Veris Residential Inc (VRE) 2016 Q1 法說會逐字稿

Good day everyone, and welcome to the Mack-Cali Realty Corporation First Quarter 2016 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Michael J. DeMarco, President and Chief Operating Officer. Please go ahead, sir.

Thank you, operator. Good morning everyone and thank you for joining the Mack-Cali 2016 first quarter earnings call. This is Mike DeMarco, the President of Mack-Cali. I'm joined today by my partners Mitchell Rudin, CEO; Marshall Tycher, Chairman of Roseland and Tony Krug, CFO.

On a legal note, I must remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the Federal Securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, we cannot give 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.

As always, we look forward today to an open dialogue about our results and plans going forward. We filed expanded disclosure about operations in two supplementals, one for Mack-Cali office portfolio and one for Roseland Residential Trust, our residential subsidiary. We will be referring to key pages on those supplementals during this call and always, we'll continue to provide the best disclosure of our operations, strategy and results.

We're going to break the call down into following sections. Tony will recap our operating results for the quarter. Mitch will discuss our office leasing results, and our views of the market. Then, Marshall will provide an overview of our multifamily operations. I will then close and provide an overview of our capital market activities, and comment on our views of our guidance and strategic plan before we take your questions.

As disclosed last night, our results show we had another excellent quarter. Our hard work over the last year has shown real results quarter-by-quarter, as we work to complete our announced transformation. As stated before, this is a long process and while we've accomplished a great deal in less than a year, we have and will continue to show steady and meaningful improvement quarter-by-quarter.

As we stated last quarter, we are well aware of the four primary concerns regarding our operations and plan to update you on this as we work to unlock the full value of the Company. One, the success and execution of our operating plan is based on a number of real estate capital market activities, leasing, sales, acquisitions, equity raises and development. We have clearly made tremendous progress on a number of these fronts as disclosed over the last month.

Two, we are over-levered. We're working toward reducing our net debt to EBITDA ratio in 2016. We truly value financial flexibility. We repaid this quarter $63 million of debt at a substantial discount last week and plan to pay down the prudential loan of $142 million in November of 2016 with sales proceeds. The total reduction will be approximately $205 million of high cost debt being eliminated in 2016. We have a clear path, as shown in the supplemental to reducing leverage over the next several quarters.

Three, we have a complex story. We believe that our story gets more transparent every day. We've started the process to simplify the complexity to realize our potential value. The activity of Roseland and Port Imperial locked in potential transactions and our completed dispositions and acquisitions are making our story more transparent and easy to understand.

Four, when New York slows down, New Jersey will suffer. Our current results and robust leasing activities past quarter as well as the general market activity do not support the logic that New York is slowing down and therefore, New Jersey will suffer. The result in cash and GAAP roll-up this quarter was the best we've achieved in quite a while and higher than many of our competitors over the last two years. Our current activity, as Michael will outline in detail is excellent. We have outlined our progress in our supplemental and we'll go into further details in our prepared remarks.

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

Thanks Mike. With respect to earnings, as indicated on page 8 of the supplemental, core FFO for the quarter was $49.1 million or $0.49 per share as compared to $43.1 million or $0.43 per share for the quarter ended March 31, 2015. For the current quarter compared to last year, the growth in FFO per share resulted primarily from increased base rents and significantly lower net property expenses in the current quarter.

We reported net income for the quarter of $62.2 million or $0.69 per share as compared to net loss of $2.5 million or $0.03 per share for the quarter ended March 31, 2015. Included in net income for the quarter ended March 31, 2016 was $61.5 million of net gains from property-related transactions.

As shown on page 23, same store NOI was up 11.4% on a GAAP basis and 7.7% on a cash basis for the quarter, ahead of our expectations and due to both better leasing results and significant expense savings.

Total Company G&A for the quarter was $12.2 million, with $9 million for the office public Company and $3.2 million for our RRT subsidiary. We will continue to focus on G&A expense as we streamline our portfolio.

Turning to our financial statistics, as indicated on page 22, our total indebtedness at quarter end was $2.3 billion with a weighted average interest rate of 4.95%, down from 5.22% at year-end and we expect to reduce that further as we move forward in 2016.

Net debt-to-EBITDA annualized for the quarter was 7.41 times. We had a fixed charge coverage ratio of 2.4 times for the quarter and interest coverage of 2.9 times. Our $600 million credit facility had $90 million drawn at quarter end and $20 million drawn as of today.

