Mining for value

So what if REIT share prices are slumping in an already turbulent stock market. That has done little to slow down Cranford, N.J.-based Mack-Cali Realty Corp. in 1999. In fact, the company continues to build on its strong Northeastern U.S. base with creative financial deals and value-adding initiatives and partnerships that also manage to keep tenants of all sizes satisfied.

First and foremost, Mack-Cali - the product of the $1.1 billion 1997 merger between Rochelle Park, N.J.-based The Mack Co., Dallas-based Patriot American Office Group (a private Southwestern developer/owner controlled by the Mack family) and Cranford-based Cali Realty Corp. - has built a reputation as one of the strongest Class-A office developers and owners in the Northeast. Of the company's 96% leased, 28.3 million sq. ft. portfolio, about 23 million sq. ft. - contributing approximately 80% of Mack-Cali's net operating income - lies in the Northeast.

During the past few years, and especially during 1999, Mack-Cali has enhanced its presence across the United States.

Before the Cali merger, the Mack Co. began diversifying in the early-1990s by acquiring a portfolio, primarily in the Southwest, from the Resolution Trust Corp., and also establishing operations in San Francisco.

It's been a very good year This year, Mack-Cali upped the ante. In June, the company acquired 795 Folsom Street in San Francisco from AT&T Corp. for $34 million. Mack-Cali then leased-back two floors (63,278 sq. ft.) in the six-story, 184,000 sq. ft. building. After repositioning 795 Folsom, San Francisco-based Rent Net Inc. leased 95,000 sq. ft., leaving the building 86% occupied.

In Denver, Mack-Cali will build a 183,000 sq. ft. Class-A building at Denver Tech Center. San Francisco-based URS Greiner Woodward Clyde has preleased 90,000 sq. ft., and Mack-Cali plans to deliver the building, which includes four stories of underground parking, in early 2001.

Like URS Greiner, Basking Ridge, N.J.-based AT&T has long been a Mack-Cali tenant in the Garden State. That relationship with AT&T enabled Mack-Cali to acquire 795 Folsom Street by negotiating directly with the company rather than through an auction process. Mack-Cali quickly completed AT&T's sale-leaseback and repositioned the building.

"It's through the relationships that we've developed over many years in the real estate business that we are able to develop a critical mass in locations on a value-added basis where we're simply not aggregating assets at an auction block," says Hersh.

Closer to its New Jersey home, Mack-Cali also acquired 1201 Connecticut Avenue in Washington, D.C., from a fund managed by Atlanta-based Lend Lease Real Estate Investments Inc. for $32.2 million.

"Those areas represent high-barrier-to-entry markets that are similar in their characteristics to the Northeast," says Hersh. "We think that a counter-balancing of the two coasts represents good economic diversity for the company and represents markets where we believe there will be continued economic strength by virtue of the difficulty in entering those markets."

And let's not forget the Northeast.

Following the April lease of 100,815 sq. ft. for DLJdirect Holdings Inc.'s Jersey City headquarters at Mack-Cali's Harborside Financial Center, Mack-Cali announced plans to add 900,000 sq. ft. of office, hotel and parking space at the already 1.9 million sq. ft. waterfront development. The new Harborside projects include a 185,000 sq. ft. build-to-suit for New York-based Waterhouse Securities built over a seven-story, 1,000-car parking garage. The hotel segment consists of a joint venture with Chicago-based Hyatt Hotels Corp. to build a 350-room Hyatt Regency.

What's more, Mack-Cali has an inventory of about 10 million sq. ft. of developable land in the Garden State.

With high land costs in the Northeast, a tenuous permitting process, low Class-A vacancies and a great deal of preleasing in developments underway, Mack-Cali's land inventory serves as the company's trump.

"There's not a lot of speculative new development pressure being exerted in the suburban markets, and, accordingly, the overall market characteristics have remained intrinsically strong," says Hersh. "Vacancy rates in most of the markets in the Class-A sector remain generally in the single digits or very low double digits. The rents are quite healthy and, in most markets, continuing to rise."

Broadband and other amenities Last month, Mack-Cali and a group of its peers joined Menlo Park, Calif.-based venture capital firm Kleiner Perkins Caufield and Byers in establishing Broadband Office Inc., which is based in Washington, D.C., and the San Francisco Bay area. Washington, D.C.-based CarrAmerica Realty Corp.; Dallas-based Crescent Real Estate Equities Co.; Indianapolis-based Duke-Weeks Realty Corp.; Chicago-based Equity Office Properties Trust; Raleigh, N.C.-based Highwoods Properties Inc.; Houston-based Hines; and Menlo Park-based Spieker Properties Inc. complete the partnership.

Broadband Office will offer local and long distance phone service, high-speed Internet access, data and voice connectivity, voice and e-mail and Web hosting. The company's initial footprint covers approximately 40% of the REIT-owned office space in the United States and about 10% of the total U.S. office market. The company makes life easier for tenants, especially smaller tenants, by offering a single vendor for communications services.

"The long-term future of office development includes the notion of plug-and-play, which means that tenants expect and should be provided with a high level of service," says Hersh. "In today's changing business environment, that includes the highest levels of technology. They can come in and not only lease space but make decisions on their telecommunications and data-service needs.

"If, while we're doing that, we can create substantial shareholder value by participating in the revenue stream and build some serious equity value at the same time, then it's a smart thing to do for our shareholders."

On another amenity level, in September Mack-Cali introduced its Mack-Cali Advantage Program. Mack-Cali Advantage provides tenants with a list of pre-screened providers for services such as computer equipment, relocation services and office furniture and supplies. Mack-Cali introduced the new program in the Northeast and will continue to implement it across its portfolio this year. While the program adds to Mack-Cali's revenues, it, again, makes life easier for the company's tenants.

"No. 1, it keeps us well connected to our tenants," says Hersh. "That is critically important, to maintain those relationships and understand the needs of tenants and be ahead of the curve. We're trying to make the quality of life better, more efficient and more fluid for our tenants."

Enhanced financial strength Credit rating agencies took notice of Mack-Cali's stature and financial flexibility earlier this year with both Duff & Phelps and Standard & Poor's issuing a stable, BBB rating in January. With the rating, Mack-Cali's unsecured credit facility jumped $100 million to $1.1 billion and lost 20 basis points over LIBOR.

In August, Mack-Cali issued $185 million in unsecured debt to retire a flipper mortgage - a mortgage that can be "flipped" from secured to unsecured debt - with Teachers Insurance and Annuity Association (TIAA). Mack-Cali is also in the process of flipping $150 million in secured debt held by Prudential Realty Funding Corp. that will bring the unencumbered portion of Mack-Cali's net operating income to 80%.

"That provides huge flexibility for us," says Hersh. "It creates another efficiency for this company in accessing the debt markets on a rapid basis.

"It's a whole new area of capital and simplifies the whole process," he adds. "The covenants that are involved in maintaining the investment-grade rating - the interest-rate coverage and the fixed-rate coverage - are very conservative, which is something the debt markets demand, and, frankly, in this company we demand it of ourselves. This is being part of Corporate America. This is what the REIT industry aspires to."

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