Veris Residential, Inc. Q2 FY2020 Earnings Call

Good day, everyone, and welcome to the Mack-Cali Realty Corporation Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Deidre Crockett, Chief Administrative Officer. Please go ahead.

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

Thank you, Deidre. Good morning, and thank you for joining Mack-Cali's Second Quarter 2020 Earnings Conference Call. Today, I plan to provide a few opening remarks, and we'll then pass the call to our leadership team. Marshall Tycher, Chairman of our multifamily platform, Roseland, will walk us through some performance highlights; Nick Hilton, our Executive Vice President of Leasing, will discuss our office operations; and Dave Smetana, our Chief Financial Officer, will discuss our key financial metrics, and then we will open up the call for questions. We've also filed a supplemental this quarter that is located on the Investor Relations section of our website. Please contact David Smetana with any further questions. I was recently appointed to my role as Interim CEO by the Board of Directors. And with just a few weeks on the job, I will keep my remarks brief. But let me start by thanking Mike DeMarco for his years of service to Mack-Cali. I'm extremely excited to have been asked by my fellow Board members to step in to lead Mack-Cali as the Board works to identify a new permanent CEO. Certainly, these are unprecedented times, and I recognize that there remains an air of uncertainty with an executive change amid a challenging healthcare crisis and what that may bring. I do not take that lightly. I joined Mack-Cali's Board following the 2019 Annual Meeting. I was appointed Board Chair in June. I have spent the entirety of my career developing and operating innovative mixed-use real estate projects in the New York region. I love real estate and believe in the importance our sector plays in the lives of Americans every day. While my tenure as CEO is only temporary, I'm deeply committed to ensuring we continue to execute on the plans currently in place, which remain highly focused on collecting rents, leasing our properties and completing the asset sales that are underway. I also plan to continue in my role as Chair after the Board selects a new CEO. Over the coming months, I will complete a tour of all of our assets and will be spending time with all of our team members in the field. I'm committed to providing stability, continuity and empowerment within the organization to be accountable and aligned with reaching our strategic objectives. As the Board Chair, I have direct insight into the priorities of the Board from an overall strategic perspective. And they have spent a considerable amount of time listening to our shareholders and evaluating the business. One of the significant takeaways and the Board is in clear alignment with shareholders is that the company is unlikely to realize maximum value in its current structure. Consequently, the Board is actively continuing to pursue value maximization strategies. In fact, even over the short six weeks since they have been in place, the sales of the company's suburban assets which are continuing, have been among the highest priorities. However, given the pandemic, we are not in a position to provide a definitive timeline for when they will be completed. The Board is committed to unlocking value and is squarely focused on the pursuit of the right strategic alternatives for the company in order to accomplish this objective. Those efforts are well underway and do not require, nor are we waiting for, the hiring of a new CEO to move ahead, if appropriate. I'm excited to build upon Mack-Cali's accomplishments, support our operational excellence and pave the way for success at every level of the company. I will work with Deidre and Dave to meet our shareholders and analysts and look forward to reporting on our progress each quarter. With that, I will turn the call over to Marshall to discuss our multifamily operations.

