Good day, everyone, and welcome to the Mack-Cali Realty Corporation's Second Quarter 2018 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.

Thank you, operator. Good morning, everyone, and thank you for joining the Mack-Cali Second Quarter 2018 Earnings Call. This is Mike DeMarco, CEO of Mack-Cali. A beautiful day. We thank you all for joining us. 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 these statements are based on reasonable assumptions, we cannot give assurances that the anticipated results will be achieved. We refer you to our press release, annual and quarterly reports filed with the SEC for risk factors that could impact the company. Last night, we filed our supplemental for this quarter, and we'll be releasing a revamped investor deck next week. These combined presentations will reflect the transformation in Mack-Cali's portfolio and NOI composition. We, as always, will be referring to key pages in our supplemental during the call. And please contact David with any further suggestions about the disclosures you'd like to see. As we've done before, we're going to break the call down into the following sections. I'll make some opening remarks. Nick will discuss our office leasing and performance and our view of the markets going forward. Marshall will then provide insight to our multifamily operations. David will recap our operating results for the quarter, and I will close. As we disclosed last night, we had another successful quarter as we grew a bit positive results for the first six months of 2018 and, more importantly, laid the groundwork for the remainder of 2018 and beyond. Without disposition strategy behind us, we're now…

Thank you, Mike. As we look at our leasing results in the first quarter, our core, Waterfront and flex portfolio ended 83.2% leased. And in that timeframe we signed just over 450,000 square feet of transactions. Of those transactions, approximately 209,000 square feet were new leases, and we were also able to capture over 244,000 square feet of in-place renewals. Across all segments, our rents on Q2 deals rolled up 7.5% on a cash basis and 16.5% on a GAAP basis. Further, we committed $4.77 per square foot per year of lease term, which was largely a result of our new lease with Plymouth Rock and Metropark for 130,000 square feet for over 12 years, with rents that started at $33.50. Turning to the Waterfront submarket. Subsequent to quarter end, we signed a long-term renewal, an expansion with E TRADE and Harborside 2 for over 132,000 square feet. And of that total, approximately 26,000 square feet was pure expansion. Additionally, we are in active lease negotiations on approximately 213,000 square feet of additional transactions. These leases are projected to close by the end of the third quarter and will result in just under 90,000 square feet of pure net absorption. Each of these additional transactions are expected to achieve cash and gap rollups in line or better than our recently reported statistics. Our increase in tours and inquiries provide a positive outlook for 2019, and we are positioned to capitalize. We have recently unveiled our new lobbies in Harborside 2 and 3 and, we will deliver a brand-new food hall in the second half of the year as well. Moving out to the suburban portfolio. We continue to benefit from the capital improvements made in the past 24 months, as detailed on last quarter's call. Our lease with Plymouth Rock for 130,000 square feet was among the top 5 of all transactions in the state during the second quarter. In addition, we just signed a long-term lease with the trustees of Princeton University at 100 Overlook in Princeton for 67,000 square feet and rents that start at $30.50. Additionally, we are experiencing significant activity in our Parsippany portfolio with active negotiations for over 150,000 square feet of requirements. With that, I'd like to turn the call over to Marshall.

Thanks, Nick. Roseland's second quarter was highlighted by the successful opening and initial lease up performance of two significant deliveries totaling 591 units. RiverHouse 11, a 295-unit community on Port Imperial's Waterfront commenced leasing activities in early of July, and in less than one month since its opening, had leased an extraordinary 173 apartments. We have raised rents five times, and the property is over 58% leased. In the 25-year history of Roseland, we had never experienced this level of lease up velocity. We also opened Portside Phase 2, a 296-unit community on the East Boston Waterfront. In four months since its opening, the community has leased 166 apartments and is currently 56% leased and has also increased rents five times over that time period. In addition, we have three ongoing lease ups totaling 621 units from our first quarter deliveries. Signature Place, a 197-unit community in Morris Plains, this apartment house is performing well and is currently 58% leased. 145 Front Street is a 365-unit community that's an integral component of the revitalized downtown Worcester, Massachusetts program. We delivered Phase 1 in the first quarter and Phase 2 late second quarter. Phase 1 is currently 55% leased, and the overall project is 36% leased. And finally, Metropolitan Lofts, a 59-unit community in Morristown, which is currently 61% leased. As of July 31, Roseland's total 1,212 unit lease-up portfolio from projects we've delivered in 2018 is 52% leased. Upon stabilization, we forecast NOI after debt service from this portfolio at $15 million. Through the remainder of 2018, we anticipate completing a 372-key, dual-flag hotel at Port Imperial that will serve as a cornerstone amenity for Port Imperial situated directly across from the New York Waterway ferry terminal and offering excellent access to Hudson Yards with exceptional views of the Manhattan…

