Mack-Cali Realty Corporation (CLI - Free Report) enjoys a strong presence in high barrier-to-entry markets and has been focusing on the waterfront and transit-oriented office properties. Further, large commercial tenant base and diversification into the apartment sector is expected to drive its long-term growth.
Nevertheless, elevated expenses and the dilutive impact on earnings from huge asset sales remain concerns for the company. Rate hikes also add to its woes.
Notably, Mack-Cali, with around 750 commercial tenants from diverse industries, enjoys a dominant presence in high barrier-to-entry markets in the United States, especially in the Northeast region. A diversified tenant base helps the company to enjoy a steady revenue stream while avoiding shortcomings related to any particular sector.
Further, Mack-Cali has been making concerted efforts in recent years to transform from a sub-urban office real estate investment trust (REIT) to a residential and geographically-focused office REIT. The company announced a three-year strategic initiative in September 2015. The initiative is aimed at transforming the company into a more concentrated owner of New Jersey Hudson River waterfront and transit-oriented office properties as well as a regional owner of luxury multi-family residential properties.
The company is targeting an increased lease percentage for office portfolio and aiming to curb expenses in office operations as well as reduce debt levels. Further, Mack-Cali is focusing on upgrading its present amenities and improving offerings with major capital investment programs. With such strategic efforts, the company plans to improve cash flow and achieve better margins in both office and multi-family apartment portfolios while strengthening its balance sheet position. Such efforts augur well for its long-term growth.
Also, shares of Mack-Cali have outperformed the industry it belongs to in the past three months. Its shares have gained 14.3% compared with 4.6% growth recorded by the industry. Moreover, the stock has seen the Zacks Consensus Estimate for 2018 funds from operations (FFO) per share remaining stable in a month’s time.
However, as part of portfolio-streamlining efforts, Mack-Cali has been aggressively disposing of its assets. The company completed $528-million property sales in 2017, and in first-quarter 2018, it accomplished the disposition of 20 properties, comprising 1.7 million square feet of space, for $232 million. Further, the company expects additional dispositions of $170 million to be completed by the end of the year. In fact, it anticipates $375-$425 million of dispositions for full-year 2018. This will mark the completion of the company’s major disposition program. Sales will occur on a select one-off basis in future. While these measures are strategically fit for the long run, the dilutive impact on earnings from such huge asset sales cannot be bypassed in the near term.
Moreover, Mack-Cali continues to pursue multi-family residential investments. While this strategy is encouraging from the long-term perspective, it involves significant upfront operating expenses and hence, limits the company’s growth momentum.
Also, any hike in interest rate can pose a challenge for Mack-Cali. This is because the company’s ability to refinance existing debt would be restricted while the interest cost on new debt would increase. This could adversely impact the company’s financial results and consequently dent its dividend payout.
Mark-Cali currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stocks to Consider
A few better-ranked stocks from the same space are Arbor Realty Trust (ABR - Free Report) , Terreno Realty Corporation (TRNO - Free Report) and Extra Space Storage Inc. (EXR - Free Report) . While Arbor Realty and Terreno Realty sport a Zacks Rank of 1, Extra Space Storage carries a Zacks Rank of 2 (Buy).
Arbor Realty’s Zacks Consensus Estimate for 2018 FFO per share has remained unchanged at $1.03 over the past month. Its shares have returned 15.3% in the past six months.
Terreno Realty’s Zacks Consensus Estimate for 2018 FFO per share has been revised upward by 1.6% to $1.28 over the past month. The stock has rallied 2.9% in six months’ time.
Extra Space Storage’s FFO per share estimates for 2018 have been revised upward marginally to $4.62 over the past month. The stock has gained 12.4% during the past six months.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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