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, 2012

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 X   No ___

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 23, 2012, there were 87,817,692 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, 2012
 
   
  and December 31, 2011
4
       
   
Consolidated Statements of Operations for the three months
 
   
  ended March 31, 2012 and 2011
5
       
   
Consolidated Statement of Changes in Equity for the three months
 
   
  ended March 31, 2012
6
       
   
Consolidated Statements of Cash Flows for the three months
 
   
  ended March 31, 2012 and 2011
7
       
   
Notes to Consolidated Financial Statements
8-33
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition
 
   
  and Results of Operations
34-48
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48-49
       
 
Item 4.
Controls and Procedures
49
       
Part II
Other Information
   
       
 
Item 1.
Legal Proceedings
50
       
 
Item 1A.
Risk Factors
50
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
50
       
 
Item 3.
Defaults Upon Senior Securities
50
       
 
Item 4.
Mine Safety Disclosure
50
       
 
Item 5.
Other Information
50
       
 
Item 6.
Exhibits
50
       
Signatures
   
51
       
Exhibit Index
   
52-67


 
2

 


MACK-CALI REALTY CORPORATION

Part I – Financial Information


Item 1.        Financial Statements

The accompanying unaudited consolidated balance sheets, statements of operations, of changes in 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, 2011.

The results of operations for the three month period ended March 31, 2012 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
 
2012
   
2011
 
Rental property
           
Land and leasehold interests
  $ 765,639     $ 773,026  
Buildings and improvements
    3,968,468       4,001,943  
Tenant improvements
    455,127       500,336  
Furniture, fixtures and equipment
    3,106       4,465  
      5,192,340       5,279,770  
Less – accumulated depreciation and amortization
    (1,377,152 )     (1,409,163 )
      3,815,188       3,870,607  
Rental property held for sale, net
    23,927       --  
Net investment in rental property
    3,839,115       3,870,607  
Cash and cash equivalents
    20,524       20,496  
Investments in unconsolidated joint ventures
    63,799       32,015  
Unbilled rents receivable, net
    134,994       134,301  
Deferred charges and other assets, net
    211,886       210,470  
Restricted cash
    21,265       20,716  
Accounts receivable, net of allowance for doubtful accounts
               
of $2,205 and $2,697
    7,851       7,154  
                 
Total assets
  $ 4,299,434     $ 4,295,759  
                 
LIABILITIES AND EQUITY
               
Senior unsecured notes
  $ 1,019,435     $ 1,119,267  
Revolving credit facility
    199,000       55,500  
Mortgages, loans payable and other obligations
    722,280       739,448  
Dividends and distributions payable
    44,999       44,999  
Accounts payable, accrued expenses and other liabilities
    105,803       100,480  
Rents received in advance and security deposits
    53,626       53,019  
Accrued interest payable
    15,068       29,046  
Total liabilities
    2,160,211       2,141,759  
Commitments and contingencies
               
                 
Equity:
               
Mack-Cali Realty Corporation stockholders’ equity:
               
Common stock, $0.01 par value, 190,000,000 shares authorized,
               
87,811,226 and 87,799,479 shares outstanding
    878       878  
Additional paid-in capital
    2,537,267       2,536,184  
Dividends in excess of net earnings
    (661,246 )     (647,498 )
Total Mack-Cali Realty Corporation stockholders’ equity
    1,876,899       1,889,564  
                 
Noncontrolling interests in subsidiaries:
               
Operating Partnership
    260,492       262,499  
Consolidated joint ventures
    1,832       1,937  
Total noncontrolling interests in subsidiaries
    262,324       264,436  
                 
Total equity
    2,139,223       2,154,000  
                 
Total liabilities and equity
  $ 4,299,434     $ 4,295,759  
                 
                 
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
   
2012
2011
Base rents
   
$148,667
$147,711
Escalations and recoveries from tenants
   
20,150
27,180
Construction services
   
3,463
3,799
Real estate services
   
1,208
1,232
Other income
   
9,492
4,291
Total revenues
   
182,980
184,213
         
EXPENSES
       
Real estate taxes
   
22,903
24,795
Utilities
   
16,102
19,742
Operating services
   
26,604
30,346
Direct construction costs
   
3,278
3,582
General and administrative
   
10,807
8,623
Depreciation and amortization
   
47,822
47,707
Total expenses
   
127,516
134,795
Operating income
   
55,464
49,418
         
OTHER (EXPENSE) INCOME
       
Interest expense
   
(30,629)
(30,892)
Interest and other investment income
   
13
10
Equity in earnings (loss) of unconsolidated joint ventures
   
600
(101)
Total other (expense) income
   
(30,016)
(30,983)
Income from continuing operations
   
25,448
18,435
Discontinued operations:
       
Income (loss) from discontinued operations
   
(193)
140
Realized gains (losses) and unrealized losses
       
on disposition of rental property, net
   
4,012
--
Total discontinued operations, net
   
3,819
140
Net income
   
29,267
18,575
Noncontrolling interest in consolidated joint ventures
   
79
110
Noncontrolling interest in Operating Partnership
   
(3,113)
(2,437)
Noncontrolling interest in discontinued operations
   
(466)
(19)
Preferred stock dividends
   
--
(500)
Net income available to common shareholders
   
$ 25,767
$  15,729
         
Basic earnings per common share:
       
Income from continuing operations
   
$ 0.25
$ 0.19
Discontinued operations
   
 0.04
 --
Net income available to common shareholders
   
$ 0.29
$ 0.19
         
Diluted earnings per common share:
       
Income from continuing operations
   
$ 0.25
$ 0.19
Discontinued operations
   
 0.04
 --
Net income available to common shareholders
   
$ 0.29
$ 0.19
         
Basic weighted average shares outstanding
   
87,799
82,948
         
Diluted weighted average shares outstanding
   
100,062
96,015
         
         
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
 
 
Common Stock
Paid-In
Excess of
Interests
Total
 
Shares
Par Value
Capital
Net Earnings
in Subsidiaries
Equity
Balance at January 1, 2012
87,800
$878
$2,536,184
$(647,498)
$264,436
$2,154,000
Net income
--
--
--
25,767
3,500
29,267
Common stock dividends
--
--
--
(39,515)
--
(39,515)
Common unit distributions
--
--
--
--
(5,484)
(5,484)
Decrease in noncontrolling interest
--
--
--
--
(26)
(26)
Redemption of common units
           
  for common stock
10
--
215
--
(215)
--
Shares issued under Dividend
           
  Reinvestment and Stock
           
  Purchase Plan
2
--
67
--
--
67
Cancellation of shares
(1)
--
(20)
--
--
(20)
Stock compensation
--
--
934
--
--
934
Rebalancing of ownership percent
           
  between parent and subsidiaries
--
--
(113)
--
113
--
Balance at March 31, 2012
87,811
$878
$2,537,267
$(661,246)
$262,324
$2,139,223


