Mack-Cali Stays Neutral

We have reiterated our Neutral recommendation on Mack-Cali Realty Corp. ((CLI - Analyst Report), a real estate investment trust (REIT), as we expect the stock to perform in line with the broader market.

The company reported first quarter 2012 FFO (funds from operations) of $74.5 million or 74 cents per share compared with $67.3 million or 70 cents in the year-earlier quarter. Fund from operations, 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, while adjusted FFO excludes impairment and restructuring charges.

Mack-Cali is primarily engaged in owning, leasing, managing, and developing Class A office and industrial/flex properties. The company focuses on high-barrier markets mostly in the suburban areas in the northeast and mid-Atlantic regions in the U.S., and derives most of its annualized base rents from New Jersey

With debt-free ownership of the bulk of its portfolio, Mack-Cali offers faster and more streamlined leasing process. In addition, Mack-Cali is structured as a vertically integrated company, providing a full range of leasing, property management, construction, legal, space planning, and architectural services under a single platform. This augurs well for its long-term profitability.

The company has a conservative balance sheet with a high ratio of debt-free assets and strong debt service coverage ratios. Consequently, the company is comparatively better equipped than its peers to sustain the challenging macroeconomic environment. For fiscal 2012, the company expects FFO in the range of $2.50 -$2.60 per share.

However, as a part of its long-term strategy, Mack-Cali continues to pursue the acquisition of properties in New Jersey, New York, Pennsylvania and in the Northeast. The continuous acquisition spree involves significant upfront operating expenses with limited near-term profitability. New properties usually take time to generate revenues, and will continue to drag down margins till they get established.

Mack-Cali currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. One of its competitors, Vornado Realty Trust. (VNO - Analyst Report) currently has a Zacks #3 Rank, which translates into a Hold rating.