Veris Residential Inc (VRE) 2012 Q2 法說會逐字稿

Please stand by, we're about to begin. Good day, everyone, and welcome to the Mack-Cali Realty Corporation second quarter 2012 conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to the President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead.

Thank you, operator. Good morning, everyone. And thank you for joining Mack-Cali second quarter 2012 earnings conference call. With me today is Barry Lefkowitz, Executive Vice-President and Chief Financial Officer.

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 assurance that the anticipated results will be achieved. We refer you to our press release and annual and quarterly reports filed with the SEC for risk factors that could impact the company.

First, I'd like to review some of our results and activities for the quarter and generally what we're seeing in our markets, and then Barry will review our financial results.

FFO for the second quarter 2012 was $0.62 per diluted share. As you'll note from our press release, we did have solid leasing activity totaling almost 940,000 square feet of lease transactions during the quarter, and that figure included 338,000 square feet of new leases.

Our tenant retention was 58.1% of outgoing space, reflecting a continued trend of downsizing and adjustments in businesses throughout all of the sectors that we enjoy within our portfolio. We ended the quarter at 87.6% leased, very slightly down from last quarter's 87.9%.

Rent on renewals rolled down this quarter by 3.1% on a cash basis compared to last quarter's 3.7% cash roll down, reflecting the fact that I do believe we're sort of at the bottom of the trough and now it's just a question of how long it will take to accelerate and increase demand in the service-based economy and add employment.

Remaining lease roll-overs for 2012 are just 4.1% of base rent, or slightly less than $26 million. Our leasing costs for the quarter were $3.10 per square foot per year, down from last quarter's $3.85 per square foot per year. Again, at the risk of redundancy, reflecting the fact that I do believe we are in a trough right now and sort of at the bottom.

Despite a challenging environment, the statistics bear out the fact that our portfolio continues to outperform virtually every market in which we operate. Our leased rates exceed market averages in Northern and Central New Jersey, West Chester, Suburban Philadelphia, and even Washington D.C.

Looking at some of the activities during the quarter, as previously announced just a short time ago, we entered into a ground lease with probably one of the most coveted retail tenants doing business, at least in the Northeast, Wegman's Food Markets. This ground lease will be at a site that's undeveloped in Hanover Township, New Jersey, Morris County, located at Sylvan Way and Ridgedale Avenue.

Wegman's plans to construct an approximate 140,000 square foot store on a finished pad that we will be delivering. And certainly this is not only a great opportunity to put our strategically located land bank to use in a very diverse manner, but I can't tell you how many communications I've received, excited about the fact that Wegman's will be a very welcome addition to the community and to the county.

As well as Wegman's, we will have probably 35 or 40,000 square feet of ancillary retail on the balance of that site. All will be in the form of ground-lease structures, as currently anticipated.

And now turning to some of the leasing during the quarter, several of the notable transactions that we've outlined in our quarterly filings include the following. As we previously announced, the Bank of Tokyo-Mitsubishi, BTMU, a subsidiary of Mitsubishi UFJ Financial Group, signed a 100,000 square foot expansion at Harborside Financial Center, Plaza 3, along the Jersey City Waterfront.

This expansion now brings the bank's presence at the waterfront in Harborside to approximately 262,000 square feet on a long-term commitment. The building, Plaza 3 as we refer to it, is about 726,000 square feet and it's 97.3% leased with this expansion.

MD On-Line, a provider of electronic data interchange solutions, signed a new lease for 33,000 square feet at 6 Century Drive at our Mack-Cali business campus in Parsippany, relocating and expanding from slightly less than 10,000 square feet at another one of our properties in the campus, reflecting the fact that certain segments of the economy are expanding, certainly in technology and electronic data type solutions.

And we were witness to and a participant in a rapid expansion and given our presence in that sub-market and at the business campus, we were able to easily and seamlessly accommodate a tenant's rapid expansion, which is part of the philosophy of our company, to have deep presence in markets and deep relationships with our tenants so that when they expand or on the contrary, when they need to contract to deal with business conditions, we're there with as their partner.

Up in West Chester, Bunge Management Services, an international agri-business and food company, signed a lease renewal for 66,000 square feet at our 50 Main Street tower in White Plains. This 309,000 square foot office building, located in West Chester Financial Center at the train station, is now in excess of 85% leased.

Also, in West Chester, My Publisher, a provider of custom photo book software and printing, signed a new lease for over 40,000 square feet at 8 West Chester Plaza in Elmsford. The 67,000 square foot office flex-building, located in what we call our Cross West Chester Executive Park, is now 100% leased. This expansion also reflects at least good fundamentals occurring in parts of the economy related to technology and digital marketing and sales.

