Market Overview

Fitch: Mack-Cali's Multifamily Transactions Do Not Overreach, Yet

NEW YORK--(BUSINESS WIRE)--

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).

Rising Leverage

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 and/or Outlook.

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.:

--IDR 'BBB';

--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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=697253

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=671869

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst
Britton Costa
Associate Director
+1-212-908-0524
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
George Hoglund, CFA
Associate Director
+1-212-908-9149
or
Committee Chairperson
Eileen Fahey
Managing Director
+1-312-368-5468
or
Media Relations
Brian Bertsch
+1-212-908-0549
brian.bertsch@fitchratings.com

 

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