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spk06: And welcome to the MacCalley's Realty Corporation Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. I would 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 on 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, I will hand the call over to Mahudnia Makhali's Chief Executive Officer.
spk05: Good morning and welcome to our second quarter 2021 earnings call. I'm joined today by David Smetana, our CFO. I'm pleased to share that we had another active quarter during which we made significant progress on a number of key initiatives as we seek to unlock value for our shareholders. We further simplified our business and strengthened our balance sheet while positioning our assets to maximize their leasing potential and streamlining our internal operations to realize operational cost savings and other ancillary benefits that will anchor us for future success. I will discuss each of these in more detail later. The US economy appears to be at the beginning of a strong recovery, supported by the government stimulus and high vaccination levels. The International Monetary Fund recently raised its 2021 growth projections at 7%, the highest level since 1984. However, risks remain, including market concerns related to rising inflation levels and the potential resurgence of COVID infection rates, and new variants. Though we cannot control what the future brings, we believe the quality of our multifamily portfolio, combined with our live, work, and play office proposition, makes us well positioned to continue capturing leasing demand as the economy reopens and employees return to the office. The rebound in economic activity is particularly visible in our multifamily portfolio, which now accounts for approximately half of our NOI, and there's seen an incredibly strong resurgence in leasing during the last 90 days. Our 5,825-unit operating portfolio was 97.5% leased and 94.4% occupied as of July 25th, up from 92.8% and 89.7% as of March 31st, respectively. We have removed concessions across the majority of our properties and have started to increase rents at a number of them. Turning to development, during the quarter, we opened a third residential community, River House 9, a 295-unit apartment building located in Port Imperial. Despite having only recently come online, the asset was 60% leased as of July 25th, ahead of our internal expectations with respect to both leasing velocity and rent level achieved. We also successfully secured strong levels of leasing at our other two recently completed properties. As of July 25th, the Upton and Short Hills and the Capstone at Port Imperial were 94% and 70% leased respectively. Our 750-unit apartment building at 25 Christopher Columbus remains on track for initial occupancy early next year. Turning to office, we are encouraged by the progress we have started to make in leasing. In the first six months of the year, we signed 87,000 square feet of new leases and lease extensions on the waterfront. The waterfront assets are now 75.4% leased, up from 74.2% at the end of the first quarter, with the growth primarily due to a new 52,000 square feet lease at Harborside II, and 24,000 square feet of leased renewals or expansions that were signed at Harborside II and 101 Hudson. We also unveiled a repositioned Harborside campus, anchored by a pedestrianized Hudson Street, recreational areas, retail amenities, and New Jersey's first ever Smorgasbord location, all of which have driven plentiful foot traffic to Harborside and reinvigorated the campus as both a community hub and workplace solution for the future. We also continue to identify ways to advance our sustainability and innovation efforts to become a more environmentally and socially conscious landlord. As an initial step in this direction, I'm pleased to share that all of our electricity usage at our headquarters at Harborside 210 is now from fully renewable sources. We also remain highly focused on our strategic objectives of simplifying the business and streamlining the balance sheet, as illustrated by the disposal of virtually all of our remaining suburban assets during the quarter, substantially in line with our pre-pandemic valuation expectations. In total, we sold $387 million, or 1.8 million square feet of suburban assets. These sales included a short-tailed portfolio for $255 million, the River Center Portfolio and Red Bank for $84 million, and a Wegmans Anchored Retail Center in Hanover for $46 million. Earlier this week, we completed the sale of seven Giralda farms for $29 million, allowing us to fully retire the $150 million term loan. Moving to operations, during the quarter, we took steps to establish a more efficient organizational architecture that we expect to result in operational cash cost savings of up to $5 million per annum on a run rate basis. We expect these changes, along with some targeted technology investments that we are contemplating, to have the potential to drive both top-line revenue enhancements and further operational efficiencies. We also bolstered our team with new talent that we believe will help us achieve our full potential as a best-in-class multifamily owner and operator. Jamin Chile, a seasoned multifamily operations leader with 16 years of multifamily experience with J.P. Morgan and Carmel, a multifamily specialist managing over 40,000 apartments, joined us this quarter. He will work closely with other members of the team to further optimize our multifamily platform and innovate the needs of our stakeholders while overseeing the third-party property management services that we provide to a number of institutional clients. With that, I'm going to hand over to David Tlatana, our Chief Financial Officer, who will update you on our financial performance during the quarter.
