Mack-Cali Realty Corporation

A premier NJ waterfront and transit-based office owner and a regional owner of luxury multi-family properties in the Northeast, Mack-Cali Realty Corporation (NYSE: CLI) is one of the country’s largest real estate investment trusts (REITs).

Mack-Cali is known for its premier properties, award-winning property management, and high credit-quality tenant base.

An investment grade-rated company, Mack-Cali has been a publicly traded REIT since 1994. The Company adheres to the conservative financial principles of modest leverage, strong debt service coverage ratios, and a high ratio of debt-free assets. Mack-Cali has a focused strategy to expand its presence on the NJ waterfront and in transit-based markets while expanding its multi-family operations in the Northeast.

Deidre Crockett
Senior Vice President
Corporate Communications and Investor Relations
732.590.1025
dcrockett@mack-cali.com

Mack-Cali Realty Corporation
Harborside 3
210 Hudson Street, Suite 400
Jersey City, NJ 07311

Speaker 1:  Great, thank you very much. First, let me just give a few introductions here.  All right. Erin Aslakson, Kyle Mcgrady here from Stifel Nicolaus somewhere back there, raise your hands. Rule number 1, Mr. De Marco?

Michael:  Speak slowly.

Speaker 1:  Speak slowly. I'm going to speak really slowly and then you're going to speak even more slowly. You want to introduce your team here?

Michael:  Sure. Michael DeMarco, President of Mack-Cali. To my left Tony Krug, CFO; my partner, Mitch Rudin, CEO; to his left, our partner, Marshall Tycher, chairman of Roseland.

Speaker 1:  Okay, great. Couple of comments here, first, a lot of moving pieces. It was just a year ago this week where I met this team for the first time. They met each other for the first time, maybe the week before, and they have had an incredibly busy 12 months. What I want to do is focus on where you think you're going to be year-end '16. What I'd like to do is be in a position to talk about 4 or 5 different specific business plans or categories; 1, Roseland; 2, the Jersey City and the Waterfront; 3, the flex portfolio; and 4, the Northern New Jersey portfolio; and then of course, number 5, the balance sheet. What I thought might be a good idea is just drilling down a little bit. Let's talk about Roseland first, and Mike and Marshall, you guys want to split that up a little bit?

Michael:  Marhsall, why don't you start?

Marshall:  Sure. Is this on? Can you hear me?

Michael:  Yeah, pull it over, Marshall.

Billy:  No, [inaudible 00:02:08].

Marshall:  That's Billy. We've had a busy year at Roseland to date. We formed Roseland Residential Trust at the end of the year so we had an isolated balance sheet and reporting a platform so it's much easier to follow us and see what we're doing. It's just pursuant to our commitment to be much more transparent and understand whilst you proceed in our development plan for Roseland. We've been doing a number of things at the same time. One of them is trying to begin the process of eliminating the subordinated interest and Mack-Cali and bought our company, we were a series of partnerships all of which were of subordinated positions to a life company and a venture capital partners that we had.

We had 11 at the beginning of the year. We're down to 6 and by the end of the year, we'll hopefully be at 2. We have gone through the process now of acquiring partner's interest or being acquired from partners and various interests. We've also been buying up into partnerships giving ourselves ability to have a nonpromoted, non-subordinated interest. The combination of these things has made our balance sheet and our cash flows much more transparent and much easier to underwrite and understand. Great example would be in overlook in our North of Boston Suburb. We bought Prudential at the first 2 phases of that community, Alterra I and Alterra II. The next phase, The Chase was a joint venture with UBS in a subordinated interest. We just acquired their interest in that property and also eliminated their right to do the next project with us, which is under construction now, Chase Phase II.

In that location, ultimately, we'll have 2000 apartments. Heads, wholly owned, but at no subordinated interest and extremely valuable asset there. Similarly, in East Boston, we had a joint venture with Prudential for the Phase I and 81 apartments there. We've acquired their interest in that and also acquired their interest in building the next Phase II, and now have gone some subordinated interest in East Boston to a 100% fully owned interest.

We've changed the nature of how the company operates. We continue in our development plan. Today, we have 9 buildings in various stages of construction either just coming into lease up in the middle of construction or just going into construction. We have 6 more stars before the end of the year, all these on lands we wholly own or control, no warrants or options on sites. These were all controlled in our pipeline.

Most recent property to hit the market is on Marbella Phase II, a brand-new apartment building. We just completed this month, began leasing 5 weeks ago. We've leased 28% of the building. Probably this week, about 30%. Rents have gone from $45 to $47. We're delivering another building at the end of the year in Jersey City URL, which is our 765-unit community.

