CLI
#Thank you.
Good morning, everyone, and thank you for joining the Mack-Cali 2016 third-quarter earnings call.
This is Mike <UNK>, the president of Mack-Cali.
I'm joined today by my partners <UNK> <UNK>, CEO; <UNK> <UNK>, Chairman of Roseland; and <UNK> <UNK>, CFO.
On a legal note, I must remind everyone that certain information discussed in this call might constitute forward-looking statements within the meaning of the federal securities laws.
And though we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved.
We refer you to our press release, annual and quarterly reports filed with the SEC, for risk factors that could impact the Company.
As always, we look forward today to an open and spirited dialogue about our results and plans going forward.
We again filed the expanded disclosure of our operations in two supplementals: one from Mack-Cali's office portfolio, and one for Roseland.
We will be referring to key pages in the supplementals during the call.
And, as always, we'll continue to provide the best disclosure on our operations, strategy, and results.
As we've done before, we're going to break our call down into the following sections.
<UNK> will recap the operating results for the quarter.
<UNK> will discuss the leasing results and our view of the markets.
And <UNK> will provide an overview of multifamily operations.
I will then provide an overview of our capital market activities, and comment on our views of guidance for the remainder of 2016 and guidance in 2017, as well as provide an update on our strategic plan before we take your questions.
As disclosed last night, our results indicate that we had another excellent quarter, showing continued positive results for the first nine months of this year.
Our strategy over the last 18 months as a new team is showing great results.
Our strategy, as we break it up, it is in four primary areas.
First, our operating plan is transformational and based on a number of activities, real estate, and capital markets, leasing, sales, acquisitions, equity rates, and development.
I would say we had another excellent quarter in transforming the Company.
We're hitting on all cylinders, and will be able to discuss that for you in the comments.
Two, the strengthening of our balance sheet is a core focus for us.
We've made great progress this quarter with our interest coverage ratio at 3.3 times; fixed charge coverage at 2.6 times.
We expect to further reduce our debt over the coming quarters as we begin to benefit from substantially improving cash flow, and we apply sales proceeds toward debt paydown.
We accessed the market this quarter, which <UNK> will get into, to get the lowest cost of capital in a number of transactions on our balance sheet and at advantageous long-term rates.
We're now in a financial [position] based on our operating results to lengthen our line and obtain a new term loan at very favorable terms, and that process has begun.
Three, the complexity of our story: it's the problem we've dealt with from day one.
We believe our story gets more transparent every day.
We started the process last year to simplify that process to get rid of the complexity, to realize our potential value.
We're well ahead of that schedule and increasing our pace.
The activity that <UNK> will go over in Roseland, our office dispositions, and acquisitions to date are making it far more transparent and easy to understand.
In another six months, we intend to be significantly more transparent, and we intend to be done by the end of 2017 with the transformation.
Four, people always worry about our dependence on New York, which we believe is waning.
The waterfront has been established as its own market and is rapidly changing as to tenant demand and the quality of tenants.
We're able to [detract].
We're no longer the only back-office ---+ we're not only no longer the only back-office to Wall Street.
Our current results and leasing activity, as well as general market activity, are exceeding our expectations with our cash flow and GAAP renewal spreads showing improvement for the fifth the quarter in a row.
Furthermore, we believe the upcoming quarters will produce similar positive results.
Our current activity, as <UNK> will outline in detail, is very strong.
We have outlined our progress in supplementals with other further detail in our prepared remarks.
We'll be turning over to key pages.
I'd now like to turn it over to <UNK> to go over our quarterly results.
Thanks, Mike.
With respect to earnings, core FFO for the quarter was $56.5 million or $0.56 per share as compared to $47.6 million or $0.48 per share for the quarter ended September 30, 2015.
For the current quarter compared to last year, the 16.7% growth in core FFO per share resulted primarily from increased base rents over the same quarter last year.
We reported a net loss for the quarter of $8.5 million or $0.10 per share as compared to a net loss of $126.9 million or $1.42 per share for the quarter ended September 30, 2015.
