Veris Residential, Inc. · NYSE:VRE
Veris Residential — Mack-Cali Realty — Proxy Contest (May 2019)
65 slides from Veris Residential's proxy contest presentation, May 22, 2019
Slide 1: 15 Years is a Long Time: The Case For Change At Mack-Cali
15 Years is a Long Time: The Case For Change At Mack - Cali May 2019
Slide 2: Disclaimer
Disclaimer 1 This presentation, the materials contained herein, and the views expressed herein (this “Presentation”) are for discussion and general informational purposes only . This Presentation does not have regard to the specific investment objective, financial situation, suitability, or the part
Slide 3: Warren Buffett quote on long-term and directors
2 (1) Buffett, Warren. The Essays of Warren Buffett: Lessons for Corporate America , Selected, Arranged, and Introduced by Lawrence A. Cunningham (1998), available at http://csinvesting.org/wp - content/uploads/2015/05/Essays - of - Warren - Buffett - _ - Lessons - for - Corporate - America_Cunningh
Slide 4: Analyst and CEO quotes on Mack-Cali
3 (1) Green Street Research report 4/13/1998 (2) Unadjusted stock price as of 3/15/2019 (3) Blomberg transcript: Mack - Cali Q1 2018 earnings call 5/3/2018 “The [Mack - Cali] deal…brought the valuable relationships and deal - making skills of Bill Mack to the REIT” - Analyst Research Note from April
Slide 5: Table of Contents
Table of Contents 1) Executive Summary 2) 15 Years of Underperformance: The Legacy of Mack - Cali’s Current Board 3) Governance: Entrenched Board, Myriad Conflicts 4) Situation Today: Trapped In Current Structure (Hope is Not a Strategy) 5) Six Fallacies: the Board’s Side of the Story 6) A New Day a
Slide 6: Executive Summary
Executive Summary Bow STREET
Slide 7: The Case For Long-Overdue Structural Change at Mack-Cali
The Case For Long - Overdue Structural Change at Mack - Cali 6 Despite a wide - spread real estate boom, Mack - Cali’s Board has destroyed shareholder value for decades – detailed review of strategic alternatives is required to unlock shareholder value After decades of underperformance, mismanagemen
Slide 8: Bow Street: Who We Are and Why We Are Here
Bow Street: Who We Are and Why We Are Here 7 We believe the current Board has failed Mack - Cali shareholders; new Board leadership essential to determining the right strategic path forward Bow Street LLC owns ~4.5% of Mack - Cali’s outstanding shares • Bow Street LLC is a New - York based investmen
Slide 9: Board has Overseen a Massive Destruction of Value
Board has Overseen a Massive Destruction of Value… 8 During a period of unprecedented asset appreciation, CLI’s Board has overseen extraordinary underperformance • $1.00 invested in Mack - Cali at the inception of the MSCI US REIT Index (RMZ) in 2005 is worth $0.92 today (inclusive of dividends); co
Slide 10: A Result of Consistently Poor Operating Performance
…a Result of Consistently Poor Operating Performance… 9 Mack - Cali’s operating metrics have steadily deteriorated over the years • Over the last 15 years, shareholders have seen their dividend decline ~70% , free cash flow per share decline ~50% , and stock price decline ~50% • Over this same perio
Slide 11: Left Mack-Cali Structurally Impaired
…that has Left Mack - Cali Structurally Impaired 10 Mack - Cali cannot realize NAV in its current structure; the Company’s financial position requires either a strategic transformation or significantly dilutive equity issuance • We believe Mack - Cali has no credible path to reducing its considerabl
Slide 12: Governance Failure: Board has Not Been Held Accountable
Governance Failure: Board has Not Been Held Accountable… 11 William Mack and his longtime fellow “independent” directors have retained their Board seats despite overseeing historic underperformance • As Board Chairman since 2000, Mr. Mack is highly conflicted – throughout his tenure he has competed
Slide 13: And Has Overseen Decades of Failed Strategies
…And Has Overseen Decades of Failed Strategies 12 (1) Bloomberg data $0 $10 $20 $30 $40 $50 $60 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 CLI Price / Sh ($) Since 1997 Combination of Mack and Cali Board has watched shareholder value
Slide 14: Strategic Review & New Leadership: Now is the Time to Act
