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, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ___ No ___ (the Registrant is not yet required to submit Interactive Data)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x                                                                                                                     Accelerated filer  ¨
 
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)Smaller reporting company  ¨

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 22, 2009, there were 66,730,498 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, 2009
 
 
           and December 31, 2008
4
     
 
        Consolidated Statements of Operations for the three months
 
 
           ended March 31, 2009 and 2008
5
     
 
        Consolidated Statement of Changes in Equity for the three months
 
 
           ended March 31, 2009
6
     
 
        Consolidated Statements of Cash Flows for the three months ended
 
 
           March 31, 2009 and 2008
7
     
 
        Notes to Consolidated Financial Statements
8-34
     
 
Item 2.    Management’s Discussion and Analysis of Financial Condition
 
 
                  and Results of Operations
35-50
     
 
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
50
     
 
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
53
     
 
Item 6.     Exhibits
53
     
Signatures
 
54
     
Exhibit Index
 
55-70


 
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 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, 2008.

The results of operations for the three month period ended March 31, 2009 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)

 
March 31,
December 31,
ASSETS
2009
2008
Rental property
   
Land and leasehold interests
$   731,128
$   731,086
Buildings and improvements
3,796,139
3,792,186
Tenant improvements
401,187
431,616
Furniture, fixtures and equipment
8,716
8,892
 
4,937,170
4,963,780
Less – accumulated depreciation and amortization
(1,035,299)
(1,040,778)
Net investment in rental property
3,901,871
3,923,002
Cash and cash equivalents
31,898
21,621
Investments in unconsolidated joint ventures
133,588
138,495
Unbilled rents receivable, net
113,543
112,524
Deferred charges and other assets, net
204,180
212,422
Restricted cash
12,918
12,719
Accounts receivable, net of allowance for doubtful accounts
   
of $2,815 and $2,319
11,130
23,139
     
Total assets
$4,409,128
$4,443,922
     
LIABILITIES AND EQUITY
   
Senior unsecured notes
$1,333,868
$1,533,349
Revolving credit facility
328,000
161,000
Mortgages, loans payable and other obligations
592,253
531,126
Dividends and distributions payable
36,887
52,249
Accounts payable, accrued expenses and other liabilities
107,999
119,451
Rents received in advance and security deposits
52,970
54,406
Accrued interest payable
19,341
32,978
Total liabilities
2,471,318
2,484,559
Commitments and contingencies
   
     
Equity:
   
Mack-Cali Realty Corporation 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,
   
66,424,213 and 66,419,055 shares outstanding
664
664
Additional paid-in capital
1,906,125
1,905,386
Dividends in excess of net earnings
(404,377)
(386,587)
Total Mack-Cali Realty Corporation stockholders’ equity
1,527,412
1,544,463
     
Noncontrolling interests in subsidiaries:
   
Operating Partnership
410,189
414,114
Consolidated joint ventures
209
786
Total noncontrolling interests in subsidiaries
410,398
414,900
     
Total equity
1,937,810
1,959,363
     
Total liabilities and equity
$4,409,128
$4,443,922
     
     
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
   
2009
2008
Base rents
   
$149,326
$148,603
Escalations and recoveries from tenants
   
27,949
25,724
Construction services
   
3,911
12,761
Real estate services
   
2,526
3,442
Other income
   
2,954
4,183
Total revenues
   
186,666
194,713
         
EXPENSES
       
Real estate taxes
   
23,471
24,036
Utilities
   
20,877
21,428
Operating services
   
27,942
25,973
Direct construction costs
   
3,714
12,654
General and administrative
   
10,082
11,095
Depreciation and amortization
   
48,272
47,722
Total expenses
   
134,358
142,908
Operating income
   
52,308
51,805
         
OTHER (EXPENSE) INCOME
       
Interest expense
   
(32,794)
(32,460)
Interest and other investment income
   
197
556
Equity in earnings (loss) of unconsolidated joint ventures
   
(5,114)
(1,148)
Total other (expense) income
   
(37,711)
(33,052)
Income from continuing operations
   
14,597
18,753
Net income
   
14,597
18,753
Noncontrolling interest in consolidated joint ventures
   
632
123
Noncontrolling interest in Operating Partnership
   
(2,628)
(3,427)
Preferred stock dividends
   
(500)
(500)
Net income available to common shareholders
   
$  12,101
$  14,949
         
Basic earnings per common share:
       
Income from continuing operations
   
$     0.18
$     0.23
Net income available to common shareholders
   
$     0.18
$     0.23
         
Diluted earnings per common share:
       
Income from continuing operations
   
$     0.18
$     0.23
Net income available to common shareholders
   
$     0.18
$     0.23
         
Dividends declared per common share
   
$     0.45
$     0.64
         
Basic weighted average shares outstanding
   
66,484
65,372
         
Diluted weighted average shares outstanding
   
80,921
80,491
         
         
The accompanying notes are an integral part of these consolidated financial statements.

 
5

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in thousands) (unaudited)
 
 
             
     
Additional
Dividends in
Noncontrolling
 
 
Preferred Stock
Common Stock
Paid-In
Excess of
Interests
Total
 
Shares
Amount
Shares
Par Value
Capital
Net Earnings
in Subsidiaries
Equity
Balance at January 1, 2009
10
$25,000
66,419
$664
$1,905,386
$(386,587)
$414,900
$1,959,363
Net income
--
--
--
--
--
12,601
2,051
14,652
Preferred stock dividends
--
--
--
--
--
(500)
--
(500)
Common stock dividends
--
--
--
--
--
(29,891)
(6,496)
(36,387)
Redemption of common units
               
  for common stock
--
--
2
--
57
--
(57)
--
Shares issued under Dividend
               
  Reinvestment and Stock
               
  Purchase Plan
--
--
3
--
66
--
--
66
Directors Deferred comp. plan
--
--
--
--
99
--
--
99
Stock Compensation
--
--
--
--
517
--
--
517
Balance at March 31, 2009
10
$25,000
66,424
$664
$1,906,125
$(404,377)
$410,398
$1,937,810
                 

The accompanying notes are an integral part of these consolidated financial statements.





 
6

 

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

 
Three Months Ended
 
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES
2009
2008
Net income
$   14,597
$   18,753
Adjustments to reconcile net income to net cash provided by
   
operating activities:
   
Depreciation and amortization, including related intangibles
46,737
46,161
Amortization of stock compensation
517
706
Amortization of deferred financing costs and debt discount
707
708
Equity in (earnings) loss of unconsolidated joint ventures
5,114
1,148
Distribution of cumulative earnings from unconsolidated joint ventures
1,000
--
Changes in operating assets and liabilities:
   
Increase in unbilled rents receivable, net
(992)
(1,274)
Increase in deferred charges and other assets, net
(3,192)
(7,518)
Decrease in accounts receivable, net
12,009
14,859
Decrease in accounts payable, accrued expenses and other liabilities
(9,395)
(9,220)
(Decrease) increase in rents received in advance and security deposits
(1,436)
4,765
Decrease in accrued interest payable
(13,637)
(15,620)
     
Net cash provided by operating activities
$   52,029
$   53,468
     
CASH FLOWS FROM INVESTING ACTIVITIES
   
Additions to rental property and related intangibles
$  (15,791)
$  (20,125)
Repayments of notes receivable
44
42
Investment in unconsolidated joint ventures
(1,580)
(1,965)
Distribution in excess of cumulative earnings from unconsolidated joint ventures
--
3,324
Decrease in restricted cash
(199)
(49)
     
