Veris Residential Inc (VRE) 2015 Q3 法說會逐字稿

Good day, everyone and welcome to the Mack-Cali Realty Corporation Third Quarter 2015 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Michael J. DeMarco, President and Chief Operating Officer. Please go ahead, sir.

Good morning everyone and thank you for joining the Mack-Cali 2015 third quarter earnings call. It's a beautiful day today in Edison, sun is out and shining. This is Mike DeMarco, I am 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 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 assurances that the anticipated results will be achieved. We refer you to our press release, annual and quarterly reports filed with the SEC for risk factors that could impact the Company.

We had an excellent quarter and we've a good initial progress on our announced transformation. However as we've stated in the past it's a long journey to able to produce consistent exceptional results for our shareholder. We look forward today to an open dialogue about our results and our plans going forward. As everyone know, we filed an expanded disclosure about our operations in two supplemental; one for Mack-Cali and one for Roseland, our partner subsidiary. And as we said from the point of our arrival at Mack-Cali, we strive to provide the best disclosure for operation, strategy and results.

Today we're going to break the call into the following sections. Tony will recap our operating results for this quarter and provide guidance for the remainder of 2015 and 2016 full year. Mitch will then discuss our office leasing results and our views of the market. And then Marshall will provide an overview of our multifamily operations and a plan to raise equity at the soon to be formed, Roseland Residential Trust. I will then provide an overview of our capital market's activities and plans before we take your questions.

I'd now like to turn the call over to Tony, who will go over the quarter results. Tony?

Thanks Mike. We reported our third quarter results last evening. We also included our detailed supplemental packages for Mack-Cali and our Roseland subsidiary, both of which we will continue to enhance over time. With respect to earnings, FFO for the quarter was $51.5 million or $0.51 per share, as composed of $48 million or $0.48 per share for the quarter ended September 30, 2014. For the nine months ended September 30 2015, FFO equaled $141.1 million or $1.41 per share, as compared to a $128.5 million or $1.29 per share for the same period last year. For the current quarter compared to last year, the increase in FFO per share resulted primarily from $0.03 of equity and earnings from refinancing proceeds received from a joint venture, increased net real estate tax appeal proceeds of $0.02, partially offset by $0.02 of additional general and administrative expense due to separation costs in the quarter. This results in core FFO per diluted share for the fourth quarter of $0.48.

We reported a net loss for the quarter of $126.9 million or $1.42 per share, as compared to net income of $2 million or $0.02 per share for the quarter ended September 30, 2014. For the nine months ended September 30, 2015 net loss equaled $94 million or $1.05 per share, as compared to net income of $37.8 million or $0.43 per share for the same period last year. The net loss in the quarter and year-to-date periods was solely due to $164.2 million of impairment charges on properties currently being considered for sale, which is part of our recently announced strategic initiative.

Same-store NOI was up 6.5% on both the GAAP and cash basis for the quarter, ahead of our expectations and due to better leasing results and expense savings. I want to discuss our G&A in the following manner; Mack-Cali, a steady state business and for our Roseland subsidiary a high growth business with $2.3 million of G&A in the quarter. G&A for the quarter was $13.7 million in the aggregate for both; $11.4 million for the office public company and $2.3 million for our multifamily subsidiary. G&A for the office public company therefore was 1.1% of total assets, 7.8% of total revenues and 14.2% of NOI.

Excluding this quarter one-time charge of $2 million of severance costs, G&A for the office public company was 0.9% of total assets, 6.5% percent of total revenues and 11.7% of NOI. Second quarter G&A for the office public company was 0.9% of total assets, 6.5% of total revenues and 12.2% of NOI.

Turning to our balance sheet, our total indebtedness at quarter end was $2 billion. Net debt-to-EBITDA for the quarter was 7.2 times. We have a fixed charge coverage ratio of 2.6 times for the quarter and interest coverage ratio of 3.1 times. A $600 million credit facility has $35 million drawn at quarter end and we'll draw on the line to fund some of the opportunities that Mike will cover in his capital markets overview.

Moving on to guidance, we are updating 2015 guidance and introducing guidance for the full year 2016. We expect fourth quarter FFO to be approximately $0.42 to $0.46 per share, for a full year 2015 FFO of $1.83 to $1.87 per share. This incorporates the impact of our plans on demolition of various vacant tenant spaces and the acquisitions and dispositions we will discuss. For 2016, we are providing initial FFO per share guidance in the range of $2 to $2.10 based on the following assumptions. Percentage leased increasing from 85.8% at September 30, 2015 to 87% at year end 2016. Same-store NOI increasing 1% to 2% on a cash basis and 2.5% to 3.5% on a GAAP basis. Non-core asset sales are between $400 million and $500 million in the first half of the year at estimated cap rates of between 5% and 5.5%. In addition, we have about $300 million of sales in the pipeline for late 2016 and early 2017 at estimated cap rates of between 8.5% and 9%.

Acquisitions in core New Jersey markets including Jersey City Waterfront, MetroPark in Edison, properties in our existing Business Campus in Parsippany and a multi-family acquisition in the Boston suburbs.

Development expenses are assumed to start -- we assume that we're going to start 10 multi-family projects between now and the end of 2016. Project cost for these starts estimated to be approximately $800 million. In addition, there are three construction projects, started in third quarter 2015 with a total estimated project cost of $260 million. On average, all these projects are financed with 65% secured debt and some with JV partner equity.

