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Company Perspectives:
Mack-Cali's focus on serving its tenants, managing its properties, strengthening its financial position, and identifying new avenues for growth has secured its position among the strongest real estate companies in the country.
Mack-Cali Realty Corporation is one of the largest Real Estate Investment Trusts (REIT) in the United States, with the bulk of its properties located in the Northeast in a corridor that runs from Connecticut through the District of Columbia. The trust is based on the holdings accumulated by the Mack and Cali families, which both have longstanding ties to the real estate business in northern New Jersey. Mack-Cali has a market capitalization of $3.6 billion (as of March 31, 2001). Concentrating on office buildings, it owns or holds an interest in 273 properties totaling some 29 million square feet. Mack-Cali's major tenants include AT&T; AT&T Wireless; Donaldson, Lufkin & Jenrette; IBM; Prentice-Hall; Toys 'R' Us; Waterhouse Securities; and Nabisco.
Creation of REITs: 1960
REITs were created by Congress in 1960 as a way for small investors to become involved in real estate in much the same way a mutual fund allowed them to pool resources in order to buy stock. REITs could be taken public and their shares traded like any other stock; likewise, REITs were also regulated and monitored by the Securities and Exchange Commission. Unlike stocks, however, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, thus severely limiting the ability of REITs to raise funds internally. During the first 30 years of existence, REITs were hindered in their growth because they were only allowed to own real estate. Third parties had to be engaged to operate or manage the properties. Moreover, the tax code made direct real estate investments an attractive tax shelter for many individuals, thereby absorbing funds that might have been invested in REITs. It was the Tax Reform Act of 1986 that began to change the nature of real estate investment. Interest and depreciation deductions were greatly reduced so that taxpayers could not generate paper losses in order to lower their tax liabilities. The Act also permitted REITs to provide customary services for property, in effect allowing the trusts to operate and manage the properties they owned. Despite these major changes in law, REITs were still not embraced as investment options in the late 1980s, as banks, insurance companies, pension funds, and foreign investors (in particular, the Japanese) provided the lion's share of real estate investment funds. That period also witnessed overbuilding and a glutted marketplace. Commercial property values fell dramatically in the early 1990s, and lending institutions, following the savings and loan debacle, were forced by regulators to be more circumspect about their investments. Capital essentially dried up and REITs finally became an attractive way for many private real estate companies to raise funds.
Of the two families that combined to form Mack-Cali, it was the Cali family that formed a REIT. In 1949 Cali Associates was created by brothers John J. Cali and Angelo R. Cali and boyhood friend Edward Leshowitz. The three men had originally pooled money to invest in a residential development company, but they were disappointed with the quality of the resulting homes and decided to form Cali Associates in order to be in charge of the building process. To help ensure quality, they required the project managers they hired to invest in the project. The company would build some 5,500 housing units in northern and central New Jersey. In 1969 Cali began constructing office properties, which at the time were in great demand in the area. The residential and commercial building programs would soon begin to feed off one another. Office buildings were constructed for self-employed professionals that lived in Cali homes but were forced to commute. Cali also built housing in areas where the company had put up office buildings, again freeing workers from long commutes. Cali associates gained a reputation among their commercial tenants as conscientious landlords who constructed excellent buildings and provided top-notch service. As a result, the company boasted an extremely high renewal rate.
Converting to a REIT, Cali Associates in 1994
After more than 40 years of housing development, Cali had built 2,000 one-family homes, 1,800 rental apartments, and 1,000 condominium townhouses. In addition, after 20 years of commercial construction, Cali had created almost four million square feet of commercial and industrial space, including 2.2 million square feet of class A office space. In the early 1990s, however, the rules of real estate had changed. Unlike those post-World War II years when Cali could secure a bank loan by using a proposed building as collateral, now access to capital was much tighter. Cali began to divest more than it built. Cali, despite a 1993 loss of $1 million, had typically strong cash flow and was not about to lose any of its properties. But a changing of the guard was imminent. The company's founders were turning over the reins to a new generation: John J. Cali's son Brant, Angelo Cali's son John R. Cali, and Brant's friend Thomas Rizk. In August 1994 it was this new management team that was instrumental in taking Cali Associates public, becoming a REIT named Cali Realty Corporation, which consisted of 12 office buildings and one apartment complex. Although Cali had hoped to sell 9.179 million shares at $18 to $20, it actually sold 10.5 million shares at $17.25. Nevertheless, the offering, along with additional financing from Prudential Securities, allowed Cali Realty to pay down a significant amount of debt.
