Mack-Cali Realty Corporation

Good day, everyone, and welcome to the Macaulay Realty Corporation fourth quarter 2020 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Ashley Cotton. Please go ahead.

Good morning. Thank you, operator. I'd like to remind everyone that certain information discussed on this call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in these statements are based on reasonable assumptions, We cannot give assurance that the anticipated results will be achieved. We refer you to the company's press release, annual and quarterly reports filed with the SEC for risk factors that impact the company. With that, please allow me to introduce Marianne Gilmartin, MacCalley Board Chair and Interim Chief Executive Officer.

Good morning, all. Thanks for joining us. I want to start by once again thanking the entire team for their continued dedication to the company through a very difficult year. We have remained focused on the execution of our strategic initiatives while navigating the challenges of the pandemic. In 2020, we made meaningful improvement on our non-core asset sales and have continued to work to strengthen our balance sheet. We absorbed the pandemic-led market disruption on the residential side and are beginning to see signs of stabilization. We've made exciting headway repositioning our Harborside campus. Across the company, we showed a willingness to embrace change, both in leadership and in the alignment of the company's priorities to ensure continued progress in the years ahead. Following the completion of the work of our strategic committee, of which I was a charter member when I first joined the board in 2019, we embarked on a diligent plan to sell all of our non-core office assets and to exit a number of land positions and residential properties outside of our core markets. This initiative was successful in generating $352 million in gross proceeds from non-core office and $437 million in gross proceeds from land and select residential sales, all in 2020. We remain on track to complete the sale of the majority of our remaining non-core office properties by the end of the second quarter, thanks to the hard work of Ricardo and his team. At that point, Matt Calley will be the owner of six large waterfront office properties strategically located in an office campus setting and a solid residential portfolio that generates the majority of the company's revenues and net operating income. Regarding our commercial portfolio, we are increasingly optimistic about the strategic repositioning of our Harborside Holdings. We believe the corporations will be returning to the office later this year and that employees are eager to give up their Zumbi existence and reconnect with old friends and colleagues. On the residential front, we now believe we are at or close to an inflection point, and we are seeing leasing velocity ahead of plan in our newest delivery, the Emory in suburban Boston. We just began two lease-ups in attractive new residential communities, the Upton in Short Hills and the Capstone in Port Imperial, and we are very pleased with the early traffic and the interest in both. With that, I will pass the call now to Dave Spantana. Dave?

