UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2005

 

or

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from	to

 

Commission File Number :	1-13274

 

 

	Mack-Cali Realty Corporation
(Exact name of registrant as specified in its charter)

 

 

Maryland		22-3305147
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

 

11 Commerce Drive, Cranford, New Jersey		07016-3501
(Address of principal executive offices)		(Zip Code)

 

 

	(908) 272-8000
(Registrant’s telephone number, including area code)

 

 

	Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES X NO ___

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) YES X NO ___

 

As of August 1, 2005, there were 61,840,145 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.

 

 

---

 

 

MACK-CALI REALTY CORPORATION

 

FORM 10-Q

 

INDEX

 

Part I

Financial Information

Page

 

Item 1.

Financial Statements:

 

Consolidated Balance Sheets as of June 30, 2005

and December 31, 2004

4

 

Consolidated Statements of Operations for the three and six month

periods ended June 30, 2005 and 2004

5

 

Consolidated Statement of Changes in Stockholders’ Equity for the

six months ended June 30, 2005

6

 

Consolidated Statements of Cash Flows for the six months

ended June 30, 2005 and 2004

7

 

Notes to Consolidated Financial Statements

8-38

 

Item 2.	Management’s Discussion and Analysis of Financial Condition
		and Results of Operations		39-57

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

58

 

Item 4.

Controls and Procedures

58

 

Part II

Other Information

 

Item 1.

Legal Proceedings

59-60

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

Item 3.

Defaults Upon Senior Securities

61

 

Item 4.

Submission of Matters to a Vote of Security Holders

61

 

Item 5.

Other Information

61

 

Item 6.

Exhibits

61

 

Signatures

62

 

 

2

 

---

 

 

MACK-CALI REALTY CORPORATION

 

Part I – Financial Information

 

 

Item 1.

Financial Statements

 

The accompanying unaudited consolidated balance sheets, statements of operations, of changes in stockholders’ equity, and of cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods.

 

The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in Mack-Cali Realty Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

 

The results of operations for the three and six month periods ended June 30, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

 

3

 

---

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)

 

ASSETS	June 30, 2005 (unaudited)	December 31, 2004
Rental property
Land and leasehold interests	$    629,471	$    593,606
Buildings and improvements	3,509,941	3,296,789
Tenant improvements	270,642	262,626
Furniture, fixtures and equipment	7,389	7,938
	4,417,443	4,160,959
Less – accumulated depreciation and amortization	(660,346)	(641,626)
	3,757,097	3,519,333
Rental property held for sale, net	--	19,132
Net investment in rental property	3,757,097	3,538,465
Cash and cash equivalents	15,710	12,270
Investments in unconsolidated joint ventures	60,613	46,743
Unbilled rents receivable, net	85,821	82,586
Deferred charges and other assets, net	186,964	155,060
Restricted cash	9,261	10,477
Accounts receivable, net of allowance for doubtful accounts
of $1,482 and $1,235	5,750	4,564
Total assets	$4,121,216	$3,850,165
LIABILITIES AND STOCKHOLDERS’ EQUITY
Senior unsecured notes	$1,330,356	$1,031,102
Revolving credit facility	163,000	107,000
Mortgages, loans payable and other obligations	472,913	564,198
Dividends and distributions payable	48,091	47,712
Accounts payable, accrued expenses and other liabilities	74,054	57,002
Rents received in advance and security deposits	46,556	47,938
Accrued interest payable	27,132	22,144
Total liabilities	2,162,102	1,877,096
Minority interests:
Operating Partnership	415,623	416,855
Consolidated joint ventures	--	11,103
Total minority interests	415,623	427,958
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, 10,000
and 10,000 shares outstanding, at liquidation preference	25,000	25,000
Common stock, $0.01 par value, 190,000,000 shares authorized,
61,704,554 and 61,038,875 shares outstanding	617	610
Additional paid-in capital	1,671,909	1,650,834
Dividends in excess of net earnings	(146,526)	(127,365)
Unamortized stock compensation	(7,509)	(3,968)
Total stockholders’ equity	1,543,491	1,545,111
Total liabilities and stockholders’ equity	$4,121,216	$3,850,165
The accompanying notes are an integral part of these consolidated financial statements.

 

 

4

 

---

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)

 

	Three Months Ended		Six Months Ended
	June 30,		June 30,
REVENUES	2005	2004	2005	2004
Base rents	$137,171	$123,730	$270,312	$244,798
Escalations and recoveries from tenants	20,730	15,822	39,142	31,019
Parking and other	5,565	2,480	7,461	5,953
Total revenues	163,466	142,032	316,915	281,770
EXPENSES
Real estate taxes	20,474	16,565	39,591	32,923
Utilities	12,413	9,490	24,362	20,523
Operating services	22,602	19,020	43,980	36,356
General and administrative	8,347	8,685	15,774	15,082
Depreciation and amortization	38,532	31,568	74,339	61,282
Interest expense	30,363	26,512	58,761	55,549
Interest income	(120)	(220)	(184)	(940)
Total expenses	132,611	111,620	256,623	220,775
Income from continuing operations before
minority interests and equity in earnings of
unconsolidated joint ventures	30,855	30,412	60,292	60,995
Minority interest in Operating Partnership	(5,586)	(6,880)	(12,260)	(13,808)
Minority interest in consolidated joint ventures	--	--	(74)	--
Equity in earnings of unconsolidated joint
ventures (net of minority interest), net	442	965	165	1,122
Gain on sale of investment in unconsolidated
joint ventures (net of minority interest)	--	--	31	637
Income from continuing operations	25,711	24,497	48,154	48,946
Discontinued operations (net of minority interest):
Income from discontinued operations	1,058	2,257	2,356	4,631
Realized gains (losses) and unrealized losses
on disposition of rental property, net	9,771	(10,501)	8,973	(10,501)
Total discontinued operations, net	10,829	(8,244)	11,329	(5,870)
Net income	36,540	16,253	59,483	43,076
Preferred stock dividends	(500)	(500)	(1,000)	(1,000)
Net income available to common shareholders	$  36,040	$  15,753	$  58,483	$  42,076
Basic earnings per common share:
Income from continuing operations	$      0.41	$       0.40	$      0.77	$      0.80
Discontinued operations	0.18	(0.14)	0.18	(0.10)
Net income available to common shareholders	$      0.59	$       0.26	$      0.95	$      0.70
Diluted earnings per common share:
Income from continuing operations	$      0.41	$       0.39	$      0.77	$      0.79
Discontinued operations	0.17	(0.13)	0.18	(0.10)
Net income available to common shareholders	$      0.58	$       0.26	$      0.95	$      0.69
Dividends declared per common share	$      0.63	$       0.63	$      1.26	$      1.26
Basic weighted average shares outstanding	61,393	60,388	61,289	60,094
Diluted weighted average shares outstanding	75,649	68,620	72,478	68,448
The accompanying notes are an integral part of these consolidated financial statements

