Fitch: Mack-Cali's Multifamily Transactions Do Not Overreach, Yet
NEW YORK -- January 28, 2013
Mack-Cali Realty Corporation's (NYSE: CLI, Mack-Cali) recently announced
multifamily acquisitions and developments are not a credit concern in and of
themselves despite the headline aggregate size (1,549 units / $392 million),
according to Fitch Ratings. The impact on Mack-Cali's consolidated metrics is
limited as the developments are within unconsolidated minority interest joint
ventures that were previously disclosed and accounted for in the $135 million
aggregate consideration paid for Roseland Partners, L.L.C. (Roseland).
Fitch does not forecast that multifamily will comprise a material percentage
of Mack-Cali's portfolio for the foreseeable future; therefore, Fitch will
consider Mack-Cali's leverage in the context of a 'BBB' rated suburban office
REIT as opposed to a hybrid office/multifamily REIT that could have higher
leverage at a given rating category.
Pro forma for the items listed below, leverage as of Sept. 30, 2012 surpassed
5.5x which is demonstrably higher than the 4.8x for the trailing 12 months
(TTM) ended Dec. 31, 2011. Additional sizable consolidated acquisitions and/or
developments without offsetting equity raises may cause Mack-Cali's leverage
to surpass 6.0x as weak suburban office fundamentals continue to erode
recurring operating EBITDA. Fitch had previously stated that an expectation of
leverage sustaining above 6.0x may result in negative momentum on the rating
Fitch defines leverage as net debt to recurring operating EBITDA. Pro forma
leverage is adjusted for the Roseland acquisition, $19.9 million of asset
sales and the aforementioned multifamily transactions.
Burgeoning Number of Longer Term Risks for Multifamily Sector
Mack-Cali's multifamily investments do not currently constitute an overreach
given the joint venture structure and limited capital contributions. However,
the company intends to increase its exposure to upwards of 40% of the
portfolio over the next five to seven years.
In Fitch's report 'U.S. Equity REITs: The Key Issues for Multifamily', Fitch
examined the longer term risks for the multifamily sector (e.g. sustainability
of demand, pro forma underwriting, increasing supply, and an uncertain future
for the government sponsored entities). Although each risk is on its own
unlikely or manageable, even modest reversals in positive trends when combined
can have a meaningful impact on fundamentals, asset values and capital
availability. See Fitch Research on 'U.S. Equity REITs: The Key Issues for
Multifamily,' dated Dec. 14, 2012, available on Fitch's Web site at
www.fitchratings.com, for more detail.
Fitch currently rates CLI and Mack-Cali Realty, L.P. as follows:
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.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Equity REITs: The Key Issues for Multifamily' Dec. 14, 2012;
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012;
--'Corporate Rating Methodology,' Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage,' Aug. 8, 2012;
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 27, 2012.
Applicable Criteria and Related Research:
U.S. Equity REITs: The Key Issues for Multifamily -- Amended
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Criteria for Rating U.S. Equity REITs and REOCs
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