Veris Residential Inc (VRE) 2015 Q2 法說會逐字稿

Good day, everyone and welcome to the Mack-Cali Realty Corporation second quarter 2015 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Michael J. DeMarco, President and Chief Operating Officer. Please go ahead, sir.

Thank you operator. I'm joined today by my partners Mitchell Rudin, CEO; Tony Krug, CFO, and Marshall Tycher, President of our Roseland subsidiary.

On a legal note, I must remind everyone that certain information discussed in this 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.

This is the first call as a team. We're really looking forward to an open dialogue about our plans going forward. As many of you are aware, seven weeks ago today, Mitch and I were announced pre-market. Today we're announcing our earnings for the second quarter. We've hit the ground running for the last seven weeks and we're evaluating assets and operations.

Based on what we've seen thus far, we're both very encouraged by opportunities to create value in the current portfolio. We also know, that while we would like to accomplish everything in a matter of days and months, it would take time and persistence to execute on these opportunities effectively. It's unlikely there will be any shortcuts. We're culturally aligned with you in every way, and are focused not only on creating value for all of our shareholders, but also on improving our outreach, our disclosure and transparency that we can measure the progress together.

Today we're going to break our call down into the following sections. Tony will recap our operating results. Mitch will discuss our office leasing and our initial views of the markets, and then Marshall will provide an overview of our multi-family operations.

I would now like to turn the call over to Tony who will go over the quarter results.

Thanks, Mike. We reported our second quarter results this is morning prior to this call. We also included a more detailed supplemental package for Mack-Cali. And a first draft of a separate supplemental for our Roseland subsidiary. Both of which we'll continue to enhance over time. We promise that we'll improve our disclosure each quarter, especially as it pertains to Roseland.

With respect to earnings, FFO for this quarter was $0.46 per diluted share and for the six months year-to-date, FFO was $0.89 per diluted share, representing a decrease of 8% and 9.8%, respectively, from the prior year periods, largely due to us being a net seller of assets over the last year. Results for the quarter were primarily driven by our same store results for the office portfolio, and by the receipt of approximately $0.2 per diluted share of net real estate tax appeal proceeds. Same store NOI was down 2.4% on the GAAP basis. Excluding the real estate tax proceeds same store NOI was down 4.9%, which was better than we expected due to better leasing results.

Turning to our balance sheet, the indebtedness at quarter end was $2 billion with a net debt to EBITDA of 6.95 times. We have a debt service coverage ratio of 2.6 times for the quarter, and interest coverage of 2.7 times.

In the quarter, we sold two properties: 14 Sylvan Way in Parsippany, New Jersey, and our joint venture interest in the Highlands at Morristown Station in Morristown, New Jersey, for net proceeds totalling $87 million. We used the proceeds to pay down our credit line with zero outstanding at quarter end. The line has capacity of $600 million, which we'll draw on to fund some of the opportunities Mike spoke about earlier.

G&A currently stands at 1.1% of total assets, or 15.1% of NOI. As part of our aforementioned corporate evaluation process, we're analyzing ways to drive down those ratios comparable to industry averages and as Mike mentioned earlier, as with our other initiatives, this will be a process that will take time. We should start to see results by the end of the year.

I will now turn the call over to Mitch.

Thanks Tony. I would like to take the next few minutes to review our leasing results for the quarter and discuss some of the initiatives that we have undertaken thus far to improve tenant and broker relations. We expect that these activities should both enhance our leasing efforts and our tenant attention over time.

First, let's turn to the leasing results for the quarter. We leased almost 1.4 million square feet, which is the largest quarterly volume we've seen in almost nine years. 16% of the leasing came from new leases and 84% from renewals. New leases included a 74,000 square-foot lease with Valley Hospital at Mack-Cali Centre III in Paramus, and renewals included 33,000 square feet with Price Waterhouse Coopers at 101 Hudson Street in Jersey City.

Our space lease nonetheless dropped to 82.3% from 84.3%, and it is our intention over the coming quarters to drive that number higher. The vacancy at One Lake Street in Upper Saddle River hit our statistics this quarter, but will benefit us next quarter by 1.7% as we take that asset and reposition it over to Roseland. Roll up for all transactions was 0.4% cash and 4.6% GAAP. Lease spreads for renewals were up 0.7% on a cash basis and 5.1% on a GAAP basis.

Overall, the pace and velocity for leasing is improving relative to prior quarters as the various markets that we are in are starting to recover, or at worse, have bottomed out. We have newer expansion leases with several firms in New Jersey representing over 150,000 square feet of absorption. And just the other night we signed a lease with Brown Brothers for about two-thirds of that. We're we are pursuing retention of our existing tenant base throughout the portfolio.

