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UPDATED: Sign of the Times: Office REIT Accelerates Move Into Multifamily

Mack-Cali Realty Corp. Trimming Dividends To Re-Invest In Multifamily Property
April 17, 2013
Mitchell E. Hersh, president and CEO of Edison, NJ-based Mack-Cali Realty Corp.
Mitchell E. Hersh, president and CEO of Edison, NJ-based Mack-Cali Realty Corp.
Mack-Cali Realty Corp. (NYSE:CLI), which paid out about $180 million in common stock dividends last year, announced it intends to reduce its second quarter common stock dividend by one-third from the current 45 cents per common share to 30 cents. The move signals Mack-Cali's view that office properties in its markets don't hold as much potential as multifamily properties in the same markets.

“With the current demand for office space, the dividend reduction represents a prudent step in retaining cash to invest in our multifamily residential platform along with use for general corporate purposes," said Mitchell E. Hersh, president and CEO of Edison, NJ-based Mack-Cali, in a statement announcing the change.

[Editors Note: An earlier version reported an incorrect amount for common stock dividends the firm paid out in 2012. The correct amount is $180 million]

Mack-Cali's shares fell about 12% following the announced cuts.

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A KeyBanc Capital Markets report this week noted that the cut still leaves Mack-Cali's dividend yield at a premium to both the office group and REIT sector average yields.

"The announced dividend cut, coupled with the recent $17.5 million sale of an older asset in Westchester, NY, demonstrates a willingness among senior management to adopt a more proactive approach to capital allocation decisions and asset management discipline," the report noted. "The dividend cut should generate $60 million annually and reflects the cheapest source of capital for CLI."

The Edison, NJ-based Mack-Cali owns or has interests in 279 properties, consisting of 270 office and office/flex properties totaling approximately 31.3 million square feet -- all located in the Northeast and Mid-Atlantic markets.

Cowen & Co. analyst James Sullivan said, "The New Jersey office market. continues to struggle through what has been a subpar cyclical recovery. While select regional submarkets have seen healthy demand from tech, social media, media and health care research and services tenants, Mack-Cali's portfolio and markets have faced declining occupancy rates and pricing."

"In response Cali has chosen to allocate capital to infill, transit-oriented locations with multifamily and mixed use projects," Sullivan continued. "Many other office REITs are also "diversifying" - some by region and others, like Cali, by use. While the effort has yet to impact the income statement, we believe that the course is the right one and reiterate our Outperform rating on this value-priced name."

More recently, the firm has moved aggressively into the multifamily property sector, and currently owns nine multifamily rental properties containing more than 3,300 residential units.

Earlier this month, Mack-Cali Realty closed on the acquisition of Alterra at Overlook Ridge IB in Metro Boston for $88 million. The completed acquisition was pursuant to a signed contract which the company announced in January with the acquisition of the sister building Alterra at Overlook Ridge IA.

The luxury contains 412 rental units, and is currently 96.1 percent leased. The property was acquired from a Prudential Insurance Company of America joint venture. Combined with its acquisition of Overlook Ridge 1A, the company's two acquisitions aggregate 722 units with a total purchase price for the properties of $149.3 million.

Mack-Cali's recently acquired Roseland subsidiary developed Alterra IB in 2008 for the venture, and has managed the property since its completion.

In late March, Mack-Cali Realty entered the Washington DC multifamily market in a joint venture with a fund advised by UBS Global Asset Management to acquire the 828-unit multifamily property known as Crystal House in the Crystal City section of Arlington, VA, for $262.5 million. The acquisition includes land to accommodate the development of approximately 295 additional units, 252 of which are currently approved. The property, which is 95.7 percent leased, was acquired from Avalon Bay.

At the same time it has been buying apartments, Mack-Cali has been a seller of office properties. In the fourth quarter of last year, it sold Moorestown Corporate Center on Strawbridge Drive in Moorestown, NJ. The three-building 222,000-square-foot office complex sold for $19.4 million.

Mack-Cali has been signalling its shift in strategy for some time.

"We have several additional initiatives to sell non-core assets," Hersh told analysts at the company's year-end earnings conference call in February, "these include 16 and 18 Sentry in Blue Bell, PA, where we will also retain a residual carried interest without any capital exposure going forward, 51 Imclone in Branchburg, NJ, which we will be finishing in contract and sell to a major telecommunications company, happens to the tenant in the building, plus additional small assets in Clifton, NJ."

Hersh said overall the REIT is looking to sell about $100 million in office properties this year.

"We will redeploy this capital into our multifamily expansion," Hersh added.

"There is no question whether the market for office space remains a challenge," Hersh told analyst in February. "In our markets, space showings were off year-over-year by 20%."

"2013 and 2014 are both challenging years and so in 2013, we have a total of 2.8 million of roll [lease expirations] and we know that roughly half of that is out the door based on what they are telling us now and so we’ve got a lot of wood to chop and work to do," Hersh said of his office portfolio.

"Most of what we see within the market are musical chairs, tenants taking advantage of opportunities to either potentially reduce the mammoth space to create better stacking efficiency at lower cost," Hersh said. "There is very little new business activity, I indicated the space showings that are off by 20% year over year and it is not New Jersey alone; it is pretty much every market that we’re familiar with. There is a lackluster amount of vitality in the business community right now, certainly as it relates to office space."

"Our acquisition of Roseland is in response to recognizing these trends," Hersh added.

Mack-Cali Realty Corp. took the multifamily plunge last October when it acquired the real estate development and management businesses of Roseland Partners LLC, a multifamily residential community developer and operator in the Northeast for about $135 million.

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