Thanks, Marianne. We reported core FFO per share for the quarter of $0.16 per share versus $0.44 per share in the prior year. The year-over-year reduction is due mainly to the impact of our suburban asset sales program and impacts from the pandemic on our hotel, parking, and multifamily operations. The Waterfront office portfolio had a cash same-store NOI decline of 4.4%, largely attributable to less parking income and expense recoveries on the revenue side. Real estate taxes in the fourth quarter of 2020 comped against a low fourth quarter 2019, resulting from lower real estate tax assessments in the waterfront portfolio in 2019. As Marshall will go into in more detail, the multifamily portfolio experienced similar operating pressures in the New York City metropolitan area that others have reported, but we have seen indications that we may be close to a bottom. Rent collections remained stable in the quarter, averaging 97.1% in our office portfolio and we're 99% in the multifamily portfolio. Bad debt expense remained in good shape. Bad debt expense in the quarter totaled $489,000, half of which related to retail tenants in the Roseland portfolio, and we also took a $200,000 write-down of straight-line rents with $131,000 relating to discontinued operations properties and $69,000 to Roseland retail tenants. On transient revenues, Our hotel operations remain limited to the residence-in portion of our dual-flagged hotel, which is running above EBITDA breakeven. However, including the closed Onview Hotel, the fourth quarter EBITDA loss was $838,000. We expect both the Onview and Hyatt hotels to remain closed for the first quarter, and we'll evaluate reopening later this spring. Parking revenues were off by $800,000 sequentially and remained subdued early in 2021. On the office leasing front, we have 408,000 square feet set to expire on the waterfront in 2021. As we have mentioned, at Plaza 4A, TD Ameritrade moved out of 140,000 square feet of space in January and will vacate the remaining 44,000 square feet of space at the end of September. That will leave Whole Foods Grocery as the only tenant in the building, and we are already marketing the asset for potential life science use, keeping in mind a wide range of structures to limit our need to make material capital commitments to the project. Our second largest move out is in Plaza 5 with Natixis, which leases 75,000 square feet of office and 26,000 square feet of storage and ancillary space, all of which is expiring at the end of July. The balance of 123,000 square feet is in various stages of leasing, which Ed will update us on. Turning to the balance sheet, In the quarter, we reduced our line balance to $25 million outstanding with proceeds from the $204 million of asset sales we executed in the quarter. In September, we exercised the first of two six-month extension options on our line of credit, extending our maturity date to July of 2021. We plan to execute our second six-month extension to January of 2022 later in March. We have only one mortgage maturity in 2021, a $3.9 million mortgage on a small retail condo within Roseland. Ricardo will discuss our asset progress shortly. The proceeds after debt and defeasance payments from the three remaining parks will be targeted for corporate debt repayment and provide the basis for the formation of a new credit line tailored to our go-forward asset mix of predominantly multifamily assets. The net debt to EBITDA metric was 15.8 times at quarter ends, Reflective of our vacancy, hotel and parking disruptions, and a nearly funded $906 million development pipeline that is in the process of coming online this year. Metric and isolation does not tell our complete story of the progress we have made towards de-risking our balance sheet. When I joined the company three years ago, we had $1.4 billion in corporate debt with a recourse to the company, supported by 146 mostly suburban office properties. Today, our only remaining corporate debt consists of an $8 million balance on our credit line and our two bond issues totaling $575 million outstanding, which are earmarked for redemption as we complete our suburban asset sales. The execution of this plan has come with dilution to FFO for share, but now positions the company to grow from a smaller base with 24 residential assets and six office buildings, all with locations that have superior access to mass transit and will have an appropriate capital structure. Upon completion of the suburban asset sales in the second quarter, we expect we will derive approximately 55% of our NOI from multifamily and 45% from our office portfolio. Now on our outlook for 2021. With the current pandemic uncertainty affecting our hotels, parking, volatility in our multifamily operations, and the timing of our suburban asset sales, we feel it is prudent to provide our outlook only for the first quarter of 12 to 15 cents. We will continue to evaluate the merit of providing a longer-term outlook as we move throughout the year. I will now turn it over to Ricardo Cardoso, our Chief Investment Officer.

Thank you, David, and good morning, everyone. I am pleased to announce that we have completed another busy quarter on executing our strategy of selling non-core suburban office and residential assets. Sales in the fourth quarter for both office and residential totaled approximately $520 million. Despite the early impacts of COVID on the capital markets, the state of New Jersey finished 2020 with just over $2.3 billion in office sales, which is in line with historical volumes. Sales of our suburban office assets in the fourth quarter totaled $94 million, comprised of four office properties and a land parcel. We successfully closed out the year with total sales of $350 million on our non-core office assets. Subsequent to year end, we exited the Princeton office market with the sale of 100 Overlook Center for $38 million. On the residential side, in the fourth quarter, Roseland completed the sale of three non-core residential properties totaling 1,025 units and two land parcels. The gross value of those assets totaled $428 million. In total, the company generated close to $83 million of net sale proceeds from its interests in the residential assets after mortgage debt retirement. As David mentioned, most of our sale proceeds from the past year have been used to pay down our credit line, with future sale proceeds earmarked for paying down our unsecured bond debt. In furtherance of this plan, as of today, we have four transactions under contract totaling over $600 million on 14 suburban office assets. This group of properties under contract comprise over 2.6 million square feet. We anticipate closing two of these transactions, our Short Hills and Metro Park portfolios, by the end of the first quarter with a gross price in excess of $500 million. The two remaining transactions total approximately $100 million and are scheduled to close in the second quarter. The completion of these sales is expected to provide over $440 million in net proceeds after debt repayment and selling costs. In summary, we are pleased with our progress of monetizing our non-core assets at a rapid pace but most importantly, without sacrificing value. We also continue to make progress on finalizing sale terms on the remainder of our non-core commercial assets, including JV interests in several office properties, retail assets, and land parcels in our non-core markets. And with that, I would like to turn the call over to Ed Gildman.