We're continuing to develop product in the mid-6 cap range. Our marketplace is on asset valuation is in the mid [ra-per 00:05:16] 4 cap range so we continue to build at about a 30% value untrended rents, very conservative underwriting. All of our markets continue to perform well. We're hopefully going to be able to build through the plan that we presented a year ago and by 2018 have put in place 16 to 17,000 units depending on our start schedule. We've been hitting the numbers as projected.

Speaker 1:  Mike, talk about the recapitalization of Roseland, where you are, where you think you're going to end up.

Michael:  A year ago, we decided that we needed to make Roseland more transparent. As Marshall stated, we set it up into a set of subsidiary, and we've made several investments in that. We've laid out a plan in our September meeting with our investor base discussing about a capital raise. We're currently in negotiation with 4 to 5 parties. Eastdil has been leading that effort. We're in the term sheet stage. We'll see where that comes back. Now that our stock prices has gone up a bit and the fact that we've had good success, we have to revisit exactly how much capital we want to raise and what form. We like to say our objective stays the same which is the ability to increase an AV, but our options change every morning we wake up. Right now, we feel pretty good about it. We're going through looking at what projects we want to actually start in '17 and what's the capital requirement. All things being considered, I think there's been a success so far.

Speaker 1:  When you're done with the capital raise on Roseland, how exactly will you be reporting it? Do we have a sense as to whether it's going to be consolidated versus unconsolidated?

Michael:  The reason why we set it up this way is we felt the business was unique and different from Mack-Cali's office business. Our balance sheet and you can say, I mean it used to be obfuscated by too many pieces put together in 1 set of statements. By doing this, it's just really segmented reporting on steroids. You'll have a separate balance sheet, income statement, notes, financials that allow you to look at that business and say what's the true value of it. As we grow it over time, you'll see it become more and more valuable to us.

Just to add one comment because I know we have to move on as the time [inaudible 00:07:37] this hour glass, but Roseland, people have asked us, "Why do you keep that business?" For the projects we have in Jersey City, in Harborside in particular, and the repositioning that we're doing throughout the portfolio, we believe Roseland adds 3 to $4 of NAV above and beyond what the normal returns are in the investment capital, but just by the synergies we bring together on the deals that we can do.

Speaker 1:  Mitchell, Mitch, you live in Scarsdale. You got 20 plus million square feet in Northern Jersey and Jersey City. Had you ever been on the GW Bridge?

Mitchell:  I saw that Mack-Cali sign on a regular basis. Just so you cross over to our Fort Lee properties which are about 93% at least combined.

Speaker 1:  Great. We're going to break this up and keep it very focused. Talk first about Jersey City, the Waterfront, the assets you own there, how those compete with Lower Manhattan, and what your near-term plan for Jersey City and the Waterfront.

Mitchell:  We've got about 4.4 million square feet in the Waterfront. It was one of the key drivers behind Mike and my decision to join just over a year ago. We saw that as the extraordinary improvement that had taken place in Manhattan in rent was likely to have a carryover effect. What has actually transpired in Jersey City and in Hoboken now that we're an owner there has really exceeded our expectations. Rents in the year that we've been there have increased by about a third. Just as significantly, there's been a philosophical change in the mindset of a number of the occupants in New York City.

For the first time, what we're seeing because Jersey City through its ebbs and flows has been supported by operational use, support use. We are seeing a number of front office uses who are coming over as part of a bifurcated Manhattan and Jersey strategy. That's been driven by economics, by also because of the move westward in the city and the significant change in downtown. Because with both, the commuting proximity is greatest in New Jersey. What comes with that not only is a different caliber of workforce as you indicate, but also greater opportunities for expansion.

Speaker 1:  Mike, do you want to make a comment?

Michael:  No, please go ahead.

Speaker 1:  We're going to leave Northern Jersey for last. Talk about the flex portfolio, what you guys see for the future of that, and give people here in this audience a little bit background on what you own, where you own it.

Michael:  The flex portfolio is the Robert H. Martin Company that was bought by the Cali Company as one of the foundations of their initial formation. Great locations, mostly west of the county. We've added to that in Northern New Jersey and in Central New Jersey some other facilities is essentially the last mile of distribution. It's flex and industrial space in tightly-controlled markets where we get premium rents. It looks very similar to what PS Business Park has. Effectively, it was a product. The rents we get grow at about 4% per annum. The leases are short term in nature for a business like that so they base it on average 3 to 5 years. It's a little shorter than we like. It gives us more velocity each year. People look at our exploration schedule. They normally see it a while. You have so much expiring. This is part of the reason. We have about 5.4 million square feet. We've got a million square feet a year give or take, expiring in this business alone.