We will draw on the line to fund some of the opportunities that Mike will cover in his capital markets overview. Also, I would direct you to page 5 in the supplemental, where we provide a sensitivity analysis of the potential impact on net debt to EBITDA based on some of our planned steps.

I will now turn the call over to Mitch.

Thanks, Tony. Our leased space at March 31, 2016 increased to 87.2%, up from 86.2% at year-end. The 1% increase primarily resulted from positive leasing absorption of 0.8% and disposition activity of 0.2%. Let's turn to the leasing results for the quarter as indicated on page 10 on the supplemental.

We signed 82 deals totaling 1.1 million square feet, of which 386,000 were from new leases and 738,000 were from renewals. This represents a 48% increase over the activity for the same period last year and an all-time high for this portfolio. Our most significant transaction was Bank of America Merrill Lynch which renewed 335,000 square feet and expanded by 53,000 square feet at 101 Hudson Street in Jersey City. The tenant's lease was originally set to expire in 2017, but it wasn't alone. We also signed four other leases in Jersey City, each in excess of 34,000 square feet.

Apart from Jersey City, other new notable new leases were signed with the Hackensack Meridian Health System for 61,000 square feet at Metropark in Edison and Ferrero U.S.A. for 50,000 square feet in Parsippany. Additionally, Securitas Electronic Security signed a 32,000 square foot renewal across Westchester Executive Park in Elmsford, New York. Our success on the Waterfront and Metropark in which we are achieving all-time high rents is why we are acquiring 101 Wood in Metropark and 111 River in Hoboken, as Mike will discuss later.

Lease rates for first quarter transactions rolled up 9.5% on a cash basis and 18.4% on a GAAP basis. The discipline that we've established in our message has paid off as we are doing larger, more accretive transactions. The average size of our lease transactions has increased by 122% and the average term by 34% from the first quarter of 2015.

You'll see on page 32, that our 2016 expirations are quite manageable. We have 1.2 million square feet expiring evenly across the remaining three quarters. Our view today is that we're likely to retain about half of these expiries. We believe we can clearly achieve year-end occupancy of at least 90%. Progress continues on our 2017 rollover as we updated on Page 6. I'm pleased to announce that this week we signed a renewal which reduces our 2017 rollover by almost 100,000 square feet.

Looking at the markets, the activity on both the Waterfront and in Parsippany continues to be very strong. At the Waterfront, we gained 4.2% in space leased this quarter, finishing at almost 91%. We have almost 1.5 million square feet of leases either out or in active negotiation and could be in the mid-90s by year-end. Jersey City is on a roll and is on its way to becoming New Jersey's largest city as well as one of the best mid-sized cities in the US.

There is not a week that goes by without a favorable article, why it is the new hotspot for people to live and we're certainly benefiting from this positive perception. We also had a 2.8% gain in percent leased in our Parsippany market in the first quarter. Other areas where our core properties are performing very well include Short Hills, Metropark, Princeton and Monmouth, all with occupancy at approximately 90% or higher.

Also, New Jersey has one of the lowest unemployment rates in the country, decreasing by 200 basis points over the last year to 4.3% and we're benefiting from that momentum. Our Flex business continued its consistently strong performance in the first quarter, GAAP rents rolled up 15% on over 150,000 square feet of activity, and leasing costs were held at $2.50 per square foot for each year of the terms.

As for Manhattan, as Mike noted earlier, while leasing activity for the first quarter was down from last year, it was still above the first quarter historical average, 6.6 million square feet versus the average of 6.2 million square feet. Asking rents rose by over 2% and the expectation is that both activity and rents will increase this year.

Lastly, we added additional analysis on New Jersey that provides perspective on whether there could be a slowing of growth in the upcoming quarters. I'd like to refer you to page 7 of the supplement. The analysis captures the fact that a good number of our tenants are using up space at a density of 6 per 1000. At this level of occupancy, the tenant could pay rents 20% higher and still have the tax offsets that equate to a 100% of the rent.

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

Thanks, Mitch. I'd like to give a brief overview of Roseland, our multi-family division. As Mike mentioned, we filed an expanded supplemental this quarter to help promote a better understanding of our residential business. To further facilitate disclosure, transparency and capital flexibility, on December 31, we formed Roseland Residential Trust as a distinct subsidiary of Mack-Cali.

Roseland Residential Trust will execute all of Mack-Cali's residential activities, including the build out of Roseland's current residential land portfolio, the repurposing and conversion of non-strategic Mack-Cali office assets into luxury apartment communities and the sourcing of new marketplace development and acquisition opportunities.

