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Edited Transcript of CLI earnings conference call or presentation 2-May-19 3:00pm GMT

Q1 2019 Mack-Cali Realty Corp Earnings Call

Edison May 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Mack-Cali Realty Corp earnings conference call or presentation Thursday, May 2, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Smetana

Mack-Cali Realty Corporation - CFO

* Marshall B. Tycher

Mack-Cali Realty Corporation - Chairman of Roseland Residential Trust

* Michael J. DeMarco

Mack-Cali Realty Corporation - CEO & Director

* Nicholas A. Hilton

Mack-Cali Realty Corporation - EVP of Leasing

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Conference Call Participants

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* Anthony Paolone

JP Morgan Chase & Co, Research Division - Senior Analyst

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Robert Lewis

SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst

* William Thomas Catherwood

BTIG, LLC, Research Division - Director

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Mack-Cali Realty Corporation First Quarter 2019 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Michael J. DeMarco, Chief Executive Officer. Please go ahead, sir.

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [2]

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Good morning, everyone, and thank you for joining the Mack-Cali's First Quarter 2019 Earnings Call. I'm going to try to speak more clearly and a bit louder than I did the last time. This is Mike DeMarco. I am joined today by my partners, Marshall Tycher, Chairman of Roseland, our multifamily operation; David Smetana, our CFO; and Nick Hilton, our EVP of Leasing.

On a legal note, I must remind everyone that certain information discussed in this call may constitute forward-looking statements within the meaning of the federal securities law. Although we believe the estimates reflected in any statements are based on reasonable assumptions, we cannot give assurance that the anticipated results will be achieved. We refer you to our press release, annual and quarterly reports filed with the SEC for risk factors that could impact the company. We have filed a supplemental this quarter. And as always, please contact David with any further suggestions.

We look forward to seeing many of you, if not all, at the upcoming NAREIT conference.

As we have done before, we're going to break our call down into the following sections. I will make some opening comments. Nick will discuss our office leasings performance and our view of the markets going forward. Marshall will provide insight into our multifamily operations. David will recap our operating results, and I will close with some comments regarding our upcoming annual meeting.

As indicated, we had another successful operating quarter as we delivered very positive results for the quarter. We had a great deal of transaction activity that we completed on plan, if not a little early. I thought our teams performed brilliantly. Our office leasing results so far for '19 were expected regarding total amount of square foot leased and rates achieved. We can believe we can achieve equal results over the upcoming quarters, if not more. We're also working on a number of new large deals in both the suburbs, which are particularly active at the moment and on the Waterfront. Additionally, our multifamily business is really hitting on all cylinders, which my partner Marshall will go into detail.

So far, 2019 is shaping up from a tone as well as our tenants are really accepting the new product that we build above office and multifamily. Every day, our office tenants love the revamped cafeterias, lobbies and amenity packages and improvements made to the Waterfront for creating a sense of place. We are bringing that same excitement to our multifamily portfolio. Starting in 2020 and '21, the new product that we deliver, both Harborside Plaza 1, which is getting redone totally, and 25 Christopher Columbus; and the planned retail transition at the Harborside, with the now announced inclusion of Whole Foods and several other restaurants, will totally change the way our Jersey's operation is looked at.

Our 3-year plan of selling the bottom of portfolio is complete. We are now in the process of creating portfolio by selected dispositions and occasional acquisitions that we can truly focus on to achieve the highest results. Our sale of the Flex business this past quarter is an example of that strategy as is the consolidation of the ownership of the Jersey apartment towers, M2 at Marbella and the purchase of Soho Lofts. Regarding multifamily, my partner, Marshall, will go over in his points, but we had a very, very good quarter for leasing at all our projects. 145 Front Street, our last delivery in 2018 is close to being fully stabilized. The second phase should be fully leased by June 30. The same-store numbers is on a show of strength, which we expect will continue throughout 2019, and Marshall and his team, as we expressed the last time, were in the process of creating some truly superb projects, inclusive of arts, theaters, substantial public space that will really help us complete the sense of place here in the Waterfront.

In Port Imperial, the Residence Inn opened in 2018 in November (sic) [December], it's actually doing above plan so far as in this year. The second phase, which is the Marriott Autograph, will open in the second quarter of this year. Also, we'd like to point out, as Hudson Yards comes fully online, our assets in Port Imperial are going to be increasingly more valuable. We could not be more excited of our strategy there.

Lastly, leverage came down from the proceeds of the Flex business, that David will talk about, and some non-income producing asset sales. We will do further sales this year in the third and fourth quarter, which will be applied to our debt balance.

I'd now like to turn it over to Nick for an overview of leasing.

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Nicholas A. Hilton, Mack-Cali Realty Corporation - EVP of Leasing [3]

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Thank you, Mike. We posted another good quarter to kick off 2019, signing just over 198,000 square feet of transactions, resulting in our core and Waterfront portfolio finishing at 80.9% leased at quarter-end. Of these transactions, approximately 60% or 119,000 square feet were new leases and 40% or 79,000 square feet were in-place renewals. Across all markets, our rents on Q1 deals rolled up 9.4% on a cash basis and 18.3% on a GAAP basis. And we committed $7.13 per square foot per year of lease term, which was largely a result of our leases executed with Amazon Whole Foods for both office space and a store in our waterfront portfolio.

