Veris Residential Inc (VRE) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mack-Cali Realty Corporation First Quarter 2013 Conference Call. As a reminder, today's call is being recorded.

At this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Mitchell Hersh. Please go ahead, sir.

Thank you, operator. Good morning, everyone. And thank you for joining Mack-Cali's First Quarter 2013 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 talk with you about our strategy and changes we are making in our capital allocation, as well as review some of our results and activities for the quarter, and generally what we're seeing in our markets. Then Barry will review our financial results.

While we continue to actively pursue our diversification strategy into multifamily, we certainly remain keenly focused on our core office portfolio. Clearly, the economic recovery in office has been frustratingly slow. Frankly, there is little new demand in financial, information, banking industries. As we all know, governments are shrinking, and there's still a great deal of uncertainty in the economy, not the least of which -- sequestration, healthcare reform and the like.

To date, job growth and the demand for office space that it generates has centered around only a few key industries -- technology, media and energy; all of which, frankly, are somewhat region-specific. In New Jersey, this economic cycle has been somewhat more severe than in past cycles, given that some of its core industries, such as pharmaceuticals and telecommunications, have been in retrenchment mode.

And so, why is the multifamily strategy logical at this point in time? Well, first of all, Roseland is the real deal, the best in class. The platform allowed us to put in place expertise to be competitive in the multifamily sector with a very limited capital commitment to build a significant multifamily portfolio through both development and value-added acquisitions -- this in contrast to buying someone else's value creation pipeline.

We control some of the best sites, with approvals for multifamily development in urban transit-oriented locations, with extremely high barriers to entry and lengthy -- if not impossible -- approval processes. Particularly, in these choice locations in New Jersey, opportunities to develop and acquire multifamily assets are real-time, versus the opportunity set in the office sector, which will likely be slower to emerge.

The locations and assets that we control has a resident population that often is a renter of choice, not a renter of necessity. The income levels of the demographic often average well above six figures. And the rents achieved by our Roseland platform outperform virtually the entire peer group on an empirical basis. This is due to attention to detail, high-quality [amenitized] assets and tenant focus, just like Mack-Cali.

As part of our strategic shift, we will continue to improve our capital allocation to improve and enhance shareholder value. At a point that I would term mid-cycle spread equalization, where A's and B's are compressing, now is the time to recycle out of noncore assets and also take advantage of the opportunity to do 1031 exchanges.

In the office sector, we will continue to sell off no-growth assets, as well as monetize value creation, such as a sale that is closing today for an asset in excess of $72 million, a very profitable sale for Mack-Cali. By doing this, we will improve the overall quality of our office portfolio as well. In some instances, such as a planned joint venture with several Pennsylvania buildings, we'll continue to retain a carried interest in a joint venture, so that without any further capital commitment on the part of Mack-Cali, we will retain the ability to harvest future value in the assets.

Our conservative balance sheet, in combination with these asset sales, and retaining cash through our recently announced dividend reduction -- some $60 million annually in the dividend -- will add fuel to our multifamily platform.

Let me now review our results for the first quarter. FFO for the first quarter of 2013 was $0.63 per diluted share. We had healthy leasing activity, with a total of more than a million square feet of lease transactions, including about 246,000 square feet of new leases. Our retention was 55.9% of outgoing space. This modest percentage is reflective of the demand trends I spoke of before in connection with corporate rightsizing and consolidation. We ended the quarter at 86% leased, down from last quarter's 87.2%.

Rent on renewals rolled down by 5.8% for the quarter on a cash basis, compared to last quarter's 4.4% cash roll-down. Remaining lease rollovers for 2013 are only 6.2% of base rent, or about $37 million. Our leasing costs this quarter were $3.30 per square foot per year, down from last quarter's $4.11 per square foot per year.

Despite the challenging environment, our portfolio continues to outperform most of the markets where we operate, with our leased rates exceeding market averages in Northern and Central New Jersey, suburban Philadelphia, Washington, DC and suburban Maryland. However, we have adjusted our guidance and tightened the range to $2.37 to $2.53, down $0.05 at the midpoint, to reflect both the top-line compression due to occupancy and rent pressure along with some $0.02 or $0.025 of dilution related to accelerating asset sales.

Having acquired the Roseland platform at the end of 2012, we have accomplished a great deal so far. During the quarter, we expanded our multifamily residential portfolio through the following acquisitions. In January, we acquired Alterra at Overlook Ridge 1-A in the Metropolitan Boston market for approximately $61 million. This luxury multifamily property contains 310 rental units in the master-planned community of Overlook Ridge in Revere, Massachusetts. Then in April, this month, we acquired Alterra 1-B, the second segment of Alterra, for approximately $88 million. This multifamily luxury property contains 412 units, and both were developed by Roseland in the mid- and late 2000s. Alterra is a wholly owned asset of Mack-Cali.