Roseland has grown from an initial Mack-Cali Investment in October 2012 of a $115 million to a current NAV of over $1.1 billion, 91% comprised of wholly owned or joint venture interests, 76% concentrated in New Jersey Waterfront and Greater Boston region, and over 80% in operating and in construction communities.

As reflected on page 9 of the supplemental, we've achieved growth across multiple financial metrics over the last three years, and in addition, continues substantial growth over the next three years. As of March 31, 2015, our portfolio is comprised of 5,640 operating apartments, 2,680 operating apartments under construction, which includes the recent start of the 295 unit RiverHouse at Port Imperial, 1,610 additional apartment starts in 2016 and remaining land development portfolio of 9,200 apartments.

I'd like to share additional activities that we undertook during and after quarters end that both expanded and simplified our portfolio ownership. First, we acquired UBS senior 50% interest in Chase I, a 371 unit recently stabilized apartment community at Overlook Ridge, Roseland masterplan community five miles north of Boston in Malden. The subordinated interest that we carried on our book for $2.3 million was valued by UBS at $11.6 million. When applying our promoted value we acquired UBS interest in effect at 5.7% cap rate.

In the first quarter, we closed on the $72.5 million long-term permanent loan facility, which created a 14% initial return on that invested equity. With the first quarter of acquisition of Chase I and the third quarter construction start of the adjacent 219 units in Chase II coupled with Roseland's ownership at Alterra, the company now owns 100% of 1,385 apartments at Overlook Ridge, with future development rights for approximately 750 units.

Two; we acquired Prudential's senior interest Portside at East Pier, the 175-unit apartment community located on the East Boston Waterfront added effective 5.18% cap rate, including our promoted interest. Once the 296-unit Portside Phase II, now under construction, is completed, the Portside project community will operate as a 471-unit single apartment community generating apartment efficiencies for all those.

Three, we acquired Prudential's 25% subordinate interest in RiverTrace, a 316 unit stabilized apartment community on Hudson Waterfront in Port Imperial which we own in joint venture with UBS. Further modifications to this partnership interest are under ongoing discussions and will be this future subject matter at our next report.

Four, we acquired our land partner's interest in the five Waterfront development parcels at Port Imperial as well as their ownership in the Port Imperial Garage and Port Imperial Retail.

And finally, in the first quarter, we started RiverHouse 11 at Port Imperial, the 295 unit development. With the acquisition of our land partner's interest, this will be a wholly owned development. As highlighted on page 13 in the supplemental we have made significant progress on our repurposing activities, including the fourth quarter of 2015 start at Signature Place, the third quarter 2016 scheduled start of 150 Monument in Bala Cynwyd, where we have received preliminary and final site plan approval, and the near-term start of 233 Canoe Brook Road next to the mall at Short Hills, which now has zoning approvals in hand for 200 apartments and the 250 key full-service hotel.

As part of the Short Hills redevelopment, we will be remodeling our adjoining 250,000 square foot office building at 150 JFK Parkway. The combined office, hotel and apartment community will be one of the premier mix-use developments in Northern New Jersey. We're working in five municipalities, on nine potential Mack-Cali office sites for redevelopment, which we will report on as future progress.

Looking forward to 2016, we are scheduled to deliver 1,182 units to the market, including Marbella 2 in May, 311 unit residential tower which we own 24%; Quarry Place in Tuckahoe in the third quarter, a 108 unit property where we own 76%; and URL at Harborside in the fourth quarter, a 763 unit, 69-story residential tower of which we own 85%.

The opening of Marbella 2 and URL will further advance our leading presence in the Jersey City market. Notwithstanding our recent achievements, we continue to engage in discussions with joint-venture partners to convert our remaining subordinated interest and operating assets to heads up joint ventures, which will correspondingly improve our residential cash flow.

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

Thanks, Marshall. Moving on to guidance, we expect full-year 2016 FFO to be in the range of approximately $2.04 to $2.10 per share. We're raising the bottom of our range and moving the target guidance at this time to $2.07 and expect second quarter FFO to be approximately $0.52 to $0.54 per share.

With only one quarter under our belt, it will be aggressive to change the top end of the guidance range, I'll put at this time. However, we will say that we feel very comfortable with the target of $2.07 and believe that $2.10 it's clearly achievable if we have continued success.

As indicated on page 18 to 20, some updates to our 2016 assumptions are as follows. The percentage lease is increasing to a range of between 89% to 91%. Our leasing activity is increasing, and as Mitch commented, the Waterfront is strengthening greatly, as is Metropark and Parsippany. We achieved 90% on our combined Waterfront core and Flex portfolio this past quarter.