 

 

5

 

---

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2005 (in thousands) (unaudited)

 

 

	Shares	Preferred Amount	Shares	Common Par Value	Additional Paid-In Capital	Dividends Excess of Net Earnings	Unamortized Stock Compensation	Total Stockholders’ Equity
Balance at January 1, 2005	10	$25,000	61,039	$610	$1,650,834	$ (127,365)	$(3,968)	$1,545,111
Net income	--	--	--	--	--	59,483	--	59,483
Preferred stock      dividends	--	--	--	--	--	(1,000)	--	(1,000)
Common stock      dividends	--	--	--	--	--	(77,644)	--	(77,644)
Redemption of      common units
for shares of      common stock	--	--	56	1	1,438	--	--	1,439
Shares issued     under Dividend
Reinvestment     and Stock
Purchase Plan	--	--	4	--	196	--	--	196
Proceeds from       stock options
exercised	--	--	493	5	14,129	--	--	14,134
Stock options      expense	--	--	--	--	71	--	--	71
Deferred     compensation plan
for directors	--	--	--	--	147	--	--	147
Issuance of     Restricted Stock
Awards	--	--	114	1	4,946	--	(4,947)	--
Amortization of     stock
compensation	--	--	--	--	--	--	1,554	1,554
Adjustment to fair      value of
Restricted Stock      Awards	--	--	--	--	194	--	(194)	--
Cancellation of
Restricted Stock	--	--	(1)	--	(46)	--	46	--
Balance at June 30, 2005	10	$25,000	61,705	$617	$1,671,909	$(146,526)	$(7,509)	$1,543,491
The accompanying notes are an integral part of these consolidated financial statements.

 

 

6

 

---

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

 

	Six Months Ended June 30,
CASH FLOWS FROM OPERATING ACTIVITIES	2005	2004
Net income	$   59,483	$ 43,076
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization	74,339	61,282
Depreciation and amortization on discontinued operations	400	2,927
Stock options expense	71	334
Amortization of stock compensation	1,554	2,010
Amortization of deferred financing costs and debt discount	1,739	2,049
Equity in earnings of unconsolidated joint ventures
(net of minority interest), net	(165)	(1,122)
Gain on sale of investment in unconsolidated joint venture
(net of minority interest)	(31)	(637)
Realized gains (losses) and unrealized losses on disposition
of rental property (net of minority interest)	(8,973)	10,501
Minority interest in Operating Partnership	12,260	13,808
Minority interest in consolidated joint venture	74	--
Minority interest in income from discontinued operations	401	598
Changes in operating assets and liabilities:
Increase in unbilled rents receivable, net	(6,412)	(5,974)
Increase in deferred charges and other assets, net	(16,336)	(24,853)
(Increase) decrease in accounts receivable, net	(1,186)	1,299
Increase in accounts payable, accrued expenses and other
liabilities	3,815	1,846
(Decrease) increase in rents received in advance and security deposits	(1,382)	952
Decrease in accrued interest payable	4,988	(423)
Net cash provided by operating activities	$ 124,639	$ 107,673
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental property and related intangibles	$(377,841)	$ (95,958)
Repayments of notes receivable	13	850
Investment in unconsolidated joint ventures	(16,281)	(15,806)
Distributions from unconsolidated joint ventures	--	12,455
Proceeds from sale of investment in unconsolidated joint venture	2,676	--
Acquisition of minority interest in consolidated joint venture	(7,713)	--
Proceeds from sales of rental property	97,414	720
Funding of note receivable	--	(9,665)
Decrease in restricted cash	1,216	249
Net cash used in investing activities	$(300,516)	$(107,155)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from senior unsecured notes	$298,804	$ 202,363
Borrowings from revolving credit facility	539,326	310,475
Repayment of senior unsecured notes	--	(300,000)
Repayment of revolving credit facility	(483,326)	(211,500)
Repayment of mortgages, loans payable and other obligations	(91,160)	(14,126)
Payment of financing costs	(2,780)	(2,058)
Proceeds from stock options exercised	14,134	33,287
Proceeds from stock warrants exercised	--	4,925
Payment of dividends and distributions	(95,681)	(94,326)
Net cash provided by (used in) financing activities	$ 179,317	$ (70,960)
Net increase (decrease) in cash and cash equivalents	$     3,440	$ (70,442)
Cash and cash equivalents, beginning of period	12,270	78,375
Cash and cash equivalents, end of period	$   15,710	$    7,933
The accompanying notes are an integral part of these consolidated financial statements.

 

 

7

 

---

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share/unit amounts)

 

1.	ORGANIZATION AND BASIS OF PRESENTATION

 

ORGANIZATION

Mack-Cali Realty Corporation, a Maryland corporation, together with its subsidiaries (collectively, the “Company”), is a fully-integrated, self-administered, self-managed real estate investment trust (“REIT”) providing leasing, management, acquisition, development, construction and tenant-related services for its properties. As of June 30, 2005, the Company owned or had interests in 267 properties plus developable land (collectively, the “Properties”). The Properties aggregate approximately 29.9 million square feet, which are comprised of 159 office buildings and 97 office/flex buildings, totaling approximately 29.5 million square feet (which include one office building and one office/flex building aggregating 538,000 square feet owned by unconsolidated joint ventures in which the Company has investment interests), six industrial/warehouse buildings totaling approximately 387,400 square feet, two retail properties totaling approximately 17,300 square feet, one hotel (which is owned by an unconsolidated joint venture in which the Company has an investment interest) and two parcels of land leased to others. The Properties are located in seven states, primarily in the Northeast, plus the District of Columbia.