With respect to our continuing diligence, at this point, we've walked 50% of the buildings in the portfolio. We're now in the process of determining which assets we'll need to intensively manage, which would best be sold and which assets could have a higher and better use through repositioning. From an acquisition perspective, we'll continue to evaluate potential opportunities and make highly selective additions to the portfolio, but our main focus will be on the properties we currently own.

As we begin to execute plans to maximize the value of our assets, the focus will primarily be recycling, reinvesting, and creating value though improved leasing. Turning to the future, one of our first of business is to enhance our relationships with the brokerage community. Based on my experience of over 30 plus years in this business, the brokerage community is a valued partner that can draw tenant traffic and leasing to assets.

To that end, Mike and I have made it a priority to get out and meet with all the leading brokerage firms in the area, including Manhattan as it relates to our Jersey City properties. We've started the process of establishing a dialogue and rebuilding the lines of communication. We expect it will help our efforts over the next couple of quarters.

Needless to say the reaction the initial feedback to our meetings have been very well received. It will be a top priority to continue to build on this initial outreach. One of the key learnings we took from this process is that we have a better understanding of what tenants are demanding from us. Through these discussions and our travels, we also learned while we have a number of buildings in great locations, the demand from tenants is not optimal and potentially cannot improve unless we make changes.

The great news is that the locations are in demand and Mike and I are already working on plans to optimize our assets with an eye toward providing tenants with workplaces they will covet. We believe that over time this will contribute to increasing our leasing velocity. We're also in the process of determining the amount of capital necessary to enhance the competitive position of our buildings.

Based on our analysis and initiatives, we feel we can substantially improve space leased over the next 6 to 8 quarters by either selling buildings that are underperforming, selectively adding buildings that have superior occupancy and essentially taking our existing buildings and driving up the occupancy.

Again, to reiterate Mike's initial comments, the opportunity is large, the development execution of our plans is critical, and we're committed to successfully transforming Mack-Cali. It will take some time, but we know we have the right team and the ability to enlight the value of our portfolio. With that, I'm going to turn it over to my partner, Marshall.

Thanks, Mitch. I would like to give a brief overview of Roseland, our multi-family division. As Tony mentioned, we filed a separate supplemental this quarter as a first attempt to properly describe our business. Next quarter the supplemental will include a more complete balance sheet and income statement as we fine tune this process. While some of you may be more familiar than others, Roseland has been owned by Mack-Cali since 2012 and is considered one of the industry-leading multi-family developers, operators and managers in the Northeast region.

We have approximately 6900 units that are wholly owned or owned with institutional joint venture partners. These are comprised with 4700 operating units, a thousand units under lease up and 1200 apartments currently under construction. Further, we have a pipeline of approximately 9,000 apartments of planned development, which includes select re-purposed Mack-Cali office holdings, the first of which is included in our scheduled 2015 starts. We also manage an additional 3600 apartments for third parties, most of which we built over the years and sold but retained property management.

At quarter end our 4700 operating apartments were 97.5% leased. And absorption of 1000 new units being delivered from construction in the second quarter averaged 111 units per month, resulting in quarter end lease percentage of those lease up communities of 62.5%. Our current construction program has 1200 units in production and will begin delivery of new product in the fourth quarter of this year.

From the 9000 apartment land inventory, all of which is owned or controlled, project starts -- projected starts of approximately 1860 units in 2015 and approximately 1700 apartments in 2016. As previously discussed, we're expecting to make Roseland a subsidiary of Mack-Cali and raise capital potentially in that subsidiary as a stand alone entity. We intend to present that plan in September as part of our strategic program for capitalizing our pipeline in 2015 and 2016. We have a strong history of delivering our projects on time and budget and find reception to our product from the marketplace to be superb.

As we move ahead we plan to complete our analysis of operation, identify and begin to implement expense reductions and align our resources and use of capital going forward as quickly as possible. With that brief overview, we would like to turn the call over to questions.

(Operator Instructions)

We'll take your first question from John Guinee with Stifel.

Thank you. I've got about three years' worth of questions here. First, Mitch, last time I was on the call, I asked the following question, which was never answered, and that's: If you run through the significant tenant list, can you walk through how comfortable you are with the buildings and the tenancy on your 2015 to 2017 lease expirations?

John, good to hear from you. I hope you will just give us about a year's worth of questions, though, if that's okay.

2015, we have about 160 -- 650,000 square feet rolling over. We anticipate renewing half. In that 650,000 is one large transaction. I would just say we're feeling very good about that one.

2016, fairly typical year -- it's about 1.8 million square feet. It's mostly smaller leases between 20,000, 45,000 square feet. So far we've only identified 17% of that portfolio that's unlikely to renew.

