REIT financing makes its mark on New Jersey

Real Estate Weekly, June 26, 1996 by Thomas A. Rizk

Following a strong 1995, in which Cali was one of the country's top performing office REITs based on total return, Cali has already acquired $40 million in properties in the first six months of 1996 - and the company has the capability to spend well over $100 million more this year in acquisitions before returning to the capital markets for additional financing. In the past 18 months alone, Call has acquired over $200 million in properties.

REITs can access their vast amounts of capital immediately. As a result, they've reduced the completion time for closing deals by several months. Even deals worth over $100 million can be done in less than two months, as opposed to up to six months for traditional real estate companies, that may need three months just for loan approval.

For example, after a successful secondary offering in October 1995 in which the company sold 4.6 million shares and generated $85 million in capital, Cali completed a $97 million deal acquiring three property portfolios with 23 buildings and over 1.1 million square feet of space. In just six weeks, Cali performed due diligence, interviewed 109 tenants, completed three different contracts with three different sellers, and closed the deal. The aggregate acquisitions, covering properties in Mercer, Passaic, Atlantic and Monmouth counties, represented the largest New Jersey real estate transaction of the year.

Cali's most recent acquisition of Rose Tree Corporate Center in Media, Pennsylvania, in May of this year, took a mere three weeks to complete. The company's purchase price for this twobuilding, 260,000-square-foot complex was approximately $28 million. The deal brought Cali's portfolio to 43 properties totaling 4.5 million square feet.

With REITs such as Cali in the marketplace, sellers' expectations have been raised regarding how quickly and efficiently transactions can be completed. Companies under strict time deadlines to sell their properties are likely to turn to a REIT first.

REITs are also helping to make real estate a lower-leveraged business. Whereas a typical private real estate company may average 80 percent debt, Cali has consistently maintained a debt to market capitalization ratio of just 30 percent, and its 1996 first quarter ratio was 26 percent. Such low leverage provides greater stability and protection against downturns in the economy, thereby further strengthening REITs' positions in the marketplace.

The potential for flexible financing is also greater for REITS. During the first quarter, for example, Cali's bottom line was further enhanced by an interest rate swap and a tax-free exchange of property. The interest exchange agreement, covering $26 million of floating rate financing under the company's revolving credit facility, allowed Cali to fix its interest costs at 6.765 percent per annum through February 1999. Under the tax-free property exchange, Cali sold a 17 year-old building in Paramus, New Jersey, with a 56 percent occupancy, and used substantially all the proceeds to purchase 103 Carnegie Center in Princeton, New Jersey, which was 92 percent occupied, for approximately $11 million.

The unique ability to issue operating partnership units to property sellers offers REITs an additional advantage in closing deals. These units, which are convertible to stock in the REIT, are beneficial to the seller since they allow the seller to defer the tax liability it would have normally incurred upon sale of the property. Cali issued approximately 93,000 such units, for example, as part of a deal to the seller of a building Cali purchased in Fair Lawn, New Jersey, in 1995.

Top-performing REITs like Cali continue to use their financial power to increase their holdings-and this pleases the markets. Last year Cali increased its portfolio by 70 percent, through $157 million in acquisitions. The company's total return, with dividends reinvested, was approximately 50 percent. Nationwide last year, REITs acquired over $7.5 billion in properties, and showed an 18 percent total return.

REITs are revolutionizing real estate financing - but their full impact is still to come. At 1995 year-end, REITs held only 7.9 percent of institutionally owned real estate and $97 billion of the country's total real estate assets. But the REIT industry's share of the multi-trillion dollar commercial real estate market - and its influence on how real estate is financed throughout the country - are expected to continue their dramatic growth.

THOMAS A. RIZK President and Chief Executive Officer Cali Realty Corporation