We assume we raised approximately $300 million of JV or entity-level equity by the end of the year. And additional financing activity, we've begun the process of obtaining a $300 million, five-year unsecured term loan, with all-in interest rates in the 3% range, floating swap to fixed. Proceeds from the loan are to be used to repay our January 2016, $200 million, 5.8% bonds. Balance of the term loan proceeds will be used to repay any outstanding borrowings on our $600 million credit facility and to handle additional debt maturities as they occur in 2016.

Multi-family development deliveries in 2016 will be comprised of the first phase of Harborside URL, although initially a slight drag on earnings during lease up late into 2016 and into 2017. Our 85% share of URLs FFO will contribute up to $0.10 or more per share in earnings, when stabilized in 2018. Marbella II in Jersey City, New Jersey and our Tuckahoe project in Westchester, New York will both begin contributing to earnings in 2016.

I will now turn the call over to Mike -- excuse me to Mitch.

Yes, it's Mitch. Thanks, Tony. First, let's turn to leasing results for the quarter. We singed 94 deals totaling 956,000 square feet; 361,000 square feet of that came from new leases and 595,000 square feet from renewals. Year-to-date, we've completed 355 leases, totaling 3.1 million square feet of which 852,000 square feet were new leases and 2.2 million square feet were renewals. This represents the highest year-to-date leasing activity since 2005. Significant transactions in this quarter include new leases with Brown Brothers Harriman and Co. for almost 115,000 square feet, and SunGard Financial for 41,000 square feet both in Jersey City, a 54,000 square feet lease with KPMG in Short Hills, New Jersey and the renewal of 141,000 square feet with the GSA in Washington. Our leased space increased to 85.8% up from 82.3% and it is our intention over the coming quarters to drive that number higher as we pursue the initiatives that we will be discussing shortly. In addition we'll continue to strengthen our relationships with the brokerage communities in both New York and New Jersey, which have been underway since we started. Lease rate rollup for all transactions, was a positive 2.8% on a cash basis and 6.6% on a GAAP basis. Lease spreads for renewals were up 3.7% on a cash basis and 7.7% on a GAAP basis.

Based on our analysis and initiatives, we believe strongly that we can continue to improve our occupancy over the next five quarters to six quarters by selling buildings that are underperforming, driving up the occupancy in our existing buildings and selectively adding buildings that have superior occupancy. We have just 273,000 square feet expiring in the fourth quarter and as of today, we know of only 86,000 square feet that is vacating. We are already working on a number of new leases that total more than 85,000 square feet and expect to wind up with flat to higher occupancy by year-end 2015.

Looking forward, if we sell the bottom of our portfolio over the next five to six quarters and our occupancy stayed at today's level, when we complete our sales by late 2016, we will have a portfolio that has been trimmed, upgraded and possibly approaching 90% occupancy. As we look to 2016, our expirations are very manageable, 1.7 million square feet and spread evenly across all four quarters. Our view today is that we are likely to retain 70% of more leaving us with 514,000 square feet to backfill.

In 2017, we expect that rollover significantly in Jersey City, will allow us to increase rents in some of our best buildings. To date, we have proactively transacted on approximately 450,000 square feet of the 2017 roll early at a net rollup of rents, which will be announced next quarter. These efforts bring our total exposure to 3.4 million square feet for 2017. We are highly likely to exceed 3.0 million square feet of leasing this year. Therefore 2017 is not a daunting number for us.

One initiative that we are pursuing now, is the demolition of vacant tenant space totaling 600,000 square feet in the fourth quarter to better position in market our existing inventory. This is not something that we have done previously, but the demo will allow us to properly show the space and its various size configurations prior to leasing. Since we don't have tenants in place here, we will be taking a charge of $3 million, the majority of it in the fourth quarter with some carryover into the first quarter. With that said, the space will be more marketable and the cost of the demolition can be recouped more quickly.

We're also launching a prebuilt office program that will accelerate our leasing velocity. We'll initially construct 75,000 square feet of prebuilt office space that will allow us to rent and offer tenants a quick turnaround to occupancy. This program will be continued as the initial build outs are absorbed. Our efforts to make strategic capital expenditures like these and other improvements we've announced will bear fruit as prospective tenants realize that we are open for business.

Looking at the markets, the activity in both the Waterfront and Parsippany has been and continues to appear very strong. We will likely get close to 90% for the Waterfront and possibly mid-80s for Parsippany by year-end 2016. Our other markets continue to be strong, Short Hills, Metro Park, Princeton and Monmouth all with occupancy at approximately 90% or higher. Our exposure to [premise] North Bergen, our weakest market is looking manageable for 2016.

Lastly our Flex business, a strong and steady performer that is consistently trended rents and increasing 4% per annum and it has been approximately 90% occupied for the last five years.

To reiterate Mike's initial comments, the journey to our successes is long, the development and execution of our plans are critical to that journey and we are committed to successfully transforming Mack-Cali. It will take some time, but we are confident that we have the right team and the ability to unlock the value of our portfolio.

I'll now turn this call over to my partner, Marshall.

