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 March 31, 2007                                                        or

[ ] 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.)
 

343 Thornall Street, Edison, New Jersey
08837-2206
(Address of principal executive offices)
(Zip Code)
 
 
 
 
 (732) 590-1000
 
 (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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
 
Large accelerated filer X Accelerated filer ___ Non-accelerated filer ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES___ NO  X

As of April 27, 2007, there were 67,917,207 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 (unaudited):
 
       
   
Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006
  4
       
   
Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006
  5
       
   
Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2007
  6
       
   
Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006
  7
       
   
Notes to Consolidated Financial Statements
8-35
       
       
       
       
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
36-48
       
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
  49
       
 
Item 4.
Controls and Procedures
  50
       
Part II
Other Information
   
       
 
Item 1.
Legal Proceedings
  51
       
 
Item 1A.
Risk Factors
  51
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  52
       
 
Item 3.
Defaults Upon Senior Securities
  52
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
  52
       
 
Item 5.
Other Information
  52
       
 
Item 6.
Exhibits
  52
       
 
Signatures
 
  53
       
 
Exhibit Index
 
54-67

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, 2006.

The results of operations for the three month period ended March 31, 2007 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) (unaudited)

 
ASSETS
 
March 31,
2007
 
December 31,
2006
 
Rental property
         
Land and leasehold interests
 
$
656,514
 
$
659,169
 
Buildings and improvements
   
3,523,319
   
3,549,699
 
Tenant improvements
   
347,141
   
356,495
 
Furniture, fixtures and equipment
   
8,388
   
8,224
 
     
4,535,362
   
4,573,587
 
Less - accumulated depreciation and amortization
   
(802,196
)
 
(796,793
)
     
3,733,166
   
3,776,794
 
Rental property held for sale, net
   
30,333
   
--
 
Net investment in rental property
   
3,763,499
   
3,776,794
 
Cash and cash equivalents
   
150,171
   
101,223
 
Investments in unconsolidated joint ventures
   
168,861
   
160,301
 
Unbilled rents receivable, net
   
104,934
   
100,847
 
Deferred charges and other assets, net
   
244,196
   
240,637
 
Restricted cash
   
16,288
   
15,448
 
Accounts receivable, net of allowance for doubtful accounts
             
of $2,486 and $1,260
   
25,454
   
27,639
 
               
Total assets
 
$
4,473,403
 
$
4,422,889
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Senior unsecured notes
 
$
1,631,748
 
$
1,631,482
 
Revolving credit facility
   
--
   
145,000
 
Mortgages, loans payable and other obligations
   
364,269
   
383,477
 
Dividends and distributions payable
   
53,651
   
50,591
 
Accounts payable, accrued expenses and other liabilities
   
119,969
   
122,134
 
Rents received in advance and security deposits
   
49,546
   
45,972
 
Accrued interest payable
   
18,457
   
34,106
 
Total liabilities
   
2,237,640
   
2,412,762
 
               
Minority interests:
             
Operating Partnership
   
470,270
   
480,103
 
Consolidated joint ventures
   
1,879
   
2,117
 
Total minority interests
   
472,149
   
482,220
 
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,
             
67,847,852 and 62,925,191 shares outstanding
   
678
   
629
 
Additional paid-in capital
   
1,968,555
   
1,708,053
 
Dividends in excess of net earnings
   
(230,619
)
 
(205,775
)
Total stockholders’ equity
   
1,763,614
   
1,527,907
 
               
Total liabilities and stockholders’ equity
 
$
4,473,403
 
$
4,422,889
 
               
               
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
 
   
March 31,
 
REVENUES
 
2007
 
2006
 
Base rents
 
$
140,034
 
$
127,975
 
Escalations and recoveries from tenants
   
26,225
   
21,003
 
Construction services
   
22,341
   
--
 
Real estate services
   
2,741
   
628
 
Other income
   
2,398
   
2,789
 
Total revenues
   
193,739
   
152,395
 
               
EXPENSES
             
Real estate taxes
   
23,519
   
20,816
 
Utilities
   
17,558
   
14,468
 
Operating services
   
24,766
   
20,260
 
Direct construction costs
   
20,911
   
--
 
General and administrative
   
11,071
   
8,775
 
Depreciation and amortization
   
41,514
   
36,578
 
Total expenses
   
139,339
   
100,897
 
Operating Income
   
54,400
   
51,498
 
               
OTHER (EXPENSE) INCOME
             
Interest expense
   
(30,936
)
 
(31,075
)
Interest and other investment income
   
1,617
   
1,445
 
Equity in earnings (loss) of unconsolidated joint ventures
   
(2,231
)
 
247
 
Minority interest in consolidated joint ventures
   
227
   
--
 
Gain on sale of investment in marketable securities
   
--
   
15,060
 
Total other (expense) income
   
(31,323
)
 
(14,323
)
Income from continuing operations before
             
Minority interest in Operating Partnership
   
23,077
   
37,175
 
Minority interest in Operating Partnership
   
(4,262
)
 
(6,886
)
Income from continuing operations
   
18,815
   
30,289
 
Discontinued operations (net of minority interest):
             
Income from discontinued operations
   
264
   
2,808
 
Net income
   
19,079
   
33,097
 
Preferred stock dividends
   
(500
)
 
(500
)
Net income available to common shareholders
 
$
18,579
 
$
32,597
 
               
Basic earnings per common share:
             
Income from continuing operations
 
$
0.28
 
$
0.48
 
Discontinued operations
 
$
--
   
0.05
 
Net income available to common shareholders
 
$
0.28
 
$
0.53
 
               
Diluted earnings per common share:
             
Income from continuing operations
 
$
0.28
 
$
0.48
 
Discontinued operations
 
$
--
   
0.04
 
Net income available to common shareholders
 
$
0.28
 
$
0.52
 
               
Dividends declared per common share
 
$
0.64
 
$
0.63
 
               
Basic weighted average shares outstanding
   
65,695
   
61,988
 
               
Diluted weighted average shares outstanding
   
81,234
   
76,642
 
               
               
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 (in thousands) (unaudited)


                       
           
Additional
 
Dividends in
 
Total
 
   
Preferred Stock
 
Common Stock
 
Paid-In
 
Excess of
 
Stockholders’
 
   
Shares
 
Amount
 
Shares
 
Par Value
 
Capital
 
Net Earnings
 
Equity
 
Balance at January 1, 2007
   
10
 
$
25,000
   
62,925
 
$
629
 
$
1,708,053
 
$
(205,775
)
$
1,527,907
 
Net income
   
--
   
--
   
--
   
--
   
--
   
19,079
   
19,079
 
Preferred stock dividends
   
--
   
--
   
--
   
--
   
--
   
(500
)
 
(500
)
Common stock dividends
   
--
   
--
   
--
   
--
   
--
   
(43,423
)
 
(43,423
)
Common Stock offering
   
--
   
--
   
4,650
   
47
   
251,685
   
--
   
251,732
 
Redemption of common units
                                           
for common stock
   
--
   
--
   
142
   
1
   
4,427
   
--
   
4,428
 
Shares issued under Dividend
                                           
Reinvestment and Stock
                                           
Purchase Plan
   
--
   
--
   
1
   
--
   
67
   
--
   
67
 
Stock options exercised
   
--
   
--
   
117
   
1
   
3,346
   
--
   
3,347
 
Stock options expense
   
--
   
--
   
--
   
--
   
33
   
--
   
33
 
Directors Deferred compensation
                                           
plan
   
--
   
--
   
--
   
--
   
79
   
--
   
79
 
Issuance of restricted stock
   
--
   
--
   
13
   
--
   
--
   
--
   
--
 
Amortization of stock compensation
   
--
   
--
   
--
   
--
   
865
   
--
   
865
 
                                             
Balance at March 31, 2007
   
10
 
$
25,000
   
67,848
 
$
678
 
$
1,968,555
 
$
(230,619
)
$
1,763,614
 
                                             
                                             




6



MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

   
Three Months Ended
 
   
March 31,
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
2007
 
2006
 
Net income
 
$
19,079
 
$
33,097
 
Adjustments to reconcile net income to net cash provided by
             
operating activities:
             
Depreciation and amortization
   
41,514
   
36,578
 
Depreciation and amortization on discontinued operations
   
343
   
3,064
 
Stock options expense
   
33
   
37
 
Amortization of stock compensation
   
865
   
693
 
Amortization of deferred financing costs and debt discount
   
708
   
721
 
Equity in (earnings) losses of unconsolidated joint ventures, net
   
2,231
   
(247
)
Gain on sale of marketable securities available for sale
         
(15,060
)
Minority interest in Operating Partnership
   
4,262
   
6,886
 
Minority interest in consolidated joint venture
   
(227
)
 
--
 
Minority interest in income from discontinued operations
   
61
   
649
 
Changes in operating assets and liabilities:
             
Increase in unbilled rents receivable, net
   
(4,087
)
 
(6,183
)
Increase in deferred charges and other assets, net
   
(13,576
)
 
(6,802
)
Decrease (increase) in accounts receivable, net
   
2,185
   
(333
)
(Decrease) increase in accounts payable, accrued expenses and other liabilities
   
(2,165
)
 
2,698
 
Increase in rents received in advance and security deposits
   
3,574
   
4,475
 
Decrease in accrued interest payable
   
(15,649
)
 
(8,020
)
               
