Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDR) for
The Rating Outlook is Negative. Mack-Cali's IDR reflects the company's persistently high and increased leverage, weak liquidity coverage, aggressive development program, limited unsecured debt and equity capital access and moderate complexity from joint venture (JV) investments, which also limit the company's strategic and operational control and reduce financial reporting transparency.
The Negative Rating Outlook is based on Fitch's concern about the prospects for backfilling leases in Mack-Cali's
KEY RATING DRIVERS
Office Leasing Remains Challenged: After occupancy remained at a low but stable level in 2020, 1Q21 saw office same-store occupancy decline by 430bp due to moveouts that will be a challenge to replace. This, combined with an environment where rents appear to be modestly declining, results in Fitch's expectation of SSNOI declines to approach 10% in 2021. Fitch believes it is unlikely that Mack-Cali will be able to return to YE2020 occupancy in the office portfolio. Speculative new leasing has been largely on hold due to the pandemic and potential tenants reassessing their space needs. This had been compounded by the inability to conduct tours for much of 2020, which should at least not be an impediment as businesses continue to reopen.
Speculative Grade Credit Metrics: Fitch expects Mack-Cali's leverage will remain elevated and increase to around 14x-15x in our one- to two-year forecast horizon, while moderately decreasing thereafter but remaining above 12x in 2024. This is due to the continuing struggle to address tenant moveouts in the company's
Suburban Asset Sale Mostly Complete: Mack-Cali has mostly completed its disposition program of selling its entire
Apartment Poised to Represent Majority: Fitch expects multifamily to comprise over 50% of NOI by 2022 given the sales of the suburban office portfolio and oncoming development projects over the next two years. The company's growing multifamily portfolio offers better growth and liquidity prospects, albeit with elevated development risk.
Fitch views the de-emphasis of the office portfolio favorably since, as a secondary office market,
Positively, Mack-Cali's extensive portfolio repositioning towards the Jersey City Waterfront focuses on one of the strongest
Transition to Exclusive Secured Financing Strategy: In the last few years, Mack-Cali had increasingly relied on secured mortgage debt, unsecured bank term loans, joint venture and redeemable preferred equity and asset sales proceeds to fund refinancing its maturing obligations and new investments, and debt capital. Mack-Cali has transitioned its balance sheet to a fully secured strategy in 2Q21. In
Elevated Rental Risk Profile: Challenging New Jersey market fundamentals, combined with high asset level concentrations and Mack-Cali's growing exposure to shorter lease duration multifamily assets are key factors contributing to a higher rental income risk profile for Mack-Cali, which will likely result in greater relative cash flow volatility through the cycle. Fitch estimates that once the suburban office portfolio dispositions are complete that Mack-Cali's six Jersey City Waterfront office assets will comprise close to half of the company's operating portfolio value. Positively, only 20.3% of Waterfront office rents expire through YE 2024.
DERIVATION SUMMARY
Mack-Cali owns a concentrated portfolio, consisting of metro and remaining suburban
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
High-single-digit SSNOI decline in 2021 in the combined office/multifamily portfolio, which is driven by an assumed 200bps occupancy loss and mid-single digit releasing spread declines, followed by low-to-mid single digit SSNOI growth in 2022-2024, based on low single-digit positive rent spreads and 100-150bps improved occupancy per annum;
Development spend of approximately
Dispositions of approximately
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Leverage sustaining below 13.0x
Stronger access to public equity and non-bank unsecured debt capital;
Stronger tangible progress in leasing up vacancy in
FCC sustaining above 1.3x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Leverage (net debt/ recurring operating EBITDA) sustaining above 14.5x or consideration of decline in supplementary leverage metrics;
Continuing difficulty in leasing up
A sustained liquidity shortfall;
FCC sustaining below 1.0x.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Mack-Cali has an adequate liquidity position. The company's sources cover its uses by 1.1x, based on Fitch's base case liquidity analysis for the April. 1, 2021 to
The size of Mack-Cali's unencumbered asset pool has decreased considerably during the last few years. Fitch estimates the company's unencumbered assets covered its net unsecured debt (UA/UD) by 0.8x based on a direct capitalization approach of unencumbered NOI using a stressed 9.0% capitalization rate at
ISSUER PROFILE
SUMMARY OF FINANCIAL ADJUSTMENTS
EBITDA excludes non-cash stock compensation;
EBITDA includes recurring cash distributions from unconsolidated JVs;
Fitch has included Mack-Cali's Series A and A1 redeemable preferreds in Mack-Cali's debt quantum to calculate leverage.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
Mack-Cali Realty Corporation LT IDR B Downgrade BB-
Mack-Cali Realty, L.P. LT IDR B Downgrade BB-
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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