Thanks, Ricardo. I've had a busy first four months back at Matt Calley. Despite the pandemic, we've begun to successfully implement new approaches to unlock the potential of Harborside. Based on discussions I've had with tenants, prospective tenants, brokers, and other business leaders, especially since the first of the year, I expect the vast majority of companies will return to their offices later this year, with many returning over the summer or shortly after Labor Day. People miss camaraderie, mentorship, and collaboration working remotely. and companies are frustrated by their inability to establish and maintain their corporate culture via Zoom. The layout of office space may change, and the work week may evolve, but people generally appear to be eager to get back to the office. Harborside is in a terrific position to capitalize on this trend. MacCalley has great assets and the best location in Jersey City. With the assistance of our CBRE leasing agency team, we are proactively engaging the market. In addition, we anticipate the state of New Jersey's new incentives program will provide additional support to our leasing efforts and makes Jersey City even more competitive compared with New York. Upon completion of the renovations to Harborside 1, the building will have a new, attractive, and energy-efficient facade with larger windows. The building will also have a reimagined lobby, modernized elevators, and new HVAC, electric, and other infrastructure. The building will look great from the outside and have floors filled with sunlight, but as importantly, it will have modern and robust mechanical systems for tenants. We are still facing challenging market conditions, but we are optimistic with the return to work in sight, the desire of employees to return to the office, the state's new incentives program, the renovations at Harborside One progressing well, and of course, the vaccine being more widely distributed. We are well positioned for the future, and look forward to keeping you all updated on our progress. Thank you. I'll now turn the call to Marshall.

Thanks, Ed. In the fourth quarter, Roseland's operating portfolio finished at 90.2% lease as compared to 89.5% last quarter. Leasing traffic exceeded the same period in the prior year. This leasing momentum continued through January as well. The improved metrics have been a result of the following initiatives. We prioritize capturing more leasing traffic with added concessions, which increased occupancy at the short-term expense of net effective rent. We implemented more competitive pricing. We continued our increased online marketing campaigns, and we increased incentives to improve existing resident retention. Whereas percentage lease and occupancy statistics have improved, recent leasing momentum will be realized in the second quarter as prior quarter concessions burn off and cash flow will improve. Moreover, as a result of leasing momentum, we are strategically reducing specials of select properties. In the quarter, Our same-store portfolio, excluding two assets under renovation, experienced a decrease in revenue of 9.5%. NOI, however, decreased 24.1% as a result of increased expenses, and in particular, an $850,000 from a pilot burn-off in Jersey City. For the entire year, the same portfolio generated a negative NOI of 6.2%, driven from a 1.1% decrease in revenues. With respect to our Port Imperial hotels, the IMVU remained closed in the fourth quarter, though Marcus Samuelson's dining operation remained open, having generated gross sales in excess of $1 million in the quarter. Despite thawing in the New Jersey lodging market, there is no immediate plan to open the on-view guest rooms. The residents then continue to operate and finish the quarter with average occupancy of 60% and positive EBITDA. The Emory, a 326-unit community in Malden, Massachusetts, stabilized in the fourth quarter. This asset leased up entirely in 2020 amidst the pandemic and achieved the highest rents in its sub-markets. At year end, Roseland had four remaining construction projects comprised of 1,616 units. The company has fully funded its equity commitment to these projects, which are projected to generate a stabilized NOI of $56 million on a 6.15% leverage yield. Subsequent to quarter end, two of the communities opened. The Upton and Short Hills, 193-unit upscale community targeting affluent empty nesters in northern New Jersey. In its first month of leasing, the property signed 49 leases, representing 25% of the overall project and 30% of its market rate inventory. We also opened the 360-unit capstone in Port Imperial. This property has achieved an initial leasing success of 44 units, or 12%, in its initial three weeks since opening. The remaining construction projects include the River House 9 of Port Imperial, a 295-unit apartment house scheduled for delivery in the second quarter, and the Charlotte, a 750-unit tower located in Jersey City's waterfront, which will open in the first quarter of 2022. Roseland secured two significant financing transactions in the fourth quarter, $165 million refinancing at Boulevard 75, which had been the platform's most significant short-term maturity, at a rate of 2.9%, and a $72 million construction and takeout facility for the Emory at a rate of 3.2%. Furthermore, the operating properties we sold in the fourth quarter were sold at a blended 12-month trailing capitalization rate in the low 3s. This pricing further underscores the continued strength in the multifamily NAV in spite of COVID impacts. We have no immediate construction start scheduled, but have two shovel-ready development projects, the park at Port Imperial and Harbor Site 8 on the Hudson waterfront in Jersey City. Both are fully planned and permitted to start when the company elects to initiate new construction starts. While 2021 will still present challenges to both occupancy and net income recovery, we do believe the last 90 days reflects a turn and noticeable improvement in our marketplace. and should continue to demonstrate steady income and occupancy growth going forward. With that, I will turn the call back to Mary Ann.