Net cash provided by operating activities
 
$
39,151
 
$
52,253
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
             
Additions to rental property and related intangibles
 
$
(19,000
)
$
(35,312
)
Repayments of notes receivable
   
41
   
39
 
Investment in unconsolidated joint ventures
   
(10,801
)
 
(779
)
Purchase of marketable securities available for sale
   
--
   
(11,912
)
Proceeds from sale of marketable securities available for sale
   
--
   
78,609
 
Increase in restricted cash
   
(840
)
 
(4,792
)
               
Net cash (used in) provided by investing activities
 
$
(30,600
)
$
25,853
 
               
CASH FLOWS FROM FINANCING ACTIVITIES
             
Proceeds from senior unsecured notes
   
--
 
$
199,914
 
Borrowings from revolving credit facility
 
$
76,000
   
223,750
 
Repayment of revolving credit facility
   
(221,000
)
 
(358,750
)
Repayment of mortgages, loans payable and other obligations
   
(19,091
)
 
(148,509
)
Payment of financing costs
   
--
   
(384
)
Proceeds from offering of Common Stock
   
251,732
   
--
 
Proceeds from stock options exercised
   
3,347
   
5,259
 
Payment of dividends and distributions
   
(50,591
)
 
(48,178
)
               
Net cash provided by (used in) financing activities
 
$
40,397
 
$
(126,898
)
               
Net increase (decrease) in cash and cash equivalents
 
$
48,948
 
$
(48,792
)
Cash and cash equivalents, beginning of period
 
$
101,223
   
60,397
 
               
Cash and cash equivalents, end of period
 
$
150,171
 
$
11,605
 
               
               
The accompanying notes are an integral part of these consolidated financial statements.
             


7



MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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 and third-parties. As of March 31, 2007, the Company owned or had interests in 300 properties plus developable land (collectively, the “Properties”). The Properties aggregate approximately 34.3 million square feet, which are comprised of 289 buildings, primarily office and office/flex buildings, totaling approximately 33.9 million square feet (which include 44 buildings, primarily office buildings, aggregating 5.4 million 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, a 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 Note 2: Significant Accounting Policies - Investments in Unconsolidated Joint Ventures 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.


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 $130,950,000 and $116,151,000 (including land of $64,405,000 and $63,136,000) as of March 31, 2007 and December 31, 2006, 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 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.
 
 
8



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 held for use may be impaired. A property’s value is impaired only if 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.

 
9

 
 
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 estimated 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
The Company accounts for its investments in unconsolidated joint ventures for which Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), 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, if any, 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.

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 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.

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

Marketable
Securities
The Company classifies its marketable securities among three categories: Held-to-maturity, trading and available-for-sale. Unrealized holding gains and losses relating to available-for-sale securities are excluded from earnings and reported as other comprehensive income (loss) in stockholders’ equity until realized. A decline in the market value of any marketable security below cost that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. Any impairment would be charged to earnings and a new cost basis for the security established.

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 $708,000 and $721,000 for the three months ended March 31, 2007 and 2006, 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 $1,137,000 and $849,000 for the three months ended March 31, 2007 and 2006, 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. Escalations and recoveries from tenants 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. Construction services revenue includes fees earned and reimbursements received by the Company for providing construction management and general contractor services to clients. Construction services revenue is recognized on the percentage of completion method. Using this method, profits are recorded on the basis of estimates of the overall profit and percentage of completion of individual contracts. A portion of the estimated profits is accrued based upon estimates of the percentage of completion of the construction contract. This revenue recognition method involves inherent risks relating to profit and cost estimates. Real estate services revenue includes property management, facilities management, leasing commission fees and other services, and payroll and related costs reimbursed from clients. Other income includes income from parking spaces leased to tenants, income from tenants for additional services arranged for by the Company and income from tenants for early lease terminations.

 
 
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Allowance for
Doubtful Accounts
Management periodically performs a detailed review of amounts due from tenants and clients 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.

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FAS No. 109”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustments regarding its tax accounting treatment. The Company expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which is included in general and administrative expense.

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.

12



Dividends and
Distributions
Payable
The dividends and distributions payable at March 31, 2007 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (67,848,012 shares), and distributions payable to minority interest common unitholders of the Operating Partnership (15,200,761 common units) for all such holders of record as of April 4, 2007 with respect to the first quarter 2007. The first quarter 2007 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.64 per common share and unit were approved by the Board of Directors on March 13, 2007. The preferred stock dividends, common stock dividends and common unit distributions payable were paid on April 16, 2007.

The dividends and distributions payable at December 31, 2006 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (62,925,271 shares), and distributions payable to minority interest common unitholders of the Operating Partnership (15,342,283 common units) for all such holders of record as of January 4, 2007 with respect to the fourth quarter 2006. The fourth quarter 2006 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.64 per common share and unit were approved by the Board of Directors on December 5, 2006. The common stock dividends and common unit distributions payable were paid on January 12, 2007. The preferred stock dividends payable were paid on January 16, 2007.

Costs Incurred For
Income
Costs incurred in connection with the Company’s 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, and in 2006, the Company adopted the provisions of FASB No. 123(R), which did not have a material effect on the Company’s financial position and results of operations. These provisions require 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 March 31, 2007 and 2006, the Company recorded restricted stock and stock options expense of $898,000 and $730,000 for the three months ended March 31, 2007 and 2006, respectively.

Other
Comprehensive
Income
Other comprehensive income (loss) includes items that are recorded in equity, such as unrealized holding gains or losses on marketable securities available for sale.
 
 
Income
Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.

 
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3.  
REAL ESTATE TRANSACTIONS

On February 27, 2007, the Company exercised its option to acquire approximately 43 acres of land sites adjacent to its Capital Office Park complex in Greenbelt, Maryland able to accommodate the development of up to 600,000 square feet of office space for $13 million. The option was acquired as part of the acquisition of the office complex in February 2006. The Company expects to complete the purchase of the land in the second quarter 2007.

On March 21, 2007, the Company announced that it reached an agreement to purchase condominium interests in 125 Broad Street (“Broad Street Condo”), a downtown Manhattan office tower, for $273 million. The condominium units being acquired include floors 2 through 16 of the 40-story building, and collectively comprise 39.6 percent, or 524,500 square feet, of the property. The condominium interests to be acquired are currently 100 percent leased. In a related transaction, the Company also signed a contract to sell 500 West Putnam Avenue, a 121,500 square-foot office building located in Greenwich, Connecticut to an affiliate of the seller of the Broad Street Condo, for $56 million. The Company expects to complete these transactions in the second quarter 2007. The completion of each of these transactions is contingent upon the other.

On April 10, 2007, the Company entered into an agreement to sell its 133,000 square-foot office building located at 1000 Bridgeport Avenue in Shelton, Connecticut for $16.8 million. The Company expects to complete the sale of the property in the second quarter 2007.


4.  
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The debt of the Company’s unconsolidated joint ventures aggregating $582.8 million as of March 31, 2007 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.

The Company and Mills owned a 20 percent and 80 percent interest, respectively, in the Meadowlands Venture. The Meadowlands Xanadu Venture Agreement required the Company to make an equity contribution up to a maximum of $32.5 million, which it fulfilled in April 2005.

Mills was to develop, lease and operate the entertainment phase of the Meadowlands Xanadu project (“ERC”). Upon the Company’s exercise of its rights under the Meadowlands Xanadu Venture Agreement to develop the office and hotel phases, the Meadowlands Venture was to convey ownership of the component ventures to the Company and Mills or its affiliate, and the Company or its affiliate was to own an 80 percent interest and Mills or its affiliate was to own a 20 percent interest in such component ventures.

On August 21, 2006, Mills announced that it had signed a non-binding letter of intent with Colony Capital Acquisitions, LLC (“Colony”) and Kan Am USA Management XXII Limited Partnership (“Kan Am”) under which Colony would arrange for construction financing for Meadowlands Xanadu and make a significant equity infusion into the Meadowlands Venture, and Mills would not have any financial obligations post closing (“Colony Transaction”). Kan Am has been a partner with Mills in the Meadowlands Venture.
 
 
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On November 22, 2006, the Company entered into and consummated a Redemption Agreement (the “Redemption Agreement”) with the Meadowlands Venture, Meadowlands Developer Holding Corp., a limited partner in the Meadowlands Venture, and the Meadowlands Limited Partnership (f/k/a Meadowlands/Mills Limited Partnership, and hereafter “MLP”), a general partner and a limited partner in the Meadowlands Venture. Immediately prior to entering into the Redemption Agreement, the investors in MLP undertook a restructuring of MLP whereby Colony became an indirect owner of MLP.

In connection with the Colony Transaction and pursuant to the Redemption Agreement, the Meadowlands Venture redeemed (the “Redemption”) the Company’s entire interest in the Meadowlands Venture and its right to participate in the development of the ERC component in exchange for (i) $22.5 million in cash and (ii) a non-economic partner interest in each of the office and hotel components of Meadowlands Xanadu. In connection with the Redemption, the Operating Partnership also received a non-interest bearing promissory note for an additional $2.5 million, which note is payable in full by MLP only at such time as the Operating Partnership exercises one of its options to develop the first of the office and hotel components of Meadowlands Xanadu. The Company’s remaining investment of approximately $11.9 million is included in deferred charges and other assets, net, as of December 31, 2006 and March 31, 2007.