In the medical arena, Sterling Medical Services, a medical supply distributor, who happens to be a subsidiary of McKesson Corporation, signed a lease renewal for the entire 49,000 square foot office flex-building, located at 2 Twosome Drive in Moorestown West Corporate Center, in Moorestown, New Jersey.

Moving on to our financial activities, during the quarter we completed the sale of $300 million in ten-year senior unsecured notes at a very favorable interest rate of 4.5%. The net proceeds, which by the way, was up-sized, the deal was up-sized it was so oversubscribed, were used primarily to repay outstanding borrowings and then we subsequently redeemed early for cash, $95 million of 6.15% notes that were due in December of this year, and $26 million of 5.82% notes due in March of 2013, thus taking the positive arbitrage in our favor, even after incurring about $4.5 million in pre-payment costs.

These successful financing transactions clearly enhanced our financial flexibility and solidified the strength of our balance sheet moving forward.

Certainly on another note, we continue to be recognized for our expertise in property management and superior energy performance. Earlier in the quarter, we announced that three of our New Jersey properties received Energy Reduction Awards from the New Jersey Chapter of BOMA. These awards went to our Bridgewater building, Mack-Bridgewater One, Eight Campus in Parsippany, and 10 Mountain View and Upper Saddle River.

Another great achievement in running our buildings efficiently, helping to reduce our carbon footprint and the cost of operating our buildings for both the benefit of the Mack-Cali stakeholders and our tenants.

Some of the other things going on in the Company include the fact that we, yesterday, closed on the sale of our building at 95 Chestnut Ridge Road in Montvale to an end user, a 47,000 square foot office building built in the 1970s that will serve as the corporate headquarters for a company moving from Hackensack, New Jersey, AP Industries.

We are nearing completion of the due diligence phase of the sale of our three Strawbridge office buildings in Moorestown, New Jersey. They're under contract and have about two weeks left on due diligence, but I do believe that that transaction will move forward. You recall that those buildings total about 225,000 square feet. They're about half vacant at this point and the sale price will be in the order of magnitude of about $90 a foot, in what historically has been a challenging market for Class A office in South Jersey.

With respect to our exciting multi-family rental apartment development project at Harborside, the project we now call URL, for Urban Ready Living, we have made some adjustment in our phasing of the project. We now have reduced the Phase 1 development to one tower on the northerly-most pedestal. We've increased the height to 69 stories. Again, mirroring the image, if you will, and from a height perspective of the Goldman Sachs Building. Probably we will parallel that building in being the tallest in the state of New Jersey, certainly along the waterfront and the skyline and vista along the waterfront. All of this is available now on our website.

The first tower will be a $230 million project, totaling 766 apartment units with a variety of choices from studio apartments to micro-studio apartments, and then, of course, one bedroom and two bedroom apartments. The project is on track for a late fall ground-breaking, more to come on announcing that. And we're hopeful of being in a position of closing a financing on the project before year's end. And so we're certainly excited about moving forward with our transformation, if you will, into the multi-family sector.

I'm sure that certainly, all of the analysts on the call have noted a roughly $3 million expense item in our G&A, which consists of transactional costs in connection with a larger initiative that I've alluded to in prior calls, that we believe we are nearing completion of that would significantly enhance our presence and expand our diversity into the multi-family apartment arena. Not too much more that I can say on that, other than I'm extremely optimistic about moving that transaction and bringing that across the goal line in the very, very near future.

With respect to guidance, you see that we've raised our guidance that previously had $2.50 to $2.60 range per share. And we've raised that and tightened it up, left it at a $0.10 spread but raised it to $2.52 to $2.62 reflecting a run-rate for the next two quarters, of about $0.61 a quarter going forward. That's our view of the world right now.

We did achieve slightly higher top line revenues this quarter. Certainly, the Bank of Tokyo-Mitsubishi transaction, which was a very exciting transaction for us, and we worked on it for a long period of time to get the approval out of Tokyo to move forward. And certainly that's a benefit to us but we are still conservative and not yet convinced that there's a lot of clarity in the corporate world among multi-national companies and domestic corporations about expanding their business plans and expanding employment, thus resulting in enhanced and increased office occupancy.

