we think we saw or we have a strategy to solving, which is to raise equity at that level or do joint ventures at that level. And we have a sales activity will give us the balance of those proceeds. But putting Roseland aside which has been a big over hang about our capital, then it's a question of rebalancing and re-trimming the portfolio. We like certain market, so Parsippany is a market we like at the right price the price that we purchased at obviously makes sense for us. The same with Metropark which is the market we've expressed interest in even our Investor Day. Jersey City is the market of choice for us for our future investments as we mentioned. We have obviously some land there we could develop on and obviously we're committing significant amount of resources and repositioning. To answer your question for the right price -- for the right price on the right circumstances we would like to purchase those assets, if it's wrong for us we won't do it.

[Manny Korchman:]

And how do you think about the vacancy in those assets especially given your rental?

[Mike DeMarco:]

Actually the one building is fully leased with long-term, so we take off the table actually in a GAAP basis which are relatively accretive for that reason. The other building based on what we know, we have the best book of knowledge in the business that could be leased up at relatively attractive rates over a reasonable period of time.

[Manny Korchman:]

Great. And last one from me, just when we take all this external growth activity into account, how do you think about growth for 2017?

[Mike DeMarco:]

I'm sorry Manny, you cut out the last statement.

[Manny Korchman:]

How do you think about your portfolio or your earnings growth going into 2017?

[Mike DeMarco:]

We think it's good. We gave muted numbers. We choose -- obviously we chose to do 1% to 2% for cash and a little more of a GAAP. We did that as a means of tempering our expectations because we were going up so much from what the street has an estimate on. But our strength has been that we're able to and we believe we will be able to achieve high rent especially since we are improving the buildings. So we gave expectation as I said in my last comments that we intend to exceed.

[Manny Korchman:]

Thanks Mike.

[Mike DeMarco:]

Thank you.

[Operator:]

And we'll take our next question from Jamie Feldman with Bank of America.

[Jamie Feldman:]

Thanks and good morning.

[Mike DeMarco:]

Good morning, Jamie.

[Jamie Feldman:]

Can you talk about the occupancy outline get to your year-end 2015 guidance, and you had the nice pop in the third quarter but how should we think about how its trend between now and then?

[Mike DeMarco:]

Well, I will turn it back and forth between Mitch and myself. But the one beneficiary releases in just before disclosure when we rebalanced, we were able to get, achieve some occupancy by moving assets from -- they were vacant into Marshall's platform for repositioning, we pick up some gain. We have a net gain of about 100 basis points of occupancy quarter-over-quarter. We look going forward the biggest drivers for us, I will turn it over to Mitch is the -- the waterfront activity there and then Parsippany, Mitch.

[Mitch Rudin:]

Yes, Jamie. We could be fully leased at our 101 Hudson by the end of the year. We've also, we've been -- I was conservative in my remarks about what we expect for full leasing for the year, but we're well over 3 million square feet already. We have significant velocity and anticipate that we'll continue at a similar pace as we finish up November and December. And those are mostly -- those are deals 40,000, 30,000 feet and smaller.

[Jamie Feldman:]

Okay. I guess what I'm getting at it, well, I guess Mike, I'm getting back to your comments, so how much of the third quarter occupancy growth was from portfolio repositioning versus true core growth before occupancy growth?

[Mike DeMarco:]

250 basis points was leasing -- no, 250 basis points was repositioning, 100 basis points was net leasing.

[Jamie Feldman:]

Okay. And then you guys were calling for 120 basis points additional by year end 2015?

[Mike DeMarco:]

Yes. So we're thinking about --

[Jamie Feldman:]

Are there any -- are there any dip in that or is kind of consistent growth and then it sounds like you can beat it?

[Mike DeMarco:]

Well, our fourth quarter is relatively light as Mitch outlined. So that gives you the best indication of what we can do. So we happened deals working in -- the activity in Jersey City as Mitch said is relatively good. So if you look at what we need to do for one point of occupancy, it's not that many -- not at the level were occupied now. It's doable. So we can move up a 100 basis points, if we have a good quarter.

[Mitch Rudin:]

Jamie, as I indicated, we're only doing with 1.7 million square feet and only 500 that we know is leaving. So that would be -- that amount is less than half of what will be anticipated to lease this year. And by all accounts next year we will continue with a similar pace to this year.

