Mack-Cali Realty Corp. (CLI) – a real estate investment trust (REIT) – reported third-quarter 2013 funds from operations (FFO) of 57 cents per share, in line with the Zacks Consensus Estimate.
However, this came below the year-ago quarter figure by 8 cents. The quarterly results reflected the impact of tough operating environment and declining occupancy rate. Though, total revenue increased 3.6% year over year to $162.5 million, it fell short of the Zacks Consensus Estimate of $169.0 million.
Leasing Activity
During the quarter, Mack-Cali inked 131 lease deals, spanning 980,600 square feet, at its consolidated in-service portfolio. This included around 783,218 square feet of office space, 5,995 square feet of industrial/warehouse space and 191,387 square feet of office/flex space. Of the total leased space, 265,455 square feet were for new lease deals and 715,145 square feet were related to lease renewals and other tenant retention deals.
As of Sep 30, 2013, the consolidated in-service portfolio of the company was 86.1% leased, down from 86.2 % in the previous quarter.
Portfolio Restructuring Activity
During the quarter under review, Mack-Cali closed the divestiture of its Pennsylvania office portfolio (1.66 million square foot) and 3 developable land parcels for roughly $233 million. The properties were sold to a joint venture between Mack-Cali and the Keystone Property Group’s affiliates. Notably, as part of the sales deal, the company possesses rights to own a land parcel at the 150 Monument Road property in Bala Cynwyd for development of a multi-family residential property.
In addition, Mack-Cali offloaded another office asset – Liberty Corner Corporate Center, 106 Allen Road – in Bernards Township, N.J., for around $18.0 million.
On the other hand, Mack-Cali started initial operations on Weehawken, N.J.-based parking/retail asset, during the quarter.
Liquidity
As of Sep 30, 2013, Mack-Cali’s cash and cash equivalents stood at $308.0 million, up significantly from $177.9 million as of Jun 30, 2013. The company had total debt of $2.4 billion, with a weighted average annual interest rate of 5.62%.
Moreover, Mack-Cali’s debt-to-undepreciated assets ratio was 39.5% as of Sep 30, 2013, compared with 38.8% as of the end of the last quarter. Interest coverage ratio was 2.9 times for the reported quarter, compared to 3.1 times in the prior quarter.
During the third-quarter, Mack-Cali amended and restated its unsecured revolving credit facility worth $600 million with a cluster of 17 lenders. The facility, which will mature in Jul 2017, can now be expanded to $1 billion. The unsecured revolving credit facility has two six month extension options, on the payment of a 7.5 basis point fee.
Outlook
For full-year 2013, Mack-Cali narrowed its FFO per share guidance and now expects it in the range of $2.35–$2.39 per share (previous one being $2.32–$2.42).
Our Viewpoint
Though Mack-Cali's FFO came in line, we note that continued weakness in the company’s core office markets carry on affecting its business. Consequently, following the earnings release, the Mack-Cali's share price fell 0.69% during yesterday's regular session on NYSE.
Although the company is aiming at strengthening its portfolio base through multifamily apartment buyouts and office assets divestiture, its aggressive disposition efforts had a dilutive impact on its financials in the reported quarter. However, we believe that these strategic initiatives will benefit Mack-Cali in the long run.
Mack-Cali currently carries a Zacks Rank #4 (Sell). However, REITs that are performing well include Parkway Properties Inc. (PKY), Getty Realty Corp. (GTY) and Sotherly Hotels Inc. (SOHO). All stocks carry a Zacks Rank #1 (Strong Buy).
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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