(The following statement was released by the rating agency)
Oct 11 - Mack-Cali Realty Corporation's (NYSE: CLI; Mack-Cali) agreement to acquire,Roseland Partners, L.L.C (Roseland), a multifamily owner / operator / developer is a near-termcredit neutral event as the transaction's small size will not meaningfully impact creditmetrics, according to Fitch Ratings. The potential for and implications of overreachingby acquiring and developing later in the multifamily cycle is a longer-term credit concern.
Fitch expects CLI will grow the multifamily segment from its current size (theRoseland acquisition and one joint venture development) to become a largercomponent over time as a way to offset weak suburban office fundamentals andmonetize its land bank. The multifamily sector currently benefits from amultitude of factors including strong demand, low supply and above averageliquidity. Fitch would view overly ambitious acquisition and development volumesnegatively as the sector may face a more challenging operating environment goingforward.
On Oct. 9, 2012, Mack-Cali agreed to acquire the real estate development andmanagement business of Roseland for an aggregate consideration of up to $135million. Roseland owns interests in six multifamily properties (1,769 units),nine in-process multifamily developments (2,149 units), land (developable up to5,980 apartment units) and interests in other developments and commercial realestate assets. The majority of the interests are located in the Northeast.
The ratings reflect Mack-Cali's strong fixed charge coverage, low leverage andgranular tenant base. Credit concerns include the lack of geographicdiversification, exposure to markets with weak fundamentals and the potential tooverreach through the multifamily expansion and weaker liquidity. Absentdeleveraging equity offerings, Fitch expects Mack-Cali's metrics to weaken goingforward though remain consistent with the rating.
Fixed charge coverage was 2.5 times (x) for the trailing 12 months (TTM) endedJune 30, 2012, compared with 2.3x and 2.5x during 2010 and 2009, respectively.Fitch projects fixed charge coverage will weaken to 2.2x through 2014 as thechallenging operating fundamentals result in declining revenues and will notbenefit materially pro forma for the acquisition (pro forma). Fitch definesfixed charge coverage as recurring operating EBITDA less Fitch's estimate ofroutine capital expenditures less straight-line rent adjustments, divided bytotal interest incurred and preferred stock distributions.
Mack-Cali's leverage is relatively low for the rating category at 4.8x for theTTM ended June 30, 2012 and 5.2x pro forma. Fitch expects the company will fundthe acquisition through the revolving credit facility. Leverage was 5.1x and4.8x as of Dec. 31, 2010 and 2009, respectively. Fitch projects leverage willapproach 6.0x through 2014, assuming the challenging operating environmentcontinues to negatively impact recurring operating EBITDA and the company incursadditional debt to fund its development expenditures.
Mack-Cali's liquidity coverage is strong for the rating (pro forma) at 2.1xthrough 2013 but weakens materially through 2014 to 0.9x as a result of $335million of secured and unsecured debt maturities. Liquidity coverage is definedas sources of liquidity (unrestricted cash, availability under the company'sunsecured credit facility, and retained cash flows from operating activitiesafter dividend payments) divided by uses of liquidity (debt maturities,projected routine capital expenditures and development commitments).
Unencumbered asset coverage of unsecured debt is solid for the rating at 2.5x(based on a stressed 9% capitalization rate) as of June 30, 2012, and themajority of Mack-Cali's assets are unencumbered providing ample contingentliquidity.
Mack-Cali's solid credit metrics are partially offset by the challenging leasingenvironment resulting from the geographic concentration in suburban officemarkets that have weak fundamentals. Same-store net operating income (SSNOI)declined 3% in 2011, the second straight year of decline (-7% in 2010). Further,operating fundamentals were worse than the reported results imply, as SSNOI waspositively impacted by a one-time tax reversal.
Economic headwinds, high unemployment, high market vacancies and a continuedmigration by tenants from suburban office to central business districts havediminished the company's ability to maintain occupancy and drive rental growth.As such, Fitch projects SSNOI will decline an additional 4% in each of the nexttwo years which results in the deteriorating leverage and coverage metrics. Amaterial deviation in strategy, a worsening in fundamentals beyond Fitch's baseexpectations, or a sizable acquisition without sufficient equity could cause thedeterioration in metrics to accelerate.
The company's projected funds from operations after deducting recurring capitalexpenditures and straight line rents, or adjusted funds from operations (AFFO),are expected to approach and later exceed dividend distributions through 2014.This will place pressure on the company's ability to generate internalliquidity. An AFFO payout ratio in excess of 100% could have negative ratingimplications.
The Stable Outlook reflects Fitch's expectation that leverage and coveragemetrics will stay within levels appropriate for the 'BBB' IDR but notes theexpected deterioration. Management remains committed to maintaining conservativecredit metrics and would enact measures to offset higher leverage, if necessary,consistent with management's track record. Additionally, the company's solidliquidity position and unencumbered assets mitigate refinance risk.
Although Fitch does not anticipate positive ratings momentum in thenear-to-medium term, the following factors may result in positive momentum onthe rating and/or Outlook:
--Sustaining positive same-store net operating income growth for severalconsecutive quarters;
--Net debt to recurring operating EBITDA sustaining below 4.5x (leverage was5.4x as of June 30, 2012 pro forma);
--Fixed-charge coverage sustaining above 2.7x (coverage was 2.5x for thetrailing twelve months ended June 30, 2012);
--Maintaining a liquidity coverage ratio above 2.0x.
The following factors may result in negative momentum on the rating and/orOutlook:
--Leverage sustaining above 6.0x; --Fixed-charge coverage sustaining below 2.0x; --A sustained liquidity shortfall;
--A deviation in strategy or a transaction effected on a non-leverage neutralbasis;
--A dividend payout ratio exceeding 100% of AFFO.
Fitch currently rates CLI and Mack-Cali Realty, L.P. (collectively, Mack-Cali)as follows:
Mack-Cali Realty Corporation:
--Issuer Default Rating (IDR) 'BBB';
Mack-Cali Realty, L.P. : --IDR 'BBB';
--Unsecured revolving credit facility 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.