I think the election, as we probably all agree, will be very pivotal, will be very important to see what some of the policies and the cost of doing business will be in the future. And then companies hopefully will make decisions about capital spending which include their largest cost, which is the cost of employment. And clearly, it's been a long period of time and we all want to get back on the track of economic growth in this country, which has been challenged for some extended period of time.

So, there you have it. That's a brief summary of what we've done in the past quarter, some of the opportunities that we're looking at moving forward and now I'll turn the call over to Barry, who will review our financial results for the quarter in more detail. Barry.

Thanks, Mitchell. For the second quarter of 2012, net income available to common shareholders amounted to $10.1 million or $0.11 a share, as compared to $17.3 million or $0.20 a share for the same quarter last year. FFO for the quarter amounted to $62.1 million or $0.62 a share versus $69.1 million or $0.69 a share in 2011.

Other income in the quarter included approximately $1.3 million in lease termination fees, as compared to $1.1 million in the same quarter last year. Included in G&A for the second quarter is $2.5 million incurred in connection with exploring potential acquisitions.

Same-store net operating income, which excludes lease termination fees, decreased by 0.3% on a GAAP basis and 0.2% on a cash basis for the second quarter. Our same-store portfolio for the quarter was 30.6 million square feet. Our unencumbered portfolio for the quarter ended total 237 properties, aggregating 24.5 million square feet of space, which represents about 79% of our portfolio.

At June 30th, Mack-Cali's total un-depreciated book of assets equaled $5.7 billion, and our debt-to-un-depreciated asset ratio was 33.9%.

We had interest coverage of three times and fixed charge coverage of 2.9 times for the second quarter of '12.

We ended the quarter with approximately $1.9 billion in debt, which had a weighted average interest rate of 6.32%. Currently we have $50 million outstanding on our $600 million revolving credit facility.

On April 19, the Company completed the sale of $300 million of 4.5% ten year senior unsecured notes. These notes were priced at [$99.801] to yield 4.525%. Net proceeds were used primarily to pay down our credit facility.

On May 25, 2012, we redeemed our 6.15% bonds due December 15 of '12, totaling $94.9 million and our 5.82% bonds due March 15th of 2013, totaling $26.1 million. We recognize a charge of approximately $4.4 million related to the early prepayment of these bonds.

We adjusted our range of FFO guidance for 2012 to $2.52 to $2.62 a share to reflect second quarter actual results.

Please note that under SEC Regulation G concerning non-GAAP financial measures such as FFO, we are required to provide an explanation of why we believe such financial measures are relevant and reconcile them to net income. Available on our website at www.mack-cali.com, are our supplemental package and earnings release, which include the information required by Regulation G, as well as our 10Q.

Mitchell.

Thank you, Barry. At this point, I'd like to open the call to questions. So, Operator, would you set up the queue?

Thank you. (Operator Instructions) We'll take our first question from Jamie Feldman with Bank of America.

Great. Thank you, and good morning.

Morning.

I'm hoping you guys can talk a little bit about your conversations with Financial Services tenants on the Harbor front and even around your other markets. Just, what are they thinking about their current space usage and the risk of downsizing their space?

I think that financial service firms at this juncture are being very cautious. They are looking at consolidation within space that they control. They're very cognizant of space utilization in terms of density. And I think that the general trend and the general discussion is one of caution. We don't see at this point, much expansion, certainly in what I would call the domestic financial service companies. The European banks and companies obviously have their issues that we all read about, whether it's LIBOR issues that's affecting some of the more significant banks over in London.

And so, I would tell you that it's pretty rare at this juncture to see expansion within that sector, and I think that they're very price conscious. You've just recently saw the fact that over at the World Trade Center that several of the Silverstein buildings have effectively been halted in terms of their construction, one at the eighth level, one at the foundation level, and that's simply because there are no tenants around to fill very expensive buildings at this point.

So, I think a combination of a lack of clarity going forward, all of the issues surrounding Dodd-Frank have weighed heavily on that industry. Transactions are fewer. You've seen some of the large banks or large institutions like Goldman Sachs announce new banks, new activity, more invested in global wealth management because there are fewer transactions in the investment banking community available right now.

So, that's exactly what we're seeing, Jamie.

So, I guess what I'm trying to get at, in your portfolio, what do you think there is in terms of excess capacity?

Yes, I think that we're not without risk in the sense that, for example, we know of a 68,000 foot use that's a component of one of the bold [racquet] banks in one of our suburban locations that had several years remaining on their lease. They're moving their people down to the waterfront on the Jersey City side to consolidate in space that they currently lease, not from us but from a friendly competitor along the waterfront, because they need to distill their workforce, if I could use that word. And they need to take advantage of space that they currently have as a long-term liability on their P&L.

