Q2 2019 Earnings Call
First team.
Good day, everyone and welcome to the Mack Cali Realty Corporation second quarter 2019 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.
Good morning, everyone and thank you for joining the Mack Cali second quarter 2019 earnings call. This is Mike Demarco seal of Mack Cali.
I am joined today by my partners Marshall Tycher Chairman of Roseland, our multifamily operation, David Santana, CFO and Nick Hilton I'll eat VP 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 these statements are based on reasonable assumptions.
We cannot give assurance 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 have filed a supplemental this quarter as always please contact my partner David with any further suggestions as we have done before we're going to break the call down into following sections I will make some opening comments Nick will discuss our office leasing performance in our view of the markets going forward.
Marshall provide insight into our multifamily operations, David will recap, our operating results and I will close with some comments before we take questions.
We had another successful operating quarter as we delivered positive results for the quarter, we had a great deal of transactional activity that we completed on plan regarding sales financings, our equity raise from that point and finish the Marriott hotel at Port Imperial which opened last month and is doing quite well.
I thought our teams continue to perform at the highest level.
This quarters.
Combined with last quarter's activity in transactions is allowing us to execute our vision.
Office leasing results of oil for 2019 were expected.
Regarding total amount of square foot lease and rates achieved.
We could but we believe we can achieve equal results over the last up over the upcoming quarters, if not increase the amount that we do on the waterfront.
We are also working on a number of new large deals in both the suburbs, which are particularly active at the moment and on the waterfront, but to our transactions.
Additionally, as Marshall will outline our multifamily operation is really hitting on all cylinders.
Regarding New Jersey office market as of June Thirtyth. The Governor stated Jersey did not approve the continuation to grow New Jersey incentive there is a disagreement between the governors legislative branches regarding size and scope of new program not whether this should be a program, but does the size and scope.
All the branches the New Jersey government, our democratically held we expected therefore, the disagreement with resolve the upcoming weeks I expect tour activity to be light until there is uncertainty around these programs and hopefully pick up in the third and fourth quarter.
Regarding our overall office portfolio, we see no pushback in prices, nor do we feel we have the wrong space type of space and we continue to make improvements I still believe we have been making a strong 2019 and 20.
Regarding our multifamily platform I'd like to make some brief comments before module mix is.
We have been able to push rents in the multifamily business as we continue to invest in our products.
Joe just city has accounted for a role is quickly becoming the place for tenants to live and the New York Metropolitan area. We're more than 1300 units delivered in the last four months in waterfront Air in Jersey City.
Prices increased over 1100, those 30 modern units have been rented the upcoming supply is right for the next several quarters, we monitor each new start.
As I've stated before starting in 2000 2021, the new product that we deliver both Harborside Plaza, one and 25, Christopher Columbus, and the plan retail changes in harborside with inclusion of whole foods and several of the restaurants will totally change the way our direct operations with that we will be expanding restaurants in our locations outcome a quarter you expect additional announcements.
Also our second hotel a port Imperial opened this quarter, which would be were very well received helping to define point imperialism as a marketplace.
David will go into and chat about our planned sales for 2019, which are ahead of schedule I'd like to mention now. We're also in the process of marketing new suburban office portfolio for sale.
These efforts are going well the preliminary we expect as they progress to present to our board in September a set of alternatives pending board approval.
Are these sales we expect they will be completed in the first quarter of 220, we will update you on these efforts on our next call. The proceeds from these sales is stable to library for 2019 will be used to repay outstanding debt.
In the cases that we do have a 10 31 need which we expect in 2020, we might make some multifamily operation.
<unk> expense.
Therefore leverage will continue to come down I would now like to turn the call Nick for an overview of leasing.
Thank you Mike.
Across our portfolio, we posted another solid quarter in Q2 2019, signing just over 226000 square feet of transactions, resulting in our core and waterfront portfolios, finishing at 79.8% leased at quarter end.
Of these transactions approximately 31% or 71000 square feet were new leases.
And 69% or 155000 square feet were in place renewals.
