Mack-Cali Realty Corp. (CLI)

[Enterprising Investor]

New Leadership at Mack-Cali Promises Change (6/23/15)

‘People didn’t want to deal with us because it was unpleasant.’

By Peter Grant

Mack-Cali Realty Corp. ’s new leadership team has a message for investors as it takes the reins of one of the country’s worst-performing real-estate investment trusts: Change is on the way.

In their first interview since taking over earlier this month, Chief Executive Mitchell Rudin and President Michael DeMarco said they would take new approaches to such things as selling poorly performing suburban office buildings, reporting financial results and interacting with investors, analysts and the public.

The style of former Chief Executive Mitchell Hersh was criticized by some as heavy-handed and inaccessible. Mr. Hersh didn’t respond to requests for comment.

“People didn’t want to deal with us because it was unpleasant,” said Mr. DeMarco, 55, who is known in the real-estate industry for stints at Fortress Investment and Vornado Realty Trust.

In another change, the compensation of Messrs. Rudin and DeMarco will be tied more to Mack-Cali’s performance than the previous management team. In nonbinding votes earlier this year and last year, shareholders rejected the compensation of Mr. Hersh’s management team. That made Mack-Cali the only REIT so far this year to receive a negative say-on-pay vote from shareholders.

“There probably wasn’t a true alignment of interest based on performance” in Mr. Hersh’s compensation, Mr. DeMarco said. “It wasn’t like you’d look at it and say, ‘Wow, he suffered with the company pound-for-pound.’”

Investors have cheered the new team so far: Mack-Cali’s shares, which have underperformed the broader REIT industry for at least 10 years according to Green Street Advisors, have risen about 15% in less than three weeks since Messrs. Rudin and DeMarco were named to lead the company. Mr. Rudin, 62, has had high profile positions at CBRE Group Inc. and Brookfield Office Properties. He left Brookfield last year. Mr. DeMarco’s most recent position was chief investment officer of Cantor Commercial Real Estate.

Now comes the hard part: The two executives must grapple with Mack-Cali’s portfolio of suburban New Jersey office buildings, which has a vacancy rate described by a Green Street Advisors report last fall as “just awful.”

They also have inherited former management’s controversial strategy to diversify into the rental apartment business, which meant increasing debt levels to one of the highest levels in REIT office sector.

Mr. DeMarco recalls that he and Mr. Rudin hit it off when they met for lunch to discuss working together. “We hadn’t even buttered our rolls when we agreed what titles we would take,” he said. “There’s a lack of ego.”

Still, some are taking a wait-and-see attitude. John Bejjani, an analyst with Green Street, said that even with the recent spurt in Mack-Cali’s stock, it is still trading at about 70% of the underlying value of the company’s real estate at current market pricing.

Mack-Cali’s plight highlights the struggle facing suburban-office-building owners throughout the country as the U.S. economy has emerged from its downturn. While downtown office markets have rebounded, many suburban markets have continued to wrestle with high vacancy, low rents and anemic property values.

Mack-Cali was formed by the 1997 merger of Cali Realty Corp. and the private real-estate company headed by William Mack, who is still chairman of the REIT and its largest shareholder. The company owns over 30 million square feet of office space, most of it in suburban New Jersey.

Mr. Hersh became chief executive in 1999. He oversaw Mack-Cali’s expansion into the rental-apartment sector that started in 2011 and intensified in 2012 with the REIT’s purchase of $134.6 million in assets from residential developer Roseland Partners LLC.

Mr. Hersh and others have said this strategy made sense partly because the outlook for rental apartments was better than that for suburban office buildings. But the move was criticized by some analysts and investors for the amount of debt it required and because Mr. Hersh and others lacked expertise in that area.

Mack Cali announced that Mr. Hersh was stepping down last fall and gave no explanation for his departure. Mr. Hersh said in release: “I agree that it is the right time to transition leadership responsibilities” and declined further comment through a spokeswoman.

The new management team intends to keep forging ahead with the residential strategy, with an eye toward having a portfolio of more than 13,000 apartments in three to five years. But Messrs. Rudin and DeMarco said they plan to make the business more understandable to investors by separating it into its own subsidiary.

Such a structure would make it easier down the line for the company to consider such options as selling it or spinning it off, Mr. DeMarco said. “Now we could have people accurately look at it and judge its performance,” he said.

As far as selling assets goes, Mr. DeMarco pointed out that prior management would have been reluctant to sell properties for less than what they paid. But the new team won’t be burdened by such considerations, and will make its decisions based more on current returns of the buildings.

“That unburdening allows us to make correct capital allocation decisions, which may have not been made in the past,” he said.

http://www.wsj.com/articles/new-leadership-at-mack-cali-promises-change-1435072838