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Mack-Cali's Mitchell Hersh: Investors Expect Consistency

With an equity market cap of roughly $2.5 billion, Mack-Cali Realty Corp. is ranked as the third-largest U.S. office REIT by the National Association of Real Estate Investment Trusts. Its portfolio consists of 264 office properties concentrated mainly in the Northeast. Under CEO Mitchell Hersh, who has held that position for four years, Mack-Cali made some savvy moves during the late 1990s by locking in a stable of credit tenants under long-term leases.

The REIT also has maintained a “rock solid” balance sheet, reports Lehman Brothers' REIT analyst David Shulman. Just last December, Mack Cali's huge mixed-use project — Meadowlands Xanadu — was cleared by New Jersey officials after months of litigation. The $1.3 billion project will bring 2.2 million sq. ft. of theme-oriented, family entertainment to the area by 2006. Mack-Cali will develop the project's office and hotel components. Hersh recently spoke with NREI about how Mack-Cali's portfolio stacks up against the weakness in the nation's office market overall.

NREI: Office vacancy in the Northeast is well over 15% in some areas. Still, you've managed to keep your portfolio-wide occupancy above 90%. Please explain.

Hersh: We were very proactive in locking in renewals three years ago, before Corporate America knew that we were going into a recession. We finished out the third quarter with 92% occupancy.

NREI: Being successful also means that your investors may harbor irrational optimism for 2004. Do you see that as a possibility?

Hersh: I don't think that investors expect huge returns year after year. They do expect consistency in earnings and cash flow. They also don't want to worry about whether or not the dividend can be sustained [their dividend yield is currently 6.3%. We really haven't seen any irrational exuberance.

NREI: You recently sold an office building in New Jersey for $194 million. Do you have plans to sell off any other assets in this hot seller's market?

Hersh: I have no sales model or program, so to speak. We operate the company in an entrepreneurial way. We would sell a building as a way to hedge against any exposure in one market.

NREI: There have been strong rumors of Mack-Cali merging with Reckson [another major Northeastern office REIT]. Also, the two REITs reportedly discussed merging back in 2001. Any comments on current discussions?

Hersh: There are no ongoing discussions with Reckson.

NREI: Should the office market expect 2004 to be any better than last year?

Hersh: I think the markets have generally bottomed out. We will roll around on the bottom for a while as jobs lag the general recovery. I'm seeing a lot of sublease space being withdrawn from the market. We won't see any positive pressure on rents before the second half of 2004. It'll be slow, and not dramatic. A rising tide does not lift all ships.

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