Thank you, Marshall. I would like to touch on a few financial highlights in what was a relatively quiet quarter. We reported core FFO per share for the quarter of $0.45 versus $0.60 in the prior year. The year-over-year decrease is, again, due mainly to move-outs of tenants on the Waterfront and asset sales from our disposition program. We reported $0.43 of NAREIT FFO and had a $0.02 per share nonrecurring item relating to the departure of executives that was added back to arrive at core FFO of $0.45 per share. Same-store cash NOI declined by 5.7%. This was buoyed slightly by better utility expense due to electricity rates improving in the rebate from prior periods received in the quarter, and we now see same-store NOI, a full year cash NOI falling in the range of minus 13% to minus 15%, slightly better than our previous guidance due to better cash rent receipts versus free rent periods on early releases. I will remind everyone that we had 400,000 square feet of move-outs impacting the quarter, heavily weighted towards the beginning of the quarter with AIG moving out of approximately 271,000 square feet at 101 Hudson on April 30, and Wiley moving out of 46,000 square feet at 111 River on April 1, and then another 46,000 square feet on April 30 as well. We still see our office EBITDA bottoming in the third and fourth quarters of this year. We did not buy or sell any properties in the quarter. We continue to expect another $170 million of sales for the remainder of the year to essentially finish our disposition program. Net proceeds of which will be used to pay down balances on our line of credit. The prospectus sales are weighted roughly 25%, 75% between the third and fourth…

Thanks, David. In closing, we're set up to have a good 2018, but a much better 2019 if we're able to continue to lease up and renew as we expect. The pipeline, as we mentioned earlier, is getting to the -- to be rather full, and hopefully, we can convert that into leases in the upcoming quarter. And we intend to deleverage as planned. The tenant demand is growing. Capital improvements, as Nick mentioned, throughout the portfolio, being very well received, which is leading to a high degree of velocity. Our focus on the Waterfront for office and multifamily is starting to yield good results, as Marshall mentioned, with Building 11 having the lease-up as it did. We believe that velocity should pick up as we moved through the end of this year and hopefully into 2019. And for that, I'd like to turn it over for questions.

Thank you. [Operator Instructions] And we'll first hear from Manny Korchman of Citi.

Nick or Mike, you talk about sort of a couple of things in the Waterfront. One is demand improving and you have more tour activities. So maybe, could you give us a little bit more color on how that's changed since the last time we spoke? And Mike, I think you mentioned that supply is down as your competitors have leased up some space. Could you be more specific as to what you're referring to in terms of their leasing? And maybe why the tenants chose to go there versus your properties?

Well, most of that's been internal expansions, which is a lot of what we're seeing across the portfolio. So what we've seen the last two years is the tenant comes up, he's not renewing for the same amount of square footage. He's making a 10 out of 12 or 15-year commitment on the Waterfront, Manny, and they, therefore, then look and say, How much space do I need today to basically expand into? And they're usually up about 20%. So last quarter, we saw the takeoff of some space in LeFrak's portfolio for the next submarket over for a couple hundred thousand square feet from two tenants that basically renewed and then took additional space. One of them being Chase as part of its redo of the Park Avenue building. This quarter, we've seen some other tenants expanding in this marketplace. Goldman Sachs is having a tenant expanding one of the buildings for 40,000 to 50,000 square feet. We actually have a couple of tenants who have taken space for us. They're taking off some space in the market. And in general, we just see more people expanding. The tenants will stay or expanding, not contracting, and therefore, you seeing a little bit of tightening. As far as the pipeline, which is your first question, tour activity continues to be up. Normally, for us, Manny, we would have a slower July, a slower August and then obviously, September is when we try to basically get everything in. We had a relatively good July, 271,000 for us post-June 30 is a good month. It's a very good month. On a yearly basis, that would be, obviously, enormous. A couple of big deals and then a couple of smaller deals but the activity level is actually quite good. To answer that -- another question that you didn't ask, what are we looking at it from -- versus pro forma to what we think we'll do, we pro forma about 1.2 million square feet for this year. We've -- almost have 1 million square feet already done with about 225,000 to do, we have 5 months to do it. If we just took the deals that we think we're extremely confident on, then we'd be surprised if we lost anything, we'd top out a little bit over $1.5 million. Though it's been a better pipeline, but we still have to convert. It's converting, it's a one lengthier process, whatever reason. E TRADE was a good trade for us, they actually expanded. And to answer people's questions, on another question that might be asked, they did that at the state of New Jersey, Grow New Jersey grant for $20-some-odd million. They're bringing about 250 jobs from overseas back to the United States with that grant.