Net cash used in investing activities
$  (17,526)
$  (18,773)
     
CASH FLOWS FROM FINANCING ACTIVITIES
   
Borrowings from revolving credit facility
$  265,000
$ 101,400
Repayment of revolving credit facility
(98,000)
(69,400)
Proceeds from mortgages
64,500
--
Repayment of mortgages, loans payable and other obligations
(3,378)
(3,994)
Repayments of senior unsecured notes
(199,724)
--
Payment of financing costs
(375)
 
Repurchase of Common Stock
--
(5,198)
Proceeds from stock options exercised
--
471
Payment of dividends and distributions
(52,249)
(52,099)
     
Net cash used in financing activities
$  (24,226)
$  (28,820)
     
Net decrease in cash and cash equivalents
$   10,277
$     5,875
Cash and cash equivalents, beginning of period
$   21,621  
$   24,716
 
 
 
Cash and cash equivalents, end of period
$   31,898  
$   30,591
     
     
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, 2009, the Company owned or had interests in 294 properties plus developable land (collectively, the “Properties”).  The Properties aggregate approximately 33.8 million square feet, which are comprised of 283 buildings, primarily office and office/flex buildings, totaling approximately 33.4 million square feet (which include 37 buildings, primarily office buildings, aggregating approximately 4.3 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 six states 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.

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


2.  
SIGNIFICANT ACCOUNTING POLICIES

Rental
Property
Rental properties are stated at cost less accumulated depreciation and amortization.  Costs directly related to the acquisition, development and construction of rental properties are capitalized.  Pursuant to the Company’s adoption of FASB No. 141(R), Business Combinations, effective January 1, 2009, acquisition-related costs are expensed as incurred. 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, tenant improvement and development in-progress of $88,552,000 and $143,010,000 (including land of $56,110,000 and $70,709,000) as of March 31, 2009 and December 31, 2008, 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.
 
 
9


 
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.

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.

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.  The Company’s estimates of value for each investment (particularly in commercial real estate joint ventures) 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 operating costs.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its impairment analyses may not be realized. See Note 4: Investments in Unconsolidated Joint Ventures.
 
 
10


 
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 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.

The fair value of the marketable securities was determined using level I inputs under FAS 157.  Level I inputs represent quoted prices available in an active market for identical investments as of the reporting date.

The Company received approximately $65,000 in dividend income from its holdings in marketable securities during the three months ended March 31, 2008.  The Company disposed of its marketable securities in April 2008 for aggregate net proceeds of approximately $5.4 million and realized a gain of $471,000.

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 $707,000 and $708,000 for the three months ended March 31, 2009 and 2008, 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 $860,000 and $744,000 for the three months ended March 31, 2009 and 2008, 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 11: 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.
 
 
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Earnings
 
Per Share
The Company presents both basic and diluted earnings per share (“EPS”).  Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.

Dividends and
 
Distributions
Payable
The dividends and distributions payable at March 31, 2009 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (66,424,553 shares), and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (14,435,743 common units) for all such holders of record as of April 3, 2009 with respect to the first quarter 2009.  The first quarter 2009 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.45 per common share and unit were approved by the Board of Directors on March 17, 2009.  The common stock dividends and common unit distributions payable were paid on April 13, 2009.  The preferred stock dividends payable were paid on April 15, 2009.

The dividends and distributions payable at December 31, 2008 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (66,419,764 shares), and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (14,437,731 common units) for all such holders of record as of January 4, 2009 with respect to the fourth quarter 2008.  The fourth quarter 2008 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 9, 2008.  The common stock dividends and common unit distributions payable were paid on January 12, 2009.  The preferred stock dividends payable were paid on January 15, 2009.
 
Costs Incurred For
 
Stock Issuances
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.  The Company recorded stock expense of $517,000 and $705,000 for the three months ended March 31, 2009 and 2008, respectively.
 
 
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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.

3.
REAL ESTATE TRANSACTION

On March 1, 2009, the Company placed in service a 250,000 square-foot, class A office building, which is fully leased by Wyndham Worldwide for 15 years.  The building is located in the Company’s Mack-Cali Business Campus in Parsippany, New Jersey.


4.  
INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

The debt of the Company’s unconsolidated joint ventures generally 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.

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 recorded an impairment loss of approximately $4.3 million on its rental property as of December 31, 2007.  The venture had a mortgage loan collateralized by its office/flex property scheduled to mature in January 2009.  On December 31, 2008, the venture transferred the deed to the lender in satisfaction of its obligations, including its mortgage with a balance of $14.7 million.  The venture recorded a gain on the disposal of its office property of $7.5 million.

The Company performed management, leasing and other services for the property when owned by the joint venture and recognized $16,000 in fees for such services for the three months ended March 31, 2008.

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.

The venture has a mortgage loan with a balance as of March 31, 2009 of $68.0 million collateralized by the hotel property.  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, 2009 of $6.7 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 $6.7 million letter of credit in support of this loan, $3.4 million of which is indemnified by Hyatt Corporation, the Company’s joint venture partner.


 
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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.  The property is fully leased to Hovnanian Enterprises, Inc. through September 30, 2017.  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, 2009 of $20.3 million), carried an interest rate of LIBOR plus 130 basis points through March 2008.  In April 2008, the interest rate was reduced to LIBOR plus 125 basis points and the maturity was extended to April 2010.  The loan currently has a one-year extension option subject to certain conditions, which requires payment of a fee.

In September 2007, the joint venture completed development of the property and placed the office building in service.  The Company performs management, leasing and other services for the property owned by the joint venture and recognized $23,000 and $18,500 in fees for such services during the three months ended March 31, 2009 and 2008, respectively.

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 in 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 owned 25 office properties (the “OP LP Properties”) which aggregated 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, which was subsequently sold.  In December 2007, the OP LP sold its eight properties located in Troy, Michigan for $83.5 million.  The venture recognized a loss of approximately $22.3 million from the sale. Included in the Company’s equity in earnings in 2007 was $223,000 in loss related to the sale.

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:

(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 $276.3 million at March 31, 2009.  $186.0 million of the mortgage loans bear interest at a weighted average fixed interest rate of 6.26 percent per annum and mature at various times through May 2016.  $90.3 million of the mortgage loans bear interest at a floating rate of LIBOR plus 275 basis points per annum and mature in May 2009. The floating rate mortgage loans are provided by an affiliate of SL Green.  Based on the venture’s anticipated holding period pertaining to six of its properties encumbered by a floating-rate mortgage loan that matures on May 9, 2009, the venture believed that the carrying amounts of these properties may not be recoverable at December 31, 2008.  Accordingly, as the venture determined that its carrying value of these properties exceeded the estimated fair value, it recorded an impairment charge of approximately $32.3 million on its rental property as of December 31, 2008. 
 
 
 
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On April 29, 2009, the Company acquired the remaining interests in Mack-Green from SL Green.  As a result, the Company now owns 100 percent of Mack-Green.  In connection with this transaction, the Company also acquired the remaining 50 percent interest in 55 Corporate Partners L.L.C. from an affiliate of SL Green (see “55 Corporate Partners, LLC” below).