[Jamie Feldman:]

Okay. And then --

[Mike DeMarco:]

Jamie to make it clear, we think we have a path to get to 90%. But how we get there -- when we get there but we indent to get there.

[Jamie Feldman:]

Okay. And then, thinking about your demand, you had mentioned Parsippany and waterfront even more is down in some of the pockets, are we seeing a pick up. How much of that pick is, you operating a portfolio better versus maybe talk about the nature of demand and job growth in those sub-markets?

[Mitch Rudin:]

It's a combination. I mean, we did get a pick up. And we have significant number of anecdotes, but we could go through and talk about the changes that we have made and we have discussed significantly. The improvements we've made in the brokerage community. And I will give you two recent examples, we're going to be given the opportunity before two significant tenants go to market to have an off market discussion with not only the brokers but the heads of real estate to see if we could craft solutions. Now, that won't guarantee that you will get there. But, those opportunities never would have existed before. In addition, we're seeing a pick up generally in the -- not only in the suburban markets and Jersey City as well.

[Jamie Feldman:]

Okay. Are those -- your transactions in -- on Jersey City, are they further out?

[Mitch Rudin:]

They're both up.

[Jamie Feldman:]

Up. Okay. All right. Thank you.

[Mike DeMarco:]

Thank you, Jamie.

[Operator:]

And we will take our next question from Ross Nussbaum with UBS.

[Mike DeMarco:]

Good morning, Ross.

[Ross Nussbaum:]

Hey, good morning guys. Let me first follow up on the question that Jamie just asked or maybe just a suggestion, could you create a same portfolio pull in the supplemental so that we can actually see what's happening to occupancy isolated from all of the acquisitions and dispositions that are going on. Because I think in the third quarter, it was very difficult to see what truly happened occupancy outside of those dispositions?

[Mike DeMarco:]

Right. We will be happy to do that. As a matter of fact, this is a general comment, anyone or any suggestion on anything that we can do to improve disclosure, please send it to Deidre Crockett, our Head of Investor Relations and we will put into the next set of supplementals.

[Ross Nussbaum:]

Appreciate that. And then so to that point, the 87% projection for the end of 2016, I just want to be clear that's apples-to-apples with the 85.8 number you had in Q3, so it's a 120 bp procure leasing improvement, there is no disposition activity in fact in that number?

[Mike DeMarco:]

Yes. Nothing will be sold -- and we may have a small transfer over to Roseland but other than that it will be just net pick up of absorption.

[Ross Nussbaum:]

Okay. The other question I have is around the acquisitions that you assumed over the next year and year and a half. Why not simply sell the assets you want to sell and distribute the proceeds as a special dividend to shareholders rather than doing 10.31. Because I look at it and I said to myself, you're doing equity to Roseland. So it looks like you're funding Roseland with external capital. Why the pressing need to say, I want to do 10.31 versus just liquidate and distribute proceeds on the office side?

[Mike DeMarco:]

Well, two things, it leads into a bigger question which I think you have asked before in other calls, which is why don't I just back buyback your stock, how do you distribute cash. So and so forth, we investigate this consistently. The problem we have which won't change until we get a high stock price and better capital market support is when you are at basically 50

[Ross Nussbaum:]

Thanks.

[Mike DeMarco:]

Thank you.

[Operator:]

We will take our next question from Vincent Chao, Deutsche Bank.

[Mike DeMarco:]

Good morning, Vincent.

[Vincent Chao:]

Good morning, everyone. Just wanted to follow up on the occupancy question. The 100 basis points of net debt leasing upside, you got quarter plus an additional by year end 2016. Just curious how much of that would be sort of rent paying by the end of 2016, of course free rent periods and all that.

[Mike DeMarco:]

Actually, it's tough because the deals you -- if you -- the new deals is always in this condition is always free rent. But what is most important, what it does to our 2016 numbers because it wears off obviously in 2016 and it allows us to have exceed or meet our guidance to be in 2016. The fourth quarter gives us a window as Mitch outlined; vacancies or terminations of -- 86,000 square feet next quarter is very even. This is a good path for us for the next 15 months. I will turn over to Mitch to indulge to allow us to execute our plan.

[Mitch Rudin:]

Vincent also as we are moving into larger transactions, all those are -- those are typically spaces that are built out by the tenants. So there is always an addition to market driven free rent period there is a construction period built into that. And those are always several months as well.