Maybe we can stick to the topic of Grow NJ. Could you talk about sort of the longevity of the program and whether there's funding to keep that going or if there's a certain time line the tenants are sort of under pressure to get done?

No. It's got another full year. It goes and ends in June 30, 2019. I expect it to be renewed. It's been very popular. The current Chairman of Grow New Jersey is an ex-colleague of mine from Lehman Brothers. I'd met with him. I'm actually having lunch with him next week. He's done a pretty rational job of taking a program that had a little bit notoriety around it, about some of the allocations, and he made it much more defined. He had worked for the Bloomberg administration as part of their PDC. So they had a big win. They took cover out of Pennsylvania, brought him to New Jersey for about 0.5 million square feet in the Parsippany market. And he's been out there actively promoting it. In fact, he's giving a speech today in the building. I'm going to join that panel after we do this call. I think that Governor Murphy understands that growth is important, especially when you have initiatives involving the use of tax dollars. So I don't think it's going to change. At least I have no knowledge of it changing today. And the noise about the program has really calmed down in the marketplace.

Okay. And final one for me, Mike, in the past, you've spoken about selling or potentially selling the flex portfolio, but you haven't mentioned that in a little while. Could you give us an update on your thoughts there?

I mentioned it in my opening comments, Manny. It's -- we've started marketing it this week, actually. So that's five -- just to be clear, for everyone's point of view, the flex portfolio was just -- it's just Westchester now because we trimmed it down. And last year, we sold all the New Jersey assets in the third and fourth quarter of 2017. The flex portfolio today is about 3.5 million square feet, consist of five separate portfolios in five different communities in Westchester, four in Westchester and one in Connecticut. We're going to market it as single individual deals. We're starting it now. And we're also thinking about doing one large global deal. We have a little bit of a tax issue, where you mentioned, we'd like to use both 2018 and 2019 ability to shield gains. So we're doing it now so we can basically have a closing in the fourth quarter, and then hopefully, with the board's approval, another closing in the first quarter of 2019.

Thanks Mike.

Thank you, Manny.

John Guinee of Stifel.

Great. Okay, it looks like the multifamily business is doing very well, but I'm trying to figure out how you pay for it. If I'm looking at your future starts, I think you mentioned Portside 8 and 9, 342 units underway; Canoe Brook; Chase III; 25 Christopher Columbus; buying a piece of Marbella that adds up to, I think, around $800 million, all in. I might be wrong on that. But what are you guys doing with that?

So if you turn to Page 41, John, there's a page in the book about what we need to do and what we have to do. So we break it out in two manners. We haven't funded our 2019 starts yet, which we'll likely will do joint ventures or raise equity on. But everything that we've already delivered is paid for, so the really starts we have to work on are at the remaining 2018 starts, which is really just three of them, which is very safe starts, Building 8/9 which is in Port Imperial next to Building 11, which just had a remarkable performance, a smaller deal in Short Hills and then a little bit of a larger deal in -- outside of Boston. We have the Rockpoint equity. We have some refinancing money. And then we have a couple of assets that we're intending on selling. We have a joint venture interest in DC that we're exiting from, and we're selling one of the assets in New Jersey. So basically, we have that money covered. What we don't have covered, to be really clear, is to build the next big tower in Jersey City, which would be a much larger job which it will have equity requirements of about $100 million per tower. And we have three towers planned, so that we don't have done yet.

Okay. And then a huge success on the recent delivery. Tell us where those tenants are originating. Are they Northern Jersey moving closer to the city? Or are they moving out of Midtown?