Additionally, the $90.3 million of mortgage loans scheduled to mature in May 2009 were modified to provide for, amongst other things, interest to accrue at the current rate of LIBOR plus 275 basis point per annum, with the interest pay rate at the lower of LIBOR plus 275 basis points or 3.15 percent per annum.  Interest is payable at the pay rate only to the extent that property expenses have been paid, with any accrued unpaid interest above the pay rate serving to increase the balance of the loans.  The loans are now scheduled to mature on May 9, 2011.
 
The Company performs management, leasing, and construction services for the properties owned by the joint venture and recognized $1.1 million and $1.1 million in income (net of $790,000 and $1.0 million in direct costs) for such services in the three months ended March 31, 2009 and 2008, respectively.

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 $52.5 million at March 31, 2009.  The loan bears interest at a rate of LIBOR plus 275 basis points and matures on January 9, 2010, with an extension option, subject to certain conditions, through January 9, 2011.

The Company performs management, leasing, and other services for PFV and recognized $223,000 and $218,700 in income (net of $0 and $146,300 in direct costs) for such services in the three months ended March 31, 2009 and 2008, respectively.

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.
 
 
 
16


 
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 has a mortgage loan with an amount not to exceed $58.6 million, with a $43.5 million balance at March 31, 2009 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, 2009, with two one-year extension options, subject to certain conditions with the payment of a fee.

On March 31, 2009, on account of the recent deterioration in the commercial real estate markets in the Boston area, the Company wrote off its investment in the venture and recorded an impairment charge in equity in earnings (loss) of $4.0 million (of which $0.6 million was attributable to noncontrolling interest in consolidated joint ventures) during the period.

Through September 30, 2008, the Company had performed services for Route 93 Master LLC and Route 93 Bedford Master LLC and recognized $16,700 in fees for such services for the three months ended March 31, 2008.

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 developed and placed in service a 175,000 square foot office property that has been substantially pre-leased to a single tenant, 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 JPMorgan (“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.
 
On September 21, 2007, 100 Kimball obtained a $47 million mortgage loan which bears interest at a rate of 5.95 percent and matures in September 2012.
 
 
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The Company performs management, leasing, and other services for the property owned by 100 Kimball for which it recognized $55,000 and $65,800 in income (net of $0 and $1.0 million in direct costs) for the three months ended March 31, 2009 and 2008, respectively.

55 CORPORATE PARTNERS, LLC
On June 9, 2006, the Company entered into a joint venture with a Gale Affiliate to form 55 Corporate Partners L.L.C. (“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 presently holding a 100 percent indirect condominium interest in a vacant land parcel located in Bridgewater, New Jersey, which can accommodate development of an approximately 205,000 square foot office building (the “55 Corporate Property”).  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”).

In November 2007, Sanofi-Aventis U.S. Inc. (“Sanofi”), which occupies neighboring buildings, exercised its option to cause the venture to construct a building on the Property and has signed a lease thereof.  The lease has a term of fifteen years, subject to three five-year extension options.  The construction of the building, estimated to cost approximately $36 million, is not required to commence until July 1, 2009 for a July 2011 delivery; however, if Sanofi gives a Construction Start Date Acceleration Notice in accordance with the provisions of its lease, then construction shall promptly commence after the necessary permits are obtained, even if such construction start date shall occur prior to July 1, 2009.

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).

On April 29, 2009, the Company acquired the remaining 50 percent interest in 55 Corporate Partners L.L.C. from SLG Gale 55 Corporate LLC.  As a result, the Company now owns 100 percent of the venture.  In connection with this transaction, the Company also acquired the remaining interest in Mack-Green from an affiliate of SLG Gale 55 Corporate LLC.

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, and bears interest at 6.9 percent per annum.  As of March 31, 2009 the outstanding balance on the mortgage note was $6.6 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-DOWNTOWN CROSSING
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”).
 
 
 
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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.  The Vornado JV LLC acquired the Filenes Property on January 29, 2007, for approximately $100 million.

On or about September 16, 2008, Vornado JV LLC was reorganized in contemplation of developing and converting the Filenes property into a condominium consisting of a retail unit, an office unit, a parking unit, a hotel unit and a residential unit.  Pursuant to this reorganization, (i) the Company and Gale/426 formed a new joint venture (“M-C/Gale JV II LLC”) and (ii) M-C/Gale JV II LLC and Washington Street Realty Member II LLC (“JPM II”) formed a new joint venture (“JPM JV II LLC”) to invest in a new joint venture (“Vornado JV II LLC”) with Vornado RTR DC LLC, an affiliate of Vornado Realty, LP (“Vornado II”).  Following this reorganization, Vornado JV LLC owns the interests in the retail unit and the office unit (the “Filenes Office/Retail Component”) and Vornado JV II LLC owns the interests in the parking unit, the hotel unit and the residential unit (“the “Filenes Hotel/Residential/Parking Component”).   In connection with the foregoing, (a) the Limited Liability Company Agreement of Vornado JV LLC, as amended, was amended and restated to reflect, among other things, the change in the ownership structure described above, (b) the Limited Liability Company Agreement of JPM JV LLC was amended and restated to reflect, among other things, the change in the ownership structure described above and (c) the Limited Liability Company Agreement of M-C/Gale JV LLC was amended and restated to reflect, among other things, the change in the ownership structure described above.

As a result of the foregoing transactions, (A) (i) the Filenes Office/Retail Component 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 and (B) (i) the Filenes Hotel/Residential/Parking Component is owned by Vornado JV II LLC, (ii) Vornado JV II LLC is owned 50 percent by each of Vornado II and JPM JV II LLC, (iii) JPM JV II LLC is owned 30 percent by M-C/Gale JV II LLC, 70 percent by JPM II and managed by Gale/426, which has no ownership interest in JPM JV II LLC, and (iv) M-C/Gale JV II 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 each of Vornado JV LLC and Vornado JV II LLC and the Filenes Property.

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.
 
Distributions are made (i) by Vornado JV II LLC in proportion to its members’ respective ownership interests, (ii) by JPM JV II LLC (a) initially, in proportion to its members’ respective ownership interests until JPM II’s investment yields an 11 percent IRR, (b) thereafter, 60/40 to JPM II and M-C/Gale JV II LLC, respectively, until JPM II’s investment yields a 15 percent IRR and (c) thereafter, 50/50 to JPM II and M-C/Gale JV II LLC, respectively, and (iii) by M-C/Gale JV II 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 has suspended its plans for the development of the Filenes Property which was to include approximately 1.2 million square feet consisting of office, retail, condominium apartments, hotel and a parking garage.  The project is subject to governmental approvals.  The venture recorded an impairment charge of approximately $67 million on its development project on December 31, 2008.
 
 
19


 
GALE JEFFERSON, L.L.C.
On August 22, 2007, the Company entered into a joint venture with a Gale Affiliate to form M-C Jefferson, L.L.C. (“M-C Jefferson”).  M-C Jefferson was formed for the sole purpose of acquiring a Gale Affiliate’s 33.33 percent membership interest in Gale Jefferson, L.L.C. (“Gale Jefferson”), an entity holding a 25 percent interest in One Jefferson Road LLC (“One Jefferson”), which is developing a 100,000 square foot office property located at 1 Jefferson Road, Parsippany, New Jersey (the “Jefferson Property”).