Across our core markets, our rents on Q2 deals rolled up 8.7% on a cash basis and 17.7% on a GAAP basis, and we committed $5.31 per square foot per year of lease term.
As we turn our focus to the specific markets. The waterfront leasing numbers were light by any measure.
However, we have approximately 150000 square feet of new transactions currently in leases, which were not close by quarter's end.
Of the 18000 square feet that was completed we continued to see a positive rent push with increases of 10.8% on a cash basis and 16.4% on a GAAP basis.
Although there are many factors that can delay the negotiations of the lease agreement, we did see a noticeable noticeable slowdown in response timing and even initial inquiries since the sunset of the grow New Jersey tax incentive program in June of this year.
We believe that the lack of clarity on the cost to occupy office space here in New Jersey has delayed the responsiveness.
Of tenants in the water front office market.
As Mike can attest, we're in regular contact with our representatives in Trenton and believe there is motivation to get a new program in place. However, the form of which is still uncertain.
To be clear the tenants that are in leases right now have not had their desire to be in this market derailed.
But simply have needed more time to forecast their occupancy costs before signing a multimillion dollar lease obligation.
On a brighter note our suburban portfolio had a strong second quarter, specifically, we executed over 195000 square feet of transactions.
One of the most significant.
Included the renewal.
And 55000 square foot expansion of for our foods in Parsippany.
Future activity also remained strong as we are in active negotiations with approximately 125000 square feet of new tenants across our suburban portfolio.
With that I'd like to turn the call over to Marshall.
Thanks, Nick.
Roselands portfolio continues to experience growth in both energy and cash flow as detailed on page seven the supplemental we estimate residential and $82.2 billion.
Present share this calculation net of Rockwell ownership is $1.75 billion.
Reflecting the continuous improvement of the portfolio, 69% of the Navy is along the Hudson River waterfront in 77% of entities and operating or in construction assets. Moreover, strategic transactions in the second quarter are aligned with our geographic focus in April the company closed on the acquisition so the loss for $264 million.
Hundred 77 unit community in Jersey City is emerging Sohot was neighborhood just south of open order. This asset was definitely income was $160 million mortgage and is currently over 97% leased in May the company closed on one of seven Morgan.
Were finalizing approvals for an approximate 800 unit development and one of Jersey city's prime sub markets and in June the company execute an agreement to acquire Liberty Towers 648 unit community in Jersey city's Paula suit neighborhood $409 million acquisition was associated financing is scheduled to close in the late third quarter.
In the second quarter, we completed a series of financings, including a follow on investment with Rockwell group.
Rockwood investment allows for up to $200 million in additional equity of which 100 million was funded at closing operationally Rose last 5673 unit same store portfolio experienced a 5.1% increase in ROI over second quarter 2018 on a GAAP basis, and our growth was spearheaded by revenue growth of 4.4%. This portfolios finished second quarter at 97.6% lease as compared to 96.3% leased last quarter.
Same store portfolio excludes 1200 12 units delivered in 2018. This portfolio is currently 99.8% lease it was delivered at a 6.5% yield on costs is forecast to reduce stabilized NOI of $26 million.
We recently launched a common area and unit renovation program at Marbella, and Monaco in Jersey City renovations, which have already begun to generate projected rent premiums will modernize the buildings common area amenities and update apartments to current market standards.
In July the company commenced operations of the full service 208, Kian view Marriott Autograph collection hotel the opening of on view. In addition to its Duplak counterpart 164 key residence Inn completed 370 unit Hotel development in the Transportation Center at Port Imperial initial performance of these hotels has been strong they're expected to serve as a cornerstone amenity for the quarter improved community on stabilization combined hotels are projected to generate $14 million in Anaheim.
In addition to our operating lease up and transaction activities Rose last in construction portfolios comprised of 1947 units.
These properties are forecast to generate in NOI of approximately $60 million or yield on cost slightly in excess of 6%. The company's remaining capital to this portfolio is $97 million.
Certain portfolios highlighted by Rewalk, Sci and Riverhouse nine two developments containing 660 units import imperial or last delivery Riverhouse 11 stabilize in three months and is currently 100% leased and 25, Christopher Columbus 750 units into development Jersey City now call. The Charlotte project will include construction of a 36000 square foot onsite Elementary school, which will be significant amenity to Jersey City waterfront neighborhood.