[Vincent Chao:]

All right. So I guess, what would you say is sort of the typical lag between signing and commencement of cash rent?

[Mitch Rudin:]

It could be five to six months, if you're doing a larger deal, it could be 9 months or 10.

[Mike DeMarco:]

All right. So on 10-year deal, you might get six months of free rent still to consent with.

[Vincent Chao:]

Six months free for 10. Okay. And then just a question on the same-store for the quarter attributed mostly through operating performance, I think. Just curious what's the real estate tax impact was?

[Mike DeMarco:]

Tony?

[Tony Krug:]

Yes. It was about $0.02, about $2 million in the quarter.

[Vincent Chao:]

That mean on the same-store?

[Tony Krug:]

It's essentially same-store. I mean most of the portfolio is same-store. So I would -- its vast majority.

[Vincent Chao:]

Right, right. So the 65 would go to -- so, I think we did lose some of that --

[Tony Krug:]

Oh, I'm sorry. Are you asking what would have been without?

[Vincent Chao:]

Correct.

[Tony Krug:]

Okay. I'm sorry. For the quarter, instead of 6.5%, it would be down about 3.9%.

[Vincent Chao:]

3.9%, okay. Thanks.

[Tony Krug:]

Welcome.

[Mike DeMarco:]

Thank you, Vince.

[Operator:]

We will take our next question from John Guinee with Stifel.

[Mike DeMarco:]

Good morning, John.

[John Guinee:]

Okay. John Guinee here. Okay, Mike, if I speak slowly will you answer slowly?

[Mike DeMarco:]

Not a chance John.

[John Guinee:]

Okay. Walk me through, you got $400 million of assets at 5 to 5.5 cap, is that anything besides the Washington CBD and 125 Broad Street?

[Mike DeMarco:]

No. That's basically the two district buildings and 125 Broad equal about $400 million give or take.

[John Guinee:]

Okay. What's the price of the --

[Mike DeMarco:]

Just to be fully -- we expect the 125 Broad will be sub-4 cap and the other ones are around the 5s. So we give a range that actually was -- actually was conservative on that number.

[John Guinee:]

Okay. Got you. And then $400 million, 8.5 to 9 cap, what would I -- well, I'm thinking about pricing per count, what would I think about? And then how much of that will be sold -- how much of that would be transferred into Roseland, or is that a separate bucket?

[Mike DeMarco:]

Different bucket. So nothing will transfer into Roseland. And the way you should look at it, as we went through and we trimmed out a number of small buildings and these are some decent size buildings that were isolated and we allowed ourselves to know that when we went on -- we won't see these buildings back again like. We don't want to sell them to a competitor and then would re-lease to us which has happened in the past for reasons we don't know. So we have buildings that are 67,000 square feet, buildings that are 225,000 square feet and accommodation between and the range of value runs anywhere from $75 to $225 on a per square foot basis, John. And it's a range depending what we see. Some of it is going to be sold to end users people who really want to occupy space that's own space. Some will be sold to investors; some will be sold to -- some of our competitors but not people that will deal with the future because we'll be exiting those markets.

[John Guinee:]

Okay. And how many square feet is that total?

[Mike DeMarco:]

Four and change.

[John Guinee:]

Four and change, so on average these are sell for a shade under $100 a foot?

[Mike DeMarco:]

No. I would four and change for the whole $800 million, John. I have to get it back to you what that number is. The price per square foot is probably above $100 and below $150 if I had to make a guess today. But, I will give you a call back and give you a more precise number.

[John Guinee:]

Okay. And then how many assets, my sense is that the Upper Saddle River asset on Lake Avano [ph], I think it is, that's going to Roseland, but correct me if I'm wrong. How many buildings square foot acres in total are essentially being bulldozed and repurposed as something else?

[Mike DeMarco:]

It's actually 10 to 12 sites. But it's a combination of things that are very nuance and subtle, so some of them are actual buildings. So it's Lake Street, we have a building in [Marsh, Plaint] [ph] is also going over. We have a few others that are in that bucket. And we have excess parking rates where we have parking fields that Marshall was able to go to the town in such as short notice, where we have built a deck for the price of the development land which is relatively modest price to pay. But then the asset that we own gets a -- and closed parking which is obviously a big attribute for the suburbs. And then we have ones that are -- deals where we had excess land in total. This 12 sites, it's about 2500 units because it's about 250 units per, Lake Street is a little bit more than, some are little less, some are 190 to 200. But it does about 250 per. But the square footage and the buildings I have to get you that number John. But it's assumed that, I would assume that building is like 200,000 or 250,000 that we transfer over that's what we generally own, some 150,000. Lake Street was bigger at 500. So that range is probably 250 which gets you 400 apartments the way I was looked at it.

