Can Capital Redeployment Drive Mack-Cali's (CLI) Growth?

Mack-Cali Realty Corporation (NYSE:CLI) has been redeploying non-core asset sale proceeds into office and multi-family properties acquisitions as well as debt reduction. Such capital recycling efforts are encouraging. However, the dilutive impact on earnings from such huge asset sales cannot be bypassed in the near term.

Recently, the company’s board of directors decided to dispose its entire 6.6 million square-foot suburban office portfolio. It plans to complete the sale of this entire portfolio in 2020, after which, the company’s entire holdings will consist of its waterfront Class-A office portfolio, spanning 5 million square feet of space and the multi-family residential real estate operations through its subsidiary Roseland Residential Trust. Moreover, Mack-Cali intends to use asset sales proceeds to repay outstanding corporate-level, unsecured debt. This will strengthen the company’s balance sheet. (Read more: Mack-Cali to Dispose Entire Sub-urban Office Portfolio)

It has also completed a three-year strategic initiative started in September 2015, aimed at transforming the company into a more concentrated owner of New Jersey Hudson River waterfront and transit-oriented office properties as well as a regional owner of luxury multi-family residential properties.

Further, Mack-Cali has been active on the investment front. In the first nine months of 2019, it completed acquisition of three rental properties for $736.9 million and intends to upgrade its current amenities and improve its properties with major capital-investment programs. These strategic efforts will drive quality improvement of cash flow and enable the company to achieve better margins in both office and multi-family apartment portfolios.

Additionally, the company has been winding up its business in non-core markets and shedding non-core assets. It sold part of its flex portfolio in 2018 for $70.3 million, and in first-quarter 2019 for $487.5 million. Also, for full-year 2019, Mack-Cali estimated $190-$240 million of dispositions excluding its flex properties. While the measures are apt for the long run, the dilutive impact on earnings from such huge asset sales cannot be bypassed in the near term.

Further, in a bid to expand its multi-family platform, the company has been actively investing in its construction pipeline that comprises 1,944 apartments. While this is encouraging from the long-term perspective, such efforts involve significant upfront operating expenses and hence, limit the company’s growth momentum in the near term.

Shares of this Zacks Rank #3 (Hold) company have gained 5.3% in the past three months against the industry’s decline of 1.6%.

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