The rents for the last 6 years and Mitch and I look back on it have grown at 4% or more and the business [inaudible 00:11:48] 90% occupied. It's again, a separate subsidiary this year given more transparency. It continues to go up. It's something we could spend out or sell as a business sometime in the near future.

Speaker 1:  Mike and Mitchell, Northern New Jersey, a lot of different submarkets, lot of different product types, quality levels. Talk a little bit about what submarkets you like you think have a pricing power, where you think it's a little bit more of a challenge, and then let that morph into your next 6 to 12 month acquisition and disposition plan within the Northern New Jersey marketplace.

Mitchell:  I'll start with that and then as we talk on the morph part, and we'll move it to Mike. Jersey has done itself a great service by aggregating into Northern and Central New Jersey without looking into the various submarkets. It was one of the pleasant surprises that we found as we dug more deeply into the portfolio, and found that there were a series of markets that really competed on an economic basis with almost any markets in the city, in the country taking apart, taking out Manhattan, Palo Alto, San Francisco, and the like.

When you go into a market like Short Hills where we have a competitor that's achieved $50 a square foot, you don't see $50 in many marketplaces. You go into a market like Metropark where we've tripled the size of our portfolio and we've moved rents there almost 15%. Then when we went a little bit counter to the grain, but now have had a very significant buy-in based on our early commitment to Parsippany, a similar market where we've also move rents. Those are 3 by way of example. Similarly, you look at where we have a commitment in Princeton, some of the others in Bergen County are a little more problematic. I think that Mike, you want to jump into.

Michael:  What you're seeing in the state is less [crange 00:14:07] and more repurposing, so that the marketplace is changing as the population of office space shrinks, so our competitor do what we do. We have a building that was built in 1980 or '85 that comes due now, and it's faking for any number of reasons. You're more likely to tear that building down and build a limited service hotel, or retail, or residential in our case. We see supplied demand fundamentals switching a little bit more to the landlord size. We want to exit the commodity markets. We made a real pits to do that so we're selling about 20% of our portfolio, the bottom 20%. We've reallocated the capital either into the residential business which has higher growth functions, or we've made truly selective acquisitions.

What have we bought in the last year? We bought 4 transactions. We bought a building in Hoboken which has great fundamentals. That market is incredibly tight where they have only a small amount of vacancy in the marketplace. Made just recently moved our headquarters to Hoboken 2 buildings down resting on just took 150,000 square feet of New York City employees and moved it to the Hoboken 1 building down. Jet, the Internet company is based 2 buildings down also expanding. We look at that market which has achieved $51 rents, the low is 48. Look at where we bought the building and felt that it was excellent buy.

In Metropark as Mitch mentioned, we tripled our portfolio. We had 1 building. We bought the building in Jason, then we bought the building, recently, we closed last week about a quarter mile down. It's a little bit better located. We're achieving rents about 15% above what we thought we would achieve last year. It's been a great market, very tight. We could be 100% occupied in that marketplace by the end of the year. We have a big bid to shed ourselves a commodity buildings which we will continue to do where people have asked us about acquisition or disposition plans. We announced 750. As of today, we're about 2/3 of the way done on about 500 on the contract or sold. We're looking forward to getting with the last 250 over the next 7 months. We're in no rush to get rid of the 250, it's obviously problematic. What we do with the capital, we have some debt that we could pay down. After that, the decade is relatively expensive so we've been rebalancing that with either capital investments or acquisitions.

Thus, it's about getting to the right platform in which we announced which was about 15,000 apartments either on construction or owned and operated, and about 20 million. We'll get to the 20 million likely at the end of this year.

Speaker 1:  Great segway into the balance sheet and opportunity for Tony to pitch in. What ends up happening oftentimes is when someone has any of these [reach 00:16:55] and we've cover a couple of dozen of them, has a turbo charged disposition plan. It's easy to say that, but what happens is you lose earnings, you lose EBITDA, and also you often don't have a good opportunity as where to redeploy the dollars. Talk about some of the new onsets, Tony on your balance sheet and then, we're going to morph it into how the big disposition plan does affect EBITDA.

Anthony:  Sure. As we become fond of saying and the reason past here, we don't have a leverage problems. We had an earnings problem. What we've focused on in the first year since Mike and Mitch joined the team is increasing EBITDA, pushing rents, reducing expenses, and you'd think we've done a pretty good job at that. If you look forward to the end of the year, our earnings, it would be a significant runway if looking ahead to 2017. We're in the middle of 3 important things that'll end up by the end of the year affecting where we stand from a balance sheet perspective. As you correctly point out, we have to be careful of earnings as we sell assets. We use some of the proceeds to reduce that, but again, with an eye towards earnings.