Included in net income for the quarter ended September 30, 2016, was $17 million of net losses from property sales and a charge of $19.3 million from the early repurchase of some of our 7.75% August 2019 bonds.
As shown on page 26, same-store NOI was up 5.5% on a GAAP basis and 2.9% on cash basis for the quarter.
And with year-to-date same-store coming in at 8.6% GAAP and 4.3% cash, we believe we are on target to get to our guidance range for the full year of 2016.
Total Company G&A for the quarter was $14 million or $11.7 million for the office public company and $2.3 million for our RRT subsidiary.
G&A included approximately $1.4 million true-up for additional bonus hurdles expected to be earned based on Company performance to date.
Reducing G&A expense remains a focus for us, and we expect to achieve additional savings as we streamline our portfolio.
Turning to financial statistics, as indicated on page 29, our total indebtedness at quarter-end was $2.5 billion with a weighted average interest rate of 4.48%, down from 4.79% at year-end.
And we expect to further reduce that as we move forward through 2016 and 2017.
Net debt to EBITDA, annualized for the quarter, was 7.7 times.
We have fixed charge coverage ratio of 2.6 times for the quarter and interest coverage ratio of 3.3 times.
Our $600 million unsecured credit facility had $95 million drawn at quarter end, and $135 million drawn as of today, leaving meaningful availability to support our business initiatives.
As Mike mentioned, we accessed the secured debt market this quarter.
We took a 10-year, $250 million, 3.19% interest-only mortgage on one of our office properties.
We also refinanced one of our multi-family assets, taking a seven-year, $59 million, interest-only loan with an effective interest rate of 3.56%.
And then also contributing to our reduced weighted average interest rate was the repurchase of $115 million of our 7.75% bonds due in August of 2019.
I will now turn the call over to <UNK>.
Thanks, <UNK>.
Our portfolio of commercial properties was 87.7% leased at September 30, up 100 basis points from last quarter, and up 190 basis points from the same period last year.
Third-quarter gains were the result of both positive absorption from leasing activity and the continued disposition of non-core assets.
During the quarter, we signed 62 deals for 664,000 square feet, and our rent roll-up for the quarter was 9.1% on a GAAP basis and 2.3% on a cash basis.
Year to date, we have signed 2.5 million square feet of transactions.
We are very pleased with the pace and level of demand for our space.
Outside of Jersey City, velocity was heaviest in our Parsippany, Monmouth County, and Princeton, New Jersey, submarkets.
We were also very active at our flex properties in Southern New Jersey, where we are now over 92% leased.
Significant transactions highlighted in our press release include 144,000 square feet of new leasing on the Jersey City waterfront.
Particularly noteworthy was the lease with TAMI tenant Omnicom, the world's second-largest advertising media company which chose Jersey City after a borough-wide New York City search.
Our waterfront portfolio is now 94.6% leased.
Additionally, we spotlight three leases totaling 120,000 square feet in Monmouth County and Princeton, two of our core, transit-based submarkets; as well as a renewal expansion in Parsippany which contributed to the reduction in our 2017 expirations.
We continue to enjoy the fruits of the leasing initiatives we implemented last year.
Transaction metrics such as lease term, average rent, tenant retention, and space leased are all up year-to-date over the same period last year.
Our remaining 2016 expirations are only 361,000 square feet, and we still anticipate finishing 2016 in the range of 89% to 91% leased.
The progress on our 2017 rollovers are updated on page 6 of the supplemental.
As you can see, almost 40% of the space expiring in 2017 doesn't roll until the fourth quarter.
We are well positioned to successfully manage the 2017 rollover.
In addition to the waterfront and Parsippany, other areas where our core properties are performing very well include Short Hills, Monmouth, and other transit-based areas such as Metropark, which are at lease rates of 95% or higher.
The flex portfolio produced great results this quarter as well, with 240,000 square feet of leasing activity generating GAAP rent roll-ups 12% and increasing space leased to 92.9%.
Taking a look at the broader markets, both Northern and Central New Jersey continued positive trends in the third quarter.