 

BASIS OF PRESENTATION

The accompanying consolidated financial statements include all accounts of the Company, its majority-owned and/or controlled subsidiaries, which consist principally of Mack-Cali Realty, L.P. (the “Operating Partnership”) and variable interest entities for which the Company has determined itself to be the primary beneficiary, if any. See Investments in Unconsolidated Joint Ventures in Note 2 for the Company’s treatment of unconsolidated joint venture interests. Intercompany accounts and transactions have been eliminated.

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.

 

 

2.	SIGNIFICANT ACCOUNTING POLICIES

 

Rental

Property

Rental properties are stated at cost less accumulated depreciation and amortization. Costs directly related to the acquisition, development and construction of rental properties are capitalized. Capitalized development and construction costs include pre-construction costs essential to the development of the property, development and construction costs, interest, property taxes, insurance, salaries and other project costs incurred during the period of development. Included in total rental property is construction and development in-progress of $92,966 and $86,916 (including land of $56,291 and $53,705) as of June 30, 2005 and December 31, 2004, respectively. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives. Fully-depreciated assets are removed from the accounts.

 

The Company considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity (as distinguished from activities such as routine maintenance and cleanup). If portions of a rental project are substantially completed and occupied by tenants, or held available for occupancy, and other portions have not yet reached that stage, the substantially completed portions are accounted for as a separate project. The

 

8

 

---

 

Company allocates costs incurred between the portions under construction and the portions substantially completed and held available for occupancy, and capitalizes only those costs associated with the portion under construction.

 

Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:

 

Leasehold interests	Remaining lease term
Buildings and improvements	5 to 40 years
Tenant improvements	The shorter of the term of the
	related lease or useful life
Furniture, fixtures and equipment	5 to 10 years

 

Upon acquisition of rental property, the Company estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values. In estimating the fair value of the tangible and intangible assets acquired, the Company considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

Above-market and below-market lease values for acquired properties are recorded based on the present value, (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. The capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases.

 

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses. Characteristics considered by management in valuing tenant relationships include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.

 

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s real estate properties may be impaired. A property’s value is impaired only if

 

9

 

---

 

management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. The Company’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved. Management does not believe that the value of any of the Company’s rental properties is impaired.

 

Rental Property

Held for Sale and

Discontinued

Operations

When assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. If, in management’s opinion, the net sales price of the assets which have been identified as held for sale is less than the net book value of the assets, a valuation allowance is established. Properties identified as held for sale and/or sold are presented in discontinued operations for all periods presented. See Note 6 – Discontinued Operations.

 

If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the property is reclassified as held and used. A property that is reclassified is measured and recorded individually at the lower of (a) its carrying amount before the property was classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell.

 

Investments in

Unconsolidated

Joint Ventures, Net

The Company accounts for its investments in unconsolidated joint ventures for which Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) does not apply, under the equity method of accounting as the Company exercises significant influence, but does not control these entities. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions.

 

FIN 46 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise should consolidate the VIE (the “Primary Beneficiary”). Generally, FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.

 

The Company has identified its Meadowlands Xanadu joint venture with the Mills Corporation as a VIE, but is not consolidating such venture as the Company is not the Primary Beneficiary. Disclosure about this VIE is included in Note 4 – Investments in Unconsolidated Joint Ventures.

 

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated joint ventures may be impaired. An investment

 

10

 

---

 

is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the value of the investment. Management does not believe that the value of any of the Company’s investments in unconsolidated joint ventures is impaired. See Note 4 – Investments in Unconsolidated Joint Ventures.

 

Cash and Cash

Equivalents

All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.

 

Deferred

Financing Costs

Costs incurred in obtaining financing are capitalized and amortized on a straight-line basis, which approximates the effective interest method, over the term of the related indebtedness. Amortization of such costs is included in interest expense and was $847 and $989 for the three months ended June 30, 2005 and 2004, respectively, and $1,739 and $2,094 for the six months ended June 30, 2005 and 2004, respectively.

 

Deferred

Leasing Costs

Costs incurred in connection with leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in depreciation and amortization. Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease. Certain employees of the Company are compensated for providing leasing services to the Properties. The portion of such compensation, which is capitalized and amortized, approximated $949 and $1,481 for the three months ended June 30, 2005 and 2004, respectively, and $1,906 and $2,956 for the six months ended June 30, 2005 and 2004, respectively.

 

Derivative

Instruments

The Company measures derivative instruments, including certain derivative instruments embedded in other contracts, at fair value and records them as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract. For derivatives designated and qualifying as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in earnings in the affected period.

 

Revenue

Recognition

Base rental revenue is recognized on a straight-line basis over the terms of the respective leases. Unbilled rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements. Above-market and below-market lease values for acquired properties are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed-rate renewal options for below-market leases. The capitalized above-market lease values for acquired properties are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases. Parking and other revenue includes income from parking spaces leased to tenants, income from tenants for additional services arranged for the

 

 

11

 

---

 

Company, income from tenants for early lease terminations and income from managing and/or leasing properties for third parties. Escalations and recoveries are received from tenants for certain costs as provided in the lease agreements. These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs. See Note 13 – Tenant Leases.

 

Allowance for

Doubtful Accounts

Management periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectibility of those balances. Management’s estimate of the allowance for doubtful accounts requires management to exercise significant judgment about the timing, frequency and severity of collection losses, which affects the allowance and net income.

 

Income and

Other Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally will not be subject to corporate federal income tax (including alternative minimum tax) on net income that it currently distributes to its shareholders, provided that the Company satisfies certain organizational and operational requirements including the requirement to distribute at least 90 percent of its REIT taxable income to its shareholders. The Company has elected to treat certain of its corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”). In general, a TRS of the Company may perform additional services for tenants of the Company and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. The Company is subject to certain state and local taxes.

 

Earnings

Per Share

The Company presents both basic and diluted earnings per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.

 

Dividends and

Distributions

Payable

The dividends and distributions payable at June 30, 2005 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (61,712,132 shares), and distributions payable to minority interest common unitholders of the Operating Partnership (13,829,254 common units) for all such holders of record as of July 6, 2005 with respect to the second quarter 2005. The second quarter 2005 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.63 per common share and unit were approved by the Board of Directors on June 23, 2005. The preferred stock dividends payable were paid on July 15, 2005. The common stock dividends and common unit distributions payable were paid on July 18, 2005.