Concurrent with the execution of the Redemption Agreement, the Company also entered into the Mack-Cali Rights, Obligations and Option Agreement (the “Rights Agreement”) by and among the Meadowlands Venture, MLP, Meadowlands Mack-Cali GP, L.L.C., Mack-Cali, Baseball Meadowlands Limited Partnership, A-B Office Meadowlands Mack-Cali Limited Partnership, C-D Office Meadowlands Limited Partnership, Hotel Meadowlands Mack-Cali Limited Partnership and ERC Meadowlands Mills/Mack-Cali Limited Partnership. Pursuant to the Rights Agreement, the Operating Partnership retained certain rights and obligations it held under the Meadowlands Xanadu Venture Agreement with respect to the development of the office and hotel components of Meadowlands Xanadu, including an option to develop any of the office or hotel components of Meadowlands Xanadu (each, a “Take Down Option”). Upon the exercise of an initial Take Down Option, the Operating Partnership will receive economic interests in each of the office or hotel component partnerships as both a general partner and a limited partner in the applicable office or hotel component, and following receipt of $2.5 million in full payment of the note from MLP, the Operating Partnership’s ownership interest in each of the office or hotel component partnerships will be reduced from 80 percent (as provided in the Meadowlands Xanadu Venture Agreement) to 75 percent.

G&G MARTCO (Convention Plaza)
The Company held a 50 percent interest in G&G Martco, which owns Convention Plaza, a 305,618 square foot office building, located in San Francisco, California. On November 6, 2006, the Company sold substantially all of its interest in the venture to an affiliate of its joint venture partner for approximately $16.3 million, realizing a gain on the sale of approximately $10.8 million. The Company performed management and leasing services for the property owned by the joint venture through the date of sale and recognized $45,000 in fees for such services in the three months ended March 31, 2006.

PLAZA VIII AND IX ASSOCIATES, L.L.C.
Plaza VIII and IX Associates, L.L.C. is a joint venture between the Company and Columbia Development Company, L.L.C. (“Columbia”). 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. The Company and Columbia each hold a 50 percent interest in the venture. 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 venture owns undeveloped land currently used as a parking facility.

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 $14.9 million balance at March 31, 2007 secured by its office/flex property. The mortgage bears interest at a rate of LIBOR plus 175 basis points and was scheduled to mature in January 2007, with one two-year extension option, subject to certain conditions. In November 2006, the venture exercised its option to extend the term of the loan until January 2009.
 
 
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The Company performs management, leasing and other services for the property owned by the joint venture and recognized $16,000 and $16,000 in fees for such services in the three months ended March 31, 2007 and 2006, respectively.

SOUTH PIER AT HARBORSIDE - HOTEL DEVELOPMENT
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, which was completed and commenced initial operations in July 2002. The Company owns a 50 percent interest in the venture.

On October 12, 2006, the venture obtained a $70.0 million mortgage loan (with a balance as of March 31, 2007 of $69.7 million) collateralized by the hotel property using the proceeds principally to retire $38.9 million of floating-rate debt and to make distributions to partners. The loan carries an interest rate of 6.15 percent and matures in November 2016. The venture has a loan with a balance as of March 31, 2007 of $7.3 million 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 a $7.3 million letter of credit in support of this loan, $3.6 million of which is indemnified by Hyatt.

RED BANK CORPORATE PLAZA L.L.C./RED BANK CORPORATE PLAZA II, L.L.C.
On March 23, 2006, the Company entered into a joint venture with the PRC Group (“PRC”) to form Red Bank Corporate Plaza L.L.C. The venture was formed to develop Red Bank Corporate Plaza, a 92,878 square foot office building located in Red Bank, New Jersey, which has been fully pre-leased to Hovnanian Enterprises, Inc. for a 10-year term. The Company holds a 50 percent interest in the venture. PRC contributed the vacant land for the development of the office building as its initial capital in the venture. The Company funded the costs of development up to the value of the land contributed by PRC of $3.5 million as its initial capital.

On October 20, 2006, the venture entered into a $22.0 million construction loan with a commercial bank collateralized by the land and development project. The loan (with a balance as of March 31, 2007 of $12.7 million), carries an interest rate of LIBOR plus 130 basis points and matures in April 2008. The loan currently has three one-year extension options subject to certain conditions, each of which requires payment of a fee.

On July 20, 2006, the Company entered into a second joint venture agreement with PRC to form Red Bank Corporate Plaza II L.L.C. The venture was formed to hold land on which it plans to develop Red Bank Corporate Plaza II, an 18,561 square foot office building located in Red Bank, New Jersey. The Company holds a 50 percent interest in the venture. The terms of the venture are similar to Red Bank Corporate Plaza L.L.C. PRC contributed the vacant land as its initial capital in the venture.

MACK-GREEN-GALE LLC
On May 9, 2006, as part of the Gale/Green transactions completed in May 2006, the Company entered into a joint venture, Mack-Green-Gale LLC (“Mack-Green”), with SL Green, pursuant to which Mack-Green holds a 96 percent interest and acts as general partner of Gale SLG NJ Operating Partnership, L.P. (the “OP LP”). The Company’s acquisition cost for its interest in Mack-Green was approximately $125 million, which was funded primarily through borrowing under the Company’s revolving credit facility. The OP LP owns 100 percent of entities which own 25 office properties (the “OP LP Properties”) which aggregate 3.5 million square feet (consisting of 17 office properties aggregating 2.3 million square feet located in New Jersey and eight properties aggregating 1.2 million square feet located in Troy, Michigan), as well as a minor, non-controlling interest in four office properties aggregating 419,000 square feet located in Naperville, Illinois.

As defined in the Mack-Green operating agreement, the Company shares decision-making equally with SL Green regarding: (i) all major decisions involving the operations of Mack-Green; and (ii) overall general partner responsibilities in operating the OP LP.

The Mack-Green operating agreement generally provides for profits and losses to be allocated as follows:
 
 
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(i)  
99 percent of Mack-Green’s share of the profits and losses from 10 specific OP LP Properties allocable to the Company and one percent allocable to SL Green;
(ii)  
one percent of Mack-Green’s share of the profits and losses from eight specific OP LP Properties and its minor interest in four office properties allocable to the Company and 99 percent allocable to SL Green; and
(iii)  
50 percent of all other profits and losses allocable to the Company and 50 percent allocable to SL Green.

Substantially all of the OP LP Properties are encumbered by mortgage loans with an aggregate outstanding principal balance of $359.3 million at March 31, 2007. $189.4 million of the mortgage loans bear interest at a weighted average fixed interest rate of 6.32 percent per annum and mature at various times through May 2016. $170.0 million of the mortgage loans bear interest at a floating rate ranging from LIBOR plus 185 basis points to LIBOR plus 400 basis points per annum and mature at various times through January 2009. Included in the floating rate mortgage loans are $90.3 million provided by an affiliate of SL Green.

On August 9, 2006, $69.7 million of mortgage loans were refinanced. The new loan has a maximum principal amount of $90.0 million with $78.9 million drawn at March 31, 2007. The loan provides the ability to draw funds for qualified leasing and capital improvement costs. The loan bears interest at a rate of LIBOR plus 185 basis points and matures on August 8, 2008 with a two-year extension option.

The Company performs management, leasing, and construction services for the properties owned by the joint venture and recognized $598,700 in income (net of $529,300 in direct costs) for such services in the three months ended March 31, 2007.

GE/GALE FUNDING LLC (PFV)
The Gale agreement signed as part of the Gale/Green transactions in May 2006 provides for the Company to acquire certain ownership interests in real estate projects (the “Non-Portfolio Properties”), subject to obtaining certain third party consents and the satisfaction of various project-related and/or other conditions. Each of the Company’s acquired interests in the Non-Portfolio Properties provide for the initial distributions of net cash flow solely to the Company, and thereafter an affiliate of Mr. Gale (“Gale Affiliate”) has participation rights (“Gale Participation Rights”) in 50 percent of the excess net cash flow remaining after the distribution to the Company of the aggregate amount equal to the sum of: (a) the Company’s capital contributions, plus (b) an internal rate of return (“IRR”) of 10 percent per annum, accruing on the date or dates of the Company’s investments.

On May 9, 2006, as part of the Gale/Green transactions, the Company acquired from a Gale Affiliate for $1.8 million a 50 percent controlling interest in GMW Village Associates, LLC (“GMW Village”). GMW Village holds a 20 percent interest in GE/Gale Funding LLC (“GE Gale”). GE Gale owns a 100 percent interest in the entity owning Princeton Forrestal Village, a mixed-use, office/retail complex aggregating 527,015 square feet and located in Plainsboro, New Jersey (“Princeton Forrestal Village” or “PFV”).

In addition to the cash consideration paid to acquire the interest, the Company provided a Gale affiliate with the Gale Participation Rights.

The operating agreement of GE Gale, which is owned 80 percent by GEBAM, Inc., provides for, among other things, distributions of net cash flow, initially, in proportion to each member’s interest and subject to adjustment upon achievement of certain financial goals, as defined in the operating agreement.

GE Gale has a mortgage loan with a balance of $52.8 million at March 31, 2007. The loan bears interest at a rate of LIBOR plus 275 basis points and matures on January 9, 2009, with an extension option through January 9, 2011.

The Company performs management, leasing, and construction services for PFV and recognized $211,500 in income (net of $714,000 in direct costs) for such services in the three months ended March 31, 2007.

