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Mack-Cali's JV Buys Stake in D.C. Asset

Zacks Equity Research

Mack-Cali Realty Corp. (CLI), through a joint venture (:JV) with Fisher Brothers, purchased a 50% stake in a luxury multi-family residential development project in Washington, D.C. for around $46.5 million. The move comes as part of its effort to diversify its business and venture into the multifamily apartment sector.

This 377-unit project is currently under construction. It comprises around 25,000 square feet of retail space and a 309-space underground parking garage and is positioned at 701 2nd Street, NE in D.C. Expected to be accomplished by mid-2015, this project is well positioned in one the trendiest streets with restaurants and nightlife and is located close to Union Station. The leasing activity is expected to begin in the first quarter of 2015.

Notably, the JV of Mack-Cali/Fisher Brothers would take on Mack-Cali's Roseland subsidiary’s services for the day-to-day operations of the assets, together with the leasing and management of the above mentioned D.C. assets. The venture has $100.7 million worth of 20-year in-place debt with attractive terms.

Amid a continued weakness in the company's core office markets, Mack-Cali has been divesting a notable part of its office portfolio and deploying its capital to expand its holdings in the multi-family residential sector that has traditionally been more of a stable product type. The growth in the echo boomers population is particularly expected to drive the demand for these properties.

As part of this, recently Mack-Cali disclosed the acquisition of 200-unit multi-family residential properties in New Brunswick, NJ. The company shelled out $41.1 million for purchasing the properties from an affiliate of Ironstate Holdings. Known as Riverwatch Commons and Richmond Court, the three-building properties are 95% leased.

Mack-Cali also acquired Alterra at Overlook Ridge 1A and 1B – luxury multi-family properties containing 722 rental units in the master planned community of Overlook Ridge in Revere and Malden, Mass., as well as 159-unit multi-family residential property – Park Square – in Rahway, NJ, for $46.5 million in 2013.

We believe that the venture into the multi-family apartment sector would benefit Mack-Cali in the long run. Yet, the aggressive disposition of office assets would continue to have a dilutive impact on its financials in the near-to-medium term. Moreover, with rents on the renewals rolling down in its core office portfolio, this Zacks Rank #4 (Sell) stock lacks sufficient growth momentum.

However, investors interested in the REIT industry may consider stocks like Getty Realty Corp. (GTY), National Health Investors Inc. (NHI) and Pebblebrook Hotel Trust (PEB). All these stocks carry a Zacks Rank #1 (Strong Buy).

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