September 28, 2020
Commercial Observer
Big Mack Attack: How MaryAnne Gilmartin Is Working to Turn Around Mack-Cali
By: Nick Rizzi
There’s nothing like an uprising from investors to oust a company’s chief executive to spice up a global pandemic.
After a proxy battle last year shook up the Mack-Cali Realty Corporation’s board of directors, one of New Jersey’s largest landlords faced another clash in mid-March when an activist investor called for the resignation of CEO Michael DeMarco.
The investors got their wish in July when DeMarco left his post after nearly five years as the pandemic waned on. In his wake, the company named real estate titan MaryAnne Gilmartin, who cut her teeth at Forest City Ratner, to serve as interim CEO for six months. (DeMarco couldn’t be reached for comment.)
“I think it’s an outstanding choice given her background both on the public and private side and her expertise in large, complex developments and working through complex structures,” Thomas Catherwood, an analyst at BTIG who covers Mack-Cali, said. “I think she’s uniquely suited for the task of taking over what is a complex company.”
CBRE’s Mary Ann Tighe said Gilmartin has a “persuasive ability” to get people to get on board with her plans — convincing the legendary Manhattan broker to help out on a Jersey City project, for instance — who has “outperformed” her entire career. Tighe first met Gilmartin when Forest City Ratner was pitching, and eventually won, the chance to build the New York Times Building at 620 Eighth Avenue.
“Nobody thought they were a serious contender for the job,” Tighe said. “Bruce Ratner did a great job, but I can tell you MaryAnne carried the day. All the New York developers were stunned and it was because she had a vision for The New York Times — as did Bruce clearly — and they were able to execute that.”
And it’s not just outsiders pleased with the choice. Ronald Dickerman, founder and president of Madison International Realty, which acquired a 5 percent stake in Mack-Cali last year, also heaped praise on Gilmartin.
“She’s very, very bright, very capable and I think that she will do well,” Dickerman said. “We certainly agree that the company needs to continue its evolution.”
Gilmartin, who is splitting her time with running her own firm, MAG Partners, said she’s “hit the ground running” in her nearly two months at the helm of Mack-Cali in order to bring about the change investors have been clamoring for at “warp speed.”
“I’ve done a couple of big moves in a little bit of time,” Gilmartin said. “This is an interim position, but we’re not going to wait to make strategic changes to move the company forward and to deliver better value to the shareholders.”
Banking on the ‘burbs
So far Gilmartin has quickened the pace of Mack-Cali’s strategy to sell off suburban office holdings to shore up its balance sheet and focus on multifamily and office properties in higher-density waterfront spots like Jersey City.
In July, Mack-Cali sold off its Madison, N.J., office property at 3 Giralda Farms for $7.8 million and in mid-September its Florham Park property at 325 Columbia Turnpike for an undisclosed amount, CoStar Group reported. On Sept. 17, Mack-Cali closed on a $160 million sale of a 10-building office portfolio in Morris County, N.J., to Onyx Equities, Taconic Capital Advisors, Axonic Capital and Machine Investment Group. Gilmartin said Mack-Cali expects to get rid of more in the next quarter.
“It gives us the opportunity to pay down corporate debt and also invest in the waterfront assets of Jersey City,” Gilmartin said.
Gilmartin has also shaken up Mack-Cali’s staff. She brought in new people to fill key roles at the company, including a new head of leasing she can’t announce yet as well as former Forest City Ratner and MAG Partners vets Rob Willis, Adam Greene and Ashley Cotton. And, in August, the company tapped Basis Investment Group CEO Tammy Jones to serve as lead independent director of its board.
The new hires haven’t come without some pain. In early September, Mack-Cali laid off about 20 people on its nearly 300-person staff. Gilmartin couldn’t give the details on the divisions targeted in the cuts but said some were related to the disposition of certain assets, while, for others, Mack-Cali outsourced the roles.
“Obviously, that’s always as a CEO one of the hardest things you’ll ever do, but as a public company, a bloated [general and administrative expense] is never a good thing, particularly in challenging times,” Gilmartin said.
Aside from staffing shakeups, Gilmartin has turned her focus strongly on the 4.5 million-square-foot Harborside office campus on Jersey City’s waterfront. The site has faced plenty of vacancies after the company started a $75 million renovation in 2018.
“I think it’s probably the most underrated piece of commercial real estate in the region,” Gilmartin said. “Repositioning Harborside as a campus on the Jersey City waterfront when we all go back to the office is a major, major priority of mine.”
To help those efforts, Gilmartin tapped CBRE’s Tighe to come across the Hudson River and help build a New Jersey-based team to lease up the property while pitching the property to Manhattan tenants.
“This isn’t one of these cases where you go and say ‘It needs everything,’” Tighe said. “You don’t have that reaction at all. You have the reaction that this is a very under-appreciated asset and MaryAnne has a very clear vision of what to do.”
Tighe will continue to market the property to the traditional tenants that filled it — financial institutions and law firms — but also wants to appeal to tech companies that might be attracted by the vibrant neighborhoods nearby.
“I think what New York City companies and brokers — because you’re always marketing to the brokers — haven’t seen is the evolution of Jersey City itself,” Tighe said. “Now you got this cool residential neighborhood that is all over.”
Plus, the area might save companies significant sums. CBRE marketing materials show tenants could pay nearly 32 percent less than the average rent in Downtown Manhattan and nearly 50 percent less than Midtown renting at Harborside.
Even with all the changes in a short time, there’s still a lot to overcome before Mack-Cali can shake off the past missteps and come out on the other side. The company has millions of square feet of its suburban portfolio to sell off and the pandemic likely cut the costs it could fetch for it.