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
 
2012
   
2011
 
Net income
  $ 29,267     $ 18,575  
Adjustments to reconcile net income to net cash provided by
               
Operating activities:
               
Depreciation and amortization, including related intangible assets
    47,666       47,618  
Depreciation and amortization on discontinued operations
    415       441  
Amortization of stock compensation
    934       797  
Amortization of deferred financing costs and debt discount
    611       584  
Equity in (earnings) loss of unconsolidated joint venture, net
    (600 )     101  
Realized gains (losses) and unrealized losses on disposition
               
   of rental property, net
    (4,012 )     --  
Distributions of cumulative earnings from unconsolidated
               
   joint ventures
    125       369  
Changes in operating assets and liabilities:
               
Increase in unbilled rents receivable, net
    (756 )     (1,783 )
Increase in deferred charges and other assets, net
    (10,910 )     (8,542 )
(Increase) decrease in accounts receivable, net
    (737 )     1,401  
Increase (decrease) in accounts payable, accrued expenses
               
   and other liabilities
    6,129       (7,724 )
Increase (decrease) in rents received in advance and security deposits
    606       (4,575 )
Decrease in accrued interest payable
    (11,832 )     (10,992 )
                 
Net cash provided by operating activities
  $ 56,906     $ 36,270  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Additions to rental property and related intangibles
  $ (21,125 )   $ (16,787 )
Investment in unconsolidated joint ventures
    (32,288 )     (111 )
Distributions in excess of cumulative earnings from
               
unconsolidated joint ventures
    988       631  
Increase in restricted cash
    (642 )     (2,514 )
                 
Net cash used in investing activities
  $ (53,067 )   $ (18,781 )
                 
CASH FLOW FROM FINANCING ACTIVITIES
               
Borrowings from revolving credit facility
  $ 207,526     $ 92,000  
Repayment of revolving credit facility
    (64,026 )     (304,000 )
Repayment of senior unsecured notes
    (100,000 )     --  
Proceeds from offering of common stock
    --       227,374  
Repayment of mortgages, loans payable and other obligations
    (2,339 )     (2,074 )
Payment of financing costs
    --       (6 )
Proceeds from stock options exercised
    --       270  
Payment of dividends and distributions
    (44,972 )     (42,176 )
                 
Net cash used in financing activities
  $ (3,811 )   $ (28,612 )
                 
Net increase (decrease) in cash and cash equivalents
  $ 28     $ (11,123 )
Cash and cash equivalents, beginning of period
    20,496       21,851  
                 
Cash and cash equivalents, end of period
  $ 20,524     $ 10,728  
                 
                 
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, 2012, the Company owned or had interests in 277 properties plus developable land (collectively, the “Properties”).  The Properties aggregate approximately 32.2 million square feet, which are comprised of 265 buildings, primarily office and office/flex buildings totaling approximately 31.8 million square feet (which include eight buildings, primarily office buildings aggregating approximately 1.2 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, one hotel (which is owned by an unconsolidated joint venture in which the Company has an investment interest) and three parcels of land leased to others.  The Properties are located in five states, primarily in the Northeast, plus the District of Columbia.

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

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  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 ASC 805, 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 $31,212,000 and $37,069,000 as of March 31, 2012 and December 31, 2011, 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 assumed, 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 fair values.  The Company records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction.  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 initially 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 rental properties held for use may be impaired.  In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment.  The criteria considered by management include reviewing low leased percentages, significant near-term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near-term mortgage debt maturities or other factors that might impact the Company’s intent and ability to hold the property.  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.  These assumptions are generally based on management’s experience in its local real estate markets and the effects of current market conditions.  The assumptions 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, and actual losses or impairment may be realized in the future.

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 disposed of are presented in discontinued operations for all periods presented.  See Note 5: Discontinued Operations.

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

Investments in
Unconsolidated
Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting.  The Company applies the equity method by initially recording these investments at cost, as Investments in Unconsolidated Joint Ventures, subsequently adjusted for equity in earnings and cash contributions and distributions.

 
ASC 810, Consolidation, 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, the consideration of whether an entity is a VIE 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.
 
 
 
 
10

 
 

 
On January 1, 2010, the Company adopted the updated provisions of ASC 810, which amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  Additionally, ASC 810 amends FIN 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.  ASC 810 amends certain guidance in Interpretation 46(R) for determining whether an entity is a variable interest entity.  Also, ASC 810 amends FIN 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity.  The adoption of this guidance did not have a material impact to these financial statements.  See Note 3: Investments in Unconsolidated Joint Ventures for disclosures regarding the Company’s unconsolidated joint ventures.

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated joint ventures may be impaired.  An investment 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, and actual losses or impairment may be realized in the future.  See Note 3: Investments in Unconsolidated Joint Ventures.

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

Deferred
Financing Costs
Costs incurred in obtaining financing are capitalized and amortized over the term of the related indebtedness. Amortization of such costs is included in interest expense and was $611,000 and $584,000 for the three months ended March 31, 2012 and 2011, respectively.

Deferred
Leasing Costs
Costs incurred in connection with leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in depreciation and amortization.  Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease. Certain employees of the Company are compensated for providing leasing services to the Properties.  The portion of such compensation, which is capitalized and amortized, approximated $1,096,000 and $1,054,000 for the three months ended March 31, 2012 and 2011, 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.
 
 
 
11

 

 
Revenue
Recognition
Base rental revenue is recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represents the cumulative 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 initially 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 terms of the lease for above-market leases and the remaining initial terms plus the terms 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 terms 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 12: 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.

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 collectability 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.
 
 
 
12

 
 

 
Pursuant to the amended provisions related to uncertain tax provisions of ASC 740, Income Taxes, 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.

In the normal course of business, the Company or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable.  As of March 31, 2012, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are generally from the year 2007 forward.

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, 2012 represents dividends payable to common shareholders (87,811,690 shares), and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (12,187,122 common units) for all such holders of record as of April 4, 2012 with respect to the first quarter 2012.  The first quarter 2012 common stock dividends and common unit distributions of $0.45 per common share and unit were approved by the Board of Directors on March 6, 2012.  The common stock dividends and common unit distributions payable were paid on April 13, 2012.

The dividends and distributions payable at December 31, 2011 represents dividends payable to common shareholders (87,800,047 shares), and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (12,197,122 common units) for all such holders of record as of January 5, 2012 with respect to the fourth quarter 2011.  The fourth quarter 2011 common stock dividends and common unit distributions of $0.45 per common share and unit were approved by the Board of Directors on December 6, 2011.  The common stock dividends and common unit distributions payable were paid on January 13, 2012.

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 the previously existing accounting guidance on accounting for stock issued to employees.  Under this guidance, 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.
 