Strategic Review & New Leadership: Now is the Time to Act 13 Mack - Cali’s Board has remained steadfastly opposed to meaningful structural change • The time for more incrementalism has passed; CLI’s Net Asset Value has not grown in 20 years • Bow Street has been contacted by over ten parties that wo
Slide 15: A New Day at CLI: Structural Change, Independent Oversight
A New Day at CLI: Structural Change, Independent Oversight 14 Bow Street is proposing to remove four of Mack - Cali’s long serving Directors, including its Chairman; we have nominated four highly capable, independent Directors in their place • Bow Street nominees bring diverse, highly relevant backg
Slide 16: Years of Underperformance: The Legacy of Current Board
15 15 Years of Underperformance: The Legacy of Mack - Cali’s Current Board
Slide 17: Staggering Long Term Destruction of Shareholder Value
Staggering Long Term Destruction of Shareholder Value 16 Mack - Cali vs. office and apartment REIT indices over prior 15 years (1) 0 50 100 150 200 250 300 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Price Index (100 3/15/2004) Mack-Cali Office REIT Index Apartmen
Slide 18: CLI Has Underperformed ALL Relevant Indices over time
CLI Has Underperformed ALL Relevant Indices over time… 17 We struggle to identify a meaningful period over the last 20 years during which Mack - Cali has not significantly underperformed CLI has underperformed its self selected peers by 100% over the past 7 years and almost 400% over the past 20 yea
Slide 19: Underperformed ALL Self Selected Peers: 3-, 5-, 7-Years
….Underperformed ALL ( Self Selected ) Peers: 3 - ,5 - ,7 - Years… 18 - 1% 2% 6% 12% 13% 18% 19% 20% 22% 22% 29% 31% 33% 34% 35% 44% 48% 49% 54% 55% 77% 77% -20% 0% 20% 40% 60% 80% 100% Paramount Group Empire State Realty Mack-Cali Highwoods Washington REIT Bloomberg Office REIT… Corporate Office Co
Slide 20: Underperformed ALL Self Selected Peers: 10-, 15-Years
….Underperformed ALL ( Self Selected ) Peers: 10 - , 15 - Years… 19 10 - Year Total Return (1) 8% 11% 26% 52% 89% 90% 125% 162% 168% 248% 280% 283% 294% 434% 0% 100% 200% 300% 400% 500% Mack-Cali Cousins Properties Brandywine Realty Lexington Realty Trust Washington REIT Equity Commonwealth Corporat
Slide 21: Board Attempted To Mask Underperformance Quantitatively
Board Attempted To Mask Underperformance Quantitatively… 20 • Beginning in 2018, Mack - Cali’s compensation committee altered its peer group to give the appearance of improvement against peers for the purposes of executive compensation; even against this significantly weaker peer group, Mack - Cali
Slide 22: Qualitatively Self-Assessment
…and Qualitatively 21 Mack - Cali’s Self - Assessment, Presented Analyst Day, January 2019 (1) Alternative reality? Board and Company grade themselves “A” on most objectives “We had a very good quarter, our tenth in a row as a team . As we delivered positive results for 2017 and laid the beginning o
Slide 23: No Accountability for Broken Promises
No Accountability for Broken Promises… 22 Mack - Cali has a long track - record of overpromising and underdelivering What Company Said… …What Actually Happened “My number for 2018 just to make it pretty emphatically is above $2 …. It won’t be below $2 (per share) .” (1) – CEO DeMarco 11/8/2017 2018
Slide 24: Board Neglect Has Driven Increasingly Deep NAV Discount
…Board Neglect Has Driven Increasingly Deep NAV Discount 23 CLI’s NAV discount (1) has persistently deepened over the last several years -60% -50% -40% -30% -20% -10% 0% Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Mack - Cali Discount to NAV Trading Discount To Company Midpoint NA
Slide 25: Governance: Entrenched Board, Myriad Conflicts
24 Governance: Entrenched Board, Myriad Conflicts
Slide 26: Green Street Research 2005 quote
25 (1) Green Street Research report 10/17/2005 “CLI’s poor corporate governance… all but ensures the company will not be a target unless Chairman Bill Mack wants it to be” - Analyst Research Note from October 17, 2005 (14 Years Ago) CLI Stock Price: $41.12/share (~100% higher than current levels)
Slide 27: Excerpt from Q4 2017 Earnings Call Transcript
26 Excerpt from Mack Cali‘s Q4 2017 Earnings Call Transcript, 2/22/2018 (1) Analyst: “I’m going to rattle off a handful of dates…Mike, and you're going to tell me what they are. 1999, 2004, 2005, 1999, 2004, 1997, 1994, 2016 and 1997?” CEO Michael DeMarco: “All dates with major interest rates rises?