Northern New Jersey's transaction activity reached levels unseen since the beginning of 2008, and Central New Jersey has absorbed a historically high 2 million square feet.
Employment stats are encouraging, with job counts increasing in office using sectors such as a financial and business services.
Research from the major brokerage companies projects that demand will remain steady, vacancy will decrease, and Class A rents will tick higher.
Westchester County, New York, where our portfolio consists primarily of flex properties, and transit-oriented White Plains, unemployment is 100 basis points lower than the national average.
Our flex buildings in this market average more than 90% leased, with a tenant roster that is both varied and stable.
And our White Plains buildings are undergoing a capital improvement program to capitalize on the positive changes in this market.
It is now broadly accepted that selected suburbs are alive and well.
In fact, a recent released report from the Urban Land Institute coined the term surbans; stated that urban living will continue to grow in popularity, but mostly in the suburbs.
I'll now turn the call over to my partner, <UNK>.
Thanks, <UNK>.
Moving on to guidance, we increased our expected full-year 2016 core FFO to (technical difficulty) of approximately $2.14 to $2.16.
We're again raising the bottom and top of our range and moving the target guidance this time to $2.15, and expect fourth-quarter FFO to be approximately $0.55 to $0.57 per share.
We feel very comfortable with the new target of [$2.15] and believe that it's clearly achievable if we have continued success.
We're also providing initial FFO guidance for 2017 in the range of $2.25 to $2.40 per share.
Then beginning on page 21 of the supplemental, we provide commentary on some updates to our 2017 assumptions, including: we expect leasing percentage range to be between 90% to 92%.
Our leasing activity is strong.
The waterfront, as <UNK> mentioned, is 94.6% currently.
Metropark is 94.5%.
We also achieved, again for the second quarter, over 90% of our combined Waterfront, core and flex portfolio ---+ with third quarter of 2016.
Two, we continue to drive rents on our reshaped portfolio, and expect same-store NOI on a post-sale portfolio to be in the 6% to 8% range ---+ we may exceed that if we get lucky in leasing ---+ and 3% to 5% on cash.
Three, non-core asset sales are expected to be in a range of $500 million to $600 million, as I said earlier, as we finish the end of our transformational stage in 2017.
To date in 2016, we've closed on $465 million.
We have $265 million expected in the fourth quarter.
We have essentially closed a deal every couple weeks; all through the [early of 2017] as we carefully manage the last segment of our original group of assets.
Four, acquisitions: as we previously mentioned, we closed on 111 River in Hoboken, and 101 Wood in Metropark in 2016 for $317 million.
We project, next year, $350 million to $400 million of potential activity as we look to 2017.
Any future acquisitions, as we stated before, we'll continue to be highly selective and have to be accretive and meet our strategic needs.
Five, we are currently assuming that we raise at least $150 million of equity for Roseland.
We have reduced needs and we're pushing out a couple major projects in 2017 to 2018.
As <UNK> stated before, we can easily fund 2016 and 2017 starts from previously invested sums in the sales of such assets as Andover.
We will be choosing a partner in the next several weeks.
We will have this done hopefully ---+ we will have it done by the end of the year.
You should also take note of our sources and uses for 2016 and 2017 presented on page 24.
Lastly, two other matters.
You can expect us to continue to achieve the highest results in everything we pursue.
In the upcoming months, we'll be making significant changes the way we manage our assets.
We believe that we can deliver first-class services at substantially reduced cost.
One last matter.
As noted accurately in a note put out by Greenstreet recently, we made an error in calculating our AFFO in the first quarter.
It was purely a mathematical error of adding versus subtracting a number, as discussed with our audit committee.
We corrected the mistake in the second quarter and the six-month to date update.
In retrospect, we did not handle our disclosure correctly.
Given the current environment we operate in, we should have highlighted this error in a more transparent manner.
As we've always said, we learn from our mistakes.
It will not happen again.
With that brief overview, I'd like to turn it over for questions.
Operator, first question.
Well, two things, and I'll turn it over to <UNK> for the back part of it.
The first part is we're reshaping the portfolio, so we have a different collection of assets today than we had last year.