Two; we are increasing our same-store NOI projection, providing disclosure on both our original and post-sale portfolio in order to give better analysis, we are driving rent in all assets. We achieved great results this quarters as indicated on page 23 of the supplemental. For the post-sale portfolio, we expect to achieve 8% to 9% on GAAP and 4% to 5% on cash.

Three; non-core asset sales of $750 million, we're ahead of schedule and achieving planned results. The blended cap rate on sales for the year should be approximately 6.5%. To-date, we have closed on $300 million, with $135 million planned close in the next 60 days and the remainder throughout the rest of the year.

Four ; on acquisitions, as announced, we agreed to purchase 111 River Street in Hoboken, New Jersey and 101 Wood Avenue in Metropark for approximately $317 million and three smaller assets for $34 million, for a total of $350 million. Our net earnings on a GAAP basis is approximately $0.09 accretive for full year and $0.03 on a cash basis. Any other acquisitions, if any, will be

be highly selective in the future.

Five; we assume we raised approximately $350 million of joint venture equity for Roseland by the end of the second quarter to early quarter this year. The marketing process is underway. We've had a number of interviews and discussions. We'll have a further update, hopefully, on our next call.

Six; corporate financing, last week we repaid $63.3 million of secured debt on four New Jersey properties at a substantial discount. That loan was accruing a rate of 10.2%. Additionally in November, we plan to repay the 6.33%, $142 million secured loan, with anticipated sales proceeds. You should also take note the sources and uses presented on page 21 as we gave you an update for the quarter activity.

And let me conclude prior to taking questions with the following. Our efforts and commitment to unlocking value is starting to take hold. This is a long process. The transformation is having a positive impact. We look forward to keeping you up-to-date on our continued progress as we move ahead.

Now, I'd like to turn the call for questions. Operator, first question please.

(Operator Instructions) Manny Korchman, Citi.

Good morning, everyone. Mike, if we think about the 111 River Street acquisition, you bought that from Equity Commonwealth. Their strategy is different than yours in that they're selling their assets. They're sitting on the cash. You've chosen to reinvest some of the disposition cash in assets. Why the latter versus the former, why not just take the cash from selling assets, pay down the debt today and not acquire?

We sweat at that question. I guess I'm going to give you expanded answer, Manny, if you would will allow me. People wonder about our acquisition profile, what we're looking at. We only underwrote four deals last quarter. We purchased each one of them. We get presented with us numerous opportunities to invest money. There is no shortage of books come across our desk. When you hire as many brokers as we have in order to undertake the sales process, you can only imagine people coming to your with ideas for reinvestment.

Regarding your question, which is as always, an excellent one, we looked long and hard on what our thoughts could be for the use of proceeds on the sale of particularly 125 Broad which we closed two days ago. 111 River presented itself, it is owned by Equity Commonwealth, as we both know. It is in our wheelhouse. We've had excellent success on the Waterfront in the past several quarters.

We looked at what could we pay in debt, which has -- a lot of it has high cost and coupons just come due in the latter part of this year and most of it next year, which has a little bit of a window for us and felt it was appropriate to look at both 101 and 111 as a source of or use of proceeds.

I have a humorous story, as always, which is part of my personality. I got a call yesterday from David Helfand as people may or may not know, Dave and I both attended -- we're happy to attend the University of Chicago. He is the President -- I guess he is CEO of Equity Commonwealth. He called me up and said Mike congratulations I think you are doing a great purchase and so forth, which is all really nice.

The call I got was from Sam Zell, Sam Zell called up and said Mike congratulations on purchase to this deal. I just said Sam, it doesn't work that way. The way it works is, I'm supposed to say congratulations to you. You're supposed to say good luck to me. You have the cash, I have the building. He agreed with me. He also felt that and I pointed out to him that he was going in a different way with his strategy and he said absolutely and he goes, this is not a building we choose to sell, other than the fact making a call on the market [and they go hey] this is going to be a good one for you over the long-term and I said, I think you have an excellent strategy going forward. Well that's my answer to your questions.

Maybe if we just spend one more minute on that asset, what's the profile there that you think that owning it or controlling the market benefits you versus just buying the building that's leased?

The way the Waterfront works, Hoboken has a little less than 2 million square feet, maybe 1.8 million square feet, so maybe you can round it to 2 million square feet. The rest of the Waterfront has about 18 million square foot. Some of it's in Weehawken and some special first buildings done for trading. The rest of it is in Jersey City. We look at this building, which is built by a colleague of a competitor of ours, SJP, and had been owned by JP Morgan and Equity Commonwealth, excellent building. It's the world headquarters of John Wiley which had done a recent renewal, leasing on the market, so there is some roll up there, but it's a long time.