In March, we marked our entry into the Washington, DC multifamily market, where we entered into a joint venture with a fund advised by UBS and acquired the 828-unit multifamily property, Crystal House, in the Crystal City section of Arlington, Virginia for approximately $262 million. This is a value-added acquisition where we are very confident on the ability to continue to lift rents in the existing facility, the two 12-story towers, as we do cosmetic improvements. And, as well, we bought both the fee on the ground and the development rights on the property for another 295 units of multifamily residential.

As we have discussed previously, we have active developments with institutional joint ventures at Port Imperial in Weehawken and West New York, New Jersey; in East Boston, Massachusetts. We have also commenced construction on the first phase of the Overlook II project in Malden, Revere, Massachusetts and will soon commence construction on projects in Morristown, New Jersey and Eastchester, Tuckahoe in Westchester County, New York. As well, we're in the zoning stage for projects in Wayne, New Jersey and Freehold, New Jersey.

With respect to repurposing Mack-Cali assets, we are increasingly active. We're under contract right now to sell a 28-acre parcel in West Windsor -- commonly known as Princeton, New Jersey -- to a lifestyle company. This is monetizing our land inventory where alternative uses -- such as retail amenities, frankly, to office buildings and its occupants -- make more sense in today's economy then holding the land for future office development. This is similar to what we've done with the Wegmans transaction in Hanover, New Jersey.

Repurposing for multifamily and mixed-use is also taking shape -- part of the initial strategy of the Roseland acquisition. We've developed preliminary plans for multifamily and mixed-use conversions on one of our Essex County, New Jersey properties; a Bergen County, New Jersey site; and two parcels of Mack-Cali-owned land in Westchester, New York. We are evaluating many other properties for incremental additive and repurposing of the assets to include multifamily, including the overlay zoning in several communities that will give us future rights to develop multifamily residential.

Regarding our strategy of recycling our capital out of noncore assets -- already in the second quarter, we've sold 19 Skyline Drive in Hawthorne, New York. We sold the vacant five-story 248,000-square foot building to New York Medical College for about $16 million, more or less. This asset would have likely required reinvestment of more than $20 million to take it to stabilization, depending on demand driving the marketplace. So clearly it made more sense to sell the asset to the neighbor and redeploy the capital into our initiatives.

We have six additional properties under contract for sale in various stages of due diligence. Most have already cleared due diligence, and we expect to have closings in the upcoming quarters. We are also evaluating many additional assets for recycling capital. And that we also expect to talk about in quarters to come.

Turning to office leasing -- we have had some significant successes, but I'm not sure that they necessarily reflect a trend in the market. In suburban Maryland, we signed a long-term lease with Bozzuto & Associates. Interestingly, Bozzuto is a very well-respected diversified residential real estate company dealing in the multifamily sector -- perhaps some synergies there over time. We signed a lease for over 74,000 square feet in our Capital Office Park in Greenbelt, Maryland to serve as the new headquarters for Bozzuto & Associates.

We have a long list of renewals that I'm proud to say we accomplished in the quarter. And you can refer to our filings and press releases for more details on those renewals. And notably, Loeb Holding Corporation, a financial services firm, signed a new lease for over 22,000 square feet at 125 Broad Street in Downtown Manhattan. And I'm pleased to tell you that this lease now brings our condominium interest in that building of 525,000 square feet to 100% occupancy.

On another note, Mack-Cali continues to manage its properties with a keen eye toward energy efficiency and sustainability best practices. Earlier in the week, we announced that 105 Eisenhower Parkway in Roseland, New Jersey was awarded a LEED EB 0M Silver certification from the United States Green Building Council. This building now joins 106 Allen Road in Bernards Township and 8 Campus Drive in Parsippany as just a handful of multi-tenanted buildings in the entire state of New Jersey to achieve this prestigious award. Obviously, the award recognizes maximized operational efficiencies with minimized environmental impact.

During the quarter, we also have continued to be awarded Energy Star designations in our properties, recognizing superior energy performance. And all of this combined allows us to create efficiently running buildings. And we can do our part in reducing the carbon footprint of our assets.

With that, now I'll turn the call over to Barry, who will review our financial results for the quarter.

Thanks, Mitchell.