Thanks, Mitch. I'd like to give a brief overview of Roseland, our multi-family division. As Tony mentioned we filed an expanded separate supplemental this quarter, which continues to provide a better understanding and disclosure of our business. The platform's wholly owned joint venture portfolio, is comprised of 2,240 operating apartments, 378 units under lease up and 2,075 units currently under construction. In addition, we have 3,026 operating apartments in subordinated joint ventures. Further, we have a pipeline of approximately 10,900 apartments, a planned development which includes select repurpose Mack-Cali office buildings. The first of which is projected to star in the fourth quarter of this year. We also manage an additional 3,800 apartments with third-parties, most of which we built over the years and sold but retained management.

At quarter's end, our 2,240 stabilized operating apartments were 95.5% leased and lease up absorption at Station House on Second and Eighth Street in Washington DC exceeded 20 units per month, resulting in a quarter end lease percentage of this community of 56.9%. Our current construction program has 2,075 units in production, including three projects, (inaudible) units and hotel keys that commenced construction in the third quarter. We'll begin deliveries from our construction portfolio in the first quarter of next year, with opening of Marbella II in Jersey City. From our 10,900 unit apartment land inventory, all of which is owned and controlled, we envision starts of 484 units in the fourth quarter and approximately 2,100 apartments in 2016.

I'd like to share some additional activities we undertook during and after quarter's end. We reached an agreement with our partner UBS to purchase their senior 50% interest in Chase I, a 371-unit and recently stabilized apartment community at Overlook Ridge, a Roseland master-plan community, five miles north of Boston. Our subordinated interest that we carried on our books were $2.3 million was valued by UBS at $11.6 million. Therefore, when applying our subordinated interest our purchase of this Class A asset represents a 5.7 cap rate, and our leverage yield will exceed 14% on $20 million of net capital invested. With the acquisition of Chase I and the third quarter construction start of adjacent Chase II, coupled with Roseland's ownership at Altera, the Company will own a 100% of the 1,385 apartments at Overlook Ridge with future adjacent development rights.

We continue to make progress on our Short Hills' repurposing project, including a projected residential start in 2016, coupled with the sale of the adjacent hotel site. Additionally, as part of the project we will be remodeling our Short Hills' office building by expanding its cafe and creating a fitness facility and conference center. When we've completed a combination of apartments, hotel and offices, it'll be a one of the premier in mixed use developments in Northern New Jersey with a value in excess of $300 million.

In the quarter, we also topped off URL at Harborside in Jersey City. At 69 stories it is truly a spectacular project. We expect that we'll commence renting in October 2016. The project is ahead of schedule and on budget. We expect based on today's rents, the URL will be delivered at a 7.25 stabilized yield or better. We have a strong history delivering our projects on time and budget and find reception to our product in the marketplace to continue to be superb.

As previously discussed, we will make Roseland a private RIET held by Mack-Cali on November 15, 2015 which will enable us to raise capital in that REIT as a standalone entity. We have engaged Eastdil Secured, Wells Fargo to handle that assignment. Mike will discuss that in more detail in a few moments.

I'll turn the call back over to Mike for closing remarks.

Thank you, Marshall. I want to outline all our capital markets and capital investment plan before we open the call for questions. We obviously have a number of activities that we've mentioned in this call so far. We've made significant progress in the last several weeks since our Investor Day. On the financing side as Tony mentioned, we are working with Bank of America, Wells Fargo and J.P. Morgan to raise the $300 million five-year term loan that will be initially floating, that we will swap to a fixed rate loan. This will take out a $200 million unsecured bond offering maturing in January and also provide funds for mortgages maturing in 2016. It's also important to note, this will allow us to keep our line of $600 million essentially undrawn and reserve for activities that we intend to happen during the course of the year. We will finance the Chase I acquisition, with a seven-year loan for $72 million at a rate of 3.625%. We expect to have that acquisition and loan closed in the first quarter of 2016.

As Marshall mentioned, we engaged Eastdil Secured, Wells Fargo to raise $300 million or more from the direct investment in Roseland Residential Trust. Mack-Cali would likely contribute $200 million from our sales program and the new investor would likely to contribute $300 million. Based on that math, the form of the investment would be common equity with no promoter subordination of Mack-Cali's equity. The new investor would own units or shares approximately 20% of the Roseland platform. The marketing for this opportunity will commence in the fourth quarter. This is only one of our options I like to stress to finance our Roseland platform. We still have the options of joint venture equity, we've options of selling feature assets of Mack-Cali, and obviously we have the options of doing additional debt. We like to keep all options open and execute at the highest level.

In addition to the Chase I acquisition, we announced that we are in discussions to purchase two office buildings. You may ask why we're purchasing office buildings and we have good reasons for that. Both in our opinion should enhance our NAV over time. First on to the contract, we purchased a building adjacent to the building that we occupy at 333 Corner. It's directly upon our headquarters 195,000 square feet, it's 92% occupied with an excellent [amount] of tenants. The prior owner had done significant capital improvements and it's truly a first-class asset. That building combined with our building will give us 400,000 square feet and it will be considered a transit oriented market and little bit of a campus.

We intend to exit this building from our occupancy and reposition ourselves some place in our portfolio, likely Parsippany. With that as the case, allows us to re-merchandise these two assets, combine them, basically improve them and achieve the highest rents in the marketplace. The cap rate of the building that we bought was about 6.5% on the income in place, it was $53.1 million.