 
 
13

 
 

 
In 2002, the Company adopted the provisions of ASC 718, Compensation-Stock Compensation.  In 2006, the Company adopted the amended guidance, 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 restricted stock expense of $814,000 and $691,000 for the three months ended March 31, 2012 and 2011, respectively.

Other
 
Comprehensive
 
Income
Other comprehensive income (loss) includes items that are recorded in equity, such as unrealized holding gains or losses on marketable securities available for sale.


3.      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, material misrepresentations, and 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”), which owns 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.  The venture owns undeveloped land currently used as a parking facility.

SOUTH PIER AT HARBORSIDE – HOTEL
The Company has a joint venture with Hyatt Corporation (“Hyatt”) which owns a 350-room hotel on the South Pier at Harborside Financial Center, Jersey City, New Jersey.  The Company owns a 50 percent interest in the venture.

The venture has a mortgage loan with a balance as of March 31, 2012 of $64.9 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, 2012 of $5.5 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 $5.5 million letter of credit in support of this loan, half of which is indemnified by Hyatt.

RED BANK CORPORATE PLAZA
The Company has a joint venture with The PRC Group, which owns 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.

The venture had a $20.3 million loan with a commercial bank collateralized by the office property, which bore interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 125 basis points and was scheduled to mature in May 2011. In May 2011, the venture paid the lender $1.7 million and refinanced the remainder of the loan.  The new loan, with a balance of $17.9 million at March 31, 2012, bears interest at a rate of LIBOR plus 300 basis points and matures on May 17, 2016.  LIBOR was 0.24 percent at March 31, 2012.  The loan includes contingent guarantees for a portion of the principal by the Company based on certain conditions.  On September 22, 2011, the interest rate on 75 percent of the loan was fixed at 3.99375 percent effective from October 17, 2011 through maturity.
 
 
 
14

 
 

 
The Company performs management, leasing, and other services for the property owned by the joint venture and recognized $25,000 and $24,000 in fees for such services in the three months ended March 31, 2012 and 2011, respectively.

MACK-GREEN-GALE LLC/GRAMERCY AGREEMENT
On May 9, 2006, the Company entered into a joint venture, Mack-Green-Gale LLC and subsidiaries (“Mack-Green”), with SL Green, pursuant to which Mack-Green held an approximate 96 percent interest in and acted as general partner of Gale SLG NJ Operating Partnership, L.P. (the “OPLP”).  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.  At the time, the OPLP owned 100 percent of entities (“Property Entities”) which owned 25 office properties (the “OPLP 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).  In December 2007, the OPLP 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.

As defined in the Mack-Green operating agreement, the Company shared 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 OPLP.

The Mack-Green operating agreement generally provided 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 OPLP 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 OPLP 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 OPLP Properties were encumbered by mortgage loans with an aggregate outstanding principal balance of $276.3 million at March 31, 2009.  $185.0 million of the mortgage loans bore interest at a weighted average fixed interest rate of 6.26 percent per annum and matured at various times through May 2016.

Six of the OPLP Properties (the “Portfolio Properties”) were encumbered by $90.3 million of mortgage loans which bore interest at a floating rate of LIBOR plus 275 basis points per annum and were scheduled to mature in May 2009.  The floating rate mortgage loans were provided to the six entities which owned the Portfolio Properties (collectively, the “Portfolio Entities”) by Gramercy, which was a related party of SL Green.  Based on the venture’s anticipated holding period pertaining to the Portfolio Properties, the venture believed that the carrying amounts of these properties may not have been 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 as of December 31, 2008. 

On April 29, 2009, the Company acquired the remaining interests in Mack-Green from SL Green.  As a result, the Company owns 100 percent of Mack-Green.  Additionally, on April 29, 2009, the mortgage loans with Gramercy on the Portfolio Properties (the “Gramercy Agreement”) were modified to provide for, among other things, interest to accrue at the current rate of LIBOR plus 275 basis points per annum, with the interest pay rate capped at 3.15 percent per annum.  Under the Gramercy Agreement, the payment of debt service is subordinate to the payment of operating expenses.  Interest at the pay rate is payable only out of funds generated by the Portfolio Properties and only to the extent that the Portfolio Properties’ operating expenses have been paid, with any accrued unpaid interest above the pay rate serving to increase the balance of the amounts due at the termination of the agreement.  Any excess funds after payment of debt service generally will be escrowed and available for future capital and leasing costs, as well as to cover future cash flow shortfalls, as appropriate.  The Gramercy Agreement was scheduled to terminate on May 9, 2011.  Approximately six months in advance of the end of the term of the Gramercy Agreement, the Portfolio Entities are to provide estimates of each property’s fair market value (“FMV”).  Gramercy has the right to accept or reject the FMV.  If Gramercy rejects the FMV, Gramercy must market the property for sale in cooperation with the Portfolio Entities and must approve the ultimate sale.  However, Gramercy has no obligation to market a Portfolio Property if the FMV is less than the allocated amount due, including accrued, unpaid interest. If any Portfolio Property is not sold, the Portfolio Entities have agreed to give a deed in lieu of foreclosure, unless the FMV was equal to or greater than the allocated amount due for such Portfolio Property, in which case they can elect to have that Portfolio Property released by paying the FMV.  If Gramercy accepts the FMV, the Portfolio Property will be released from the Gramercy Agreement upon payment of the FMV.  Under the direction of Gramercy, the Company continues to perform management, leasing, and construction services for the Portfolio Properties at market terms.  The Portfolio Entities have a participation interest which provides for sharing 50 percent of any amount realized in excess of the allocated amounts due for each Portfolio Property.  On November 5, 2010, the Portfolio Entities that owned the remaining four unconsolidated Portfolio Properties provided estimates of the properties’ fair market values to Gramercy, pursuant to the Gramercy Agreement.  On May 5, 2011, the Gramercy Agreement was extended to December 31, 2011.  On November 16, 2011, the Gramercy Agreement was further extended to April 30, 2012.
 
 
 
15

 
 

 
As the Company acquired SL Green’s interests in Mack-Green, the Company owns 100 percent of Mack-Green and is consolidating Mack-Green as of the closing date.  Mack-Green, in turn, has been and will continue consolidating the OPLP as Mack-Green’s approximate 96 percent, general partner ownership interest in the OPLP remained unchanged as of the closing date.  Additionally, as of the closing date, the OPLP continues to consolidate its Property Entities not subject to the Gramercy Agreement, as its 100-percent ownership and rights regarding these entities were unchanged in the transaction.  The OPLP does not consolidate the Portfolio Entities subject to the Gramercy Agreement, as the Gramercy Agreement is considered a reconsideration event under the provisions of ASC 810, Consolidation, and accordingly, the Portfolio Entities were deemed to be variable interest entities for which the OPLP was not considered the primary beneficiary based on the Gramercy Agreement as described above.  As a result of the SLG Transactions, the Company has an unconsolidated joint venture interest in the Portfolio Properties.