As you know, 2017 is our big year. Fortunately, most of those tenants, with the exception of one, have lease expirations in the second half of the year. So, while we've had very preliminary conversations, what's come back from every one of them is that it's going to be the latter part of the year or the beginning of 2016 before they're ready to seriously engage. And as I indicated in my call, we got a nice present this week -- we're getting Brown Brothers done over at [Park Harborside].

Okay. Great.

Mike, when we met about five weeks ago, I thought you did a wonderful job articulating the NAV. Let me just refresh what you told me, and then maybe see if you've come off these numbers at all. You basically said you thought your apartment portfolio, Roseland, was about $700 million, all in. You talked about Jersey City and lower Manhattan as $500 a foot times 5 million square feet, or about $2.5 billion. And then on a very broad-brush basis, the other 20 million square feet at about $100 a foot, or $2 billion. How comfortable do you feel about those numbers, and feel free to adjust them.

Thank you, John. Right direction, maybe not the right block or house. So, let's go through each component of the three of them.

So, the business that Marshall runs so ably, we probably think today -- when we look at some of the assets that we're transferring over for repositioning, and some of the value that he's created through the construction and the repurposing of some of our parking lots into buildings, probably net amount of value we see in that may have an 8 in front of it, may even get close to a 9 with the right assumptions. So, it's moved up a little bit. That's some things that we found that we transferred over, and also just the fact that value continues to be created in our Business at a fairly good clip.

When you look at the Harborside and lower Manhattan portfolio, what I mentioned to you in our conversation was there were a couple of elements. We own two development parcels. We own half of the Hyatt, which throws out like $8 million of cash flow -- $7 million to $8 million. Both interesting assets.

We own the bottom part of 125 Broad Street, which is not a strategic asset. It's very valuable; it's 530,000 plus square feet. We have 4.4 million square feet of Jersey City office assets, which runs from Harborside, which is what we call super wide building, and then we have three excellent modern office buildings in that market with a dominant landlord, by far.

When you look at all of those combined, I gave you a range of between $2 billion and $2.5 billion, and said between $400 to $500, if you look at it as a package when you blended everything together, and you have to then obviously back out the Hyatt and the land, which obviously is an increment to that.

What I then said to you was: When you looked at the way the market was valuing us, with the remainder, we own 25 million square feet in the suburbs. We have assets in our portfolio similar to the ones we sold recently, which was the Wyndham headquarter buildings that sell at $400 per square foot, and have a low-6% cap rate. We have other buildings that, obviously vacant, that sell at a much lower number. If you just assumed $100, which we are very, very comfortable at, you wind up with a value of $2.5 billion for the suburbs, $2 billion for Jersey City, and then $800 million net for the multi-family division.

Okay. Fair.

Hey, Tony, can you -- and if you don't feel comfortable with this, that's fine. If you look at your debt detail page, you have a series of footnotes that is about a mile long. Essentially, it appears that a number of assets will, sooner than later, convey back to the lenders, which is effectively an asset sale. If you feel comfortable, can you talk about any of those upcoming conveyances?

Yes, John. There are a couple that we actually did in the quarter, so that they've been given back to the lenders by the end of June. I think there's only one, two, three more -- three loans -- one of which is going to go back here imminently. That's the one for 210 Clay -- as a matter of fact -- I'm sorry -- it actually went back yesterday afternoon. So, that one is back.

We have another -- 5 Becker Farm Road. It's in the process and will go back here shortly.

And then the last one is the four buildings are crossed, and we're having more meaningful discussions with those lenders about -- that lender, I should say -- about those assets. We would like to hold on to those assets if we could, so we're having more meaningful discussions with the lender.

How about the $144 million with Prudential --cross collateralized I think by seven -- (multiple speakers)

That's maturity in the early part of 2017. Those are just seven properties -- $150 million loan principal base amount. We fully expect to repay that loan. It's not a troubled loan at all.

Great. Well, thank you, and good luck.

John, let's hope it's not three years again till we hear from you.

Okay.

Operator, next question, please.

We'll go next to Jamie Feldman with Bank of America Merrill Lynch.

Thank you, good morning. I was hoping you could talk about some of the changes to guidance. I think on the last call, the team talked about same-store NOI down in the back half of the year. Can you just give us some of the updates on the basic assumptions behind how you're thinking about the back half of the year?

The back half of the year is still a work in progress for us, Jamie. Obviously, we raised the range last night to reflect the fact that we outperformed in the second quarter. We're still taking a wait-and-see approach, but we would say -- Mitch and I would both agree that things look better than we thought when we took over the job seven weeks ago.

It's still a little early to tell as to how the third quarter will turn out, but in no way do we think we'll be at the bottom part of the range. We probably think we are toward the mid to the top, and may even exceed the range if we continue to have good results.