And so, we've seen some of that but I would say that in Jersey City, our cost of operating and our rent cost and the fact that we have some of the newest, best space in terms of vintage allows us to be very, very competitive.

And you know, so I think we have opportunity down along the waterfront, but in some of the suburban locations, I'm giving you a case in point, where that reflects the attitude of financial service companies, at least anecdotally, and I don't think they want to pay big rents at this point. I don't think they can justify it because of the lack of transactional activity. And that's putting some of the newer development projects at some level of risk.

Okay, and then can you walk us through your largest expirations over the next year and kind of let us know where they stand?

Yes, sure. Down in Plaza 5, this would be a third quarter issue, we have a large tenant, about 112,000 foot tenant, that their lease is expiring and that's the definite vacate.

We have, I would tell you a lot of activity on that space. The activity is a financial service tenant that is national financial services, actually. And -- but we have a lot of activity on the space, more in the service and technology sector looking at the space. And we also have a global financial company in a bond [inta] dealer that is looking at some expansion because of the contiguity of their space, and the fact that Plaza 5 is virtually a brand new building.

We have mostly, I would say, 10s, 12s, 15, 17,000 foot definitive vacates in a host and variety of locations throughout the suburban portfolio. These are traditionally activities that we deal with every day of the week.

In Short Hills, we have a fourth quarter event where KPMG, whose lease is expiring. They've been in the building actually since the day we built it and completed the building in 1980. And they're moving to another location. And the reason they're moving to another location is they simply -- what we've seen in the accounting sector, quite frankly. Probably more so than in a lot of other disciplines and sectors is a mantra for space sharing and hoteling. And so they have to rebuild their space.

We've seen it a little bit in law firms but we've seen a lot of it in accounting firms. They have to restack their space to accommodate much greater densities, six, seven, eight people per thousand. And so what you're going to see, at least in some other locations is the cost of enabling that kind of thing, whether it's adding parking or whether it's adding HVAC capacity to a building to accommodate those densities, is going to be sort of a phenomenon that we're going to see in the office arena going forward.

These are corporate mandates, at least at several of the Big Four accounting firms, and so that's why their leaving. It's about an 84,000 square foot lease. I can tell you right now we're pretty active on a discussion for about 40,000 feet of that with a new tenant. And so you know, we'll deal with it. It's not something that's immediate, but it is a 2012 expiration.

Does that kind of do it, Jamie?

Sure. I mean, I will follow-up with you guys. I was hoping to go through the whole forward 12 months but we can talk offline. Thank you.

Great, you're welcome.

We'll take our next question from Michael Knott, Green Street Advisors.

Hey, Mitchell. Can you just talk about maybe the revised cost and unit count of the revised phasing at the multi-family development?

Yes, we had talked about close to $400 million for Phase 1 and you know, we have a very, very unique design. We brought in the architect from Amsterdam. And by the way, this is all available now on our website and I credit our Vice-President of Marketing, Ilene Jablonski, who has done a fastidious and superb job of integrating all of this on our website.

So, our architect Concrete, in Amsterdam, has been working very, very closely with our consultants and the original phase had two towers on a relatively confined pedestal. And we had always a slight concern that the footprint of these two towers might be a little closer than we would've liked. Phase 2 has always been two towers, but it's a much larger footprint for the pedestal.

So, what we have done is we've made the decision for a variety of reasons. We felt that the absorption of fewer units would obviously occur much more quickly if we reduced the unit count in Phase 1.

We are seeking a particular federal financing, a HUD financing, that is very sensitive to absorption and unit mix and unit count. And so we felt that a much better solution, much more, sort of financeable, would be to go to one tower on Phase 1 with all the same amenities, all the connectivity of Urban Ready Living that we've been emphasizing in this project, and so now we have a 69-story tower, the same parking ratio which is about 0.4. And we have 766 units, 25% of which will be studios.

The average studio apartment will be 467 square feet, although we are putting in, or including I should say, of those 188 units, we're going to have a smathering of what we call micro-studios, which are about 400 square feet. You may have seen Mayor Bloomberg advocating this whole concept of, you know, at least in New York City, of micro-spaces and they were talking about 280 square feet, which is like a big closet.

So 25% studio, 59% one bedroom averaging 630 square feet, and the balance, 16% two bedroom averaging 871 square feet. And so the big population -- biggest population will be in the one bedrooms and in the studios. And we are on track with our development, our construction drawings, wind testing, and all of the elements and we expect to be in the ground, literally and figuratively later this year.