Thanks, MaryAnne. In the second quarter, Roseland's percentage leased finished at 92.6% as compared to 95.7% last quarter. The reduction was primarily a result of a dramatic decline in new lease traffic in the quarter due to COVID-19. We believe the decline in occupancy and reduction in new lease traffic is consistent with other Northeast-focused portfolios and a substantial portion of our comps. Despite the traffic reduction, our portfolio experienced a 58% retention rate, 300 basis points higher than 2019, and renewal rates on retained leases grew 2.8%. In July, net leasing activity turned positive. We believe the worst is behind us. In the quarter, our same-store portfolio experienced a 10.2% decrease in NOI generated by a 5.2% loss in revenue. On a year-to-date basis, the same-store NOI is negative 0.6%. The quarterly loss includes a one-time $944,000 write-down from a single corporate provider in Jersey City. Absent that write-off, our same-store portfolio would be negative 5% for the quarter and positive 2.1% for the year. Subsequent to quarter-end, we reached a settlement with that provider and retrieved 71 of their furnished units. We're evaluating alternatives to capitalize on these furnished units now. We continue to deliver a high level of service to our residents during the COVID period. Our staff has been on-site and responsive, we have increased the quality and quantity of daily cleanings across the portfolio and we have enhanced our residents' lifestyle by scheduling virtual programming, implementing door-to-door deliveries and introducing additional dining options. In regard to our hotel properties at Port Imperial, the EnVue was closed at the end of March and remains closed today. However, the Residence Inn continued to operate and finished the quarter with an average occupancy of 70%. In late June, we activated EnVue's 15,000 square foot patio for dining, which has been averaging $100,000 in weekly sales in its comfortable rooftop setting. The company has five projects representing 1,942 units in construction, which are projected to generate $62 million of stabilized NOI on a development yield of 6.15%. Moreover, as of now, we only have a $5 million capital obligation remaining to complete this portfolio. The Emery in Massachusetts has delivered its initial 240 of 326 units. As of July 27, we have leased 81% of delivered units at rents in excess of our initial pro forma. The balance of the units will be completed by quarter's end. Roseland is preparing lease-up activities at three projects for initial deliveries in early 2021, including 673 units in Port Imperial at both Capstone and RiverHouse 9, and The Upton in Short Hills, a 193-unit luxury community in one of New Jersey's premier municipalities adjacent to the Short Hills Mall. Our fifth project, The Charlotte, is scheduled for delivery in the first quarter of 2022. This central development is a 750-unit tower located in the Jersey City Waterfront submarket on Christopher Columbus Drive, which will benefit from a below-market pilot fixed at 7% for 20 years. Though construction activities are proceeding at a near-standard pace, as a result of COVID-related delays, we have revised our supplemental schedules to account for, on average, 90-day delivery delays. Subsequent to quarter-end, we reached an agreement to refinance our largest 2021 maturity, having locked a 7-year interest-only $165 million mortgage at 2.9% for Monaco. Looking ahead, we are continuing predevelopment activities on three potential Hudson River starts, including Harborside 8, a 679-unit highly amenitized tower, which will be adjacent to our corporate headquarters here at Harborside 3; the Park Parcel at Port Imperial, a 302-unit mid-rise development to be constructed overlooking a 17-acre city park with unencumbered 270-degree views of Manhattan; and the second phase of Urby, a proposed 796-unit tower adjacent to our successful Urby project with the highest rents per square foot in Jersey City.

Thank you, Marshall. Before I get into our leasing results, I'd like to quickly touch upon our continued response to the ongoing COVID-19 pandemic. All the protocols discussed in my last quarter's remarks have been implemented portfolio-wide, including increased and expanded cleaning procedures, augmented ingress and egress plans to limit crowding, limited elevator capacity and mandatory mask use in common areas. We take the health and safety of our tenants, coworkers and operational staff very seriously. Together with our property management team, we continue to take all the necessary precautions to ensure a safe, secure and clean environment as the tri-state area begins to transition into the reentry phase. From a new leasing perspective, we continue to make progress portfolio-wide, signing just over 155,000 square feet in the second quarter. This resulted in our core and waterfront portfolio finishing at 80.3% leased at quarter-end. Of these transactions, approximately 6% or 10,000 square feet were new leases, and 94% or 145,000 square feet were in-place renewals. Across all core markets, our rents on second quarter leasing rolled up 3.6% on a cash basis and 12.9% on a GAAP basis. As we turn our focus to the specific markets, the Waterfront closed approximately 55,000 square feet of transactions, finishing the second quarter at 78.6% leased. We are pleased to see increases of 8.5% on a cash basis and 18.6% on a GAAP basis over these deals. While the pandemic has paused many of our discussions, we still have approximately 200,000 square feet of transactions currently in negotiations across a diverse tenancy mix, including technology, financial services and insurance. Looking ahead, we have a limited amount of lease roll with just over 54,000 square feet expiring on the Waterfront through the end of the year. Turning to the performance of our suburban portfolio. In the second quarter, we executed over 101,000 square feet while achieving positive rent increases of 1.2% on a cash basis and 10.3% on a GAAP basis. For the remainder of the year, we have over 118,000 square feet expiring in our suburban portfolio, of which approximately 91,000 square feet pertain to assets that are under contract to be sold by year's end, subject to any unforeseen delays from the pandemic. And of the remaining 27,000 square feet rolling, we expect to renew approximately 20,000 square feet as we move ahead. With that, I'd like to turn the call over to David.