Does that answer your question?

So, to be clear, you haven't really changed the assumptions; it's more just the second quarter came in $0.03 ahead, so you bumped up the midpoint $0.03 ahead?

Yes, I think that if you looked at it, we had a very wide range previous management had set, that we would be unlikely to do in the future. We'll actually try to be much tighter, and more precise. And when we looked at the first six months' results, we dropped the bottom, raised it, put it onto the top. What I'm trying to convey is, we believe today that we should have stronger versus weaker future than we previously thought.

Okay. And do you know what leasing spreads were during the quarter?

Just a second.

Jamie, it's Mitch. It was flat on cash, and 4.6% on GAAP.

Positive or negative?

Positive.

Positive, okay. Good.

And then I guess now that you've been there for a while, any thoughts on growing the team or other internal changes we may see?

Well, we would say we've only been here about nine days longer than Moses came down with the tablets. So, I don't know if we've been here that long to answer that question. I think that we're still evaluating both our people and operations, and it will be a while before we even come to that conclusion.

Okay, thank you.

Thank you, Jamie.

We'll go next to Manny Korchman with Citi.

It's Michael Bilerman with Manny.

Mitch DeMarco, if you want to take this one? As you think about other changes potentially that you would want to do at the Board level, is there anything that you guys feel that you need as you think back to the prior management team, there was an executive committee of the Board that went through a strategic planning process last year, and the result was stay the course. So, I guess, how do you feel in terms of being able to execute with the same executive committee and the same Board that's there?

So, we've been asked this question in different formats and different ways, probably -- Mitch and I are looking at each other now across the table -- 60, 70 times. He's actually indicating a little higher actually. Obviously, since we weren't here previously, it's hard for us to answer that.

We think we've come to the conclusion which I think will make this come to an end, as far as the question. We love Bill Mack, both of us. He's a very talented gentleman; he's a truly brilliant individual. It's been criticized that he didn't react quickly enough to what happened at Mack-Cali. We can't really comment on that because we weren't here.

I do know that he had a great sense of loyalty toward our predecessor, which probably influenced his decision making. I don't think he has that loyalty toward us, which means he'll be much quicker to make the decision a second time around.

If I had to summarize for him, and I'm taking the liberty, I would say, other than the love of his family, he loves his reputation second, way before his wealth. And his reputation has been somewhat damaged here because people have viewed this as not being his finest moment. He has no intention of correcting that. I have no intention of making the same mistake going forward.

To answer it, I think the Board is talented. We get along with them great. We had an audit committee meeting yesterday. It's really a place that we think we can enact value, and change things. And we have no hindrance whatsoever in front of us.

Have you balanced the capital plan in terms of the capital needs are there to finish up the development, effectively have the capital to grow the asset base, as well as delever at the same time. How do you balance that with a stock that -- while it's up since you came on, if your math on the asset values are correct, you're looking at a $30 NAV with a $20 stock price. I assume you have no desire to issue the stock anywhere below NAV and destroy value. So, how do you balance those things out over a period of time where you're not going to sell assets immediately as you're still evaluating things?

It's a long question, Michael, but here's what I think we can answer the following parts today, and obviously over the next six, seven weeks until we get to the point where we can release the plan fully, we'll hopefully give you all your answers. We don't think we have a leverage problem today. We realize that we are slightly over leverage.

We think we have an earnings problem. So, we first want to direct earnings. Mitchell isn't focused solely on leasing. He's going to look at how to improve results. The Brown Brothers deal last night was a good win for us, for 100,000 plus square feet in Jersey City. It's a nice thing to happen on a summer day to you.

Secondly, we're going to look at expenses in a somewhat cold, analytical and maybe even ruthless manner on both operating and employee costs. Third, we're going to look at what assets we can sell. We want to lay them out in a somewhat programmatic fashion, and not leave money on the table, right?

We look at recycling capital. We think we have the ability, with our balance sheet today, with our line undrawn, to have enough capability to move forward. And as we said earlier, with Marshall's business, with the enhanced disclosure, our strapping it down as subsidiary, we're allowing ourselves to have other options to raise capital to complete that plan.

It's a little early to tell you what all of the sources and uses are. That's where we'll be spending primarily the month of August trying to formulate.

That's helpful.

As you think about the -- just on the multi-family side and cleaning up a lot of these joint venture and subordinated interests, a lot of those assets are effectively in the core markets that you want to be in along the Gulf Coast and the Jersey waterfront. How do you balance the desire to maintain that ownership position in those markets and the capital that would need to effectuate a buy-in of those interests versus just selling that interest at some profit relative to where you paid?

