Jones Lang LaSalle


Mack-Cali CEO talks soothingly of Xanadu
REIT says profit rose, but a key number fell
Friday, February 24, 2006
BY JUDY DeHAVEN
Star-Ledger Staff

Mack-Cali Realty's chief executive sought yesterday to allay concerns about the firm's 20 percent stake in the troubled Xanadu project, a $1.3 billion retail and entertainment center now under construction at the Meadowlands Sports Complex.
The lead Xanadu developer, the Mills Corp., has been mired in an accounting scandal and a series of poor earnings reports. Just yesterday, the Virginia-based company confirmed it has hired two investment banks to advise it on a potential sale of key assets or the entire business. Mills also said it was cutting its work force and its 2005 earnings will be "significantly below" market expectations.
Mack-Cali Chief Executive Mitch Hersh said during a conference call with analysts and investors that the Cranford-based real estate investment trust and state officials would need to sign off before Mills' interest in Xanadu could be sold. Mack-Cali gained its 20 percent interest and the right to develop a hotel and office buildings at the complex in exchange for $32 million.
"Right now, construction is well under way," Hersh said during the call, which was held to discuss the company's fourth-quarter earnings.
During a recent meeting with officials from Mills and the sports authority, Hersh said, "the Mills team indicated that ... there are no concerns, immediate concerns anyway, relative to funding the construction activity.
"Other than that, I don't know anything other than I have a seat at the table if ... ownership is intending to change or (there is) any other material type of change."
Mack-Cali, a major owner and operator of office buildings in New Jersey, reported fourth-quarter revenue of $163.3 million, a 9.5 percent increase over last year. But both net income and funds from operations, a key figure for real estate investment trusts, fell. Net income of $14.4 million, or 23 cents per share, was less than half the $30.3 million, or 49 cents per share, Mack-Cali reported a year earlier.
Funds from operations, which adds depreciation and amortization back to earnings, declined 4 percent, to $65.1 million.
Shares of Mack-Cali slid 2.4 percent.
Hersh said the recovery of the commercial real estate market remains slow, and the industry is still not experiencing the kind of wide- scale corporate expansion that would create a large demand for more office space. While he expects the first quarter to be challenging, he said he is "very hopeful it will moderate throughout the balance of the year."
He also said the recent announcement that Mack-Cali would buy the Gale Co.'s office portfolio for $545 million "will provide us with a very powerful engine for growth."
Analysts peppered Hersh with questions about the company's purchase of a 3 percent stake in CarrAmerica Realty, a REIT with holdings in 12 major markets throughout the country, including Washington, D.C., and California. Mack-Cali disclosed it spent $62.7 million to buy more than 1.8 million shares of CarrAmerica in the annual report it filed with the Securities and Exchange Commission.
Hersh said Mack-Cali spent roughly $35 a share, on average, for CarrAmerica stock, which closed yesterday at $40.57.
Hersh said he and Mack-Cali's board decided to make the purchase because, at a minimum, it represented a "very good value," but stopped buying the stock as the price began to rise. He said while the company is always on the lookout for a bi-coastal presence, he has had no discussions with CarrAmerica about an acquisition, nor has Mack-Cali hired financial advisers to evaluate such a transaction.
When asked if Mack-Cali bought the CarrAmerica stock in hopes of gaining control of the company, Hersh said: "We live in a world where anything can happen, and the rules of the road are pretty strict.
"I don't know where it ends up," he said, "but either way, it ended up a sound investment."