For the first quarter 2013, net income available to common shareholders amounted to $11.6 million or $0.13 per diluted share, as compared to $25.8 million or $0.29 a share for the same quarter last year. FFO for the quarter amounted to $63 million or $0.63 a share, versus $74.5 million or $0.74 a share in 2012. Other income in the quarter included approximately $965,000 in lease termination fees, as compared to $6.8 million for the same quarter last year.

Same-store net operating income, which excludes lease termination fees, decreased by 5.1% on a GAAP basis and 10.2% on a cash basis for the first quarter. Our same-store portfolio for the quarter was 29.7 million square feet. Our unencumbered portfolio at quarter end totaled 237 properties aggregating 24.8 million square feet of space, which represents about 80.7% of our portfolio.

At March 31st, Mack-Cali's total un-depreciated book assets equaled $6 billion, and our debt-to-un-depreciated asset ratio was 38.1%. The Company had interest coverage of 3.1 times and fixed charges coverage of 2.7 times for the first quarter of 2013. We ended the quarter at approximately $2.3 billion of debt, which had a weighted average interest rate of 5.68%. Currently, we have $217.5 million outstanding on our $600 million revolving credit facility and expect to reduce that by $70 million with the upcoming sale of 55 Corporate in coming days.

We adjusted our FFO guidance for 2013 to the range of $2.37 to $2.53 a share. At the midpoint, our guidance assumes leasing starts of 1.5 million square feet versus scheduled expirations of 1.7 million square feet for the remainder of the year. We project year-end lease percentage of 86%, which is about where we are today; additional development investment of about $40 million for wholly owned and joint venture projects, including the completion of phase two for Wyndham Worldwide in Parsippany and the startup of multifamily residential joint ventures in Jersey City. And we also look at additional acquisitions of about $100 million for mainly multifamily properties for the remainder of 2013. We project property sales of about $215 million, of which $25 million have closed to date, including what has closed in April; and same-store NOI down around 5%.

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 on our Supplemental Package and Earnings Release, which include the information required by Regulation G, as well as our 10-Q.

Mitchell?

Operator, with that, we will now take questions.

(Operator Instructions) Josh Attie, Citi.

Can you talk about some of the larger expirations in the office portfolio this year, and also maybe next year? I think you have Morgan Stanley for 300,000 square feet this year, US Life, and then also AT&T next year. Maybe just tell us which quarter some of these expire, and also what the plan is if you have opportunities to backfill some of this space, or if these are redeveloping repurposing opportunities?

Sure, Josh.

Relative to the AT&T lease expirations, it's our expectation of entering into renewals imminently. We've been working with them for some period of time, and we have documentation out to them, lease amendment documentation extending their leases at 30 Knightsbridge. We've done extensions now in Paramus. So the AT&T situation appears to be moving in a very positive direction.

Relative to US Life, which is a component of AIG, we are finalizing -- literally, as we speak -- a lease renewal with AIG in approximately 74,000-and-change square feet in the 180,000-foot building. We have a lease behind that with a new tenant for about 25,000 square feet, and we're in the final throes of lease language on that. So we expect that more than 100,000 feet of that asset will be leased. And of course, AIG will allow for no downtime essentially on their current lease.

We are also on that property seeking overlay zoning. We've met with the municipal officials, and we have formal applications and very favorable indications from them that we will get multifamily overlay zoning and a small modicum of retail zoning, since it's a corner site in a very premier location in Neptune, New Jersey. So we'll have the opportunity to do other things with that site in the future.

As far as Morgan Stanley is concerned, we've also entered into some extensions with Morgan Stanley, some of the former Smith Barney retail units in a couple of our buildings. We're well along with them on a renewal and, frankly, a consolidation that will involve more space in Short Hills. And so that's moving forward in a very positive way. We fully expect to complete that. In Harborside, Morgan Stanley has reconsolidated into One New York Plaza. And so we're in the process of approximately -- we have some of it re-leased -- but about, more or less, 225,000 square feet at Harborside that we are actively marketing for lease.

As far as the following year, we really have no major expirations of any singular tenancy until, frankly, the beginning of 2015. And that would be the Prentice Hall Pearson occupancy in Upper Saddle River. We have advanced plans -- we have some interesting multifamily mixed-use development concepts for that particular location. I have personally, along with the Roseland team, been working quite closely with an institution of higher education to potentially work with us on the redevelopment of that site. So there's a good deal happening there.

As far as other repurposing -- we're in the preliminary stages of entering into applications in Short Hills with our current Roseland headquarters -- Roseland Property Company headquarters -- to repurpose that land, in combination with some of our parking lot of the office building, 150 JFK, into a mixed-use multifamily development.