On March 31, 2010, the venture sold one of its unconsolidated Portfolio Properties subject to the Gramercy Agreement, 1280 Wall Street West, a 121,314 square foot office property, located in Lyndhurst, New Jersey, for approximately $13.9 million, which was primarily used to pay down mortgage loans pursuant to the Gramercy Agreement.

On December 17, 2010, the venture repaid the $26.8 million allocated loan amount of one of the unconsolidated Portfolio Properties which was subject to the Gramercy Agreement, One Grande Commons, a 198,376 square foot office property, located in Bridgewater, New Jersey.  Concurrent with the repayment, the venture placed $11 million mortgage financing on the property obtained from a bank.  As a result of the repayment of the existing mortgage loan, the venture, which is consolidated by the Company, obtained a controlling interest and is consolidating the office property.

The Company performs management, leasing, and construction services for properties owned by the unconsolidated joint ventures and recognized $125,000 and $161,000 in income for such services in the three months ended March 31, 2012 and 2011, respectively.

12 VREELAND ASSOCIATES, L.L.C.
On September 8, 2006, the Company entered into a joint venture to form M-C Vreeland, LLC (“M-C Vreeland”), for the sole purpose of acquiring 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 Participation Rights (see Note 14: Noncontrolling Interests in Subsidiaries – Participation Rights).

The office property at 12 Vreeland is a 139,750 square foot office building.  The property is subject to a fully-amortizing mortgage loan, which matures on July 1, 2012, and bears interest at 6.9 percent per annum.  As of March 31, 2012, the outstanding balance on the mortgage note was $652,000.
 
 
 
16

 
 

 
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
In October 2006, the Company entered into a joint venture with affiliates of Vornado Realty LP and JP Morgan Chase Bank to acquire and redevelop the Filenes property located in the Downtown Crossing district of Boston, Massachusetts (the “Filenes Property”).  The venture was organized 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, aggregating 1.2 million square feet.  The Company, through subsidiaries, separately holds approximately a 15 percent indirect ownership interest in each of the units.  The project is subject to governmental approvals.

The venture acquired the Filenes Property on January 29, 2007, for approximately $100 million.

Distributions will generally be in proportion to its members’ respective ownership interests and, depending upon the development unit, promotes will be available to specified partners after the achievement of certain internal rates of return ranging from 10 to 15 percent.

The joint venture has suspended its plans for the development of the Filenes Property.  The venture recorded an impairment charge of approximately $69.5 million on its development project in 2008.

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”) for the sole purpose of acquiring an 8.33 percent indirect interest in One Jefferson Road LLC (“One Jefferson”), which developed and placed in service a 100,010 square foot office property at One Jefferson Road, Parsippany, New Jersey, (“the Jefferson Property”).  The property has been fully leased to a single tenant starting in 2010 through August 2025.

The operating agreement of M-C Jefferson provides, among other things, for the Participation Rights (see Note 14: Noncontrolling Interests in Subsidiaries – Participation Rights).  The operating agreements of Gale Jefferson, L.L.C. (“Gale Jefferson”), which is owned 33.33 percent by M-C Jefferson and 66.67 percent by the Hampshire Generational Fund, L.L.C. (“Hampshire”) 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 had a loan in the amount of $21 million, bearing interest at a rate of LIBOR plus 160 basis points, which was repaid on October 24, 2011.  On October 24, 2011, One Jefferson obtained a new loan in the amount of $20.2 million, which bears interest at a rate of one-month LIBOR plus 160 basis points and matures on October 24, 2012 with a one year extension option, subject to the payment of a fee and certain other conditions.

The Company performs management, leasing, and other services for Gale Jefferson and recognized $48,000 and $39,000 in income for such services in the three months ended March 31, 2012 and 2011, respectively.

STAMFORD SM LLC
On February 17, 2012, the Company entered into a joint venture to form Stamford SM L.L.C. (“Stamford SM”) which acquired a senior mezzanine loan (the “Mezz Loan”) position in the capital stack of a 1.7 million square foot class A portfolio in Stamford, Connecticut for $40 million.  The Mezz Loan has a face value of $50 million and is secured by the equity interests in a premier seven-building portfolio containing 1.67 million square feet of class A office space and 106 residential rental units totaling 70,500 square feet, all located in the Stamford Central Business District.  The interest-only Mezz Loan has a carrying value of $40.3 million as of March 31, 2012.  The Mezz Loan is subject to an agreement which provides subject to certain conditions, that principal proceeds above $47 million are paid to another party.  The Mezz Loan bears interest at LIBOR plus 325 basis points and matures in August, 2012 with two one-year extension options, subject to certain conditions.
 
 
 
17

 
 

 
The operating agreement of Stamford SM provides, among other things, distributions of net available cash in accordance with its members’ respective ownership percentages.  The Company owns an 80 percent interest in the venture.  The Company and the 20 percent member share decision-making regarding all major decisions involving the operations of the joint venture.


 
18

 

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, 2012 and December 31, 2011. (dollars in thousands)


 
March 31, 2012
 
Plaza
 
Red Bank
   
Boston-
     
 
VIII & IX
Harborside
Corporate
Gramercy
12
Downtown
Gale
Stamford
Combined
 
Associates
South Pier
Plaza
Agreement
Vreeland
Crossing
Jefferson
SM LLC
Total
Assets:
                 
Rental property, net
$ 8,182
$ 58,492
$ 22,745
$ 39,025
$ 14,144
--
--
--
$ 142,588
Other assets
1,108
13,189
3,108
5,713
484
$ 45,986
$ 2,987
$ 40,485
113,060
Total assets
$ 9,290
$ 71,681
$ 25,853
$ 44,738
$ 14,628
$ 45,986
$ 2,987
$ 40,485
$ 255,648
Liabilities and
                 
 partners’/members’
                 
 capital (deficit):
                 
Mortgages, loans payable
                 
  and other obligations
--
$ 70,411
$ 17,914
$ 50,978
$      652
--
--
--
$ 139,955
Other liabilities
$    532
6,344
138
1,255
--
--
--
---
8,269
Partners’/members’
                 
  capital (deficit)
8,758
(5,074)
7,801
(7,495)
13,976
$ 45,986
$ 2,987
$ 40,485
  107,424
Total liabilities and
                 
  partners’/members’
                 
  capital (deficit)
$ 9,290
$ 71,681
$ 25,853
$ 44,738
$ 14,628
$ 45,986
$ 2,987
$ 40,485
$ 255,648
Company’s investments
                 
  in unconsolidated
                 
  joint ventures, net
$ 4,301
$  (1,331)
$   3,787
--
$ 10,432
$ 13,049
$ 1,173
$ 32,388
$   63,799