Thanks, Nick. We reported core FFO per share for the quarter of $0.28 versus $0.40 in the prior year. To provide some perspective in the absence of formal guidance, the results of each division were roughly in line with heavily revised down expectations that we began to flow through our models in May. We had in-line office results as we anticipated increased credit write-downs and benefited again from having very low lease expirations. And we had slightly lower-than-anticipated multifamily results that included a $944,000 write-off related to our corporate apartment operator. In total, there were $4.2 million of credit charges in the quarter or $0.04 per share, including the $944,000 charge related to the corporate housing provider. $2.2 million of the charges related to reserve allowances and $2 million related to straight-line rent receivables. The strength we saw in rent collections, when we presented at NAREIT in early June, of 96% in our office portfolio and 97% in multifamily carried through as our rough averages for the quarter. In July, we have collected 98% of office rents and 99% on the multifamily side. The slight increase is attributable to the hard work our leasing and operations teams have done to appropriately give a limited number of modifications or deferrals where needed in getting tenants back on a normal payment cadence. While our exposure to hotel operations, which were 4% of revenues in Q1 and parking operations, which are currently just 3% of revenues are modest, they were disrupted in line with our expectations. For parking, we think the second quarter run rate of $3 million is a conservative way to think about the second half of the year, but remain hopeful that in the fourth quarter, as people return to work, they will be more apt to drive and park with us. Our hotel operations remain limited to the Residence Inn portion of our dual-flag Port Imperial hotel. That hotel contributed a $960,000 EBITDA loss in the second quarter. We continue to believe the hotel recovery will be slow and do not plan to reopen the EnVue in Port Imperial and the Hyatt in Jersey City until the fourth quarter at best. And thus, we recommend using the current quarter as a run rate until further notice. Our office cash same-store NOI increased by 13.4% in the second quarter, as we continue to receive the benefit of all our major blend-and-extend leases at Harborside, now cash flowing over prior periods that still had free rent provisions. This will, however, moderate in the second half. GAAP same-store NOI was down by 3.6%, with $1.3 million of straight-line rent reserves in our same-store pool, creating a negative 5% drag on GAAP same-store NOI. We had $1 million of credit reserve allowances and $1.8 million of straight-line rent reserves across the entire office portfolio, including our discontinued operations. In the office segment, we originally gave guidance that included 135,000 square feet of Waterfront leasing for the year. To date, we have signed 105,000 square feet of transactions on the Waterfront with another 18,000 in leases today. Given the current operating environment, we do not assume any further speculative new leasing to take occupancy between now and the end of the year in our internal projections. To reiterate what Nick said, for the remainder of the year, we have over 118,000 square feet expiring in our suburban portfolios, of which 91,000 square feet pertain to assets that are under contract to be sold this year. Of the 27,000 square feet remaining in our suburban portfolio, we expect 20,000 square feet to renew in the coming quarter. Touching briefly on the multifamily results. Residential same-store NOI, which Marshall has already given great detail on, was down 5% for the quarter when excluding a $944,000 write-down related to a corporate housing provider. We expect incentives to remain elevated as we seek to rebuild occupancy. Now on the transaction side. Our Parsippany and Giralda portfolio sale has been restructured for a gross price of $272 million, a 4% discount to the original purchase price of $285 million. The first phase of 11 properties was contracted for $167 million. In July, the first property, 3 Giralda Farms, closed for $8 million, leaving 10 of the 11 properties in Phase 1 scheduled to close at the end of the third quarter for the remaining $159 million. The second phase under contract for $105 million is for 4 of the 15 remaining properties with these closings scheduled to take place in the fourth quarter. For the Monmouth, Short Hills and Metropark portfolios, we believe the timing of these sales is very hard to predict and see closings taking place either late in the fourth quarter or early in 2021. In addition to the Parsippany and Giralda portfolio sale, we currently have three properties, including 111 River, totaling 833,000 square feet under contract for closing by year-end. On our NAV schedule, which we publish quarterly, while we are cognizant of the fact that price discovery is challenging in this environment, we are trying to do our best to make sure our assumptions are reflective of what we are seeing operationally and where there is buyer interest reflective of where pricing may end up. We took a 3% discount to our multifamily NAV in the quarter, given the uncertainty of NOI growth, but also reflective of a healthy multifamily financing market at record low rates. Notably, we took a 6% haircut to our unlevered waterfront asset value and some reductions in land value for a 7.4% total hit to office NAV and a 7.1% hit to total NAV. Turning to the balance sheet. We have no debt maturities in 2020. And in July, as Marshall mentioned, we placed a deposit and rate locked at 2.9%, the refinancing of our only major 2021 property level maturity, a $165 million multifamily loan on Monaco with its existing lender. We expect to close this mortgage in November, avoiding prepayment penalties. The net debt-to-EBITDA metric was 13.0x at quarter-end. The metric remains elevated as we carry all of the multifamily development debt and no EBITDA benefit. We expect this metric to improve as we have four multifamily development properties that will begin contributing to EBITDA within the next 12 to 24 months, including the Emery, which opened in Q1 2020. Additionally, the metric was negatively affected and increased by 1.3 turns from negative hotel and parking impacts. Lastly, I'm pleased to say today, as we sit here today, we only have $5 million of equity left to fund on our current CIP pipeline, all relating to our 750-unit project called The Charlotte in Jersey City. We then will begin for the construction loan portion of all five development projects totaling $1 billion in construction costs, with a projected 6.2% stabilized yield. With that, I will turn the call back to the operator to open it up for questions.

