Mack-Cali FFO & Revs Miss, Cuts View - Analyst Blog

Mack-Cali Realty Corp. CLI – a real estate investment trust (REIT) – reported first-quarter 2014 funds from operations (FFO) of 46 cents per share, a penny short of the Zacks Consensus Estimate and 27.0% below the year-ago quarter figure of 63 cents.

Higher expenses again dampened the quarterly results of Mack-Cali. Consequently, the company trimmed its 2014 FFO per guidance for the second time this year. As a result, Mack-Cali's share price fell 0.29% during yesterday's regular session on the NYSE.

Total revenue dipped 0.8% year over year to $169.6 million. Nevertheless, it exceeded the Zacks Consensus Estimate of $150.0 million. However, expenses moved up 19.1% year over year to $156.4 million.

Leasing Activity

During the quarter, Mack-Cali executed 102 lease deals, spanning 645,041 square feet, at its consolidated in-service portfolio. This included around 53,700 square feet of industrial/warehouse space, 497,810 square feet of office space and 93,531 square feet of office/flex space. Of the total leased space, 220,288 square feet were for new lease deals and 424,753 square feet were related to lease renewals and other tenant retention deals.

As of Mar 31, 2014, the consolidated in-service portfolio of the company was 83.6% leased, down from 86.1% at the end of the prior-quarter.

Notable Portfolio Activity

During the quarter under review, Mack-Cali penned a deal with the Keystone Property Group to divest its 15 office assets located across Northern New Jersey, New York and Connecticut for around $230.8 million. As per the deal terms, Mack-Cali will take part in the portfolio management fees as well as a percentage of value creation over certain hurdle rates. It would also keep a senior pari-passu equity position at 3 of the properties in Elmsford, New York.

Also, the company inked a deal to divest a New Jersey-based office property for about $96.6 million, during the first quarter.

Subsequent to the quarter end, in April, Mack-Cali disclosed the acquisition of a 220-unit multi-family residential asset in Andover, MA. The company shelled out $37.7 million for purchasing the property.

Liquidity

As of Mar 31, 2014, Mack-Cali had cash and cash equivalents of $58.7 million, down from $221.7 million at the end of the prior year. The company had total debt of $2.2 billion, with a weighted average annual interest rate of 5.54%.

Moreover, Mack-Cali's debt-to-undepreciated assets ratio was 38.8% as of Mar 31, 2014, compared with 39.9% as of the end of the last quarter. Interest coverage ratio was 2.0 times for the reported quarter, compared to 2.7 times in the prior quarter.

Guides Low

For full-year 2014, Mack-Cali lowered its FFO per share guidance and now expects it in the range of $1.62 – $1.72 per share compared to its previous outlook of $1.75 – $1.95 per share. The guidance range is also well below the Zacks Consensus Estimate of $1.85 per share for 2014.

Our Take

The persisting weakness in the company's core office markets continues to impact Mack-Cali's business. Although the company is aiming at strengthening its portfolio base through multifamily apartment buyouts and office assets divestiture, its aggressive disposition efforts would continue to have a dilutive impact on its financials in the near-to-medium term.

Mack-Cali, which has reported disappointing earnings and guided low in last quarter too, now carries a Zacks Rank #4 (Sell).

However, some better-ranked REIT stocks include Duke Realty Corporation DRE, SL Green Realty Corp. SLG and Public Storage PSA. All these stocks carry a Zacks Rank #2 (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.