The second building is more unique in what we're trying to do. It's in Parsippany, it's a 147,000 square feet, we're purchasing it for $10.3 million or $70 per square foot. It sits directly in middle of two other buildings that we own in Parsippany. It is also a Class A building, it is owned by an institution that is selling it vacant to us. We assume we can lease it up very quickly. We are in current conversations for a tenant for half the building and we may occupy the remaining square footage or we have other tenants that has best interest. The conversion of this asset from vacant to value-enhancing should be relatively quick with a reasonably a high payout. The economics of deals are very easy to understand, base price is $70, assuming $60 per square foot with tenant improvements, which is a lot of money for us to spend to secure a top tenant.

Commissions are $15, $5 for amenities in the entire complex, which is 450,000 square between the three buildings we own as a grouping, that's a $2.25 million. We're in for that one building for $150 per square foot. It rents at $29, which we know based on the other two buildings that we own and expenses are also $9, which we know for the two buildings that are adjacent, and the net is $20 on a $150. What we're attempting to do here is not to have, what we've done to us in the past, which our competitors would buy a building in our market, we would pass the [reset] by, they would enjoy this opportunity on a roll basis and we rent it at the levels that we couldn't match. That activity is not going to happen in the future for this management team.

We will likely combine our Mack-Cali and Roseland operations into one location in the future. We haven't figured out that plan, will publicly announce in the fourth quarter, thereby lowering our cost and releasing valuable space in our two best markets, which is Short Hills and Metro Park.

Regarding our sales activities, we've hired six brokerage firms to execute on these properties. We basically hired the entire industry. We expect to achieve a cap rate of 5 to 5.5 on our more valuable assets, which are the first things to go, which results are more interest rate sensitive, with roughly half of the total planned dispositions, of about $800 million, so it's $400 million. The back half is done in the latter part of the year. It gives us a chance to asset -- manage those assets. We expect that the range will be 8.5 to 9, and we've had excellent initial interest from assets that we have expressed interest in selling. We tend to execute these sales over the next five to six quarters, get it done quickly and have the entire process completed by the first quarter of 2017. Obviously, we'll inform you at each opportunity of our progress.

Regarding our guidance, I'd like stress a few points. One was our strategy. This is balance sheet neutral. People think we're actually adding debt or going up in assets, it's not our intention. We will be fixing all of our new debt obligations, for the fourth quarter guidance, you'll be wondering why the core is less than the interest that we expressed. As Mitch said, we're taking a charge, which should have been done in previous periods. Our prior management didn't do that. It's a little bit of an accounting game that we will not be playing in the future.

And one other thing we're thinking of doing, which we have not got approval yet, is adding a 401-K program for our employees, who are obviously working very hard to achieve our results. That could be a $0.01 charge. So the $0.03, $0.01, take off the $0.48, gets you to $0.44. In fact we intend to make the same amount of money in the fourth quarter as we did this past quarter on a core basis.

Look at full year guidance as Tony expressed, we gave you assumptions that we think we can be and exceed. There are actually reasonable assumptions. Regarding 2017, we expect to be in a much better position than we're in 2016 for a number of reasons we outlined. Therefore, we've realized that we have exiting from our NAV story and hopefully entering toward the growth phase of our earnings story.

With that I'd like to turnover it over -- one other question. We've made steady progress in all our repositioning activities. We are finalizing plans, we'll give you more disclosure in the fourth quarter.

Operator, we're ready for questions.

(Operator Instructions) Emmanuel Korchman, Citi.

Good morning, guys. Mike and Mitch maybe -- as you think about acquisitions in your criteria for acquisition, how you're weighing those, maybe specifically in Jersey City how you're thinking about the Hudson Street assets that have come on the market?

We've mentioned this before, those are assets that would fit into our portfolio that would be -- obviously pursue the top 5 buildings if we were able to acquire them. We are carefully looking at all our choices. (Inaudible) acquisitions to expand upon my comments, we're balanced, right we have a capital need for Roseland which we think we solved or we have a strategy for solving, which is to raise equity at that level or do joint ventures at that level. And we have a sales activity will give us the balance of those proceeds. Putting Roseland aside, which is been a big overhang about our capital. Then it's a question of rebalancing and returning the portfolio.

We like certain markets, so Parsippany is a market we like at the right price, the price that we purchased at obviously makes sense for us. The same with Metro Park, which is the market we've expressed interest in even in our Investor Day. Jersey City is the market of choice for us for future investments, as we've mentioned throughout. We have obviously some plan that we could develop on and obviously we're committing a significant amount of resources and repositioning. But to answer your question, for the right price, on the right circumstances, we would like to purchase those assets. If it's wrong for us, we won't do it.

And how do you think about the vacancy in those assets, especially given your rental incentive?

Actually the one building is fully leased for long-term, so we take it off the table, actually on GAAP basis it's relatively accretive for that reason. The other building based on what we know, we have the best book of knowledge in the business that could be leased up at relatively attractive rates over a reasonable period of time.

Great and a last one from me. Just when we take all this external growth activity into account, how do you think about growth for 2017?

I am sorry Emmanuel, you cut off the last statement.

How do you think about your portfolio or your earnings growth going into 2017?

We think it's good, we gave a muted numbers. We chose -- obviously we chose to do 1% to 2% for cash and a little more for GAAP. We did that as a means of tempering our expectations, because we're going up so much from what the street had an estimate on. But our experience has been that, we're able to and we believe we will be able to achieve high rents, especially since we are improving the buildings. So we gave expectations, as I said in my last comments, that we intend to exceed.

