The Mack Daddy

Michael DeMarco, the CEO of Jersey City-based REIT Mack-Cali, on the firm’s $2B divestment of tri-state office properties and why it’s betting big on the Hudson County waterfront

August 19, 2019 01:00 PM

Michael DeMarco

Despite Mack-Cali’s recent board member defections and a $22 million net income loss posted in the second quarter, company CEO Michael DeMarco characterized this moment as a time no busier than any other in his career. For one, the latest board departures at the REIT, which brings the total to eight out of 11 members who’ve left since DeMarco joined Mack-Cali as COO in 2015, are a natural consequence of redefining the direction of the company, he said.

Shifting the firm’s focus from suburban offices to multifamily and office properties on the Hudson County waterfront has taken arduous work and a considerable amount of turnover, said DeMarco, who replaced Mitch Rudin as CEO in 2017. But the results, he said, are reflected in the growth of Mack-Cali’s stock, from about $17.30 when he joined the REIT to $23.24 at the end of the second quarter. 

A Vornado Realty Trust and Lehman Brothers alum, DeMarco spoke with The Real Deal about Mack-Cali’s residential development pipeline, selling off its tri-state office holdings and what lies ahead.

What do you make of the second-quarter losses? We had a large depreciation shield that then creates a negative net income for the quarter. The way we judge [our performance] is by funds from operation, which is more like a type of cash flow. Ours was about $40 million for the quarter, so we were fine. We don’t do quarter-to-quarter guidance, but the market is pretty good for multifamily, as we expressed in our [earnings] call.

Do you think that Mack-Cali has done enough to carry out the wishes of the stakeholders since you’ve been with the company? My long-standing shareholders are Morgan Stanley, Frontier, CenterSquare, Columbia Threadneedle, First Manhattan and Fidelity, which has been in and out of the stock. We’ve totally changed over the company. We used to be over 85 percent suburban. We’re probably 30 percent suburban now. We were 10 percent multifamily, and we’re going up to 50 percent in the next year or so.

Just before the annual investors meeting this year, the board agreed to rescind the “Mack Agreement” — which allowed the Mack family to nominate up to three directors — and opt out of the Maryland Unsolicited Takeover Act (MUTA), which allowed the board of directors to reclassify itself without a shareholder vote. How did these decisions come about? Is this an attempt to position the company for a potential sale? We have meetings about corporate governance and have taken a look at what best practices are. We had several conversations with ISS and Glass Lewis, and then this whole proxy battle came. So, we just came to the conclusion that the Mack Agreement was outdated. MUTA was the same conversation.

What do you see up ahead for the company? I think we’ll sell more office in the upcoming months and possibly reinvest it into some more multifamily. We’re developing a lot more multifamily, so the shift should go 50-50 in the next few quarters. Waterfront-wise, I think we’ll find ourselves concentrated in Hudson County probably 75 to 80 percent in the next few quarters. 

Tell us about the deal you closed in April to acquire the 377-unit Soho Lofts development in Jersey City for $263.8 million. We’re absorbing apartments at an outstanding rate. We have experienced consistently that when we deliver product, our product is about 98 percent rented, and we keep getting rental growths. The recent woes that are afflicting the New York City residential community, with the changes in the affordable housing rules and the stabilization rules, is very unlikely to get a plethora of apartments built, which I think is going to slow down that market and will bring Jersey City more into the forefront.

Mack-Cali offloaded a 56-building portfolio in Westchester and Fairfield for $487.5 million in March of this year (see our ranking of top Westchester office sales on page 58). How much more are you planning to offload? We will continue to look at our suburban assets over the next several quarters as we look to exit that market. We have pretty robust, high-value multifamily development, and we have other projects we intend to undertake over the next several quarters.

Every quarter we look at what we need to get rid of and whether or not to deploy our money in something else. We’ve been consistently redeploying [our funds] into multifamily, which we think is a better use than suburban office.

Multifamily is a proven winner in this marketplace. The two best bets in the real estate market around the country are to either own industrial or multifamily. And you can’t fight a trend, right?

Where do you see the suburban office market heading? Where is there room for growth? New Jersey is a great place to live. It is a great place to work, but certain sectors are getting pinched. We used to be the tech hub for bioresearch, chemistry and medicine, and we’ve really lost that niche. There’s a lot more life sciences buildings being built outside of New Jersey than in. I think we might need to have a rotation back to what works and see how that goes.

I don’t know that I see growth. It depends on the demographics. You might see other nexuses that make sense for people. Some of the hottest markets in the state are downtown Short Hills, Summit and Montclair because people want to have the combination of urban living and transit.

What do you think about trendy multifamily configurations like co-living and micro-apartments? Are you looking to get in on those? We don’t think too much about it. My buildings have a plethora of choices. My newer buildings are getting smaller because it’s a little bit more expensive to live, and you have to be efficient. My older buildings have medium and large apartments. There will be niches [for co-living and micro-apartments], but it won’t work for everyone. Some people would rather share a three-bedroom than have a studio. That’s just the way things are.

—This interview was edited and condensed for clarity.

Related Article

Robert Martin Company’s Tim Jones (left) and Greg Berger

Beating a benchmark

Landlords racing upstate face a long haul

Slash and grab

Land banks: a developer’s savior?