Michael, it's Marshall Tycher. We're going to have to approach each of these institutional partners with a different story and a different outlook for each asset. Clearly we want to change our subordinated position in these legacy assets, and it's going to be a combination hopefully of buying up into those partnerships where we think it's strategically important, such as the waterfront, and maybe somewhere we actually swap interests and create larger interest in certain assets and exit others. It's a process we're going to spend the month of August, as Mike said, analyzing all the capital requirements and all the assets one at a time, and trying to come up with a formula that gets us more ownership, heads up and legacy assets and, of course, going forward on new assets, as much ownership as we possibly can to increase our NOI.

Great. I really appreciate the color. Thanks, guys.

Thank you, Michael.

We'll go next to John Bejjani with Green Street Advisors.

Good morning, John.

Good morning, guys. Mike, I know you guys still have the broader strategic plan forthcoming, but can you help quantify some of your balance sheet goals as you see them today?

Obviously, the biggest goal in the short term is how to maintain an investment-grade rating. We look at that very hard every day. We also look at the fact that our first responsibility and our chief goal is to close the gap between what we perceive our NAV to be and what our share price is. We'll look to do those steps as best we can, which might indicate that we might go up slightly in leverage.

But we, in no way, manor, shape or form, wanted to limit our options. We're careful to monitor, John, exactly how much cash and capability we have, where our financing sources are. And as Marshall just laid out, we're going to carefully look at creating value for every dollar that we spend.

But in no way do we want to effectively go to a true junk status, but we may slightly go up in leverage depending upon -- to enact a plan. We expect to be selling and recycling capital, possibly, as Marshall said, recycling money in the multi-family business and then looking to invest in our core business. Also balanced by the fact that if the opportunity comes up, and it makes sense to buy back stock, or pay down debt, we'll do whatever it takes to make NAV a reality as opposed to a possibility.

Thanks. That's helpful.

On the operations side, management had previously expected to be around 81.5% leased by mid-year. Instead, you guys are almost 100 basis points ahead of that. It looks like tenant retention has been better than it's been the last couple of years. Can you elaborate a little on what you're seeing as the outperformers, the drivers of your outperformance versus guidance? And on a look forward, do you see low-hanging operational fruit that you can take advantage of, to improve operations going forward?

Let me do the second one first. You know, as we indicated, Mike and I have toured half the portfolio, and what we've seen is questionable decisions about deployment of capital. We have seen not maximization of amenities, and we've also seen not maximization of the use of this Organization. So, as we start to look at it, as we make those changes, in addition to our improved relations with the brokerage community, we're going to see the benefit of that. We're also going to see what we anticipate will be a potential uptick in our pricing.

Let me give you a for-example of something that we haven't really discussed. When we looked at Harborside, we made the decision on the spot that our plan for that was inadequate. We put it on hold. We sent everyone back to the drawing board. They're coming back to us with it shortly.

In the meantime, although we have not finalized the decision, I'll tell you on the phone we're going to take those properties off the market for the next 60 days, because they're being leased based on what was, not on what will be, and we're going to bring it back on the market sometime in September or so with improved pricing.

Okay. Thanks.

I guess one last question: You guys talk about potentially, selectively looking at acquisition opportunities. What would that be? Is this multi-family, is this office, what markets? Anything you can share on that front would be helpful.

It would be unlikely that it would be multi-family, unless we found something that was particularly attractive or some type of deal that was maybe currency based. We think the multi-family -- our platform -- obviously we have a lot on our plate, and a great pipeline, and some great leadership that will take us to the right spot.

For the office side of it, we have to figure out what we want to be when we grow up. We have to think about what the future is. If there were opportunities in certain key markets that we felt were strong enough, and we gave you enhanced disclosure in our supplemental about our markets that shows that not everything is exactly the same, which is a statement that we probably used too much in the past.

There are chances for us to redeploy capital from what we think is an underperforming market to something that we think is more stable or has ability to perform, or an asset that we can add to another part of our portfolio that we can easily manage, we're going to look at those, as well we think we should. Only with the true goal, though -- only with the true goal to enhance NAV, to get our stock price to reflect what we think our net asset value should be.

All right. Great, thanks, guys. Welcome aboard.

Thank you, have a great day. Next call, please.

We'll go to Vincent Chao with Deutsche Bank.

Good morning, everyone. Just want to go back to the near-term performance, which has been a lot stronger than it has been in the past. You talked about the underutilization of amenities, and the underutilization of the people within the Organization, and some capital allocation decisions, all of which should result in better performance going forward, but just in the very near term, seems like those things are longer term in nature. Just curious, if you think about market conditions improving, maybe it is just broker relationship reach-out program or maybe just very, very low bar being set. What do you really attribute the more near-term outperformance to?