Thanks, Marshall.

When I joined the board nearly two years ago, I believed that with the right strategy and leadership, we would unlock unrealized value at Matt Calley. Thanks to the dedicated and talented team at the company and the inherent strengths of our assets, I believe we are well on our way to achieving that vision. We'll now open up the call for questions.

Thank you, and if you wish to queue for a question, please signal by pressing Star 1 on your telephone keypad. Again, that is Star 1 to queue for a question. We will now take our first question from Derek Johnston of Deutsche Bank. Please go ahead.

Hi, everybody, and good morning. You know, across all office REITs, we've seen a paucity of leasing activity. And your waterfront office really has been no exception here. How long do you think it will take business leaders to refocus again on their real estate footprint? And if they do decide to reduce New York City office footprints, do you think your waterfront assets can actually see a net benefit? Just as a quick example, I think Condé Nast was reported recently in the press that

be considering a smaller office footprint and you know did cite the Jersey City waterfront as an alternative are you seeing any of this demand you know from them or from others I'll take that first thanks for the question I'll begin by saying that we have a level of activity presently in the harborside properties that is encouraging and it's been relatively busy, Derek, given that we don't think that there's a lot going on on the other side of the river. And we think that has a little bit to do with the desire for companies to remain close to the urban core but perhaps to be at some standoff distance but still be well served by mass transit and all the amenities that the Harborside campus brings. So as we retool our messaging, revamp our marketing efforts, and continue to reconnect with the brokerage community, we remain encouraged. And there is presently a level of activity of approximately 110,000 square feet of leasing for which we are trading paper. And that is encouraging, but of course, we can't be assured that we will complete those transactions. And so we're going to be very modest and careful about predicting. And of course, I'm not in a position to comment on the Condé Nast situation, as we typically would not comment on any prospective tenants or leasing transactions prior to leases being signed. Matt Calley has the best assets in our location in Jersey City, so I think it's fair to assume that any tenant that's looking for office space in Jersey City would be speaking to us. Ed, why don't you comment about the... If you'd like, Derek, I'll just let Ed talk about the return to work mentality and what we're finding out given that we're in close touch with all of our current tenants.

Sure, Marianne. Over the last few weeks, we've seen an uptick in in-person tours and in-person meetings, which really have been very rare since the start of the pandemic. We are engaged in conversations with a number of our existing tenants and prospective tenants and have proposals outstanding. And as you mentioned, we have leases outstanding with several tenants for more than 110,000 square feet of space. It seems like the market has reached a point where tenants are recognizing that the return to work is going to happen this year, and they need to be ready for the return to work. For the first time in quite some time, it seems like tenants are more willing to make real estate-related decisions, whereas during the early stages of the pandemic, certainly, they really shied away from making any decision they had to make, except for a deadline-driven delay or some other critical need for a decision.

No, thank you for the color. That was very helpful. Just switching to the residential, how has the current environment impacted the residential development pipeline or outlook with your land bank? And how has the capstone, I know it's leasing up, but how is it performing versus underwriting? And clearly Riverhouse 9 is basically right behind it. So is the demand there? and how much, given lower rents, have development yields compressed in these projects? Thank you.

I'm going to let Marshall take that question.

