Mack-Cali Realty (CLI) is a fully integrated, self-administered, and self-managed office real estate investment trust (REIT). The company reported 2Q FFO [funds from operations] of $0.93 per share compared to $0.88 per share in 2Q07. Results were $0.06 above our estimates and consensus.
The surprise was due to lower overall expenses. Despite a weakening economy, operations held up relatively well; the company reported rental rate increases on new leases and portfolio occupancy held steady. In addition, CLI has limited near term lease expirations. However, we are maintaining our Sell recommendation due to macroeconomic factors.
Office occupancies in the company's core markets have increased at a rapid pace from last year. As such; CLI will have a difficult time holding occupancy and increasing rents. We think suburban office landlords will have a tough time over the next 12 months. National job growth numbers are negative and corporations are not expanding. Office landlords could see substantial cash flow declines as leases roll in 2008 and 2009.
At 10.9x 2008 FFO estimates, CLI trades at an approximate 30% discount to office sector averages. In addition, the company trades at an 11% discount to our NAV [net asset value] estimates. We are setting our price target at $35.00 per share or approximately 10x 2008 FFO estimates.
Read the full analyst report on CLI
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