spk02: Thank you, Mahbad. We reported core FFO per share for the quarter of $0.15 versus $0.28 per share in the prior year. The year-over-year reduction in core FFO per share was primarily due to the impact of our suburban office asset sales program and effects of the pandemic on hotel, parking, and multifamily operations. This quarter, our team drove significant improvements in multifamily operations underpinned by increasing occupancy. Net effective rents have stabilized due to lower concessions, and we are now beginning to show sequential revenue growth. On a sequential same-store basis, we reported a revenue increase of 1.5% and a sequential same-store NOI increase of 1.4%. Also in the quarter, we received our share of the sale proceeds from the IRB tax credit of $2.6 million, which was included in core FFO. Historically, this credit was received in the third quarter. The Waterfront office leasing team continued their efforts to reinvigorate the portfolio, resulting in 76,000 square feet leased compared to 58,000 square feet leased last quarter. The Waterfront portfolio incurred a cash game store NOI reduction of 9.6%, largely attributable to decreased parking income year-over-year and previously announced tenant move-outs. Gap same-store NOI increased by 2.5%, due primarily to prior year straight-line rent write-downs. For the balance of 2021, we have approximately 190,000 square feet of our waterfront office leases remaining to expire, 44,000 square feet of which relate to the additional TD Ameritrade move-outs at Harborside 6 in the fourth quarter and 100,000 square feet of which relate to a Natixis move out at Harborside 5 at the end of July. Looking ahead, 2022 has a manageable lease roll with only 100,000 square feet expiring and no single lease greater than 26,000 square feet set to expire. I'd now like to take a moment to provide an overview of our current portfolio. It is currently comprised of 21 operating Class A multifamily assets, which produced approximately 53% of our pro rata NOI, one multifamily project in construction, our six waterfront office assets, two remaining suburban office assets, one of which is in discontinued operations, our two hotels, and a land bank comprising 14 development sites. As our multifamily development pipeline stabilizes, we expect to have embedded NOI growth gradually begin to contribute to earnings. We will also continue to derive incremental income as occupancy rises and concessions burn off in our multifamily operating portfolio. Turning to the balance sheet, in the second quarter, both the $300 million April 22 bond issue and the $275 million May 23 unsecured bonds were retired with proceeds from the sale of our suburban office portfolios. Simultaneous with the retirement of the bonds, we entered into a a new revolving credit facility, and $150 million term loan. With the closing of seven Geraldo Farms earlier in the week, our term loan has now been fully repaid, further de-risking our balance sheet. We are left with a favorable debt maturity schedule with a single $3.8 million mortgage maturity in 2021 and only one maturity in 2022 related to a successful Class A apartment construction loan totaling $74 million. which has a one-year extension if needed. We are pleased with the progress we have made on our balance sheet and the flexibility our new credit line provides us as we continue executing on our strategic objectives. This concludes our prepared remarks. Operator, can we open the call for Q&A?
spk06: Thank you. If you would like to ask a question today, please press star 1 on your telephone keypad. We will pause for just a moment to allow everyone an opportunity to signal for questions. As a reminder, it's Star 1 to ask a question today.
spk07: Thank you.
spk06: We can now take our first question. It comes from Manny Quartman of Citi. Your line is open. Please go ahead.
spk03: Manny Quartman of Citi. Hey, good morning. You know, office concessions remain elevated as witnessing your leasing. Is that sort of the new normal for now, and when do you expect those to come back down?
spk05: Good morning, Manny. Thanks for the question. Yeah, I think that concessions obviously are elevated relative to pre-COVID levels, but certainly if you look at the package that we offered on the at that MGM lease, really there, there was a very minimal rent-free that was granted. So really the majority of the concessions really went into the TI package. So we're leasing at levels that are accretive to the business from a value perspective and from an earnings perspective, net of incentives. And we're pleased to, or encouraged really, to have started to see some traction on that front and hope to see that continue.
spk03: Great. And then, Mahbub, during our meeting in Navy, you spoke about expanding the multifamily platform outside of sort of the core in New Jersey and maybe New Jersey plus base. What do you say on that? Is that something you're actively pursuing at the moment?
spk05: Yeah, I would say really that the comment was more centered around concentration risk and whether to the extent that we do gravitate more towards becoming a multifamily REIT, whether we should be more concentrated in our current markets or look to new markets. And we have a presence in Boston. As you know, there are some interesting dynamics on the job and earnings growth front and general economic front. in that market and in a couple of others in that northeast corridor. So we're at the point where we're really evaluating potential options for us in the future, but no conclusive decisions have been made at this point. Thank you. Thank you, Manny.