Jamie Feldman, Bank of America.

Can you talk about the occupancy outlined to get to your year-end 2015 guidance? And you had the nice pop in the third quarter, but how should we think about how it trends between now and then?

I'll turn it back and forth between Mitch and myself, but the one benefit you should realize is just to be full disclosure, when we rebalance we were able to get -- achieve some occupancy by moving assets from that were vacant into [Marshall's] platform for repositioning, we pick up some gain. We had a net gain of about 100 basis points in occupancy quarter-over-quarter. We look going forward, the biggest drivers for us kind of limit is the Waterfront and our activity there and then Parsippany. Mitch?

Yes, Jamie. We could be fully leased at our 101 Hudson by the end of the year. We've also -- we've been, I was conservative in my remarks about, what we expect for full leasing for the year, but we're well over 3 million square feet already. We have significant velocity and anticipate that we'll continue at a similar pace as we finish up November and December. And those are -- mostly those are deals 40,000 feet, 30,000 feet and smaller.

Okay. I guess what I'm getting at is, well I guess Mike back to your comment. So how much of the third quarter occupancy growth was form portfolio repositioning versus true core growth -- core occupancy growth?

250 basis points was repositioning, 100 basis points was net leasing.

Okay. And then you guys are calling for a 120 basis point additional by year end 2015. Are there any dips in that or it's kind of consistent growth and then it sounds like you can beat it?

Our fourth quarter is relatively light as Mitch outlined, so that gives you the best indication of what we can do. So we have some deals working and the activity in Jersey City as Mitch said is relatively good. So if you look at what we need to do for one point of occupancy, it's not that many -- at the level we're occupied now, it's doable. So we can move up a 100 basis points, if we have a good quarter.

Yes. Jamie, as I indicated, we're only dealing with 1.7 million square feet and only 500 that we know is leaving. So that would be -- that amount is less than half of what will be anticipated to lease this year. And by every -- by all counts, next year we'll continue at similar pace to this year.

Jamie let me clear, we think we've a path to get to 90%, right. How we get there, when we get there, but we intend to get there.

Okay. And then thinking about demand , you had mentioned Parsippany and the Waterfront and even (technical difficulty) in some of the pockets where you're seeing a pick up. How much of that pick up is just you operating the portfolio better versus maybe talk about the nature of demand and job growth in those sub markets?

It's a combination. I mean, we did get at pick up and we have a significant number of anecdotes that we could go through to talk about the changes that we've made and we've discussed significantly, the improvements we've made in the brokerage community. And I give you two recent examples; we're going to be given the opportunity before two significant tenants go to market. We have an off-market discussion with not only the brokers but the heads of real estate to see if we could craft solutions. Now that won't guarantee that you'll get there, but those opportunities never would have existed before. In addition, we're seeing a pick-up generally, not only in the sub-urban markets and Jersey City as well.

Okay. And -- your transactions are in Jersey City or they are further out?

Both.

Ross Nussbaum, UBS.

Hey, good morning guys. Let me first follow-up on the question that Jamie just asked or may be just a suggestion, could you create a same portfolio full in the supplemental, so that we can actually see, what's happening to occupancy, isolated from all of the acquisitions and dispositions that are going, because I think in the third quarter, it was very difficult to see, what truly happened to occupancy outside of those dispositions?

Right, we'll be happy to do that. As a matter of fact, this is a general comment, anyone or if there is any suggestion on anything that we can do to improve disclosure, please send it to Deidre Crockett our Head of Investor Relations and we'll put into the next set of supplementals.

I appreciate that. And then, so to that point the 87% projection for the end of 2016, I just want to be clear, is that apples-to-apples with the 85.8% number you had in Q3, so it's 120 bps this year leasing improvements, there is no disposition activity impacting that number?

Yes. Nothing will be sold (inaudible). And we might have a small transfer over to Roseland, but other than that it will be just net pickup of [absorption].

The other question I had is around, the acquisitions that you assumed over the next year, year and a half. Why not, simply sell the assets you want to sell and distribute the proceeds as a special dividend to shareholders, rather than doing an [1031]. Because I look at it, and I say to myself, you're doing equity into Roseland, so it looks like you're funding Roseland with external capital. Why the pressing need to say I want to do 1031 versus just liquidate and distribute the proceeds on the office side?

We have two things. It leads into a bigger question which I think you've asked before in other calls, which is why not just buyback your stock, how do you distribute cash, so and so forth, and we investigate this consistently. The problem we have which won't change until we get a higher stock price and better capital market support is when you're at basically 50-50 leverage, which we were at for most of our tenure now and just recently passed that number just last month or so, you have limited options.

We have a rating, we have to preserve that rating or at least look at the impact of not having a rating. So by distributing cash I would be outlying money, I would get a downgrade and we would have therefore a problem. Well, I could pay back debt in an equal portion, then I'm really just buying back equity and just keeping my leverage the same as we move down into small and small base. What we intend to do and I think it's the right course and we've run all the math on this is to basically keep our options open.