“It’s probably going to be a little more challenging in the COVID environment,” Gilmartin said about the selloffs. “Everybody’s talking about the suburbs having a second coming. It’s hard for me to know if that’s true, but I can assure you we’re going to market into that story because there are definitely buyers out there who believe that.”
Mack-Cali’s stock price has dropped by nearly 9 percent since January; and, in July, before Gilmartin took the helm, Fitch Ratings downgraded the REIT to a negative outlook of BB-. Fitch cited the company’s “high leverage, weak liquidity coverage, active development program, limited unsecured debt and equity capital access and moderate complexity from joint venture (JV) investments” as reasons for the drop.
BTIG’s Catherwood said that while the company has some amazing land holdings in Jersey City and Weehawken, its huge debt load — it’s carrying a debt to equity ratio of 1.38 — makes it hard to capitalize on it.
“I don’t think they have the time horizon to fully build out their land bank in the company’s current structure,” Catherwood said. “Something is going to need to happen: whether it’s a different type of partnership, whether it’s some sort of recapitalization, whether it’s an outright sale. The problem it faces right now is it’s a company going through growing pains.”
The weight
A lot of Mack-Cali’s debt came from the company’s huge push into the multifamily market nearly a decade ago.
Mack-Cali started in 1969 as Cali Associates when John Cali built his first office property in Cranford, N.J., The New York Times reported. He kept going and developed office buildings all around New Jersey, including the International Financial Tower in Jersey City.
The company went public in 1994, and became Mack-Cali when it merged with fellow New Jersey firm the Mack Company in 1997, The Wall Street Journal reported. Things started to take a turn for the worse when former Mack Company head William Mack left in 1999, and Mitchell Hersh became CEO.
Hersh started a huge push into the multifamily market in 2011, which kicked into high gear in 2012 when Mack-Cali acquired residential developer Roseland Partners for $134.6 million, the Journal reported. Since then, the company has built huge luxury developments like Urby and the Soho Lofts, both in Jersey City.
However, Hersh faced criticism for his brash management style. The company, too, kept underperforming in the early 2010s while the rest of the real estate sector improved. Hersh left in 2015, with Mitchell Rudin taking over as CEO and DeMarco as president. DeMarco was later bumped to CEO and Rudin became a vice chairman. Rudin eventually left for Savills in 2018.
DeMarco and Rudin faced the task of dealing with Mack-Cali’s high vacancy rate throughout its nearly 25 million-square-foot suburban office portfolio while it carried one of the highest levels of debt for any office REIT, the Journal reported.
That high debt level sprang from the company’s controversial push into multifamily, but DeMarco had no other choice but to go all-in on the strategy, Catherwood said.
“The previous management was stuck with a very challenging situation,” Catherwood said. “Really, the only strategy left for them, short of selling the company, was to sell their suburban offices to use that capital to develop more residential assets.”
The company started to aggressively sell off its suburban portfolio to put the money into its waterfront holdings, with it dispossessing $528 million worth of properties in 2017 alone and nearly $400 million in 2018, as Commercial Observer previously reported. It was around this time that Ronald Dickerman saw potential in Mack-Cali, and Madison International bought 4.5 million shares in February 2019.
“It’s a listed property company trading at a large discount to [net asset value] which is executing a transition that, if successful, will leave them with a major concentration of Class A residential and office directly on the Jersey side of the Hudson River across from Hudson Yards, Manhattan West and Brookfield Place,” Dickerman said. “If the company continues executing on the plan, in our view the company will either be much more attractive to REIT shareholders or is likely to sell themselves.”
In DeMarco’s own words, there was no better person to lead the company’s change than himself. In a 2017 interview with NJ.com, DeMarco called himself a “turnaround expert” and a “stone-cold killer.” He had similarly high praise for himself in a 2018 interview with CO.
“I only have one speed; it’s just the way I am,” he said. “If I do something, I do it very well.”
After the battle
But not everybody was as confident in DeMarco as he was in himself. Investment firm Bow Street, which owns a 4.5 percent stake in Mack-Cali, started a proxy battle in 2019 to install more members on the board after Mack-Cali turned down a $2.4 billion takeover bid that would’ve spun its office portfolio into a separate REIT, The Real Deal reported.
After a very public back-and-forth, Bow Street eventually succeeded and got four members added to Mack-Cali’s board, including Gilmartin. It was then that Gilmartin realized the problems with the company couldn’t be fixed with a simple board shakeup.
“It turned out to be a lot harder to make a difference just because of the way the board was structured,” Gilmartin said. “Once you’re inside, while you’re not under the hood inside the company, you start to appreciate how governance works, the board dynamic; the level of engagement on the part of the board members and all that, to me was, was deeply disappointing and there was lots of room for improvement.”
In March, Bow Street started a push to replace DeMarco, writing in an open letter that, “It is now clear that the rot at Mack-Cali goes far deeper than any of us knew and that more comprehensive action is required to protect shareholders’ investment.”
“Having lost two proxy battles in successive years, I haven’t come across that in any other REIT,” Catherwood said. “To completely overhaul the board, to completely overhaul the corporate governing structure and then the change in the C-suite is really indicative of a sea change at the company.”
Gilmartin took over either for six months or until the company finds a permanent CEO. Mack-Cali will in turn pay MAG Partners a monthly fee of $150,000, a sign-on bonus of $300,000 and a $200,000 completion bonus, according to Securities and Exchange Commission filings.
Gilmartin said she’s up for the task of changing the company while continuing to run MAG Partners — which she said is having its staff step up to help run it — and searching for a permanent CEO. She’s confident in Mack-Cali because she said it already has most of what it needs to turn around.
“It’s been really intense, but really, really great,” she said. “You need great assets and you need great people. Mack-Cali has both.”
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