spk06: Thank you. We can now move along to our next question. It comes from Brian Spann of Evercore. Your line is open, sir. Please go ahead.
spk04: Hey, thank you. Good morning. Could you maybe just talk about leasing interest at the waterfront? You know, what does the pipeline of activity look like? There's a bit of acceleration in the corridor, so just kind of, can you add some color on what's in the pipeline in terms of types of tenant, size, industry? Thank you.
spk05: Sure. I think certainly with the investment that we've made into the waterfront, onto the Harborside Complex, the sense of the placemaking initiatives that we've implemented. It really is a live, work, play campus now. And that coupled with the fact that we have a pretty diverse offering in terms of the type of space that we have available for tenants means that it's a pretty varied and diverse group of tenants that are that are showing an interest. And so, you know, that getting specific, it is pretty diverse. It's, you know, financial services, professional services, insurance, technology, advertising, entertainment. It's really pretty broad and the requirements are pretty diverse as well.
spk04: Great. Okay. And then I guess just switching over to multifamily, you know, with apartments leased over 94% as of a few days ago. You've talked about tapering back concessions and starting to be able to push rents. How aggressive do you think you can get given current market conditions? And where do you plan on settling out on the occupancy front there?
spk05: Yeah, well, it's a good question. It really, I would say, having tapered back concessions on substantially all of the assets and having reached leasing of 97.5%, occupancy is at just over 94%, we are at that inflection point now where the next natural phase in the evolution of this story should be rental growth. On a very case-specific basis, we'll be working closely with the team and on the ground to assess what's feasible. But certainly, it's an encouraging sign, the rebound really in occupancy and leasing over the last quarter. And we still haven't seen all the constituents that would reside in our apartments return yet. So with the borders being shut and office return still being more of a sort of post-September Labor Day type of an event, generally speaking. We would hope with the borders opening, overseas students returning, and a wider return to the office, there's still more momentum on the demand side that could help us realize some rental growth.
spk04: Okay, great, Keller. And lastly, Dave, is there anything left on the suburban office front in terms of sales, or is that completed?
spk02: Thanks, Brian. Good question. So I want to make sure everybody understands where all the assets, remaining assets, are accounted for. So there are technically two suburban office assets left for Gate Hall, which is under contract and held in discontinued operations, and our 23 Main Street asset, which is really a big office campus, which ultimately may turn into a land play, may not. But that one will probably be around with us a little bit longer than for Gate Hall. But we're down to two remaining suburban office assets. So really the focus, and you can see in our bullets and on the call, is on the waterfront and the leasing momentum there.
spk04: Great. Thanks very much.
spk06: Thank you. We can now move to our next question. It comes from Jamie Feldman of Bank of America. Your line is open. Please go ahead.
spk01: Thanks, and good morning. I guess just to follow up, so for Gatehall, is that on the market now, or you're not marketing that just yet?
spk02: It is. It is currently under contract.
spk01: Okay. And looking at the Gerald and Farms cap rate 10, I know the... I know it was 60-ish percent lease. I mean, do you expect something similar for this asset or lower?
spk02: Both these assets are located in the Parsippany and Geraldo submarkets, which have a lot of sublease space due to a couple mergers of some big pharma companies. So we're not going to give cap rate guidance, but the price per square foot should be in the same price per square foot category. is a decent way to think about that last remaining sale.
spk01: Okay, thank you. And Mahbub had mentioned, you know, talking about the cost savings and maybe some of the platform improvements, technology investment. Can you just talk a little bit more about what you guys have in mind and how that might help the business? Sure.
spk05: Good morning, Jamie. well you know so as you know we um have an established multi-family operations platform uh we manage our own assets we manage assets for a number of um blue chip institutions as well so the steps that we've taken are really um on the one hand to just further optimize um and enhance the operational efficiency within which we operate internally And then equally importantly, really to ensure that we remain, you know, ahead of the curve in terms of achieving our objective of being a best in class owner operator in that sector. And so with that, there are a number of initial changes. I talked about the organizational architecture and hiring in Jamin Chile, who I believe will be tremendous at leading that effort for us. And some of the changes that I mentioned on the technology side will be targeted at the revenue side and more effectively monitoring and managing and controlling the revenue side of the business and some of them will be more focused on the cost side. So they're incremental. We already have a platform. It works well. It's validated by others who rely on us to manage assets for them. But we really want to make sure we remain best in class and that we're really at the leading edge of the market when it comes to utilizing technology and in the way that we operate our assets. That's really what that's targeted at. Okay.