Sure. So the first instance, we have a few questions here to respond to. So certainly the lease-up that we've had to date of the pipeline that we started construction on three years ago has gone quite well, actually. They haven't released up completely. Short Hills is leased very well, very quickly at pro forma. The Emory, by the way, leased over pro forma. Capstone has been a very pleasant surprise. We've been hitting our face rent pro forma and have had a very good traffic and capture percentage for the opening month. But we do give it away in free rent, as does everybody in our marketplace. Historically, when you open new buildings, you have one to two months free rent in a normalized market. In this pandemic market, those numbers are generally three months. But we try to average a 15-month lease, so we have almost a full 12-month runway of market rent being paid by our residents. But to date, that has been the case in Capstone. We've opened that up with 90 days, which is what we performed in our cash flow projection. So it's actually exactly where we projected it. And Riverhouse and I will open the same way. It will open up with a 90-days free rent on an average 15-month term. So for us, fortunately, we've actually done well, actually as well as we possibly hoped for given the marketplace on the opening of these new units. Certainly, stabilized yields because of COVID will not be affected in new construction because all that free rent is absorbed in the capitalization of the project on our interest reserve. So as long as we maintain face rent, the stabilized yield on these assets coming out of construction will sustain itself in and around 6%, 6.15%, somewhere in that yield. And as we mentioned with the sales we made this year and what we're seeing with other properties sold in the marketplace, cap rates on apartment houses have never been better than they are today. So I think the return spread between new construction and value still is a minimum of 150 basis points. So it's still very, very accretive to build versus buy. Having said that, construction pipeline starts for us at the moment, as we said before. We're waiting for the board to make a decision on when we want to capitalize new starts. And so we're ready to go with projects. We are selling a few non-strategic land holdings. And when it's time to start again and somebody gives us a checkbook, we'll start again.

And, Derek, I'll just round out what Marshall is saying by saying we believe the growth is important and we strongly believe in the value of the multifamily assets in the markets we build in. As we address our debt in our corporate line, we'll do it with an eye toward potential growth and unlocking the potential of our very valuable land assets. Once the market's corrected for the COVID impact, we think there's tremendous value there.

Thanks, everyone.

We will now take our next question from Steve Sackler of Evercore ISI.

Please go ahead.

Thanks. Good morning. I just wanted to first circle back on the suburban assets to make sure I had the number straight. I think you, Marianne, or Ricardo had talked about, I can say it's 2.6 million feet in four transactions that was a little over 600 million. In the supplemental, you list about 3.3 million between the Class A suburban and the suburban. So it kind of leaves about 700,000 feet left to sell. Is that right? And is there a kind of a rough estimate of kind of value on that 700,000 feet?

Ricardo? Sure. The 600 million of 2.6 million square feet are transactions that we have under a hard contract. We are working through a number of other sale transactions that we are under contract but not quite non-refundable and others that we are close to executing final PSAs or purchase and sale agreements.

Okay, so is your expectation, Ricardo, that that kind of remaining chunk would close this year, just maybe later in the year, or do you think that spills over into 22?

The $600 million that I mentioned earlier will close by the end of the second quarter. We have another, call it, $100 to $150 million of you know, one-off single transactions that we feel we'll be able to capture a good portion of those sales in the latter part of the year. But it would also trickle, some of it will trickle into 22 because it includes land transactions also where we're still working through various entitlements to maximize the value of the land before executing a transaction.

Okay, great. Thank you. And then I guess between Dave's comments on the leasing and Ed, again, if I have my facts right, you said there's about 408,000 rolling, but only about 123 that's still kind of up in the air. So it kind of implies 270 is moving out. I guess maybe, Ed, could you just comment on the remaining 123 and Of the 110,000 where you're trading paper, is most of that for the 123, or is there still kind of a lot of indecision on the kind of remaining 21 expirations?

As you can imagine, we're aggressively speaking to all the 21 rollover tenants. In addition to that, we're talking to the tenants in the near future beyond 21 that are rolling over. So we are in discussions with a number of the tenants. additional 21 rollovers, but the 110,000 square feet of lease transactions that we talked about are separate and aside from those.

Great. And then last question, Mary, and I guess there was really no comments in your prepared remarks or in the press release just about the full-time CEO search, so could you just maybe update us on that process?

Sure. As you recall, we indicated as a board that we would be aiming for a first quarter of 2021 announcement, and I'm happy to report that an announcement on the permanent CEO is imminent, and so you can expect to be hearing from us soon about that selection.

Great. Thank you. That's it for me.

We'll take our next question from Manny Quartzman of Citi. Please go ahead.

Hey, good morning, everyone. We've got some questions for each of you here. Ed, can you give us some updates on what the new New Jersey Incentive Program actually looks like?