We will now take our first question from Manny Korchman from Citi.

MaryAnne, realizing that you've been in the CEO seat for just a couple of weeks but in the boardroom for longer, maybe you could just share current views as to how the Board is thinking about hitting on strategic alternatives or think about strategic alternatives right now beyond the suburban asset sales, which sounds like the current strategic focus.

Thanks, Manny. Sure. So clearly, the focus on the suburban dispositions is a clear priority that's been reaffirmed by the newly reconstituted Board of Directors. In addition, there's a feeling that the lease-up strategy on the Waterfront is critical and that we are going to be focused on wins there in the coming months. And then with the Board, we're going to be working as a management team to develop strategic alternatives in the coming months. Clearly, given the environment we find ourselves in, there are challenges around execution and whether it's the right time to make any strategic moves. But the Board of Directors is focused on this and will be ready should there be an opportunity.

And then in that light, how do you or how should we think about the multifamily portfolio versus office holdings?

As I said earlier in my remarks, the thinking is that there's a decoupling needed of these two asset types. And so as we review strategic alternatives with that in mind, we'll be giving further direction as to our priorities related to the residential portfolio.

And Nick, maybe a quick one for you. Realizing that you guys tried not to change NAV too much because of COVID, but it doesn't look like there were any market rent adjustments for the Waterfront in NAV. Was that just to keep consistency from not including those COVID impacts? Or do you really think the market rents haven't changed?

Well, I would say that if you look at the broader market right now, it's a little too early to tell. Fundamentals within the broader market just even outside of our portfolio have not changed much. Maybe the availability rate has really hovered around 20% in the market, and average asking rents have probably ticked down about 3%. And as we look at our portfolio, I do think that we are going to reevaluate what our rents are, everything from rents to concession packages. I just think it's a little bit early right now to give you firm feedback in terms of percentages, what have you.

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

So it sounds actually like the strategy hasn't shifted that much at this time. Is it just that you're on the job too early? Or is the strategic focus on suburban dispositions and getting to 60-40 in Waterfront focus, is that still what we should be thinking about? Or will there be adjustments to the strategy? Or what is the difference in the strategy under new leadership?

Thanks. I think that the way for you to think about the near-term strategy is to stabilize and empower the management team here at Mack-Cali, sell the suburban assets and lease office space on the Waterfront. And then inside of that strategy, there's the broader thinking around where does the company go and what strategic alternatives are available to the company. And again, just given where we are in the middle of a pandemic, it's difficult for us to give any sense of how opportunistic we can be. What we're not going to do is sell the company on a fire sale, and we need to be strategic. And that is the work of the day.