Cali Realty initiated an aggressive acquisition campaign. One of the few REITs in the country to focus on suburban office buildings, the trust spent $200 million buying properties over an 18-month span beginning in 1995. Although concentrating on its home territory of New Jersey, Cali Realty expanded its scope in 1996 by also buying property in Pennsylvania. Already the trust boasted one of the highest returns of any REIT in the country, and investors quickly took note. Cali Realty raised an additional $545 million through two additional equity offerings in 1996. Fortified with cash, the trust was then able to complete its first major deal. In February 1997 Cali Realty bought Westchester-based Robert Martin Company and its portfolio of 65 properties, totaling 4.1 million square feet, for $440 million.
Robert Martin was not the name of a person, rather it was the combination of the first names of the company's founders, Robert F. Weinberg and Martin S. Berger, who created their partnership in 1957. With $15,000 in financing they began their business by constructing five houses, three colonials and two ranches, which they sold for $25,000 each. They became involved in larger projects and also displayed a pioneering spirit. Robert Martin was the first to build condominiums in Westchester. In the mid-1960s the company began to develop office parks and introduced "flex" buildings, which could serve as offices, a warehouse, or industrial space. Over 40 years, Robert Martin constructed more than 2,000 apartments and houses, as well as eight million square feet of commercial, hotel, recreation, medical, and retail space. Like other developers, Robert Martin was adversely affected by sour economic conditions in the early 1990s and began to consider the possibility of becoming a REIT or merging with one. For Cali Realty, Robert Martin was an excellent fit in terms of property mix and location. In one stroke it gained a major presence in the suburbs north of New York City, prompting management to describe itself as a "super regional" REIT. It also retained the Robert Martin name, which was a valuable brand in the Westchester market.
The size of the Robert Martin acquisition, however, would soon pale in comparison to the $1.1 billion merger with the office assets of The Mack Company in August 1997, the largest public to private deal in REIT history. (Mack's 11 million square feet of industrial and retail space were not included.) Also part of the deal was Dallas-based Patriot American Office Group, majority owned by the Mack family. Because the Mack portfolio contained twice as much property as Cali Realty, many observers viewed the transaction as Mack swallowing up Cali Realty. The connection of the Mack family to real estate dated back to 1896 when members became involved in New York demolition as well as residential and industrial construction. The Mack Company was established in New Jersey in 1962 and engaged in a wide range of commercial real estate activities: from developing and acquiring properties to management. By the mid-1990s Mack controlled properties with a total of 20 million square feet, of which 5.9 million square feet was Class A office space. In addition to considerable holdings in New Jersey, the company also owned property in New York, Arizona, Florida, and Pennsylvania. William L. Mack and partners founded Patriot American Office Group in 1992. Most of its 3.6 million square feet of office space was located in Texas.
Despite being a large and successful company, Mack also needed to attract outside capital in order to grow to the next level. Turning to a REIT structure made sense, and joining forces with Cali Realty, another New Jersey family-run business, seemed like a natural combination. Cali Realty's CEO, Thomas Rizk, and Mack's chief operating officer, Mitchell Hersh, had been friends and neighbors for more than ten years. One night in mid-1997 they met for dinner to discuss the possibility of a merger. The result, two months later, was Mack-Cali Realty, which would own 8 percent of all office space in New Jersey. For Cali Realty the deal meant increased size that could attract further investment. For Mack it was an opportunity to convert illiquid real estate into liquid assets. Mack-Cali also looked to gain considerable prestige with Wall Street because of the perception of William Mack as a brilliant investor, a reputation earned by heading the real estate arm of the highly successful Apollo Fund. Mack and his brothers would own 18 percent of Mack-Cali, and the board of the REIT would be restructured to reflect this reality. The board was expanded to accommodate Mack board members, Rizk was named CEO, and Hersh was named president and chief operating officer. Despite the titles, however, the two men were tabbed to co-run the trust.