So we've been trimming the bottom, <UNK>, so it allows us to have more focus on assets that you could actually lease to tenants that want to be in.
And as we've noted before, I happen to know where you live; the Short Hills market is a perfect example.
You can rent in Short Hills, but you have other problems in Essex County for a variety of reasons.
For example, our properties on Eisenhower and Roseland never lease, but Short Hills does.
So we want to own more in the areas that people want to be in, and less in the areas that people have decided, for any number of reasons, not to be in.
So by adding assets to Metropark, we increased that quality of portfolio.
By trimming the bottom, we've been able to eliminate some of the weaker markets.
The reshaped portfolio has responded better to tenant demand.
The tenant demand today is coming from a higher-quality tenant who wants a more amenitized base.
I'll turn it over to <UNK> for further comments.
Hey, <UNK>.
If you look in the supplemental, you'll note that page where you'll see that in our core markets, we outperform ---+ our portfolio outperforms by almost 300 basis points.
And what we've been able to see in those markets is increased velocity, as you've seen as we've talked about the different markets reports.
And I didn't identify any particular brokerage firms, because in this instance, there was an absolute consensus about the uptick in velocity and where they see the year going.
And then it's a continuation of this trend, which has become accepted wisdom about what's happening with the older Millennials and their movement to selected suburbs.
And we've been well positioned to take advantage of it.
So if you looked when we took over, I would have said we were in the low 50s, maybe 51%, 52%.
Today if you ran the numbers ---+ and we did them last night ---+ we are 59%, 58%, in that range, depending on how you look at things.
We've been able to do that in really two functions, <UNK>.
One, we're growing revenue.
Two, we've held really, really tight expenses.
As a matter fact, they continue to go down, quarter to quarter.
Part of that is a complete, maniacal focus on staffing levels.
We've had a hiring freeze since the day we took over.
If you noticed in the disclosure, we updated it.
We're down 71, 70-some-odd spots on a company our size, which is relatively significant.
We think that it will be 100 by the end we get through which we reshape the portfolio.
Because as we have less assets but more valuable assets, you need less people to run them.
So, that burden gets basically affected in the margin.
So we're focused on operating expenses from an electricity point of view.
We're focused on staffing levels, services.
In the same line, we're actually investing a significant amount of money on the amenities.
So we'll be ---+ we'll have six or seven projects this year where we call it swinging hammers.
So we're out of the design phase, and actually into the construction phase that enables us to deliver that first-class product.
But I assume we get to a 6 handle on margins sometime by the end of 2017, maybe even better than that.
In the waterfront, for example ---+ just one last comment ---+ if you assumed we were mid-30s market when we took over, we're a mid-40s market.
So if you had $15 expenses, <UNK>, on 35, you still have the same $15 on 45.
And the margin obviously moved dramatically.
So we can expect that in a number of markets is what we're trying to achieve.
We do it in a benchmark, so we probably bought a little less than we thought we would have.
Let's go back from the beginning.
If you looked at where we thought we were in 2016, and where we are in ---+ sorry ---+ where we were in 2015 and where we are in 2016, I will tell you we've noted a number of differences.
One, we've sold more than we thought.
And <UNK> has been better at restructuring the joint ventures than we thought.
So we used to have the knock that we had too many subordinate interests, and that's got down dramatically, and will get down even further in the upcoming months.
Also, tangentially, we've done a very good job of exiting certain markets.
We've moved quicker than people thought we could on selling.
We're going to achieve the goal we laid out; maybe we'll exceed it.
We have a couple other portfolios we've teed up.
As we do that, we get a semblance on what works and doesn't work.
So we have to look at where tenant demand is and where people are going.
And I will tell you, the Waterfront is highly active, no better way to describe it; and rents have [persponded].
So if we could find an acquisition on the waterfront ---+ and there are some deals that may come up as people view themselves as the right time to sell ---+ we kind of set up some to look at that.
If there's also some things in the suburbs that is on what we call a covet list ---+ so we literally have a list.
It's not a very long list.