The price level long term below market tax abatements fix for 20 years at 7%.
Looking forward rose as recurring for a series of construction starts in Port Imperial and Jersey City. In 2020, we were also evaluating the sale of a number of non strategic apartment buildings and suburban land size with that I'll now turn the call over to David.
Thanks Marshall of a few brief highlights before turning the call back over to Mike.
The quarter largely fell in line with our expectations on the office side with slightly better operational performance at our multifamily division.
We reported core FFO per share for the quarter up 40 cents versus 50 cents in the prior year the year over year decrease is due mainly to move out of tenants on the waterfront and lost NOI from asset sales executed as part of our disposition program.
Cash same store NOI at our office portfolio declined by 7.3% GAAP same store NOI declined by 8.6% in the second quarter.
Year over year declines once again are negatively impacted by move outs at our waterfront portfolio and positively affected by reduced real estate tax expense, we still see GAAP same store NOI turning positive in the fourth quarter of this year as we begin to anniversary quarter is that had been fully impacted by the 2018 waterfront move outs.
As mentioned by Marshall residential same store NOI improved by 5.1% this quarter with Boston remaining extremely strong along with our newer properties in Jersey City as Marshall noted renovations of lobbyists and units are now fully underway at both Monaco and Maher Bayer and there were 61 units in total offline for renovation at quarter end.
All within our same store pool will now highlight a couple of transactions that took place in the quarter. We disposed of our last office asset in the premise market for a $42 million gross sales price, bringing our total dispositions today, excluding the flex sale to $152 million.
We currently have approximately a $155 million of commercial assets in various stages of marketing and therefore, it and therefore are increasing the midpoint of our 2019 disposition guidance by $33 million.
The remaining sales will be weighted towards the fourth quarter. This year with proceeds targeted towards debt repayment.
Quickly on a couple of acquisitions on the multifamily side as previously disclosed.
We closed on our Soho loss acquisition for $264 million on April Onest and have a full quarter of operations of the asset in our numbers. We also purchased a future residential development lot in Jersey City, we call whether seven Morgan for $67 million.
Both assets are now fully reflected in the Roseland section of our Navy.
Turning to the balance sheet on August 5th we received $150 million of proceeds from a 10 year, 3.8% interest only mortgage we placed our 111 River office asset in Hoboken, New Jersey.
These proceeds were used to retire the $100 million balance remaining at our $350 million 2016 term loan and we used another $45 million to reduce our 2017 term loan to a balance of $280 million. This term loan has two one year extensions available on it pushing the maturity date to January 2022.
This low and now represents our nearest term corporate office debt maturity.
The net debt to EBITDA metric was 9.5 times this quarter and 9.4 times on a trailing six month basis.
At the end of the quarter as Marshall mentioned, we raised $100 million of preferred partnership equity from our rock point partners to fund our current $1 billion pipeline of development that is currently projected to produce a roughly 6% at a wide deal and NOI yield or $60 million of additional annualized cash flow. The developments in this pipeline begin to stabilize throughout 2020, and 2021 and as such we will continue to carry all of that that related to these projects estimated currently at $720 million without any of the attendant EBITDA benefit until these projects are stabilized lastly on guidance as we stated in the press release, we are tightening our core FFO guidance to $1.58 to $1.66 per share. We are still waiting for the state to release, our irby tax credit and we'll provide an update on that timing of when we receive clarity.
Notably we have increased our disposition guidance for the year by $33 million at the midpoint and have moved up our same store NOI guidance on the multifamily side by 50 basis points at the midpoint as well.
We have reflected the modestly better operating results at our office portfolio, increasing the midpoint of same store cash NOI by 2% and by 1% at the midpoint on a GAAP basis with that I'll turn it back over to Mike.
Thanks, David.
In closing as my colleagues have outlined we continue to believe that was set up to have a solid 2019.
From an exit execution point of view with the results showing up in 2020 and beyond.