We have the Roseland equity raise. Mike also said how many different choices we have there. Not sure where that's going to end up. We're in the middle of pretty big fluxes as it relates to the balance sheet, but we're comfortable where we are from a coverage perspective. I don't think we have an issue there at all. Mid-2's increasing as we increase our earnings and that that the EBITDA has been the focus of a lot of people at 7.4 times in the recent quarter. We expect that that'll come down too as we come online with some of the development that we have in a multifamily sector. I think we're fairly comfortable where we are, and we look for improvements as we head into the end of the year, and into next year from the balance sheet perspective.

Michael:  Just to embellish Tony's comments. We're high 2's on debt service and mid-2's on fixed-charged coverage. We think at the end of the year with the run rate in earnings, we might have a 3 handle on debt service coverage and a high 2's on fixed-charge coverage. We feel comfortable there and that the EBITDA should shrink based on a forward-looking basis to mid to high 6's. The one thing that we have which is in the nature of what we inherited is we have a big CIP, construction in progress. We have about $450 million. If you look at that 450 and look at what we project, the earnings to be on that, we have about 130% i.e., we make 30% on every project that we're building, maybe more with the ones that are in the bank already. We take 30% off one 450, you have 150. 150 plus 450 is 600. We have $600 million of draft equity on a balance sheet, not earning anything.

If that projects were online today and they were earning on that that the EBITDA would be dramatically less because we would have more EBITDA. We have a temporary or transitional phase that we're going through as we grow earnings through as Tony said, growing rents substantially, reducing expenses which we're not done there. We'll actually do more of that before the end of the year. As our projects come online, we think we want to end up in the right spot without having to do the higher delude of raise equity to get your leverage on which we don't need to do, or sell assets in order to pay down debt which wouldn't also reduce our EBITDA. We've been able as a team, I think the forecast of when we took over we would make $1.65 this year, $1.70 this year, and will likely make around 2.10. While I'm talking, it's around 2 or 7 now, but soon 2.10, it's $0.40 up. There's 25% increase over the course of the year when leverage has come down over the same time.

Speaker 1:  Tony, I think actually, let me just make a point here. As I've got a couple more questions and we're going to open it up to the audience, and if there's no questions from the audience, I've got a few more questions after that. Let me just give you a couple more questions, and then if the audience has some questions, be prepared. Tony, my recollection is you have some above-market debt. I think it might be asset specific, maybe it's a bond, but talk about the maturity schedule on your bonds, and your above-market debt, and what kind of interest savings you think that's baked into Cali.

Anthony:  This thing at large is a piece of debt we have coming due this year is 140 million approximately a project-level debt at a 6.33 rate. We are looking at that now, paying it off a little bit early, November of this year with debt depending upon what we do of course, probably around 4%. It'll be a meaningful reduction on our 141 million, I think the number is 141. After that, most of the project-level debt is fairly modest from a maturity perspective. The next big piece of debt we have is a bond, December of '17 was a 5-year bond, but with a fairly low rate. After that, the next bond isn't due until '19. That's a fairly expensive piece of debt that we have. Actually, Mike and I and Mitch are looking at what we're going to do with those kind of pieces of debt as we look forward over the next 12 months from a long-term perspective. Have a couple of options, but again, just beginning to explore those maturity. We have some interest expense savings to come this year from that first piece of debt.

Michael:  We also paid off a piece of bond secured that we brought back in from a lender at $0.80 and $1 that enable us to get us a substantial savings. We have another piece that'll also be financed this year. We've done a good job on balance sheet.

Speaker 1:  Questions from the audience? Anybody interested in asking a question before I keep going?

Speaker 6:  Please.

Speaker 1:  Okay. A little thing I always bring up and this is clearly a curveball, but in my recollection is that Mack-Cali has a very stable board that's been around for a long time. My recollection is the average age may be well north of 70. Is that correct? To the extent you feel comfortable, can you talk about how your board may change in the next 12, 24 months?

Michael:  Sure. Our board is senior, been together a long time, very skilled, highly sought after individuals. We're lucky to have them, but board 10 has been an issue, and also board composition has been an issue. One of our board members stepped down, Roy Zuckerberg who's a truly talented gentleman, was the vice chairman of Goldman, Sachs to have an indication of people we have on our board. We'll be replacing that board member with a board member to be designated who will probably substantially younger in age. Roy, who was approaching 80 and also likely not to be in the same gender.

Speaker 1:  Yes, sir?