[John Guinee:]

Okay. And then, a last question, the impaired assets, is that all generic eventually held for sale or up for sale office or is there something else JVs, land et cetera in that bucket?

[Mitch Rudin:]

No. We try to basically be clean about this. So we took the impairment charge. And we have gains one of the things that's not disclosed. We had gains on assets that were actually moved out most of the impairment maybe we have a slight impairment charge of $30 million to $50 million is an estimate, right, net-net, right, so we have gains on other stuff. You can't take gains for accounting as you know John until you realize that transaction, where you can estimate impairments once you put an asset up for the sale. So we took a full disclosure, take the charge now, kind of our balance sheet. We think we foot marked everything we went through as we did with the audit committee about impairments. So this is the list that we know today.

[John Guinee:]

Okay, great. Hey, thanks a lot.

[Mitch Rudin:]

All the best, John.

[John Guinee:]

Bye-bye.

[Operator:]

We will take our next question from Scott Frost of Bank of America.

[Mike DeMarco:]

Good morning, Scott.

[Scott Frost:]

Thanks for taking my question. Hi, good morning. You said earlier that you would -- you are going to avoid a special dividend or buybacks because you wanted to avoid a downgrade. Normally, I would say that's understandable because it would result in higher funding costs in public markets but it looks like you moved away from that again with the term loan which was announced at your investor day, and which you have elaborated on here. What would the effect of a downgrade, what was the negative consequences of a downgrade actually be on your operations?

[Mike DeMarco:]

Not much. Our term loan is going to be both LTV and rating base, so we would be the same. Our line of credit has a certain grid pattern. But we haven't really bowled over it. It’s somewhat muted. But more important Scott, you make a covenant when you do business with people and operate in a certain way. We made those covenants when we attained that rating. What we would basically try to meet that as much as possible while still meeting the covenant we have with our shareholders to get the highest returns. So we will get the rating as one of the valuable tools in our boxes indicative of how we run our business and we intend to run that going forward. This is why I said earlier we have to operate as a -- essentially a leverage neutral case. And then hopefully, overtime as we have done we have improved earnings, we cut expenses, our stock price is up and then we shown reasonably disciplined capital allocation.

[Scott Frost:]

Are there any rating based covenants in the term loan or your revolver or anything like that?

[Mike DeMarco:]

They don't have a great pattern that basically move up and I think we disclosed that, but its not -- nothing that would drive us not as far as expenses.

[Scott Frost:]

Okay. All right. Thank you.

[Mike DeMarco:]

Thank you.

[Operator:]

And we'll go to our next question from Manny Korchman with Citi.

[Michael Bilerman:]

Hey it's Michael Bilerman here with Manny.

[Mike DeMarco:]

Good morning, Michael.

[Michael Bilerman:]

Good morning. Can you follow-up a little bit on Roseland just in terms of the 275 to 325, how that is pure I guess NTB level equity versus equity into assets or has that not been determined? And then as Eastdil goes out and raises their capital, are they thinking about one investor or multiple investors, is it going to be sort of out to institutions versus smaller investors, how should we think about that investor?

[Mike DeMarco:]