Let's talk about the brokerage community, because that's something that we've literally changed overnight. Mike and I both have very strong relations in that community. We come with significant history. So, we didn't have to start over.

In addition, let me give you one anecdote. One of the first things we did was we took a look at our brokerage agreement. We found out that it was not in keeping with practices in the community. We immediately changed it. We made four changes to that agreement.

We were fortunate we were signing a deal the week of those changes. That weekend, an internal memo was circulated by the firm, by the broker who completed the deal, saying -- just want to advise all of my colleagues, Mack-Cali has made these four changes, Mack-Cali is back in business. Now, that supposedly confidential memo was circulated to every other brokerage company in New Jersey, and made its way back to us here. So, that was certainly nice to hear.

Fortunately, also as part of our tours and our time spent in various brokerage offices, as you have read the statistics, there's been a noticeable uptick in velocity across a good part of the marketplaces. You can just sense that enthusiasm when you go in the room. The last quarter is one of the strongest. There's been a downtick in vacancy in northern New Jersey, and the increase in activity that we saw in our portfolio leading us to, as I said, the best quarter we've had in nine years. That's a long time.

You're seeing that across. Now, not everyone, but we're seeing it in a number of ours. And that's short term. That's 2015 activity.

Okay, thanks for that.

Just on the renewal spread, or the total spread, I think I heard plus 0.7%, and I thought I heard flat cash. I don't know what the difference there was, but clearly better than it's been as well. I guess, is that something that you think is sustainable, given some of the improvements that you're seeing in the markets, or was there a couple leases that really skewed that number?

What we're looking at, we made the decision -- again, as Mike and I toured, we felt that, given the state of a number of the assets -- and I'm not going to repeat the Harborside example -- but that we were priced on what was. So, we're in the process of revisiting our mark-to-market information. We know a number of examples. That will be part of what we discuss in mid-September.

Okay. Thank you.

We'll go next to Ross Nussbaum with UBS.

Morning, Ross.

Hey, guys. Good morning. Couple of questions: Can you guys definitively say -- while the CEO search process or the search process for the new management team is under way, was the Company being shopped? Were there offers being evaluated? Or was that not even a process that was going on?

To our knowledge, there was no formal process. That's the best we can comment on that type of information, Ross.

Okay. I guess the second follow-up would be: Based on the numbers you went through earlier in response to John Guinee's question as to where you think the NAV might be, why wouldn't the Board go out and see if anybody out there wants to pay that price at this juncture? Curious what your thoughts are around that.

I think we believe that the process is one where you create the value first, because someone would have severely discounted that number. We've done hopefully a good job in the seven weeks that we've been together of realizing where value could be, setting the path on. And as we said earlier, Ross, we've been told that no option is off the table, to answer your question as firmly as we can.

We believe that we can create that value, and then the shareholders will get the benefit of it. That's the best I can comment on that information today.

Okay. The third question is a little bigger picture. You mentioned -- there's an earnings problem here. You have slightly too much debt. We'll see where the occupancy number is in two years after these big 2017 rolls.

I guess the question is: At the end of the day, while you might be trading at a pretty hefty discount to NAV, it would seem to me that there's still a very realistic scenario out there that the earnings of this Company may not be materially higher a few years from now. I'm curious what you think about whether that's a realistic statement?

We don't think that. If you look back at our balance sheet, Ross, you will find lots -- a tremendous amount -- of assets that produce no cash flow today that have value, whether it's a building that has no occupancy, a building that's basically just covering operating costs, land. Obviously, Marshall's business doesn't produce material cash flow today, but it will in the future. An ability for us to develop some of the parcels in Jersey City over time -- there's a number of ways that we can add significant value.

We do agree, and we've been open about it, that we have an earnings problem today. We have an earnings problem because we have -- operate our buildings probably at a rich number, and have too high of expenses. We have an earnings problem because we probably have the wrong alignment of employees per asset that we manage and lease. There's a number of ways that we can influence earnings.

If we had leased, just for example, to where we think the markets are, where the markets are, just not beat them but equal them, we might have added $25 million to the bottom line, which is $0.25 a share. You do that, plus make some expense reductions, you really don't have much of an earnings problem left. There's a lot of work for us to do, but the days are long in the summer, and we're happy to be here.

Okay. And lastly for me, Mitch, you mentioned the four changes you've made in terms of your relationships with brokers. Can you specifically outline what those were that have been so positively received by the brokerage community?

Actually, what I talked about was four changes to the brokerage agreement, and we had a forbearance clause in there which, particularly as the brokerage industry has moved to the public arena, creates contingencies that prevents them from booking it. We also had payout and coverage issues, all of which we've addressed. In addition, we were paying by paper check, so we've moved into the 2000s on that, and all of which have been appreciated.