So we have a lot going on and are very cognizant of our lease expirations, and have been working in the manner I've indicated to accomplish renewals, in most instances, in repurposing, for example, in Bergen County, in the Upper Saddle River situation, where we know that in fact that tenant will ultimately leave the premises.

Does that kind of cover it, Josh?

Yes, it [does]. I'm sorry, but if you could just clarify the Morgan Stanley lead --

The Morgan Stanley lead --

-- it sounds like --

Yes. I'm sorry.

It sounds like you think about 225,000 of that is going to come back to you?

In Harborside, yes.

Okay. Can you remind us the timing of that during this year?

Yes, it's a one-year-away event.

Thanks.

And one separate question -- on 55 Corporate Drive, based on your comments, it sounds like you're going to sell that at a pretty nice gain versus what you developed it at. Could you remind us what the development yield was?

The development yield originally was about 9% unleveraged, approximately. It was a $50 million project roughly, and it's being sold for over $72 million.

Great.

Closings current today.

And you have an opportunity to 1031 that tax gain?

That's a wholly owned asset. And we've also used our Alterra acquisition in Boston, which is wholly owned for reversed exchanges. And so we have so far -- and I expect this to be the case going forward -- very efficiently dealt with contributed assets that have -- or assets that have built-in gain.

Thank you very much.

You're welcome.

Jordan Sadler, KeyBanc Capital Markets.

I wanted to just circle back on the development pipeline a little bit. First, I didn't hear -- I might've missed it -- on Jersey City, the plan with the Iron State development --

Right.

-- what the status is there. So an update there would be helpful.

And then, just a general comment surrounding the overall scope and scale of the development pipeline. Sounds like there's a lot of repurposing -- and obviously there's been a number of starts -- and what the capacity is, and how big you'd want to see that get.

With regard to the Harborside Plaza 7 URL development, as we call it, with Iron State -- actually, we're ready to go, we're finalizing all of the bids, hard-lining all of the bids and leveling them. At this point, we have applied for certain incentives. And those I expect -- those deal with some legislative issues in the state of New Jersey that I'm hopeful will be dealt with within the next 30 to 45 days.

And it's important to us to see the completion of that exercise, and that's all I'm going to say about it before we actually can commence construction on that project. That's about a $0.25 billion project. It looks like we've locked up very satisfactory -- very attractive, I should say -- long-term both construction and permanent financing with a well-respected insurance company, provided we can get this incentive from the state. And so that's what I'm going to say at this moment about that project.

Other than that, we have about $1 billion of development with various levels of interest. Much of that is our joint venture opportunities in the waterfront here, the waterfront in Boston; where the capital commitments on our part are quite limited. Actually, we'd like to put more money to work. And we have significant fee income being generated by those joint venture developments in the form of developer fees and then extending on to management and leasing fees. And so we're concentrating on that.

Most of the financing for those projects is in place -- construction loans, mini-perms, and again primary equity being furnished by institutional partners. Sum total, including Harborside, I would say it's about $1.25 billion in total aggregate development in various stages at this moment.

That's helpful.

And then, just one on your 30 million-square foot primary portfolio -- you made a comment -- and this has been the case for a while -- that the office recovery is frustratingly slow. And you also had some successes recently, but they're not necessarily a trend. And you also did comment about New Jersey being a little bit weaker. I guess I'm curious -- are you seeing anything of a recovery? Obviously, there's a lot of activity from a construction perspective going on in New Jersey. I don't know if it's started to translate into increasing economic activity. But I also know we saw a job print in New Jersey that looked a little bit encouraging recently maybe.

So I'm just curious -- are you seeing anything there on the economic side that sort of could lift your core portfolio?

Yes. Look, the job statistics that actually I had seen -- and you were kind enough also to send them to me -- certainly a positive statement. But I would tell you that much of that job creation was in the manufacturing and industrial segment of the economy, and the leisure and resort and healthcare segment of the economy; which has, quite frankly, limited impact on the jobs necessary to create more incremental demand in office buildings. The office building demand, or the job picture, with respect to jobs being created in the entire metropolitan region -- not only New Jersey but New York City -- is generally flat.

We continue to see lackluster demand. However, you continue to see flight to quality -- I know it's a cliché, but it's true -- and companies looking to retrench, consolidate, become more efficient, densify occupancy. And those are currently the opportunities in the marketplace.

I think that the recovery in the office segment is still going to take awhile. Suburbia is a little more staid than some of the urban centers for the obvious demographic shifts we've talked about, in terms of access to public transportation. We still talk to many companies that are looking to consolidate in suburban locations where we think we have opportunities going forward to acquire or attain their occupancy with us. These are companies that are not interested in moving from their suburban campus locations to high-density locations either on the waterfront or in New York City.