Our focus as Marshall and Nick and David have outlined is almost 100% on the waterfront, which really means growing our multifamily business.
For example, we intend to exit our DC joint ventures, the land sites in Philadelphia land sites, and suburban New Jersey to either pay down debt and fund our development.
Additionally, when prices selling a portion of our Boston assets and in the process of may possibly purchasing a large new jersey multifamily to replace that cash flow.
We're very excited about our operating portfolio and continue to grow with excellent new projects.
The key is really creating a sense of place on the waterfront, which I guess will outline and comments and questions in a few minutes Im confident that the total effect of our coordinate efforts on office retail multifamily.
We'll produce excellent turns in a short and long term.
With that I'd like to take some questions. Operator first question. Please.
Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad to using a speaker phone. Please make sure. Your mute function is turned off to legacy now to reach our equipment again press star one to ask a question.
We'll take our first question from Emmanuel Korchman with Citi.
Hey, guys good morning.
Mike you talked about the tax credit.
On incentive package to weigh on the waterfront leasing, but it sounds like things in the suburbs are actually going okay. So I just wonder what's different about the company focused on the waterfront and what other options are they looking out the incentive package will be.
So meaningful to them that tours are going to stop there.
Versus the rest of sort of the margin of the portfolio.
Great question, Manny the New Jersey breaks two ways. If you look at where the incentive to actually use that primarily used in Camden for tenants coming out of Philadelphia and in the Hudson County market for tenants come into New York, That's like 85% occasionally you get someone going to parsippany.
Maybe in a drug corridor, Tivo basically was announced coming out of the Pennsylvania market to come into the most county area, but 85% of the incentives are used either in the areas of joining New York city, including by the way you could use the alpine angle what areas attracted corporate tenants over the years as I think about my comment and primarily Camden. So the tenants were seeing in central New Jersey, whether its Metro Park in Parsippany and short hills are really tenants that have based in new Jersey that are looking to expand and relocate and we've been getting more than our fair share of tours and we think we have a good chance of getting more than our fair share of deals.
And I guess, just one of waterfront piece that are those done new to market tenants and if they say hey look we're not going to deal with this we're not going away for these incentive packages and sort of packages on com, where do they end up.
I think what I think the gain that people planning or the way. The strategy works is previously they would go do all the work applied in New Jersey, and get incentive now Governor Murphy has been basically tough on getting new incentives and he says I really want to make sure that you have the right type of person coming and you really don't expand so and so forth. So the states been doing a series of warrants, which have been well publicized in the papers. So we are seeing tenant demand from tenants in new Jersey are ready well guys relocating on the waterfront to begin with so there's a lot of large corporate guys that come up they have been in the building for 15 years, They don't want to restock in place, but they like the operational base of Jersey City. So they moved to another building. So we have a number of those tours. We still have obviously, we work, which we've we've announced previously which will finalize in which is a decent sized deal and then we have a bunch of smaller deals with five and 10 and 15 from people, who chose regional locations and aren't that incentive base, but the guy wants to move over 300000 square feet.
The incentives are worth 8000, ASC $8000 per job.
300000 square feet, you could have almost 2000 jobs, it's a big number and that number they'll play it to they'll say we want to know the incentives are there and we want to go in and make sure that we get our incentives at the more of a corporate strategy.
Got it and then just quickly switching to dispositions you mentioned that youre going to use proceeds to pay down debt, but at the same time, you might have 10 31 issues or challenges.
Just if you had to throw out a number right now how much money do you think you'd have to de lever versus reinvesting into different or property type or different assets.
I apologize I put up two concepts I didn't make it clear my comments mentioned that you have to suffer through me.
Everything that we're selling in 2019 at David Ticky related to $155 million, we used to be solely to pay down debt.
When I said then thereafter is we have a series of 2020 deals that we start now to make sure we get it done in the first quarter those deals in the early stages I think based on initial tax estimates and strategies that substantial portion could be used to pay down debt. However, I also think there's a number of those deals and have attenuating tax basis could be one of these assets for 25 years. This is not a unit prominent today Mack Cali corporate problem, which might involve having to do 10 31 that I wanted to make it perfectly clear that it would only do multifamily investment and not do suburban office, what waterflood office.
