Development Buzz Begins
With the purchase of Harborside, in a market that has been running a class A vacancy rate near zero, Cali acquired 11.3 acres of fully zoned property that has permits for 4.1 million square feet of development, as well as the development and water rights to another 27.4 acres, including two piers. A space-hungry market began to buzz with talk of Cali becoming a developer again.
Cali's acquisition of the 1.9-million-square-foot Harborside Financial Center in Jersey City increased its portfolio by 40%.
The company has since announced plans to build the American Financial Exchange in a tract of land it owns near Harborside. Cali followed its fall 1996 Harborside purchase and the January Ď97 Robert Martin buy with a string of asset acquisitions throughout the year. They are:
On July 24, the firm purchased vacant class A office buildings in Moorestown, N.J. Cali paid Metropolitan Life Insurance Co. $10.2 million for the two, 75,000-square-foot buildings, the only available large blocks of space in the area. They are located in the Moorsetown Corporate Center.
On August 4, Cali announced its $15.5-million acquisition of Shelton Place. a 133,000-square-foot office building in Shelton, Conn. The property, with 11 tenants and a 97% occupancy, increased Calis Connecticut holdings to four buildings and a total of 300,000 square feet.
On August 18, Cali exercised a purchase option it obtained in the Robert Martin merger and acquired another South Westchester Executive Park property for $8 million. The 84,000-square-foot office/flex building, which was .98% occupied by seven tenants, increased Caliís Westchester County holdings to 63 properties and more than four million feet.
Three weeks later, on September 4, Cali acquired a 111,000-square-foot class A building at Three Independence Way in the Princeton (N.J.) Corporate Center. The price was $13.1 million.
Although plans for the American Financial Exchange are still in the early stages, Mack-Cali executives are talking about development as a part of its future growth. Institutional investors and lenders have started to come around to accept the idea of REITís as developers, Mr. Rizk says.
A Change of Heart
"Many institutional investors did not want to see this type of vehicle become a developer, even though most of the people involved had been developers," he explains. "We have been developing for 45 years. Today, the attitude is beginning to change. As prices get higher, development becomes an important part of the story, the theory being that returns on the development end are higher than on an acquisition."
The Mack-Cali merger was a logical next step in the strategy to develop a strong capital position that would open new doors for the company and allow it to be even more nimble in pursuing its entrepreneurial goals. The Cali and Mack families had been friendly competitors for decades. "William Mack has the same history as we have." says Mr. Cali. "I knew exactly what Bill was building every year and he knew the same about us."
Or, as Mr. Mack, who had discussed with his brothers the possibility of taking the family business public for several years, puts it: "This was the right execution at the right time with the right company. Cali was a natural partner."
Especially since bonds were developing in the next generation of Cali and Mack executives. In fact, Mr. Rizk and Mitchell Hersh, chief operating officer for Mack, were neighbors in Passaic County. N.J. and had become friends, a fact both men say helped allow a seamless merger.
"The driving force was the ability to create a vehicle with a substantial balance sheet and have the opportunity to do things we couldn't do in the past," Mr. Rizk says. "Today, we have a total of $3.4 billion in capitalization and about $1 billion in debt. So youíre talking about $2.4 billion in equity, and thatís a substantial balance sheet. We probably have the ability to move our line of credit to about $1 billion."
"It really opens up opportunities we didnít have before," he continues. "We can do larger transactions. We can be both a money partner and an active investor. And we can close transactions more quickly. Look at the Mack transaction. We closed just a few months after it was announced. Some people canít close on a house in that time."
Barry Lefkowitz, who is CFO, says being able to make acquisitions and complete large transactions without disruption to ongoing operations will continue to be an essential part of maintaining the companyís pace of growth. "One of the things we pride ourselves on is that, before we do a transaction, all the systems are merged," Mr. Lefkowitz says. "When we did the Robert Martin transaction, for instance, we required that they he operating on our computer system the day we closed. Thatís unusual in any merger. We came to terms with them on a Monday and closed the deal on Friday. The same thing with the Mack deal: we required that they he up and running on our system. As a result, the experience tenants are going to have in Cranford is the same they will have in Westchester and in Texas. Weíre very focused on providing a uniformity of quality."
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