They're in the bottom of the building. The top of the building basically rolls in the foreseeable future. Some of the leases are underway. We have an aggressive view toward what we think we can achieve there. I will point out that Rubbermaid just moved their world headquarters. Two buildings down, paid $51.50, took a 100,000 square feet, represented by CBRE which we have a close and personal relationship with, given my colleagues background.

We looked at what rents are in that market, we think they are at $48 for our building. We think we can achieve that. We bought it at a [6.7%] yield. It's a leasehold under long term with the Port authority, very favorable terms. 6.7% versus what we were selling, which was really a 5% in the first quarter, 170 basis points reinvestment. Asset we know, it's a premium. We've already started soliciting new tenants for those making proposals this week, in particular, just shows what our business model is.

As I said in the press release, we own a quarter of the Waterfront now. You can't have a buy for the Waterfront, a commitment to it, and pass up on one of the best building. I've said this repeatedly, and I meant every word of it, we will only look at deals if they add into the top 10 of our assets. We get shown a tremendous amount of product from brokers that would be highly accretive to us, nine-cap, 10-cap deals, buildings in markets that we really don't want to be in, which would manufacture earnings. This is not the case. This is a good long term hold. We view this, Mitch and I, view this is as the number three building in our portfolio. After 101 Hudson, after Plaza VIII, this would be the third best building.

If we think about the new NAV disclosure that you provided in your supplementals, somewhere between $33 and $36 a share. You compare that to where the Street is, closer to $26. How much time have you guys spent looking at the delta between what you think your NAV is and where the Street has you. Maybe, if you can highlight some of the big pieces that you've seen. Is it Roseland, the people are thinking about incorrectly? Is it just the cap rates that people are applying, so what are the biggest differences?

So, the amount of time we spend is 168 hours a week, which is literally every hour, and probably it goes across my mind when I'm sleeping. We thought we had only a limited amount of options given our initial stock price. We thank everyone for their commitment to us and their support. And we get closer and closer, we have more options now in front of us just closing that gap. And I've also said this repeatedly, now we can look at certain other things, as we get through the next stage of sales proceeds, and other objectives that we could achieve.

Roseland, we think there is disconnect until we prove out that value. We think there is clearly a disconnect to us on suburban assets, which we think we can improve on over time. I don't take it personally, when people viewed ourselves the way they did, when we were 82% leased. The day we took over, 11 months ago. But as we've increased almost 500 basis points of occupancy over the last 11 months. and increased cash flow almost 20%, I think that's what shows up in the numbers. And that's why I think we can either close that gap, through a series of income producing, transformational moves or some capital markets activity, which people have given us advice to in the past.

Thanks, Mike.

John Guinee, Stifel.

Marshall, can you talk a little bit more about the potential redevelopment? What sort of income erosion happens when the existing office assets go out of service, and you have to revalue the parcel just for the dirt? And how much NAV destruction is there before there is NAV creation with that portion of the overall Cali strategy?

Great question. We have two different activities in the repurposing. One is, actually not impacting the office buildings or NAV at all, and that is when we take up excess parking fields, and create new apartment product on excess parking fields and replace that parking with garage structures for the office. And that's over half of our activities included in that, most particularly for example, the Short Hill site. So in that instance, we're not impacting NAV at all, and strictly, it's purely an enhancement.

The other side of the repurposing activity is basically a monthly review with Mack-Cali's team on which office buildings are vacating in the suburbs, where the NAV is dropping on Mack-Cali's book precipitously anyway. And in those instances, we are analyzing the redevelopment opportunities and we're valuing the redevelopment going in to our multifamily pro forma, pretty much at the book value that Mack-Cali has written down the office building too. If it's not something like that, then it generally doesn't get into our Q.

So I would tell you in both instances, either there is no impact at all, or the transformation happens at a decreased book value, because of the vacancy factor in the office building, and it being an antiquated property, that would be sold anyway.

Okay. And then, next question and maybe there is just so many moving pieces, I have lost track. But Mike, you mentioned three small assets, $34 million acquired. Can you give us more detail on those three assets for $34 million?

Sure. We bought the bottom of a building that we own in White Plains that was owned by Pace University. So we felt it was like $10 million to $12 million and buy that building to get the bottom back, so we can control the whole building, and therefore if we sell in the future, we'll obviously get the better proceeds for having cleaned up the strategy.