Focusing on our results by market. In the first quarter, the Waterfront completed just over 114,000 square feet of transactions with a cash roll-up of 13.1% and a GAAP roll-up of 19.1%. In addition, we've approximately 300,000 square feet of new transactions currently in negotiations.

Our suburban portfolio also remained active in the first quarter. Specifically, we executed just over 84,000 square feet of transactions. One of the most significant included the renewal and expansion of FINRA for over 28,000 square feet at 581 Main Street, Metropark.

Broadly speaking, we continue to see strong momentum across the entire suburban portfolio where we are in active negotiations with over a dozen tenants over 20,000 square feet, aggregating to more than 0.5 million square feet of new transactions. Of that total, we feel confident about executing roughly 300,000 square feet by year's end.

With that, I'd like to turn the call over to Marshall.

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Marshall B. Tycher, Mack-Cali Realty Corporation - Chairman of Roseland Residential Trust [4]

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Thanks, Nick. Roseland stabilized operating portfolio finished the quarter at 96.3% leased as compared to 95.9% leased last quarter. Our strong leasing momentum continued into April, and we are currently 97.6% leased as we enter into our historically strong spring season. Roseland's same-store portfolio, which has now grown at 5,673 units, experienced a 3.9% increase in NOI over first quarter 2018. Over the same period, revenues grew 3.1% with the most substantial growth experienced in our Alterra, Chase and M2 communities. The same-store portfolio excludes 1,212 units delivered in 2018. This lease-up portfolios collectively 94% leased and was delivered at a 6.5% yield on cost and is forecasted to produce stabilized NOI of $26 million. Our last remaining lease-up, 145 Front Street in Worcester, as Mike mentioned, is currently 82% leased with Phase 1 as stabilized at 95%, and we expect to finish lease-up by the end of June.

On the last quarter call, we referenced the corporate objective to limit Airbnb and corporate tenant abuses in our communities. The eviction process led to temporary vacancies in our Washington, D.C. and Jersey City communities. All have been restabilized and finished the quarter above 95% leased. Strategically, the select transactions have led to increased ownership with a more focused geography. First, we closed on the assignment of Prudential's 50% membership interest in M2, a 311-unit high-rise that adjoins Marbella. The acquisition was based on a gross asset valuation of $195 million and after refinancing had a net capital requirement of approximately $36.5 million.

Second, and subsequent to quarter-end, we acquired Soho Lofts, a 377-unit community for $264 million. This recently stabilized asset is located in Jersey City's emerging Soho West neighborhood near the Hoboken border. These collective transactions have reduced the Jersey City portfolio of 2,385 stabilized apartments with average ownership of 87.4%.

Lastly, in the first quarter, we closed on the disposition of the nonstrategic Park Square in Rahway, New Jersey for $35 million and approximately 5% cap rate.

Additionally, Roseland's active construction and process pipeline is comprised of 372 hotel keys and 1,947 apartments, representing total cost of $1.16 billion. These assets were forecasted to generate NOI of $75 million upon stabilization. The 164 key Residence Inn at Port Imperial opened at December 2018 and completed April with an average occupancy of 90% and an ADR of $172. We anticipate this success will continue with the third quarter opening of the dual-flag, full service component Envue, a Marriott Autograph Collection Hotel. Upon stabilization, the combined hotels are projected to generate $14 million in NOI.

The construction portfolio is highlighted by 25 Christopher Columbus, a 750-unit signature development in Jersey City now called The Charlotte. The project will include construction of a 36,000 square-foot on-site elementary school, which will be a significant amenity to the Jersey City Waterfront neighborhood. This project has a long term, below-market tax abatement fixed for 20 years at 7.5%.

In the first quarter, we launched a common area and unit renovation program at Marbella and Monaco in Jersey City. These renovations will modernize the building's common area amenities and update the apartments to current market specs and should generate substantial rent premiums. Additionally, in the first quarter, we initiated disposition efforts of our suburban Philadelphia land holdings as we target greater geographic focus of our residential portfolio.

Finally, we estimate a residential NAV of approximately $1.9 billion. After accounting for Rockpoint participation, Mack-Cali share of NAV would be approximately $1.6 billion. Consistent with the company's Waterfront focus and highlighted on Page 8 of the supplemental, 62% of residential NAV is located along the Hudson Waterfront, actually, 66% with the Soho Lofts acquisition in April. Moreover, we control 6,500 units of the most desirable development sites along the Waterfront in Jersey City and Port Imperial.

With that, I turn the call over to David.

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David J. Smetana, Mack-Cali Realty Corporation - CFO [5]

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Thank you, Marshall.

I've a few brief highlights before turning the call back over to Mike. As Mike said, overall, we saw a solid quarter operationally with an earlier-than-expected closing on our $488 million Flex portfolio sale. We reported core FFO per share for the quarter of $0.40 versus $0.50 in the prior year. The year-over-year decrease is due mainly to move-outs of tenants on the Waterfront and a shift in timing of the receipt of proceeds from the sale of our early tax credit of $0.03 per share as well as lost NOI from asset sales executed as part of our disposition program. Our core office portfolio, excluding Flex, was 80.4% leased at year-end and was 80.9% leased at this quarter-end, a pickup of 50 basis points.

