By Lorna Pappas
Shift from national to regional focus strengthens Mack-Cali Realty Corporation's operations
To call the economic environment entering 2003 challenging for an office REIT would be a generous understatement. Facing a tough economy, declining office rental rates, an influx of sublease space, a downturn in job growth and rising vacancies, Mack-Cali Realty Corporation (NYSE: CLI) has demonstrated impressive results and outperformed the core markets in which it does business. The fully integrated, self-administered and self-managed REIT has used several key strategies to maintain its strong occupancies, a stable cash flow, steady earnings and solid funds from operations (FFO) growth—no small feat in the current environment. As markets continue to soften, the company appears to be well positioned to continue its success.
Mack-Cali Realty Corporation
Headquarters
11 Commerce Drive
Cranford, NJ 07016
908-272-8000
www.mack-cali.com
CEO
Mitchell E. Hersh
President
Timothy Jones
Core markets
High barrier-to-entry markets along the Northeast corridor
including: northern/central
New Jersey; Westchester
County, New York; Fairfield County, Connecticut;
and Suburban Philadelphia.
Founded
Cali Associates was founded
in 1949. Following a December 1997 merger with the Mack Company and Patriot American Office Group, the company was renamed Mack-Cali Realty
Corporation.
Went Public
1994
Ticker Symbol
CLI (NYSE)
52-Week High
$35.73
52-Week low
$26.64
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In the third quarter of 2002, Mack-Cali posted FFO of $0.98 per share, which was higher than many analysts' estimates and 7.7 percent above the prior year. In addition, the company posted a per share increase of 13.2 percent in cash available for distribution in the third quarter versus the same quarter in 2001; and a per-share increase of 37.2 percent in net income for the third quarter, versus the same period in 2001.
However, despite all the positive results there were signs of the impact of the tough economy. At the end of the third quarter, Mack-Cali's portfolio was 93 percent leased, down 90 basis points from the second quarter, and 310 basis points from a year earlier. The company expects an additional 150 basis point decline by the end of 2003 due to increased competition and continued pressure on an already weak office sector.
"We are cautiously optimistic that the economy will be turning, with job growth the catalyst of the next wave of economic expansion," says Mitchell Hersh, chief executive officer of Mack-Cali.
"This upswing may not occur until the latter part of 2003, which will have a lagging impact, as it always does, on all real estate sectors—including office. It takes longer for the sector to regain pricing flexibility and stability than other industries."
Historic Perspective
When it comes to understanding real estate cycles or predicting economic waves, Mack-Cali has a significant body of knowledge to draw upon. The roots of Mack-Cali Realty Corporation date back to the first half of the 20th century. The Mack family’s real esate roots go back to the early 1900s, during New York’s residential and industrial development. Brothers John J. Cali and Angelo R. Cali founded Cali Associates in 1949 as a developer of single-family homes in northern New Jersey.
By 1990, Cali Associates had built more than 2.2 million square feet of class A office space in New Jersey, switched its strategy from development to growth through acquisitions and management of office properties, and in August 1994 went public as a real estate investment trust.
The Robert Martin Company started construction on its first office park, in Westchester, N.Y., in 1972 and went on to develop executive parks, condominiums, shopping centers, high-rise office buildings and hotels before merging with Cali Realty Corporation in 1997.
Also merging with Cali Realty in 1997 was The Mack Company, which was founded in New Jersey in 1962 as a private, family-owned commercial real estate firm. In a $1.2 billion transaction, The Mack Company and Patriot American Office Group, a private firm controlled by the Mack family, merged its combined office assets of 9.2 million square feet into Cali Realty Corporation. The new company was renamed Mack-Cali Realty Corporation.
In 1998, Mack-Cali acquired the Denver-based Pacifica Holding Company and its 1.4 million square feet of office space. The acquisition was part of the company's plan to expand nationally, a goal now successfully revamped.
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| Mack-Cali Business Campus Parsippany, NJ |
Cultivating the Garden State
What has Mack-Cali been doing right to maintain its strong performance in the face of the market challenges? Part of the success has come from altering that initial national push. The company now concentrates on high barrier-to-entry, Northeastern markets in which sub-markets are strong and have shown the greatest resiliency. At the same time, Mack-Cali has been disposing of assets in softer U.S. regions and recycling that capital into the Northeast corridor; while continuing to provide first-rate service to a diverse base of about 2,000 tenants.
That strategic adjustment in the late 1990s from a national plan to one that focuses on the Northeast "has put the company on a much more appropriate path," says Jim Sullivan, a senior analyst with Green Street Advisors. "Important progress has been made in the company's refocus on markets in the Northeast where it commands a competitive edge."
Mack-Cali owns or has an interest in 260 properties—totaling about 28.6 million square feet, with an equity market capitalization of approximately $1.8 billion—and about 54 percent of that portfolio's NOI comes from the New Jersey office market, mostly from the state's northern region. New Jersey is a difficult market for developers due to cumbersome zoning and entitlement processes. However, Mack-Cali has been building and acquiring properties and purchasing land in the state for five decades, and those deep roots have fostered strong relationships with local authorities.
