S&P Cuts Mack-Cali Realty (CLI) to 'BB+'; Sees NJ Lease Expirations Eroding Net Op. Income

Standard & Poor's Ratings Services lowered its corporate credit rating on Mack-Cali Realty Corp. (NYSE: CLI) and its operating partnership, Mack-Cali Realty L.P., to 'BB+' from 'BBB-'. The outlook is negative.

At the same time, we assigned a '2' recovery rating to the REIT's senior unsecured notes, indicating our expectations for substantial (70% to 90%) recovery of principal in the event of a payment default. Our 'BBB-' issue-level rating on Mack-Cali's senior unsecured notes remains unchanged. The '2' recovery rating affects roughly $1.3 billion of rated senior unsecured notes currently outstanding and reflects our practice of assigning recovery ratings to a speculative-grade rated issuer's debt.

"The downgrade reflects our assessment that over the next three years Mack-Cali's New Jersey lease expirations will lead to further erosion in net operating income, which will contribute to additional weakening of its key credit measures," said credit analyst Jaime Gitler. "Mack-Cali issued public guidance for 2015 that same-store net operating income (NOI) will decline more than 8% year over year, which was below our expectations."

The outlook is negative. We believe unfavorable operating trends in Mack-Cali's core suburban office portfolio are likely to persist for the next several years, which will further stress cash flow. While we expect the multifamily segment's contribution to EBITDA to pick up over the same period, we don't believe it will replace cash flow deterioration from the core portfolio. This should continue to pressure key credit measures.

We would lower the ratings if FCC declines below 2.1x, on a sustained basis, because of occupancy erosion, lack of multifamily cash flow contribution, or financing growth with additional debt capital. This would cause us to revise the financial risk assessment to "significant" from "intermediate".

We could affirm the ratings and assign a stable outlook if we believe that the company can stem portfolio cash flow erosion and will sustain key credit measures at current or better levels, notably FCC above 2.1x.

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