Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDR) for Mack-Cali Realty Corporation (NYSE: CLI) and its operating subsidiary Mack-Cali Realty, L.P. to 'B' from 'BB-'.

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 Jersey City waterfront office portfolio. Successful stabilization of the rating would be predicated on substantial progress in leasing up the company's Jersey City waterfront office portfolio, which should serve to lower leverage.

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 New Jersey waterfront office portfolio that began in 2018, where Mack-Cali has made minimal progress backfilling vacant space since when the Waterfront office portfolio was over 90% leased. However, the situation has been exacerbated by the pandemic as the company lost 430bp of occupancy in 1Q21. In addition, suburban asset sales that the company has executed are geared to pay off debt are partially offset by debt-funded development projects, which serve to increase leverage further in 2021. Future delevering is contingent upon incremental NOI from multifamily development stabilizations, and leasing success in its Jersey City waterfront office portfolio.

Suburban Asset Sale Mostly Complete: Mack-Cali has mostly completed its disposition program of selling its entire New Jersey suburban office portfolio, having sold $352 million of office assets in 2020 with an incremental $631 million of sales as of beginning of June 2021. This is the culmination of a six-year process that began in 2015. Fitch views the disposition program as executed within initial valuation expectations.

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, New Jersey has weaker institutional lender and investor interest than core, 24-hour gateway central business district office markets, such as New York, Washington, DC, Boston, Chicago and San Francisco. New Jersey office fundamentals will remain a headwind given the state's difficult business climate that includes high labor and living costs, as well as regulatory and tax burdens. New Jersey employment growth has been weak during the past decade, partly due to telecom and pharma industry consolidation, which has led to job eliminations and relocations out of state.

Positively, Mack-Cali's extensive portfolio repositioning towards the Jersey City Waterfront focuses on one of the strongest New Jersey office submarket, which generally has above average occupancy and rental rates for Class A New Jersey office space and mass transit access. The company's growing multifamily portfolio offers better growth and liquidity prospects.

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 May 2021, the company replaced its prior $600 million unsecured credit facility with a new $400 million secured credit facility and term loan. Subsequently, the company drew on the new credit facility, along with cash to pay off its two existing public unsecured bonds outstanding in full. Therefore, Mack-Cali no longer has any remaining unsecured borrowings. This results in less financial flexibility and weaker relative capital access for the company, especially in the context of limited access to attractively priced public equity.

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 New Jersey office assets and multifamily properties. The company's portfolio markets have more challenging office market demand fundamentals and lower supply barriers than higher rated peers SL Green Realty Corp. and Vornado Realty Trust. The company's operating strategy also entails elevated development risk exposure, which is partially offset by related residential property portfolio with better growth and liquidity elements. Mack-Cali has not publicly committed to financial policy targets, with current metrics consistent with high speculative-grade REITs. The company has weaker access to unsecured debt and equity capital, notwithstanding its prior long-tenure as a regular public unsecured bond issuer.

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 $150 million per year from 2021 to 2023 with anticipated delivery volumes of approximately $450 million per year in 2021-2022 at 6.1% yields;

Dispositions of approximately $835 million and $100 million in 2021 and 2022, respectively.

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 Jersey City office waterfront portfolio;

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 Jersey City office waterfront portfolio;

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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 Dec. 31, 2022 forecast period, which is pro forma for the company's recasting of its secured credit facility and term loan in May 2021 and subsequent paydown of its two remaining unsecured public bond issuances outstanding, which totalled $575 million. In addition, it incorporates Mack-Cali's projected development and capital expenditure spend. The company's liquidity improves to 1.5x on a pro forma basis, if it is assumed that 80% of secured debt is refinanced.

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 March 31, 2021. This compares with a net UA/UD for Mack-Cali of 1.7x at our prior review. Fitch usually views 2.0x UA/UD coverage as the standard threshold for investment-grade REITs. Mack-Cali's secured debt as a percent of total debt increased to 80% at March 31, 2020 from 70% at March 31, 2020 and 38% at the end of 2016. After redemption of Mack-Cali's $575 million of unsecured bonds and implementation of a secured credit facility, secured debt is now 100% of total debt.

ISSUER PROFILE

Mack-Cali Realty Corporation is an owner, manager and developer of office and multifamily properties in select waterfront and transit-oriented markets throughout New Jersey.

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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