But it's slow to come. And the job report the other day is a hopeful sign. It gives us generally some cause for optimism. But this will take awhile.

One last one, if I may -- I noticed that you guys upped the sales activity guidance. And I'm curious about the potential to accelerate that even further, given your commentary and the fact that there seems to be quite a bit of institutional capital that actually is interested in suburban assets.

Yes. The institutional capital really -- there's a bifurcation. The institutional capital is more inclined to look at an asset like 55 Corporate, where there's an income stream -- albeit somewhat modest on a yield basis, given the pricing levels and the cap rates that are being paid for that -- sort of a long-term cash flow from a very high-grade, corporate-grade tenant. And we haven't yet seen a major flight of institutional capital in the traditional suburban asset. There's some. We sold our interest in One Jefferson recently to a private REIT, if you want to classify that as institutional capital. And that's, in fact, a law firm lease that has a relatively -- had about 13 years running on law firm credit, and we got a good price for that.

We have another asset being held for sale with a very high-end -- it's in an industrial building that years ago we converted to a corporate headquarters in part; part of it is still a warehouse. And we have a state pension funds advisor under contract to buy it at a very good pricing level for us.

But I would say that your more traditional suburban office building, with a lot of lease rollover risk and lease-up risk -- the appetite for that is more the entrepreneur, the local private equity players that feel confident that they can get financing and are hoping for some big futures and then hope that they can flip it in three or five years for profit.

So there's really a very bifurcated capital market for the suburban type product.

Thanks, Mitch.

You're welcome.

Steve Sakwa, ISI Group.

Mitch, I just wanted to see if you and Barry could -- I just want to make sure we've got our numbers straight here as it relates to developments and acquisitions, dispositions; and then kind of what that means potentially for equity or no equity, to the extent that you've cut the dividend and have obviously created more additional free cash flow. So if I heard you right, I think you said $40 million of development spend including your share of JVS -- that's $100 million of acquisitions and $250 million of dispositions. Is that --

Correct -- $215 million, we said.

$215 million, okay.

On dispositions.

Okay.

Would you be able to give us kind of a blended cap rate on that disposition? Because you're selling some land and some empty buildings which are effectively zero cap rates, and then you may be selling some --

It's hard. Because as I said in my comments, some assets, like Skyline Drive, where we didn't want to put the incremental capital in because it would never make economic sense to do it; it was an empty building that IBM -- their lease expired, they moved back to a corporate campus. So a cap rate on that is meaningless. And I'm not looking to be glib about it; it's just that I don't want to distort the picture. Everything has its own value. The cap rate on the sale of 55 Corporate was slightly in excess of -- it was about 6.2% on in-place income.

So that gives you a picture of what a well-leased high-grade credit with a very high-end asset can command in the marketplace. I would say that anything else, other than to say an average cap rate of 8% or 8.5% on a traditional suburban building would be somewhat distortive. Because it really depends on the income stream, the leasing risk and the capital needs that could accomplish stabilized occupancy.

No, Mitch, I appreciate that, and I understand. I think what I'm actually trying to [help] understand and maybe help the investors -- there may be less dilution from your asset sales than people think. Because some of the buildings that you're actually selling aren't really throwing off any income today. So you're going to get cash, you're not going to give up any NOI.

Right.

If people just put a generic 8 in on $215 million, they're overstating the dilution you may incur from asset sales. And I'm trying to really get to (multiple speakers) how much of your asset sales is kind of non-income producing and how much of it is a more stabilized bucket.

Yes, and that's very fair. And I would say to you that out of that total of $215 million, probably at least a third of it is either under-leased or no income in place, like 19 Sky. So at least a third of it is incremental positive cash flow because it has no NOI in place today.

That's helpful.

And then, I guess, given all that, and given where the balance sheet is and the fact leverage has ticked up, how do you think about -- do you need equity? Or are you looking at your capital plan today and saying, with the dividend cut, with the accelerated dispositions, unless we were to materially accelerate the development pipeline short term, that there's no equity need on the balance sheet today?

First of all, we would like to raise equity at some point. Do we need it? No, not necessarily. We have still -- we raised our leverage to 38% from 34% a year ago, quarter-over-quarter. So we've raised 400 basis points, but we still have ample coverage. We're bringing in cash now on these sales -- currently, with this sale today, with the things that [have] -- $140 million or $150 million of cash -- and a lot of room on our leverage at this point, should we choose to do that.

