REIT Focus: Mack-Cali Realty Corporation

| About: Mack-Cali Realty (CLI)

This REIT Focus is on Mack-Cali Realty Corporation (NYSE:CLI), a publicly traded REIT that provides leasing, management, acquisition, development, construction and tenant related services for its properties and third parties. As of June 30, 2013, CLI owned or had interests in 273 properties comprising 30.6 million sq. ft. The portfolio includes 250 office buildings with 30.1 million sq. ft., six industrial warehouses with 387,400 sq. ft., nine multifamily properties with 3,319 units, four retail properties with 98,800 sq. ft., and three parcels of land. The average occupancy and average base rent of the portfolio was 86.2% and $22 per sq. ft. as of 6/30/13 and 12/31/12, respectively. Major tenants include, Deutsche Bank, National Union Fire Insurance Company, Wyndham Worldwide Operations and New Cingular Wireless PCS, LLC. CLI's properties are located in seven states primarily in the Northeast and the District of Columbia. CLI owns a 88% partnership interest in its UpReit general partnership, Mack-Cali Realty, L.P.

CLI was incorporated in Maryland in 1994, is traded on the NYSE, is based in Edison, NJ and its debt is rated BBB by Standard & Poor's. CLI has 88 million common shares outstanding and a market capitalization of approximately $1.93 billion. CLI has a very experienced and solid management team that includes Mitchell E. Hersh, President, Chief Executive Officer, and Member of the Executive Committee of the Board of Directors and Barry Lefkowitz, Executive Vice President and Chief Financial Officer.

Select financial data for CLI as of the 6/30/13 10Q and for the period 1/1-6/30/13 is as follows (in millions where applicable):

Real Estate Assets, Gross $5,405
Total Assets $4,638
Senior Unsecured Notes and Mortgages Payable $2,369
Stockholders' Equity $1,741
Revenue $359
Net Income $34
Net Income Per Share $.39
Cash Flow from Operations $104
Unsecured Revolving Credit Facility ($1,000 with $0 used) $1,000
Market Capitalization $1,930
Property Debt to:
Gross Real Estate Assets 44%
Market Capitalization 122%
Enterprise Value 53%
Dividend and Yield ($1.20/sh.) 5.4%
Valuation Methodology:
First Half Revenue Per Above Annualized $718
Less: Operating Expenses Annualized (excluding depreciation, amortization & interest expense, plus G&A expenses and other income) 362
Annualized Net Operating Income 2013 $356
Projected Inflation Rate at 3.5% x103.5%
Projected Forward NOI for Next Year $368
Projected Cap Rate 8%
Projected Value of Real Estate Assets $4,600
Add: Net Operating Working Capital 329
Add: Investment in Unconsolidated Joint Ventures (at book value) 136
Total Projected Asset Value $5,065
Less: Total Debt Per Above (2,369)
Projected Net Asset Value $2,696
Shares Outstanding 100.1M (88M common stock shares, 12M common unit shares and .1M option shares)
Projected NAV Per Share $27
Closing Market Price Per Share on 10/15/13 $21

The gross real estate assets, property debt, net income, funds from operations and dividends per share for the years 2009 through Q2 2013 are shown in the table below:

(millions except per share amounts) 2009 2010 2011 2012 Q2 2013
Gross Real Estate Assets $5,186 $5,217 $5,280 $5,440 $5,405
Property Debt $2,337 $2,089 $1,913 $2,204 $2,369
Net Income $63 $62 $70 $41 $34
Funds From Operations $268 $261 $277 $267 $128
Dividends Per Share $1.80 $1.80 $1.80 $1.80 $.60(1)

(1) Dividend reduced to $.30 per quarter in the second quarter of 2013

As shown above, our net asset value per share for CLI is $27 per share versus a market price of $21 per share. Current average cap rates for office, retail, industrial and apartment properties per CBRE are in the 5% to 10% range, depending on the location, tenancy and quality of the property. We have used an average cap rate of 8% due to CLI's portfolio being primarily older Class B suburban office properties.

CLI's strengths include; attractive dividend yield of 5.4%, experienced management team, low leverage and diversified asset and tenant base. Weaknesses include; low average occupancy of portfolio at 86%, minimal asset growth of only 4% since 2009 (excluding off- balance sheet joint ventures), decline in rent from lease renewals of 6.2% in Q2 and a reduction in the dividend in the second quarter of 2013 from $.45 to $.30 per share.

Although CLI is facing challenges of tepid rent growth, a rise in vacancy and a weak job market, due to the soft office market, we like the stock at this discounted price and attractive dividend yield of 5.4%. We believe the price of $21 is a big discount to NAV and this is a cheap asset play, especially if the economy and job market continue to improve. We would also like to see CLI management perform a total portfolio review and sell a number of their smaller (less than 50,000 sq. ft.) assets, as they are too small for this large of a REIT, are management intensive and increase operating costs. The capital from these sales should be used to reduce debt and acquire larger and higher quality assets.

A five year price chart of CLI is shown below:

(Click to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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