Well, just as a little longer answer, John, it's -- New Jersey's delivered -- Jersey's to be delivered about 4,000 units. We've had this conversation before, and we're happy to report that all 4,000 units are stabilized at around 98%, and we haven't really seen any pressure on rent. It's actually, in some respects, is going the other way. Port Imperial, John, as you know we've done the tours together, sits north of Hoboken, so Jersey City, Hoboken, Weehawken, West New York. This is at the border of Weehawken and West New York, sits really at the ferry station. We had a debate. We haven't delivered the product -- and I'm going to turn it over to my colleague, Marshall, in a minute -- in that market in a while, we wondered what the new west activity would be. It was outstanding, right? So we rented at a rate that exceeded what we did in Urby. And we could be full in less than six weeks, which is nuts because normally the pro forma was a year. The tenants, to get to your answer, seemed to be coming about 50-some-odd percent or more from New York City and about 40-some-odd percent from New Jersey, most of those we think are from the Hoboken submarket. So that market basically prices a little cheaper and priced that Hoboken does by about 10%. We have people moving there for that reason even though it's a spectacular building. And then the New Yorkers realized that you can wake up in the morning there, walk about 250 feet, and I'll let Marshall finish, to take the ferry and you can be in Hudson Yards and be less 20 minutes in total commute. Marshall?

Yes. Good morning, John. The building has really been extraordinary, at least I've -- we've never seen anything like it. I mean, we've had a couple of projects over the years. We've done 100 units a month, we've never had anything that's done 170, and the month's not over yet. Mike described exactly on the money where the people are coming from. This is also the first delivery we've had in Port Imperial in 4 -- at least 4, 4 or 5 years. And so I think we had a lot of pent-up demand for new, higher-end product. We raised the bar in this building significantly. If you have a chance to come by, it's a really spectacular property, both the units and the common area package. And we're just getting an incredibly strong response.

And rents up about 10%.

And rents are up about 10%. We've raised rents every few days across-the-board and then on select unit types as we see them running out. I just raised rents again this -- yesterday on studios. They went so quickly, we're about done with them. So we've raised rents about 10% since we opened 3.5 weeks ago, and we'll have a few more rent increases and then we'll finish up. It's been pretty exceptional.

And then, David, you had given a number where you said you're going to top out at about 10 times net debt-to-EBITDA in 3Q. And I think you said that if you stabilize the Waterfront at $40, it only takes you down 1.2 times, could that be right?

Thanks for the question, John. So yes, in my opening comments, I made the comment that at an assumption of $40 per square foot on the Waterfront and getting back to 92% occupancy, our net debt-to-EBITDA ratio would improve 1.2 times from the current 9.7 times, which does include some EBITDA from the tenants vacating this quarter. Thanks.

And then if you are able to hit your NAV number on the flex sale a year from now, what happens to that? Let's separate it from the Jersey City lease up. Does the flex sale for $550 million reduce your net debt-to-EBITDA at all? Or is that debt neutral?

It's a reduction, John. The component that we we're working through is depending on what price we sell at, how much cap gains we have. So assume it's a 60/40 split, so 60% of it can go to debt reduction, $300-plus million, call it $350 million, and $200 million will get reallocated to a 1031 exchange, of course, there's some of the tax, that numbers are prohibitive. So $300 million takes you down about 1.1 times on a turn. So between the two of them, you're down about 2.5 times. So to your point, you're getting to the 7s. And that would be another split, John, if you'll allow me to be more definitive. The office business would be in like a six range and the multifamily business would be like in the nine range, and then two of them would blend to around a 7.5 on the composition of 35% of the income coming from multifamily and 65% coming from office. So we'd have a relatively secure office business and a little bit higher than we would like multifamily business that's able to carry the leverage because of the nature of the business. That's what the model tries that we're trying to get to.

Okay. And then within the tax issues, is this tax issues at the corporate or REIT level? Or is it tax issue at the OP unit holder level because on...

Excellent question. Be fascinated to know. Inquiring minds want to know, John. I would say, definitively, this is not a Mack family issue. There are unitholders that do have tax issues. They're not related, kin, cousins, brothers of the Macks, right? To be very clear. But it's from the Robert Martin Company, which we bought the portfolio from. The tax issues is not being protected through 1031 because of them, it's protected because of the corporation's gain. We've owned it for so long that 90% of the problem is us and the extra 10% is them. But our 90% is what really drives that answer. I hope that's a definitive answer for you, John.

Good enough. Thank you. Thank you.

John, we'll talk to you soon.

Thanks.

Next we'll hear from Rob Simone of Evercore ISI.

Hey, guys. Good morning. Marshall, was just wondering, in relation to your comments in the prepared remarks, if you could kind of dig in or get a little more granular in what drove the temporary type revenue reductions in those few select properties?

