Mack-Cali Realty Corp. (CLI) – a real estate investment trust (:REIT) – 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 and occupancy gains acted as a growth catalyst for the quarter. Yet, a tough operating environment prompted Mack-Cali to cut its FFO outlook for full year 2013.
Total revenue came in at $177.9 million, exceeding the Zacks Consensus Estimate of $174.0 million and increasing 3.4% year over year.
Mack-Cali executed strong leasing activities during the quarter. The company executed 165 lease deals at its consolidated in-service portfolio spanning over 1.3 million square feet. This included around 0.9 million square feet of office space, 0.3 million square feet of office/flex space and 0.06 million square feet of industrial/warehouse space.
Of the total leased space, 0.4 million square feet were for new leases and 0.9 million square feet were related to lease renewals and other tenant retention deals. The consolidated in-service portfolio of the company was 86.2% leased at the quarter-end, compared with 86.0% in the previous quarter.
Portfolio Restructuring Activity
In Apr 2013, Mack-Cali acquired Alterra at Overlook Ridge IB (a 412-unit multi-family rental property) in Revere, Mass. for approximately $88 million. The deal was financed mainly with borrowings under its unsecured revolving credit facility. Also, in June, Mack-Cali initiated development on 14 Sylvan Way – a N.J.-based commercial asset – that is currently 100% occupied.
Additionally, from April to July 2013, the company closed the sale of 9 office properties, spanning 1.3 million square feet, for roughly $186.6 million.
In addition, on Jul 18, the company penned deals to sell its 15 commercial office properties and 3 land parcels in suburban Philadelphia through several joint ventures. Particularly, the deal was inked with a fund sponsored by Keystone Property Group to facilitate the divestitures at approximately $233 million. The transaction will expectedly close in late 2013.
As of Jun 30, 2013, Mack-Cali’s cash and cash equivalents stood at $177.9 million, up significantly from $24.2 million at the end of the prior quarter. The company had total debt of $2.4 billion, with a weighted average annual interest rate of 5.64%. This was slightly above the total debt of $2.3 billion as of Mar 31, 2013.
Moreover, Mack-Cali’s debt-to-undepreciated assets ratio was 38.8% as of Jun 30, 2013, compared with 38.1% as of the end of the last quarter. Interest coverage ratio was 3.1 times for the reported quarter, same as that of the prior quarter.
During the second-quarter, Mack-Cali issued 3.15% senior unsecured notes worth $275 million, having maturity date on May 15, 2023 with interest payable semi-annually in arrears. The net proceeds of approximately $266.5 million (excluding underwriting discount and offering expenses) were mainly utilized to pay off outstanding debts under the unsecured revolving credit facility.
For full-year 2013, Mack-Cali expects FFO per share in the range of $2.32–$2.42 per share. This reflects a cut in outlook for the second time in the year, lowering it further from the prior guidance of $2.37–$2.53 per share. The pessimism reflected Mack-Cali’s concern regarding unsatisfactory rental revenues and occupancy gains in 2013, due to current staggering office sector environment.
Although Mack-Cali came up with satisfactory results this time, following moderate results in the past quarter, the current office market scenario still keeps it on toes. The concern is reflected in company’s another 2013 FFO guidance slash move. In particular, holding occupancy and increasing rents are a concern due to the tough environment in the office sector.
Hence, Mack-Cali has been focusing on expanding its multifamily apartment portfolio. The noteworthy Alterra at Overlook Ridge IB buyout is encouraging in this respect. We believe that this will ultimately help Mack-Cali to diversify its business and stay on the growth trajectory in the long run.
Mack-Cali currently carries a Zacks Rank #4 (Sell).
We are looking forward to the results of other REITs that are scheduled to report today after the market closes. This includes CBRE Group Inc. (CBG), Highwoods Properties Inc. (HIW) and Taubman Centers, Inc. (TCO).
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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