Over the next year, Mack-Cali went on an acquisition spree, spending $147 million on office buildings in New Jersey, Connecticut, and Texas. In March 1998 it announced a spate of deals totaling $450 million, including the $188 million acquisition of property held by Pacifica Holding Co. in Denver, as well as buildings in Washington, D.C., and Maryland. In its home territory, Mack-Cali now controlled 20 percent of northern New Jersey's Class A office space. REITs in general were buying properties at low prices and bumping rents to grow revenues and stimulate stock prices, but they were unable to maintain that pace and REITs saw the price of their stocks begin to fall. In turn, financing began to dry up. REITs now teamed up with developers to build properties in order to maintain growth. In March 1999 Mack-Cali formed a joint venture with SJP Properties of Parsippany, New Jersey, to construct two office buildings. The trust had not acquired any new properties since September 1998, when a Connecticut deal had increased its portfolio to 253 properties totaling 28 million square feet in 12 states.
Management Changes: 1999
Mack-Cali underwent a significant structural change in April 1999 when Rizk suddenly resigned and Hersch became CEO and the lone leader of the company. According to Hersh, Mack-Cali's shared power arrangement had proved inefficient. Nevertheless, the local press speculated that the ouster of Rizk was the result of a power play by the executive board that favored a Mack executive over a longtime Cali man. Hersh had been a partner with Mack since 1982. Rizk publicly supported the move, and was certainly well compensated as he left, paid $14.5 million immediately and $500,000 annually for the next three years. He was also not bound by any non-competition agreements, so that he was free to continue in the real estate business. Because of Hersch's experience in development, industry observers anticipated that Mack-Cali might pursue more joint ventures with builders, such as the one with SJP Properties.
A year later, in June 2000, Mack-Cali surprised the real estate industry when it announced that it had reached an agreement to acquire Dallas-based office building owner Prentiss Properties Trust for $975.8 million in stock plus the assumption of $1.25 billion in debt and preferred securities. The deal would make Mack-Cali the fourth largest REIT in the country, with a total capitalization of $5.9 billion. Clearly the move was intended to spread risk: by having a national footprint, Mack-Cali would be better situated to weather difficult times in any one particular market. In conjunction with the Prentiss deal, the Calis would also exit the stage, as William Mack became chairman and John J. Cali was named chairman emeritus, while Brent Cali and John R. Cali resigned. The Calis' presence on the 13-member board was also reduced to two seats.
Wall Street's reaction to the $2.3 billion acquisition, however, was decidedly chilly. Analysts at a number of investment firms downgraded Mack-Cali stock, and the price of its shares began to fall. Essentially the belief was that Mack-Cali was overpaying for Prentiss and had failed to offer a persuasive argument for wanting to become a national REIT, most of which were faring poorly in comparison to well-run regional REITs. Moreover, William Mack's reputation as a dealmaker was being questioned, with one analyst telling the Wall Street Journal that "his talents were oversold." By September 2000, Mack-Cali decided to pull out of the deal, a decision which forced it to pay Prentiss $25 million in breakup fees, but at least investors were placated and the company stock began to recover.
The Wall Street message to Mack-Cali in a nutshell was that all real estate is local. If investors wanted diversification, they could do it themselves by spreading their money around the country, while REITs like Mack-Cali should stick to their knitting and service the regions where they had developed relationships with local businesses, leasing brokers, and government officials. Mack-Cali indicated that it would refocus on a regional strategy, announcing in November 2000 that it intended to sell $600 million of its Southwestern portfolio within the next two years. In March 2001 it announced it would sell the 20 office buildings it owned in Colorado. Back in the Northeast, Mack-Cali renewed its efforts to grow its regional assets, announcing plans to build two office towers in Jersey City. The trust also discussed a major merger with Westchester's Reckson Associates Realty Corp., a deal that would make it the largest owner of commercial properties in the New York metropolitan area. Although the deal would ultimately fall apart, it was indicative of Mack-Cali's commitment to achieving growth while sticking close to its home base.
Principal Subsidiaries: Cali Property Holdings; Mack-Cali Realty L.P.; Mack-Cali Services, Inc.; White Plains Realty Associates L.L.C.
Principal Competitors: Boston Properties, Inc.; Equity Office Properties Trust; Liberty Property Trust.
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