 
December 31, 2011
 
Plaza
 
Red Bank
   
Boston-
     
 
VIII & IX
Harborside
Corporate
Gramercy
12
Downtown
Gale
Stamford
Combined
 
Associates
South Pier
Plaza
Agreement
Vreeland
Crossing
Jefferson
SM LLC
Total
Assets:
                 
Rental property, net
$ 8,335
$ 59,733
$ 22,903
$ 39,276
$ 13,122
--
--
--
$ 143,369
Other assets
933
12,840
2,909
5,669
521
$ 46,121
$ 2,927
--
71,920
Total assets
$ 9,268
$ 72,573
$ 25,812
$ 44,945
$ 13,643
$ 46,121
$ 2,927
--
$ 215,289
Liabilities and
                 
 partners’/members’
                 
 capital (deficit):
                 
Mortgages, loans payable
                 
  and other obligations
--
$ 70,690
$ 18,100
$ 50,978
$   1,207
--
--
--
$ 140,975
Other liabilities
$    531
4,982
117
1,086
168
--
--
--
6,884
Partners’/members’
                 
  capital (deficit)
8,737
(3,099)
7,595
(7,119)
 12,268
$ 46,121
$ 2,927
--
   67,430
Total liabilities and
                 
  partners’/members’
                 
  capital (deficit)
$ 9,268
$ 72,573
$ 25,812
$ 44,945
$ 13,643
$ 46,121
$ 2,927
--
$ 215,289
Company’s investments
                 
  in unconsolidated
                 
  joint ventures, net
$ 4,291
$     (343)
$   3,676
--
$ 10,233
$ 13,005
$ 1,153
--
$   32,015






 
19

 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended March 31, 2012 and 2011.  (dollars in thousands)


Three Months Ended March 31, 2012
 
   
Plaza
         
Red Bank
               
Boston-
                   
   
VIII & IX
   
Harborside
   
Corporate
   
Gramercy
      12    
Downtown
   
Gale
   
Stamford
   
Combined
 
   
Associates
   
South Pier
   
Plaza
   
Agreement
   
Vreeland
   
Crossing
   
Jefferson
   
SM LLC
   
Total
 
Total revenues
  $ 229     $ 8,161     $ 847     $ 1,346     $ 594       --     $ 60     $ 467     $ 11,704  
Operating and other
    (55 )     (5,631 )     (234 )     (881 )     (22 )   $ (334 )     --       (22 )     (7,179 )
Depreciation and amortization
    (153 )     (1,403 )     (228 )     (453 )     (153 )     --       --       --       (2,390 )
Interest expense
    --       (1,102 )     (179 )     (388 )     (21 )     --       --       --       (1,690 )
                                                                         
Net income
  $ 21     $ 25     $ 206     $ (376 )   $ 398     $ (334 )   $ 60     $ 445     $ 445  
Company’s equity in earnings
                                                                       
  (loss) of unconsolidated
                                                                       
  joint ventures
  $ 10     $ 12     $ 103       --     $ 199     $ (100 )   $ 20     $ 356     $ 600  


Three Months Ended March 31, 2011
 
   
Plaza
         
Red Bank
               
Boston-
                   
   
VIII & IX
   
Harborside
   
Corporate
   
Gramercy
      12    
Downtown
   
Gale
   
Stamford
   
Combined
 
   
Associates
   
South Pier
   
Plaza
   
Agreement
   
Vreeland
   
Crossing
   
Jefferson
   
SM LLC
   
Total
 
Total revenues
  $ 194     $ 7,635     $ 727     $ 1,809     $ 396       --     $ 66       --     $ 10,827  
Operating and other
    (51 )     (5,734 )     (127 )     (917 )     (18 )   $ (374 )     --       --       (7,221 )
Depreciation and amortization
    (153 )     (1,424 )     (225 )     (793 )     (316 )     --       --       --       (2,911 )
Interest expense
    --       (1,125 )     (80 )     (402 )     (36 )     --       --       --       (1,643 )
                                                                         
Net income
  $ (10 )   $ (648 )   $ 295     $ (303 )   $ 26     $ (374 )   $ 66       --     $ (948 )
Company’s equity in earnings
                                                                       
  (loss) of unconsolidated
                                                                       
  joint ventures
  $ (5 )   $ (161 )   $ 147       --     $ 13     $ (112 )   $ 17       --     $ (101 )





 
20

 

4.  
DEFERRED CHARGES AND OTHER ASSETS


 
March 31,
December 31,
(dollars in thousands)
2012
2011
Deferred leasing costs
$ 247,835
$ 261,106
Deferred financing costs
16,064
16,158
 
263,899
277,264
Accumulated amortization
(110,483)
(123,597)
Deferred charges, net
153,416
153,667
In-place lease values, related intangible and other assets, net
24,880
28,055
Prepaid expenses and other assets, net
33,590
28,748
     
Total deferred charges and other assets, net
$ 211,886
$ 210,470


5.  
DISCONTINUED OPERATIONS

The Company’s office property located at 2200 Renaissance Boulevard in King of Prussia, Pennsylvania, aggregating 174,124 square feet, was collateral for a $16.2 million mortgage loan scheduled to mature on December 1, 2012.  The Company had recorded an impairment charge on the property of $9.5 million at December 31, 2010. On March 28, 2012, the Company transferred the deed for 2200 Renaissance Boulevard to the lender in satisfaction of its obligations. As a result, the Company recorded a gain on the disposal of the office property of approximately $4.5 million.

At March 31, 2012, the Company identified as held for sale its 47,700 square foot office building located at 95 Chestnut Ridge Road in Montvale, New Jersey.  The Company determined that the carrying amount of this property was not expected to be recovered from estimated net sales proceeds and, accordingly, recognized a valuation allowance of $0.5 million during the three months ended March 31, 2012.  At March 31, 2012, the Company also identified as held for sale three office buildings totaling 222,258 square feet in Moorestown, New Jersey.  The four properties held for sale at March 31, 2012 carried an aggregate book value of $23.9 million, net of accumulated depreciation of $10.0 million, and a valuation allowance of $0.5 million.

The Company has presented all of the above properties as discontinued operations in its statements of operations for all periods presented.