Okay, the $400 million was about the same as before, for Phase 1?

Phase 1 was about $400 million. It's now $230 million, Phase 1.

Oh, it's now $230 million? Okay.

Right.

And then, can you just talk maybe a little bit about the strategic considerations for this transaction you're talking about? And maybe any rough sense of size or timing?

Well, I wish that either this call could've been a week or so later or vice versa. But, there's a limited amount that I can tell you at this point without violating you know, selective issues, the disclosure issues, etcetera.

I can again emphasize the fact that the expensing of the deal cost, which is of course, an accounting treatment requirement, would kind of tell you that it's a large transaction and it will further our objectives -- my objective and shared by the Board to diversify the Company, to transform the Company to be a very large player in the multi-family for rent arena.

I could tell you that the geography of what we're talking about is very friendly to us. It's very compatible to the geography of our office holdings. And this opportunity as well as becoming a prolific operator and developer in the multi-family arena would enable us and allow us to very comfortably put some of our own land inventory to work, not unlike what we've done with Wegman's but in a multi-family arena, and also some adaptive reuse where, as I've talked in prior calls about the fact that just certain assets may have a better future life as being something else other than an office building.

And so, beyond that, timing is unfortunate, but there's really not too much more I can tell you right now.

Okay, but it sounds like this is going to be transformative and sounds like you are more skeptical or dour on sort of long-term prospects of office and that's why you want to diversify?

I think that the office business for high-quality operators and high-quality assets and high-quality locations, and the definition of high-quality operators is how we see ourselves at Mack-Cali, tenant-focused and well-capitalized, and able to deal with the rather significant capital needs and re-tenanting office buildings and keeping them fresh and technologically efficient and proficient.

So, it's not that I'm dour on the office market, I think selectively there has been -- there are markets that have remained difficult and probably will remain so, even as the economy begins to regain some traction. And that's partly due to paradigm shifts and demographic shifts and the trend to transit oriented and urbanization, in some instances for the new millennium worker. We operate in a world right now that's consolidating.

In New Jersey, for example, the pharmaceutical industry continues to consolidate, and it's not so much that the pharma companies are big space leasers. Mostly they own their own facilities and their facilities -- their corporate campuses are not even a competitive threat if they decided to vacate them and lease them to third party tenants, but it's all the other service providers that conglomerate and aggregate around companies like the big pharmas that are taking less space and have fewer employee needs right now because of some of these consolidations. And frankly, it's the same in financial services.

You see financial services, whether it's -- even if it's city-oriented, New York City or other gateway city orientation, if they're in a downsizing contracting mode, well, that's certainly going to affect the law firms and the accounting firms and all the other service providers that are doing business with them.

So, what we're trying -- so again, it's not being dour, its being clear thinking. And I think somewhat visionary about how office space will evolve with a growing economy going forward. There will be a need for high-quality suburban campus locations that are well located, that are located near public transportation and near affordable housing with good school systems, et cetera.

There're other instances where that may not be the case. And so, however, having said that, with regard to the multi-family sector and even though it's been hot and you know, valuations are at very, very significant numbers, and cap rates are low, et cetera, there remains what I would say an insatiable demand in certainly urban areas or quasi-urban areas, transit oriented urban areas for workforce type housing that is affordable. Family formation is occurring much later.

The for-sale single family housing market has really not improved. I mean, every day you see some new statistic and it's bouncing around, up and down, but most young people still don't qualify for mortgage loans, even though mortgages are sub -- 3.5%, they can't get them, and they partly can't them because they have such significant student loans and don't have the deposits to put down.

And so, we see a continuation of demand in the affordable, extremely well designed and well located sector of the multi-family arena -- the for rent arena.

So, we're going to balance things going forward. We're going to sell more office properties. I think we're getting reasonably good numbers for the -- even though they're not huge deals is these $25 million worth of sales with Moorestown, but we're getting reasonable numbers.

And we will deploy that capital that we otherwise would have invested in tenant improvements and commissions in areas that commanded three to five year leases or seven year leases with cancellations after five, or five year leases with cancellations after three, and we'll put that in the hands of local entrepreneurs that have more local presence, if you will, in small micro-markets. And we'll do a lot of that selling going forward.

So, we're going to try to balance things. Hold office property where we think it meets all of the criteria that I've just talked about and look to dispose of it or remake it into something else, be it residential or potentially retail or something else, where we don't think it has good prospects going forward.