The operating agreement of M-C Jefferson 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 Jefferson is owned 33.33 percent by M-C Jefferson and 66.67 percent by the Hampshire Generational Fund, L.L.C. (“Hampshire”).  The operating agreements of Gale Jefferson provides, among other things, for the distribution of net cash flow, first, in accordance with its member’s respective interests until each member is provided, as a result of such distributions, with an annual 12 percent compound return on the Member’s Capital Contributions, as defined in the operating agreement and secondly, 50 percent to each of the Company and Hampshire.

One Jefferson is owned 25 percent by Gale Jefferson and 75 percent by One Jefferson Road Realty Member LLC, an affiliate of JPMorgan (“JPM”).  The operating agreement of One Jefferson provides, among other things, for the distribution of net cash flow, first, in accordance with its members’ respective interests until each member is provided, as a result of such distributions, with an annual 12 percent compound return on the Member’s Capital Contributions, as defined in the operating agreement and secondly, 50 percent to JPM and Gale Jefferson.  One Jefferson has a construction loan in an amount not to exceed $21 million (with a balance of $12.7 million at March 31, 2009), bearing interest at a rate of LIBOR plus 160 basis points and maturing on October 24, 2010 with a one-year extension option.

The Company performs management, leasing and other services for Gale Jefferson and recognized $135,000 and $61,300 in income (net of $314,000 and $2.0 million in direct costs) for such services for the three months ended March 31, 2009 and 2008, respectively.

 
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, 2009 and December 31, 2008.  (dollars in thousands)


 
March 31, 2009
 
 
Plaza
   
Red Bank
Mack-
Princeton
       
Boston-
   
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Assets:
                         
Rental property, net
$ 10,019
--
$ 62,159
$ 24,476
$ 324,541
 $ 41,079
$ 56,817
---
--
$ 14,844
--
 
$ 533,935
Other assets
1,153
--
15,473
4,670
 45,679
22,557
90
$ 64
$ 17,896
779
$ 46,486
$ 1,838
156,685
Total assets
$ 11,172
--
$ 77,632
$ 29,146
$ 370,220
 $ 63,636
$ 56,907
$ 64
$ 17,896
$ 15,623
$ 46,486
$ 1,838
$ 690,620
Liabilities and
                         
 partners’/members’
                         
 capital (deficit):
                         
Mortgages, loans
                         
  payable and other
                         
  obligations
--
--
$ 74,620
$ 20,331
 $ 276,254
 $ 52,507
$ 43,541
--
--
$  6,569
--
--
$ 473,822
Other liabilities
$      530
--
4,693
 84
22,883
 4,867
672
--
--
--
--
--
33,729
Partners’/members’
                         
  capital (deficit)
10,642
--
(1,681)
8,731
71,083
6,262
12,694
$ 64
$ 17,896
9,054
$ 46,486
$ 1,838
 183,069
Total liabilities and
                         
  partners’/members’
                         
  capital (deficit)
$ 11,172
--
$ 77,632
$ 29,146
$ 370,220
 $ 63,636
$ 56,907
$ 64
$ 17,896
$ 15,623
$ 46,486
$ 1,838
$ 690,620
Company’s
                         
  investment
                         
  in unconsolidated
                         
  joint ventures, net
$   5,244
--
--
$   4,122
$   91,292
$   1,358
--
$ 18
 $  9,195
$   8,463
$ 13,129
$    767
$ 133,588


 
December 31, 2008
 
 
Plaza
   
Red Bank
Mack-
Princeton
       
Boston-
   
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Assets:
                         
Rental property, net
$ 10,173
--
$ 62,469
$ 24,583
$ 326,912
 $ 41,673
$ 56,771
--
--
$ 14,598
--
 
$ 537,179
Other assets
1,008
$ 20
34,654
4,301
 45,391
22,396
 495
--
$ 17,896
789
$ 45,006
$ 1,838
173,794
Total assets
$ 11,181
$ 20
$ 97,123
$ 28,884
$ 372,303
 $ 64,069
$ 57,266
--
$ 17,896
$ 15,387
$ 45,006
$ 1,838
$ 710,973
Liabilities and
                         
 partners’/members’
                         
 capital (deficit):
                         
Mortgages, loans
                         
  payable and other
                         
  obligations
--
--
$ 74,852
$ 20,416
 $ 276,752
 $ 52,800
$ 43,541
--
--
$   7,170
--
--
$ 475,531
Other liabilities
$      531
--
21,652
 87
23,805
 5,128
985
--
--
--
--
--
52,188
Partners’/members’
                         
  capital (deficit)
10,650
$ 20
619
8,381
71,746
6,141
12,740
--
$ 17,896
8,217
$ 45,006
$ 1,838
183,254
Total liabilities and
                         
  partners’/members’
                         
  capital (deficit)
$ 11,181
$ 20
$ 97,123
$ 28,884
$ 372,303
 $ 64,069
$ 57,266
--
$ 17,896
$ 15,387
$ 45,006
$ 1,838
$ 710,973
Company’s
                         
  investment
                         
  in unconsolidated
                         
  joint ventures, net
$   5,248
--
$      254
$   3,929
$   92,110
$   1,342
$   4,024
--
$   9,068
$   8,300
$ 13,464
$    756
$ 138,495



 
21

 


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, 2009 and 2008:  (dollars in thousands)


 
Three Months Ended March 31, 2009
 
Plaza
   
Red Bank
Mack-
Princeton
       
Boston-
   
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Total revenues
$  188
--
$  6,827
$  810
$ 13,179
$ 3,171
$     720
$  64
--
$   595
$  (1,120)
$1
$  24,435
Operating and
                         
  other expenses
(43)
--
(4,979)
(249)
(5,336)
(1,669)
(1,108)
--
--
(19)
--
--
(13,403)
Depreciation and
                         
  amortization
(153)
--
(998)
(148)
(4,834)
(906)
(453)
--
--
(128)
--
--
(7,620)
Interest expense
--
--
(1,144)
(83)
(3,644)
(475)
(306)
--
--
(121)
--
--
(5,773)
                           
Net income
$    (8)
--
$  (294)
$  330
$    (635)
$     121
$ (1,147)
$  64
--
$   327
$  (1,120)
$1
$  (2,361)
Company’s equity
                         
  in earnings (loss)
                         
  of unconsolidated
                         
  joint ventures
$    (4)
--
$     746
$  165
$    (712)
$       16
$ (4,354)
$  18
--
$   164
$  (1,153)
--
$  (5,114)





 
Three Months Ended March 31, 2008
 
Plaza
   
Red Bank
Mack-
Princeton
       
Boston-
   
 
VIII & IX
Ramland
Harborside
Corporate
Gale-
Forrestal
Route 93
Gale
55
12
Downtown
Gale
Combined
 
Associates
Realty
South Pier
Plaza I & II
Green
Village
Portfolio
Kimball
Corporate
Vreeland
Crossing
Jefferson
Total
Total revenues
$ 303
$  488
$ 8,873
$ 782
$ 12,325
$  2,788
$     670
$  47
--
$  397
$ 46
--
$ 26,719
Operating and
                         
  other expenses
(48)
(314)
(5,619)
(172)
(5,153)
(1,483)
(900)
--
--
(23)
--
--
(13,712)
Depreciation and
                         
  amortization
(154)
(181)
(1,469)
(148)
(4,751)
(766)
(393)
--
--
(128)
--
--
(7,990)
Interest expense
--
(201)
(1,183)
(224)
(4,584)
(973)
(744)
--
--
(100)
--
--
(8,009)
                           