The following table summarizes income from discontinued operations and the related realized gains (losses) and unrealized losses on disposition of rental property, net, for the three month periods ended March 31, 2012 and 2011:  (dollars in thousands)

   
Three Months Ended
   
March 31,
     
2012
2011
Total revenues
   
$ 1,528
$ 2,117
Operating and other expenses
   
(878)
(1,089)
Depreciation and amortization
   
(415)
(441)
Interest expense (net of interest income)
   
(428)
(447)
         
Income from discontinued operations before
       
gains (losses) and unrealized losses on
       
disposition of rental property
   
(193)
140
Realized gains (losses) and unrealized losses on
       
disposition of rental property, net
   
4,012
--
         
Total discontinued operations, net
   
$ 3,819
$    140
 
 
 
21

 
 

 
6.  
SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of March 31, 2012 and December 31, 2011 is as follows:  (dollars in thousands)

 
March 31,
December 31,
Effective
 
2012
2011
Rate (1)
5.250% Senior Unsecured Notes, due January 15, 2012 (2)
--
$     99,988
5.457%
6.150% Senior Unsecured Notes, due December 15, 2012 (3)
$     94,561
94,438
6.894%
5.820% Senior Unsecured Notes, due March 15, 2013 (3)
26,000
25,972
6.448%
4.600% Senior Unsecured Notes, due June 15, 2013
99,965
99,958
4.742%
5.125% Senior Unsecured Notes, due February 15, 2014
200,450
200,509
5.110%
5.125% Senior Unsecured Notes, due January 15, 2015
149,740
149,717
5.297%
5.800% Senior Unsecured Notes, due January 15, 2016
200,294
200,313
5.806%
7.750% Senior Unsecured Notes, due August 15, 2019
248,425
248,372
8.017%
       
Total Senior Unsecured Notes
$1,019,435
$1,119,267
 
       
(1)  Includes the cost of terminated treasury lock agreements (if any), offering and other transaction costs and the discount/premium on the notes, as applicable.
(2)  These notes were paid at maturity, primarily from borrowing on the Company’s unsecured revolving credit facility.
(3)  On April 25, 2012, the Company gave notice that it will redeem these notes on May 25, 2012 using cash on hand and borrowings from its unsecured revolving credit facility.

On April 19, 2012, the Operating Partnership completed the sale of $300 million face amount of 4.50 percent senior unsecured notes due April 18, 2022 with interest payable semi-annually in arrears.  The net proceeds from the issuance of $296.8 million, after underwriting discount and offering expenses, were used primarily to repay outstanding borrowings under the Company’s unsecured revolving credit facility and for general corporate purposes, which may include the purchasing or retiring of some of our outstanding debt securities.


7.      UNSECURED REVOLVING CREDIT FACILITY

On October 21, 2011, the Company amended and restated its unsecured revolving credit facility with a group of 20 lenders.  The $600 million facility is expandable to $1 billion and matures in October 2015.  It has a one year extension option with the payment of a 20 basis point fee.  The interest rate on outstanding borrowings (not electing the Company’s competitive bid feature) and the facility fee on the current borrowing capacity payable quarterly in arrears are based upon the Operating Partnership’s unsecured debt ratings, as follows:

Operating Partnership’s
Interest Rate –
 
Unsecured Debt Ratings:
Applicable Basis Points
Facility Fee
Higher of S&P or Moody’s
Above LIBOR
Basis Points
No ratings or less than BBB-/Baa3
185.0
45.0
BBB- or Baa3
150.0
35.0
BBB or Baa2(current)
125.0
25.0
BBB+or  Baa1
107.5
20.0
A-or A3 or higher
100.0
17.5

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 those above.

The terms of the unsecured facility include certain restrictions and covenants which limit, among other things 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.  If an event of default has occurred and is continuing, the Company will not make any excess distributions except to enable the Company to continue to qualify as a REIT under the Code.
 
 
 
22

 
 

 
The lending group for the credit facility consists of: JPMorgan Chase Bank, N.A., as administrative agent; Bank of America, N.A., as syndication agent; Deutsche Bank Trust Company Americas; US Bank National Association and Wells Fargo Bank, N.A., as documentation agents; Capital One, N.A.; Citicorp North America, Inc.; Comerica Bank; PNC Bank, National Association; SunTrust Bank; The Bank of New York Mellon; The Bank of Tokyo-Mitsubishi UFJ, LTD., as managing agents; and Compass Bank; Branch Banking and Trust Company; TD Bank, N.A.; Citizens Bank of Pennsylvania; Chang Hwa Commercial Bank, LTD., New York Branch; Mega International Commercial Bank Co., LTD., New York Branch; First Commercial Bank, New York Branch; and Hua Nan Commercial Bank, LTD., New York Agency, as participants.

As of March 31, 2012 and December 31, 2011, the Company had outstanding borrowings of $199 million and $56 million, respectively, under its unsecured revolving credit facility.

Through October 20, 2011, the Company had a $775 million unsecured revolving credit facility.  The interest rate on outstanding borrowings was LIBOR plus 55 basis points.

MONEY MARKET LOAN
The Company has an agreement with JPMorgan Chase Bank to participate in a noncommitted 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.  As of March 31, 2012 and December 31, 2011, the Company had no outstanding borrowings under the Money Market Loan.


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, 2012, 31 of the Company’s properties, with a total book value of approximately $931.2 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.

 
23

 

A summary of the Company’s mortgages, loans payable and other obligations as of March 31, 2012 and December 31, 2011 is as follows: (dollars in thousands)

           
   
Effective
     
   
Interest
March 31,
December 31,
 
Property Name
Lender
Rate (a)
2012
2011
    Maturity
2200 Renaissance Boulevard (b)
Wachovia CMBS
5.888%
--
$  16,171
 --
One Grande Commons (c)
Capital One Bank
LIBOR +2.00%
$  11,000
11,000
12/31/12
Soundview Plaza
Morgan Stanley Mortgage Capital
6.015%
15,387
15,531
01/01/13
9200 Edmonston Road
Principal Commercial Funding L.L.C.
5.534%
4,436
4,479
05/01/13
6305 Ivy Lane
John Hancock Life Insurance Co.
5.525%
6,185
6,245
01/01/14
395 West Passaic
State Farm Life Insurance Co.
6.004%
10,654
10,781
05/01/14
6301 Ivy Lane
John Hancock Life Insurance Co.
5.520%
5,846
5,899
07/01/14
35 Waterview Boulevard
Wachovia CMBS
6.348%
18,975
19,051
08/11/14
6 Becker, 85 Livingston,
  75 Livingston &
  20 Waterview
Wachovia CMBS
10.220%
62,367
62,127
08/11/14
4 Sylvan
Wachovia CMBS
10.190%
14,449
14,438
08/11/14
10 Independence
Wachovia CMBS
12.440%
15,990
15,908
08/11/14
4 Becker
Wachovia CMBS
9.550%
37,886
37,769
05/11/16
5 Becker
Wachovia CMBS
12.830%
12,161
12,056
05/11/16
210 Clay
Wachovia CMBS
13.420%
11,947
11,844
05/11/16
51 Imclone
Wachovia CMBS
8.390%
3,884
3,886
05/11/16
Various (d)
Prudential Insurance
6.332%
150,000
150,000
01/15/17
23 Main Street
JPMorgan CMBS
5.587%
30,862
31,002
09/01/18
Harborside Plaza 5
The Northwestern Mutual Life Insurance Co. & New York Life Insurance Co.
6.842%
230,842
231,603
11/01/18
100 Walnut Avenue
Guardian Life Insurance Co.
7.311%
19,189
19,241
02/01/19
One River Center (e)
Guardian Life Insurance Co.
7.311%
43,958
44,079
02/01/19
581 Main Street (f)
Valley National Bank
6.935% (g)
16,262
16,338
07/01/34
           