Obviously, Roseland is being set up, we've outlined our Flex business, we've described core, non-core and our transit-based to city locations, which allows us if we move up in stock price, which we think we should give based on our earnings growth, to then make that move that will allow you to capture the difference between that price and what your true NAV is, which is really the question, right. Once you're at 25, how to get to 30. When you're at 20, you really can't get to 30 by doing some recap, because it's not available to you, because you have leverage and other balance sheet concerns. At least that's what the consumption [which came to] us. But we look at maximizing NAV for our shareholders every single day we get to work and probably on weekends too, but this is the path that we've laid out, that's most prudent and allows us to get there.

Vincent Chao, Deutsche Bank.

Just wanted to the follow-up on the occupancy question. The 100 basis points of net sort of leasing, I'm trying to get in the quarter plus additional by the year end 2016. Just curious how much of that would be [surplus] rent paying by the end of 2016, post premium periods and all that?

Actually it's tough because the deals you, it's -- there's the new deals. There's always in this kind of condition, there's always free rent. But what's most important is what it does for 2016 numbers, because it wears off, obviously in 2016 and that allows us to have exceed our need our guidance that we gave for 2016. And the fourth quarter gives us a window as Mitch outlined, vacancies or terminations are very light 86,000 square feet; next quarter's very even. This is a good path for us for the next 15 months. I'll turn over to Mitch to embellish, to allow us to execute on plan.

Vincent also as we're moving into larger transactions, all those are typically spaces that are built out by the tenants, so there is always in addition to market driven free rent period, there's a construction period built into that and those are always at several months as well.

So I guess what would you say is sort of the typical lag between signing and commencement of cash rent?

It could be five to six months, if you're doing a larger deal it could be nine months or 10 months.

So on a 10 year deal we might give six months of free rent.

Six months free for 10 months. Okay. And then just a question on the same-store for the quarter, is attributed mostly to operating performance I think, just curious what's the real estate (inaudible) field impact was?

Yes, it was about $0.02, about $2 million in the quarter.

I mean on the same-store?

It's essentially same-store, I mean most of the portfolio were same-store, it's vast majority.

Right. So the 6.5% would go to, so I think we did lose some of that disclosure?

I am sorry. Are you asking, what it would be without?

Correct.

Okay. I'm sorry. Yes, for the quarter, instead of 6.5% will down about 3.9%.

John Guinee, Stifel.

John Guinee here. Okay. Mike, I speak slowly, will you answer slowly?

Not a chance John.

Okay. Walk me through, you've got $400 million of assets at a 5 to 5.5 cap, is there anything else besides the Washington CBD and 125 Broad Street?

No that's basically the two district buildings and 125 Broad equal about $400 million give or take. (multiple speakers) And just to be fully informed, we expect to 125 Broad will be a sub for cap and other ones are around a five, so we gave a range that actually was -- actually conservative on that number.

Okay got you. And then the $400 million, 8.5 to 9.5 cap, what would I -- well I am thinking about price per [pound], what would I think about? And then how of that will be transferred into Roseland or is that a separate bucket?

Different bucket, so nothing will transfer into Roseland. And the way you should look at, is we went through -- we trimmed out a number of small buildings and there is some decent sized buildings that were isolated and we allowed ourselves to know, that when we were done, we wouldn't see these buildings back again, right. That we once sell them to a competitor and then they would re-lease to us, which has happened in the past for reasons we don't know.

So we have buildings that are 67,000 square feet, buildings that are 225,000 square feet and accommodation in between and the range of value runs anywhere from $75 to $225 on a per square foot basis, John. And it's a range depending on what we see. Some of it is going to be sold to end users, people who really want to occupy space, that own space, some will be sold to investors, some will be sold to some of our competitors, but not people that we'll deal with in the future because we'll be exiting those markets.

And how many square feet is that total?

Four and change.

Four and change, so on average these will sell for a shade under $100 a foot?

No, that was four and change for the whole $800 million, John. I have to get back to you what that number is. The price per square foot is probably above $100 and below $150 if I had to make a guess today. But, I will give you a call back and give you a more precise number.

Okay. And then how many assets, my sense is that the Upper Saddle River asset on Lake Avenue, I think it is, that's going to Roseland, but correct me if I'm wrong. How many buildings, square foot, acres in total are essentially being bulldozed and repurposed as something else?

It's actually 10 to 12 sites. But it's a combination of things that are very nuance and subtle, so some of them are actual buildings. So it's Lake Street, we have a building in [Marsh, Plaint] is also going over. We have a few others that are in that bucket. And we have excess parking rates, where we have parking fields that Marshall was able to go to the town, it's just a short hill, where we built a deck for the price of the development land which is relatively modest price to pay, within the asset that we own gets a -- and closed parking which is obviously a big attribute for the suburbs. And then we have ones that are -- deals where we had excess land in total. This 12 sites, it's about 2,500 units because it's about 250 units per, Lake Street is a little bit more than, some are little less, some are 190 to 200. But it does about 250 per. But the square footage and the buildings I have to get you that number John. But let's assume that, I would assume that building is like 200,000 or 250,000 that we transfer over, that's what we generally own, some 150,000. Lake Street was bigger at 500. So the range is probably 250 which gets you 400 apartments, the way I always looked at it.

Okay. And then last question, the impaired assets, is that all generic eventually held for sale or up for sale office or is there something else JVs, land et cetera in that bucket?