Sure. As you know the -- our denominator is quite small, so it doesn't take much to move this meter 1% either way. We had it, for example -- and then I -- I can get a couple more, but just off the top of my head, in Monaco, in the first quarter, we had a washer dryer pipe break and 25, 30 units came offline. At the same time that was happening and we were repairing it, bringing it back online going to the second quarter, Vibe [ph] the 4-city, apartment house next door was finishing its lease up and putting some tremendous pressure on concessions to finish. So the rest of the lease backed up unexpected units and meet Vibe next door's program to make sure we've got that absorption. We had a tough second quarter from stuff in that property, so that's a substantial percentage of that variance. So we work off with such a small denominator. I mean, next year, literally, when we're comparing quarter-to-quarter, year-end to year results, it -- our denominator doubles, literally doubles from where it is today. So it doesn't take much to move our meter, but that's an example of costing us maybe as much as a couple of hundred thousand dollars of NOI and that's a big impact on such a small base.

Got it. Okay. And then, just one follow-up question on the multifamily business, but also as it relates to the overall leverage discussion. Kind of long-term as your leased-up assets fully stabilized, and obviously, you have the 96% lease, same-store portfolio, plus or minus, longer term, assuming that you were to like -- you guys were to build one or more of the larger towers in Jersey City, what's kind of like the longer term leveraged target for the platform, especially like vis-à-vis trying to consider ultimately separating these two platforms into two separate businesses?

Everything we do -- I'll start off and if Marshall wants to pipe in, I'll be happy to have his comments. We work towards that aim of what is the right way to create NAV, what's the right way to create value. What would someone want to buy from us and pay the highest price for, right, the eventual sale or with disposition or spinoff. In that effort, people haven't asked but -- why we did the Marbella deal, where we had a chance to get a member's interest, we had a chance to refinance it at incredibly good rate. We were able to basically control the asset. We'll be basically selling other assets and rebalancing things in another joint venture to get out of two JVs, one subordinated to wind up with one controlling interest, makes it clean and neater, more focused, and I don't think people will pay an extra penny for us for having a DC presence. I think they might pay a few extra pennies with a concentrated Jersey City presence that they could build off of. Regarding the second part of your question, which is about construction, we intend to build the units that we have in the pipeline. They'd be coming on very successful. We've had excellent returns. It would behoove us to basically continue to do that. We don't intend to do it at elevated leverage levels. We intend to raise equity, which we have done before at the Roseland level, to base solely -- underpin the financial stability of that platform. As we grow and as we have grown, and the way I look at the pipeline today versus where it was three years ago when we took over, it's a far better company on a Roseland point of view and the Mack-Cali role. But in Roseland, in particular, we created a real, solid, multifamily business with a focus in Northern New Jersey and select markets in Boston. And we think that lend to us in creating the right amount of NAV for our shareholders. With the leverage levels, do we answer the clarity? I'd love to get it in the 6s one day. I don't think we can get to the 5s, the way some of the classic companies are, like Avron [ph], EQR, that would take a much longer sustained period of growth. But could we get below 7? Yes, that's an aim of ours, to be very candid.

Yes. That's great, Mike. Thanks. Appreciate it.

Next we'll hear from Jed Reagan of Green Street Advisers.

Hey, good morning, guys. Just on the Roseland same-store guidance. Just to clarify, so it sounds like most or all of that is related to just kind of onetime tempered. I mean, is any of that related to just kind of underlying pressure on the fundamentals of rents in your portfolio that might be kind of more sustained?

No. We think it's really -- the market has absorbed all the product. We have a lot of product coming on in these submarkets. Rents will stall a little bit because people do what they have to do to fill up brand-new buildings. But we've sustained absorption in all our submarkets quite well. And as I said in the last two quarters in calls, I mean, rents are not growing the same rate they were a year or two years ago, but we see most of our submarkets is being anywhere from 1% to 2% in growth. And I don't think we'll see much difference. There will be minor aberration in a given quarter as a new building opens up next door and impacts that. But there's no overall -- in fact, the apartment business overall, I think you're seeing it in most markets is actually having a relatively healthy time of it. People are choosing to rent longer than they were before. And the demography of renting, both the young professionals and now, empty nesters, it's actually growing. So our submarkets experience the same thing, and I don't see anything that's going to change that in the near future.

And Jed, just to embellish Marshall's comments, the absorption in Jersey City has been excellent. We're now in a low period. There's -- there are really no units being provided for the next six to nine months. We were hoping that we'll start to see the rents starts to increase. We also think that the amenities at the area continues to gather each year and the fact that people continue to find us as a good alternative to some of the New York markets is going to bode very well for us.

