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Analyst Blog

On Aug 28, 2013, we downgraded our long-term recommendation on Mack-Cali Realty Corp. (CLI - Analyst Report) – a real estate investment trust (REIT) – to Underperform from Neutral based on the continued weakness in the company’s core office markets and reduction in rent on the renewals.

Why the Downgrade?

With rental rates declining over the last few years in the company’s markets, we anticipate that following lease expirations in 2013, the company would experience lower rental rates at these commercial properties on new leases than the current ones. Moreover, rising interest rates raise its funding cost. Mack-Cali also slashed its dividend in the first half of 2013.

Mack-Cali reported second-quarter 2013 funds from operations (FFO) of 65 cents per share, surpassing the Zacks Consensus Estimate as well as the year-ago quarter figure by 3 cents. The rise in overall revenues as well as leasing activity helped the company’s results in the quarter.

Though the company posted better-than-expected results in second-quarter 2013 and continues to diversify in the growing multifamily apartment sector, we believe that its aggressive disposition efforts would have a dilutive impact on its financials in the near-to-medium term. Moreover, for full-year 2013, Mack-Cali expects FFO per share in the range of $2.32–$2.42. This reflects a cut in the outlook for the second time in the year.

Over the last 30 days, the Zacks Consensus Estimate for 2013 FFO per share moved south 0.4% to $2.41 while the Zacks Consensus Estimate for 2014 fell 4.5% to $2.35 per share. The stock currently has a Zacks Rank #4 (Sell).

Other Stocks to Consider

Other REIT stocks that are worth considering include Douglas Emmett Inc. (DEI - Snapshot Report), Highwoods Properties Inc. (HIW - Analyst Report), and SL Green Realty Corp. (SLG - Snapshot Report), all carrying a Zacks Rank #2 (Buy).

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
 

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