No. We try to basically be clean about this. So we took the impairment charge. And we have gains one of the things that's not disclosed. We have gains on assets that would actually mute out most of the impairment. Maybe we'll have a slight impairment charge of $30 million to $50 million as an estimate, right, net-net, right, so we have gains on other stuff. You can't take gains for accounting as you know John until you realize that transaction, but you can estimate impairments once you put an asset up for the sale. So we took a full disclosure, take the charge now, cleans up our balance sheet. We think we've marked everything we went through, as we did with the audit committee about impairments. So this is the list that we know of as today.

Scott Frost, Bank of America.

Thanks for taking my question. Hi, good morning. You had said earlier that you would -- you're going to avoid a special dividend or buybacks because you wanted to avoid a downgrade. Normally, I'd say that's understandable because it would result in higher funding costs in public markets but it looks like you've moved away from that again with the term loan which was announced at your investor day, and which you have elaborated on here. What would the effect of a downgrade, what would the negative consequences of a downgrade actually be on your operations?

Not much. Our term loan is going to be both LTV and rating base, so we would be the same. Our line of credit has a certain grid pattern, but we haven't really borrowed of it. It's somewhat muted. But more important Scott, you make a covenant when you do business with people and operate in a certain way. We made those covenants when we attained that rating. We like to basically try to meet that as much as possible, while still meeting the covenant we have with our shareholders to get the highest returns. So we will get the rating as one of the valuable tools in our boxes indicative of how we run our business and we intend to run that going forward. This is why I said earlier, we have to operate as a -- essentially a leverage neutral case. And then hopefully over the time as we have done we have improved earnings, we cut expenses, our stock price is up and then we've shown reasonably disciplined capital allocation.

Are there any ratings based covenants in the term loan or your revolver or anything like that?

They all have a grid pattern that basically move up, and I think we disclosed that, but it's nothing that would drive us nuts as far as expenses.

Emmanuel Korchman, Citi.

Hey, it's Michael Bilerman here with Emmanuel. Good morning. Mike can you follow up a little bit on Roseland just in terms of the 275 to 325? How much of that is pure I guess entity level equity versus equity into assets or has that not been determined? And then as Eastdil goes out and raises that capital, are they thinking about one investor or multiple investors, is it going to be sort of out to institutions versus smaller investors, how should we think about that investor?

Well, let's look at the overall strategy. So as I said earlier just to emphasize, this is one arrow in the quiver, so we have a number of tools, right, we could merchant build and sell assets and recycle which we clearly can do and shown our preference to do that. We could leverage up as we feel appropriate as earnings have increased, we could raise joint venture equity, right. So what we've done is obviously get away from the subordinate equity which is one of the reasons why we bought Chase I in, which allows us to have a wholly-owned asset next to other units we own and a building we're about to construct. So it gives us the real project in Boston of significant size to match up with what we have in Jersey City with URL and other investments.

Looking at that as a strategy we look and said, drop Roseland into subsidiary, it's private REIT Michael which is the preferred vehicle. It's a heads up transaction, no promotion, no fees, which is very uncommon. And as you know in the private equity world, it's the chance to invest side-by-side with the majority owner, you're minority, so you don't have to worry about valuation issue because we have more money in the deal than the investor will.

Our thought was to limit the amount that we were going to sell because of the high accretive nature of Roseland, so we picked 20%. We picked 20%, we assume they put in 300 of cash we matched it with 200, you have 500, which on Investor Day we said was the magic number that got us through the foreseeable future, right. And we'd always do future raises as the business plan goes. It's not dilutive to the overall Mack-Cali transaction, we're just trading out of assets, we could argue we are trading under the 5% assets or the 8.5% assets to fund Roseland in the future but again it's one thing.

Now to your second question regarding number of investors, obviously we think there is going to be a very attractive investors. The Roseland people have done business with a number of institutions and obviously, they are institutional primes, right, not a question. So we have UBS, Prudential, we've done business with. And there is a whole number of foreign institutions that have shown interest in multi-family.

For example one of the biggest news articles was cased upon purchasing the Blackstone (inaudible) right? The Canadians have always shown an interest in U.S. apartments and we think it's going to be a wide variety. And this transaction is somewhat unique given its size, which isn't that big and the structure which is incredibly clean. So we think it's going to be well received [as a system.]

Now does that in terms of access, what sort of things you're going to put in place or what will the investors want and ultimately is this entity going publicly, would it be sold, what sort of protocols would be put in?

Well, we always have to think about the exit. So there will be number of things that we could workout which we haven't got into. But just to think about it, they don't make it for as does a stock investor for a quick turn. You're making a five, seven year and maybe a 10-year commitment for these funds. So they'll be looking for exit sometime after that threshold, because otherwise they wouldn't be -- they don't do liquid investments to turnaround relatively quickly. We'll break in some things may -- it might be a transition into Mack-Cali. It's a number of things we haven't worked into or we might take it public or we could spin it out. As we've always said, we leave our options open and this only is an attempt to basically get our NAV to respect to reflect what our -- that our stock price to reflect what the NAV should be.

So the other $75 million to $125 million in this equity financing represents joint venture of assets or other things?

No. It's 300 of cash. We put up 200 of cash and 500 sits in the venture as I said, 500 fills out the plan. Our 200 that comes in, could be from assets we sell, borrow any other number of means we could fund. But the thought is we would own 80, maybe it's 75 could be, could be 85, it depends on what we chose to and the investor obviously is the remainder. That's just a cleaner transaction and much easier accounting for people like yourself to look at quarter-to-quarter.