ROUTE 93 MASTER LLC (“Route 93 Participant”)/ROUTE 93 BEDFORD MASTER LLC (with the Route 93 Participant, collectively, the “Route 93 Venture”)
On June 1, 2006, the Route 93 Venture was formed between the Route 93 Participant, a majority-owned subsidiary of the Company, having a 30 percent interest and the Commingled Pension Trust Fund (Special Situation Property) of JPMorgan Chase Bank having a 70 percent interest, for the purpose of acquiring seven office buildings, aggregating 666,697 square feet, located in the towns of Andover, Bedford and Billerica, Massachusetts. Profits and losses are shared by the partners in proportion to their respective interests until the investment yields an 11 percent IRR, then sharing will shift to 40/60, and when the IRR reaches 15 percent, then sharing will shift to 50/50.
 
 
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The Route 93 Participant is a joint venture between the Company and a Gale affiliate. Profits and losses are shared by the partners under this venture in proportion to their respective interests (83.3/16.7) until the investment yields an 11 percent IRR, then sharing will shift to 50/50.

The Route 93 Ventures have mortgage loans with an amount not to exceed $58.6 million, with a $39.4 million balance at March 31, 2007 collateralized by its office properties. The loan provides the venture the ability to draw additional monies for qualified leasing and capital improvement costs. The loan bears interest at a rate of LIBOR plus 220 basis points and matures on July 11, 2008, with three one-year extension options.

GALE KIMBALL, L.L.C.
On June 15, 2006, the Company entered into a joint venture with a Gale Affiliate to form M-C Kimball, LLC (“M-C Kimball”). M-C Kimball was formed for the sole purpose of acquiring a Gale Affiliate’s 33.33 percent membership interest in Gale Kimball, L.L.C. (“Gale Kimball”), an entity holding a 25 percent interest in 100 Kimball Drive LLC (“100 Kimball”), which is developing a 175,000 square foot office property located at 100 Kimball Drive, Parsippany, New Jersey (the “Kimball Property”).

The operating agreement of M-C Kimball provides, among other things, for the Gale Participation Rights (of which Mark Yeager, an Executive Vice President of the Company, has a direct 26 percent interest).

Gale Kimball is owned 33.33 percent by M-C Kimball and 66.67 percent by the Hampshire Generational Fund, L.L.C. (“Hampshire”). The operating agreement of Gale Kimball provides, among other things, for the distribution of net cash flow, initially, in accordance with its members’ respective membership interests and, upon achievement of certain financial conditions, 50 percent to each of the Company and Hampshire.

100 Kimball is owned 25 percent by Gale Kimball and 75 percent by 100 Kimball Drive Realty Member LLC, an affiliate of JP Morgan (“JPM”). The operating agreement of 100 Kimball provides, among other things, for the distributions to be made in the following order:

(i)  
first, to JPM, such that JPM is provided with an annual 12 percent compound preferred return on Preferred Equity Capital Contributions (as such term is defined in the operating agreement of 100 Kimball and largely comprised of development and construction costs);

(ii)  
second, to JPM, as return of Preferred Equity Capital Contributions until complete repayment of such Preferred Equity Capital Contributions;

(iii)  
third, to each of JPM and Gale Kimball in proportion to their respective membership interests until each member is provided, as a result of such distributions, with an annual twelve percent compound return on the Member’s Capital Contributions (as defined in the operating agreement of 100 Kimball, and excluding Preferred Equity Capital Contributions, if any); and

(iv)  
fourth, 50 percent to each of JPM and Gale Kimball.

100 Kimball has a construction loan in an amount not to exceed $29 million, with a balance at March 31, 2007 of $16.7 million. The loan bears interest at a rate of LIBOR plus 195 basis points and matures on December 8, 2008 with a one-year extension option.

The Company performs construction and development services for the property owned by 100 Kimball for which it recognized $13,000 in income (net of $747,000 in direct costs) in the three months ended March 31, 2007.

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55 CORPORATE PARTNERS, LLC
On June 9, 2006, the Company entered into a joint venture with a Gale Affiliate to form 55 Corporate Partners, LLC (“55 Corporate”). 55 Corporate was formed for the sole purpose of acquiring from a Gale Affiliate a 50 percent interest in SLG 55 Corporate Drive II, LLC (“SLG 55”), an entity indirectly holding a condominium interest in a vacant land parcel located in Bridgewater, New Jersey, which can accommodate development of an approximately 200,000 square foot office building. Sanofi-Aventis, which occupies neighboring buildings, has an option to cause the venture to construct the building, which it would lease on a long-term basis. Sanofi-Aventis is required to pay a penalty of $7 million, subject to certain conditions, in the event it fails to exercise the option by November 2007. The remaining 50 percent in SLG 55 is owned by SLG Gale 55 Corporate LLC, an affiliate of SL Green Realty Corp (“SLG Gale 55”).

The operating agreement of 55 Corporate provides, among other things, for the Gale Participation Rights (of which Mr. Yeager has a direct 26 percent interest). If Mr. Gale receives any commission payments with respect to a Sanofi lease on the development property, Mr. Gale has agreed to pay to Mr. Yeager 26 percent of such payments.

The operating agreement of SLG 55 provides, among other things, for the distribution of the available net cash flow to each of 55 Corporate and SLG Gale 55 in proportion to their respective membership interests in SLG 55 (50 percent each).

12 VREELAND ASSOCIATES, L.L.C.
On September 8, 2006, the Company entered into a joint venture with a Gale Affiliate to form M-C Vreeland, LLC (“M-C Vreeland”). M-C Vreeland was formed for the sole purpose of acquiring a Gale Affiliate’s 50 percent membership interest in 12 Vreeland Associates, L.L.C., an entity owning an office property located at 12 Vreeland Road, Florham Park, New Jersey.

The operating agreement of M-C Vreeland provides, among other things, for the Gale Participation Rights (of which Mr. Yeager has a direct 15 percent interest).

The office property at 12 Vreeland is a 139,750 square foot office building that is fully leased to a single tenant through June 15, 2012. The property is subject to a mortgage loan, which matures on July 1, 2012, in the initial amount of $18.1 million bearing interest at 6.9 percent per annum. As of March 31, 2007 the outstanding balance on the mortgage note was $9.9 million.

Under the operating agreement of 12 Vreeland Associates, L.L.C., M-C Vreeland has a 50 percent interest, with S/K Florham Park Associates, L.L.C. (the managing member) and its affiliate holding the other 50 percent.

BOSTON-FILENES
On October 20, 2006, the Company formed a joint venture (the “MC/Gale JV LLC”) with Gale International/426 Washington St. LLC (“Gale/426”), which, in turn, entered into a joint venture (the “Vornado JV LLC”) with VNO 426 Washington Street JV LLC (“Vornado”), an affiliate of Vornado Realty LP, which was formed to acquire and redevelop the Filenes property located in the Downtown Crossing district of Boston, Massachusetts (the “Filenes Property”).

On January 25, 2007, (i) each of M-C/Gale JV LLC, Gale and Washington Street Realty Member LLC (“JPM”) formed a joint venture (“JPM JV LLC”), (ii) M-C/Gale JV LLC assigned its entire 50 percent ownership interest in the Vornado JV LLC to JPM JV LLC, (iii) the Limited Liability Company Agreement of Vornado JV LLC was amended to reflect, among other things, the change in the ownership structure described in subsection (ii) above, and (iv) the Limited Liability Company Agreement of MC/Gale JV LLC was amended and restated to reflect, among other things, the change in the ownership structure described in subsection (ii) above. In January 2007, the Company funded an additional $9.6 million in the venture. The Vornado JV LLC acquired the Filenes Property on January 29, 2007, for approximately $100 million.

As a result of the foregoing transactions, as of January 29, 2007, (i) the Filenes Property is owned by Vornado JV LLC, (ii) Vornado JV LLC is owned 50 percent by each of Vornado and JPM JV LLC, (iii) JPM JV LLC is owned 30 percent by M-C/Gale JV LLC, 70 percent by JPM and managed by Gale/426, which has no ownership interest in JPM JV LLC, and (iv) M-C/Gale JV LLC is owned 99.99 percent by the Company and 0.01 percent by Gale/426. Thus, the Company holds approximately a 15 percent indirect ownership interest in the Vornado JV LLC and the Filenes Property.
 
 
19


 
Distributions are made (i) by Vornado JV LLC in proportion to its members’ respective ownership interests, (ii) by JPM JV LLC (a) initially, in proportion to its members’ respective ownership interests until JPM’s investment yields an 11 percent IRR, (b) thereafter, 60/40 to JPM and MC/Gale JV LLC, respectively, until JPM’s investment yields a 15 percent IRR and (c) thereafter, 50/50 to JPM and MC/Gale JV LLC, respectively, and (iii) by MC/Gale JV LLC (w) initially, in proportion to its members’ respective ownership interests until each member has received a 10 percent IRR on its investment, (x) thereafter, 65/35 to the Company and Gale/426, respectively, until the Company’s investment yields a 15 percent IRR, (y) if by the time the Company receives a 15 percent IRR on its investment, Gale/426 has not done so, 100 percent to Gale/426 until Gale/426’s investment yields a 15 percent IRR, and (z) thereafter, 50/50 to each of the Company and Gale/426.

The joint venture’s current plans for the development of the Filenes Property include approximately 1.2 million square feet consisting of office, retail, condominium apartments, hotel and a garage. The project is subject to governmental approvals.