Net income
$ 101
$ (208)
$    602
$ 238
$ (2,163)
$    (434)
$ (1,367)
$  47
--
$  146
$ 46
--
$ (2,992)
Company’s equity
                         
  in earnings (loss)
                         
  of unconsolidated
                         
  joint ventures
$   50
--
$    287
$ 118
$ (1,572)
$    (107)
$      (39)
$  25
--
$    73
$ 17
--
$ (1,148)


 
22

 

5.  
DEFERRED CHARGES AND OTHER ASSETS

 
March 31,
December 31,
(dollars in thousands)
2009
2008
Deferred leasing costs
$ 210,333
$ 214,887
Deferred financing costs
24,098
23,723
 
234,431
238,610
Accumulated amortization
(102,414)
(104,652)
Deferred charges, net
132,017
133,958
Notes receivable
11,399
11,443
In-place lease values, related intangible and other assets, net
27,157
33,256
Prepaid expenses and other assets, net
33,607
33,765
     
Total deferred charges and other assets, net
$ 204,180
$ 212,422


6.  
SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of March 31, 2009 and December 31, 2008 is as follows (dollars in thousands):

 
March 31,
December 31,
Effective
 
2009
2008
Rate (1)
7.250% Senior Unsecured Notes, due March 15, 2009
--
$   199,689
7.486%
5.050% Senior Unsecured Notes, due April 15, 2010
$   149,943
149,929
5.265%
7.835% Senior Unsecured Notes, due December 15, 2010
15,000
15,000
7.950%
7.750% Senior Unsecured Notes, due February 15, 2011
299,684
299,641
7.930%
5.250% Senior Unsecured Notes, due January 15, 2012
99,453
99,404
5.457%
6.150% Senior Unsecured Notes, due December 15, 2012
93,086
92,963
6.894%
5.820% Senior Unsecured Notes, due March 15, 2013
25,668
25,641
6.448%
4.600% Senior Unsecured Notes, due June 15, 2013
99,880
99,872
4.742%
5.125% Senior Unsecured Notes, due February 15, 2014
201,169
201,229
5.110%
5.125% Senior Unsecured Notes, due January 15, 2015
149,464
149,441
5.297%
5.800% Senior Unsecured Notes, due January 15, 2016
200,521
200,540
5.806%
       
Total Senior Unsecured Notes
$1,333,868
$1,533,349
 
       
(1)  Includes the cost of terminated treasury lock agreements (if any), offering and other transaction costs and the discount on the notes, as applicable.


7.  
UNSECURED REVOLVING CREDIT FACILITY

The Company has a $775 million unsecured credit facility (expandable to $800 million) with a group of 23 Lenders.  The facility matures in June 2011, with an extension option of one year, which would require a payment of 15 basis points of the then borrowing capacity of the facility upon exercise.  The interest rate on outstanding borrowings (not electing the Company’s competitive bid feature) is LIBOR plus 55 basis points at the BBB/Baa2 pricing level.

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 55 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 also requires a 15 basis point facility fee on the current borrowing capacity payable quarterly in arrears.
 
 
 
23


 
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-
100.0
25.0
BBB-/Baa3/BBB-
75.0
20.0
BBB/Baa2/BBB (current)
55.0
15.0
BBB+/Baa1/BBB+
42.5
15.0
A-/A3/A- or higher
37.5
12.5
     
(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.

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, if an event of default has occurred and is continuing, the Company will not make any excess distributions with respect to common stock or other common equity interests except to enable the Company to continue to qualify as a REIT under the Code.

The lending group for the credit facility consists of: JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”); Bank of America, N.A., as syndication agent; Scotiabanc, Inc., 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.; The Bank of Tokyo-Mitsubishi UFJ, Ltd. (Successor by merger to UFJ Bank Limited); North Fork Bank; Bank Hapoalim B.M.; Comerica Bank; Chang Hwa Commercial Bank, Ltd., New York Branch; First Commercial Bank, New York Agency; Mega International Commercial Bank Co. Ltd., New York Branch; Deutsche Bank Trust Company Americas and Hua Nan Commercial Bank, New York Agency, as participants.

As of March 31, 2009 and December 31, 2008, the Company had outstanding borrowings of $328 million and $161 million, respectively, under its unsecured revolving credit facility.

MONEY MARKET LOAN
The Company has an agreement with JPMorgan Chase Bank to participate in a money market loan program (“Money Market Loan”).  The Money Market Loan is an unsecured borrowing of up to $75 million arranged by JPMorgan Chase Bank with maturities of 30 days or less.  The rate of interest on the Money Market Loan borrowing is set at the time of each borrowing.  The Company had no outstanding borrowings under the Money Market Loan as of March 31, 2009 and December 31, 2008.


 
24

 


8.  
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, 2009, 21 of the Company’s properties with a total book value of approximately $792 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.

On January 27, 2009, the Company obtained $64.5 million in mortgage financing from Guardian Life Insurance Company of America.  The two mortgage loans, which are collateralized by one and three office properties located in Clark and Red Bank, New Jersey, respectively, both bear interest at an effective rate of 7.31 percent per annum and carry a 10-year term.

A summary of the Company’s mortgages, loans payable and other obligations as of March 31, 2009 and December 31, 2008 is as follows (dollars in thousands):

   
Effective
Principal Balance at
 
   
Interest
March 31,
December 31,
 
Property Name
Lender
Rate (a)
2009
2008
Maturity
Assumed obligations
Various
4.96%
$    2,939
$   5,090
05/01/09 (b)
Various (c)
Prudential Insurance
4.84%
150,000
150,000
01/15/10      
105 Challenger Road
Archon Financial CMBS
6.24%
19,243
19,188
06/06/10      
2200 Renaissance Boulevard
Wachovia CMBS
5.89%
16,939
17,043
12/01/12      
Soundview Plaza
Morgan Stanley Mortgage Capital
6.02%
16,988
17,109
01/01/13      
9200 Edmonston Road
Principal Commercial Funding L.L.C.
5.53%
4,917
4,955
05/01/13      
6305 Ivy Lane
John Hancock Life Insurance Co.
5.53%
6,850
6,901
01/01/14      
395 West Passaic
State Farm Life Insurance Co.
6.00%
12,068
12,176
05/01/14      
6301 Ivy Lane
John Hancock Life Insurance Co.
5.52%
6,435
6,480
07/01/14      
35 Waterview Boulevard
Wachovia CMBS
6.35%
19,802
19,868
08/11/14      
23 Main Street
JPMorgan CMBS
5.59%
32,397
32,521
09/01/18      
Harborside Plaza 5
The Northwestern Mutual Life Insurance Co. & New York Life Insurance Co.
6.84%
239,175
239,795
11/01/18      
100 Walnut Avenue
Guardian Life Insurance Co.
7.31%
19,600
--
02/01/19      
One River Center
Guardian Life Insurance Co.
7.31%
44,900
--
02/01/19      
           
Total mortgages, loans payable and other obligations
 
$592,253
$531,126
 

(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)  The obligations mature at various times through May 2009.
(c)  Mortgage is collateralized by seven properties.