Okay. You provided the good bridge from 3Q to 4Q effectively, core FFO (inaudible) $0.48.

Other than with the 401k and the demolition charges, yes.

Right. But effectively from a core basis you're earning the same amount of money. The math is pretty simple 100 million shares, so if every penny is a million bucks, so walk us through the bridge going from 4Q to 1Q and effectively the run rate into 2016, where your guidance effectively is $0.50 to $0.53. And so you're effectively picking up and you're working through $5 million sequentially, and I don't know how much of that [rent] in 4Q that you're going to end 4Q at a much higher rate but may be just talk about the key points that are driving that?

I'll turn over to Tony to give you details.

Yes. There are number of things that I guess I could point to. If you remember back on Investor Day, we talked about expense savings both from an operating perspective and interest. The aggregate of those things, call it $0.17 in round numbers. Mike and Mitch have both spoken about the lease up, the growth in rents that we would see and kind of pick a number but it's going to contribute something, maybe it's another $0.04. Depending up on and obviously driven a lot by timing of the acquisitions and dispositions there could be another few cents accretively if we do the timing that we have laid out in the -- in our plan correctly or I should say in our 2016 guidance. So those things are all the contributors that get us kind of to the mid-point of guidance and it will be slow steps forward to get that done.

Some will hit sooner the refinancing, interest expense savings hit earlier in the year. Expense savings, we're working on that as we proceed here and that's -- that will be in the books from the beginning too. And then the trades, the acquisitions and dispositions, the arbitrage there will obviously be based on timing when we get that done.

Gabriel Hilmoe, Evercore ISI.

Good morning, guys. Mike I appreciate your comments on the capital sources that you walked through, but may be for Tony just given the plan in place for 2016 with the sources and spend do you have a sense of where you kind of expect 2016 to end from a leverage basis, what kind of debt-to-EBITDA metric may look like?

Yes. Clearly, that's a concern of everybody including us. But with our plan we don't have net debt being meaningfully increased by the end of the year compared to where we are now and if we're successful at growing the EBITDA that we spoke about we could be and actually we plan to be even less from a net debt to EBITDA than we are currently.

Okay. That's helpful. And then just on the guidance for 2015, Mike I think you had alluded to, there may be some of the higher capital sales hitting later next year, is any of that contemplated in the 2 to 2.10 range right now?

It's contemplated, but what we're trying to do Gabe and we've said as before is, we don't want to leave any money on the table as my friends always say, [guilt in the felt], right. So we have set ourselves up to asset manage. The stuff that we are selling early which is DC and New York, is potentially pristine. So it gives us a chance as a management team to look at buildings and say should it go or should it stay. We've had actually very positive results. There was a building just as one example, I won't give you the name, but it's 300,000 square feet in one of our submarkets that we would have sold. And we would have sold for $100 a square foot.

But the leasing broker who was in-charge of the building knowing that he was about to lose it has been working on it and he has turned it into a building that was like sub-70% occupied, Gabe like may be 68%, it's going to be like may be 90% or 91% by the end of this quarter. He has gone out. He has made deals. They have been accretive. We've actually put money in. We've had discussions with tenants about putting some tenants improvements. And that building we think today could be worth $200 a square foot which on 300,000 square feet is real money for us and it probably -- they won't keep for the intermediate and a make decision about later but it went off our sell list.

We're going to try to work every one of these deals, but not being so foolish enough to actually wait and sell, we think we take 16 months or 27 months and we have a 36 month plan. We have a discipline. We want it done over the next 15 months, but some of the stuff will likely be in June to January of that segment as opposed to January to June of this segment, if you understand my calendar, right, so certain things we will sell early and there are things we'll sell late, we think we can get good prices on it and we're getting more increase by using six brokers, right. Think about it, we've used the entire street, everyone got a piece of the business, everyone got a set of books and now they're getting cross fertilization like, oh, I have an idea for you on this one, I know you're also selling that. So we're getting a lot of inquiry which we're sorting through, it's going to difficult, it's like 40 some odd assets that we intend to dispose off, but we think we'll get to the right spot and we have a whole team talented and led by our CIO, Ricardo Cardoso, whose is doing this effort.

John Guinee, Stifel.

Okay. Just a quick reminder Marshall, how much land do you have that's wholly-owned in the Roseland residential business? What's the -- and where do you think that is relative to market value right now?

We own multiple sites both in New Jersey and Massachusetts. I think of wholly-owned apartment sites we own and/or control over 10,000 units. Some of them are options, but most of them are wholly-owned. We do have partners in various parcels. So I don't have the exact number, what's a 100% owned versus in joint ventures. But in all instances we are in our sites below fair market value. We've owned most of these sites for many years and they usually [multiple pay] sites that we've bought, permitted and improved. So we are in it under fair market value and I can get you more detail later as to which ones are wholly-owned versus owned and joint ventures.

So what you are doing is, when Eastdil goes out and tries to raise $300 million privately for you, you're going to basically be selling them a -- at an appreciated book value, current book value for the land, current book value for the asset and selling among the value creation which is really what you are doing here as an essentially a private development company?

Yes, that's correct.

At this time we have no further questions.

We thank everyone for joining us, and we hope you have a nice holiday season. We'll see you in the January. Talk to you, soon. Bye-Bye.

That concludes today's conference. We appreciate your participation.