Much of the company's activities in New Jersey are centered in Jersey City, just across the river from New York City and an extension of the lower Manhattan office market. Two office projects in Jersey City will be the primary drivers of Mack-Cali's near-term external growth. Approximately 85 percent of Mack-Cali's $475 million development pipeline is in Jersey City, including a 350-room luxury hotel (Mack-Cali's first hotel project) built through a joint venture with Hyatt Development Corporation.
"Strong demand from financial services firms seeking a lower cost alternative to Manhattan caused the Jersey City market to double in size from 7 million square feet in 1990 to 14 million square feet in 2001. In the post September 11 environment, decentralization and redundancy considerations prompted additional interest in Jersey City," Sullivan says.
However, the area is by no means immune to the factors that continue to weaken the office sector nationwide. "Jersey City is very sensitive to the cutbacks currently afflicting financial services firms, as well as increased competition from lower Manhattan, including desperate landlords charging low rents and ample government subsidies," Sullivan reports.
Sullivan adds that Mack-Cali's occupancies are high in many of its sub-markets, about 500 to 1,000 basis points higher than the market averages, reflecting "an operating prowess within the organization." However, the gap invites competing landlords increasingly to fight for Mack-Cali's tenants.
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Harborside Financial Center
Jersey City, NJ |
Expanding the Northeast Portfolio
In addition to New Jersey, 16 percent of Mack-Cali's net operating income is generated by the Westchester market in southeastern New York, 6 percent from Philadelphia, 5 percent from the other areas of New York and Connecticut, and 3 percent from the Washington, D.C. area. As in New Jersey, land to develop new properties is scarce and government approvals are lengthy in these regions, placing constraints on new development. This has kept inventory levels relatively stable, as new construction has been minimal in recent years. As a result, these markets are expected to be less affected by swings in economic cycles.
Hersh says the company's next step is to consider breaking into the Boston market. "I believe there is a shared intellectual capital between Boston and the metropolitan region in New York/New Jersey, and on down to the Washington, D.C. area—all targets for our strategy to grow in the Northeast," he says.
While he cannot commit to a timetable on expansion into Boston, Hersh says the company currently is exploring several opportunities for both property and portfolio acquisitions of class A, stabilized assets along with developable land. The company does not currently own land in Boston or in downtown Washington, D.C., but does own land outside of D.C. in Maryland's Prince George's County. "We are always looking at accretive expansion opportunities in the Washington, D.C. market, where we have been active since 1998," Hersh says.
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| 300 Tice Blvd., Woodcliff Lake, NJ |
Dispositions, Strong Tenant Base
In keeping with its focus on the Northeast, Mack-Cali closed on about a dozen properties in the second and third quarters of 2002. The dispositions took place in softer U.S. markets such as Arizona, Dallas, Denver, California, Florida, Houston and Tampa, with the capital from those sales—about $204 million—being recycled into the Northeast.
While buying and selling, Hersh says his company's attention is never diverted from its main focal point—its tenants. The company's tenant base includes AT&T, IBM, Prentice-Hall, Nabisco, Toys "R" Us, Allstate Insurance and several well-known banks and securities firms. "We operate with a high level of service, keep our properties pristine and offer the latest in technology and amenities, all of which help us maintain a high occupancy rate in a fairly difficult economy," Hersh says.
To further secure those tenants, Mack-Cali initiated a proactive lease renewal program about three years ago throughout its entire portfolio, whereby tenants which represented either 20 percent of an asset or 20,000 square feet and had at least two years remaining on their leases were targeted for early renewal. "It was our sense at that time that we were in a fervent economic growth period which might not last," Hersh says. "While the economy was still strong, we proactively brought down the rollover of leases and locked in our high-credit, high-quality tenants through this aggressive campaign."
The program is still ongoing and has enabled the company to keep occupancies and tenant retention high, with laddered lease maturities and minimal rollovers—even in today's recessionary environment.
Steering the Company
Having a sound business strategy is one component of a successful company; another is employing an equally sound management team to execute those plans. Leading Mack-Cali through the current recession and into the future is a management team with a complementary skill set in real estate and capital markets, representing more than 100 years combined experience in developing, owning and managing commercial real estate properties.
Along with Hersh at the company's helm is president Timothy Jones, who is responsible for the company's real estate acquisitions, dispositions and development programs, and its real estate operations. Hersh and Jones are both intertwined in Mack-Cali's long history; Hersh came up through the ranks from The Mack Company, while Jones joined Hersh at Mack-Cali when the firm merged with The Robert Martin Company in 1997.
With its deep management team, streamlined strategy, strong portfolio of strategically located assets, stable occupancies, flexible balance sheet, secure earnings stream, and array of sound tenants, Mack-Cali appears well positioned to continue its record of outperformance in the core markets in which it does business.
Lorna Pappas, based in Andover, NJ, is a regular contributor to Portfolio.
