Fitch Rates Mack-Cali Realty L.P.'s $250MM 2.50% Senior Notes Due 2017
'BBB'; Outlook Stable
NEW YORK -- November 14, 2012
Fitch Ratings has assigned a 'BBB' rating to the $250 million 2.50% senior
notes due 2017 issued by Mack-Cali Realty L.P., the operating partnership of
Mack-Cali Realty Corporation (NYSE: CLI). The notes were issued at 99.409% of
par to yield 2.625%.
Net proceeds from the offering are expected to be used to repay amounts
outstanding on the revolving line of credit and for general corporate
Fitch currently rates CLI and Mack-Cali Realty, L.P. (collectively, Mack-Cali)
Mack-Cali Realty Corporation:
--Issuer Default Rating (IDR) 'BBB';
Mack-Cali Realty, L.P.:
--Unsecured revolving credit facility 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
The ratings reflect Mack-Cali's strong fixed charge coverage, lower leverage
and granular tenant base. Credit concerns include the lack of geographic
diversification, exposure to markets with weak fundamentals and the potential
to overreach through the recent expansion into the multifamily sector. Absent
deleveraging equity offerings, Fitch expects Mack-Cali's metrics to weaken
going forward though remain consistent with the rating.
Fixed charge coverage was 2.4 times (x) for the trailing 12 months (TTM) ended
Sept. 30, 2012, compared with 2.5x and 2.3x during 2011 and 2010,
respectively. Fitch projects fixed charge coverage will weaken to 2.2x through
2014 as the challenging operating fundamentals result in declining revenues
and will not benefit materially pro forma the Roseland acquisition and note
issuance. Fitch defines fixed charge coverage as recurring operating EBITDA
less Fitch's estimate of routine capital expenditures less straight-line rent
adjustments, divided by total interest incurred and preferred stock
Mack-Cali's leverage is relatively low for the rating category at 5.4x for the
TTM ended Sept. 30, 2012 pro forma. Leverage was 4.8x and 5.1x as of Dec. 31,
2011 and 2010, respectively. Fitch projects leverage will approach 6.0x
through 2014, assuming the challenging operating environment continues to
negatively impact recurring operating EBITDA and the company incurs additional
debt to fund its development expenditures.
Mack-Cali's liquidity coverage is adequate for the rating (pro forma) at 1.2x
through 2014. Liquidity coverage is defined as sources of liquidity
(unrestricted cash, availability under the company's unsecured credit
facility, and retained cash flows from operating activities after dividend
payments) divided by uses of liquidity (debt maturities, projected routine
capital expenditures and development commitments).
Unencumbered asset coverage of unsecured debt is solid for the rating but
weakens slightly pro forma to 2.0x (based on a stressed 9% capitalization
rate) as of Sept. 30, 2012. Fitch expects coverage to improve should the
company use issuance proceeds to repay future secured debt maturities.
Mack-Cali's solid credit metrics are partially offset by the challenging
leasing environment resulting from the geographic concentration in suburban
office markets that have weak fundamentals. Same-store net operating income
(SSNOI) declined 3% in 2011, the second straight year of decline (-7% in
2010). Further, operating fundamentals were worse than the 2011 reported
results imply, as SSNOI was positively impacted by a one-time tax reversal.
Economic headwinds, high unemployment, high market vacancies and a continued
migration by tenants from suburban office to central business districts have
diminished the company's ability to maintain occupancy and drive rental
growth. As such, Fitch projects SSNOI will decline an additional 4% in each of
the next two years which results in the deteriorating leverage and coverage
metrics. A material deviation in strategy, a worsening in fundamentals beyond
Fitch's base expectations, or a sizable acquisition without sufficient equity
could cause the deterioration in metrics to accelerate.
The company's projected funds from operations after deducting recurring
capital expenditures and straight line rents, or adjusted funds from
operations (AFFO), are expected to approach and later be insufficient to fund
dividend distributions through 2014. This will place pressure on the company's
ability to generate internal liquidity. An AFFO payout ratio in excess of 100%
could have negative rating implications.
The Stable Outlook reflects Fitch's expectation that leverage and coverage
metrics will stay within levels appropriate for the 'BBB' IDR but notes the
expected deterioration. Management remains committed to maintaining
conservative credit metrics and would enact measures to offset higher
leverage, if necessary, consistent with management's track record.
Additionally, the company's solid liquidity position and unencumbered assets
mitigate refinance risk.
Although Fitch does not anticipate positive ratings momentum in the
near-to-medium term, the following factors may result in positive momentum on
the rating and/or Outlook:
--Fitch's expectation of sustaining positive SSNOI growth for several
--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.4x as
of Sept. 30, 2012 pro forma);
--Fitch's expectation of fixed-charge coverage sustaining above 2.7x (coverage
was 2.4x for the TTM ended Sept. 30, 2012);
--Maintaining a liquidity coverage ratio above 2.0x.
The following factors may result in negative momentum on the rating and/or
--Leverage sustaining above 6.0x;
--Fixed-charge coverage sustaining below 2.0x;
--A sustained liquidity shortfall;
--A deviation in strategy or a transaction effected on a non-leverage neutral
--A dividend payout ratio exceeding 100% of AFFO.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012;
--'Corporate Rating Methodology,' Aug. 8, 2012;
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 27, 2012.
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Criteria for Rating U.S. Equity REITs and REOCs
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