Okay, that's helpful. On the flex portfolio sale, just to be clear, this -- any sales activity this year would be incremental to the '18 stated disposition target, correct?

Without question, yes.

Yes. Okay. And on the Grow New Jersey program, just to come back to that, if that were to sunset next summer and not be replaced, I mean, how impactful do you think that could be at a leasing velocity in New Jersey, especially the Waterfront?

It's obviously a negative. We're still competitive versus Brooklyn and Lower Manhattan, those continue to rise in price. We're competitive on the cost structure also from our cost. And then we also have, I think, a relatively stable transportation system, so if you're looking at attracting people, the path actually is probably the best subways just in the United States because it's supported by the Port Authority, which has unbelievable funds. But it's definitely a negative when they constantly monitor it. I don't think it's going to go away, but I would view that not as a positive if it wasn't here. So either you accept it...

What percent of your pipeline -- sorry, go ahead?

I apologize. Most of the tenants that we're getting now are expanding in place. And we're getting a few others that are coming in. And no one's really mentioned the Grow New Jersey part of it. So it's something they take advantage of, to be honest. It's a good incentive for this part of the state, but it's also been a good revenue source for the state as far as growing jobs. And the Murphy administration's all about growing jobs.

So your pipeline today, you're not seeing a big list of tenants that are looking to take advantage of that program, currently?

Some, some, but not all, and probably no one makes it as the number one requirement to come.

Okay. And maybe just a last one from me; trying to understand the economics on the Marbella. Do you now own 100% of that asset or is it something less? And then, what is the trend that you value the property as -- at?

It's 74% reported at about a 4.5% cap rate, give or take. Maybe 4.6%. Maybe -- depending on the trend, maybe 4.7% if you looked at the last month. But if we looked at what EQR had paid for, the recent deal in Hoboken and we were above that level. We're about $640,000 a door in a range. We were able to refinance it at about 4.1% for RPs. We basically wind up -- we wind up at a relatively -- probably a high 6% to probably a low 7% cash-on-cash yield for us.

Okay. And dollars per door, did you say that?

That's $540,000. Might have said $600,000, I was thinking of something else. And Jed, by the way is that your last question.

Yes, it is. Thanks.

All right. But I would miss you when you gone by the way. So it’s a pleasure to talk to you.

Thank you.

Next we'll hear from Jamie Feldman of Bank of America/Merrill Lynch.

Great. Thank you. Marshall, I was hoping to get your thoughts on construction costs. And I think you had mentioned you're confident rents can rise for residential 1% to 2% per year. How are you thinking about higher costs and what it might mean for yields and returns?

Well, construction costs are certainly growing faster than 1% or 2%. The industry, historically under normal conditions, construction costs have grown 5% to 6% a year, and that's probably a healthy mix of materials and labor, and that's also very submarket -- a submarket, depending on how busy labor is, really, more than anything else. Clearly, with the tariffs and other conversations going on politically, that's going to impact steel and that's good impact lumber. So -- and the trades are all still busy, particularly in our markets, both Jersey and Massachusetts, the trades are all still busy. So we're constantly -- and since we're always building or are always, for the most part, building the same submarkets, we've finished the job in right before, we are almost always pricing labor and commodities in the markets we start jobs in. So there's no surprise for us, but definitely the trend of costs will exceed the rate of rent increase, and so your yields are going to go down a few points. There's no question about it. But they're still very healthy. We're still building north of a 6%, and most of our deals probably start between 6.25% and 6.4%. And a year or two ago, frankly, we had looked at numbers that were 6.5% and 6.6%, so not quite as good as they were before, but cap rates remained very strong. The demand to buy apartments remains very high, and value creation's very sound. So we monitor it, and we certainly adjust our budgets. I mean, the next overlook start that we mentioned earlier is certainly going to cost us more per unit than the one we finished a year or two ago. Remember, that job was bought out four years ago in the start of construction, so we've suffered. It will be four years of cost trending to start the next job.

And you're saying the 6.25% to 6.4%, that's a fully stabilized cash yield?

Correct. That's before leverage, of course.

Right. Okay. Thank you. And then turning to the Waterfront, I think you guys said 230,000 square feet of active negotiations expected to close by the end of the third quarter, 90,000 square feet of net absorption. I assume that's just the Waterfront. And then what is -- what do things look like after that? How are your conversations?