And as part of the Bank of America transaction, with the renewal, we consolidated their operations from New York into Jersey City and as part of that consolidation, we picked up two beautiful prime buildings in New York New Jersey that are basically special purpose-built and we have a discussion with the tenant to fully rent them ongoing. So we kind of knew what we were getting into when we purchased them, and that was like 22 and change. So that's the $34 million.

So essentially, BofA offloaded how many square feet in New York to you?

147,000 and we paid about $140 a square foot for a building that I value the replacement cost at about $350. Its over improved, its state-of-the-art security, backup generation, parking, actually couldn't built for less than $45 million.

Great. Okay, thanks a lot.

Vincent Chao, Deutsche Bank.

Hey, good morning everyone. Just wanted to go back to the same store performance and the outlook. Just curious, just going (inaudible), I know we said it's very early in the year, so you don't want to get too aggressive. But it implies some steep deceleration of about 1.5% at the midpoint. Just curious, is that the right way to think about the back half here, or is that more sort of just taking a conservative view to start off?

Its two things, it really depends on -- we have three different portfolios Vincent, as we talked about. Four, if you think about what we're just selling, but that obviously really dissipate over the course of the year. So the Flex business is a steady grower, and I think we gave you enough data on that. If you can look at that, it's a quarter-by-quarter business that rolls over, that we are able to increase on a pretty much [programical] basis, not a problem.

The Waterfront is moving quickly. When Mitch and I took over, one of the deals we approved was a $31 from Brown Brothers Harriman. If that space is rented today, it will be mid-40s or low 40s. So you can just see the improvement level of that. So as we go out of Jersey City, which has a lot of our expirations for 2017, you can see we're picking up steam in that submarket. Literally rent it out, start with a four, but they literally start it with a three when we began. So low-threes to low-fours.

The amount of disparity we have in our suburban portfolio runs the gamut from things like Metro Park, where we had underwritten rents on an acquisition we did, 333, the first one we made last year at $32. We just achieved a deal of $35 in the building we sit in, and $35 in a building that we just purchased, which is 333. And that's like a 12% to 14% increase, which is strengthening of the market. We see, although improvements in Parsippany and obviously Princeton and Metro Park and a few other markets.

So it's a lot of submarkets. The supplemental gives you data as to how we are performing. But we view it as what we could have announced today, and said okay, let's take a mid-step approach. We will raise the bottom of the range, keep the top the same, increase the target, but give expectations that we think, if we have continued success, we will achieve top end of the range at least.

Okay. Yes, and I think my question is more about the same store side, but product price as well. But just to ask a technical question maybe, interesting, occupancy, same store both GAAP and cash all increased by 100 basis points at the midpoint. But just given free rent periods and downtime, things like that, I would have thought that cash would have lagged a little bit? Is there something else going on, earlier commencements or something like that, that's driving the cash up the same as GAAP?

We instituted some differences in how do we do renting now. So we no longer give free rent on renewals. Well previously as a management, they always gave free rent. So people would always try to hold two things, they would try to hold occupancy and they would try to hold the face amount. We don't look at either one of them. We look at the cash flow coming in over the course of the deal and discount it. So we don't get free rent as at cost we can't roll down rents for us, they won't be accepted, and growth rate has to be about 2% or that we won't accept the deal.

So those three parameters by themselves, are forcing us certain [line] that didn't exist before that show up in our cash flow growth. That's a technical answer. Did I answer your question?

Yes, that did. Thank you.

Jed Reagan, Green Street Advisors

Hey, good morning guys. It sounds like the Jersey City office pipeline leasing sites still looking strong. Just to what extent that's driven these days by the price point differential versus Manhattan just reaching a tipping point or is the tenants now taking more advantage of the New Jersey tax incentives, and then just to what degree are you seeing some migration to Jersey City from -- or maybe suburban areas of Jersey?

It's Mitch. It's a combination of two things; the rent differential continues to grow, and that spread has been significant. So that we're not only seeing growth out of relocation from Manhattan, we're seeing growth out of Manhattan that can't be satisfied there.

The second part of it, and this may seem a hard to believe, but notwithstanding having perhaps the most sophisticated real estate professionals in the country, people fully didn't understand the Grow New Jersey program, and the previous program which was converted in three years ago, the State of New Jersey had some missteps with it, where they didn't actually fund some of the commitments that they had made; and when Mike and I started, there was a carryover to that.

The current program, as we outlined on page 7 in the supplemental, explains that this is in corporate income tax credit program. And people have now woken up to the value of it. So as per the example there, so if you pick a number, we're charging $40 in rent with an anticipated occupancy, your rent can be nominally zero, and zero is pretty attractive.

