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Real estate investment trust (REIT) Mack-Cali Realty Corp. (CLI - Analyst Report) reported fourth quarter 2012 FFO (funds from operations) of 66 cents per share, beating the Zacks Consensus Estimate by 3 cents. This fell short of the prior-year quarter figure by 2 cents.

For full year 2012, Mack-Cali reported FFO per share of $2.67. This marginally surpassed the Zacks Consensus Estimate of $2.65 per share but decreased from $2.80 per share reported a year ago.

Total revenues during the reported quarter were $177.0 million. Though the figure marginally missed the Zacks Consensus Estimate of $178 million, it was slightly ahead of the prior-year quarter’s revenue of $175.5 million.

For full year 2012, Mack-Cali booked total revenue of $704.7 million, slightly up from the Zacks Consensus Estimate of $703 million, but below $709.1 million reported a year ago.  

Leasing Activity

Mack-Cali executed strong leasing activities during the quarter. The company executed 120 leases at its consolidated in-service portfolio spanning over 1.1 million square feet, including 0.9 million square feet of office space, 0.1 million square feet of office/flex space and 0.1 million square feet of industrial/warehouse space.

Of the total leased space, 0.4 million square feet were for new leases and 0.8 million square feet were for lease renewals and other tenant retention transactions. The consolidated in-service portfolio of the company was 87.2% leased at quarter end compared with 87.5% in the previous quarter.

Acquisitions and Developments

In Jan 2013, Mack-Cali acquired Alterra at Overlook Ridge IA in Metro Boston for approximately $61.3 million. In addition, the company inked a deal to purchase Alterra at Overlook Ridge IB for roughly $88 million, which is expected to close in Apr 2013, subject to the opening of prepayment option of the property’s loan.

The properties, which collectively comprise 722 rental units in the master planned community of Overlook Ridge in Revere and Malden, Mass., were acquired from a joint venture of Prudential Insurance Company of America, an operational arm of Prudential Financial Inc. (PRU - Analyst Report). The properties are currently 97.2% leased.

In Oct 2012, Mack-Cali acquired the real estate development and management businesses of Roseland Partners, L.L.C., a leading multi-family residential community developer and operator in the Northeast. The transaction worth $134.6 million was funded through a combination of cash on hand and debt under its $600 million unsecured revolving credit facility.

In December, Mack-Cali’s Roseland subsidiary started construction of the following key multi-family communities in the Northeast: RiverParc at Port Imperial – a joint venture (JV) with Prudential Insurance, with the project cost expected to be around $96.4 million; The Highlands at Overlook Ridge – a JV with a fund advised by UBS Global Asset Management of UBS AG (UBS - Analyst Report) and the anticipated project cost is about $79.4 million.

In addition, the company commenced the development of Portside at Pier One – a JV with Prudential Insurance Company and the estimated project cost is approximately $66.3 million. Following completion, Roseland will manage the leasing and management for the above-mentioned properties.

Moreover, Mack-Cali sold 3 of its office buildings at Moorestown Corporate Center totaling 0.2 million square feet in Moorestown, N.J. The net sales proceeds were about $19.4 million, and it incurred a loss of around $0.1 million from the sale.

Liquidity

As of Dec 31, 2012, Mack-Cali had total debt of $2.2 billion, with a weighted average annual interest rate of 5.86%. Its debt-to-undepreciated assets ratio was 36.7%, an interest coverage ratio of 3.2x, and cash and cash equivalents of $58.2 million.

2013 Outlook

For full year 2013, Mack-Cali expects FFO per share in the range of $2.40–$2.60 per share, unchanged from the prior issued guidance.
    
Dividend Update

During the reported quarter, Mack-Cali announced a quarterly cash dividend of 45 cents per share, which equates to an annualized distribution of $1.80. The dividend was paid on Jan 11, 2013 to shareholders of record as of Jan 4.

Our Take

We are encouraged with a better-than expected results at Mack-Cali. The company is one of the largest office REITs in the U.S., primarily focusing on high-barrier markets in the suburban areas of the Northeast and Mid-Atlantic regions. It has a conservative balance sheet with a high ratio of debt-free assets and strong debt service coverage ratios, and is comparatively better equipped than its competitors to sustain the economic challenges.  

Moreover, the recent acquisitions are a quality addition to the company’s multi-family properties portfolio and accretive to its earnings upon completion. Yet, Mack-Cali will have a difficult time holding occupancy and increasing rents due to volatility in the office sector.

Mack-Cali currently retains a Zacks Rank #3 (Hold). Another REIT stock that is performing better and is worth a look is Terreno Realty Corp. (TRNO - Snapshot Report), carrying a Zacks Rank #1 (Strong 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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