Cash same-store NOI in our office portfolio declined by 5.4%, and GAAP same-store NOI declined by 7.5% in the first quarter, with the year-over-year declines once again driven by move-outs at -- in our Waterfront portfolio. We still see GAAP same-store NOI turning positive in the fourth quarter this year. And note, cash same-store NOI performance came in better than expected in the first quarter due to slightly later free rent commencement dates on some of our 2018 blend and extend deals, which have now begun in April. We also had a 125,000 square-foot tenant in the suburbs move out at the very end of the first quarter, which in isolation will have a minus 1% impact on year-over-year cash and GAAP same-store NOI. Residential same-store NOI improved by 3.9% this quarter in our newly expanded same-store pool. In addition to the properties Marshall highlighted, we saw some benefits from lower concessions in some of our newer properties and lower operating expense increases due to favorable prior-year comps. We will be watching our lease-up season closely before making any adjustments to full year multifamily same-store NOI guidance.

And now -- I will now highlight some of the transactions that we've talked about for a while now that closed in the quarter and post quarter close. We finalized the sale of the remaining Flex portfolio of assets for $488 million and 5 other office buildings for $75.3 million. We also disposed of a noncore multifamily asset for $35 million, and its net proceeds after repayment of debt will be recycled into development. We currently have another $41 million of assets under a contract to be sold this quarter, representing a total of $116 million of dispositions versus our guidance midpoint of $168 million. The remaining sales will be weighted towards the fourth quarter of this year. With our noncore asset sales substantially complete, our incremental sales will be driven by tax planning where the paydown of debt is involved, and we will continue to look to rationalize the portfolio swapping for micro markets where we do not have substantial share to those where we have a platform and more influence in the market.

A couple of notes on acquisitions. As previously disclosed on the fourth quarter call, we closed on buying out our partners 50% share of M2 at the end of January. Both M2 and Marbella are now consolidated joint ventures, and we have updated our disclosure to reflect the change, and they are now both in the top section of our residential NAV under wholly owned and consolidated. We closed on the acquisition of Soho Lofts in New Jersey for $264 million on April 1, that's post quarter closed. I will note, the proceeds from our Flex sale earmarked to Soho Lofts are in our 1031 Balances section of the NAV.

Lastly, on February 6, as part of the tax planning around our Flex sale through a 1031 exchange, we purchased a 272,000 square-foot office property in 99 Wood adjacent to our 101 Wood property in Metropark.

Turning briefly to the balance sheet. We reported net debt-to-EBITDA of 9.5x this quarter. We used $70 million from the sale of our Elmsford Flex portfolio on December 31 to repay outstanding balances on our line of credit and another $210 million from the recent sale of the balance of our Flex holdings to pay off credit line balances and pay down our 2016 term loan by $90 million to our current balance of $260 million. There's approximately $30 million remaining in 1031 escrows which may be used to pay down additional corporate debt. We have identified a group of unencumbered assets and are working with the lenders to finance these assets with proceeds going to retire the balance of our first term loan and other corporate debt outstanding.

Lastly, shifting to guidance. As we stated in the press release, we are reaffirming our core FFO guidance given at our Investor Day of $1.57 to $1.67 a share. I also noted earlier that we now plan on receiving our Urby tax credit in the second quarter versus receipt at the very end of the first quarter in 2018. We are maintaining all of our ranges in our initial guidance. We still see same cash -- same-store cash NOI coming in, in the range of minus 14% to minus 10% despite the better-than-expected quarter on a cash basis and minus 7% to minus 3% on a GAAP basis. And we will maintain our 1% to 3% same-store NOI guidance for our apartment segment until completion of the leasing season ahead.

With that, I turn the call back over to Michael.

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [6]

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Thank you, David.

In closing, as my colleagues have outlined, we continue to believe we are set up to have a good 2019 from an execution point of view, with the results showing up in 2020. Our focus is really 100% on the Waterfront for future transactions. For example, as Marshall has laid out before, we intend to exit out D.C. joint ventures, land sites in Philadelphia and land sites in suburban New Jersey to either pay down debt or fund our development. You can expect us to also have additional suburban office sales in the third and fourth quarter as outlined earlier. We are excited about our operating portfolio and how we'll continue to grow with excellent new projects. The key is creating a sense of place in the Waterfront for us to execute our strategy. I'm confident the total effect of our coordinated efforts in office, retail with the Whole Foods additions and other restaurants we're adding, multi-family projects that we currently own and will construct will produce excellent returns in the short and long term.

Before we turn to the Q&A portion of today's call, I want to provide a brief update regarding the unsolicited proposal to acquire Mack-Cali suburban and Waterfront office assets that we received from Bow Street and David Werner Real Estate Investments as well as the related board nominations that we separately received from Bow Street. We welcome Bow Street, as we would any other shareholder. As I've said before, my door is always open to shareholders, and my phone and e-mail work. We listen carefully and ran what I would honestly say is a thorough process. They might -- may not agree with the decision, but I stake my personal reputation in that statement. Prior to Bow Street's overture, we already had [BAMO] reviewing strategic alternatives. We started with the decision to sell our Flex portfolio last November. So effectively, BAMO has been working with us for about 9 months. Therefore, we have and will continue to be very thoughtful in our approach on every opportunity to increase and realize our NAV.