Okay, thanks. I'll get back in the queue.

Okay.

We'll take our next question from Jordan Sadler with KeyBanc Capital Markets.

Hi, it's Craig Melman for Jordan. Mitch, maybe just a follow-up on the repurposing of the land for multi or retail. Have you guys started to formally kind of go and try to rezone some of these plots or identified assets or land plots that you want to convert to multi?

I am imminently intending to do that at least on one significant site. We've got obviously -- I'm setting the Wegman situation aside on another site.

Okay. Is that in New Jersey or another one of your markets?

It's in New Jersey.

Okay. I guess, as you think about kind of transforming the Company to be more multi, is that 30% to 40% still kind of a good number to think over the next five to seven years, or is that still formulating?

Yes, no, I think that's a good number.

Okay. And then just separately, you know the mezz piece that you guys have with Winthrop on the Stanford portfolio, I know that maturity's coming up soon.

Right.

Is there any increased clarity on maybe what the borrowers' going to do?

The borrower believes that they have conformed and complied with the test -- the net operating income test to get their first one year extension. The first mortgagee is reviewing that and we will obviously comport as a lender with the first mortgagee. You know, I could tell you that it's being reviewed right now and certainly that's an any day situation.

Okay. And then just lastly, on the guidance, was there any change to the underlying same-store assumption?

No. No.

Great.

You know, again, the guidance reflected the actual results in the quarter. The top line results were slightly improved which you know, it's a great thing. But, you know, it was a little anomalistic in the sense that you know, we were very fortunate to make that Bank of Tokyo transaction which had a lot to do with it.

Perfect. Thank you, guys.

You're welcome.

We'll take our next question from Jim Sullivan with Cowen and Company.

Good morning. Mitch, I wonder what you can tell us regarding the yield on the Wegman's ground lease in Part 1 and Part 2? The incremental 40,000 square foot ground lease, if you can give us some indication as to where the yields will be on that?

Well, I think -- I'm going to put in this context. I'm going to say that we have a carrying basis on the land and that carrying basis -- I mean, depending on how you cut it and to the extent we had capitalized -- we no longer do so, but we had capitalized the expenses on the land when we're permitted to do that, would reflect that that piece of ground is at least carried on the books for somewhere in the range of $30 million, and that with the Wegman's lease and the incremental lease, if you were to assume that it has a value of, say 6.5% free and clear or cap rate of 6.5%, thus as good as it is retail is always a little vulnerable.

It would demonstrate that the transactions, together with the cost of delivering the pads that we have to do and the brokerage fees that we'll pay, which are not huge, but that these land sites will now be profitable to us.

And on that ground lease, is there some provision or what kind of provision will there be for increases in the rent on the lease?

Yes, the rent increases every five years.

Okay. Can you share with us the size of the increase? Sorry, 10%?

Ten percent, Yes.

Okay, good. Thank you, on that. And on the Jersey City residential, what are your thoughts about the initial yield there?

Seven, 6.8% to 7%, depends on locking up the financing that we've been working on. I think that'll certainly have an impact, but you know, we're talking about an interesting program that has 40 year amortization through the HUD guarantees. Our expectation is to deliver it on an unleveraged basis however, at close to a 7% yield.

Okay. And are there any thoughts once that financing is put in place regarding risk mitigation as to your capital position? Are you thinking about bringing in a partner?

It's quite possible we would do that.

Okay. And the -- regarding the costs incurred in the second quarter associated with the transaction which you've alluded to, does your guidance for the second half of the year include some additional costs or not?

Yes. Yes.

So, that's provided. Okay.

Which is another reason that you know, we're being somewhat cautious and careful about the run rate going forward for the next two quarters.

Okay. And then finally from me, again, regarding refinancing activity, you do have some sizable high coupon, 2014 maturities and can you just remind us if any of that is prepayable and what your thinking is about addressing that?

Well, we have $100 million tranche in '13 of unsecured, and let me just get to the expiration schedule. Yes, we have at 6/13 it's 4.6% unsecured, $100 million. In '14 we have $200 million, that's pretty long way away, that's 5.125%. So, you know, '13, other than the $100 million is a pretty quiet year in terms of any secured financings that we have. They total like $19 million.

'14 is a little more active for us in mortgage financings. About $135 million and $200 million in unsecured. So, we haven't -- you know, we just did a 10 year deal at 4.5%, I don't know exactly where a deal could be done today. Treasury's are 50 basis points or 45 basis points tighter than we were when we thought we were in Nirvana when we saw 1.96% treasury, now they're much -- you know, it's 1.45, 1.50, but I don't know where spreads would be, but nonetheless, the note is 4.6% a year from now. So, it doesn't make sense to do anything there.