Speaker 7:  Can you give us the stats of what supplies are coming into Jersey City over the next few quarters [inaudible 00:24:21]?

Speaker 1:  Let me just repeat the question. Degree of supply for both multifamily and office, Jersey City and the whole Jersey Waterfront.

Michael:  The offices, unless we put up a new building, there's likely not to be a new office building being built. We did propose a new building to a tenant from New York City recently and still looking at that. Rent in Jersey City are around the mid-40's level. If you ask us where new construction would kick in, we think you have the right land causing the right site which we have several. If you could get $50 starting rents with reasonable growth, you would earn a 7% yield. We think we're close to that new construction barrier. We have some thoughts about adding some space onto a [inaudible 00:25:08] building to build some penthouses on top of it that could also be extremely attractive with unparalleled views and [cam-free 00:25:15] space, but these are things that we want to take a market leadership in so we don't get caught with the guy competing as a new building. We want to have the new building on a drawing board. By the time we have the right partner, Marshall about the multifamily side.

Marshall:  A little more product coming on the apartment side and the office side on the new construction. Apartment absorption up to now and rent growth has been very substantial in Jersey City. As I mentioned earlier, we've just opened up a building and are having excellent absorption and rent growth, but there is a lot of product. This year, the remainder of the year, there's total of 4000 units coming on, but 1000 of those are in Journal Square which is a totally different submarket. We're delivering 1000 units between Marbella II and the URL, and then of course, there's another couple 1000 units in 4 other properties.

The total pipeline of permitted projects, they're in developer's hands and are scheduled for [star-ches 00:26:12] about 18,000 units. I don't know how many of those are going to start each year. The market has been very strong and there's maybe 8 or 9, the developers who've been building in that submarket for the last number of years. I think most of us, if rents continue to grow and units absorbed, I think you'll see product continue to come online. We still are building in a submarket. Jersey City rents are 45 to $50 a foot. Manhattan rents are $85 a foot. Brooklyn is $65 a foot. Queens is $55 a foot. We're still for a 10-minute commute to Manhattan. We are still by far the best provider and value in Jersey City. Jersey City is a place to live as everybody who reads the New York Times in a post every day as more and more great articles written about what's happening in Jersey City as far as lifestyle and transportation is excellent as we all know.

Jersey City is a great story and has been getting better. It is a lot of product. It's being absorbed. It's still a very competitive rent, but we're going to watch it. We own our sites. We don't have to start any building we don't choose to start, and we'll continue to watch and see as absorption in rents sustain themselves.

Mitchell:  Let's play a little math game. Everyone likes math in this business. On the front page of the Wall Street Journal today, there was an announcement that Cravath was raising the starting salaries for attorneys, $280,000 a year. It's a pretty good number any place else. In America, that would be a fortune. Let's look at New York City for a moment. At 180 and $0.45 tax bracket, you net $100,000. Let's leave it at 100. Assuming you wanted to pay 40% in rent, you get $40,000. Let's do easy math because I like it better. $40,000 divided by $80 a square foot which is on the low end of Manhattan rental rates gets you a 500 square foot studio. You make $180,000 a year, you live in a 500 square foot studio some place on the west side.

If you move to Jersey City and went around new buildings which have spectacular amenities, unparalled views, relatively easy to commute in; let's do the math a second time. $40,000 again, our rent as Marshall pointed out at the top end of the range, the best apartments go for 50 bucks a square foot. You get an 800 square foot either a very large one or small too. The parking spaces in Manhattan are, Mitch and I had debate this, 450, $500 so you make 180 grand, you want to have a car, you're spending $6000 a year to park it. In Jersey City, the rents go for, Marshall, 175? 175.

When we look at the value, people talk about supply, the manics. That entry level, I'm not talking about the guy who's the third, your associate making 300, or now, compare that to Condé Nast who moved downtown which is really right off our bellway. If an average Condé Nast employee makes 80 grand, I'd be surprised. Same math, they would net 55 with that rate and they pay 25,000 or $30,000 to rent, they're lucky to be able to get a 3-split in, a [inaudible 00:29:23] side to be and 3 other people sharing a small apartment.

In Georgia City, you could get a studio for 400 square feet. We have the ability to attract exactly what Manhattan wants to live in and to be closer than Brooklyn, or the upper east, upper west depending upon what the employment. If you lived with your parents on Park Avenue, you had to commute to Condé Nast, you could be in Georgia City and make that commuting half to thorough the time.

Speaker 1:  We have 5 seconds left. I want to thank everybody for attending. This is a great company, great upside, and talk soon.

Marshall:  Thanks everyone.