Well, let's look at the overall strategy. So as I said earlier just to emphasize, it is one arrow in equivalent, so we have a number of tools, right, we could merchant, build and sell assets and recycle which we could, we can do and shown our preference to do that. We could leverage our op as we feel appropriate as earnings to increase; we could raise joint venture equity, right? So what we've done is obviously get away from the subordinate equity which is one of the reasons why we bought Chase I in which allows us to have a wholly-owned asset next to other units we own and the building we're about to construct. So it gives us the real project in Boston of significant size to match up of what we have in Jersey City with URL and other investment. Looking at that as a strategy we look and said drop Roseland into subsidiary, it's private REIT Michael which is the preferred vehicle. It's a heads up transaction, no promotion, no fees, which is very uncommon. And as you know in the private equity world, it's the chance to invest side-by-side with the majority owner; you're minority, so you don't have to worry about evaluation issue because we have more money than the deal than the investor will. Our thought was to limit the amount we wouldn't sell because of the high accretive nature of Roseland, so we picked 20%. We picked 20%, we assume they put in 300 of cash we matched it with 200, you have 500, which on Investor Day we said was the magic number that got us through the foreseeable future, right? And we always do future races as the business plan goes. It's not dilutive to the overall Mack-Cali transaction, we're just trading out of assets you could argue with trading under the 5% assets or the 8.5% assets to fund Roseland in the future but again it's one thing. Now to your second question regarding number of investors, obviously, this will be a very attractive investor. The Roseland people have done business with a number of institutions and obviously, their institution prime, right, not a question. So we have UBS, Prudential, we've done business with. And then, there is a whole number of foreign institutions that shown interest in multifamily. For example one of the biggest news articles was case -- purchasing the Blackstone [indiscernible], right? The Canadians have always shown an interest in U.S. deployments and we think it's going to be a wide variety. And this transaction is somewhat unique given its size, which isn't that big and the structure which is incredibly clean. So we think it's going to be well received as a system.

[Michael Bilerman:]

Now does that in terms of access, what sort of things you're going to put in place or what were the investors want and ultimately as this entity going publicly would it be sold, what sort of protocols would be put in?

[Mike DeMarco:]

Well, we always have been thinking about the exit. So there will be number of things that we could workout which we haven't got into. But just to think about it, they don't make it for -- does a stock investor for a quick turn. You're making a five, seven year and maybe a 10-year commitment for this fund. So they'll be looking for exit sometime after that threshold -- otherwise they wouldn't be -- they don't do liquid investments to turnaround relatively quickly. We'll break in some things may be -- it might be a transition into Mack-Cali. It's a little number of things we haven't worked into or we might take it public or we could spin it out. As we've always said, we leave our options open and this only is an attempt to basically get on every respect to reflect what our -- our stock price to reflect what the NAV should be.

[Michael Bilerman:]

So the other $75 million to $125 million in this equity financing represents joint venture of assets or other things?

[Mike DeMarco:]

No. It's 300 of cash. We put up 200 of cash and 500 sits in the venture as I thought. And 500 fills out the plan. Two hundred that comes in, could be from assets we sell, borrow any other number of means we could fund. But the thought is we would own 80, made it 75 could be, could be 85, it depends on what we chose to and the investor obviously is the remainder. If it's just a cleaner transaction and much easier accounting for people like yourself to look at quarter-to-quarter.

[Michael Bilerman:]

Okay. You provided the good bridge from 3Q to 4Q effectively [indiscernible]…

[Mike DeMarco:]

Other than with the 41k and the demolition charges, yes.

[Michael Bilerman:]

Right. But effectively from a core basis you're earning the same amount of money. The math is pretty simple 100 million shares, so if every penny is the million bucks, so walk us through the bridge going from 4Q to 1Q and effectively the run rate into 2016 where your guidance effectively is $0.50 to $0.53. And so you're effectively picking up and you're looking to $2 million to $5 million sequentially, and I don’t know how much of that ramped in 4Q that you're going to end 4Q at a much higher rate but may be just talk about the key points that are driving that?

[Mike DeMarco:]

I'm going to turn over to Tony to give you details.

[Tony Krug:]

Yes. There are number of things that I guess I could point to. If you remember back on Investor Day, we talked about expense savings both from an operating perspective and interest. The aggregate of those things, call it $0.17 in round numbers. Mike and Mitch have both spoken about the lease up, the growth in rents that we would see and kind of pick a number but it's going to contribute something may be its another $0.04. Depending up on and obviously driven a lot by timing of the acquisitions and dispositions there could be another few cents accretively if we do the timing that we have laid out in the -- in our plan correctly or I should say in our 2016 guidance. So those things are all the contributors that get us kind of to the mid-point of guidance and it will be slow steps forward to get that done. Some how it sooner, the refinancing, interest expense savings hit earlier in the year. Expense savings, we're working on -- on that as we proceed here and that's -- that will be in the books from the beginning too. And then the trades, the acquisitions and dispositions, the arbitrage there will obviously be based on timing when we get that done.

[Michael Bilerman:]

Okay. Thanks.

[Mike DeMarco:]

Thank you, Michael. Have a nice day.

[Operator:]

We'll go to our next question from Gabriel Hilmoe with Evercore ISI.