CASH PAID FOR INTEREST AND INTEREST CAPITALIZED
Cash paid for interest for the three months ended March 31, 2009 and 2008 was $46,135,000 and $48,527,000, respectively.  Interest capitalized by the Company for the three months ended March 31, 2009 and 2008 was $660,000 and $1,376,000, respectively.

SUMMARY OF INDEBTEDNESS
As of March 31, 2009, the Company’s total indebtedness of $2,254,121,000 (weighted average interest rate of 5.37 percent) was comprised of $328,000,000 of revolving credit facility borrowings (weighted average rate of 1.11 percent) and fixed rate debt and other obligations of $1,926,121,000 (weighted average rate of 6.10 percent).

As of December 31, 2008 the Company’s total indebtedness of $2,225,475,000 (weighted average interest rate of 5.87 percent) was comprised of $161,000,000 of revolving credit facility borrowings (weighted average rate of 1.82 percent) and fixed rate debt and other obligations of $2,064,475,000 (weighted average rate of 6.18 percent).


 
25

 


9.  
EMPLOYEE BENEFIT 401(k) PLANS

Employees of the Company, who meet certain minimum age and service requirements are eligible to participate in the Mack-Cali Realty Corporation 401(k) Savings/Retirement Plan (the “401(k) Plan”).  Eligible employees may elect to defer from 1 percent up to 60 percent of their annual compensation on a pre-tax basis to the 401(k) Plan, subject to certain limitations imposed by federal law.  The amounts contributed by employees are immediately vested and non-forfeitable.  The Company may make discretionary matching or profit sharing contributions to the 401(k) Plan on behalf of eligible participants in any plan year.  Participants are always 100 percent vested in their pre-tax contributions and will begin vesting in any matching or profit sharing contributions made on their behalf after two years of service with the Company at a rate of 20 percent per year, becoming 100 percent vested after a total of six years of service with the Company.  All contributions are allocated as a percentage of compensation of the eligible participants for the Plan year.  The assets of the 401(k) Plan are held in trust and a separate account is established for each participant.  A participant may receive a distribution of his or her vested account balance in the 401(k) Plan in a single sum or in installment payments upon his or her termination of service with the Company.  Total expense recognized by the Company for the 401(k) Plan for the three months ended March 31, 2009 and 2008 was $100,000 and $100,000, respectively.


10.  
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 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 $250,000 for the three months ended March 31, 2009 and 2008, respectively.

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, 2009 and 2008.

Total Project Costs for Harborside Plaza 5 and Harborside Plaza 4-A are currently being reviewed by the City of Jersey City.  The Company believes that the ultimate resolution of such reviews will not have a material adverse effect on the Company’s financial condition.

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.


 
26

 

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, 2009, are as follows (dollars in thousands):

Year
Amount
April 1 through December 31, 2009
$     388
2010
501
2011
501
2012
501
2013
501
2014 through 2084
34,451
   
Total
$36,843

Ground lease expense incurred by the Company during the three months ended March 31, 2009 and 2008 amounted to $191,000 and $166,000, respectively.

OTHER
The Company may not dispose of or distribute certain of its properties, currently comprising 11 properties with an aggregate net book value of approximately $202.6 million, which were originally contributed by certain unrelated common unitholders, without the express written consent of such 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 specific 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 specific common unitholders, which include members of 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).  126 of the Company’s properties, with an aggregate net book value of approximately $1.8 billion, have lapsed restrictions and are subject to these conditions.


11.  
TENANT LEASES

The Properties are leased to tenants under operating leases with various expiration dates through 2029.  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.

 
27

 


Future minimum rentals to be received under non-cancelable operating leases at March 31, 2009 are as follows (dollars in thousands):

Year
Amount
April 1 through December 31, 2009
$   439,184
2010
545,131
2011
481,065
2012
415,548
2013
333,545
2014 and thereafter
1,137,185
   
Total
$3,351,658


12.  
MACK-CALI REALTY CORPORATION 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.

PREFERRED STOCK
The Company has 10,000 shares of eight-percent Series C cumulative redeemable perpetual preferred stock issued and outstanding (“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 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, 2009, 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.

The Series C Preferred Stock is 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
On September 12, 2007, the Board of Directors authorized an increase to the Company’s repurchase program under which the Company was permitted to purchase up to $150 million of the Company’s outstanding common stock (“Repurchase Program”).  The Company has purchased and retired 2,893,630 shares of its outstanding common stock for an aggregate cost of approximately $104 million through March 31, 2009 under the Repurchase Program.  The Company has a remaining authorization to repurchase up to an additional $46 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, 2009 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, 2009 and December 31, 2008, the stock options outstanding had a weighted average remaining contractual life of approximately 3.0 and 3.3 years, respectively.  Stock options exercisable at March 31, 2009 and December 31, 2008 had a weighted average remaining contractual life of approximately 3.3 and 3.5 years, respectively.
 
 
 
28


 
Information regarding the Company’s stock option plans for the three months ended March 31, 2009 is summarized below:

 
Shares
Weighted
 
 
Under
Average
Aggregate Intrinsic
 
Options
Exercise Price
Value $(000’s)
Outstanding at January 1, 2009
395,541
$28.77
 
Lapsed or canceled
(5,000)
$28.47
 
Outstanding at March 31, 2009 ($24.63 – $45.47)
390,541
$28.77
$(3,499)
Options exercisable at March 31, 2009
390,541
$28.77
$(3,499)
Available for grant at March 31, 2009
4,538,294
   

Cash received from options exercised under all stock option plans was $0 and $0.5 million for the three months ended March 31, 2009 and 2008, respectively.  The total intrinsic value of options exercised during the three months ended March 31, 2009 and 2008 was $0 and $96,000.  The Company has a policy of issuing new shares to satisfy stock option exercises.

STOCK COMPENSATION
The Company has issued stock awards (“Restricted Stock Awards”) to officers, certain other employees, and nonemployee 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 seven-year vesting period, of which 304,418 unvested shares were outstanding at March 31, 2009.  Of the outstanding Restricted Stock Awards issued to executive officers and senior management, 196,998 are contingent upon the Company meeting certain performance goals to be set by the Committee each year, with the remaining based on time and service. All Restricted Stock Awards provided to the officers and certain other employees were issued under the 2000 Employee Plan and the Employee Plan. Restricted Stock Awards provided to directors were issued under the 2000 Director Plan.

DEFERRED STOCK COMPENSATION PLAN FOR DIRECTORS
The Amended and Restated 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.
 
 
 
29


 
During the three months ended March 31, 2009 and 2008, 4,369 and 2,379 deferred stock units were earned, respectively.  As of March 31, 2009 and December 31, 2008, there were 59,743 and 55,446 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, 2009 and 2008 in accordance with FASB No. 128:  (dollars in thousands)

 
Three Months Ended
March 31,
Computation of Basic EPS
2009
2008
Income from continuing operations
$14,597
$18,753
Deduct:  Noncontrolling interest in consolidated joint ventures
632
123
Noncontrolling interest in Operating Partnership
(2,628)
(3,427)
Preferred stock dividends
(500)
(500)
Income from continuing operations available to common shareholders
12,101
14,949
Net income available to common shareholders
$12,101
$14,949
     
Weighted average common shares
66,484
65,372
     
Basic EPS:
   
Income from continuing operations available to common shareholders
$     0.18
$     0.23
Net income available to common shareholders
$     0.18
$     0.23


 
Three Months Ended
March 31,
Computation of Diluted EPS
2009
2008
Income from continuing operations available to common shareholders
$12,101
$14,949
Add:    Income from continuing operations attributable to common units
2,628
3,427
Income from continuing operations for diluted earnings per share
14,729
18,376
Net income available to common shareholders
$14,729
$18,376
     
Weighted average common shares
80,921
80,491
     
Diluted EPS:
   
Income from continuing operations available to common shareholders
$     0.18
$     0.23
Net income available to common shareholders
$     0.18
$     0.23

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,
     
2009
2008
Basic EPS shares
   
66,484
65,372
Add:Operating Partnership – common units
   
14,437
14,984
Stock options
   
--
135
Diluted EPS Shares
   
80,921
80,491


 
30

 

Unvested shares of restricted stock outstanding as of March 31, 2009 and 2008 were 304,418 and 346,786, respectively.


