Stifel Upgrades Mack-Cali Realty, Expects Big Changes From New Management Team

On June 4, Stifel analyst John Guinee published a research note upgrading office REIT Mack-Cali Realty (NYSE: CLI) from Sell to Hold, a day after the company announced its new senior leadership team: CEO Mitchell Rudin and COO/President Michael DeMarco.

Guinee's note was titled, "Portfolio and Balance Sheet Repositioning Increasingly Possible," reflecting a need for change, as Mack-Cali is challenged by high vacancies and declining cash rents in its same store office portfolio located in the Washington D.C. - Boston corridor.

Tale Of The Tape - Stifel Upgrade

During the past 52-weeks shares of Mack-Cali have traded in a range of $16.85 to $21.76, closing up slightly on June 4, the day after its new management team was announced.

Tough Sledding For Small-Cap Office REIT Peers

Northeast Suburban Office Challenges

The Mack-Cali portfolio consists of 263 office and office/flex properties containing ~30.9 million SF, as well as 20 multi-family properties totaling over 5,800 units -- a fairly recent initiative led by its Roseland subsidiary.

During the Q1 conference call, the last for 18 year veteran CEO Mitchell Hersh, he described the competitive situation this way, "… in the suburban markets -- unfortunately that we are operating in -- it's kind of a food fight for tenants."

Mack-Cali is looking to reposition some of its suburban assets into mixed use or residential uses.

Stifel - Mack-Cali: Upgrade From Sell To Hold, No Target Price

Upgrade Rationale: Stifel expects 1) "proactive leasing, asset repositioning and increased dispositions in the long suffering office portfolio, 2) aggressive balance sheet activity is likely, 3) assuming the company can transition from its current 'broken' state, the real estate valuations are currently extremely attractive."

Stifel Concerns: 1) "the suburban New York City markets are generally very weak, 2) expect significant capex will be needed for office leasing, 3) functional obsolescence is real, and 4) the multi-family portfolio and strategy are unproven."

Opportunities: 1) cut G&A, (highest in sector), Stifel would like to see "sub-$30 million annually," 2) asset repositioning and liquidation strategy to bolster balance sheet and lower cost of debt, 3) CLI office portfolio is currently trading at below asset replacement cost.

Stifel - Specific Balance Sheet Concerns

• "Of its $2.1B of debt outstanding, just over $900mm matures between now and YE17.
• $145mm matures in 2015, $96.5mm of which is currently in default accruing interest at 10.26%.
• Another $333mm of debt matures in 2016 of which $69mm is in default and accruing interest at rates between 9.5% and 19.5%.
• $200mm of the 2016 maturities is a bond yielding 5.8%."

"All of this is likely to be repaid or given back to the bank over time with asset sale proceeds being the logical source of funds," according to Guinee.