NKFGMS OWNERS, LLC
On December 28, 2006, the Company contributed its facilities management business, which was acquired on May 9, 2006 as part of the Gale/Green transactions, to a newly-formed joint venture called NKFGMS Owners, LLC. With the contribution, the Company received $600,000 in cash and a 40 percent interest in the joint venture. The Company and a joint venture partner agreed to loan up to $3 million in total to the venture from time to time until December 28, 2009, which shall be funded by each of the Company and the joint venture partner on a pro-rata basis in an amount not to exceed $1.5 million, respectively. The joint venture operating agreement provides for, among other things, profits and losses generally to be allocated in proportion to each member’s interest. In connection with the Contribution, the Company recognized a loss of approximately $1.5 million.


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 March 31, 2007 and December 31, 2006: (dollars in thousands)

 
March 31, 2007
 
Plaza
   
Red Bank
Mack-
Princeton
         
NKFGMS
 
 
VIII & IX
Ramland
Harborside
Corporate
Green-
Forrestal
Route 93
Gale
55
12
Boston-
Owners
Combined
 
Associates
Realty
South Pier
Plaza
Gale
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
LLC
Total
Assets:
                         
Rental property, net
$ 11,250
$ 11,992
$ 67,819
$ 17,751
$ 479,024
$ 41,255
$ 58,343
$ 27,860
$ 17,000
$ 8,154
--
$ 242
$ 740,690
Other assets
1,625
825
11,486
2,089
72,453
28,419
5,721
654
--
887
$ 49,545
5,452
179,156
Total assets
$ 12,875
$ 12,817
$ 79,305
$ 19,840
$ 551,477
$ 69,674
$ 64,064
$ 28,514
$ 17,000
$ 9,041
$ 49,545
$ 5,694
$ 919,846
Liabilities and partners’/members’ capital
                         
(deficit):
                         
Mortgages, loans payable and other obligations
--
$ 14,906
$ 77,012
$ 12,694
$ 359,348
$ 52,800
$ 39,435
$ 16,710
--
$ 9,922
--
--
$ 582,827
Other liabilities
$ 529
409
3,288
23
36,125
7,224
1,072
--
--
--
$ 139
$ 4,622
53,431
Partners’/members’ capital (deficit)
12,346
(2,498)
(995)
7,123
156,004
9,650
23,557
11,804
$ 17,000
(881)
49,406
1,072
283,588
Total liabilities and partners’/members’ capital
                         
(deficit)
$ 12,875
$ 12,817
$ 79,305
$ 19,840
$ 551,477
$ 69,674
$ 64,064
$ 28,514
$ 17,000
$ 9,041
$ 49,545
$ 5,694
$ 919,846
                           
Company’s investment in unconsolidated
                         
joint ventures, net
$ 6,093
--
--
$ 3,713
$ 118,684
$ 2,429
$ 5,754
$ 1,032
$ 8,500
$ 7,251
$ 14,976
$ 429
$ 168,861




 
December 31, 2006
 
Plaza
   
Red Bank
Mack-
Princeton
         
NKFGMS
 
 
VIII & IX
Ramland
Harborside
Corporate
Green-
Forrestal
Route 93
Gale
55
12
Boston-
Owners
Combined
 
Associates
Realty
South Pier
Plaza
Gale
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
LLC
Total
Assets:
                         
Rental property, net
$ 11,404
$ 12,141
$ 69,303
$ 12,462
$ 480,867
$ 37,825
$ 48,699
$ 26,601
$ 17,000
$ 8,221
--
$ 239
$ 724,762
Other assets
1,408
841
11,170
3,309
76,897
25,025
5,916
654
--
909
$ 10,500
2,638
139,267
Total assets
$ 12,812
$ 12,982
$ 80,473
$ 15,771
$ 557,764
$ 62,850
$ 54,615
$ 27,255
$ 17,000
$ 9,130
$ 10,500
$ 2,877
$ 864,029
Liabilities and partners’/members’ capital
                         
(deficit):
                         
Mortgages, loans payable and other obligations
--
$ 14,936
$ 77,217
$ 8,673
$ 358,063
$ 47,761
$ 34,413
$ 15,350
--
$10,253
--
--
$ 566,666
Other liabilities
$ 532
257
4,944
8
39,497
4,839
587
--
--
--
--
$ 1,329
51,993
Partners’/members’ capital (deficit)
12,280
(2,211)
(1,688)
7,090
160,204
10,250
19,615
11,905
$ 17,000
(1,123)
$ 10,500
1,548
245,370
Total liabilities and partners’/members’ capital
                         
(deficit)
$ 12,812
$ 12,982
$ 80,473
$ 15,771
$ 557,764
$ 62,850
$ 54,615
$ 27,255
$ 17,000
$ 9,130
$ 10,500
$ 2,877
$ 864,029
Company’s investment in unconsolidated
                         
joint ventures, net
$ 6,060
--
--
$ 3,647
$ 119,061
$ 2,560
$ 6,669
$ 1,024
$ 8,500
$ 7,130
$ 5,250
$ 400
$ 160,301


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 March 31, 2007 and 2006: (dollars in thousands)


 
Three Months Ended March 31, 2007
     
Plaza
   
Red Bank
Mack-
Princeton
         
NKFGMS
 
 
Meadowlands
G&G
VIII & IX
Ramland
Harborside
Corporate
Green-
Forrestal
Route 93
Gale
55
12
Boston-
Owners
Combined
 
Xanadu
Martco
Associates
Realty
South Pier
Plaza
Gale
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
LLC
Total
Total revenues
--
--
$ 259
$ 526
$ 8,938
--
$ 16,440
$ 2,868
$ 325
--
--
$ 524
$ 326
$ 8,990
$ 39,196
Operating and
                             
other expenses
--
--
(39)
(374)
(5,563)
--
(7,442)
(1,631)
(888)
$ (9)
--
(19)
(261)
(8,918)
(25,144)
Depreciation and
                             
amortization
--
--
(154)
(175)
(1,478)
--
(6,735)
(751)
(1,624)
--
--
(88)
--
--
(11,005)
Interest expense
--
--
--
(264)
(1,203)
--
(6,624)
(1,106)
(732)
(93)
--
(175)
--
--
(10,197)
                               
Net income
--
--
$ 66
$ (287)
$ 694
--
$ (4,361)
$ (620)
$ (2,919)
$ (102)
--
$ 242
$ 65
$ 72
$ (7,150)
Company’s equity
                             
in earnings (loss)
                             
of unconsolidated
                             
joint ventures
--
--
$ 33
--
$ 347
--
$ (1,736)
$ (132)
$ (904)
$ (8)
--
$ 121
$ 19
$ 29
$ (2,231)




 
Three Months Ended March 31, 2006
     
Plaza
   
Red Bank
Mack-
Princeton
         
NKFGMS
 
 
Meadowlands
G&G
VIII & IX
Ramland
Harborside
Corporate
Green-
Forrestal
Route 93
Gale
55
12
Boston-
Owners
Combined
 
Xanadu
Martco
Associates
Realty
South Pier
Plaza
Gale
Village
Portfolio
Kimball
Corporate
Vreeland
Filenes
LLC
Total
Total revenues
--
$1,869
$ 126
$ 512
$ 7,829
--
--
--
--
--
--
--
--
--
$ 10,336
Operating and
                             
other expenses
--
(902)
(42)
(340)
(4,885)
--
--
--
--
--
--
--
--
--
(6,169)
Depreciation and
                             
amortization
--
(355)
(154)
(188)
(1,449)
--
--
--
--
--
--
--
--
--
(2,146)
Interest expense
--
(725)
--
(236)
(950)
--
--
--
--
--
--
--
--
--
(1,911)
                               
Net income
--
$ (113)
$ (70)
$ (252)
$ 545
--
--
--
--
--
--
--
--
--
$ 110
Company’s equity
                             
in earnings (loss)
                             
of unconsolidated
                             
joint ventures
--
$ 10
$ (35)
--
$ 272
--
--
--
--
--
--
--
--
--
$ 247



22



5.  
DEFERRED CHARGES AND OTHER ASSETS
 
 
March 31,
December 31,
(dollars in thousands)
2007
2006
Deferred leasing costs
$181,994
$184,175
Deferred financing costs
21,252
21,252
 
203,246
205,427
Accumulated amortization
(74,448)
(76,407)
Deferred charges, net
128,798
129,020
Notes receivable
11,728
11,769
In-place lease values, related intangible and other assets, net
53,014
58,495
Prepaid expenses and other assets, net
50,656
41,353
     
Total deferred charges and other assets, net
$244,196
$240,637


6.  
DISCONTINUED OPERATIONS

On March 15, 2007, the Company entered into an agreement to sell its 121,250 square-foot office building located at 500 West Putnam Avenue in Greenwich, Connecticut for $56 million. This transaction is contingent upon the Company’s completion of a contracted acquisition of the Broad Street Condo from an affiliate of the buyer. The Company expects to complete these transactions in the second quarter 2007.

On April 10, 2007, the Company entered into an agreement to sell its 133,000 square-foot office building located at 1000 Bridgeport Avenue in Shelton, Connecticut for $16.8 million. The Company expects to complete the sale of the property in the second quarter 2007.

The above referenced properties are identified as held for sale as of March 31, 2007 and carried an aggregate book value of $30.3 million, net of accumulated depreciation of $8.7 million.

The Company has presented these assets as discontinued operations in its statements of operations for the periods presented. As the Company sold 300 Westage Business Center Drive in Fishkill, New York, 1510 Lancer Drive in Moorestown, New Jersey; a Colorado portfolio in various cities throughout Colorado; and a California portfolio in San Francisco, California during the year ended December 31, 2006, the Company has presented these assets as discontinued operations in its statements of operations for all periods presented.

