Following a contentious tussle with one of its investors, Mack-Cali Realty Corp. is moving ahead with determining whether an outright sale of the office and multifamily REIT or a sale of certain assets might be in order.
On June 12, Mack-Cali shareholders installed four new board members nominated by New York City investment firm Bow Street LLC, which holds about 4.5 percent of the REIT’s outstanding shares of common stock. Four incumbent directors stepped down from the 11-member board to make way for the Bow Street-backed candidates.
The board shakeup comes four months after Bow Street, in conjunction with Brooklyn real estate investor David Werner, floated an unsolicited offer to buy Mack-Cali’s office portfolio for nearly $2.5 billion in cash. Under that plan, Mack-Cali would have spun off its multifamily assets into a publicly-traded REIT.
In proposing the office acquisition and multifamily spin-off, Bow Street was advocating for “long-needed structural change” at Mack-Cali, designed to reverse years of underperformance at the hands of the REIT’s “entrenched” board.
Mack-Cali rejected the Bow Street bid, saying it “grossly” undervalued the REIT’s assets. It accused Bow Street of launching the board fight to scoop up the REIT’s “premium” properties at a “lowball price,” or forcing a “fire sale” of the company or some of its assets to make a quick buck.
With a revamped board in place, the Jersey City, N.J.-based REIT can now concentrate more fully on its path forward. On June 12, Mack-Cali said its board would form a committee of independent directors to examine strategic alternatives, including a sale of the company or of certain assets. Those assets are anchored by waterfront office and multifamily properties in Jersey City, a short ferry ride across the Hudson River from Manhattan.
In a June 2019 note, Atlanta-based investment bank SunTrust Robinson Humphrey speculated that Mack-Cali will eventually be sold. However, the investment bank added, such a deal wouldn’t happen in 2019, which “is likely to be a year of repositioning.” SunTrust Robinson Humphrey views Mack-Cali “as a longer-term turnaround story, with some challenges but also some opportunities.”
SunTrust Robinson Humphrey figures it’ll take a couple of years to turn around the company to achieve earnings growth or carry out a “palatable sale.”
Selling Mack-Cali would be the “surest way” to close the gap between the company’s share prices and the private market value of its assets, according to Danny Ismail, lead office REIT analyst at Green Street Advisors Inc., a real estate research and advisory firm in Newport Beach, Calif. REIT analysts and others have long criticized Mack-Cali’s wide discount to NAV, which Bow Street complains has historically been one of the worst among REITs.
“While it’s not clear who the natural buyer of the entire portfolio would be, Mack-Cali has some attractive assets and there remains plenty of capital looking to find a home,” Ismail says.
During Mack-Cali’s May 3 earnings call, CEO Michael DeMarco noted that even before Bow Street’s rebuffed overture, executives at the REIT had been mulling strategic alternatives. As a result of that review, Mack-Cali recently sold its 3.1 million-sq.-ft. office/flex portfolio for $487.5 million.
“We will continue to maintain an active and productive dialogue with all of our stockholders,” DeMarco said in a June 12 news release, “as we continue to execute on our strategic plan and build a stronger and more focused company that creates long-term value for stockholders.”
It’s a safe bet that at least one of the four Bow Street-supported independent directors will be part of that dialogue. Those four directors include Alan Batkin, chairman and CEO of strategic advisory firm Converse Associates Inc.; Frederic Cumenal, former CEO of jewelry retailer Tiffany & Co.; MaryAnne Gilmartin, former president and CEO of commercial real estate heavyweight Forest City Ratner Cos. LLC; and Nori Gerardo Lietz, president of real estate advisory firm Areté Capital and a Harvard Business School lecturer.
Batkin, Cumenal, Gilmartin and Lietz “are excited to roll up their sleeves and work alongside their fellow directors to ensure that a robust strategic alternatives process leaves no stone unturned in creating meaningful value for all shareholders,” Akiva Katz and Howard Shainker, managing partners of Bow Street, said in a news release.
“We have no doubt that with truly independent directors and renewed oversight in the boardroom, Mack-Cali shareholders will finally reap the long-overdue benefits of their investment,” Katz and Shainker added.
At this point, it doesn’t matter what route Mack-Cali chooses to boost shareholder value, says REIT analyst John Guinee, managing director of Stifel Nicolaus & Co., a St. Louis-based investment brokerage. Guinee says there could be a “smorgasbord of outcomes” from the review of strategic alternatives.
“What is important is having adults on the board who are working for shareholders,” he notes.
One of those shareholders, New York City-based real estate investment firm Madison International Realty LLC, owns a 5 percent stake in Mack-Cali valued at roughly $100 million. The firm says it picked up those shares last year to take advantage of the REIT’s discount to NAV. Over the past five years, the discount to NAV has averaged 17 percent, according to SunTrust Robinson Humphrey. As of March 31, Mack-Cali’s NAV stood at $3.6 billion, with the New Jersey waterfront portfolio representing 60 percent of that figure.
Ronald Dickerman, founder and president of Madison International Realty, says his firm supports the aim of Mack-Cali executives to capitalize on the REIT’s New Jersey “waterfront strategy” along the Hudson River. That strategy is tied to nearly 5 million sq. ft. of office space, more than 4,400 multifamily units either occupied or under construction, and more than 6,200 multifamily units either planned or entitled.
Through that plan, Dickerman believes Mack-Cali can narrow the NAV gap before the REIT’s self-imposed deadline of the spring of 2021. Mack-Cali executives have indicated that if the NAV goal isn’t achieved by then, it’ll be time to sell the company.
“We could not applaud that business plan any louder,” Dickerman says.
One factor almost certainly would preclude a sale of all or some of Mack-Cali’s assets in the near future: a vacancy rate in the New Jersey waterfront office buildings of around 25 percent. Mack-Cali has earmarked nearly $150 million in capital expenditures for amenity and cosmetic upgrades at those properties in an effort to bump up vacancy and rental rates.
If Mack-Cali were to proceed with some sort of strategic alternative, Dickerman says that could include a “lock, stock and barrel” sale of the company or a spin-off of the multifamily properties into a publicly-traded REIT coupled with a sell-off of the office properties.
“I’ll bet there’s a lot of companies that would find Mack-Cali attractive as a potential acquisition target,” says Dickerman, citing the proximity of the waterfront assets to Manhattan.
For now, though, Dickerman’s firm is fine with waiting to see how Mack-Cali will execute on the New Jersey strategy.
“We are private equity people. We are not stock jockeys. We don’t run around and trade stocks,” he says. “What we do is focus on high quality real estate portfolios that are dislocated or are trading at discounts in the public markets where we can be supportive over an intermediate period of time and participate in the value creation.”
“We think that’s going on right here, right now at Mack-Cali, so we’re not in a huge rush to see the company sold,” Dickerman adds.