13.  
NONCONTROLLING INTERESTS IN SUBSIDIARIES

Noncontrolling interests in subsidiaries 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.

Pursuant to the Company’s adoption on January 1, 2009 of FASB No. 160, which establishes and expands the accounting and reporting standards of minority interests to be recharacterized as noncontrolling interests in a subsidiary and the deconsolidation of a subsidiary, the Company is presenting its noncontrolling interests as equity for all periods presented in these financial statements.

OPERATING PARTNERSHIP

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 12:  Mack-Cali Realty Corporation Stockholders’ Equity – Preferred Stock.

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 unitholders have the right to redeem their common units, subject to certain restrictions.  The redemption is required to be satisfied in shares of Common Stock, cash, or a combination thereof, calculated as follows:  one share of the Company’s Common Stock, or cash equal to the fair market value of a share of the Company’s Common Stock at the time of redemption, for each common unit.  The Company, in its sole discretion, determines the form of redemption of common units (i.e., whether a common unitholder receives Common Stock, cash, or any combination thereof).  If the Company elects to satisfy the redemption with shares of Common Stock as opposed to cash, it is obligated to issue shares of its Common Stock to the redeeming unitholder.  Regardless of the rights described above, the common unitholders may not put their units for cash to the Company or the Operating Partnership under any circumstances.  When a unitholder redeems a common unit, noncontrolling interest in the Operating Partnership is reduced and Mack-Cali Realty Corporation Stockholders’ equity is increased.

Unit Transactions
The following table sets forth the changes in noncontrolling interests in subsidiaries which relate to the common units in the Operating Partnership for the three months ended March 31, 2009 (dollars in thousands):

     
Common
Common
     
Units
Unitholders
Balance at January 1, 2009
   
14,437,731
$414,114
Net income
   
--
2,628
Distributions
   
--
(6,496)
Redemption of common units for shares
       
of Common Stock
   
(1,988)
(57)
         
Balance at March 31, 2009
   
14,435,743
$410,189

Noncontrolling Interest Ownership
As of March 31, 2009 and December 31, 2008, the noncontrolling interest common unitholders owned 17.9 percent of the Operating Partnership.
 
 
 
31


 
Consolidated Joint Ventures
The Company has ownership interests in certain joint ventures which it consolidates.  Various entities and/or individuals hold noncontrolling interests in these ventures.

14.  
SEGMENT REPORTING

The Company operates in two business segments: (i) real estate and (ii) construction services.  The Company provides leasing, property and facilities management, acquisition, development, construction and tenant-related services for its portfolio.  In May 2006, in conjunction with the Company’s acquisition of the Gale Company and related businesses, the Company acquired a business specializing solely in construction and related services whose operations comprise the Company’s construction services segment.  The Company had no revenues from foreign countries recorded for the three months ended March 31, 2009 and 2008.  The Company had no long lived assets in foreign locations as of March 31, 2009 and December 31, 2008.  The accounting policies of the segments are the same as those described in Note 2: Significant Accounting Policies, excluding depreciation and amortization.

The Company evaluates performance based upon net operating income from the combined properties in the real estate segment and net operating income from its construction services segment.


 
32

 

Selected results of operations for the three months ended March 31, 2009 and 2008 and selected asset information as of March 31, 2009 and December 31, 2008 regarding the Company’s operating segments are as follows (dollars in thousands):

   
Construction
Corporate
Total
 
 
Real Estate
Services
 & Other (d)
Company
 
Total revenues:
         
 Three months ended:
         
March 31, 2009
$   182,059
$ 11,517
$     (6,910)
$   186,666
 
March 31, 2008
181,002
14,128
(417)
194,713
 
           
Total operating and interest expenses (a):
         
 Three months ended:
         
March 31, 2009
$     61,762
$ 11,659
$    45,262
$   118,683
(e)
March 31, 2008
70,210
14,854
42,026
127,090
(f)
           
Equity in earnings (loss) of unconsolidated
         
joint ventures:
         
 Three months ended:
         
March 31, 2009
$      (4,827)
--
$        (287)
$      (5,114)
 
March 31, 2008
 (1,148)
--
--
(1,148)
 
           
Net operating income (b):
         
 Three months ended:
         
March 31, 2009
$   115,470
$    (142)
$   (52,459)
$     62,869
(e)
March 31, 2008
109,644
(726)
 (42,443)
66,475
(f)
           
Total assets:
         
March 31, 2009
$4,529,926
$ 16,662
$ (137,460)
$4,409,128
 
December 31, 2008
4,731,929
25,845
(313,852)
4,443,922
 
           
Total long-lived assets (c):
         
March 31, 2009
$4,165,333
--
$   (16,331)
$4,149,002
 
December 31, 2008
4,191,036
--
(17,015)
4,174,021
 
 
 
(a) Total operating and interest expenses represent the sum of: real estate taxes; utilities; operating services; direct construction costs; real estate services salaries, wages and other costs; general and administrative and interest expense (net of interest income).  All interest expense, net of interest income, (including for property-level mortgages) is excluded from segment amounts and classified in Corporate & Other for all periods.
(b) Net operating income represents total revenues less total operating and interest expenses [as defined in Note (a)], plus equity in earnings (loss) of unconsolidated joint ventures, for the period.
(c) Long-lived assets are comprised of net investment in rental property, unbilled rents receivable and investments in unconsolidated joint ventures.
(d) Corporate & Other represents all corporate-level items (including interest and other investment income, interest expense and non-property general and administrative expense) as well as intercompany eliminations necessary to reconcile to consolidated Company totals.
(e) Excludes $48,272 of depreciation and amortization.
(f) Excludes $47,722 of depreciation and amortization.


 
33

 


15.  
IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS

FASB STAFF POSITION No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

This FASB Staff Position (FSP) addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share.  This FSP became effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years.  The Company’s adoption of this FSP effective January 1, 2009 did not have a material effect on these financial statements.

FAP FAS 107-1 AND APB 28-1, Interim Disclosures about Fair Value of Financial Instruments

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, The FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosure about fair value of financial instruments in interim financial statements. FSP FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009.  We will include the disclosures required under this FSP beginning in our June 30, 2009 Consolidated Condensed Financial Statements.  The Company does not believe that the adoption of FSP FAS 107-1 and APB 28-1 will have a material impact on our financial statements of the Company.



 
34

 


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

GENERAL

The following discussion should be read in conjunction with the Consolidated Financial Statements of Mack-Cali Realty Corporation and the notes thereto (collectively, the “Financial Statements”).  Certain defined terms used herein have the meaning ascribed to them in the Financial Statements.