So the answer is that, given the $60 million in additional cash from the dividend on an annualized basis, we have capacity clearly to more than handle what we have on our plate today. But certainly, the goal is that as the investors -- and with the help of the analysts' understanding the strategy, and hopefully embracing it, that it will reflect in a multiple expansion, like some of our strictly suburban office peers have seen, and allow us to access multiple forms of capital going forward.

And then, just last clarifying question -- I think you mentioned the kind of [$1,250,000,000] of total multifamily development that's kind of in the hopper. What percent share is Cali of that sort of $1,250,000,000?

Well, out of $1 billion, Mack-Cali is, I would say, roughly 25%, more or less. And we can go through each JV, if you want. But I'd say on average that with no capital requirements, highly promoted interests in what we're doing, the value-added acquisitions where we've done them with -- I know we're talking development, but the value-added acquisitions are very highly promoted, like the one we did in Washington, where effectively we get two times our interest, two times our money, achieving a modest threshold on IRR.

So I'd say that on $1 billion, 25%-ish, with literally almost no capital investment -- couple guarantees here and there for completion and land guarantees, that kind of thing.

And then, on the Harborside project, we own 85% of that. We expect that our financing as it looks today -- coupled with what I talked about briefly before, about this legislative initiative -- should represent about 35% of the total. Plus we're getting a land contribution basis in the partnership of $30 in FAR. So that's about $25 million on the development. So it's very limited equity required on our part.

Thanks for the clarification.

You're welcome. Take care, Steve.

Jim Sullivan, Cowen Group.

Mitch and Barry, I just wanted to be clear on the same-property NOI. I think you indicated -- previously, I think you had talked about a range of down three to down five. And I think the new guidance assumes simply down five. There wasn't a range. Is that the case?

Yes, we believe that it's going to be closer to five. And as we tightened up guidance, that's what we've built into it. We've kind of tightened up the range, if you will. So I would say at this point it's going to be closer to five than three.

Okay.

And I believe you said that you expect the current level of occupancy to be retained through the balance of the year?

That's right.

Okay. And --

(Multiple speakers)

Sorry?

I said we're hoping to grow the occupancy as we move through the year, but it's somewhat cyclical, as you know. So there will be peaks and valleys. But we think we've kind of stabilized at this 86 as a low point.

Okay.

And then, this is a question maybe more for Barry. But the straight-line rent number in the quarter was certainly a good deal higher than we had in our model. And I wonder if you could talk to that, and maybe give us some guidance as to what the full-year straight-line number is expected to be.

Sure. The straight-line rent in the first quarter reflected several large leases in Jersey City that were on free rent that burnt off. Going forward, we would expect that number to come down more into the $3 million to $4 million range going forward per quarter.

Okay.

Really, last question for me -- but on Harborside 7 -- and correct me if I'm wrong, Mitch, but I thought historically you had suggested or maybe implied that when the financing would be put in place, there was a possibility perhaps of bringing in some private equity to invest in that project. Is that happening, or not? Can you give us an update on that aspect?

It's premature to talk about that at this juncture. There are moving parts. We finalized the asset. In terms of the plans, we're ready to go subject to our being successful with the initiatives I talked about with the state and completing the financing. Once that can be achieved, we can certainly -- and we will -- look at the possibilities of taking advantage of the value creation there and looking at an institutional partner. But it's something that -- it's premature right now.

Okay.

Then, if you could just remind me -- I saw today that Vornado announced they had sold their interest in [Downtown] Crossing to Millennium. And you guys have a share of that. If you could just remind me the amount of capital that will be coming back to you, and the timing?

It was about $13.5 million. It about pars out for us, after everything, with all the costs and the impairments and whatnot. We end up on a valuation basis at about par.

You mean par relative to book?

Yes.

And what's the timing on that?

That's now, it's done.

Great. Thank you.

You're welcome.

Michael Knott, Green Street Advisors.

John Bejjani here. Do you see yourself expanding further into DC Metro in multifamily?

Well, we know we're going to expand in connection with the development that we're going to undertake for the plus or minus 295 units. We're looking at another site right now where we've been brought in to look at it from another publicly traded company that has asked us to take a look at a particular site that they have; they're in a different segment of the property sector. Yes, so I would say that the purpose of having gone into that market is to establish a platform and expand.

We are also, by the way, somewhat advanced in taking the land that we own at Capital Office Park, where we bought the land. We had an option to purchase it when we bought Capital Office Park from the contributors. And we exercised that option at a relatively modest per-square foot -- on a buildable basis. And it's right next to the federal courthouse. And we are in the process of seeking zoning approvals to develop a number of -- hundreds of units of multifamily on that site. So that also would be considered the Metropolitan Washington marketplace.

Thanks.

