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Mack-Cali Realty shares pop with potential buyer in the wings

Mack-Cali Realty Corp. shares jumped more than 8% in midday trading Dec. 20 trading after a potential suitor for the New Jersey-headquartered office and multifamily landlord, recently emerged from a strategic review, entered onto the scene.

The market awaits a formal offer from the prospective buyer multifamily real estate investment trust UDR Inc. in partnership with Rizk Ventures CEO Thomas Rizk, who notably was CEO of Mack-Cali from 1997 to 1999 but analysts and investors frustrated by Mack-Cali's discounted share price meanwhile have reacted positively to the company's planned suburban office sales, which the company announced Dec. 19 hours before the potential buyout emerged. UDR wants the residential assets while Rizk reportedly has eyes for the office side of the business.

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Mack-Cali had a tumultuous 2019 as it fought an activist investor's efforts to wrest control of its suburban and waterfront properties, overhauling its board and corporate governance structure and apparently taxing investor confidence in the process. The company's shares had returned 9.5% this year through Dec. 19, while the SNL U.S. REIT Equity index returned 26.1% and the S&P 500 returned 30.4%, according to S&P Global Market Intelligence data.

Under its just-announced asset sales plan, Mack-Cali will offload 6.6 million square feet altogether by the end of 2020, leaving the company with just waterfront class A office properties comprising roughly 5.0 million square feet and its Roseland multifamily assets. The first $285 million-plus tranche of the suburban office sales includes 2.4 million square feet in Parsippany and Madison, N.J.

BTIG analyst Thomas Catherwood said there is significant interest in the market already for the company's residential assets and land holdings, and the pruning of the portfolio could make the company more attractive to a buyer. But he lamented the lower-than-expected sale price for the first tranche of the planned suburban office sales, which he estimated represents a 11.0% cap rate — significantly higher than the 8.5% cap rate his own net asset value calculation assumes.

"Selling assets at an 11.0% yield to repay unsecured notes and term loans with an average cost of ~3.9% does not help the company's overall leverage metrics," Catherwood said in a Dec. 20 research note, reiterating his "buy" rating on the company.

Mack-Cali did not immediately return a request for comment.

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Others see UDR as a fit buyer. Stifel analyst John Guinee called both UDR and Rizk "very credible investors." UDR is capable of funding the entire transaction, especially if it turns out to be a stock-for-stock deal, and any price paid more than $25 per share "would make shareholders very happy," he said, rating Mack-Cali at "buy."

"While we have no explicit knowledge, we assume the offer is real, and we assume other office and/or multifamily investors are actively evaluating the CLI real estate," Guinee said.

Evercore ISI analyst Steve Sakwa said the potential deal makes "strategic sense" for UDR given its exposure to New York City nearby and its absence to-date from New Jersey, a market that could provide a hedge for landlords exposed to New York City's new rent control laws.

Mack-Cali's land bank should also prove to be a major draw, Sakwa said. "[W]e'd expect that UDR would seek to monetize these land parcels over time by building additional residential units," he said.

Sakwa rates Mack-Cali at "In Line."

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