Mack-Cali Realty Corp. (CLI)

[Enterprising Investor]

For Mack-Cali, Jersey Waterfront Is Just the Ticket (9/15/15)

Turnaround plan focuses on developing urban, hip Hudson River properties

By Liam Pleven

Young hipsters often look for the next hot urban neighborhood. Mack-Cali Realty Corp. , long associated with suburban office parks, wants to help build one.

The firm is aiming to turn property it owns in communities along the Hudson River in New Jersey into a destination for renters and workers who want to live, work and play in close proximity.

“We think we can turn that into a hip, cool, vibrant area,” Michael DeMarco, the company’s president, said in an interview.

In order to help finance the turnaround plan, Mack-Cali will sell up to $800 million worth of real estate it owns throughout the Northeast. Mr. DeMarco and Chief Executive Mitchell Rudin, who took the top jobs in June, unveiled the plan last week.

The move comes as property owners scramble to adjust to a revived interest in living in urban areas where offices, stores and homes are clustered together. That posed a particular challenge for companies like Mack-Cali, which had built up a portfolio focused largely on the suburbs.

Mack-Cali has tried to shift its strategy in recent years, purchasing Roseland Partners LLC, a developer of apartment complexes, in 2012. But investors have continued to pummel the company’s stock, cutting its share price nearly in half from a post-financial crisis high in 2010.

Mr. Rudin and Mr. DeMarco were brought on board to try to reverse the company’s fortunes. “We shouldn’t be viewed as a suburban company,” Mr. DeMarco said in an interview.

The company’s goal is to make places such as Jersey City, N.J., popular with the kind of young workers and renters who have transformed parts of Brooklyn, N.Y., into destinations in recent years, Mr. DeMarco said.

Mack-Cali owns millions of square feet of commercial property in New Jersey, including office space and apartments in Jersey City, Weehawken and West New York. It also owns properties in Connecticut, Pennsylvania and other states.

Mr. DeMarco cited Smorgasburg, a popular open-air market in Williamsburg, Brooklyn, as a model for the kind of food market it wants to establish at its Harborside office complex in Jersey City.

Mack-Cali also plans to move its headquarters from Edison, N.J., to Jersey City in the first half of next year. Mr. DeMarco, a Jersey City native, said the move would make it easier to oversee the company’s properties and described it as “living above the store.”

Investors have pushed Mack-Cali’s shares up 6.6% since details of the plan were released. Eric Rothman, a portfolio manager at CenterSquare Investment Management, a BNY Mellon unit that holds Mack-Cali stock, said the company’s properties near Manhattan are well-positioned to pursue the new strategy.

“They’ve got a lot of stuff along the waterfront,” he said. “Access into New York City is in many ways as easy as it is from Brooklyn.”

But, Mr. Rothman added, “Nothing is easy, particularly when it comes to dense, urban projects.” Mack-Cali will need to strike the right balance between office space, retail and different types of apartments. “It’s kind of exponentially more complicated,” he said.

In addition, Mack-Cali still faces problems. Vacancy rates are high and a number of existing leases are due to expire in the next few years.

The company also has to sell a lot of property to execute the plan. According to a securities filing, Mack-Cali may sell 30 to 40 properties in Maryland, New York City, Washington, D.C., Paramus, N.J., and elsewhere, and it expects the sales to generate $600 million to $800 million.

After the company shared its plans with investors last week, UBS analyst Ross Nussbaum put out a research report titled “Lots of Wood to Chop.”

“We’re not denying the stock looks cheap,” Mr. Nussbaum said in an interview after the report was released. But, he said, Mack-Cali faces greater challenges than some other real-estate investment trusts that own office space and that also saw their share prices drop amid an August pullback in the stock market. “It should be cheaper” than other office REITs, he said.

Currently, more than a third of the company’s assets by value are in Jersey City and neighboring communities along the Hudson River, according to Mr. DeMarco. He said that figure should rise to more than half as a result of the portfolio overhaul.

Mack-Cali plans to bolster its remaining properties with some of the proceeds of selling assets. Roughly $20 million will go to upgrade property the company owns in long-established suburbs of New York City, including Paramus, N.J., Parsippany, N.J., and White Plains, N.Y.

The company also plans to create a subsidiary for its Roseland unit, which could give Mack-Cali the option of spinning Roseland off as a separate publicly traded company down the road, Mr. DeMarco said.

According to the securities filing, Mack-Cali also plans to cut expenses by about $25 million next year, by cutting jobs and refinancing debt, among other things.



http://www.wsj.com/articles/for-mack-cali-jersey-waterfront-is-just-the-ticket-1442309401