The following tables summarize income from discontinued operations (net of minority interest) for the three month periods ended March 31, 2007 and 2006:  (dollars in thousands)

   
Three Months Ended
 
   
March 31,
 
   
2007
 
2006
 
Total revenues
 
$
1,731
 
$
11,647
 
Operating and other expenses
   
(715
)
 
(4,778
)
Depreciation and amortization
   
(343
)
 
(3,064
)
Interest expense (net of interest income)
   
(348
)
 
(348
)
Minority interest
   
(61
)
 
(649
)
               
Income from discontinued operations
             
(net of minority interest)
 
$
264
 
$
2,808
 
 

 
23

 

 
7.  
SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of March 31, 2007 and December 31, 2006 is as follows: (dollars in thousands)

   
March 31,
 
December 31,
 
Effective
 
   
2007
 
2006
 
Rate (1)
 
7.250% Senior Unsecured Notes, due March 15, 2009
 
$
299,540
 
$
299,481
   
7.49
%
5.050% Senior Unsecured Notes, due April 15, 2010
   
149,833
   
149,819
   
5.27
%
7.835% Senior Unsecured Notes, due December 15, 2010
   
15,000
   
15,000
   
7.95
%
7.750% Senior Unsecured Notes, due February 15, 2011
   
299,338
   
299,295
   
7.93
%
5.250% Senior Unsecured Notes, due January 15, 2012
   
99,064
   
99,015
   
5.46
%
6.150% Senior Unsecured Notes, due December 15, 2012
   
92,104
   
91,981
   
6.89
%
5.820% Senior Unsecured Notes, due March 15, 2013
   
25,447
   
25,420
   
6.45
%
4.600% Senior Unsecured Notes, due June 15, 2013
   
99,822
   
99,815
   
4.74
%
5.125% Senior Unsecured Notes, due February 15, 2014
   
201,648
   
201,708
   
5.11
%
5.125% Senior Unsecured Notes, due January 15, 2015
   
149,279
   
149,256
   
5.30
%
5.800% Senior Unsecured Notes, due January 15, 2016
   
200,673
   
200,692
   
5.81
%
                     
Total Senior Unsecured Notes
 
$
1,631,748
 
$
1,631,482
       
                     
(1) Includes the cost of terminated treasury lock agreements (if any), offering and other transaction costs and the discount on the notes, as applicable.


8.  
UNSECURED REVOLVING CREDIT FACILITY

The Company has an unsecured revolving credit facility with a borrowing capacity of $600 million, (expandable to $800 million). The interest rate on outstanding borrowings (not electing the Company’s competitive bid feature) under the unsecured facility is currently LIBOR plus 65 basis points. The facility has a competitive bid feature, which allows the Company to solicit bids from lenders under the facility to borrow up to $300 million at interest rates less than the current LIBOR plus 65 basis point spread. The Company may also elect an interest rate representing the higher of the lender’s prime rate or the Federal Funds rate plus 50 basis points. The unsecured facility, which also requires a 15 basis point facility fee on the current borrowing capacity payable quarterly in arrears, is scheduled to mature in November 2009 and has an extension option of one year, which would require a payment of 25 basis points of the then borrowing capacity of the facility upon exercise.

The interest rate and the facility fee are subject to adjustment, on a sliding scale, based upon the operating partnership’s unsecured debt ratings. In the event of a change in the Operating Partnership’s unsecured debt rating, the interest and facility fee rates will be adjusted in accordance with the following table:

Operating Partnership’s
Interest Rate -
 
Unsecured Debt Ratings:
Applicable Basis Points
Facility Fee
S&P Moody’s/Fitch (a)
Above LIBOR
Basis Points
No ratings or less than BBB-/Baa3/BBB-
112.5
25.0
BBB-/Baa3/BBB-
80.0
20.0
BBB/Baa2/BBB (current)
65.0
15.0
BBB+/Baa1/BBB+
55.0
15.0
A-/A3/A- or higher
50.0
15.0
     
(a) If the Operating Partnership has debt ratings from two rating agencies, one of which is Standard & Poor’s Rating Services (“S&P”) or Moody’s Investors Service (“Moody’s”), the rates per the above table shall be based on the lower of such ratings. If the Operating Partnership has debt ratings from three rating agencies, one of which is S&P or Moody’s, the rates per the above table shall be based on the lower of the two highest ratings. If the Operating Partnership has debt ratings from only one agency, it will be considered to have no rating or less than BBB-/Baa3/BBB- per the above table.
 
 
 
24

 
The terms of the unsecured facility include certain restrictions and covenants which limit, among other things, the payment of dividends (as discussed below), the incurrence of additional indebtedness, the incurrence of liens and the disposition of real estate properties (to the extent that: (i) such property dispositions cause the Company to default on any of the financial ratios of the facility described below, or (ii) the property dispositions are completed while the Company is under an event of default under the facility, unless, under certain circumstances, such disposition is being carried out to cure such default), and which require compliance with financial ratios relating to the maximum leverage ratio, the maximum amount of secured indebtedness, the minimum amount of tangible net worth, the minimum amount of fixed charge coverage, the maximum amount of unsecured indebtedness, the minimum amount of unencumbered property interest coverage and certain investment limitations. The dividend restriction referred to above provides that, except to enable the Company to continue to qualify as a REIT under the Code, the Company will not during any four consecutive fiscal quarters make distributions with respect to common stock or other common equity interests in an aggregate amount in excess of 90 percent of funds from operations (as defined in the facility agreement) for such period, subject to certain other adjustments.

The lending group for the credit facility consists of: JPMorgan Chase Bank, N.A., as administrative agent; Bank of America, N.A., as syndication agent; The Bank of Nova Scotia, New York Agency; Wachovia Bank, National Association; and Wells Fargo Bank, National Association, as documentation agents; SunTrust Bank, as senior managing agent; US Bank National Association; Citicorp North America, Inc.; and PNC Bank National Association, as managing agents; and Bank of China, New York Branch; The Bank of New York; Chevy Chase Bank, F.S.B.; The Royal Bank of Scotland, plc; Mizuho Corporate Bank, Ltd.; UFJ Bank Limited, New York Branch; The Governor and Company of the Bank of Ireland; Bank Hapoalim B.M.; Comerica Bank; Chang Hwa Commercial Bank, Ltd., New York Branch; First Commercial Bank, New York Agency; Chiao Tung Bank Co., Ltd., New York Agency; Deutsche Bank Trust Company Americas; and Hua Nan Commercial Bank, New York Agency.

SUMMARY
As of March 31, 2007 and December 31, 2006, the Company had outstanding borrowings of $0 and $145.0 million, respectively, under its unsecured revolving credit facility.


9.  
MORTGAGES, LOANS PAYABLE AND OTHER OBLIGATIONS

The Company has mortgages, loans payable and other obligations which primarily consist of various loans collateralized by certain of the Company’s rental properties. As of March 31, 2007, 18 of the Company’s properties, with a total book value of approximately $516.5 million, are encumbered by the Company’s mortgages and loans payable. Payments on mortgages, loans payable and other obligations are generally due in monthly installments of principal and interest, or interest only.

25



A summary of the Company’s mortgages, loans payable and other obligations as of March 31, 2007 and December 31, 2006 is as follows: (dollars in thousands)

   
Effective
Principal Balance at
 
   
Interest
March 31,
December 31,
 
Property Name
Lender
Rate (a)
2007
2006
     Maturity
Mack-Cali Airport
Allstate Life Insurance Co.
7.05%
--
$ 9,422
(b)
6303 Ivy Lane
State Farm Life Insurance Co.
5.57%
--
6,020
(c)
6404 Ivy Lane
TIAA
5.58%
$ 13,509
13,665
08/01/08
Assumed obligations
Various
4.91%
35,666
38,742
05/01/09 (d)
Various (e)
Prudential Insurance
4.84%
150,000
150,000
01/15/10
105 Challenger Road
Archon Financial CMBS
6.24%
18,803
18,748
06/06/10
2200 Renaissance Boulevard
TIAA
5.89%
17,727
17,819
12/01/12
Soundview Plaza
TIAA
6.02%
17,906
18,013
01/01/13
9200 Edmonston Road
Principal Commercial Funding L.L.C.
5.53%
5,198
5,232
05/01/13
6305 Ivy Lane
John Hancock Life Insurance Co.
5.53%
7,239
7,285
01/01/14
395 West Passaic
State Farm Life Insurance Co.
6.00%
12,898
12,996
05/01/14
6301 Ivy Lane
John Hancock Life Insurance Co.
5.52%
6,780
6,821
07/01/14
35 Waterview Blvd.
Wachovia CMBS
6.35%
20,259
20,318
08/11/14
500 West Putnam Avenue (f)
New York Life Insurance Co.
5.57%
25,000
25,000
01/10/16
23 Main Street
JP Morgan CMBS
5.59%
33,284
33,396
09/01/18
           
Total mortgages, loans payable and other obligations
 
$364,269
$383,477
 

(a) Reflects effective rate of debt, including deferred financing costs, comprised of the cost of terminated treasury lock agreements (if any), debt initiation costs and other transaction costs, as applicable.
(b) On February 5, 2007, the Company repaid this mortgage loan at par, using available cash.
(c) On February 15, 2007, the Company repaid this mortgage loan at par, using available cash.
(d) The obligations mature at various times through May 2009.
(e) Mortgage is collateralized by seven properties.
(f) Property securing this mortgage is under contract for sale and is included in Rental Property Held For Sale.