Slide 28: Foundations are Rooted in Bad Governance
Mack - Cali’s Foundations are Rooted in Bad Governance… 27 At its effective founding in 1997, Mack - Cali was structured to benefit Chairman Bill Mack and his family at the expense of common stockholders • A weak conflict policy has permitted Chairman Mack to pursue over $70 billion (1) of value enh
Slide 29: Weak Governance Has Persisted to this Day
…And Weak Governance Has Persisted to this Day… 28 Mack - Cali has the worst corporate governance score of any of the 79 REITs ranked by Green Street research • Mack - Cali scores a 14 out of 65 on Green Street's assessment of Board make - up Green Street current governance rankings for public REITs
Slide 30: Overseen By an Entrenched Board Loyal to Bill Mack
…Overseen By an Entrenched Board Loyal to Bill Mack 29 A Detailed Look at Chairman Mack’s “Independent” Board: • Chairman Mack has significant influence and long - standing relationships with numerous CLI Board members from his time at AREA, Mack Real Estate Group, FCB Financial Holdings, and NRDC A
Slide 31: Investors and Analysts have Long Clamored for Change
Investors and Analysts have Long Clamored for Change… 30 …with which Wall Street research analysts concur Steady drumbeat of investor concern over the years… “ultimately, the proof is in the pudding, right. And if the stock is where the stock is, at this point, perhaps fresh perspectives are needed
Slide 32: CLI's Board has Remained Deeply Entrenched
…Yet CLI’s Board has Remained Deeply Entrenched 31 - 5 10 15 20 25 Michael DeMarco (CEO) Rebecca Robertson Alan Bernikow David Mack Nathan Gantcher William Mack (Chairman) Alan Philibosian Vincent Tese Irvin Reid Years On Board 4 directors identified for replacement by Bow Street have served for a c
Slide 33: Status Quo Has Been Preserved by Weak Governance
Status Quo Has Been Preserved by Weak Governance… 32 • Stockholders can’t act outside of annual meeting - Unanimous written consent is required to act in lieu of a stockholder meeting, thus severely limiting shareholders’ ability to effect change • Bar for director removal is unusually high, driving
Slide 34: Significant Unmitigated Conflicts for the Mack Family
…and Significant Unmitigated Conflicts for the Mack Family 33 Mack - Cali’s weak conflict policy has allowed Chairman Bill Mack to transact extensively across Greater New York/North East, creating significant value for himself and his (non - CLI) investors • At time of combination in 1997, Bill Mack
Slide 35: Why is Board so Opposed to Considering a Sale?
Why is Board so Opposed to Considering a Sale ? 34 In a sale, Chairman Mack’s tax liability is likely to be significant and meaningfully higher than common shareholders Over the years, Mack - Cali is rumored to have rebuffed numerous prospective bidders; our recent experiences with the Company and i
Slide 36: Situation Today: Trapped In Current Structure
Situation Today: Trapped In Current Structure (Hope is Not a Strategy) 35
Slide 37: CEO quote on asset sales and debt
36 “Anyone who thinks that I could have just sold assets to pay down debt doesn't realize when you sell at 7 caps or 6.5 caps and you pay down debt, you don't actually work down your net debt - to - EBITDA. The only way you can do that is by selling either land or selling Roseland or raising equity
Slide 38: Absent Structural Change, CLI's Value Will Continue To Erode
Absent Structural Change, CLI’s Value Will Continue To Erode 37 Mack - Cali is trapped in its current structure ; absent immediate change we believe value erosion will persist • Mack - Cali’s disparate assets do not belong together, resulting in lowest common denominator valuation – Bundling develop
Slide 39: Disparate Asset Base Hinders Value Realization
Mack - Cali’s Disparate Asset Base Hinders Value Realization 38 Public markets value Mack - Cali (and other diversified real estate companies) using the lowest common denominator of its underlying assets • Today’s REIT market penalizes companies with diversified assets - Mack - Cali will never get c
Slide 40: Board Has Overseen Creation of Serious Leverage Problem