That make it clear.
Thanks, Mike.
My pleasure, Matt have a great day.
Our next question comes from Jason Green with Evercore.
Good morning, just a question on the suburban portfolio I know you said you hope to have it.
For the important.
Can you give us an update just generally compared to kind of what are you guys put in your any of your schedule where pricing is coming in and then just in terms of structure, what the structure that deal might be whether you would continue to own a piece or whether it would be an outright sale.
It's a little early that give you a definitive answer all those questions, but I'm going to try to answer as much as I can as always so.
The sales that we Havent for 2019 are coming on on track essentially we usually go up with David I've talked about it recently, we might be 4% higher one 3% lower than other kind of balance out to that level. We've shown over the last weve been doing this down for 15 16 quarters that we generally tend to track what ideas.
That being said if I choose to exit the suburban portfolio and a larger deal I will pay a tax payer tall someone's understated me if you want to move all of it at one moment you have to take a number down I don't think that number will be more than a dollar of LTV, maybe less maybe more the case I still don't know yet, but we'll make that determination or board will make its termination if I get to that point in September .
So we start and Youre new to US I know because you had just joined US Steve's team, we start six to nine months before we intend to do a transaction, we're very thoughtful about it. So we started marketing this in.
April .
Now we are in August we Gotta initial feedback we got some people looking around for funds. We think we know where we can place that we don't want to own any of it if we sell it we think we'll be out of it we want to own a continuing interest, but we havent made a determination I would make the recommendations to the board in our September meeting and then if they chose to we would then transact if we didn't choose to transact I think we get at deals although set of deals done by the first quarter early first quarter 2020.
Okay, great. Thank you.
Welcome.
Your next question comes from Tom Catherwood with BTIG.
Thank you good morning.
I just want to back to Manny's question.
You said that the governor is motivated to kind of come up with a new version of the grow New Jersey Act, but it seems like his focus when he is not battling with Trenton has been more on this venture capital funding program.
Mike you alluded to kind of in coming weeks, some resolution to grow New Jersey, what gives you that confidence that that's on kind of the front burner and then in addition to that once there is an agreement how long does it take for that plan to actually go into action could it actually be six months or 12 months out.
No I think we are much shorter than that Tom So let's look at the at the political landscape New Jersey is democratically held across the assembly and local wide majority the Senate and the substantial majority and the Governor is Democratic Murphy has governor Murphy has a view that he wanted to mirror some of the success at Massachusetts did with venture capital and he's always been actually actually happens have been I think is a bostonian by birth and new Jersey by transplant. So he looked at it that kind of the biotech tech part of it and thought that was the way to go the former program actually awarded all jobs, depending on just on salary. He wanted to be more focused upon what he thought was growth.
Senator Sweeny, who runs the Senate President I think has the votes override the governor if you chose to do so what they did starting last week was at a series of Senate conferences and meetings, where they interview investor.
Various people in the business community.
Presentations, we made and my understanding is still meet again in September when it come back from recess. The governor of the state had a number of line item veto shows the we'll go back and see whether they can override those I think that the governor said one of the programs Sweeney is one of the program Sweeny wants the program to be similar to one that expired the governor wanted to basically be.
A basket of allocations each year its just a debate between the two of them.
I think bottom agreed and won't be will be co intercompany Interstate transfers like going from Parsippany Paramus.
Everyone knows I mean.
The jobs that a way to go in jobs are created by base incentives Murphy stated that I've had conversations with the chairman the head of the Chief of staff just firmly believe the state is business oriented but this is just a disagreement between three democratically held.
Legislative branches, so I think they can reconcile between them.
Got it and just.
Good.
So it's just the process.
I was just classic so process wise, let's assume that.
Six weeks eight weeks whatever it is they were to come to agreement Whats then the legislative kind of structure actually get a possibility.
They passed a bill.
And then bill gets enacted into law in analog it's administrated by the governor no different than whether they.
Based elected whether or not to have medical marijuana or change the.