CASH PAID FOR INTEREST AND INTEREST CAPITALIZED
Cash paid for interest for the three months ended March 31, 2007 and 2006 was $47,390,000 and $40,170,000 respectively. Interest capitalized by the Company for the three months ended March 31, 2007 and 2006 was $1,324,000 and $1,487,000, respectively.

SUMMARY OF INDEBTEDNESS
As of March 31, 2007, the Company’s total indebtedness of $1,996,017,000 (weighted average interest rate of 6.14 percent) was comprised entirely of fixed rate debt.

As of December 31, 2006, the Company’s total indebtedness of $2,159,959,000 (weighted average interest rate of 6.11 percent) was comprised of $145,000,000 of revolving credit facility borrowings (weighted average rate of 5.76 percent) and fixed rate debt of $2,014,959,000 (weighted average rate of 6.14 percent).


10.  
MINORITY INTERESTS

OPERATING PARTNERSHIP
Minority interests in the accompanying consolidated financial statements relate to (i) preferred units (“Preferred Units”) and common units in the Operating Partnership, held by parties other than the Company, and (ii) interests in consolidated joint ventures for the portion of such properties not owned by the Company.

PREFERRED UNITS
In connection with the Company’s issuance of $25 million of Series C cumulative redeemable perpetual preferred stock, the Company acquired from the Operating Partnership $25 million of Series C Preferred Units (the “Series C Preferred Units”), which have terms essentially identical to the Series C preferred stock. See Note 14: Stockholders’ Equity - Preferred Stock.
 
 
26

 

 
COMMON UNITS
Certain individuals and entities own common units in the Operating Partnership. A common unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. Common units are redeemable by the common unitholders at their option, subject to certain restrictions, on the basis of one common unit for either one share of common stock or cash equal to the fair market value of a share at the time of the redemption. The Company has the option to deliver shares of common stock in exchange for all or any portion of the cash requested. The common unitholders may not put the units for cash to the Company or the Operating Partnership. When a unitholder redeems a common unit, minority interest in the Operating Partnership is reduced and the Company’s investment in the Operating Partnership is increased.

UNIT TRANSACTIONS
The following table sets forth the changes in minority interest which relate to the common units in the Operating Partnership for the three months ended March 31, 2007: (dollars in thousands)

     
Common
Common
     
Units
Unitholders
Balance at January 1, 2007
   
15,342,283
$480,103
Net income
   
--
4,323
Distributions
   
--
(9,728)
Redemption of common units for shares
       
of Common Stock
   
(141,522)
(4,428)
         
Balance at March 31, 2007
   
15,200,761
$470,270

MINORITY INTEREST OWNERSHIP
As of March 31, 2007 and December 31, 2006, the minority interest common unitholders owned 18.3 percent and 19.6 percent of the Operating Partnership, respectively.

CONSOLIDATED JOINT VENTURES
The Company has ownership interests in certain joint ventures which it consolidates. Various entities and/or individuals hold minority interests in these ventures.


11.  
EMPLOYEE BENEFIT 401(k) PLANS

Employees of the Company, other than those assigned to the Gale Company and affiliated employers, who meet certain minimum age and period of service requirements are eligible to participate in a 401(k) defined contribution plan (the “401(k) Plan”). The 401(k) Plan allows eligible employees to defer from 1 to 30 percent of their annual compensation, subject to certain limitations imposed by federal law. The amounts contributed by employees are immediately vested and non-forfeitable. The Company, at management’s discretion, may match employee contributions and/or make discretionary contributions. Total expense recognized by the Company for the 401(k) Plan for the three months ended March 31, 2007 and 2006 was $100,000 and $100,000, respectively.

All employees of the Gale Company and other affiliated participating employers, other than certain employees who are represented for collective bargaining purposes by a labor organization, who meet certain minimum age and period of service requirements are eligible to participate in a 401(k) defined contribution plan (the “Gale Plan”). The Gale Plan allows eligible employees to defer from their annual compensation, the maximum amount permitted under federal law. The amounts contributed by employees are immediately vested and non-forfeitable. The Gale Company or the participant’s employer matches the employee’s deferral at the rate of 50 percent on the first six percent of the employee’s annual compensation for employees who have at least 1,000 hours of service and are employed on the last day of the plan year. In addition, the Company, at management’s discretion, may make discretionary contributions. Participants become 50 percent vested in employer contributions after two years of service and become 100 percent vested after three years of service. Total expense recognized by the Company for the Gale Plan for the three months ended March 31, 2007 was $67,000.
 
 
 
27


 

12.  
COMMITMENTS AND CONTINGENCIES

TAX ABATEMENT AGREEMENTS
Pursuant to agreements with the City of Jersey City, New Jersey, the Company is required to make payments in lieu of property taxes (“PILOT”) on certain of its properties located in Jersey City, as follows:

The Harborside Plaza 5 agreement, as amended, which commenced in 2002 upon substantial completion of the property, as defined, is for a term of 20 years. The PILOT is equal to two percent of Total Project Costs. Total Project Costs, as defined, are $159.6 million. The PILOT totaled $798,000 and $798,000 for the three months ended March 31, 2007 and 2006.

The Harborside Plaza 4-A agreement, which commenced in 2000, is for a term of 20 years. The PILOT is equal to two percent of Total Project costs, as defined, and increases by 10 percent in years 7, 10 and 13 and by 50 percent in year 16. Total Project costs, as defined, are $45.5 million. The PILOT totaled $250,000 and $227,000 for the three months ended March 31, 2007 and 2006, respectively.

At the conclusion of the above-referenced PILOT agreements, it is expected that the properties will be assessed by the municipality and be subject to real estate taxes at the then prevailing rates.

LITIGATION
The Company is a defendant in litigation arising in the normal course of its business activities. Management does not believe that the ultimate resolution of these matters will have a materially adverse effect upon the Company’s financial condition taken as whole.

OPERATING LEASE AGREEMENTS
Future minimum rental payments under the terms of all non-cancelable operating leases under which the Company is the lessee, as of March 31, 2007, are as follows: (dollars in thousands)

Year
Amount
2007
268
2008
68
2009
16
2010
3
   
Total
$355

GROUND LEASE AGREEMENTS
Future minimum rental payments under the terms of all non-cancelable ground leases under which the Company is the lessee, as of March 31, 2007, are as follows: (dollars in thousands)

Year
Amount
2007
$ 381
2008
486
2009
501
2010
501
2011
501
2012 through 2084
35,454
   
Total
$37,824
 
 
 
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Ground lease expense incurred by the Company during the three months ended March 31, 2007 and 2006 amounted to $159,000 and $152,000, respectively.

OTHER
The Company may not dispose of or distribute certain of its properties, currently comprising 50 properties with an aggregate net book value of approximately $1.3 billion, which were originally contributed by members of either the Mack Group (which includes William L. Mack, Chairman of the Company’s Board of Directors; David S. Mack, director; Earle I. Mack, a former director; and Mitchell E. Hersh, president, chief executive officer and director), the Robert Martin Group (which includes Robert F. Weinberg, director; Martin S. Berger, a former director; and Timothy M. Jones, former president), the Cali Group (which includes John R. Cali, director, and John J. Cali, a former director) or certain other common unitholders without the express written consent of a representative of the Mack Group, the Robert Martin Group, the Cali Group or the specific certain other common unitholders, as applicable, except in a manner which does not result in recognition of any built-in-gain (which may result in an income tax liability) or which reimburses the appropriate Mack Group, Robert Martin Group, Cali Group members or the specific certain other common unitholders for the tax consequences of the recognition of such built-in-gains (collectively, the “Property Lock-Ups”). The aforementioned restrictions do not apply in the event that the Company sells all of its properties or in connection with a sale transaction which the Company’s Board of Directors determines is reasonably necessary to satisfy a material monetary default on any unsecured debt, judgment or liability of the Company or to cure any material monetary default on any mortgage secured by a property. The Property Lock-Ups expire periodically through 2016. Upon the expiration of the Property Lock-Ups, the Company is generally required to use commercially reasonable efforts to prevent any sale, transfer or other disposition of the subject properties from resulting in the recognition of built-in gain to the appropriate Mack Group, Robert Martin Group, Cali Group members or the specific certain other common unitholders. 87 of our properties, with an aggregate net book value of approximately $805.8 million, have lapsed restrictions and are subject to these conditions.


13.  
TENANT LEASES

The Properties are leased to tenants under operating leases with various expiration dates through 2026. Substantially all of the leases provide for annual base rents plus recoveries and escalation charges based upon the tenant’s proportionate share of and/or increases in real estate taxes and certain operating costs, as defined, and the pass-through of charges for electrical usage.

Future minimum rentals to be received under non-cancelable operating leases at March 31, 2007 are as follows: (dollars in thousands)

Year
Amount
2007
$ 415,174
2008
522,677
2009
475,183
2010
420,510
2011
353,218
2012 and thereafter
1,048,898
   
Total
$3,235,660


14.  
STOCKHOLDERS’ EQUITY

To maintain its qualification as a REIT, not more than 50 percent in value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any taxable year of the Company, other than its initial taxable year (defined to include certain entities), applying certain constructive ownership rules. To help ensure that the Company will not fail this test, the Company’s Articles of Incorporation provide for, among other things, certain restrictions on the transfer of common stock to prevent further concentration of stock ownership. Moreover, to evidence compliance with these requirements, the Company must maintain records that disclose the actual ownership of its outstanding common stock and demands written statements each year from the holders of record of designated percentages of its common stock requesting the disclosure of the beneficial owners of such common stock.
 
