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Fitch Affirms Mack-Cali Realty Corp.'s IDR at 'BBB'; Outlook Stable

^{Published on 2010-11-23 09:20:30 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following ratings for Mack-Cali Realty Corporation (NYSE:CLI) and Mack-Cali Realty L.P. (together, Mack-Cali) as follows:

Mack-Cali Realty Corp.

--Issuer Default Rating (IDR) at 'BBB';

--Preferred stock at 'BB+'.

Mack-Cali Realty, LP

--IDR at 'BBB';

--Unsecured revolving credit facility at 'BBB';

--Senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

The affirmation reflects the company's credit strengths, including its manageable debt maturity and lease expiration schedules, granular tenant base and the company's maintenance of leverage and coverage ratios appropriate for the rating category, despite the weak operating environment. The Stable Outlook reflects Mack-Cali's strong liquidity and unencumbered asset coverage of unsecured debt, offset by expected soft property-level fundamentals.

The company's portfolio benefits from tenant diversification with the top 10 tenants representing 14.6% of annual base rent (ABR) as of Sept. 30, 2010. Five of the 10 largest tenants are considered investment grade by Fitch.

Mack-Cali's leverage ratio remains consistent with a 'BBB' IDR, as the company's net debt divided by recurring operating EBITDA was 4.9 times (x) for the 12 months ended Sept. 30, 2010, compared with 4.8x and 5.3x during 2009 and 2008, respectively. The slight increase in leverage over the past nine months stems from a decline in recurring EBITDA. Mack-Cali is adequately capitalized, measured by the book based risk-adjusted capitalization ratio. The company's risk-adjusted capitalization ratio of 1.07x is flat over the prior year.

Credit concerns are focused on fragile fundamentals, with high unemployment continuing to reflect limited prospects for positive absorption in the near term. Mack-Cali's portfolio is concentrated in New Jersey with approximately 70.5% of its rental revenue coming from submarkets within the state. The top five submarkets are Hudson County (20.5% of base rental revenue as of Sept. 30, 2010), Bergen County (12.5%), Morris County (12.4%), Westchester, New York (13.9%), and Essex County (5.9%). While Fitch is generally concerned with office fundamentals for these submarkets, Hudson and Bergen Counties are expected to rebound earlier than others due to their proximity to and affordability relative to Manhattan.

As a result of the company's geographic concentration in markets with generally soft fundamentals, the portfolio experienced a 7.5% decline in same property cash net operating income (NOI) in the third quarter of 2010 as compared to the same period last year. Rental rates are expected to continue to roll down to market levels upon lease expiration, maintaining negative pressure on NOI growth. Despite this roll down, market research provider Property & Portfolio Research (PPR) projects improved asking rents and occupancy in all of Mack-Cali's submarkets by 2012, giving some indication that stabilization in these markets is near.

While occupancy and rent deterioration since 2008 have challenged Mack-Cali's operations, fixed charge coverage remains at a level that is appropriate for the rating category. Fixed charge coverage (defined as recurring operating EBITDA less recurring capital expenditures less straight line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) was 2.3x for the 12 months ended Sept. 30, 2010 as compared to 2.5x for the year ended Dec. 31, 2009. Additional stress to fixed charge coverage includes higher interest expense due to a bond offering issued in the third quarter of 2009 at an above average coupon of 7.75%. Fixed charge coverage is expected to improve in December 2010 with Mack-Cali's announced redemption of $300 million of notes, which also carry a 7.75% coupon. The company intends to fund the note redemption with a mixture of cash proceeds and draws from its revolving credit facility.

The Stable Outlook reflects Mack-Cali's large unencumbered property pool, which gives the company financial flexibility as a source of contingent liquidity. Unencumbered asset coverage of unsecured debt (based on annualized unencumbered property NOI for the six months ending Sept. 30, 2010 divided by an 8% capitalization rate reflective of the portfolio) was 2.5x, which is solid for the 'BBB' IDR. Moreover, covenants within the company's unsecured revolving line of credit agreement and bond indenture do not currently restrict Mack-Cali's financial flexibility.

Mack-Cali's liquidity position is strong for the rating category. Sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and expected recurring capital expenditures) for Oct. 1, 2010 to Dec. 31, 2012 result in a liquidity coverage ratio of 1.5x, and 1.9x accounting for the company's intention to redeem notes next month. Further, the company's debt maturity schedule is well laddered with no more than 16% of debt maturing annually over the next five years.

The two-notch differential between Mack-Cali's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. Based on Fitch's report, 'Equity Credit for Hybrids and Other Capital Securities' (dated Dec. 29, 2009 and available at '[ www.fitchratings.com ]'), Mack-Cali Realty Corp.'s preferred units are 75% equity-like and 25% debt-like since they are perpetual and have no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring operating EBITDA was 5.0x as of Sept. 30, 2010, compared with 4.8x and 5.3x, as of Dec. 31, 2009 and Dec. 31, 2008, respectively.

Guidelines for Further Rating Actions:

The following factors may have a positive impact on Mack-Cali's ratings:

--Maintaining a fixed charge coverage ratio above 2.7x (for the 12 months ended Sept. 30, 2010, fixed charge coverage was 2.3x);

--Maintaining leverage (net debt to recurring operating EBITDA) in a range below 4.5x. (for the 12 months ended Sept. 30, 2010, leverage was 4.9x);

--Improved market fundamentals.

Going forward, the following factors may have a negative impact on Mack-Cali's ratings:

--Declining fixed charge coverage to levels below 2.0x;

--Increasing leverage to above 5.5x.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 13, 2010;

--'Criteria for Rating U.S. Equity REITs and REOCs', April 16, 2010;

--'Equity Credit for Hybrids & Other Capital Securities - Amended', Dec. 29, 2009;

--'Rating Hybrid Securities', Dec. 29, 2009;

--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009.

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

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