To diversify its portfolio and venture into the multifamily apartment sector, Mack-Cali Realty Corporation (CLI - Analyst Report) has penned deals to sell its 15 commercial office properties and 3 land parcels in suburban Philadelphia through several joint ventures. Particularly, the deal inked with a fund sponsored by Keystone Property Group would help the company sell the assets at approximately $233 million.
The Deal Details
These assets comprise existing office properties spanning 1.663 million square feet and land, which could house future development of about 162,000 square feet. The selling price would include $201 million in cash, a $10 million mortgage secured by One Plymouth Meeting, as well as subordinated interests in the portfolio with capital accounts totaling $22 million.
Under the agreements, Mack-Cali would take part in management fees and 50% of value creation over certain hurdle rates. The deal would also result in Mack-Cali gaining majority stake in a land parcel in Bala Cynwyd, Pa. This land parcel would be used for multi-family residential development. Further, Mack-Cali would enjoy the privilege of subdividing and building up multi-family residential units at 150 Monument Road in Bala Cynwyd.
Mack-Cali - the real estate investment trust (REIT), which previously has primary focus on office assets, aims to redeploy the proceeds for funding other strategic growth prospects. As a matter of fact, the suburban office portfolio lacks significant growth prospects in the near term due to a weak demand for such properties.
Amid a stretched macroeconomic environment with high unemployment levels and sufficient availability of space, the demand for office space remains moderate. This, in turn, exerts pressure on rent and occupancies. The company has also vended a number of office properties in New Jersey in the recent past.
At the same time, Mack-Cali has been inking various acquisition deals to expand its multifamily apartment portfolio. Among the recent acquisitions, Alterra IA and Alterra IB at Overlook Ridge in Metro Boston are noteworthy that were acquired from a joint venture of Prudential Insurance Company of America, an operational arm of Prudential Financial Inc. (PRU - Analyst Report) .
We believe that such restructuring efforts will ultimately help the company to diversify its assets and ride high on growth. Moreover, the increase in apartments' demand driven by ‘echo boomers’ – children of the baby boomer generation – makes us positive on the company’s strategy, as the particular population’s propensity to rent is significant.
Zacks Earnings ESP
Mack-Cali is slated to release second-quarter 2013 results on Jul 25, before the opening bell. The Zacks Consensus Estimate for funds from operations (FFO) per share for the upcoming quarter is pegged at 62 cents.
The earnings ESP (Read: Zacks Earnings ESP: A Better Method) for Mack-Cali is a positive 1.61% for the second quarter. However, we are skeptical about a positive earnings surprise owing to the company’s Zacks Rank #4 (Sell).
Other REITs to Consider
Two other REITs that are performing better are W. P. Carey Inc. (WPC - Snapshot Report) and Winthrop Realty Trust , both of which carry 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.