 
29


 
COMMON STOCK
On February 7, 2007, the Company completed an underwritten offer and sale of 4,650,000 shares of its common stock and used the net proceeds, which totaled approximately $252 million (after offering costs), primarily to pay down its outstanding borrowings under the Company’s revolving credit facility and for general corporate purposes.

PREFERRED STOCK
On March 14, 2003, in a publicly registered transaction with a single institutional buyer, the Company completed the sale and issuance of 10,000 shares of eight-percent Series C cumulative redeemable perpetual preferred stock (“Series C Preferred Stock”) in the form of 1,000,000 depositary shares ($25 stated value per depositary share). Each depositary share represents 1/100th of a share of Series C Preferred Stock. The Company received net proceeds of approximately $24.8 million from the sale.

The Series C Preferred Stock has preference rights with respect to liquidation and distributions over the common stock. Holders of the Series C Preferred Stock, except under certain limited conditions, will not be entitled to vote on any matters. In the event of a cumulative arrearage equal to six quarterly dividends, holders of the Series C Preferred Stock will have the right to elect two additional members to serve on the Company’s Board of Directors until dividends have been paid in full. At March 31, 2007, there were no dividends in arrears. The Company may issue unlimited additional preferred stock ranking on a parity with the Series C Preferred Stock but may not issue any preferred stock senior to the Series C Preferred Stock without the consent of two-thirds of its holders. The Series C Preferred Stock is essentially on an equivalent basis in priority with the Preferred Units.

Except under certain conditions relating to the Company’s qualification as a REIT, the Series C Preferred Stock is not redeemable prior to March 14, 2008. On and after such date, the Series C Preferred Stock will be redeemable at the option of the Company, in whole or in part, at $25 per depositary share, plus accrued and unpaid dividends.

SHARE REPURCHASE PROGRAM
The Company has authorization to repurchase up to $45.5 million of its outstanding common stock, which it may repurchase from time to time in open market transactions at prevailing prices or through privately negotiated transactions.

STOCK OPTION PLANS
In May 2004, the Company established the 2004 Incentive Stock Plan under which a total of 2,500,000 shares have been reserved for issuance. No options have been granted through March 31, 2007 under this plan. In September 2000, the Company established the 2000 Employee Stock Option Plan (“2000 Employee Plan”) and the Amended and Restated 2000 Director Stock Option Plan (“2000 Director Plan”). In May 2002, shareholders of the Company approved amendments to both plans to increase the total shares reserved for issuance under both of the 2000 plans from 2,700,000 to 4,350,000 shares of the Company’s common stock (from 2,500,000 to 4,000,000 shares under the 2000 Employee Plan and from 200,000 to 350,000 shares under the 2000 Director Plan). In 1994, and as subsequently amended, the Company established the Mack-Cali Employee Stock Option Plan (“Employee Plan”) and the Mack-Cali Director Stock Option Plan (“Director Plan”) under which a total of 5,380,188 shares (subject to adjustment) of the Company’s common stock had been reserved for issuance (4,980,188 shares under the Employee Plan and 400,000 shares under the Director Plan). As the Employee Plan and Director Plan expired in 2004, stock options may no longer be issued under those plans. Stock options granted under the Employee Plan in 1994 and 1995 became exercisable over a three-year period. Stock options granted under the 2000 Employee Plan and those options granted subsequent to 1995 under the Employee Plan become exercisable over a five-year period. All stock options granted under both the 2000 Director Plan and Director Plan become exercisable in one year. All options were granted at the fair market value at the dates of grant and have terms of ten years. As of March 31, 2007 and December 31, 2006, the stock options outstanding had a weighted average remaining contractual life of approximately 4.5 and 4.7 years, respectively. Stock options exercisable at March 31, 2007 and December 31, 2006 had a weighted average remaining contractual life of approximately 4.1 and 4.5 years, respectively.

30



Information regarding the Company’s stock option plans for the three months ended March 31, 2007 is summarized below:

 
Shares
Weighted
 
 
Under
Average
Aggregate Intrinsic
 
Options
Exercise Price
Value $(000’s)
Outstanding at January 1, 2007
690,306
$29.68
 
Exercised
(116,830)
$28.65
 
Outstanding at March 31, 2007 ($24.63 - $45.47)
573,476
$29.89
$10,294
Options exercisable at March 31, 2007
454,196
$30.27
$ 8,035
Available for grant at March 31, 2007
4,534,214
--
--

Cash received from options exercised under all stock option plans was $3.3 million and $5.3 million for the three months ended March 31, 2007 and 2006, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $3.0 million and $2.8 million, respectively. The Company has a policy of issuing new shares to satisfy stock option exercises.

The Company recognized stock options expense of $33,000 and $37,000 for the three months ended March 31, 2007 and 2006, respectively. As of March 31, 2007, the Company had $4.2 million of total unrecognized compensation cost related to unvested stock compensation granted under the Company’s stock compensation plans. That cost is expected to be recognized over a weighted average period of 1.8 years.

STOCK COMPENSATION
The Company has granted stock awards (“Restricted Stock Awards”) to officers, certain other employees, and non-employee members of the Board of Directors of the Company, which allow the holders to each receive a certain amount of shares of the Company’s common stock generally over a one to five-year vesting period and generally based on time and service, of which 153,211 shares were outstanding at March 31, 2007. Of the outstanding Restricted Stock Awards granted to executive officers and senior management, 46,873 are contingent upon the Company meeting certain performance and/or stock price appreciation objectives. All Restricted Stock Awards provided to the officers and certain other employees were granted under the 2000 Employee Plan and the Employee Plan. Restricted Stock Awards granted to directors were granted under the 2000 Director Plan.

Information regarding the Restricted Stock Awards for the three months ended March 31, 2007 is summarized below:

   
Weighted-Average
   
Grant-Date
 
Shares
Fair Value
Outstanding at January 1, 2007
216,620
$39.78
Granted
13,000
$52.62
Vested
(76,409)
$37.22
     
Outstanding at March 31, 2007
153,211
$42.15

DEFERRED STOCK COMPENSATION PLAN FOR DIRECTORS
The Deferred Compensation Plan for Directors, which commenced January 1, 1999, allows non-employee directors of the Company to elect to defer up to 100 percent of their annual retainer fee into deferred stock units. The deferred stock units are convertible into an equal number of shares of common stock upon the directors’ termination of service from the Board of Directors or a change in control of the Company, as defined in the plan. Deferred stock units are credited to each director quarterly using the closing price of the Company’s common stock on the applicable dividend record date for the respective quarter. Each participating director’s account is also credited for an equivalent amount of deferred stock units based on the dividend rate for each quarter.

31


During the three months ended March 31, 2007 and 2006, 1,643 and 1,635 deferred stock units were earned, respectively. As of March 31, 2007 and December 31, 2006, there were 38,799 and 37,263 deferred stock units outstanding, respectively.

EARNINGS PER SHARE
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.

The following information presents the Company’s results for the three months ended March 31, 2007 and 2006 in accordance with FASB No. 128: (dollars in thousands)

   
Three Months Ended
March 31,
 
Computation of Basic EPS
 
2007
 
2006
 
Income from continuing operations
 
$
18,815
 
$
30,289
 
Deduct: Preferred stock dividends
   
(500
)
 
(500
)
Income from continuing operations available to common shareholders
   
18,315
   
29,789
 
Income from discontinued operations
   
264
   
2,808
 
Net income available to common shareholders
 
$
18,579
 
$
32,597
 
               
Weighted average common shares
   
65,695
   
61,988
 
               
Basic EPS:
             
Income from continuing operations
 
$
0.28
 
$
0.48
 
Income from discontinued operations
   
--
   
0.05
 
Net income available to common shareholders
 
$
0.28
 
$
0.53
 

   
Three Months Ended
March 31,
 
Computation of Diluted EPS
 
2007
 
2006
 
Income from continuing operations available to common shareholders
 
$
18,315
 
$
29,789
 
Add: Income from continuing operations attributable to Operating Partnership -
             
common units
   
4,262
   
6,886
 
Income from continuing operations for diluted earnings per share
   
22,577
   
36,675
 
Income from discontinued operations for diluted earnings per share
   
325
   
3,457
 
Net income available to common shareholders
 
$
22,902
 
$
40,132
 
               
Weighted average common shares
   
81,234
   
76,642
 
               
Diluted EPS:
             
Income from continuing operations
 
$
0.28
 
$
0.48
 
Income from discontinued operations
   
--
   
0.04
 
Net income available to common shareholders
 
$
0.28
 
$
0.52
 

The following schedule reconciles the shares used in the basic EPS calculation to the shares used in the diluted EPS calculation:

   
Three Months Ended
March 31,
 
   
2007
 
2006
 
Basic EPS shares
   
65,695
   
61,988
 
Add: Operating Partnership - common units
   
15,287
   
14,330
 
Stock options
   
252
   
324
 
Diluted EPS Shares
   
81,234
   
76,642
 

32



Not included in the computations of diluted EPS were 0 and 5,000 stock options, as such securities were anti-dilutive during the three months ended March 31, 2007 and 2006, respectively. Unvested shares of restricted stock outstanding as of March 31, 2007 and 2006 were 153,211 and 184,946, respectively.


15.