But when you talked about more broadly changes to the industry, the biggest thing is our outreach and availability. We return calls immediately. We visit offices. And those things have significantly resonated and -- notwithstanding being competitors -- brokers talk amongst each other and amongst shops, and that message has gotten out quickly.

Appreciate it, thanks, guys.

Thank you, Ross.

Now we'll go next to Gabriel Hilmoe with Evercore ISI.

Thanks, good morning. Mitchell or Mike, can you walk through some of the office repurposing opportunities that are in the portfolio, maybe similar to the old Pearson building, and just how big that opportunity could be?

Refurbishing or repositioning?

Repositioning.

Well, take example the Pearson building, which [upper side of river] -- it was high 400,000s -- 490,000 square feet. The building was built in 1980 initially, had an addition put on when Pearson moved in 20 years ago. That building will be torn down by us. It will be transferred over to Roseland; it'll be on their books. They will take it through the approval process, and turn that likely into maybe just slightly less than 500 units of multi-family sometime in the near future.

The way we look at that though, to get to the fine math is, that's an asset that we think is worth $50 million in its current state and raw land. By the time Marshall takes it through the process, and turns it into a vibrant multi-family community, we'll probably make 2 1/4 times our money or 2 times our money in a four-year span of time. So, we think that asset on a capital redeployment goes from being worth $50 million, to being worth $100 million to $125 million, within a three to four year time frame. (multiple speakers)

I apologize; I wanted to finish. There's a number of instances we've gone through that, and it's pointed out in the supplemental. We've had some obviously brilliant ideas from Marshall and his team about taking excess land on parking lots. So, really just taking things that we have little to no value, and creating multi-family communities in Bala Cynwyd, Short Hills, and the third one -- I'm losing my mind -- Morris Plains, excuse me. And each of those examples, and Roseland is another one, we're able to basically take sites, reposition them, turn them into something.

Each time we do it is an average of between 250 and 500 units. We're adding to the pipeline. So, the last quarter pipeline was 8,000, now it's over just about 9,000 based on our repositioning efforts.

Okay. And I know you're coming out with a broader plan in September. Can you just give broad strokes on what kind of levels of asset sales we should maybe expect to see over the next year, year and a half, given what you've seen so far in the portfolio?

You will see nothing in the third quarter, because obviously we took over just before that, the beginning of the third quarter, on June 3. We've been evaluating, but we would put out a couple hundred million dollars per quarter for the next several quarters going forward as we reposition our capital. We'll give you a better plan for that. We're having brokers now go through the list that Mitch and I have put together for the first cut.

What we do, just so people understand it, every week we spend two days in the field, sometimes more than that, reviewing markets, walking every building, looking at our competitors, coming back and then looking at asset management plans and then making the determination on an initial cut whether we think an asset is something we can actively manage up, we could stabilize or we should actually think about removing from our portfolio. And from that, we formulate a list and then talk to brokers about the process of selling those assets.

Okay, that's helpful. Thank you.

You're welcome.

We'll go next to James Sullivan with the Cowen Group.

Good morning. Two questions for me -- first one for Mike DeMarco. Mike, when you walk through the NAV building blocks, you came up with a number for the Roseland platform. I'm just curious, what kind of math you did on the value creation and the pipeline, which was extensively outlined in the supplement. How did you factor that in to the NAV?

There's a couple ways to look at it. We're not done obviously getting the math, but if you think about it, we invested $135 million in 2012, a little less if you think about some of the earnouts, so that was $1 plus per share.

If you look at URL, what we had invested in that asset, which is obviously, let's say, almost $100 million, plus the remaining value that you could create on the two other towers not yet built, there's another $1 or $2 in value. Then we invested about $260 million, if my mind serves me correct, about acquisitions that we had bought, then you wind up -- we had bought other assets with joint ventures, and then we have the pipeline. If you add it all up, Jim, obviously math can all be plus or minus depending on discount, our pipeline is 9,000 units.

If you think it was worth $10,000 a site, which is incredibly low, right, you wind up with a number. If it's $20,000 or $30,000, more likely $30,000 to $40,000, given the quality of multi-family, which runs, as you know, 15% to 20% of the construction costs. So, at $30,000 to $40,000 per unit, and you have 9,000 units, you have a couple of dollars just in the pipeline. If you add those components up, discount them back, and we come to a range between $8 and $9, which we more than fully outline in our plan coming in September. But I just wanted to give a reference check today.

Okay. Second question, for Marshall, and certainly appreciate the separate supp on the Roseland platform, very helpful. Can you walk us through -- there's two assets where the projected stabilized yield is lower than average, certainly the DC asset on Second Street and then URL I think is a 6.1%. If you can walk us through -- when you project the revenues, are you projecting increases, stable rents? How do you trend the rents in your development for projected yield purposes, number one?