And in terms of the 2014 it's just too early to look at doing something?

That's too early. The yield maintenance would be severe. Right now, we're drawn on our line, somewhere around $50 million, and so we have enormous capacity and nowhere near enough warehousing, if you will, to enter the bond market right now.

Okay, very good. Thank you.

You're welcome.

We'll take our next question from Steve Sakwa with ISI Group.

Mitch, my questions have been answered. It was on Wegman's. Thank you.

Great. Thanks.

We'll take our next question from Michael Knott, Green Street Advisors.

Hey, Mitchell. Just to follow-up on another question --.

Sure.

-- that was recently asked about any change in same-store guidance, you said, no. And I think the prior guidance was minus 3 to minus 5?

Yes.

You guys are plus 2 for the year, so does that imply a pretty ugly second half?

No. We're kind of looking at it consistent.

Our second quarter GAAP NOI -- it's down 0.3% and cash is down 0.2%, so the second quarter clearly was -- you know, the first quarter was anomalistic, it's 4.8% up on cash and 3.8%, but if you look back on the first quarter, you saw major declines in operating expenses.

So utilities were down 18.5%, operating services were down 16%, then moving into this quarter or the quarter that we've just completed, the second quarter, utilities were still down 13%. We don't know if that trending is going to continue because we've already seen -- actually huge increase in natural gas. It's gone from $2.00 a therm to $3.00 which is huge.

So, we don't know exactly what the story is going to be with that. Very hot summer so far, so we're going to see electricity costs increase. I mean, we're concerned about that in our thinking and our modeling and services have basically normalized, they still remain a slightly negative trend because of union contracts and so forth.

So, you know, maybe we're being a little too conservative in saying 5%, but certainly it's going to trend down about 3%.

Okay, but that -- but you're saying it's on the same basis or apples and apples with the plus 2.2% for the year-to-date period? You're not sort of adjusting 1Q to get to your 3% to 5% down?

No. Absolutely not.

Okay. And then can you talk for a second about -- I think we saw something that your multi-family partner is building another project right near your development with them. Can you talk about that?

Our multi-family partner which is Ironstate formally known as [Clyde] is building a project in -- well, they had an old partnership down at Liberty Harbor -- by the marina. It's sort of near us, but it's kind of a different location. It's not on the transit line.

That's an old partnership. It's a much smaller project. And it includes a Boys Club and a Girls Club in Jersey City. It's a very different kind of project. And it's located right at the Liberty Harbor Marina.

But it's you know, it's a partnership they've had in effect and they weren't able to get it off the ground because of whatever reasons, for a couple years. But it's a small project.

But it's not terribly competitive with your project?

No, I actually don't view it as, quite frankly, the same market as we're going to be in.

Okay. And then for the total development there, I think you in the past had talked about Phase 1 and 2 totaling maybe almost a billion dollars, but now Phase 1 is less dollars. I mean, the total is less now?

I think -- right. We adjusted that to more like $750 million to $800,000 -- $800 million rather on the prior call, because it looked like Phase 1 was -- with the two towers was actually -- I said $400 million before, I'm rounding, it was about $380 million.

The following or subsequent two towers will be in equal size to the one that we've just talked about. So, we're talking about still $750 million.

Right.

For the project.

Okay. Thank you.

You're welcome.

We'll take our next question from Josh Attie with Citi.

Yes, Mitch, it's Michael Bilerman speaking.

Just going a little bit further on the multi-family and I guess the transaction that you're working on, and I do apologize, I jumped on late, I was on another call.

But you know, I guess as you think about obviously of the Jersey City project, but making a bigger foray into multi-family and becoming a diversified company, you know, the stock already trades at a discount to NAV, don't you think that complicates things a little bit further? It potentially adds more volatility. Potentially adds going into a marketplace that may be slowing their growth.

I'm just curious why not just keep focusing on the core, sell assets and [we'll] sell assets and buy back stock or you know, sell the entire Company if it's not achieving the right value. I'm just trying to put all the pieces together.

Well, you and I have had this conversation at least [surficially] in the past.

I believe that our relationships and our land positions, both in terms of what we can redeploy or repurpose in the future for product type that's other than office, is an extremely valuable asset.