Total mortgages, loans payable and other obligations
 
$722,280
$739,448
 

(a)  Reflects effective rate of debt, including deferred financing costs, comprised of the cost of terminated treasury lock agreements (if any), debt initiation costs, mark-to-market adjustment of acquired debt and other transaction costs, as applicable.
(b)  On March 28, 2012, the Company transferred the deed for 2200 Renaissance Boulevard to the lender in satisfaction of its obligations.  See Note 5: Discontinued Operations.
(c)  The mortgage loan has two one-year extension options subject to certain conditions and the payment of a fee.
(d)  Mortgage is collateralized by seven properties.  The Operating Partnership has agreed, subject to certain conditions, to guarantee repayment of a portion of the loan.
(e)  Mortgage is collateralized by the three properties comprising One River Center.
(f)  The Operating Partnership has agreed, subject to certain conditions, to guarantee repayment of a portion of the loan.
(g)  The coupon interest rate will be reset at the end of year 10 (2019) and year 20 (2029) at 225 basis points over the 10-year treasury yield 45 days prior to the reset dates with a minimum rate of 6.875 percent.

CASH PAID FOR INTEREST AND INTEREST CAPITALIZED
Cash paid for interest for the three months ended March 31, 2012 and 2011 was $43,144,000 and $40,852,000, respectively.  Interest capitalized by the Company for the three months ended March 31, 2012 and 2011 was $230,000 and $550,000, respectively.

SUMMARY OF INDEBTEDNESS
As of March 31, 2012, the Company’s total indebtedness of $1,940,715,000 (weighted average interest rate of 6.15 percent) was comprised of $210,000,000 of revolving credit facility borrowings and other variable rate mortgage debt (weighted average rate of 1.54 percent) and fixed rate debt and other obligations of $1,730,715,000 (weighted average rate of 6.70 percent).


 
24

 

As of December 31, 2011, the Company’s total indebtedness of $1,914,215,000 (weighted average interest rate of 6.46 percent) was comprised of $66,500,000 of revolving credit facility borrowings and other variable rate mortgage debt (weighted average rate of 1.77 percent) and fixed rate debt and other obligations of $1,847,715,000 (weighted average rate of 6.63 percent).


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 one 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.  The Company did not make any contributions nor recognize any expense for the 401(k) Plan for each of the three months ended March 31, 2012 and 2011, respectively.


10.      DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS

The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop estimated fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments at March 31, 2012 and December 31, 2011.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash equivalents, receivables, accounts payable, and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of March 31, 2012 and December 31, 2011.

The fair value of the Company’s long-term debt, consisting of senior unsecured notes, an unsecured revolving credit facility and mortgages, loans payable and other obligations aggregated approximately $2.1 billion and $2.1 billion as compared to the book value of approximately $1.9 billion and $1.9 billion as of March 31, 2012 and December 31, 2011, respectively.  The fair value of the Company’s long-term debt is categorized as a level 2 basis (as provided by ASC 820, Fair Value Measurements and Disclosures).  The fair value is estimated using a discounted cash flow analysis valuation on the borrowing rates currently available to the Company for loans with similar terms and maturities.  The fair value of the mortgage debt and the unsecured notes was determined by discounting the future contractual interest and principal payments by a market rate.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 2012 and December 31, 2011.  Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2012 and current estimates of fair value may differ significantly from the amounts presented herein.



 
25

 

11.      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, as amended, which commenced in 2002, is for a term of 20 years.  The PILOT is equal to two percent of Total Project Costs, as defined.  Total Project Costs are $49.5 million.  The PILOT totaled $247,000 and $247,000 for the three months ended March 31, 2012 and 2011, respectively.

The Harborside Plaza 5 agreement, as amended, which commenced in 2002, is for a term of 20 years.  The PILOT is equal to two percent of Total Project Costs, as defined.  Total Project Costs are $170.9 million.  The PILOT totaled $854,000 and $854,000 for the three months ended March 31, 2012 and 2011, respectively.

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

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

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, 2012, are as follows: (dollars in thousands)

Year
Amount  
April 1 through December 31, 2012
$     275
2013
351
2014
367
2015
371
2016
371
2017 through 2084
16,318
   
Total
$18,053

Ground lease expense incurred by the Company during the three months ended March 31, 2012 and 2011 amounted to $102,000 and $102,000, respectively.

OTHER
The Company may not dispose of or distribute certain of its properties, currently comprised of seven properties with an aggregate net book value of approximately $131 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; and Timothy M. Jones, former president), the Cali Group (which includes John R. Cali, director, and John J. Cali, a former director).  128 of the Company’s properties, with an aggregate net book value of $1.7 billion, have lapsed restrictions and are subject to these conditions.
 
 
 
26

 
 

 
In August 2011, the Company commenced construction of a 203,000 square foot office building which is pre-leased for 15 years and three months, subject to two extension options of between five and 10 years each, to Wyndham Worldwide.  Wyndham currently leases space in neighboring buildings in the Mack-Cali Business Campus in Parsippany, New Jersey.  The new building is expected to be delivered to the tenant in the first quarter of 2013 at a total estimated cost of approximately $53.5 million (of which the Company has incurred $18.2 million through March 31, 2012).

In December 2011, the Company entered into a development agreement (the “Development Agreement”) with Ironstate Development LLC (“Ironstate”) for the development of up to 2 million square feet of residential space with associated parking and ancillary retail space on land owned by the Company at its Harborside Financial Center complex in Jersey City, New Jersey (the “Harborside Residential Project”).  The first phase of the project is expected to consist of a parking pedestal to support two high-rise towers of approximately 630 apartment units each, and estimated to cost approximately $380 million.  The parties anticipate a fourth quarter 2012 ground breaking and the project will be ready for occupancy within approximately two years thereafter.

Pursuant to the Development Agreement, the Company and Ironstate shall co-develop the Harborside Residential Project with Ironstate responsible for obtaining all required development permits and approvals.  Major decisions with respect to the Harborside Residential Project will require the consent of the Company and Ironstate.  The Company and Ironstate will have 85 and 15 percent interests, respectively, in the Harborside Residential Project.  The Company will receive capital credit of $30 per approved developable square foot for its land.

The Development Agreement is subject to obtaining required approvals and development financing as well as numerous customary undertakings, covenants, obligations and conditions.  The Company has the right to reasonably determine that any phase of the Harborside Residential Project is not economically viable and may elect not to proceed, subject to certain conditions, with no further obligations to Ironstate other than reimbursement to Ironstate of all or a portion of the costs incurred by it to obtain any required approvals.