Upon receiving the unsolicited proposal in February, the Mack-Cali Board of Directors, which I am a part of, thoroughly evaluated it in consultation with our substantial legal advisers. Following this careful review, the Board unanimously rejected the proposal as grossly inadequate on price, usually on terms unworkable and not in the best interest of the shareholders.

Further, the Board had concluded the Mack-Cali strategic plan as outlined by us previously will deliver value to shareholders as far as superior without the substantial cost, risk and uncertainties associated with the proposal. We met with Bow Street several times, myself personally. They now question whether we were open to any deal. I'd like to answer that. The answer is yes. We are, and continue to be, receptive to all offers. One could wonder what bid would be susceptive to the Board. The answer is simply as one that is real, has certainly execution that is in the best interest of its shareholders. A long time ago, I defended my Board about their intentions. I'd like to repeat that comment today. I firmly believe, without any reservation, that they hold their positions as directors because they are talented and have the best interest of the shareholders and for no other reason.

Following the decision to reject the proposal, Bow Street nominated essentially 6 directors, 2 of which are the principles plus the 4 they've actually outlined for the public to stand for election to the Mack-Cali Board at the annual meeting. We firmly believe these nominations are simply a means to an end, intended to advance Bow Street's interest, self-interest to acquire Mack-Cali's office assets at an inadequate price. It's worth noting that we met with the Board and management so as to avoid a costly and distracting proxy fight by proposing to add 2 of the Bow Street directors, 2 of any of their 4 other than the principles. Bow Street rejected that effort to amicably resolve it, which we will believe is very telling of their true objective. I personally headed our negotiation. I felt we could have done a good job and the 2 directors was fair and reasonable given the fact that we're adding 2 new ones today. So we'll be adding 4 new directors to a balance of 11, which given myself was added the year before, Rebecca Robertson was added 2 years before, will be 6 of the 11 directors turning over, which is obviously majority. We believe that it's clear that Bow Street had a single-minded focus of forcing a sale to the detriment of all of the shareholders. Last week, we filed a definitive proxy statement for our upcoming annual meeting and recommend a shareholder's vote for our qualified candidates. Importantly, this slate includes 2 now -- 2 new highly qualified independent nominees, who I am are very fond of, if elected, will join the Board following the annual meeting, demonstrating the Board's commitment as we stated to refreshing its composition, reducing average age and tender and increasing diversity. And we will continue to add new Board members in 2020 additionally. In the coming weeks, the members of the board and the management team will engage with all shareholders, and encourage them to vote the white proxy card.

That said, today's call is about our first quarter earnings call. We'd appreciate if you could keep your questions focused on results. But as always, I will answer all questions as best as I can. I'd also like to point out if anyone would like to meet with the Board at any time in the near 6 or 5 weeks from now, please let me know, and I'll arrange the meeting personally.

With that, operator, I'd like to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We'll take our first question from Manny Korchman of Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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Nick, thanks for giving us an update on sort of what you see in terms of leasing for the year. Can you talk about how the momentum of whether it be tours or propensity of lease has changed now versus the last time you updated us about 3 months ago?

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Nicholas A. Hilton, Mack-Cali Realty Corporation - EVP of Leasing [3]

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Yes, absolutely. Basically, activity continues to be strong. I mean, we see a significant amount of people just actually looking and more than just kicking the tires, coming in and looking at the new product. And as I mentioned before, the exciting thing is actually the diversification of the tenant base, which I like to see. And it's -- we've got a fairly good mix from all size ranges. And from there, Mike?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [4]

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Manny, this is Mike. The other thing we said is the suburbs are being stronger than the Waterfront today. Waterfront's been steady. The tour's about the same. As Nick pointed out, the mix is actually quite good, but the suburbs have gone up like 2 or 3 levels like from a 3 to maybe a 6 in a scale of 10. A lot more activity, a lot more people appealing to our product. We wouldn't have any debate on price. And we're actually having some buildings that we're having a tough time fitting people in that want to get in. So we're hoping to have a visibly good year in the suburbs. For whatever reason, we're just the choice in several markets.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [5]

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And have you seen that as a local upgrade with owning another building down the street, and they're reacting well to what you've done or the way you position the buildings? Or is it people from outside the market?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [6]

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It's a combination of both. But to point out, as we've let people know before, we invested substantially in our assets, starting in '16. That got completed '18 and tailed into a little bit of '19, but they're basically done now. So going from south to north, Manny, Monmouth has been really active for us, like extremely active which we think we could fill that -- those complexes which was -- had substantial vacancy may be by as late as Labor Day or as early as Memorial Day if we get lucky. Those tenants are coming from that market and then a few other people that are migrating from north to south for standard of living. Metropark is 100% full. The addition of 99 Wood will be well received by us. We are the landlord of choice because of our commitment. And it really comes down to the tenant experience. When you walk into our renovated Mack-Cali project, you sense that we have a commitment to the asset, which bodes well for their view of how we'll handle problems going forward which makes us the top of the list. I would say that Short Hills has been solid. We think we're going to have some activity in Morris County. We have a couple of expansions that should work out very well for us. So overall, it's been in and out but potentially will -- we own 30% of most of the markets when, if not more, and it bodes well for us from an annual point of view.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [7]

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And realizing that you asked us not to ask about the Bow Street proposal, I won't. But I will ask about...