 

The dividends and distributions payable at December 31, 2004 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (61,118,025 shares), distributions payable to minority interest common unitholders of the Operating Partnership (7,616,447 common units) and preferred distributions payable to preferred unitholders of the Operating Partnership (215,018 preferred units) for all such holders of record as of January 5,

 

12

 

---

 

2005 with respect to the fourth quarter 2004. The fourth quarter 2004 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.63 per common share and unit, as well as the fourth quarter 2004 preferred unit distributions of $18.1818 per preferred unit, were approved by the Board of Directors on December 7, 2004. The preferred stock dividends, common stock dividends, and common and preferred unit distributions payable were paid on January 18, 2005.

 

Costs Incurred

For Preferred

Stock Issuances

Costs incurred in connection with the Company’s preferred stock issuances are reflected as a reduction of additional paid-in capital.

 

Stock

Compensation

The Company accounts for stock options and restricted stock awards granted prior to 2002 using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations (“APB No. 25”). Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options is recognized ratably over the vesting period. The Company’s policy is to grant options with an exercise price equal to the quoted closing market price of the Company’s stock on the business day preceding the grant date. Accordingly, no compensation cost has been recognized under the Company’s stock option plans for the granting of stock options made prior to 2002. Restricted stock awards granted prior to 2002 are valued at the vesting dates of such awards with compensation cost for such awards recognized ratably over the vesting period.

 

In 2002, the Company adopted the provisions of FASB No. 123, which requires, on a prospective basis, that the estimated fair value of restricted stock (“Restricted Stock Awards”) and stock options at the grant date be amortized ratably into expense over the appropriate vesting period. For the three months ended June 30, 2005 and 2004, the Company recorded restricted stock and stock options expense of $828 and $1,573, respectively, and $1,625 and $2,344 for the six month periods ended June 30, 2005 and 2004. FASB No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, was issued in December 2002 and amends FASB No. 123, Accounting for Stock Based Compensation. FASB No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation. In addition, this Statement amends the disclosure requirements of FASB No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. FASB No. 148 disclosure requirements are presented as follows:

 

13

 

---

 

 

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested stock awards in each period:

 

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2005	2004	2005	2004
Net income, as reported	$36,540	$16,253	$59,483	$43,076
Add:    Stock-based compensation expense
included in reported net income
(net of minority interest)	676	1,393	1,382	2,075
Deduct:  Total stock-based compensation
expense determined under fair value
based method for all awards	(873)	(1,838)	(1,804)	(2,837)
Add:       Minority interest on stock-based
compensation expenses under
fair value based method	161	210	269	326
Pro forma net income	36,504	16,018	59,330	42,640
Deduct:  Preferred stock dividends	(500)	(500)	(1,000)	(1,000)
Pro forma net income available to
common shareholders – basic	$36,004	$15,518	$58,330	$41,640
Earnings Per Share:
Basic – as reported	$    0.59	$    0.26	$    0.95	$    0.70
Basic – pro forma	$    0.59	$    0.26	$    0.95	$    0.69
Diluted – as reported	$    0.58	$    0.26	$    0.95	$    0.69
Diluted – pro forma	$    0.58	$    0.26	$    0.95	$    0.69

 

 

3.	REAL ESTATE PROPERTY TRANSACTIONS

 

Property Acquisitions

The Company acquired the following office properties during the six months ended June 30, 2005:

 

					Acquisition
Acquisition			# of	Rentable	Cost (a)
Date	Property/Address	Location	Bldgs.	Square Feet	(in thousands)
03/02/05	101 Hudson Street (b)	Jersey City, Hudson County, NJ	1	1,246,283	$330,342
03/29/05	23 Main Street (b) (c)	Holmdel, Monmouth County, NJ	1	350,000	23,947
Total Property Acquisitions:			2	1,596,283	$354,289
(a)    Amounts are as of June 30, 2005.
(b)   Transaction was funded primarily through borrowing on the Company’s revolving credit facility.
(c)    In addition to its initial investment, the Company presently intends to make additional investments related to the property of approximately $11,702.

 

 

14

 

---

 

 

Property Sales

The Company sold the following office properties during the six months ended June 30, 2005:

 

					Rentable	Net	Net	Realized
Sale				# of	Square	Sales	Book	Gain/
Date	Property/Address		Location	Bldgs.	Feet	Proceeds	Value	(Loss)
02/04/05	210 South 16th Street		Omaha, Douglas County, Nebraska	1	318,224	$ 8,464	$ 8,210	$ 254
02/11/05	1122 Alma Road		Richardson, Dallas County, Texas	1	82,576	2,075	2,344	(269)
02/15/05	3 Skyline Drive		Hawthorne, Westchester County, New York	1	75,668	9,587	8,856	731
05/11/05	201 Willowbrook Blvd.		Wayne, Passaic County, New Jersey (a)	1	178,329	17,696	17,705	(9)
06/03/05	600 Community Drive/
		111 East Shore Road	North Hempstead, Nassau County, New York	2	292,849	71,593	59,609	11,984
Total Office Property Sales:				6	947,646	$109,415	$96,724	$12,691
(a)    In connection with the sale, the Company provided a mortgage loan to the buyer of $12,000 which bears interest at 5.74 percent, matures in five years with a five year renewal option, and requires monthly payments of principal and interest.

 

Subsequent Events

On July 12, 2005, the Company acquired Monmouth Executive Center, a four-building, 236,338 square-foot class A office complex in Freehold, New Jersey, for approximately $33,000.

 

 

4.	INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

 

The debt of the Company’s unconsolidated joint ventures aggregating $123,460 as of June 30, 2005 is non-recourse to the Company, except for customary exceptions pertaining to such matters as intentional misuse of funds, environmental conditions and material misrepresentations, and except as otherwise indicated below.

 

MEADOWLANDS XANADU

On November 25, 2003, the Company and affiliates of The Mills Corporation (“Mills”) entered into a joint venture agreement (“Meadowlands Xanadu Venture Agreement”) to form Meadowlands Mills/Mack-Cali Limited Partnership (“Meadowlands Venture”) for the purpose of developing a $1.3 billion family entertainment, recreation and retail complex with an office and hotel component to be built at the Meadowlands sports complex in East Rutherford, New Jersey (“Meadowlands Xanadu”). The First Amendment to the Meadowlands Xanadu Venture Agreement was entered into as of June 30, 2005. Meadowlands Xanadu’s approximately 4.76 million-square-foot complex is expected to feature a family entertainment, recreation and retail destination comprising five themed zones: sports; entertainment; children’s education; fashion; and food and home, in addition to four office buildings, aggregating approximately 1.8 million square feet, and a 520-room hotel.