I'd also like to just give you one other vision; we talked about the amount of current activity, which of course, was reduced from the last quarter because of the deals that we signed, but that we also anticipate this summer, we so far have identified approximately 500,000 square feet of tenants, potentially growing to 800,000 square feet that are going to be entering the market in Jersey City. So thanks.

Okay, thanks. I guess, related to that, you are making some headway on 2017 expirations, but seems like there is still quite a bit of work left. What are some of the lumpier expirations that you are most focused on, and could you peg at this point, what percent of that overall exposure is, are definite move-outs at this point?

As we said on the last call, we anticipate getting up into the mid-90s on occupancy. We're at various levels of discussion with the tenants that we have there and remain optimistic about those discussions. Also, as we said before, given the changing nature of the tenancy that's moving to New Jersey, our preference is not to renew all the tenants that we have.

Can't tell you which one won't find the seat at the table. But as we go forward, and with all the demand that we have, we'll look to be not only renewing, but expanding with new tenants and hopefully we'll have some announcements for you next quarter.

Okay. Sounds good. And just last one for me, can you walk through the economics for the Metro Park acquisition? What kind of upside might be there, and then what sort of the general thesis on that investment is?

Jed, this is Mike DeMarco, and also welcome. Metro Park was one of the key markets we chose to really focus on, after the Waterfront, and it's [a scenario] with it, it has two major train lines. The intersection of about five highways, probably one of the best located submarkets in New Jersey.

In particular, it's the land of labels. If you drive the streets here, you will see Siemens, Investors Bank, Provident, E&Y, couple of engineering companies, and Daiichi-Sankyo, who is a big drug company. We just recently did a deal, which Mitch outlined for Hackensack Meridian, which were actually moving. We rented our own space. So we're taking our headquarters, and as we previously announced, we're moving half of it, the front office to Jersey City, their back half is going to Parsippany, which is a commitment to that submarket for us.

We were able to achieve $35 rents, 2% growth, 10-year deal, and relatively low concessions. We also did a renewal behind us in a building we had purchased last quarter, with simple if not better terms. So we rented about 70,000 square feet of the 400,000 we owned in the last quarter. So we had pretty good data, as to the strength of the submarket.

Those two buildings are inferior to the one that we're buying. 101 Wood is in a better location. It's a slightly larger building. Totally remodeled, has every state-of-the-art communications, backup generation, refurnished cafeteria, conference rooms, gyms, and achieves rents in excess of what we get.

The in-place rents in that building were $28, because they had been rented up through the 2009 to 2011 phase. In the next few years, we will get the ability to roll those rents up significantly. We have actually one empty floor. The building is about 88% occupied. We have the ability to rent one floor which we are actually actively engaging in, and believe we can substantially improve the cash flow almost immediately.

So we bought a better quality building, than the two that we owned. It's a market we clearly knew. We had recent transactional data which gave us the view towards where we could rent that. And we ran the numbers on it, and the IRR and initial cash flow came into where we thought was a good use of proceeds, given our choices of capital markets discipline.

And are you disclosing an initial yield at this point in time?

Yes. Once we get through, it's about a six GAAP yield. And as I said, as we rent up the empty space, it will get a little higher.

Great. Thank you.

Jamie Feldman, Bank of America.

Great. Thanks and good morning. I guess, focusing on the multifamily side, maybe if you could give some thoughts on supply risks across some of your markets, and where you think we are in the cycle, I guess, focusing mostly on Jersey City?

Good morning. Jersey City has had a lot of product, but it continued to have substantial rent growth. The two stabilized properties we have in Jersey City, Monaco and Marbella, for the last 12 months has had a rent growth of over 5%. The most recent comp opening in the marketplace, 70 Columbus opened up between $45 and $46 is leasing 70 apartments a month, and has raised their rents up to a little over $51 a foot.

So far, everything that has been delivered in Jersey City has leased at that pace, and the existing marketplace, including our assets, as I mentioned, has had a real rent growth. I think the remainder of 2016, there is 4,000 units coming to Jersey City to be delivered.

In that marketplace, maybe rent absorption instead of 70 units a month, will be 50 units a month. But at this point, I don't think -- the misleading percentage or perception is that because 13,000 units have been permitted or submitted means they're all going to start and I don't think that's going to be the case.

So, well I think we have to be cautious and look at each building as we go. Rents are continuing to grow and lease-up absorption has been excellent, and I just don't think that 2016 pipeline for delivery is going to have any impact on rents or absorption.