Okay. It's interesting that the sale of the Hoboken office building came in at $432 per square foot, which serves as an intriguing price point for your Waterfront office portfolio. When did this go into contract? Was it before or after the pandemic, just from a discovery perspective?

As I understand it, the price was determined before the pandemic, and we're working hard to finalize the sale and believe we can maintain stable pricing. The coming weeks will provide more clarity, but it's a valuable asset, and we consider it to have a strong price per square foot.

Okay. And look, clearly, residential quarter-over-quarter, losing 310 basis points of leased occupancy is tough. So I'm certainly expecting that you do have some concessions in there. Has there been any evidence of folks moving out of Manhattan maybe stepping-stoning it to Jersey City a little bit? Or is it basically just the mass exodus that we're seeing in New York kind of is sweeping you guys up at least in the near term?

It's Marshall Tycher. I think the latter comment is probably more consistent. Clearly, there's a lot of dislocation of jobs and a lot of uncertainty, and New York is a big job driver for this entire North Jersey market. So people are leaving Manhattan, and they're making new decisions. They're making them quickly. So we're going to have to wait to see how it settles down, but we are certainly being impacted by people's job dislocation and indecision.

We will now take our next question from Steve Sakwa from Evercore.

Nick, I was wondering if you could comment a little bit on the competition that you are facing from 30 Hudson Street. I know there were a couple of large leases that got done which might have slipped through your fingers. I mean how competitive was that leasing situation? And I guess, with that building now leased up, I guess, how do you feel about leasing up Harborside at this point?

Thank you, Steve. I'll address both deals. In each case, we were one of two contenders. For the Merck transaction, sometimes called the WeWork deal, the tenant had a strict timeline for occupancy due to circumstances within their business. 30 Hudson provided a building solution that met their needs, while our Harborside 5 was going to be built from scratch. We proposed solutions to help manage the cost differences. Ultimately, though, the execution risk was too high to ensure they wouldn't face delays from COVID. Regarding the AIG deal, we were again one of two options. We had a prime location in the middle of the stack, and AIG was already a tenant in our portfolio, so negotiations were progressing well. However, midway through the lease, their requirements expanded. They outgrew that space, and to accommodate them, we had to split them across two elevator banks, which wasn't ideal. As a result, they concentrated their efforts on 30 Hudson and finalized the deal there. At 30 Hudson, they occupy about half of this 1.4 million square foot tower, having leased approximately 700,000 square feet. While I won’t say the building is completely wrapped up, I’m optimistic that it’s nearly so. This situation highlights our ability to engage with the right tenants. We were one of two options in both cases. Currently, having a top three building in the market like Plaza 5 positions us well for future tenants. With our diverse product offerings in the same area, including various floor sizes and pricing structures, I believe we have a strong advantage moving forward.

Okay. And then I guess, just moving to the suburban sales, the small haircut on the first set isn't surprising. But maybe Dave or MaryAnne, just talk about the balance at the Monmouth, the Short Hills, the Metropark. Just remind us, were those being pushed out more for tax consideration purposes? Or is it just kind of a lack of bidder pool or just inability to kind of handle it all at once? Just trying to sort of understand the timing of these and whether those could be pulled forward in any way and maybe with an uptick in suburban leasing activity.

Thanks, Steve. I'll address that. As we've mentioned previously, a number of local operators in New Jersey, often in partnership with private equity or hedge fund money, have shown interest in these properties. The delay is primarily due to the COVID environment. In our experience with Parsippany and Giralda, the main issue has been lenders needing to get in line, particularly concerning the more expensive second piece of debt. However, we are starting to see some stabilization. We are focused on obtaining the best execution possible and have done tax planning to align these portfolios for both this year and next. I wouldn't attribute the holdup to tax planning. Our goal is to achieve optimal execution and to pay down all corporate debt as quickly as possible with the proceeds.

Okay. So maybe, Dave, just maybe elaborate a little further, just in terms of the demand or appetite for those other portfolios. Are there kind of one group looking at each of those portfolios, multiple groups? Just trying to get a sense for the demand and the pricing levels.