Given the defense budget cuts that are coming and [fi] growth ramping up in DC Metro, particularly [full], and also in Northern Virginia -- how did you get comfortable diving in there?

I got comfortable by visiting the site on several occasions with my team of Marshall Tycher and his son, Jack, who lived there when he went to school and thus was instrumental in sourcing the opportunity for us, and looking at the rent roll and finding that a large percentage of the rent roll consisted of healthcare professionals that are involved in all of the medical centers that surround the area, in graduate students in the universities that surround the area that have very young families at this point, and really taking a very close look at the income levels and the demographic of who we were renting to and who our peers -- because of the ability to access software and understand what our peers were doing, and found that as much as it's coincidental or interesting that if you look out the window from anything above, let's say, the fourth or fifth floor apartments in the two towers, you can see the Pentagon, you can walk to the airport -- but that we had extremely limited occupancy of anybody who worked at the Pentagon or the airport.

And so we felt very comfortable that the interdependency on the defense industry, based on the historical profile of that apartment complex, was very limited.

Thanks.

And one more question -- I'm trying to understand your property expenses, same-store property expenses. This quarter, they were up about 6%. And they've generally been lower recently. But looking back to mid-2000s, you guys have had extended periods where you've got mid-single-digit to high single-digit property expense growth. And I'm trying to understand just what's driving that. I mean, is there something unique about how your leases are structured that makes you more exposed to expense growth? Any clarity you could get there would be helpful.

Yes (multiple speakers) --

Josh Attie, Citi.

Wait, I didn't answer that question, operator. Hello? Operator?

Please go ahead.

Talking about the expenses -- first of all, expenses and how it reflects on the performance [and] how it reflects on NOI is a result of base-year composition, number one; and depends on a point in time in which a base year for a tenant is established. And so if the tenant has the good fortune of having established in a year, for example, where snow removal is relatively high, they get that advantage. And they may never experience escalations as a result of that. And therefore, that would fall to our bottom line.

Utility expenses -- some were set when utility expenses fell off. Similar with real estate taxes -- some real estate taxes were set on high basis, some were set when we had the advantage of maximum appeals. So they fluctuate. Operating expenses and services are somewhat dependent. We have labor contracts, for example, on cleaning with 32 BJ. And so we have to pay additional contractual labor increases. If we don't have the ability to claw back to a tenant because of its particular base year, obviously that slightly erodes the bottom line.

So there are a lot of variables that comprise how we can recover expense increases. But the truth of the matter is things are more expensive today than they were in 2000, which is what you refer to. And labor increases continue to escalate.

Does that answer your question?

Yes, that's helpful, thanks, Mitchell.

You're certainly welcome.

Josh Attie, Citi.

Good morning, Mitch, it's Michael Bilerman.

It was helpful to go through some of the development and multifamily acquisitions, and how you're thinking about it. And it's sort of good to hear that I guess there's less capital from your share, because [of the] construction loans and the way the funding is working. But how do you think of it at the corporate level? Because as you think about the multifamily deals that you just did, you put on high leverage on those assets, because the financing is available. Obviously at the corporate --

(Multiple speakers) let me clarify that. We didn't put any leverage on Alterra. We were moving in a certain direction. But in looking at that, if we can -- we have a conviction -- we're developing right next to that now on Overlook. The market is very strong there. And we believe that our acquisition yield is going to be, let's just say, over 6%. And our corporate debt, if you will, is, call it, 3.75% on a 10-year piece of paper versus a mortgage that's going to be somewhat higher. And in the residential sector, you're going to have a number of years of no amortization -- interest-only payments and no amortization -- but the rate's going to be higher.

So just in the simplistic way of looking at it, you're looking at a 6%-plus yield with a cost of corporate funds of, call it, 3.75%. So you got a good positive spread there.

But I'm just thinking about, as you embark on all these developments, they're obviously -- while your equity funding may be reduced by the structure, your share of the overall project -- and eventually they are going to be big construction loans on it -- the total -- your share of capital sort of raises --

Right. I get it, Mike. So let me just address it with an empirical example. In Washington -- and again, not withstanding any sort of reports to the contrary, we bought the fee. We bought the ground lease fee when we bought the asset. And so we've got, call it, a $0.75 billion asset that we acquired, and we're 25% of the capital. And we get a promoted interest to bring us up to 50%. We get a pari passu 9%, pari passu with UBS. We get all the fee income for both the operating management, leasing, and then development fees, as we move into the development.

We placed H&C financing on that through a DUS. Our institutional partner wanted to do seven-year financing. They had their own reasons, and they're the majority partner. So we obviously did that. And we had a good day in the market the day we closed the deal, because Cypress was in turmoil. And the bond market was strong, and we locked rate with Fannie Mae at 3.17%.

