Purchase of a Pioneer
With the acquisition of the Mack Co., Cali also gains an entrepreneurial spirit, and Mr. Rizk praises the firmís role as a "pioneer in a couple of areas."
In the late 1960s, Mack started developing warehouse and light-manufacturing facilities in North Bergen and Secaucus. N.J. It had developed more than 12 million square feet by 1975. when the company turned its attention to suburban office development. The principals ó brothers William, David, Earle and Fred Mack, along with Mitchell Hersh, built the 330,000-square-foot Mack Center II in Paramus, N.J., one of the first substantial office developments in the suburbs.
"We grew through various types of development," says Mr. Hersh. "We built strictly for our own account and amassed a portfolio throughout New Jersey, with a few properties in suburban Philadelphia, that included six million square feet of class A office space."
Also, beyond his role as senior managing partner at Mack, William Mack also co-founded Apollo Real Estate Management in April 1993 and has since served as its president. Apollo has raised about $2 billion in equity in its three real estate funds and invested in properties worth about $8 billion and other real estate assets totaling about $15 billion. The fundsí investments include properties in Western Europe as well as both public and private operating companies at home.
The 95,509-square-foot Preston Center in Dallas was folded into the portfolio through the Patriot American portion of the Mack merger.
In 1991, the Mack Co., along with entrepreneur Paul Nussbaum, became the first to make a bulk acquisition from the Resolution Trust Corp. when it purchased office properties and formed the Dallas-based Patriot American Group. Mack bifurcated the company, spinning off Patriot Americans hotel holdings in a deal with partner and co-founder Mr. Nussbaum, who now serves as chairman of Patriot American Hospitality Inc., a lodging REIT.
When Mack acquired the Patriot portfolio, it was approximately 50% rented. "But when you looked at it carefully, it was actually 35% rented because a lot of the tenants were on a month-to-month basis or had temporary leases," Mr. Mack says. At the time of the merger. 91% of the space in the Southwestern properties was leased.
"We think we've done some very interesting and creative things in creating acquisition and development structures." says Mr. Hersh, who is an architect. "So, in the context of public markets, we can bring that expertise up front and raise the bar, so to speak, on what this company can do."
Wall Street Is Listening
The performance of both companies, and the potential of their merger, has impressed Wall Street. Wheat First Butcher Singer, one of the growing number of investment companies that has issued buy recommendations on Cali stock (CLI on the New York Stock Exchange), forecast sustainable three-to-five-year growth with the merger at an annual rate from 13 to 14%. And PaineWebber reports that Caliís conservative accounting policy of not including straightólined rents in its FF0 calculations results in a lower reported FF0. This means that Caliís stock has been trading at a 5.4% discount to its office-REIT peers.
"We have seen clear evidence that, on the retail side of the house, REITs have become much more popular and, with Mack going public, we are beginning to see more institutional interest," Mr. Hersh says.
This, of course, is not surprising, given the watershed nature of the industry's growth. "This industry is moving away from financing itself as a collection of assets and moving toward financing itself as a business that happens to be in real estate," says CFO Lefkowitz. "This is a very exciting time for REITs. In this country, less then 10% of the commercial real estate is owned by REITs or other public real estate companies. The other ownership is institutional and itís generational, often with large family holdings. Weíre starting to see the transformation from private ownership into a secruitized format. Insurance companies and institutions are starting to divest themselves of their property ó and that gives us a tremendous opportunity. Weíre sort of in the infancy of this."
But growth for the infant will be measured. Rather than pulling out all stops to become a national REIT, Mack-Cali will focus on becoming a so-called super-regional. Company executives say it will continue to pursue properties in suburban markets and is less likely to enter large urban centers like New York City, where gaining a dominant position is made more difficult by the vast size of the marketplace.
"What you will not see us do is go into new markets and simply buy the assets," Mr. Rizk says. "Other companies have been successful pursuing that strategy. However, that isnít our strategy. We improve our chances of succeeding by joining up with management teams that have been most successful in markets we want to be in. To some degree, weíre a hybrid. The important thing is that we have the infrastructure and the right amount of the best assets in a particular market."
With that approach in mind, says Mr. Hersh, Mack-Cali probably will sell several one-off properties that the Mack Co. owned in Des Moines and in Omaha.
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