So Steve, it is multiple groups looking. They're all now listed with brokers. I would say kind of notably, our CIO and myself, on Metropark, we are starting to see more institutional names than we typically see in New Jersey, starting to look at that product. But I think Monmouth and Short Hills, again, will go to kind of local operator guys with some more hedge fund or private equity money backing them. But we feel good about our prospects of getting the executions done within a 12-month time frame, and we're looking to maximize price. But taxes should not get in our way. And we feel good, but are just trying to be conservative given the pandemic and the environment.

I noticed there were some impairment charges included in the add back, along with proxy costs and severance costs for the quarter. I assume some of these expenses are one-time, but could you clarify if any are expected to impact Q3? Additionally, with the CEO change, what should we anticipate regarding costs moving forward?

Yes. Steve, there shouldn't be much spillover with any of those. Each quarter, we look at impairments, we had some land impairments. We had the purchase price adjustment on Parsippany and Giralda was the biggest one there on the $11 million of operating properties. And with the CEO, I think we have a note in our 10-Q that Mike's leaving, being asked to leave without cause pursuant to his contract. So I think the proxy is going to be the best guide there. It was a third quarter event, so look for that in the third quarter.

We will now take our next question from Anthony Paolone from JPMorgan.

On the 200,000 square feet of leasing, I guess, in the pipeline or deals that are out there, is that all incremental? Or is some of that to replace any exits?

The 200,000 square feet I mentioned is a bit higher than that. Currently, we are discussing approximately 185,000 square feet in terms of leases. The process is progressing very slowly. There are proposals for an additional 80,000 square feet. For new deals, I would estimate them to be split almost evenly. So, we’re looking at about 130,000 square feet for new deals and 135,000 square feet from existing tenants, either through renewals or expansions.

Okay. I believe you mentioned that a little over 100,000 square feet is expiring in the remainder of the year for those properties that are set for sale. Does whether the tenants choose to renew affect whether the sales proceed, or could that cause any issues?

No.

Okay. I have a question for MaryAnne. Regarding the Board, before it was restructured, there was a general Board adviser and a committee with an adviser. Can you clarify if there is a specific process in place? Is there a committee managing this process, or is it open to ideas like any other Board at this stage?

Thank you. As you might recall, there was a Shareholder Value Committee that was created in 2019, and the work of that committee will continue with a similar committee of the new Board that will focus on strategic alternatives and inbound. And so the Board will operate, I think, with maximum efficiency if there are committee structures that do much of the heavy lifting. So that is the current thinking. And as you know, we have a lead director as well to complement the fact that I am now management as Board Chair.

We will now take our next question from Jamie Feldman from Bank of America.

I guess for Nick, can you just talk about any change on the demand side for suburban office leasing? Are you seeing interest in suburban satellite offices? And if so, what submarkets? And also, is it co-working type tenants to prepare for shorter-term leases or more direct?

Yes, I can provide an update on the suburban portfolio. We're definitely experiencing some growth. In primary markets, locations like Metropark are seeing increased activity, along with Short Hills. These areas are centrally located near several highways and have access to mass transit. Overall, the suburban office market is significant, being the second largest outside of Los Angeles, and it currently faces a structural vacancy rate of about 20%. The best-performing properties are true Class A and trophy assets. We plan to keep following this strategy to take advantage of the current activity and to continue with the disposition of assets.

And Jamie, if I might also say about the Waterfront leasing strategy on the commercial side, we're seeing a movement toward decentralization and de-densification. Companies that are close in the urban core of Manhattan are looking at strategies even post-vaccine to decentralize, and I think that bodes well for the Waterfront. I think there's potential for a refresh kind of strategy that might look to capitalize on the world we find ourselves in and the changing trends and how to keep talent safe, engaged and content.

Okay. As you think about the types of interest you're seeing, what's the typical lease structure? Is this very short term, 1, 2 years short-term deals just to kind of get through this? Or are people really thinking about longer-term plans?

Currently, we are focused on the intermediate term, around three years. We are either considering a sublease or entering into a three-year agreement, primarily seeking properties that are already built and furnished if possible. Regarding the tenants, so far, most interest has been in the FIRE sector and serviced office spaces, though there hasn't been much activity beyond that. We are collaborating with serviced office providers in our own portfolio, but for new initiatives, there hasn't been any movement.

