NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Mack-Cali Realty Corporation (NYSE: CLI) and its operating partnership Mack-Cali Realty, L.P. (collectively, Mack-Cali), at 'BBB-' and revised the Rating Outlook to Negative from Stable. A full list of rating actions can be found at the end of the press release.
KEY RATING DRIVERS
Mack-Cali's Negative Outlook reflects Fitch's expectation that key credit metrics will remain under pressure from weak New Jersey suburban office fundamentals and development spending, primarily in the company's multifamily portfolio. Fitch's downgrade of Mack-Cali's IDR to 'BBB-' from 'BBB' in March 2014 was based on its view that share price weakness and strong liquidity reduced the likelihood of CLI issuing equity to reduce leverage. Equity issuances were previously CLI's main lever for managing its credit profile.
Mack-Cali's willingness and ability to sell assets and raise equity will likely condition its capacity to maintain investment grade ratings. However, Fitch recognizes that asset sales used to fund unconsolidated joint venture (JV) investments reduce the company's wholly-owned unencumbered asset coverage of unsecured debt, absent lower unsecured borrowings. Mack-Cali's appropriate liquidity profile partially offsets this credit concern.
DISPOSITIONS OR EQUITY NEEDED TO MAINTAIN METRICS
Fitch projects Mack-Cali's leverage will approach 8.0x by 2016 assuming same-store net operating income (SSNOI) declines by 8.5% and 5% in 2015 and 2016, respectively. However, leverage could remain around 7.0x if Mack-Cali continues its recent pace of asset sales and/or issues equity. Fitch puts a low probability on the latter given the current share price thus the direction of Mack-Cali's credit profile will be determined by its capital allocation decisions and priorities.
From 2005 through 2012, Mack-Cali operated with leverage between 4.5x - 5.5x and fixed charge coverage of 2.5x which was appropriate for the 'BBB' rating despite the longstanding operating headwinds due primarily to timely equity issuances. In comparison, leverage was 6.6x for the trailing 12 months (TTM) and quarter ended Sept. 30, 2014 pro forma for the repayment of a $52 million loan by a joint venture partner to Mack-Cali subsequent to the period's end. Fitch had previously stated that leverage sustaining between 6.0x-6.5x and 7.0x-7.5x (increasing towards the higher end of each range as the contributions from the multifamily portfolio grew) would be consistent with the 'BBB-' IDR.
Fitch defines leverage as total debt less readily available cash to recurring operating EBITDA including recurring cash distributions from joint venture operations.
Fitch projects fixed charge coverage will remain between 1.5x to 2.0x through 2016. Fixed charge coverage has declined to 1.9x for the TTM and quarter ended Sept. 30, 2014 from 2.0x and 2.4x for the years 2013 and 2012, respectively. Fitch defines fixed charge coverage as recurring operating EBITDA including recurring cash distributions from joint venture operations less maintenance capital expenditures and straight-line rent divided by total interest incurred.
SECULAR SHIFT IN FUNDAMENTALS
Since 2009, Mack-Cali has reported SSNOI declines ranging from -2.2% (2012) to -8.9% (YTD) attributable to market fundamentals and specific lease expirations. CLI has guided for a similar decline in 2015 (-8.6%), which will continue to pressure metrics and Fitch has not assumed a material improvement through 2016 in its forecasts.
New Jersey suburban office fundamentals have exhibited persistently weak tenant demand as some of the key industries, such as biotechnology, pharmaceuticals and telecommunications have relocated to other regions, often due to industry consolidation.
LEADERSHIP TRANSITION IN QUESTION
Mack-Cali has announced significant changes to senior leadership this year, most recently with the announcement that long-time CEO Mitchell Hersh will step down in May 2015. The announcement follows the departure of CLI's CFO and General Counsel in March and the early release of two principals of Roseland (the multifamily operating platform) from their employment agreements in July.
Fitch's ratings assume Mack-Cali's financial policies and strategy will not change; however, Fitch will watch whether the company is willing to make capital allocation decisions (e.g. continued asset sales, decisions to determine development starts, equity issuances) prior to the hiring of a new CEO.
LIQUIDITY APPROPRIATE; COST OF CAPITAL INCREASING
Mack-Cali's liquidity is appropriate for the rating at 1.2x when including development and assuming Mack-Cali completes deed-in-lieu of foreclosures for its CMBS loans that matured in August 2014. Additional equity contributions are limited relative to the headline size of the development pipeline assuming no new starts. Mack-Cali has construction financing agreements for its joint venture developments and is a subordinated partner in some.
Fitch expects Mack-Cali will use cash and cash equivalents and/or its revolving line of credit to fund investments and redeem the $150 million senior unsecured notes due January 2015. However, the deterioration in Mack-Cali's credit profile and share price weakness has increased the cost of the company's unsecured debt and equity capital. Fitch views reliable access to capital as a key rating consideration for REITs given dividend distribution requirements limit retained cash flows from operations.
Fitch calculates liquidity coverage as sources of cash (unrestricted readily available cash, committed and undrawn line of credit capacity and retained cash flow from operating activities) divided by uses (pro rata debt maturities, maintenance capital expenditures and committed equity funding of development).
Similarly, contingent liquidity as measured by unencumbered assets to net unsecured debt remains adequate at 1.9 - 2.4x assuming a stressed 8 - 10% cap rate.
Fitch has affirmed Mack-Cali's ratings as follows:
Mack-Cali Realty Corporation
--IDR at 'BBB-'.
Mack-Cali Realty, L.P.
--IDR at 'BBB-';
--Unsecured revolving credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is revised to Negative from Stable.
The following factors may result in negative momentum in CLI's ratings:
--Fitch's expectation of leverage sustaining above 7.0x - 7.5x (increasing toward 7.5x as contributions from the multifamily portfolio grow; leverage was 6.6x pro forma for the TTM and quarter ended Sept. 30, 2014, respectively);
--Fitch's expectation of fixed charge coverage sustaining below 1.5x (coverage was 1.9x for the TTM and quarter ended Sept. 30, 2014, respectively);
--A sustained liquidity shortfall;
--Fitch's expectation of unencumbered asset coverage of unsecured debt sustaining below 2.0x, or a material change in the quality of the unencumbered pool due to sale of best relative assets.
The following factors could result in positive momentum in CLI's ratings:
--Fitch's expectation of leverage sustaining below 6.0x - 6.5x (increasing toward 6.5x as contributions from the multifamily portfolio grow);
--Fitch's expectation of fixed charge coverage sustaining above 2.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' May 28, 2014;
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' Feb. 26, 2014;
--'Recovery Ratings and Notching Criteria for Equity REITs' Nov. 19, 2013.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Recovery Ratings and Notching Criteria for Equity REITs