Mack-Cali Realty Corp.’s board of directors came out strongly against a $2.4 billion offer for its suburban and waterfront assets by Bow Street Special Opportunities Fund and the notice that the fund intends to nominate a majority stake of six candidates to the board at its upcoming annual meeting of stockholders.
In a release posted on its website, Mack-Cali’s board said the real estate investment trust received an unsolicited proposal Feb. 25, had initial discussions with Bow Street, but determined March 13 — at its regularly scheduled quarterly meeting — that the offer would be rejected because it “substantially undervalues (Mack-Cali’s) core office portfolio, is unworkable and, if consummated, would leave (Mack-Cali) and its stockholders without the wherewithal to capitalize on its residential assets and with shares of a small, undercapitalized company unlikely to achieve an attractive valuation in the public market.”
The board also said Roseland Residential Trust and other Mack-Cali residential assets would be spun off to Mack-Cali stockholders as a newly formed, publicly traded residential REIT.
On March 14, Bow Street delivered its formal director nomination notice to Mack-Cali.
The unanimous decision of the Mack-Cali board to reject the Bow Street proposal was based, among others, on the following considerations, the company said in the release:
“The proposal values Mack-Cali’s core office portfolio at a substantial discount to management’s valuation estimate. The proposed cash price of $2.4 billion to $2.6 billion for Mack-Cali’s suburban and waterfront office assets implies a gross asset valuation for the company’s core office portfolio that is significantly lower than management’s valuation.
“The proposal overstates the amount of net cash proceeds that would be available for distribution to Mack-Cali stockholders. The amount of net cash proceeds from the sale of Mack-Cali’s suburban and waterfront office assets that would be available for distribution to Mack-Cali stockholders would likely be materially lower than $8 to $10 per share, as suggested in the proposal, due to taxes, frictional costs and/or structuring prohibitions.
“The proposal is based on unrealistic assumptions regarding trading multiples of the new residential REIT. The assumptions regarding the post-transaction trading levels of the new residential REIT used in the proposal imply earnings multiples that are materially in excess of the current trading multiples of blue-chip public multifamily peers (which operate with significantly lower financial leverage than inherent in the new residential REIT) and are not realistic for a small-cap, highly leveraged multifamily REIT, with limited cash flows, substantial development exposure and significant distribution obligations to a joint-venture investor (Rockpoint Group).
“The proposal does not take into account the cash flow constraints of Mack-Cali’s residential business. The proposal fails to take into account the current cash flow constraints and significant multifamily development exposure of Mack-Cali’s residential business, which may result in the new residential REIT not being able to generate sufficient cash flows to support its debt service obligations, fund its multifamily development activities or pay meaningful dividends to its stockholders.
“The proposal contemplates a structure that would create serious tax risks for Mack-Cali and its stockholders. While the proposal suggests that the sale of the company’s suburban and waterfront office assets would be accomplished in a “tax efficient structure,” the company’s preliminary analysis indicates that the proposed transaction would likely have materially adverse tax consequences for the company and its stockholders.”
William Mack, Mack-Cali’s chairman, released the following statement:
“The Mack-Cali board is committed to continued stockholder value creation. Our board considers all credible alternatives for maximizing value for our stockholders, including potential strategic transactions.
“However, the Bow Street/DWREI unsolicited proposal is wholly inadequate from a value perspective, illusory in nature and does not reflect Mack-Cali’s intrinsic value and growth potential. Indeed, the proposal is not a credible offer to deliver value to our stockholders through the acquisition of the entire company at a full and fair price. Rather, it is nothing more than an attempt to break up Mack-Cali in order to acquire our valuable office assets at a grossly inadequate price and at the expense of all other stockholders.
“The Mack-Cali board believes that Bow Street’s notice of director nominations is an attempt to pressure the board into accepting Bow Street’s inadequate proposal and, failing that, to gain control of the board, all of which is part of Bow Street’s and DWREI’s plan to seize for themselves value that belongs to all of Mack-Cali stockholders.”
Mack-Cali CEO Mike DeMarco released this statement:
“Over the past several years, Mack-Cali has taken significant steps to transform our business to focus on the Hudson River Waterfront and other transit-based office markets, while expanding our multifamily operations. For example, we have sold over $2.1 billion of assets in the last 3½ years while constructing over $2 billion of multifamily assets and buying over $740 million 1031 replacement assets.
“We have learned three things during this process: (1) exactly where the market is for New Jersey office assets; (2) how to sell those assets in today’s environment; and (3) how to do so in a tax-efficient manner.
“This proposal, which we estimate to be at a 9 percent in place cap rate and under $200 per square foot, flies in the face of everything we have learned over the last 3½ years. By successfully executing on our plan to evolve and improve the Mack-Cali asset portfolio, we believe we have established the finest office and residential platform in New Jersey.
“While there are certainly challenges that face our company and our industry, we firmly believe that Mack-Cali has significant upside and value creation opportunities and that our strong strategic and business plan will enable us to deliver profitable growth and meaningfully higher stockholder value than the Bow Street proposal.”
Mack-Cali said its stockholders are not required to take any action at this time and that the company is evaluating Bow Street’s director nomination notice for compliance with the company’s bylaws.
Mack-Cali, the largest REIT in New Jersey, is based in Jersey City.