Executive Overview

Mack-Cali Realty Corporation (together with its subsidiaries, the “Company”) is one of the largest real estate investment trusts (REITs) in the United States.  The Company has been involved in all aspects of commercial real estate development, management and ownership for over 50 years and has been a publicly-traded REIT since 1994.  The Company owns or has interests in 294 properties (collectively, the “Properties”), primarily class A office and office/flex buildings, totaling approximately 33.8 million square feet, leased to approximately 2,100 tenants.  The Properties are located primarily in suburban markets of the Northeast, some with adjacent, Company-controlled developable land sites able to accommodate up to 12.7 million square feet of additional commercial space.

The Company’s strategy is to be a significant real estate owner and operator in its core, high-barriers-to-entry markets, primarily in the Northeast.

As an owner of real estate, almost all of the Company’s earnings and cash flow is derived from rental revenue received pursuant to leased space at the Properties.  Key factors that affect the Company’s business and financial results include the following:

· 
the general economic climate;
· 
the occupancy rates of the Properties;
· 
rental rates on new or renewed leases;
· 
tenant improvement and leasing costs incurred to obtain and retain tenants;
· 
the extent of early lease terminations;
· 
operating expenses;
· 
cost of capital; and
· 
the extent of acquisitions, development and sales of real estate.

Any negative effects of the above key factors could potentially cause a deterioration in the Company’s revenue and/or earnings.  Such negative effects could include: (1) failure to renew or execute new leases as current leases expire; (2) failure to renew or execute new leases with rental terms at or above the terms of in-place leases; and (3) tenant defaults.

A failure to renew or execute new leases as current leases expire or to execute new leases with rental terms at or above the terms of in-place leases may be affected by several factors such as: (1) the local economic climate, which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors; and (2) local real estate conditions, such as oversupply of office and office/flex space or competition within the market.

The Company’s core markets continue to be weak.  The percentage leased in the Company’s consolidated portfolio of stabilized operating properties was 90.7 percent at March 31, 2009, as compared to 91.3 percent at December 31, 2008 and 92.1 percent at March 31, 2008.  Percentage leased includes all leases in effect as of the period end date, some of which have commencement dates in the future and leases that expire at the period end date.  Leases that expired as of March 31, 2009, December 31, 2008 and March 31, 2008 aggregate 65,176, 67,473 and 70,107 square feet, respectively, or 0.2, 0.2 and 0.2 percentage of the net rentable square footage, respectively.  Rental rates on the Company’s space that was re-leased (based on first rents payable) during the three months ended March 31, 2009 decreased an average of 6.1 percent compared to rates that were in effect under the prior leases, as compared to a 0.8 percent decrease for the three months ended March 31, 2008.  The Company believes that vacancy rates may continue to increase in some of its markets through 2009 and possibly beyond.  As a result, the Company’s future earnings and cash flow may continue to be negatively impacted by current market conditions.
 
 
35

 

 
Deteriorating economic conditions have resulted in a reduction of the availability of financing and overall higher borrowing rates.  These factors, coupled with a slowing economy, have reduced the volume of real estate transactions and created credit stresses on most businesses.  On September 15, 2008, Lehman Brothers Holdings Inc. (“Lehman”) filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.  Lehman leases 270,063 square feet of office space from the Company at 101 Hudson Street in Jersey City, New Jersey, which are scheduled to expire through 2018.  Lehman has currently sublet 54.1 percent of its leased space to subtenants.  Should Lehman’s lease no longer be in effect, the subtenants would become direct tenants of the Company for the remainder of the term of their respective subleases.  This would mitigate a portion of the Company’s potential future loss of the Lehman lease as a result of Lehman’s bankruptcy.

The Company expects that the impact of the current state of the economy, including rising unemployment and the unprecedented volatility and illiquidity in the financial and credit markets, will continue to have a dampening effect on the fundamentals of its business, including increases in past due accounts, defaults, lower occupancy rates and reduced effective rents.  These conditions would negatively affect the Company’s future net income and cash flows and could have a material adverse effect on the Company’s financial condition.  In addition to the financial constraints on the Company’s tenants, many of the debt capital markets that real estate companies like the Company frequently access, such as the unsecured bond market and the convertible debt market, are not currently available to the Company on terms that management believes are economically attractive. Although the Company believes that the quality of its assets and its strong balance sheet will enable it to raise capital from other sources such as traditional term or secured loans from banks, pension funds and life insurance companies, these sources are lending fewer dollars, under stricter terms and at higher borrowing rates, and there can be no assurance that the Company will be able to do so on terms that are economically attractive or at all.

The remaining portion of this Management’s Discussion and Analysis of Financial Condition and Results of Operations should help the reader understand:

· 
property transactions during the period;
· 
critical accounting policies and estimates;
· 
results of operations for the three months ended March 31, 2009 as compared to the three months ended March 31, 2008;
· 
liquidity and capital resources.


Property Transactions

On March 1, 2009, the Company placed in service a 250,000 square-foot, class A office building, which is fully leased by Wyndham Worldwide for 15 years.  The building is located in the Company’s Mack-Cali Business Campus in Parsippany, New Jersey.


Critical Accounting Policies and Estimates

The Financial Statements have been prepared in conformity with generally accepted accounting principles.  The preparation of the Financial Statements 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 reported period.  These estimates and assumptions are based on management’s historical experience that are believed to be reasonable at the time.  However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment.  The Company’s critical accounting policies are those which require assumptions to be made about matters that are highly uncertain.  Different estimates could have a material effect on the Company’s financial results.  Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances.
 
 
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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.  Interest capitalized by the Company for the three months ended March 31, 2009 and 2008 was $0.7 million and $1.4 million, 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.

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 remaining 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 will be amortized to expense over the anticipated life of the relationships.
 
 
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On a periodic basis, management assesses whether there are any indicators that the value of the Company’s rental properties 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.

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

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

Investments in Unconsolidated Joint Ventures, Net:
The Company accounts for its investments in unconsolidated joint ventures for which Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (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.  The Company’s estimates of value for each investment (particularly in commercial real estate joint ventures) 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 operating costs.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its impairment analyses may not be realized.
 
 
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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.

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 our 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 the Company and income from tenants for early lease terminations.

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



 
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Results From Operations

The following comparisons for the three months ended March 31, 2009 (“2009”), as compared to the three months ended March 31, 2008 (“2008”), make reference to the following:  (i) the effect of the “Same-Store Properties,” which represent all in-service properties owned by the Company at December 31, 2007 excluding properties sold or held for sale through March 31, 2009, and (ii) the effect of the “Acquired Properties,” which represent all properties acquired by the Company or commencing initial operations from January 1, 2008 through March 31, 2009.


Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

 
Three Months Ended
   
 
March 31,
Dollar
Percent
(dollars in thousands)
2009
2008
Change
Change
Revenue from rental operations and other:
       
Base rents
$149,326
$148,603
$     723
0.5%
Escalations and recoveries from tenants
27,949
25,724
2,225
8.6
Other income
2,954
4,183
(1,229)
(29.4)
Total revenues from rental operations
180,229
178,510
1,719
1.0
         
Property expenses:
       
Real estate taxes
23,471
24,036
(565)
(2.4)
Utilities
20,877
21,428
(551)
(2.6)
Operating services
27,942
25,973
1,969