spk01: And then, David, I mean, when you think about the core portfolio, excluding those two suburban assets, it sounds like you still have the TD market. move out into Texas in the back half of the year, 22, probably less. And when do you think NOI bottoms? Because it sounds like you are feeling pretty good about the apartment pickup.
spk07: Yeah, Jamie, sorry.
spk02: Sorry, Jamie, do you have me without the feedback now? Apologize.
spk01: Yeah, no, you're good.
spk02: All right, so a good question. So Yeah, we have a couple of countervailing forces. I highlighted the move outs, which are well known of Natixis at the end of this month, and then another 44,000 square feet from TD Ameritrade. So to the positive, we are starting to see a recovery in parking income, albeit slight, and our hotels. And we have our multifamily development pipeline coming online, coupled with the now sequential growth in our residential portfolio so I think putting that all together I think we're seeing EBITDA starting to bottom you know towards the end of this year and then and grow going into next year but this is kind of the peak of the dilution as we're finishing up the suburban office asset sales and these couple big mood move outs which we've been trying to notify everybody about for a couple quarters in a row now okay that's helpful and then just to confirm you're saying on the waterfront in 22
spk01: You really have nothing meaningful moving out?
spk02: Yeah, and I highlighted in prepared remarks, there's 100,000 square feet total in our largest lease rolling is 26,000 square feet. So nothing like the large tenant move outs we had this year in 2021. Okay. All right.
spk01: Great. Thank you.
spk06: Thank you. We can now move along to our next question. It comes from Tom Catherwood of BTIG. Your line is open. Please go ahead.
spk00: Thank you. Good morning, everyone. Dave, just wanted to swing back. I appreciate the comments on the suburban office sales and the two remaining assets there. As we think, though, kind of about the track for repaying the remaining secured line of credit. Is there anything else besides just the operating office that's kind of in the non-core sales bucket? Things like remaining office land, maybe any of the non-core land within Roseland or anything else that was non-core, kind of like the Wegman Center. Is there anything else besides office that's going to come out to help kind of alleviate the balance of that debt?
spk02: Yeah, great question, Tom, and you know the company well. That's right. We have the remaining two suburban office assets. We have some land over on the Mack Cali side, some perhaps excess land on the Roseland side, and I think we've messaged to yourself and many that hotels probably are not part of our long-term kind of operating core portfolio. So those in total should be able to take care of the remaining line balances.
spk00: Got it. Appreciate that, Dave. And then when we look at office leasing, obviously, New Jersey put its Emerge New Jersey incentive program in not too long ago. Any sense on when those benefits could kind of start flowing in? And do you expect them to have a positive uptick beyond what was obviously a positive quarter on the office leasing front?
spk05: Good morning, Tom. Let me take that. So it's definitely made a difference, I would say, in terms of helping further enhance the appeal of Jersey City. So tenants obviously to varying degrees will qualify for it, but it can be a pretty meaningful subsidy and can make it even more appealing from a pure financial perspective for tenants to relocate there. Patrick Corbett- And we're very pleased that it's been introduced at the beginning of this year. We do think it it's already making a difference. I think we just need the mobile widespread return to the office. Patrick Corbett- Plan to continue as it appears to be today and I'm sure we'll see the benefits of that come through.
spk00: Got it. Appreciate that, Abad. And then last question for me, and I know it's tough to ask about retail, especially as things are just kind of starting to reopen. But if we look at your office business segment, there's 190,000 square feet plus of retail amongst a variety of buildings. It's not generating any NOI right now. What are your kind of thoughts as far as filling that space up, utilizing that space as the reopening continues? And then what could that ultimately generate in terms of earnings for you as it stabilizes?
spk02: Tom, it's David. So on retail, a couple of things. You're starting to see in the quarter our base building office tenants, the ones that we do have, are starting to come back to us, get current on rents. So we had some write-ups there. In the larger kind of retail footprint we have in the base of Harborside, we view that space as really amenity to the office. As the occupancy picks up and our leasing guys want to get it leased as well to help induce our office tenants, we'll start to see more impact from the retail, but we want to go slowly on that now and make sure we get the right tenants, but I would not be modeling in any big pick-up from a retail contribution. But when you're in Jersey City, you will start to see increased retail leasing. But we're going to hold off on really modeling that retail income coming in.
spk00: Understood. I appreciate it. Thanks, everyone. Thank you.
spk06: Thank you. That concludes our Q&A session. I can now hand the call back to the speakers for any additional or concluding remarks. Thank you.
spk05: Thank you, everyone, for joining us this quarter. It's been a productive quarter for us, and we look forward to updating you again in due course.
spk06: That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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