 

On December 3, 2003, the Meadowlands Venture entered into a redevelopment agreement (the “Redevelopment Agreement”) with the New Jersey Sports and Exposition Authority (“NJSEA”) for the redevelopment of the area surrounding the Continental Airlines Arena in East Rutherford, New Jersey and the construction of the Meadowlands Xanadu project. The Redevelopment Agreement provides for a 75-year ground lease and requires the Meadowlands Venture to pay the NJSEA a $160,000 development rights fee and fixed rent over the term. Fixed rent will be in the amount of $1 per year for the first 15 years, increasing to $7,500 from the 16th to the 18th years, increasing to $8,447 in the 19th year, increasing to $8,700 in the 20th year, increasing to $8,961 in the 21st year, then to $9,200 in the 23rd to 26th years, with additional increases over the remainder of the term, as set forth in the ground lease. The ground lease also allows for the potential for participation rent payments by the Meadowlands Venture, as described in the ground lease agreement. The First Amendment to the Redevelopment Agreement and the ground lease, itself, were signed on October 5, 2004. The Meadowlands Venture received all necessary permits and approvals from the NJSEA and U.S. Army Corps of Engineers in March 2005 and commenced construction in the same month. As a condition to the commencement of work to fill wetlands pursuant to the permit issued by the U.S. Army Corps of Engineers and pursuant to the Redevelopment Agreement, as amended, the Meadowlands Venture conveyed certain vacant land, known as the Empire Tract, to a conservancy trust. On June 30, 2005, the $160,000 development rights fees was deposited into an escrow account by the Meadowlands Venture in accordance with the terms of the First Amendment to the Redevelopment Agreement. On such date, the following amounts were paid

 

15

 

---

 

from escrow: (i) approximately $36,000 to defease certain debt obligations of the NJSEA; and (ii) $26,800 to the NJSEA, which, in turn, paid such amount to the Meadowlands Venture for the Empire Tract. The balance of the escrow is to be released and paid in accordance with the terms of the First Amendment to the Redevelopment Agreement.

 

The Company and Mills own a 20 percent and 80 percent interest, respectively, in the Meadowlands Venture. These interests were subject to certain participation rights by The New York Giants, which were subsequently terminated in April 2004. The Meadowlands Xanadu Venture Agreement required the Company to make an equity contribution up to a maximum of $32,500, which it fulfilled in April 2005. Pursuant to the Meadowlands Xanadu Venture Agreement, Mills has received subordinated capital credit in the venture of approximately $118,000, which represents certain costs incurred by Mills in connection with the Empire Tract prior to the creation of the Meadowlands Venture. However, under the First Amendment to the Meadowlands Xanadu Venture Agreement, the Company and Mills agreed that due to the expected receipt by the Meadowlands Venture of certain other sums and certain development costs savings in connection with Meadowlands Xanadu, Mills’ subordinated capital credit in the venture for the Empire Tract should be reduced to $60,000 as of the date of the First Amendment to the Meadowlands Xanadu Venture Agreement. The Meadowlands Xanadu Venture Agreement requires Mills to contribute the balance of the capital required to complete the entertainment phase, subject to certain limitations. The Company will receive a 9 percent preferred return on its equity investment, only after Mills receives a 9 percent preferred return on its equity investment. Residual returns, subject to participation by other parties, will be in proportion to each partner’s respective percentage interest.

 

Mills will develop, lease and operate the entertainment phase of the Meadowlands Xanadu project. The Meadowlands Venture has formed and owns, directly and indirectly, all of the partnership interests in and to the component ventures which were formed for the future development of the office and hotel phases, which the Company will develop, lease and operate. Upon the Company’s exercise of its rights under the Meadowlands Xanadu Venture Agreement to develop the office and hotel phases, the Meadowlands Venture will convey ownership of the component ventures to the Company and Mills or its affiliate, and the Company or its affiliate will own an 80 percent interest and Mills or its affiliate will own a 20 percent interest in such component ventures. However, under the First amendment to the Meadowlands Xanadu Venture Agreement, if the Meadowlands Venture develops a hotel that has video lottery terminals (or “slots”), or any other legalized form of gaming on or in its premises, then the Company or its affiliate will own a 50 percent interest in such component venture and Mills or its affiliate will own a 50 percent interest. The Meadowlands Xanadu Venture Agreement requires that the Company must exercise its rights with respect to the first office and hotel phase no later than four years after the grand opening of the entertainment phase, and requires that the Company exercise all of its rights with respect to the office and hotel phases no later than 10 years from such date, but does not require that any or all components be developed. However, under the Meadowlands Xanadu Venture Agreement, Mills has the right to accelerate such exercise schedule, subject to certain conditions. Should the Company fail to meet the time schedule described above for the exercise of its rights with respect to the office and hotel phases, the Company will forfeit its rights to participate in future development. If this occurs, Mills will have the right to develop the additional phases, subject to the Company’s right to participate, or to cause the Meadowlands Venture to sell such components to a third party, subject to a sales price limitation of 95 percent of the value that would have been required to form such component ventures.

 

Commencing three years after the grand opening of the entertainment phase of the Meadowlands Xanadu project, either Mills or the Company may sell its partnership interest to a third party subject to the following provisions:

 

• Mills has certain “drag-along” rights and the Company has certain “tag-along” rights in connection with such sale of interest to a third party; and
• Mills has a right of first refusal with respect of a sale by the Company of its partnership interests.

 

In addition, commencing on the sixth anniversary of the opening, the Company may cause Mills to purchase, and Mills may cause the Company to sell to Mills, all of the Company’s partnership interests at a price based on the then fair market value of the project. Notwithstanding the exercise by Mills or the Company of any of the foregoing rights with respect to the sale of the Company’s partnership interest to Mills or a third party, the Company will retain its right to component ventures for the future development of the office and hotel phases.