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [8]

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No, no, no. Actually, Manny, I didn't say that. I said, just focus on results. You can ask whatever you want, as always. But I do have a question for you, by the way. Do you mind? Is it true that Bilerman is standing -- do you think Bilerman is really standing in for Nick this weekend at the Jazz Fest?

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [9]

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We'll have to see. Mike, so in the past, in your investor presentations, you've had a slide called valuation-implied stock price, and it's a sum of the parts.

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [10]

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Yes.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [11]

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And in there, you put the NAV of the multifamily segment and you sort of leave the office piece and back into the multiple. It sounds like the Bow Street proposal has sort of taken that and added a couple of other layers to it. But in essence, it's under that same framework of let's split the companies and this is what we're left with in office versus multifamily. Like you sort of clearly disagree with that in your rebuttals to their proposals of how the standalone entity doesn't work. So help me figure out how I should react to the slide that you guys have had in the past as to some of the parts, where now you're telling me, "Don't look at the some of the parts because this company needs to be held together."

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [12]

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Not exactly right, but the same vein. So their proposal took 2 pieces, and we always felt that the multifamily is a little easier to value, a little cleaner, a little bit more institutional, right? And then we have suburban, which is getting smaller, getting better quality and then we have what we think is our institutional assets on the Waterfront which have vacancy issues. And we pointed out that if you looked at the multifamily and said, "Could it trade at around NAV?" That's great, right? But we don't trade at NAV. Because if that was the case, then this slide makes no sense because it's really sensitive for purpose, which is if we do trade at, let's say, $16, $17, then you're basically getting the multi -- office business for virtually nothing, right?

So their proposal took what we had looked as office values, discounting them significantly from the low end of the range, crystallizing $800 million to $1 billion loss, right, effectively, and then said "Oh, by the way, we think even though you're 13x levered and won't have the operational cash flow to basically do your business, that multi's going to spin out, spin out and trade." Now if they came back and said, "Oh, listen, you should sell to us and sell to someone else," right, that might have been a better conversation. But it wasn't done that way. It was done in a sense of, "We're going to basically give you a certain price", an analysis which we keep on pointing to, they just took and said, "Here's the price, minus the debt. Here's what the net is."

Okay, Manny, there is a couple of things missing. One, every piece of debt I have and then I get transferred has prepayment penalties. It's almost $1. Basically, you can well imagine on how much debt we have. Every time we sold assets in the state of New Jersey, which were particularly bad debts having sold over $2.1 billion and growing, we have about a 1.4% cost of doing business. So take that $2.2 billion and come out and tell me it's $30 million or $0.30.

Third, with that drastic reduction of assets, I'm going to have a change of control and severance issues and other costs that have to get factored in. So 8 to 10 is never 8 -- is never 10. It just -- listen, I'll alive 60 years coming this August. I want to set 8 to 10, I never get to 10, I get the 8. You take the deductions, I'm down to like probably high 5s, maybe a 6. You add it to what I think the multi's going to trade at, at a slight discount, or maybe an even better discount and I don't have a $27 or $30 number they profit it out. Plus, it was a real estate deal. And it was like they said, "Underwritten cash, all yours. We'll take care of everything." It was we want to go look. And then when we rejected them on the price, they came back and said, "Well, we'll buy another piece." Well, the last time I called, the last time I talked and that was called greenmail, right? "We'll buy a small piece and go away for 500. What we really wanted was to provide something for 500 down 20 points, buy it for 400 and then make the differential. That's why it's rejected.

I'm not 100% aligned with the shareholders, everyone knows that based on how I'm paid and my view on how I work my job. If it was a real bid, you know me, I would be ecstatic about having something we could work on. But so to get to your point to finish up, but analysis tends to change. We really think -- and by the way, just to refresh, we had our valuation reject by HFF starting about 3 months ago when they first read the bid. They reconfirmed our numbers.

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Operator [13]

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We will now take our next question from Derek Johnston of Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [14]

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I'm wondering, what levers are you pulling in order to ramp occupancy at the Waterfront? I mean, I've seen the spaces. They are lovely. And I'm just wondering, are you guys pushing rents too aggressively? Are you holding back on TIs? What's it going to take, in your opinion, to get supply and demand in balance there?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [15]

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I think it's a couple of things. I think having Whole Foods, Derek, an excellent question, was the first stake. And that deal, we reached -- we rolled the price. We give them some further concessions. We did the store with them as a 2-for 1 deal, which we think will be the -- not the first time you'll get full front of the house marketing company in our building, which I think will add to a certain luster.

We have a co-working deal that we've mentioned to people that it's actually grown in size and that would be not less than 20,000 square feet that we will do in 2 different buildings that will absorb occupancy, bring a certain panache to our buildings, certain sense of activity. And then we have a number of other tenants.