We will be doing something with a group -- I'll just call it that, that have the same philosophies that will be aligned completely with our goals and objectives to build and operate and also a fairly significant initial batch if you will, of operating multi-family product in the best locations that have a similar footprint -- similar overlay as the Company does.

The Office business in general is an expensive business. No secret, we've talked about and I'm sure you have with every other landlord, or REIT, the cost of turning over tenants is expensive and if you can achieve the rents to make that profitable, certainly the public sector of the Office business has the liquidity and the capital availability and financial flexibility to do that.

But I believe that there will be a better growth trajectory in the multi-family sector, in the places that we will be with this transaction. And I believe that it's completely possible and credible and viable to merge those interests with our core business of owning and operating Class A office assets and even expanding frankly, our ability to offer 24/7 environments where people will work, play and have families, et cetera.

And while initially the [self-side] may have some concern over the fact that we're not in a tight enough box, because after all, you know, that's what you would like to do with the companies. You'd like to put them in a tight box so that they are pure plays, and I understand that.

But, we're going to make money at what we're doing here. And we're going to selectively sell product and use that capital and allocate that capital for the best growth opportunities going forward.

At this point, we have no intention of selling the Company. We have no intention of buying back stock. We have every intention of moving forward in the manner that I've described on this call. And some will like it and some won't. And some will write, you know, unfriendly analyst notes, but at the end of the day I believe we're going to make a lot of money at what we're doing.

That's what I mean, but you can also look at how the share price has performed since that announcement and that's not analysts, that's shareholders voting with their feet.

I think the share price has certainly kept pace with the -- certainly I would say outperformed the general suburban office owner in general if I look at the most widely traded names or those with similar volumes of trades.

So, I think that the stock has performed okay. I'd like it to perform better, but I think that, you know, it will take a level of understanding. It will take a level of demonstrating performance and articulating very specifically what the opportunity said is with this multi-family diversification.

So that's what it is, Michael.

Okay. You know, if you're a $5 billion company today how do we think about the incremental pieces and timing of incremental multi-family? You talked about Jersey City being a 50 but that obviously is over time and multiple phases. With a potential partner coming in, how should we think -- I mean, then there's re-entitlement of existing land to multi-family and then there's this multi-family transaction.

How should we think about how large you become? How quickly you've become more multi-family or split?

Right. Well, you know, unfortunately I can't go into too much detail and it's not for reasons of avoidance. It's reasons of following, you know, SEC and governance procedures because of where we are in connection with this transaction. So, I simply can't go into more detail than to say to you that over the five to seven year period that we've talked about on this call, I would expect this company to be 30% to 40% multi-family.

Okay.

So, you could do the math.

Thank you.

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

Thanks. Mitch, sticking with the transformation team, what do you think within the organization has to change? I mean, your D&A is the really -- as an office landlord, so to transform so much multi-family -- kind of how you've re-engineered the organization?

Yes. Again, at the risk of sounding like I'm being evasive, with what we're doing, very little integration other than systems reporting will be required.

Okay. And then thinking through your development project at Jersey City, what are your thoughts on competitive supply coming online around the same time? Seems like there's you know, several projects that are in process there.

Yes, there are several projects in process. The average occupancy rate along the coastline in New Jersey is 97% to 98%. And the cost of apartments and due to high-quality brand new product, you know, is $40ish a foot. You go to Brooklyn and now you're hovering at $60 a foot and if you go to New York City, you're exponentially higher than that.

So, unless the metropolitan area is going to stop growing and unless the new millennium worker isn't going to be hired by any of the vast businesses that are doing business in the gateway cities, we don't see any end to demand right now, and affordable demand in Jersey City.

So, I think that we will compete extremely well with whatever is currently planned to be developed along the waterfront.

Okay. All right, thanks.

You're welcome.

That concludes today's question and answer session. At this time I'd like to turn the conference back over to Mr. Hersh for any additional or closing remarks.

Thank you, very much.

Again, in closing we ended the quarter in a very strong position. We had a lot of leasing activity. We are very excited about the opportunities set that I've talked at length about on the call in the multi-family sector and arena. We know that you know, we need to demonstrate our success in that diversification and we're prepared to do it, and we think we're going to be doing it with the best and the brightest as we move along.

So, while we certainly maintain a very, very laser focus on being the office landlord of choice in the markets in which we operate and a stable partner for our tenants that is extremely well capitalized and financially flexible, we are equally excited about moving the Company forward in this multi-dimensional direction.

So, thanks for joining us and we look forward to talking with you all in the all near future. Good day.

This concludes today's conference, we appreciate your participation.