Change the voting ages whatever they want they can do legislatively gets enacted immediately upon the magnet a bill remember this is a there is an agency already set up there is a process already set up the EPA is formed in the state of New Jersey or the other to do is go back and say okay. The new rules are you pick up page to put in page six and with the leading the rest have the book, but I think the relatively quickly.
Okay, but there are there and I think and then it gets a little bit of a.
Of a political dance between the Governor June Thirtyth, you struck a number of line items. Some of them are critical I think APAC put back in and they'll deal with accordingly.
Understood understood, Mike you've had kind of eight weeks with your with your New Board members have you been engaging with these new members and how can you think can you provide an update on the status of the strategic review.
Yes, so it wasn't a weeks we hope it's been the basically.
I guess just July maybe maybe I guess, that's true maybe there's a weeks time flies me having fun.
The board and bad.
My new members on the audit committee. So they were fully immersed in these results we had a very long session.
Thoughtful I enjoyed working with each one of them I think it's a good board from the tone and texture no dis harmony whatsoever.
The strategic review Committee I will not be commenting on it at all at the substantial other than the fact that it's formed it is formed as was described it contains our current accounts chairman Lisa My as a new director, but started with US several months ago, Maryanne Gilmartin and further criminal.
And they will begin to see if they will start getting information based on all the things. We've done I think it's a little bit of a learning process to take a few weeks to get up to speed and if we can start digging into thoughts about which direction. We should go but we've already as you know continue to move on.
Tom as you look at the idea of embracing selling suburban business as just another continuation of a strategy to make ourselves more streamlined.
Understood and then kind of last one for me multifamily demand. It appears strong across the waterfront still seeking some sort of large.
Which is great which is great, but there are a number of larger projects in various stages of development, namely Brookfields Hudson exchange and Avalon potential tower at Avalon Cove, how does this competitive set or potential competitive set and form your development plans and is there sort of accelerating development starts like irby or plaza eight to finish ahead of these other projects.
No I think Tom though in your residents of the town for everyone on the call.
You know as well as I do every time, we open up a new project you got an influx of new new citizens right. Those citizens have a need for certain services demand and things start to pop up that didn't exist before there's been a proliferation of germs and his area. There has been a proliferation of new restaurants.
So as you know that I mentioned it was 1300 units that was the enclave.
And my list 90, Columbus, and 235 Grand which is your boys and girls club side all of them are great projects two of them built by.
One of the Bofa carry and I'd say that the window by United States of colleagues of mine. The last one bill by Larry Pentair at all or quality projects or rented up very well and the assumption has been.
Better than any other market in the country.
The next set of projects will go on Marine Boulevard, whether its carries projects so silverman.
Marco and Albany's and then there is an element when our has another site or right in a row.
But what's more important to us as as we've talked about for the people listening on the call. If you look at a map.
We're adding on whole foods as you know Tom also hitting a score Eleanor's building has a theatre going in a theater group a black box it otherwise finance chairman, which has got some funding from the city Council, that's going to get done but were told this week total just built a new condo project about to do another other condo building.
Which would be good for the area, but they're required to open up a 500 to seek theater.
We intend to put a theater symbols or the anjelica intersect, we're doing and add another score. This is all within three or four blocks in my office. So.
Adding the projects they announce an ambassador anomalies have one day in my humble opinion is one of the finest manage multifamily companies in the United States without question right them every residential but Avalon, particularly good in development that are they cut that made a mark that's what they live and breathe they have planned but as I pointed out and I won't steal the Thunder do another project in Jersey City, along that to me is a testament to the market I take it for that I look at it each time, a new deal comes on it adds more people more people gives us more services more restaurants and fills in the vast number of parking lots that we have in this area.
Got it thanks, Mike.
Thank you so much.
Operator is that it.
We have no further questions at this time I'd like to turn the conference back to Mr. Demarco for any additional or closing remarks.
We thank everyone, who joined us from the Hamptons and the Jersey shore, Martha's Vineyard Bar Harbor, where else at whatever price you draw. We appreciate your time and attention have a great day bye bye.
That concludes today's presentation. Thank you for your participation you may now disconnect.
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