And number two, are those two projects performing up to your expectations at the time you initially decided to go ahead with them? Are they better or worse? How are they doing?

Sure. First of all, in our projections, we do not trend. So, that stabilized yield is based on the rents that we projected going into the project. If market rents grow, those yields will grow.

The two assets you referred to, if you look at their returns in relation to some of the other projects we're developing, those are both urban communities that historically have been built at a little bit of a lower return going in, but have also traded at much lower cap rates going out. The DC asset is performing exactly where it should perform, and new apartment communities inside the District generally are delivered in and around the 6% return -- between 5.75% and 6.1% and 6.2%. That's very typical, similar to Manhattan and other markets that would have very expensive costs going in. The yields are slightly less than some of the suburban communities, or even the semi-urban communities, but the returns on the exit side are always quite higher.

URL similarly was priced -- these are the rents that were projected for URL when the project was just conceived three years ago; those numbers have not been trended or readjusted, and rents in Jersey City have grown dramatically. So, our internal reviews -- and we're not going to publish a projection now, because we don't really want to guess on where we think rent is necessarily going to land a year and a half from now, but our internal projections for those numbers that we have not yet published are significantly better returns than what you see on this sheet. This just represents the yield that was put together as far as rents, well over two years ago.

So, is it fair to say, Marshall, that even though the yields on those two projects that I mentioned are a little lower than average, there's no (technical difficulty) for the development margin since your exit cap rate here, if you will, your stabilized cap rate is you just use an average. No reason to think that the margins on those two projects are any lower than the overall portfolio of development?

That is correct. You're going to see most new production of apartment communities -- yields are as low as 5.75% and up to the mid-6%s. A lot of that depends on where they're located and the type of product that's being built. But similarly the exit cap rates are as low as 4%, and as high as around 5%. Generally, most of our communities without trending rents are developing to 150 to 175 basis points, spread the cost, and that's that 30% to 35% profit over the initial base cost of a project. That's been typical for a lot of years.

Okay. Great disclosure, very good.

(multiple speakers) We'll go next to Jamie Feldman with Bank of America Merrill Lynch.

Thank you. Can you talk a little bit more about operating conditions in the suburban markets? You sound a little bit more positive on operations just on what you've seen since you've joined. What specifically are you seeing in the suburbs?

Jamie, it's Mitch. You know, unfortunately, as a Company, we've been defined by our worst-performing markets. So, as we -- there are a number of markets and property types that are actually performing quite well. So, within our portfolio, we have 4.5 million square feet of office flex space divided between New Jersey and Westchester County in New York. The occupancy there is at 92%.

We have a number of markets that we're very upbeat about. Monmouth County, Princeton, Metro Park where we're currently located, and of course, the Jersey waterfront.

If you look at the marketplaces that are somewhat transit-based, they're performing at almost 600 basis points better than non-transit-based markets. So, this is not to suggest that we have markets that aren't problematic, but I think Mike and I were guilty of what everyone else was. When we walked in the door, we similarly defined the Company. So, what we have found is a number of positive -- truly positive examples on an absolute basis, and others where we have the opportunity to improve.

The last thing I just want to tell you, as we've looked at this, and this relates to organizational performance, and sometimes it's hard to line all this stuff up. If you say we're in roughly 27 submarkets in New Jersey alone, the bad news is that we're underperforming in 44% of them. The good news is that we're underperforming in 44% of them, because there's opportunity for significant improvement.

Okay. Thank you for the color.

Thank you, Jamie.

Thanks.

And we'll go next to Scott Frost with Bank of America Merrill Lynch.

Good morning, Scott.

Hi. How are you? I wanted to talk -- you touched on investment-grade ratings. One of your goals is to maintain IG. I wanted to ask how your conversations have gone with NRSROs in light of results? How would you characterize those talks?

We reached out to each one of them the first week we got here. We've had several meetings. They've given us the drill about -- we'll monitor your results. We appreciate your openness, your disclosure.

We've told them what our plans are. A number of them will affect hopefully short-term earnings -- results will be better. We acknowledge the fact that we carry a little bit too much leverage today, and we will work on a plan to hopefully reduce that over time. Whether our time frame fits their time frame is yet to be determined, but every conversation we've had today has been supportive and productive.

Okay. Thank you for the color.

Have a great morning.

And with no further questions in the queue, I would like to turn the conference back for any additional or closing remarks.

We want to thank everyone for coming this morning. We had a little larger audience than normal. We appreciate the support.

We look forward to speaking with each of you in the near future. And as always, if you have any questions, feel free to contact us. Thank you so much.

Again, that does conclude today's presentation. We thank you for your participation.