Board Has Overseen Creation of Serious Leverage Problem… 39 Mack - Cali’s elevated leverage profile is a poor fit for public markets Mack - Cali’s leverage is higher than any peer average (1) 9.5x 8.4x 6.7x 6.6x 6.4x 6.1x 5.8x 4.9x 4.6x 0x 1x 2x 3x 4x 5x 6x 7x 8x 9x 10x Mack-Cali Malls Urban Office
Slide 41: Leverage Problem Cannot be Solved Organically
…that Cannot be Solved Organically 40 Mack - Cali does not have a credible path to adequately de - lever absent transformational change 1) Asset sales are dilutive to cash flow – While reducing complexity, office asset divestitures likely to result in dividend cuts - selling 8% - 12% cap rate suburb
Slide 42: Mack-Cali Has Tried and Failed To Reduce Leverage
Mack - Cali Has Tried and Failed To Reduce Leverage… 41 Despite management’s recently completed ~$2+ billion divestment program, Mack - Cali’s leverage has actually increased over time Date Leverage What Management Said at the Time Leverage Up Or Down? February 2016 (1) 7.7x “ The Company has a plan
Slide 43: Management is Fighting a Losing Battle
…but Management is Fighting a Losing Battle… 42 Even under highly optimistic scenarios, Mack - Cali’s leverage is likely to remain elevated • Even with full lease - up of waterfront Mack - Cali is unable to get leverage below ~8.5x • Given development pipeline and peer levels, we believe prudent pub
Slide 44: CLI's Cash Flow Does not Support Current Dividend
$1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 FFO / Sh … and CLI’s Cash Flow Does not Support Current Dividend 43 Despite cutting the dividend by nearly 70% over the last 15 years, Mack - Cali’s cash flows still do not support its current dividend • The Board has overseen a period of steadily declining
Slide 45: The Likely Outcome: Significant Future Equity Dilution
The Likely Outcome: Significant Future Equity Dilution 44 Significant equity required to bring leverage in - line with peers • ~$700m+ required to bring leverage to acceptable public market levels • Management has indicated equity raises will take place at Roseland and through project - level JVs •
Slide 46: Management is Already Messaging Dilution to Investors
Management is Already Messaging Dilution to Investors 45 Mack - Cali management has only recently taken a more straightforward approach with investors regarding the Company’s equity needs: “[Leverage] should blend below 8 times… We may have to raise equity in order to get there” (1) - CEO Michael De
Slide 47: Wall Street Concurs: Analysts Uniformly Bearish on CLI
Wall Street Concurs: Analysts Uniformly Bearish on CLI… 46 Other than two upgrades catalyzed by Bow Street’s involvement, Mack - Cali does not a have a single “Buy” rating amongst the eight analysts covering its stock; average analyst price target: $21/share (1) Prior to price target increase due to
Slide 48: Analysts Consistently Call for Strategic Change
…and Consistently Call for Strategic Change 47 “ We think if the Board is not modified the shares quickly trade to below $20/ sh ” (5/6/2019) “As we have long referenced, we think the CLI Board is too entrenched and in need of an overhaul .” (4/16/2019) “At over 9x net debt/ EBITDA, the leverage rem
Slide 49: A Cautionary Tale for Board: Macerich (MAC)
A Cautionary Tale for Mack - Cali’s Board: Macerich (MAC) 48 • Macerich Inc is one of the largest shopping mall REITs in the United States • In 2015, suffering from challenged business conditions and excessive leverage, Macerich’s Board of Directors rejected a $95.50 /share bid from Simon Property G
Slide 50: Six Fallacies: the Board's Side of the Story
Six Fallacies: the Board’s Side of the Story 49
Slide 51: Fallacy #1: "Give Us A Year"
Fallacy #1: “Give Us A Year” 50 Management argues that the Company may be better positioned for a sale if given more time But… with time comes execution and market risks 1) Absent a transaction…shareholders are likely to be diluted with equity issuance 2) Absent a transaction…debt is likely to incre
Slide 52: Fallacy #2: Company Mischaracterizes Bow Street Goals