It maybe has 10 buildings on it that we would like to buy in the upcoming several quarters.
And it doesn't have 40 [mains]; it doesn't have 60 locations; it has really 10.
And that covet last, if it comes up, we'll transact on it if we can get it for the right price.
If you look back, we passed on 70 and 90 Hudson on the Waterfront because we felt it was not the right price at the time.
In retrospect, given where the market moved, maybe we made a mistake.
But I think we exercised good judgment at the time, given where we were in the transformation.
So, if you look, we'll probably be bigger on sales, less on acquisitions; more limited on development, as we moderate what we think we can do in the time frame we have.
And drive ourselves toward, at the end of 2017, having a portfolio that doesn't have as many moving parts, a lot less complex, and more easily understood.
Size doesn't matter to us.
We really don't believe in ---+ our predecessor was big on always using the biggest, and how many square feet.
I think we're making more money, if you think about it.
We're up about $50 million than people expected from the time we took over, with less assets.
So, if we can do that trade every day, Manny, we would do it twice on Sunday.
We'd run 15 buildings and have $4 a share of FFO.
So, we look more fundamentally the way we approach the new building we want to build at Harborside.
Of all the things we know and don't know, one of the things is not to ---+ how to build a $500 million building.
So we partnered up with the best guy in the business, really a master builder, who's going to put in an equity check.
And then it is us and him, and we have the ability to do financing and take in a third party.
So we'll look at that as a place where we know how much FFO we could create, and we have to balance by how much risk.
I look at joint ventures as adding complexity to our numbers, as opposed to removing them.
<UNK>, I always talk about it, right.
You want to own buildings that you can control.
Deals that we own, we can sell immediately.
Deals that you're in a JV, you have to have a conversation.
The difference between being married, I guess, and being single.
Let's put it that way.
This is Alfred Hitchcock.
We have a predecessor somewhere in the clouds; you've got to looks carefully.
It's kind of a combination of both.
Obviously, it's advertising.
So the first ad, for everyone's benefit, was our way of thanking the tenants and the leasing people that we work with in the industry for helping us achieve 95%; which is, given where we started, was a great accomplishment in the 18 months we've been together as a team.
The second ad was to say, listen, when you're this full, and you look at the tenants that roll out of New York City, they roll out this past year.
There's six of them that are over 0.25 million square feet kind of circling for space.
We don't have the space available, and we're the largest landowner on the waterfront.
We own a quarter of the market.
And we own the ---+ obviously much more of that, if you just look at downtown Jersey City where we have probably 65% market share.
So, our view was if you look at what is winning in New York City ---+ the genius of Steve Ross at the Hudson Yards, the genius of Larry Silverstein at World Financial Center ---+ is new is better than old.
People will pay for new.
They want the amenities.
They want the quality.
They want the ---+ be able to ---+ benching, the destination elevators, the enlarged bathrooms, the better HVAC.
I could go on and on.
We happen to have a site now.
We didn't buy the land.
We're not the same way as our colleagues, the SL Green, who are going long something.
We have a parking lot.
It makes a great deal of money as a parking lot.
But if a tenant comes to us and says, listen, I want to do a 500,000 square-foot use, and there's another guy that will do 200,000.
And would you build a 900,000 square-foot building, and go long a couple hundred thousand square feet of spec space.
Absolutely.
I pointed out on the Investor Day, if we did the trade at what we think are today's rent ---+ and we're assuming $50, and the market for existing space is $45.
So that spread is not a lot, Manny, for what we think a new building is worth.
We earn about $0.20 a share on our piece of the deal, assuming the land is zero.
If you don't assume the land is zero, you earn obviously about $0.10.
But assuming that the market has to give us credit for the land, it's an impactful thing for us.
So, 100% confident.
Yes, I think we're confident that this is a great place to do business.
We're investing a substantial amount of activity.
I will tell you, we're doing this call today for the first time at our new office space in Jersey City.
We're looking at lovely Midtown and downtown Manhattan from our conference room window.
It's a beautiful day in New Jersey, a lovely day in Jersey City.
100% confident.