And it's the West Side Story of Manhattan, the migration West. If you think about what that might mean for an ability to, again, decentralize, de-densify and have better cost alternatives for lots of the corporate migration West on the Isle of Manhattan, again, it could bode well for the Jersey Waterfront if we think about it in terms of what we can expect in the coming years. And I think some of this could be temporary, but I could equally see it being a more permanent approach to corporate locations.

And that doesn't change your view on selling suburban? I mean do you guys kind of rethink it at all? Or it's already going down that path?

No. We're committed to the go-forward strategy on sale of suburban. And again, it gets to this idea that we want to focus on our knitting and the core competency on the Waterfront. We think that, that's the wise strategy. And again, just based on price discovery and where we think the suburban assets can be disposed of, it's the best approach given the other objectives of the company.

Okay. Can you share any updated insights on leverage or reducing debt? Is there a way to achieve these goals more quickly than previously planned? How should we view the balance sheet and what actions can be taken to improve it?

Yes. Dave and I spent a lot of time talking about that. I'm going to throw that over to Dave to answer. It's clearly something that we're super focused on. Dave?

Thanks, MaryAnne. Jamie, so listen, it depends really how you define deleveraging. I know everybody points to the net debt-to-EBITDA metric. So as I've pointed out there, listen, to manage expectations over the next coming quarters and years until we really get our multifamily online and cash flowing and we get some traction here and get some net absorption and lease-up on the Waterfront, it's going to remain elevated in the low teens. But I do consider selling our suburbs and paying off our corporate debt delevering. It makes us safe, it gets rid of our covenants and is more focused on our multifamily NOIs, which have better drop-downs to cash flow. And so we're excited to get going on the suburban sales and finish those off and get the company more focused, as MaryAnne said, on its core competencies.

Okay. And then one for Marshall. Considering the pandemic and the shift to remote work, have you revised your thoughts on apartment design? Additionally, how do you foresee this impacting construction costs or your approach to future deals?

Those are some interesting topics, Jamie. Everyone is discussing a reevaluation of the product itself. Our industry transitioned from larger units to smaller ones, enhancing our common area amenities based on the idea that people preferred to socialize and spend more time in those spaces, which allowed for smaller units. The question is whether this mindset will change. Certainly, there will be a short-term change; the long-term implications are what we're currently studying as we reassess our units. Historically, we've constructed larger unit averages compared to most of the industry, so we are already on the larger side relative to our competitors. I don't anticipate returning to building offices in apartments or fixed office spaces, as most people now work on tablets from tables. We are evaluating unit sizes to see if any adjustments are needed for upcoming projects. Regarding construction costs and materials, commodity materials have remained relatively stable. We are not primarily wood frame builders, so that sector's rising costs due to home construction do not significantly impact us. Our product costs have been largely flat. The more intriguing question will be whether labor costs start to decline, as trades are less busy than before, which could provide some relief. Historically, construction has experienced an inflation rate of 3% to 5%, and there may be some easing due to labor costs, although I don't expect much movement in commodity prices.

Okay. And then from a residential perspective, do you think differently about the best submarkets to be in going forward if you do see more of an urban exodus or different markets?

Well, the question becomes, if you look at the urban market, that is our Waterfront as an exit from Manhattan and the density of Manhattan or do you think if people go further West into the suburbs? I mean at this immediate moment, clearly, the suburbs are doing a little bit better than even New Jersey urban markets. They've had less move-outs than we've had in the Waterfront. We think that's a short-term concept. We don't think it will be long term. I think people will still want to gravitate to the Waterfront for price and access to New York when the COVID has passed. So I think short-term, for sure, Jamie, the suburbs are faring better than the urban locations. But we don't think that's going to be a long-term trend.

We now have a follow-up question from Manny Korchman from Citi.

MaryAnne, previously, Bank of America and Goldman were acting as advisers to the Board and to the CEO in terms of running some processes. Are either of them still engaged with the company? Or have you selected other banks? Or is there no banks currently involved?

Thanks, Michael. Currently, there are no banks involved. As you pointed out, we've had the involvement of BAML and a banker to advise the special committee. That may or may not be the case going forward, but there's been no decision made.