So when it comes down to price, we're relatively flexible, and we're very good in terms and we pay it a full commission. We think it's a little bit about getting the building set up. So 2 years ago, we were looking at something that wasn't as pretty as you saw on the last tour, which actually even looks nicer now that the foothold is opened, and we continue to make improvements. We've done canvassing. We have agents. We think we'll be successful in the future. We think it's lining up this year to be a good year. We hold -- we get great renewal rates. So our terms on both cash and GAAP have been excellent, and if we had to [conces] dollars in order to get tenants then we're totally rational, to answer your question.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [16]

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Okay. And just secondly, you guys have stated in the past and even in the release that 2019 will serve as a baseline for a fully repositioned Mack-Cali. So at what point will we be able to move past having somewhat lackluster results, right? So to me, it seems, I'm certain that 2020 can snap back to what would be solid growth from the fully repositioned portfolio. So I guess the question, Mike, is what are the metrics you look toward that will be a validation of the strategy?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [17]

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Two things. I think the -- again, a very good question. The multifamily business has to start to gel the way we wanted to do. So we've been adding product. That product, the newer product as well but even though you build it to a 6.5, you still have to drive rents thereafter. So our same-store numbers this quarter were the first time that we've actually started to have that type of power in our numbers.

As Marshall pointed out, we have about 2,400 units of Class A in Jersey City and more on the way. At 2,400 units, we become a factor in driving demand and price which we think we can do. We also believe we can cut from expenses out of the business. We have some synergies of what we're doing to basically drive those numbers. So in a multi, I look for both rate and occupancy. Occupancy we've already gotten. We want to maybe drive it up a little bit more and then really to look to push rates. That's 40% of our P&L today, right? So that's the first part.

The second part and the third part, which are therefore easy to understand, is suburban. It's 20% of our number, give or take. But we think we're going to have a relatively good year. So if we do, Derek, have the year that I think we can as we sit here in April -- sorry, May 2, then we should have relatively good results in our same-store numbers for the suburban office portfolio. Class A should do really well. Our bottoms should get pulled up. We're going to do a little trimming on some asset sales. So when we enter into 2020, I think you're in a constituted number that should work, which could lead to a sale of those assets if it -- if the market is receptive to it.

The Waterfront, a little bit more problematic. Whole Foods was a start. Co-working is the next start. Now we need another deal or 2. We are getting very good play for smaller tenants, 5, 10, 15, who come in, love the space, love the proximity, but we need that tenant out of Manhattan who's going to take the 250. And they've been sniffing around and poking the tires. Right now, personally, I think it's a little bit of a waiting game because the legislative branch of New Jersey, well, have communicated that they're going to renew the program for growing New Jersey, haven't finalized it. So I don't think anyone's going in today for a large deal. They'll wait till July after the budgetary session's over.

To those 3 pieces, and we'll still drive down expenses which were noted for as we'll trim jobs and other things. But multi-suburban has to have a good leasing year. Waterfront has to have a steady year, and that will give us a good baseline for 2020.

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Operator [18]

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We will now take our next question from Tom Catherwood from BTIG.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director [19]

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Following up on Derek's question on Harborside. So you've completed the Atrium and the lobby's in there. The food hall is complete. But how much investment is left? And how does it break down between the modernization of Harborside 1, the reskinning of 2 and 3 and then work that's left at 5 and 101 Hudson?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [20]

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So each one has a component, I'll run through it. 5's essentially done. We did some lobby work, we added some artwork. It's a beautiful building to begin with. It's in superb condition. 101 Hudson's getting a restaurant. The restaurant's going to cost us about $1.5 million. It's a relatively -- it's a moneymaking deal, but it's what it's cost. We're going to refresh the lobby. We're probably going to put in better elevator controls, which is an expense that we charge back over the years. Building is in excellent shape, but we also will add an amenity floor. We have a deck on 17 that overlooks the harbor that we think the building needs a kind of a convening space, to use a term, we might actually use it for convening but it's what it will be shaped after. That probably is about $4 million, maybe $5 million in total between both the lobby and the fit out of the 17th floor. And those are relatively too small numbers.

The rest of 2 and 3, as you pointed out for the people on the call, lobby's done. Food hall's opened up. It looks great. A little bit of cosmetic work. We're going to be getting another restaurant in for about $1 million, $1.5 million. Also, it's a moneymaker, but it's what we lay out to build the space.

And then the reskinning is over the next year or so. And we laid out those numbers before and they haven't really changed. It's like $56 million to $58 million, actually coming in cheap because I signed the budgets, we're getting better bid than we thought to reskin 1 and then 2 is like $11 million to $15 million, give or take. Both will get done over like an 18-month period.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director [21]

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Got it. So it's 1 gets completely reskinned and everything else that needs to be done to that once they get it?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [22]

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Yes.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director [23]

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And the reskinning of 2, 3, all in that $56 million to $58 million.