 

16

 

---

 

 

On February 12, 2003, the New Jersey Sports and Exposition Authority selected The Mills Corporation and the Company to redevelop the Continental Airlines Arena site (“Arena Site”) for mixed uses, including retail. In March 2003, Hartz Mountain Industries, Inc., or Hartz, filed a lawsuit in the Superior Court of New Jersey, Law Division, for Bergen County, seeking to enjoin the New Jersey Sports and Exposition Authority, or NJSEA, from entering into a contract with Mills and the Company for the redevelopment of the Continental Arena site. In May 2003, the court denied Hartz’s request for an injunction and dismissed its suit for failure to exhaust administrative remedies. In June 2003, the NJSEA held hearings on Hartz’s protest, and on a parallel protest filed by another rejected developer, Westfield, Inc. (“Westfield”). On September 10, 2003, the NJSEA ruled against Hartz’s and Westfield’s protests, and on May 14, 2004, the Appellate Division of the Superior Court of New Jersey rejected Hartz’s contention that the NJSEA lacks statutory authority to allow retail development of its property. The Supreme Court of New Jersey has declined to review the Appellate Division’s decision. Hartz, Westfield and four taxpayers (the “Braha Appellants”) have also filed appeals from the NJSEA’s final decision based on other grounds. In a separate action commenced in January 2004, Hartz and Westfield also appealed the NJSEA’s approval and execution of the formal redevelopment agreement with the Meadowlands Venture. Several appeals filed by Hartz, Westfield and others, including certain environmental groups, that challenge certain approvals received by the Meadowlands Venture from the NJSEA, the New Jersey Meadowlands Commission and the New Jersey Department of Environmental Protection remain pending before the Appellate Division. The Appellate Division, in a decision rendered on November 24, 2004, completed its review of Hartz’s Open Public Records Act appeal and the remand proceeding it earlier ordered and upheld the findings of the Law Division in the remand proceeding. The Supreme Court of New Jersey has declined to review the Appellate Division’s decision. The NJSEA held further hearings on December 15 and 16, 2004, at Hartz’s request to review certain additional facts in support of its bid protest. The Hearing Officer rendered his Supplemental Report and Recommendation to the NJSEA on March 4, 2005, finding no merit in the protests presented by Hartz and Westfield. The NJSEA accepted the Supplemental Report and Recommendation on March 30, 2005 and Hartz appealed that decision to the Appellate Division. Hartz also filed an application with the Appellate Division seeking an Order staying the construction of the Meadowlands Xanadu project, which officially commenced on March 24, 2005, and on April 27, 2005, the Braha Appellants filed a separate appeal with the Appellate Division also challenging the NJSEA’s decision to allow construction to begin and seeking an Order staying the construction of the Meadowlands Xanadu project. The Appellate Division denied Hartz’s application for a stay of construction by Order dated May 5, 2005. The Appellate Division has not made any determinations with respect to these appeals. On April 5, 2005 the New York Football Giants filed a Verified Complaint seeking an emergency order halting construction pending a final decision on its contention that construction of the Meadowlands Xanadu project violates its lease agreements with the NJSEA. The Superior Court of New Jersey, Chancery Division, has scheduled a hearing on that application for August 5, 2005. On March 18, 2005, the U.S. Army Corps of Engineers issued a permit to the Meadowlands Venture to authorize the filling of 7.69 acres of wetlands and other waters of the United States in connection with the Meadowlands Xanadu project. Three separate lawsuits have been filed in the United States District Court for the District of New Jersey, challenging the Corps’ decision to issue the permit to the Meadowlands Venture and seeking to set aside the permit and remand the matter to the Corps for further proceedings consistent with the National Environmental Policy Act and the Clean Water Act. The first suit was filed on March 30, 2005, by the Sierra Club, the New Jersey Public Interest Research Group, Citizen Lobby, Inc. and the New Jersey Environmental Federation. Additional suits were filed on May 16 and May 31, 2005, respectively, by Hartz Mountain Industries, Inc., (together with one of its officers as an individual named plaintiff) and the Borough of Carlstadt. The Meadowlands Venture is named as a defendant, along with the Corps, in all three of these suits. On May 3, 2005, the Sierra Club filed a motion for a preliminary injunction to stop certain construction activities on the project. The Court denied that motion on July 6, 2005. The Meadowlands Venture and the Corps have filed motions to dismiss the Hartz complaint for lack of standing. Similar motions may be filed to dismiss the Carlstadt complaint. Once these standing issues are resolved, the court will address the merits of the claims through motions for summary judgment. The New Jersey Builders’ Association has commenced an action, which is pending in the Appellate Division, alleging that NJSEA has failed to meet a purported obligation to provide affordable housing at the Meadowlands Complex. The Builders’ Association has filed an application for injunctive relief seeking to enjoin further construction of the project. That application is pending. The Company is not a party to that action.

 

The Company believes that the Meadowlands Venture’s proposal and the planned project comply with applicable laws, and the Meadowlands Venture intends to continue its vigorous defense of its rights under the executed Redevelopment Agreement and recently executed Ground Lease. Although there can be no assurance, the Company

 

17

 

---

 

does not believe that the pending lawsuits will have any material affect on its ability to develop the Meadowlands Xanadu project.

 

HPMC

On July 21, 1998, the Company entered into a joint venture with HCG Development, L.L.C. and Summit Partners I, L.L.C. to form HPMC Development Partners II, L.P. (formerly known as HPMC Lava Ridge Partners, L.P.). HPMC Development Partners II, L.P.’s efforts focused on three development projects, commonly referred to as Lava Ridge, Stadium Gateway, Pacific Plaza I & II. Lava Ridge was sold in 2002.

 

The Company has a 50 percent ownership interest and HCG Development, L.L.C. and Summit Partners I, L.L.C. (both of which are not affiliated with the Company) collectively have a 50 percent ownership interest in HPMC Development Partners II, L.P. Significant terms of the applicable partnership agreements, among other things, call for the Company to provide 80 percent and HCG Development, L.L.C. and Summit Partners I, L.L.C. to collectively provide 20 percent of the development equity capital. As the Company agreed to fund development equity capital disproportionate to its ownership interest, it was granted a preferred return of 10 percent on its invested capital as a priority. Profits and losses are allocated to the partners based upon the priority of distributions specified in the respective agreements and entitle the Company to a preferred return, as well as 50 percent of residual profits above the preferred returns. Equity in earnings recognized by the Company consists of preferred returns and the Company’s equity in earnings (loss) after giving effect to the payment of such preferred returns.