And as you think about the strategic review committee on your web, it looks like it's Akiva Frederic, Mahbod and Tammy. Was there any thought of putting someone who had previously been on the Board like yourself on that committee versus all new people coming in?

It's a great question. I am adviser to that committee as is Frederic Cumenal. Both of us sat on the original 2019 committee and have participated in discussions within that early new committee, and we would expect to continue to do that.

Okay. And then Dave mentioned per the Q that there was a note about Mike. Has that agreement now been finalized and signed where both parties have agreed to the terms? Or it's still outstanding?

As of yet, it's not been executed.

Is there any reason why that hasn't been done yet? And how should we think about that?

This is day 5 on the job for me. So I think it's really just about the fact that these matters do take a little bit of time, but I would expect that it will conclude in short order.

Okay. Is the Nominating and Corporate Governance Committee the members of the Board who are running the CEO search? Or is it other people?

There is a separate committee, a search committee set up within the Board, and that Board has already gotten to work. That committee who is in the Board has already gotten down to work.

Which members of the Board?

The Board discussed the creation of a committee and populated it with, I believe, Akiva Katz, Tammy Jones, Frederic Cumenal as Head of Comp. And I believe that's the committee.

And how is the company thinking about the spec of a CEO role for a company that has been through a number of CEOs already? Two has got some strategic alternatives and processes that they're going by, has 2 primary asset types. How do you, I guess, get someone to want to take that role and incentivize them to do it? But also what are you looking for in terms of the characteristics of that individual to come lead Mack-Cali in its next chapter?

I don't want to preempt the search committee, as their responsibility is to define the specifications for the new CEO. However, I believe this is an excellent opportunity. There are strong executives in the real estate sector who possess the necessary expertise and would excel in this position. We are focused on finding a motivated leader who isn't looking to be a long-term CEO within a REIT. Additionally, I want to emphasize that operations have already begun and will continue. The lack of a permanent CEO will not hinder our efforts or our willingness to pursue strategic alternatives if an appealing opportunity arises. So, there won't be any delays. It's important to acknowledge that, given the current pandemic, it may take some time to find and secure long-term leadership. In the meantime, my interim role will ensure we can proceed with transactions and maintain effective execution.

And it sounds like you've removed yourself from potentially making yourself permanent in this role, that you view this purely as an interim role and you go back to Board Chair once all is said and done?

Correct.

As there are no further questions in the queue, I'd like to hand the call back to MaryAnne Gilmartin, CEO, for any closing remarks.

Thank you, operator. So I'd like to conclude with a comment on leadership through a change in challenge. Many of my career milestones have been amid and through crises. After 9/11, I led the construction and leasing of the first two new office buildings in New York to rise after the attacks of 9/11, one in Brooklyn for Empire BlueCross BlueShield, which sustained significant loss of life and space on World Trade Center. In Times Square post-9/11, I led the construction and lease-up of the New York Times Tower, faced with what the industry deemed to be an undesirable location marked as a terrorist target across from the Port Authority sitting atop 11 subway lines, yet we achieved record-breaking rents in record time on the highest tower floors, which the industry said would be shunned after the attacks. In Lower Manhattan, I led the team that financed, built and leased over 900 rental units at New York by Gehry through the 2007 banking crisis, when experts wrote off the multifamily market in New York City. On the heels of the Great Recession, I stepped in to lead the restructuring and recapitalization of Pacific Park Brooklyn and leased thousands of units after it was plagued by delay and litigation. Post Superstorm Sandy, my leasing team in Brooklyn was able to capitalize on Downtown Brooklyn's separate power grid, quality infrastructure and high C-level coordinates. In short, I'm good in a crisis. And while in modern times we have never been through anything quite like a global pandemic, I will lead with my strengths, which include empowerment, problem-solving and execution. In closing, for sure today we find ourselves in an exceptionally challenging environment that is fraught with change and uncertainty. But in the face of it all, what will remain constant is the team's focus, suburban disposition, waterfront leasing and strengthening the balance sheet. The team and I are fully engaged and we will look forward to continuing to speak to you all in the coming weeks. Please stay safe and healthy. Thank you and have a great day.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.