Nov 14 - 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)
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
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
--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
--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