We have a couple of renewals in the suburbs that are going relatively well, that are sizable, that could be a couple of hundred thousand square feet. The tour activity in Parsippany, in particular, has been very, very high in the last several weeks. What we should remember is we don't have a steady-state portfolio, so a couple of years ago, we didn't own Short Hills, we didn't own Giralda, and we didn't pop in $50 million to renovate a series of buildings in Parsippany, Short Hills, Metropark and in Monmouth. So because we have the nice and newer buildings, Jamie, we're getting better activity. We're just getting more people to come in because all things being equal, for the extra $3 or $4, you can be in a building that's pretty much brand, spanking new from the lobby, amenity, corridor and bathroom scenario versus the competitor that could be a building that's 30 years old and not been touched. So we feel pretty good about our competitive position in a number of different ways.

Okay. I guess just to clarify, so the 233,000 square feet, is that across the entire portfolio or is that just the Waterfront?

Just the Waterfront.

It is. Okay. So I guess what I was asking, is the Waterfront beyond that? I think you mentioned those were more suburban assets.

I apologize. I made up a wrong term on that question. The Waterfront, we have pretty good activity from a number of different tenants looking at us for either 2019 or early 2020 starts. We got some people coming in, looking a little bit earlier than that. They range anywhere from 30,000 to 60,000 to 150,000 to a 300,000 square-foot user. So we're still in negotiations with those people. We have -- touring activity has actually been very high, and we still have tours, I'm surprised by, as scheduled for next week, given normally that August is very slow for us.

Okay. That's helpful. And then just a final question for David. I just want to make I understand the change in the office same-store NOI. So you mentioned better utility rates and a rebate helping margins. Is that the main piece? Or there's also -- I think you also mentioned something about revenue.

Yes. Thanks, Jamie. So yes, the main piece was the utilities, but also on some of these early renewal leases, we had modeled in greater free rent periods, and we're actually going to be getting greater cash collections from some of these tenants while we prep their new space for them, that was the other driver.

Okay. And do you -- and any comments on utilities and how they might trend going forward and just expenses in general?

I think going forward, we'll see electricity rates remain stable. We did have a onetime kind of true up from past billings over the past 12 months that will not recur.

Okay. All right. Thank you.

Our next question comes from Tom Catherwood of BTIG.

Thanks. Good morning, guys. Marshall, just wanted to clarify the one thing on the same-store, I know we kind of talked around it, but the lower same-store guide on the multifamily portfolio for the year, it sounds like that's just a result of some of the kind of -- I'm going to call it lease-up weakness, but some of kind of the comparative set to other building weakness in the second quarter. And then there's not much else for the rest of the year dragging that down. Is that a fair assessment?

That's a fair assessment.

Okay. And then, Marshall, sticking with the multifamily, it looks like you guys accelerated the start of the resi portion of the Canoe Brook road development from a possible start to kind of the next start on the list. What was it that changed this quarter that made you guys move that one up?

We do them -- it's Michael. We do them in ordinal ranking when they're ready. So if 25 Christopher Columbus would have been ready, we would've done that start first, but that's just taking a little bit longer to plan and to design. And the Short Hills site was number six on the list, so it just moved into the top five just based on a queuing basis.

Got it. Got it. Thanks for that. And then, Mike, it looks like -- if we take a look at the portfolio, it looks like you moved one of the assets from the Red Bank portfolio into redevelopment this quarter. What are your plans in general for that Red Bank portfolio? And do you need any kind of zoning changes to do what you want to do? And what kind of demand are you seeing in that market?

Demand's actually pretty good. So, you look at where people in New Jersey want to live and then work, that part of the state, as you well know, Tom, from being a New Jersey resident -- and my good friend, John Guinee, would also know because he's friends to some of them there, is pretty affluent in Ocean and Monmouth County. Our complex that we bought -- we have one and we bought another one about four quarters ago. Basically dominates the 109 exit market, which is Red Bank, the town of Red Bank. Actually, we're literally in the town of Middletown. We renovated our complex to the highest level. It's a gorgeous complex now, and we're getting some excellent rents and very good tenant demand. Across the way, we had three buildings, one of which we've done multitenant. It's about 83%, and we think we have some activity, we'll get it to the 90s and we'll be done. One of the other buildings, which you've mentioned, we have under contract to be sold to Life Time Fitness. Life Time Fitness is going to tear that building down and build a very large health club. Life Time, as people only know is one of the premier fitness companies. They run kind of a more -- of like a country club-like fitness center, usually 150,000 square feet with every amenity they're going to have it created. That's what they're going to do. So we think that's going to add to the complex, which will have the renovated complex, you're right off the highway. And the last building we have a debate on which is a great [Indiscernible] to the Parkway, and we don't know whether we really want to do multitenant, which is what that market tends to a lot or be a lot of or should we hold out for that one tenant that might want that premier location, 100,000 square feet. But in general, we've been very happy with the way the rents have gone. We'd like a little bit more velocity, but that's what we say about every market.