 

Stadium Gateway

Stadium Gateway was a development joint venture project, located in Anaheim, California between HPMC Development Partners II, L.P. and a third-party entity. The venture constructed a six-story, 273,194 square foot office building, which commenced initial operations in January 2002. On April 1, 2003, the venture sold the office property for approximately $52,500.

 

Pacific Plaza I & II

Pacific Plaza I & II is a two-phase development joint venture project, located in Daly City, California between, HPMC Development Partners II, L.P. and a third-party entity. Phase I of the project, which commenced initial operations in August 2001, consists of a nine-story office building, aggregating 364,384 square feet. Phase II, which comprises a three-story retail and theater complex, commenced initial operations in June 2002. On August 27, 2004, the venture sold the Pacific Plaza I & II complex for approximately $143,000. The Company performed management services for the property while it was owned by the venture and recognized $0 and $87 in fees for such services in the three months ended June 30, 2005 and 2004, respectively, and $0 and $176 for the six months ended June 30, 2005 and 2004, respectively.

 

G&G MARTCO (Convention Plaza)

The Company holds a 50 percent interest in G&G Martco, which owns Convention Plaza, a 305,618 square foot office building, located in San Francisco, California. The venture has a mortgage loan with a $45,501 balance at June 30, 2005 collateralized by its office property. The loan also provides the venture the ability to increase the balance of the loan up to an additional $2,183 for the funding of qualified leasing costs. The loan bears interest at a rate of the London Inter-Bank Offered Rate (“LIBOR”) (3.34 percent at June 30, 2005) plus 162.5 basis points and matures in August 2006. The Company performs management and leasing services for the property owned by the joint venture and recognized $34 and $36 in fees for such services in the three months ended June 30, 2005 and 2004, respectively, and $69 and $72 for the six months ended June 30, 2005 and 2004, respectively.

 

PLAZA VIII AND IX ASSOCIATES, L.L.C./AMERICAN FINANCIAL EXCHANGE L.L.C.

On May 20, 1998, the Company entered into a joint venture with Columbia Development Company, L.L.C. (“Columbia”) to form American Financial Exchange L.L.C. The venture was formed to acquire land for future development, located on the Hudson River waterfront in Jersey City, New Jersey, adjacent to the Company’s Harborside Financial Center office complex. Among other things, the partnership agreement provides for a preferred return on the Company’s invested capital in the venture, in addition to the Company’s proportionate share of the venture’s profit, as defined in the agreement. The joint venture acquired land on which it initially constructed a parking facility. In the fourth quarter 2000, the joint venture started construction of Plaza 10, a 577,575 square foot office building, which was 100 percent pre-leased to Charles Schwab & Co. Inc. (“Schwab”) for a 15-year term,

 

18

 

---

 

on certain of the land owned by the venture. The lease agreement with Schwab obligated the venture, among other things, to deliver space to the tenant by required timelines and offers expansion options, at the tenant’s election.

 

On September 29, 2003, the Company sold its interest in AFE, in which it held a 50 percent interest, and received approximately $162,145 in net sales proceeds from the transaction, which the Company used primarily to repay outstanding borrowings under its revolving credit facility. Following completion of the sale of its interest, the Company no longer has any remaining obligations to Schwab.

 

In advance of the transaction, AFE distributed its interests in Plaza VIII and IX Associates, L.L.C., which owned the undeveloped land currently used as a parking facility, to its then partners, the Company and Columbia. The Company and Columbia subsequently entered into a new joint venture to own and manage the undeveloped land and related parking operations through Plaza VIII and IX Associates, L.L.C. The Company and Columbia each hold a 50 percent interest in the new venture.

 

RAMLAND REALTY ASSOCIATES L.L.C. (One Ramland Road)

On August 20, 1998, the Company entered into a joint venture with S.B. New York Realty Corp. to form Ramland Realty Associates L.L.C. The venture was formed to own, manage and operate One Ramland Road, a 232,000 square foot office/flex building and adjacent developable land, located in Orangeburg, New York. In August 1999, the joint venture completed redevelopment of the property and placed the office/flex building in service. The Company holds a 50 percent interest in the joint venture. The venture has a mortgage loan with a $14,936 balance at June 30, 2005 secured by its office/flex property. The mortgage bears interest at a rate of LIBOR plus 175 basis points and matures in January 2007, with two one-year extension options, subject to certain conditions.

 

The Company performs management, leasing and other services for the property owned by the joint venture and recognized $46 and $15 in fees for such services in the three months ended June 30, 2005 and 2004, respectively, and $55 and $18 for the six months ended June 30, 2005 and 2004, respectively.

 

ASHFORD LOOP ASSOCIATES L.P. (1001 South Dairy Ashford/2100 West Loop South)

On September 18, 1998, the Company entered into a joint venture with Prudential to form Ashford Loop Associates L.P. The venture was formed to own, manage and operate 1001 South Dairy Ashford, a 130,000 square foot office building acquired on September 18, 1998, and 2100 West Loop South, a 168,000 square foot office building acquired on November 25, 1998, both located in Houston, Texas. The Company held a 20 percent interest in the joint venture. Included in depreciation and amortization in the results of operations for the fourth quarter 2004 for the joint venture was a valuation allowance of $24,575 on account of the carrying value of the venture’s assets exceeding the net realizable value as of December 31, 2004. Included in the Company’s equity in earnings (loss) of unconsolidated joint venture for the fourth quarter 2004 was a $4,915 loss representing the Company’s share of the valuation allowance. On February 25, 2005, the Company sold its interest in the venture to Prudential for $2,664 and recognized a gain on the sale of $31 (net of minority interest of $4).

 

SOUTH PIER AT HARBORSIDE HOTEL

On November 17, 1999, the Company entered into a joint venture with Hyatt Corporation (“Hyatt”) to develop a 350-room hotel on the South Pier at Harborside Financial Center, Jersey City, New Jersey, known as the Hyatt Regency Jersey City on the Hudson, which was completed and commenced initial operations in July 2002. The Company owns a 50 percent interest in the venture.