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [24]

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$56 million is for just 1 because we do bathrooms, we do elevators. It will be a brand new building. And then another $11 million-or-so to do 2 and 3.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director [25]

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Got it. Got it. Got it. And how do you -- some of the spend, how do you classify this? Is this base building CapEx? Is this leasing capital expenditures? How does it get classified?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [26]

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It's a combination of all 3. So when you do a restaurant deal, it's a leasing expense. So we got a guy, comes in, wants to pay $50, you build up the restaurant for them, you amortize it over the course of the deal. No different than doing a TI for a law firm. The lobby improvements are basically base building. The amenity space, depending upon whether we rent it out to a company or not, could either be a lease transaction or we run it through a building expense. The reskinning is truly just base building effective to just a category. We'll be happy to give you -- if you're willing to call us offline, we'll give you a breakdown, if you like.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director [27]

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Perfect. Yes, I'll do it later. One last one for me. Just trying to figure out the dispositions. Dave, you talked about this a little bit. But so you've guided to $168 million for 2019. You completed $110 million. But if we look at the Roseland sources and uses, there is still $160 million of potential sales there. So how do we think of how those 2 sites tie together?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [28]

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There's 2 sides -- I'll answer the call because it's -- I've not been counting the numbers. There's a little bit left to do in the office side and with a few projects. And David does a great job of managing that. On the Roseland side, we're really talking about it. We laid it out, strategy-wise of redeploying capital, which is we've exiting things and going into things. Like, we sold Park Square last year, which we don't put into the same way we will get an office disposition because that money got basically redeployed into their residential business while the office business usually goes -- sales go to pay down debt fundamental at 1031 because we have owner's tax basis. We had some dispositions in DC for the JVs, which likely will get redeployed into other assets. So that's really the answer. It's really 2 separate sources and uses.

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William Thomas Catherwood, BTIG, LLC, Research Division - Director [29]

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Got it. So when we think then of that $168 million that you've guided to, that's separate than what's going to be happening at Roseland?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [30]

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Fundamentally, yes.

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Operator [31]

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We will now take our final question from John Guinee of Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [32]

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Final question? Wow. David, you had mentioned on the Investor Day a plan to delever maybe an equity event of sorts. What's your current thinking on that? And what's the goal on a net debt-to-EBITDA by year-end '19 and year-end '20?

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David J. Smetana, Mack-Cali Realty Corporation - CFO [33]

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John, we certainly didn't mean for you to be last, so thanks. So we came in at 9.5x. Never, never with us. So listen, what we laid out at Investor Day was we thought we could get to around 8x with just the leasing. And then on top of that, I said to go further beyond that, we would have to raise equity from a couple of sources, those could be asset sales. We're taking a look at our suburban assets. That could be joint venture partners on the Roseland side. And if something happened, Rockpoint, specifically. And then if we really did lease up, it wouldn't commence over the next 2 years. But had earnings growth of 15%, 20% from our leases, we would take a look at equity markets if we got to a price that was reasonable. Certainly, not here. But those would be the 3 ways to go. You get to 8 from leasing and below, you have to raise equity from outside sources at NAV.

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [34]

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John, just to embellish David's comment. The planned sales which will be in the third and fourth quarter which will probably go into 2020, the tax planning could be as much as $200 million to $300 million that we're looking at currently today.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [35]

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So does your -- do your numbers still get -- give you the ability to get to 8.0x by year-end '19 or not?

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David J. Smetana, Mack-Cali Realty Corporation - CFO [36]

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No, John. No. We would need the Waterfront to be leased up. That would be a '20 event. We would have to have at least. And for EBITDA to commence, it would probably be sometime early in '21 on a truly commenced basis.

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Operator [37]

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We have another question from Anthony Paolone of JPMorgan.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [38]

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I was hoping maybe you can just help me understand something on the tax side as it relates to the proposal. I think you highlight in one of your rebuttals of $400 million tax liability that it would create. I'm just trying to understand if an investor buys Mack-Cali stock today in the open market at $23 and there's some sort of a deal whether it's $27, $29 or whatever the number would be, but what's the tax implication?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [39]

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So what the Bow Street proposal took into effect is either a partial or total liquidation. So you already used up your shield, Tony, for 2019 when we did the transactions -- we sold a significant number of assets in the Flex business. So we used our dividend, 1031 money, kept it, bought an asset and paid down debt. That's efficient. They come and say, "Let's sell the rest," which is $2.2 billion. One transaction, here's the cash. Well, the questions we have, which are numerous, is whether or not we will still keep the safe harbor rules under REIT regulations because it's a fairly large transaction. We don't have any shield left in '19. We have to go into '20, but it's an enormous deal in '20. So you're going to have recapture if you're a normal shareholder or if you're -- sorry, if you're a unitholder. But putting that aside, the company has taxes, right? So 101 Hudson, which we bought for $200 million from Lincoln Properties back in the day, is worth $500 million or $400 million, you wrote $200 million of cap gains, right? That money gets basically taken out, right, or you have to basically pay out enough. So when a shareholder gets the -- your return, your dividend will say, "Oh you got $8." However, if you pay taxes -- if you have a pension plan, you don't. But if you're a sovereign wealth plan, you're an individual, family office, any one of the other baskets, which is anywhere from 15% to 25% of a normal pool, you'll be paying taxes. And there are some other corporate liabilities that people worried about whether or not we would actually violate the REIT rules, and so on and so forth. We laid it out. So this is just essentially -- this is like basic taking a company and saying, "Oh, let's go sell everything which no one's ever done in this space by the way," right, which has been around since the day of God, right, we've because been in business for 20-some-odd years and not have tax ramifications. That's why most of these deals, if not all of them, are structured as corporate deals, which is to your point, you bought the stock for $23, if somebody buys it for $27 and it's their responsibility for the $4 or whatever. You get the benefit. And if there's taxes, they deal with it. Did that get clear?