Got it, Mike, appreciate that. And then just one more if I can. There's been a lot more kind of investment and development in Newark over the past year. And as you sell down the flex portfolio in 2018 and 2019 and you end up having, you said, roughly 40% of that, that you're going to have to 1031 exchange out, have you looked or considered a kind of expansion in Newark? Or do you think any acquisitions you do would be kind of in the core markets you have right now?

I'm a core guy. We made our bets. I mean, I might exit a market more likely than I would actually enter a market, to be very candid. I would love to have the market that we currently focus on become true high performers. And we've spent our time -- and we believe that when you diffuse your thought processes, energies, you don't get yourself to a better result. So doing more things doesn't mean you do them well, it just means you do more things. But Newark, I wish them the best of luck. We have a building in Newark that we're renting up. We had two buildings actually that we had gotten out and exchanged with Bank of America three years ago. We are renting up now to city organizations, and that's gone pretty well. But Newark, I wish you the best of luck, but I -- hopefully, Jersey City does better.

Got it. Thanks Mike.

John Guinee of Stifel has our next question.

Great. Thank you. Hey, Marshall, a quick follow-up to your very impressive, stabilized yield on development. Are you assuming land at the original basis, the Rockpoint markup or today's fair market value when you come up with those projected yield on cost?

Land is, for the most part, and there's an exception that didn't come to my brain at the moment, it's mostly at the Rockpoint valuation number.

But John, we also revalue that number almost every quarter, though. And we move it from land into building. We take a write up generally if we think it's warranted based on evaluation.

Okay. And essentially -- and you guys are going to do what you're going to do on your residential development, merchant building business. Should people just sort of look at that separate and distinct from the core office business? Because it -- it's -- they couldn't be more different.

It's so true, John. If it wasn't for the fact there was the handout, we would doubt that, as I said before. I don't think I would actually play this game, to be very candid, which is to have two businesses like this -- it's part -- Marshall and I were discussing this morning about the fact, this is what we were dealt, and we're dealing with it, and what we think is the best interest for the shareholders. The residential business has become a real business. It was a byline three years ago. It was a side story two years ago. Last year, there was some thought about, well, this does make sense, and now, what we can we say, well, this is a real business, right? We -- as you pointed out in some of the pieces you put out, we make money on building, right? We build buildings at good deals, finance them correctly, deliver them on time and rent them up accordingly. It is not a symbiotic business with the office business. We acknowledge that. It's just that they don't go hand-in-hand, other than in Jersey City where we're creating a sense of place but that's a portion of the platform. So I look at them as separate, and I think one day you could create a Waterfront company if you could carve off certain pieces of it. But most -- very candidly, we work with the shareholders. So we think what we do on the multifamily business is creating NAV. The land that we acquired and we put into service each time tends to be proven out in great results about what we achieve. And we'll continue to do it until it doesn't prove out, right? And right now, in each building we build, including Urby and M2 and then Building 11 and then the projects that we built in Boston, Portside or whatever, all come to be great returns, and it increased the NAV of the company. So yes, I view them separately.

Okay. And then just a detailed question, maybe you answered this. The 25 Christopher Columbus Drive, Marshall, is that the site with the school embedded in the development? Or is that separate and distinct?

That's yes. It's a yes, John. School in the bottom of it. It's not at the bottom, it's to the side. It's an L. One part of the L is the school, the middle part of the L is the tower, and the third part of the L is a retail component.

Got it. Could be complicated deal I'm sure. All right. Thanks a lot.

Thank you, John.

All right. Thank you.

And it appears there are no further questions at this time. I'll turn the conference back over to you for any additional or closing comments.

We appreciate everyone joining us today. It was a gorgeous day. I imagine most of us wanted to be outside, but we thank you for your time and attention. See you next call.

That does conclude today's conference. Thank you all for your participation. You may now disconnect.