Okay. And what do you think the [governors] are and other starts away from you guys?

Well most of the sites are in the primary submarkets in Jersey City are owned by fairly sophisticated developers, and well capitalized. I think if they continue to see good metrics, they'll have starts, and if they look at it slip, they will slow up. It gets hard to predict what everybody is going to do. We're opening up Marbella II this coming month. Just anecdotally we've signed 45 leases in advance of opening to corporate providers at just under $45 a foot.

And we have a significant waiting list of people, I suspect, will sign 50 or 60 leases in the first month at $46 a foot. So in a property that size, it will be the third leased before we even get past the first month. I think people are going to continue delivering product until they see it slow, and then they'll stagger their starts and stretch them out a little bit more.

That's certainly what we're going to be doing. We have a number of future starts in our portfolio in Jersey City and we're going to watch. And if we see absorption continue and growth continue, then we'll make a start and if we don't, we'll wait.

Okay. And then, are there other markets you guys are in, where you're more concerned about supply?

The Greater Boston market, so far, has held up well. It had a historic number of starts in the whole metropolitan region for the last few years, and has also sustained good occupancy, good absorption and good rent growth. Our community, north of the city, Overlook Ridge has grown 4% or 5% over the last 12 months as well.

Most of the submarkets are -- New Jersey submarkets have all maintained 97% lease, 96% occupancy. Not a lot of product being delivered in any of those submarkets. So those should continue to do well.

Most of the supplies come on in the last two years has been well absorbed and rents have grown at different rates, but have grown. So right now, at this moment, I think there has been a lot of discussion about too much product coming on. But so far, nothing has actually reflected that in the absorption or rent growth.

We'll just have to watch, I mean, we own the sties, we control our own destiny as far as starts, and we have a program for what we intend to do, and if we see a submarket that doesn't mandate a start, then we will hold up. So far, nothing has indicated that.

Okay, that's helpful. And then, can you guys talk about the capital markets in general? Like what are you guys seeing in terms of cap rates, either on dispositions or I know you have talked about some of the deals you have done, but just generally over the last six months or so, a view on how those markets are holding up?

I think the markets continue to be relatively strong, but have slightly abated since the credit market has a little bit of discombobulation through the CMBS, the back-end part of the CMBS, the (inaudible) on pricing, the way they did say 15 to 18 months ago. So you see a pretty full list of people looking at deals. I mean, Hoboken has six or seven bidders that went in the second round with us.

I would expect that, you see more discipline in the marketplace. Less people just acquiring, because financing is cheaper. The cost of debt is actually the same for the AAA or the senior piece than it was last year, maybe even slightly tighter, given the fact that rates are a little bit lower.

I think that you'll see a decent amount of activity in our market of people buying and selling assets. I know there is a few buildings out there that are affiliate sizable, that are trading at a credit tenant leases. It remains a good healthy market, I would say probably not as frothy as it was, let's say a year ago, Jamie.

Okay. And where would you say, cap rates are or have moved for -- either primary or secondary type assets that you guys are looking at?

I think the cap rates on the waterfront are what we indicated on our NAV, and we obviously had competitors where we are looking at to buy on 111 River. We lost or looked at hard at 70 and 90 Hudson, which traded also in those same ranges, 70 Hudson was a little cheaper, because it was empty, but 90 which is a full building with some [quarter range], in the 6% range.

I think in the suburbs, you'll see deals done in the ranges that we indicated, probably the 8%, 8.5% range, some stuff trade at 7%. Some stuff like in Metro Park or Short Hills, we trade in the 6%s, because of the nature of the markets and where people want to be, and the rents they will pay. I think you are asking about the subprime or the sub-stuff, it still trades, still there are people out there who buy buildings, we seem to get a number of them looking at our assets that are ones that we want to dispose of. So I think the range of CapEx will be more sticky and I think financing ability has been a little bit more softer.

Okay. Thanks. And then finally, I think you said you expect to retain 50% of the 1.2 million square feet that expires in 2016, and still get to 90% occupancy? Can you talk about that space, prospects to backfill?

Jamie, you are talking on 2016, it's mostly smaller deals dealing 10,000, 15,000 and under the indications we've had plus the amount of new leasing velocity makes us highly comfortable. There is no one transaction one way or the other that's going to impact that.

Okay. All right, thank you.

And we have no further questions. I would now like to turn the conference back over to Michael DeMarco for any additional or closing remarks.

Thank you all for joining us. Talk to you again in 90 days. Have a wonderful day, bye-bye.

And this concludes today's conference. Thank you for your participation, you may now disconnect.