So that gives you an example, at roughly 65%, 70% financing, of how you can also be efficient in the secured debt markets in multifamily. The wind is sort of at the back of the multifamily sector. And by the way, that seven-year -- five years is interest-only out of seven years.

Okay.

As you think about -- your comment that you'd like to raise equity at some point, but the multiple is not where -- and I guess your stock price is not where you'd like it to be. You have a share repurchase program in place, right? So that sort of tells the market how you feel about your stock. Granted, you didn't exercise on it in the first quarter. But I'm just curious -- as you think about where the stock trades, what do you think is sort of the main driver? Is it the fact that you believe there's an equity overhang on the stock? Do you believe it's the market not embracing the strategy of what you're doing? And how much of it do you think is sort of the suburban office fundamentals that continue to be very weak?

I'm just trying to think about how you're looking at the stock and looking at the multiple, and why you think it is where it is.

I think that the diversification strategy needs to be better understood. And that's why in my commentary today I chose to address the issue of strategic diversification somewhat differently than past earnings calls. And I'm hopeful that to those that participated in the call today, and to those that will participate in reading the analyst notes that are put out after today's call, that there's a better understanding of the opportunity set and the more rapid emergence of an opportunity set in multifamily -- and the ability to scale this up -- this is not a hobby; we have scalability here -- that they'll better embrace the mixed-property sector opportunities that we have. So that's one.

Yes, the suburban markets have been affected more than the urban markets. And being next to New York City -- which, by the way, is no panacea, as you know -- a lot of compression, a lot of vacancies. You can go to Avenue of the Americas today and find seven blocks of space in excess of 100,000 square feet. So there's a lot of pressure in that market.

I spoke to one of the preeminent brokers this morning in New York City on a 28,000-foot deal. He told me that it's taken four months so far to get to the final lease comments. And he's personally spent four hours at a meeting yesterday in the city with city lawyers that bill at $1,000 an hour to try to get a 28,000-foot lease done in New York City, in a premier building.

So there's no panacea anywhere in this business right now. But being geographically next to New York City has, I think, negatively infected our multiple. Because the perception -- and to some extent the reality -- I admit that, because we see it along the waterfront -- the demographic shift to more urban occupancy, mass transit, public transportation -- is quite real, particularly for young professionals and the companies that have expanded technology media. That's their workforce -- the echo boomers, the new millennium sort of workers. And so I think that's affected our multiple more than it's affected our peers'.

We operate pretty good-size portfolios in the same markets that some of our peers in the public REIT universe operate in. We compete for the same tenants. And so it's a mystery to me why their multiples are so much better when I know their economics cannot be better. Because we compete for the same tenants in the same markets on the same deals.

Right.

So that's what I could say to you. I'm hopeful that as we articulate this story, as we put more wins on the board, more successes in connection with both disposition of noncore assets to bring in capital as we do more accretive incremental capital allocation going forward, that the markets will continue to -- or will embrace that, and that our multiple will expand and that we will have another form of capital available to us.

And then, last question on -- I guess it ties to the capital side. And certainly appreciate enlarging the [disposition] program up to $215 million in order to fund some of the uses that you have already started this year. Are you thinking about maybe sort of testing the market with more assets, so that if it takes more time for the market to turn around to where you think it should, that you can fund this growth that you want to do and have the assets at the ready to do it, so that you're not going to get yourself in a further box about having opportunities that you view as very attractive, but not having access to equity capital to fund it? So test the market with $500 million of assets, and pull the trigger if you need to, or else an equity overhang becomes even larger when we enter 2014 and you have another $200 million to $300 million of acquisitions or development that you want to embark on on the multifamily side.

So I'm just trying to think about where your head is at in terms of dispositions in lieu of common equity at what would be very low-multiple high cap rate today.

I think it's an extremely intelligent question.

We are looking at some significant, what I'll call, portfolio disposition opportunities. We have to be careful. There are lots of moving parts to those sorts of acquisitions. But we've identified certain of our, what I'll call, asset acquisition group that we think we can generate what I'll call a programmatic acquisition opportunity in some of our secondary markets. And when I say "secondary," it's not that I'm calling them inferior. I'm saying secondary in terms of our core.

What we're not looking at selling is Jersey (technical difficulty) the redundancy, we have the best in class in Roseland.

And so, thank you all for joining today's call. And we certainly look forward to reporting to you again next quarter and seeing many of you at NAREIT in Chicago in June.

Thank you again. Good day.

Ladies and gentlemen, that does conclude today's call. Thank you for your participation.