Well, it's actually very funny.
They run both ways.
<UNK> and I have this debate.
We're in an old space.
We're in a fourth floor.
We have these big mushroom columns.
We have an exposed window ---+ sorry, exposed brick, <UNK>.
And people love our space, actually adore it.
And on the other hand, the elevators are antiquated.
They don't run exactly the way you'd want to.
The bathrooms aren't the right size.
So there's two kind of theories.
The old space has a certain attraction, but it has to have the right amenities.
And the new space for the big corporate tenants who are worried about green, security, benching, so on and so forth, it actually works.
So you need to play both sides of the market.
But to answer the question totally directly, we're going to re-skin the east-facing wall of Harborside, which is the one you can see from the city, with floor-to-ceiling glass.
It's an older installation.
We've hired a contractor.
We have somebody who is extremely competent to do it.
We'll do what's called a window wall system.
It's not curtain wall; it's attached outside.
It should look spectacular.
It should add up the views and enable us to get higher rents.
We're also going to redo the public common space, which we've been advancing.
If you come here week to week, we are constantly swinging hammers with the night crew, who is demoing space and reconfiguring it.
And we've gotten a tremendous amount of tenant demand for restaurants and other retail uses.
We're fine.
And we're very close with the Spear Street guys.
They are going to do a lobby renovation.
That's really about it.
Their capital is their lobby was built as a grandiose office lobby, and kind of iconic, what a Manhattan would've been 20 years ago.
And they want to make it softer.
Then they'll add in some seating and do a restaurant function.
We're well ahead of them, because we've been planning it 12 months earlier.
And obviously it's a much larger project.
And we welcome their addition.
because they're only going to make the market better.
We actually act in concert on a number of different things.
So, we won't change our assumptions.
If we do, we'll update you.
I would say that the demand has been steady.
It is predicated, as you well know, by people's alternative investment ability; so people view real estate as being a more preferred source of cash flow than you can get from bonds.
So you're getting a lot of family offices, a collection of investors, some opportunity funds who look at it as still advantageous.
As <UNK> pointed out, New Jersey is growing in occupancy and in lease rate, in some respects.
So people feel like they're buying into a market that has more legs than it does declining.
We've been able to transact ---+ and the guy who does it for us for, Ricardo Cardoso, has done an excellent job.
He basically does hand-to-hand combat every day to basically close these things.
I mean, closing a $5 million sale for some miscellaneous asset that we bought in a Gale transaction 10 years ago is just as complicated as buying a $250 million deal in Hoboken.
There's no difference in them.
But we've been able to do that, as has Gabe Shiff, who's <UNK>'s Chief Investment Officer, in exiting a number of joint ventures with Prudential and buying ---+ going back and forth, and getting us to a more transparent balance sheet.
If you want to be transformational, you actually have to have activity.
I don't know if I can give you that detailed an answer, <UNK>.
But we are looking at selling occupancy ---+ assets that are owners will occupy if we don't think we can actually increase over the short term and make a meaningful impact.
That has always enabled us to have better and better occupancy per quarter, because we're trimming the bottom.
We've also likely ---+ those assets, other than the few that we sold early on, don't have particularly high rental rates.
So the average rental rate increases as we go to a quality picture versus a more broad-based picture that we currently enjoy.
So you're going to get ---+ it won't affect your same-store NOI growth that much depending upon what leases roll.
But you'll see ---+ as we've added buildings in Metropark, for example, we are able to drive rents.
Same thing on the Waterfront.
So I think you'll see us get, hopefully by the end of 2017, have a clear picture of us having a quality portfolio that produces consistent rent growth over quarter by quarter; as opposed to the portfolio we have today, which has a lot of quality in it, driving.
And then we have some other numbers that are more average that temper down our numbers.
So we think, inside this Company, if you get rid of the bottom, say, 10%, 15%, you'll unlock the 85% which produce exemplary returns.
If you want, we'll get you a more detailed breakdown, but I don't think could explain it more differently on the phone.
Thank you very much for joining us.
We'll see you in a few months.
Have a great day.
Bye.