[Gabriel Hilmoe:]

Thanks

[Mike DeMarco:]

Good morning, Gabe.

[Gabriel Hilmoe:]

Good morning, guys. Mike I appreciate your comments in the capital sources that you true, but may be for Tony just given the plan in place for 2016 with the sources and spend do you have a sense of where you kind of expect 2016 to end from a leverage basis, what kind of debt to EBITDA metric may look like?

[Tony Krug:]

Yes. Clearly, that's a concern of everybody including us. But with our plan we don't have net debt being meaningfully increased by the end of the year compared to where we are now and if we're successful at growing the EBITDA that we spoke about we could be and actually we plan to be even less from a net debt to EBITDA than we are currently.

[Gabriel Hilmoe:]

Okay. That's helpful. And then just on the guidance for 2016, Mike I think you have alluded to there maybe some of the higher capital sales hitting later next year, is any of that contemplated in the 2 to 2.10 range right now?

[Mike DeMarco:]

It's contemplated, but what we're trying to do Gabe and we've said as before is, we don’t want to leave any money on the table as my friends always say go from the felt, right? So we have set ourselves up to asset manage. There is nothing we're selling early which is DC and New York, is potentially pristine. So it gives us a chance as a management team to look at buildings and say should it go or should it stay. We've had actually very positive result there was a building just this one example, I won't give you the name. But it's 300,000 square feet in one of submarkets that we would have sold. And we would have sold for $100 a square foot. But the leasing broker who was in-charge of the building knowing that he was about to lose it has been working on it and he has turned it into a building that was like sub-70% occupied, Gabe like may be 68%, it's going to be like may be 90% or 91% by the end of this quarter. He has gone out. He has made deals. They had been accretive. We've actually put money in. We've had discussions with tenants about putting some tenants improvements. And that building we think today could be worth $200 a square foot which on 300,000 square feet is real money for us and it probably -- they won't keep for the intermediate and a make decision about later but it went off our sellers. We're going to try to work everyone of these deals, but not being so foolish and off-tax you wait and sell, we think we take 16 months or 27 months and we have a 36 month plan. We have a discipline. We want it done over the next 15 months, but some of the stuff will likely be in June to January of that segment as supposed to January to June of this segment, if you understand my calendar, right, so certain things we will sell early and there are things that will sell late, we think we can get good prices on it and we're getting more increase. By using six brokers, right? Think about it, we've used the entire street, and won't got a piece of the business and won't got a set of books and now they're getting cross fertilization like, "Oh, I have an idea for you on this one, I know you're also selling that." So we're getting a lot of inquiry which we're sorting through, it's going to difficult, it's like 40 somewhat assets that we intend to dispose off, but we think we'll get to the right spot and we have a whole team talented and led by our CIO, Ricardo Cardoso, whose is doing this effort.

[Gabriel Hilmoe:]

All right. Thanks guys.

[Operator:]

Then we'll go to our next question from John Guinee with Stifel.

[Mike DeMarco:]

Welcome back, John.

[John Guinee:]

Okay. Just a quick remainder Marshall, how much land do you have its wholly-owned in the Roseland residential business, what's the -- where do you think that is relative to your market value right now?

[Marshall Tycher:]

We're on multiple sites both in New Jersey and Massachusetts. I think the wholly-owned apartment sites -- we own and/or control over 10,000 units. Some of them are options, but most of them are wholly-owned. We do have partners in various parcels. So I don't have the exact number, what's a 100% owned versus in joint ventures. But in all instances we are in -- our sites below fair market value. We own most of these sites for many years and they usually multiple pay sites that we've bought permitted and improved. So we are in it under fair market value and I can get you more detail later as to which ones are wholly-owned versus owned and joint ventures.

[John Guinee:]

So what you are doing is, what Eastdil goes out and tries to raise $300 million privately for you, you're going to basically be selling them a -- have an appreciated book value, current book value for the land, current book value for the asset and selling among the value creation which is really what you are doing here as a essentially a private development company.

[Marshall Tycher:]

Yes. That's correct.

[John Guinee:]

All right. Got it. Thanks.

[Marshall Tycher:]

You bet.

[Operator:]

And at this time, we have no further questions.

[Mike DeMarco:]

We thank everyone for joining us and hope you have a nice holiday season. We will see you in January. Talk to you soon. Bye-bye.

[Operator:]

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