Sure. The new program is named Emerge.

It's a tax credit program that rewards new tenants and retained tenants that's been recently rolled out by the state. A number of the tenants that we're talking to are glad that there's finally been a new program put in place and are looking forward to take advantage of it.

And then I think you guys mentioned doing life science at One Harborside. Is that based on demand you're seeing, where tenants have approached you, and now you're going to make that space applicable to them, or is that just, hey, life science seems to be a good sector, others are doing it, let's do this too?

Manny, thanks for the question. So it's Harborside 4A, formerly known as 4A, and we've renamed it Harborside 6. And again, we are looking to diversify the offerings here. So it's everything from pre-built to large-scale single occupancy abilities at Harborside 1. And so in the quest to provide the market more options, we studied the life sciences capabilities of that building and did a deeper dive into the potential need for increased investment in infrastructure. And it's quite positive because the floor plates are generous and there isn't much by way of that product offering here in the market. And that has proven to be an interesting idea because we have been in discussions with a few JV partners in the life science space. And because the building is so well suited and it's, you know, effectively available, 100% available, we will continue to discuss a life science conversion opportunity with partners. And as I indicated last, the partnership concept is important because of the capital needed to be a true life science offering on the enhanced corn shell. And so we are mindful of the fact that the capital will need to come from somewhere, and therefore we're looking at strategic partnerships.

Thanks. Ricardo, where does 111 River fall into the disposition plan now?

Right now, we are focused solely on the selling of the suburban office assets. We will take, you know, we will review, we continue to review our waterfront assets right now. 111 River, we are not currently marketing for sale.

And then finally one for Dave. I told you I had one for everyone. Dave, you talked about redoing or thinking about redoing the line, the line of credit later this year, I guess. How do you think about that in totality, just given where you're going to end up on a multifamily and office perspective? Are you going to need more equity just to get things done? Is it going to be a smaller line? Just help us frame what that new line might look like.

Thanks, Manny. Yeah, so I'll help you frame that. So I think let's first take a look at Roseland, which is where we'll mostly be after this bourbon office sale. So Roseland's in a joint venture. We use mortgage financing there. When we develop, most of the equity we have is already in the land that we own and control. So a small portion of our new line would be allocated over to Roseland to help them with their kind of general corporate purposes and needs. But the larger line, one, I'll be very clear, we do not need to put any equity in. It'll be secured by our six assets on the waterfront, four of which are unencumbered. It'll be a smaller line, and it'll be really based more on mortgage metrics and availability than corporate covenants. So I'll be sleeping better at night. Our capital needs will be much more modest when we're down to the six office assets here on the waterfront, Manny, and we'll have separate set-asides within the line for TI and CAPEX. So a smaller line secured by the waterfront with some availability for our Roseland friends and partners, if that makes sense.

Great. Thanks, everyone.

We'll take our next question from Aziz Rodriguez of Bank of America. Please go ahead.

Good morning, and thank you for taking the question. Mary Ann, perhaps you can share your thoughts on what it would look like to spin off the multifamily business and then just keep that as core and maybe just sell off the rest of the office in the future. I know you've mentioned potentially the ability to spin off the Roseland business so you can get proper valuation in the market for what that's worth. So any thoughts on that would be helpful. Thank you.

Thanks, Elvis.

I've got lots of thoughts on it, but I think the best way to answer that question is we're super focused on the disposition strategy in the suburbs, and we're continuing to explore all strategic alternatives, including, you know, an entire transaction or partial spinoffs of sections of the business. And so I think the best thing for me to communicate to you is that the focus today is to shore up the balance sheet and dispose of the suburban assets, while at the same time, the strategic review committee at the board is deeply engaged in exploring all strategic alternatives and responding to inbounds.

Great, and then just one more. On the CEO search, will the person be an internal hire or someone from the outside?

As we've indicated, my position here as an interim CEO, it's always been my intention to pass the baton, and I'm excited to be doing that, and it is not an internal candidate.

Great, thank you so much.

And there are no further questions at this time. I would like to hand the call back to our host.

Thank you all for joining us today. Enjoy your weekend and happy Friday.

Thank you. That now concludes the call. Thank you for your participation. You may now disconnect.