March 12, 2020
Dear Mack-Cali Shareholders:
Nine months have now passed since Mack-Cali Realty Corporation’s (“Mack-Cali” or the “Company”) 2019 annual meeting. At that meeting, shareholders overwhelmingly voted for change, electing Bow Street’s full slate of four, independent director candidates to the Company’s Board of Directors (the “Board”) by a wide margin.
In response to this near-unanimous rebuke of the status quo, Mack-Cali made a series of public commitments to shareholders, including the promise of a robust strategic alternatives process overseen by an independent special committee. Mack-Cali has failed to honor these commitments. Following decades of underperformance, we were hopeful that last year’s election of four new, independent directors would catalyze meaningful change. 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.
As documented in recently released public correspondence between Mack-Cali and Rizk Ventures, CEO Michael DeMarco blatantly misled shareholders and the market regarding numerous approaches from a consortium that included ~$14 billion Apartment-REIT UDR Inc. While the extent of Mr. DeMarco’s casual deception is disappointing (and no doubt embarrassing for the Company), longtime shareholders will find it unsurprising. Recent press reports1 suggest the Rizk Ventures/UDR consortium was one of no less than five prospective bidders that have expressed interest in acquiring Mack-Cali since January of this year. We do not believe any of this interest was seriously evaluated or considered by the Company. This serial rejection of prospective suitors is particularly concerning in the context of Chairman William Mack’s reported efforts to privatize Mack-Cali for himself and his family.2 Enabled by his self-described “friends”3 at Bank of America Merrill Lynch, Mr. DeMarco has let it be known – time and again – that despite what he says publicly on conference calls, he is far more interested in preserving his role as CEO than he is in delivering value to Mack-Cali shareholders.
We have now learned that the so-called Shareholder Value Committee was, in reality, a special committee in name only. In direct contradiction to the promises Mack-Cali made to the market, this committee was neutered by a narrow mandate that prohibited contact with prospective bidders, a role Mr. DeMarco has continued to reserve for himself. Worse still, Mr. DeMarco has knowingly misrepresented the status of this committee to investors. In recent communications with the market, Mr. DeMarco implied the Shareholder Value Committee was in full effect and that he was consulting it for further action.4 However, we recently learned that this committee actually dissolved in December 2019.5 While this dissolution is undoubtedly worthy of 8-K disclosure, its glaring omission is consistent with Mack-Cali’s long history of weak governance and conflicts of interest. In fact, as recently as two weeks ago – more than two months after this committee and its advisors were dismissed – Mack-Cali’s website continued to list the Shareholder Value Committee on its governance page. It was only following the publication of reports detailing Mr. DeMarco’s attempt to obstruct the Rizk Ventures/UDR bid6 that all references to this committee mysteriously disappeared from the internet. Given the limited transparency surrounding the entire strategic review process, shareholders must question whether Mr. DeMarco has accurately reflected the conclusions of the Shareholder Value Committee or its advisors – none of which have been formally disclosed in any way to the shareholders who paid for them.
To make matters worse, Mr. DeMarco’s operational missteps have led to dramatic underperformance. Since his appointment as CEO in April 2017, Mack-Cali shares have underperformed the MSCI US REIT Index by ~3,400bps.7 His “Waterfront Strategy” – the combination of residential and office assets along the Jersey City coast – is underpinned by an untenable capital structure and has resulted in a steady erosion of value. Moreover, Mr. DeMarco has increasingly transferred value in Mack-Cali’s crown jewel residential assets from shareholders to private equity firm Rockpoint Group. Under Mr. DeMarco’s leadership, Funds from Operations have declined ~40%,8 and leverage has increased from ~7.5x EBITDA to ~9.7x EBITDA. In fact, over the past year, Mack-Cali’s shares have materially outperformed only when (i) Bow Street’s slate of directors was elected to the Board and (ii) reports of strategic interest in the Company surfaced in the press.
We had believed that the election of four new independent directors in 2019 would have appropriately impressed shareholders’ wishes upon management and Mack-Cali’s long-serving legacy Board members. However, the events that have unfolded since the annual meeting have demonstrated that Bow Street’s minority slate was insufficient to protect shareholders. Mr. DeMarco’s bullying demeanor and aggressive behavior have long been a liability for Mack-Cali and can no longer be tolerated. The time has come for a change in leadership.
As long-term investors, we are committed to maximizing the value of Mack-Cali to the benefit of all shareholders. Accordingly, we are nominating four additional, highly-qualified director candidates to the Board – Tammy Jones, Mahbod Nia, Howard Stern, and Akiva Katz of Bow Street. We believe that, in partnership with the four strong, independent directors elected to the Board last year (Alan Batkin, Frederic Cumenal, MaryAnne Gilmartin and Nori Gerardo Lietz), these new director candidates – one of whom was previously CEO of a publicly traded real estate company that he successfully sold – will facilitate a renewed focus on shareholder value under the leadership of a new CEO. While we continue to welcome constructive engagement from the Company and the Board, shareholders can no longer trust Mr. DeMarco’s stewardship, and can ill afford yet another year of broken promises and value destruction.
We look forward to discussing our plans for maximizing shareholder value with all of you in the weeks ahead.