 

The venture had a mortgage loan with a commercial bank with a $62,902 balance at December 31, 2003 collateralized by its hotel property. The debt bore interest at a rate of LIBOR plus 275 basis points, which was scheduled to mature in December 2003, and was extended through January 29, 2004. On that date, the venture repaid the mortgage loan using the proceeds from a new $40,000 mortgage loan, (with a balance as of June 30, 2005 or $39,767), collateralized by the hotel property, as well as capital contributions from the Company and Hyatt of $10,750 each. The new loan carries an interest rate of LIBOR plus 200 basis points and matures in February 2006. The loan provides for three one-year extension options subject to certain conditions. The final two one-year extension options require payment of a fee. On May 25, 2004, the venture obtained a second mortgage loan with a commercial bank for $20,000 (with a balance as of June 30, 2005 of $13,000) collateralized by the hotel property, in which each partner, including the Company, has severally guaranteed repayment of approximately $8,000. The loan carries an interest rate of LIBOR plus 175 basis points and matures in February 2006. The loan provides for three

 

19

 

---

 

one-year extension options subject to certain conditions. The final two one-year extension options require payment of a fee. The proceeds from this loan were used to make distributions to the Company and Hyatt in the amount of $10,000 each. Additionally, the venture has an $8,000 loan (with a balance as of June 30, 2005 of $7,835) with the City of Jersey City, provided by the U.S. Department of Housing and Urban Development. The loan currently bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 2020. The Company has posted an $8,000 letter of credit in support of this loan, $4,000 of which is indemnified by Hyatt.

 

NORTH PIER AT HARBORSIDE – RESIDENTIAL DEVELOPMENT

On April 3, 2001, the Company sold its North Pier at Harborside Financial Center, Jersey City, New Jersey to an entity which planned on developing residential housing on the site. At the time, the Company received net sales proceeds of approximately $3,357 (which included a note receivable of $2,027 subsequently repaid in 2002), and recognized a gain of $439 (before minority interest) from the transaction. On March 31, 2004, the Company received additional purchase consideration of $720, for which the Company recorded a gain of $637 (net of minority interest of $83) in gain on sale of investment in unconsolidated joint ventures for the three months ended March 31, 2004.

 

20

 

---

 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES

The following is a summary of the financial position of the unconsolidated joint ventures in which the Company had investment interests as of June 30, 2005 and December 31, 2004:

 

	June 30, 2005
				Plaza
	Meadowlands		G&G	VIII & IX	Ramland	Ashford	Harborside	Combined
	Xanadu	HPMC	Martco	Associates	Realty	Loop	South Pier	Total
Assets:
Rental property, net	$255,308	--	$10,072	$12,320	$12,777	--	$76,903	$367,380
Other assets	205,568	--	5,484	1,482	1,518	--	12,526	226,578
Total assets	$460,876	--	$15,556	$13,802	$14,295	--	$89,429	$593,958
Liabilities and partners’/ members capital (deficit):
Mortgages, loans payable and other obligations	--	--	$45,501	--	$14,936	--	$63,023	$123,460
Other liabilities	$ 6,405	--	1,216	$ 1,362	333	--	3,677	12,993
Partners’/members’ capital (deficit)	454,471	--	(31,161)	12,440	(974)	--	22,729	457,505
Total liabilities and partners’/members’
capital (deficit)	$460,876	--	$15,556	$13,802	$14,295	--	$89,429	$593,958
Company’s investment in unconsolidated
joint ventures, net	$ 33,633	--	$ 6,913	$ 6,141	$ --	--	$13,926	$ 60,613

 

 

	December 31, 2004
				Plaza
	Meadowlands		G&G	VIII & IX	Ramland	Ashford	Harborside	Combined
	Xanadu	HPMC	Martco	Associates	Realty	Loop	South Pier	Total
Assets:
Rental property, net	$235,254	--	$ 8,571	$12,629	$13,030	$11,256	$79,721	$360,461
Other assets	1,420	--	4,589	1,463	1,559	539	12,034	21,604
Total assets	$236,674	--	$ 13,160	$14,092	$14,589	$11,795	$91,755	$382,065
Liabilities and partners’/ members capital (deficit):
Mortgages, loans payable and other obligations	$ --	--	$ 43,236	$ --	$14,936	$ --	$66,191	$124,363
Other liabilities	8,205	--	963	1,376	334	670	4,009	15,557
Partners’/members’ capital (deficit)	228,469	--	(31,039)	12,716	(681)	11,125	21,555	242,145
Total liabilities and partners’/members’
capital (deficit)	$236,674	--	$ 13,160	$14,092	$14,589	$11,795	$91,755	$382,065
Company’s investment in unconsolidated
joint ventures, net	$ 17,359	--	$ 7,157	$ 6,279	$ --	$ 2,664	$13,284	$ 46,743

 

 

21

 

---

 

 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES

The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended June 30, 2005 and 2004:

 

 

	Three Months Ended June 30, 2005
								Minority
				Plaza				Interest in
	Meadowlands		G&G	VIII & IX	Ramland	Ashford	Harborside	Operating	Combined
	Xanadu	HPMC	Martco	Associates	Realty	Loop	South Pier	Partnership	Total
Total revenues	--	--	$1,568	$ 52	$ 664	--	$ 9,158		$11,442
Operating and other expenses	--	--	(908)	(62)	(348)	--	(5,294)		(6,612)
Depreciation and amortization	--	--	(290)	(154)	(162)	--	(1,289)		(1,895)
Interest expense	--	--	(525)	--	(179)	--	(1,292)		(1,996)
Net income	--	--	$ (155)	$(164)	$ (25)	--	$ 1,283		$ 939
Company’s equity in earnings (loss)
of unconsolidated joint ventures	--	--	$ (77)	$ (79)	--	--	$ 698	$(100)	$ 442

 

 

 

	Three Months Ended June 30, 2004
								Minority
				Plaza				Interest in
	Meadowlands		G&G	VIII & IX	Ramland	Ashford	Harborside	Operating	Combined
	Xanadu	HPMC	Martco	Associates	Realty	Loop	South Pier	Partnership	Total
Total revenues	--	$ 4	$1,913	$ 16	$ 394	$ 809	$ 7,950		$11,086
Operating and other expenses	--	(87)	(865)	(14)	(322)	(817)	(4,950)		(7,055)
Depreciation and amortization	--	--	(260)	(154)	(153)	(242)	(1,646)		(2,455)
Interest expense	--	--	(287)	--	(106)	--	(515)		(908)
Net income	--	$ (83)	$ 501	$(152)	$(187)	$(250)	$ 839		$ 668
Company’s equity in earnings (loss)
of unconsolidated joint ventures	--	$526	$ 250	$ (76)	$ --	$ (50)	$ 440	$(125)	$ 965

 

 

22

 

---