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [40]

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Right. Well, yes and no. Sorry to get in a tax conversation tone on a call like this. But just -- again, to make sure I'm understanding some of this, the $400 million of that $4, that's -- any REIT would effectively have, if they liquidate it, likely a gain against the depreciated basis. So is that what the $400 million is? Or is that something just more unique to the unitholders or to Mack-Cali or this specific deal?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [41]

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It's not a unitholder number. It's a corporate number for us. We would have substantial capital gains. We have recapture, right? So the typical investor, if you're in a mutual fund, if you own a share, if you own -- if your family offers and you own the stock, if you have sovereign wealth, you'd look at that trade and say, "Oh, what I really should do, because Anthony gave me good advice, is I should sell immediately," right, "and let the next guy pick it up." Which then puts pressure on the stock, which then drives down the value of the whole transaction. That's why, Anthony, all these deals are usually done as corporate deals, right? They're not structured as asset dissolution. The only one that was done, which I don't think worked out that well, was New York REIT, and I don't want to go down that road. Right? Which is to basically do a liquidation or a partial liquidation and suffer the vagaries of that.

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Anthony Paolone, JP Morgan Chase & Co, Research Division - Senior Analyst [42]

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So to the extent a deal were proposed the way most REIT deals have been done historically when there's just been an outright cash takeout, this $400 million is a nonevent for the common share?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [43]

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Nonevent. Nonevent, absolutely. And by the way, we have a bigger gain, which we didn't even factor into our numbers is let's assume there was a secondary sale because it was a secondary liquidation of Roseland, which we have a more embedded gain. Because all those buildings that we've been building have been built at cost substantially below what the market value is. So we'd have another set of gains, right? I mean, I always say this as a last to somebody. But when you look at the transaction, that the way it was proposed and that the way they simply said, "Well, you get $8 to $10 and this will trade at $19," at the end of that, I thought I should get warm milk and cookies, which is a bedtime story, right? The way it really works is a guy comes in and says to you, "Here's the price, here's the terms, we're done," Right? "Finance, here's my equity." We'd have none of that. It was, "Oh, we can put up a substantial deposit" or "Our next bid is we'll buy a portion of the assets at a discount." Look, of all my skills, one of the things I can really do well is spell. But one of the words I've really learned recently, Tony, you know want I've learned? It's Tuscany, because I really like to spend some time there in the future. So if this was a real bid, I would have been very excited about it.

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Operator [44]

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We'll now take our next question from Michael Lewis of SunTrust.

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Michael Robert Lewis, SunTrust Robinson Humphrey, Inc., Research Division - Director and Co-Lead REIT Analyst [45]

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So maybe this is the same question Tony just asked in a different way. But you've got this $36 NAV estimate. Is there any way or any structure to kind of crystallize that? And there's so much room between that and your stock price. Why is it you think there isn't -- you can't find that deal or the deal isn't out there?

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [46]

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Well, I would say this, Michael. I think if that $36 didn't exist when we took over 4 years ago, right? When we were trading at $17.02 in June 2, when Marshall and I formed our partnership, we want -- we didn't have a $36 NAV, right? People thought we were worth $19.21. And we've sold 2/3 of the assets of the company that we basically took over. So that 1/3, we've either re-leased to the higher numbers. So those assets are more valuable, which is one reason why when we look at our suburban portfolio today, we think we can crystallize. The Waterfront, even though it's not as well rented as we would like, we get substantially higher rents. And obviously, the multifamily business has been a deployment of capital, building and reaping the benefits of development deals. We think, over the upcoming quarters, and I would think less than 8, so 2 years in total, we'll have a real shot at crystallizing our numbers. Why is that? Well, I think we have a chance to get out of the suburban market sometime in the future, which will create a much more crystallized company, obviously less bet.

And then lastly, I think as the multifamily continues to produce value, it becomes increasingly more valuable. And then obviously, the ultimate point is if we can lease up the Waterfront, you create a certain amount of value. And at that point, we're probably better off. But we're having more substantial conversations today based on the fact that we continue to redo the portfolio every single quarter. The joke that David Smetana always tells me is, "I didn't you guys actually did this every quarter, don't you have a normal quarter?" Truth is we don't have normal quarters, right? We announced each quarter some series of deals that gets us to a different place. The one number I would point out is 297, and I think it's like 54. We started with 297 office buildings when we took over 4 years ago, and we're down to like 50 something now. Total change. Sometime in the future, my phone, my e-mail, my door is going to have a good visitor.

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Operator [47]

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There are no further questions over the phone at this time. I would like to turn the call back to your host for any additional or closing remarks.

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Michael J. DeMarco, Mack-Cali Realty Corporation - CEO & Director [48]

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We look forward to seeing everyone at NAREIT. We'll have a full schedule if we need to extend. Two, we'll be reaching out to all our investors, every single one, about setting up a meeting. We'll be bringing board members with us. If you would so desire to speak to them directly, you can expect to hear from Deidre Crockett or David and myself. Anyone has any questions or concerns, please call us. We know these are interesting times, and we're there for you. And with that, I wish everyone a great day.

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Operator [49]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.