Fallacy #2: Company Mischaracterizes Bow Street Goals 51 • As significant shareholders, we endeavored to work constructively with Mack - Cali to unlock significant value that we believe is trapped in its current structure • To this end, we approached Mack - Cali with a constructive proposal to serve
Slide 53: Fallacy #3: "NAV Creation" Myth
Fallacy #3: Mack - Cali’s “NAV Creation” Myth 52 CLI’s Board and management argue that significant NAV growth has occurred since new management took over in 2016; in reality, NAV has been essentially flat over this period • Company cited NAV appreciation since Mr. DeMarco became President in June 20
Slide 54: Fallacy #4: CLI Can Grow/Lease Out of its Cash Flow Strain
Fallacy #4: CLI Can Grow/Lease Out of its Cash Flow Strain 53 (1) Assumes rent / ft of $45, 10 - year lease, $50 / ft TI package (spent in year 1), 6 months of free rent, 5% leasing commission , and lease starts middle of the year Leasing up the Waterfront is not a panacea for Mack - Cali’s leverage
Slide 55: Fallacy #5: JVs in Residential Business Create Value
Fallacy #5: JVs in Residential Business Create Value 54 By using dilutive third - party joint - ventures to finance its residential development, Mack - Cali is essentially transferring value from shareholders to its capital partners (e.g. Rockpoint ) • Given its cash - flow constraints, Mack - Cali
Slide 56: Fallacy #6: All is Well Since Michael DeMarco Came Aboard
Fallacy #6: All is Well Since Michael DeMarco Came Aboard 55 Current CEO Michael DeMarco was appointed President on June 3, 2015 when Mack - Cali stock was on its lows, there has been no durable stockholder value created since his appointment • While we believe Mr. DeMarco and his team have made a c
Slide 57: A New Day at Mack-Cali: the Path Forward
A New Day at Mack - Cali: the Path Forward 56
Slide 58: Now is the Time For New Board Leadership
Now is the Time For New Board Leadership 57 The 4 Directors Bow Street seeks to replace have combined tenure of over 80 years • Mack - Cali’s long serving Board has overseen massive destruction of shareholder value over the last 15 years; 7 of 11 directors from this period remain on the Board (inclu
Slide 59: Bow Street Open to Settlement, Not "Window Dressing"
Bow Street Open to Settlement, Not “Window Dressing” 58 On May 13 th , 2019 Bow Street initiated what we believed to be a constructive dialogue with Mack - Cali’s Chairman; he abruptly terminated these discussions on May 17, 2019 • Over two days of discussions Bow Street and Mack - Cali agreed to th
Slide 60: Our Nominees: Alan Batkin
Our Nominees: Alan Batkin 59 • Former Vice Chairman of Eton Park (6 years), previously Vice Chairman of Kissinger Associates (16 years), Lehman Brothers Investment Banker (14 years as Managing Director), Coopers & Lybrand (4 years) • Mr. Batkin has extensive public board experience, as he has served
Slide 61: Our Nominees: Frederic Cumenal
Our Nominees: Frederic Cumenal 60 • Former CEO and President of Tiffany’s and Co, preceded by 15 years of senior brand/consumer leadership positions at LVMH Group • Currently on the Board of Directors of Blue Nile Inc (Nasdaq: NILE, privatized in 2017), formerly on Boards of Directors of Tiffany & C
Slide 62: Our Nominees: MaryAnne Gilmartin
Our Nominees: MaryAnne Gilmartin 61 • Co - Founder/CEO of L&L MAG, a New - York based real estate development firm, Director at Jefferies Financial Group, Inc. • Former CEO/President Forest City Ratner Companies, LLC (2013 – 2018); Forest City Executive since 1994 • Member of the Executive Committee
Slide 63: Our Nominees: Nori Gerardo Lietz
Our Nominees: Nori Gerardo Lietz 62 • Professor at Harvard Business School teaching Real Estate Private Equity, President of Areté Capital - a real estate advisory firm • Formerly a Partner at Partners Group, a $50 billion Swiss asset manager, served as Chief Strategist and Investment Committee Chai
Slide 64: Shareholders Have a Clear Choice to Make
Shareholders Have a Clear Choice to Make 63 • Newly constituted independent Board of Directors, mandated to create value for all shareholders • Focus on meaningful solutions that address the Company’s structural issues – its leverage and cash flow needs • A commitment to explore all strategic altern
Slide 65: Bow Street
BOW STREET