NEW YORK--()--Fitch Ratings has assigned a 'BBB' rating to the $250 million 2.50% senior notes due 2017 issued by Mack-Cali Realty L.P., the operating partnership of Mack-Cali Realty Corporation (NYSE: CLI). The notes were issued at 99.409% of par to yield 2.625%.
Net proceeds from the offering are expected to be used to repay amounts outstanding on the revolving line of credit and for general corporate purposes.
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.:
--Unsecured revolving credit facility 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
The ratings reflect Mack-Cali's strong fixed charge coverage, lower leverage and granular tenant base. Credit concerns include the lack of geographic diversification, exposure to markets with weak fundamentals and the potential to overreach through the recent expansion into the multifamily sector. Absent deleveraging equity offerings, Fitch expects Mack-Cali's metrics to weaken going forward though remain consistent with the rating.
Fixed charge coverage was 2.4 times (x) for the trailing 12 months (TTM) ended Sept. 30, 2012, compared with 2.5x and 2.3x during 2011 and 2010, respectively. Fitch projects fixed charge coverage will weaken to 2.2x through 2014 as the challenging operating fundamentals result in declining revenues and will not benefit materially pro forma the Roseland acquisition and note issuance. Fitch defines fixed charge coverage as recurring operating EBITDA less Fitch's estimate of routine capital expenditures less straight-line rent adjustments, divided by total interest incurred and preferred stock distributions.
Mack-Cali's leverage is relatively low for the rating category at 5.4x for the TTM ended Sept. 30, 2012 pro forma. Leverage was 4.8x and 5.1x as of Dec. 31, 2011 and 2010, respectively. Fitch projects leverage will approach 6.0x through 2014, assuming the challenging operating environment continues to negatively impact recurring operating EBITDA and the company incurs additional debt to fund its development expenditures.
Mack-Cali's liquidity coverage is adequate for the rating (pro forma) at 1.2x through 2014. Liquidity coverage is defined as sources of liquidity (unrestricted cash, availability under the company's unsecured credit facility, and retained cash flows from operating activities after 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 but weakens slightly pro forma to 2.0x (based on a stressed 9% capitalization rate) as of Sept. 30, 2012. Fitch expects coverage to improve should the company use issuance proceeds to repay future secured debt maturities.
Mack-Cali's solid credit metrics are partially offset by the challenging leasing environment resulting from the geographic concentration in suburban office markets 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 2011 reported results imply, as SSNOI was positively impacted by a one-time tax reversal.
Economic headwinds, high unemployment, high market vacancies and a continued migration by tenants from suburban office to central business districts have diminished 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 next two years which results in the deteriorating leverage and coverage metrics. A material deviation in strategy, a worsening in fundamentals beyond Fitch's base expectations, or a sizable acquisition without sufficient equity could cause the deterioration in metrics to accelerate.
The company's projected funds from operations after deducting recurring capital expenditures and straight line rents, or adjusted funds from operations (AFFO), are expected to approach and later be insufficient to fund dividend distributions through 2014. This will place pressure on the company's ability to generate internal liquidity. An AFFO payout ratio in excess of 100% could have negative rating implications.
The Stable Outlook reflects Fitch's expectation that leverage and coverage metrics will stay within levels appropriate for the 'BBB' IDR but notes the expected deterioration. Management remains committed to maintaining conservative credit metrics and would enact measures to offset higher leverage, if necessary, consistent with management's track record. Additionally, the company's solid liquidity position and unencumbered assets mitigate refinance risk.
Although Fitch does not anticipate positive ratings momentum in the near-to-medium term, the following factors may result in positive momentum on the rating and/or Outlook:
--Fitch's expectation of sustaining positive SSNOI growth for several
--Fitch's expectation of leverage sustaining below 4.5x (leverage was 5.4x as of Sept. 30, 2012 pro forma);
--Fitch's expectation of fixed-charge coverage sustaining above 2.7x (coverage was 2.4x for the TTM ended Sept. 30, 2012);
--Maintaining a liquidity coverage ratio above 2.0x.
The following factors may result in negative momentum on the rating and/or Outlook:
--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 neutral basis;
--A dividend payout ratio exceeding 100% of AFFO.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012;
--'Corporate Rating Methodology,' Aug. 8, 2012;
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 27, 2012.
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Criteria for Rating U.S. Equity REITs and REOCs