Fitch Affirms Mack-Cali's IDR at 'BBB'; Outlook Stable
NEW YORK -- May 9, 2013
Fitch Ratings has affirmed Mack-Cali Realty Corporation's and Mack-Cali Realty
L.P.'s (NYSE: CLI, collectively Mack-Cali) credit ratings as follows:
Mack-Cali Realty Corporation:
--Issuer Default Rating (IDR) at 'BBB'.
Mack-Cali Realty, L.P.:
--IDR at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation reflects the company's long-standing track record of
conservative balance sheet management. However, leverage continues to
increase, is weak for the rating and forecasted to remain weak even after
adjusting upwards Fitch's rating sensitivities to reflect the transition
towards becoming a suburban office/multifamily hybrid REIT. Fitch's forecast
contemplates Mack-Cali raising material amounts of equity to fund multifamily
developments and acquisitions and to de-lever; therefore the ratings would
likely come under pressure absent equity issuance.
Supporting the ratings are adequate fixed charge coverage, manageable debt
maturities and appropriate liquidity. The rating also takes into account
sustained weakness in operating fundamentals for the suburban office
CREDITOR-FRIENDLY TRACK RECORD
As a pure suburban office REIT, Mack-Cali proactively kept its credit metrics
at levels appropriate for the rating despite the continuous erosion in
operating fundamentals. Since 2009, the company has raised equity twice via
underwritten offerings, reduced its dividend twice, and extended/transferred
maturing debt obligations well ahead of maturities.
As such, the ratings balance the weakening metrics of a still predominantly
suburban office REIT with the expectation that a hybrid suburban
office/multifamily REIT can sustain moderately higher leverage at the same
rating. Additionally, Fitch expects Mack-Cali to continue its conservative
balance sheet management over the longer term despite near term volatility in
leverage during the transition period.
WEAKENING LEVERAGE & ADJUSTED RATING SENSITIVITIES
Leverage rose to 6.0x from the trailing twelve months ended (TTM) March 31,
2013 from 5.5x and 4.8x at Dec. 31, 2011 and 2010, respectively, as Mack-Cali
acquired multifamily assets and the Roseland platform and assets while
operating fundamentals continued to weaken. Fitch expects leverage will
increase sequentially towards 6.5x through 2015 which would remain weak for
the rating's adjusted rating sensitivities. As noted above, Fitch's forecast
includes the expectation of the company raising equity. As such, Mack-Cali
would need to raise equity in excess of Fitch's expectations to revert back to
maintaining stronger metrics for the rating.
Fitch had previously indicated potential negative rating momentum should
Mack-Cali's leverage to exceed 6.0x. As the multifamily share of net operating
income and assets increases, Mack-Cali's leverage sensitivity for negative
rating momentum will increase towards 6.5x.
CONTINUED WEAK OPERATING FUNDAMENTALS
Virtually all portfolio indicators reflect the continued challenging operating
environment for suburban office properties in the greater New York metro area
driven by the overall macroeconomic malaise (i.e. limited job growth),
corporate right-sizing of real estate foot prints and the reduction of core
industries in New Jersey such as pharmaceuticals and telecommunications.
Mack-Cali's portfolio was 86% leased as of March 31, 2013 and SSNOI endured
its third year of negative growth at -2.2% in 2012. Fitch expects SSNOI will
continue to decline by 3%-5% per year through 2015.
Despite the weakening operating fundamentals, fixed charge coverage is
expected to remain appropriate for the rating and improve towards 2.3x from
2.2x for the TTM ended March 31, 2013 benefitting largely from reduced
interest cost as the company replaces suburban office mortgage maturities with
lower coupon unsecured debt and maximizes its usage of low coupon multifamily
secured debt funding.
Mack-Cali's portfolio benefits from tenant diversification with no tenant
comprising more than 1.9% of annualized base rent (ABR). Additionally, eight
of the 15 largest tenants, that together comprise 11.8% of ABR, are rated
investment grade by Fitch, thereby limiting tenant bankruptcy risk.
APPROPRIATE LIQUIDITY & UNENCUMBERED ASSET COVERAGE
Mack-Cali's liquidity coverage ratio is appropriate for the proposed rating at
1.2x for the period April 1, 2013 through Dec. 31, 2014. Fitch defines
liquidity coverage as sources (unrestricted cash, availability under the
unsecured line of credit, and retained cash flow from operations, pro forma
for recently announced transactions) divided by uses (pro rata debt
maturities, recurring capital expenditures and in-process remaining
development expenditures). The company's liquidity coverage is supported by
the manageable debt maturity schedule with 3.5%, 14.3% and 6.4% of debt coming
due in 2013, 2014 and 2015 pro forma for the May 2013 unsecured note issuance.
Further, the recent reduction in the quarterly dividend to $0.30 per share
from $0.45 per share allows the company to retain internally generated cash
flow as it implies an 81% adjusted funds from operations payout ratio and
addresses one of Fitch's rating sensitivities for negative ratings momentum
noted in May 2012.
Mack-Cali's unencumbered assets cover unsecured debt by a range of 1.6x - 2.0x
based on a stressed cap rate range of 8% - 10%, which is slightly weak for the
STABLE RATING OUTLOOK
The Stable Rating Outlook reflects that although Mack-Cali's metrics are
projected to weaken further, they will remain inside of Fitch's adjusted
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 leverage sustaining between 4.5x - 5.0x (the
guideline increases toward 5.0x as contributions from the multifamily
portfolio grow; leverage was 6.0x as of March 31, 2013);
--Fitch's expectation of fixed-charge coverage sustaining above 2.7x (coverage
was 2.2x for the TTM ended March 31, 2013).
The following factors may result in negative momentum on the rating and/or
--Fitch's expectation of leverage sustaining above 6.0x - 6.5x (increasing
toward 6.5x as contributions from the multifamily portfolio grow);
--Fitch's expectation of fixed-charge coverage sustaining below 2.0x;
--A sustained liquidity shortfall.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 26, 2013.
--'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.
Applicable Criteria and Related Research
Criteria for Rating U.S. Equity REITs and REOCs
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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