12.      TENANT LEASES

The Properties are leased to tenants under operating leases with various expiration dates through 2033.  Substantially all of the leases provide for annual base rents plus recoveries and escalation charges based upon the tenant’s proportionate share of and/or increases in real estate taxes and certain operating costs, as defined, and the pass-through of charges for electrical usage.

Future minimum rentals to be received under non-cancelable operating leases at March 31, 2012 are as follows (dollars in thousands):

Year
Amount
April 1 through December 31, 2012
$432,341
2013
524,171
2014
463,797
2015
394,113
2016
343,592
2017 and thereafter
1,299,559
   
Total
$3,457,573



 
27

 

13.
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 Charter provides, 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 had 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 represented 1/100th of a share of Series C Preferred Stock.  The Series C Preferred Stock was essentially on an equivalent basis in priority with the preferred units of the Operating Partnership (See Note 14: Noncontrolling interests in subsidiaries).  On October 28, 2011, the Company redeemed its Series C Preferred Stock, at a price of $2,500 per share, plus accrued and unpaid dividends through the date prior to the redemption date.  The write off of preferred stock issuance costs of $164,000 was included in preferred stock dividends for the year ended December 31, 2011.

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, 2012 under the Repurchase Program (none of which has occurred in 2011 and the three months ended March 31, 2012).  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.

DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) which commenced in March 1999 under which 5.5 million shares of the Company’s common stock have been reserved for future issuance.  The DRIP provides for automatic reinvestment of all or a portion of a participant’s dividends from the Company’s shares of common stock.  The DRIP also permits participants to make optional cash investments up to $5,000 a month without restriction and, if the Company waives this limit, for additional amounts subject to certain restrictions and other conditions set forth in the DRIP prospectus filed as part of the Company’s effective registration statement on Form S-3 filed with the Securities and Exchange Commission (“SEC”) for the 5.5 million shares of the Company’s common stock reserved for issuance under the DRIP.

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, 2012 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, and the 2000 Employee Plan and 2000 Director Plan expired in 2010, 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 became exercisable over a five-year period.  All stock options granted under both the 2000 Director Plan and Director Plan became 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, 2012 and December 31, 2011, the stock options outstanding, which were all exercisable, had a weighted average remaining contractual life of approximately 0.9 and 1.1 years, respectively.
 
 
 
28

 
 

 
Information regarding the Company’s stock option plans is summarized below:

   
Weighted
Aggregate
 
Shares
Average
Intrinsic
 
Under
Exercise
Value
 
Options
Price
$(000’s)
Outstanding  as January 1, 2012
183,870
$29.51
--
Exercised/Cancelled
--
--
 
Outstanding at March 31, 2012 ($28.47 – $45.47)
183,870
$29.51
--
Options exercisable at March 31, 2012
183,870
   
Available for grant at March 31, 2012
2,343,337
   

Cash received from options exercised under all stock option plans was zero and $270,300 for the three months ended March 31, 2012 and 2011, respectively.  The total intrinsic value of options exercised during the three months ended March 31, 2012 and 2011 was zero and $44,000, respectively.  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 105,843 unvested shares were outstanding at March 31, 2012.  Of the outstanding Restricted Stock Awards issued to executive officers and senior management, 40,877 are contingent upon the Company meeting certain performance goals to be set by the Executive Compensation and Option Committee of the Board of Directors of the Company 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 2004 Incentive Stock Plan, 2000 Employee Plan and the Employee Plan. Restricted Stock Awards provided to directors were issued under the 2004 Incentive Stock Plan and the 2000 Director Plan.

Information regarding the Restricted Stock Awards is summarized below:

   
Weighted-Average
   
Grant – Date
 
Shares
Fair Value
Outstanding at January 1, 2012
187,447
$33.82
Vested
(81,604)
34.42
Outstanding at March 31, 2012
105,843
$33.36

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.
 
 
 
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During the three months ended March 31, 2012 and 2011, 4,238 and 3,197 deferred stock units were earned, respectively.  As of March 31, 2012 and December 31, 2011, there were 102,274 and 98,009 director 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, 2012 and 2011 in accordance with ASC 260, Earnings Per Share: (in thousands, except per share amounts)

   
Three Months Ended
 
   
March 31,
 
Computation of Basic EPS
 
2012
   
2011
 
Income from continuing operations
  $ 25,448     $ 18,435  
Add:         Noncontrolling interest in consolidated joint ventures
    79       110  
Deduct:  Noncontrolling interest in Operating Partnership
    (3,113 )     (2,437 )
Deduct:  Preferred stock dividends
    --       (500 )
Income from continuing operations available to common shareholders
    22,414       15,608  
Income (loss) from discontinued operations available to common
               
   shareholders
    3,353       121  
Net income available to common shareholders
  $ 25,767     $ 15,729  
                 
Weighted average common shares
    87,799       82,948  
                 
Basic EPS:
               
Income from continuing operations available to common shareholders
  $ 0.25     $ 0.19  
Income (loss) from discontinued operations available to common
               
   shareholders
    0.04       --  
Net income available to common shareholders
  $ 0.29     $ 0.19  


   
Three Months Ended
 
   
March 31,
 
Computation of Diluted EPS
 
2012
   
2011
 
Income from continuing operations available to common shareholders
  $ 22,414     $ 15,608  
Add:         Noncontrolling interest in Operating Partnership
    3,113       2,437  
Income from continuing operations for diluted earnings per share
    25,527       18,045  
Income (loss) from discontinued operations for diluted earnings
               
   per share
    3,819       140  
Net income available to common shareholders
  $ 29,346     $ 18,185  
                 
Weighted average common shares
    100,062       96,015  
                 
Diluted EPS:
               
Income from continuing operations available to common shareholders
  $ 0.25     $ 0.19  
Income (loss) from discontinued operations available to common
               
   shareholders
    0.04       --  
Net income available to common shareholders
  $ 0.29     $ 0.19  


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

   
Three Months Ended
   
March 31,
     
2012
2011
Basic EPS shares
   
87,799
82,948
Add:   Operating Partnership – common units
   
12,193
12,952
Stock options
   
--
43
Restricted Stock Awards
   
70
72
Diluted EPS Shares
   
100,062
96,015

Unvested restricted stock outstanding as of March 31, 2012 and 2011 were 105,843 and 157,681, respectively.

Dividends declared per common share for each of the three month periods ended March 31, 2012 and 2011 was $0.45 per share.

14.      NONCONTROLLING INTERESTS IN SUBSIDIARIES

Noncontrolling interests in subsidiaries in the accompanying consolidated financial statements relate to (i) 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.

OPERATING PARTNERSHIP

Preferred Units
In connection with the Company’s issuance of $25 million of Series C Preferred Stock, the Company acquired from the Operating Partnership $25 million of Series C Preferred Units (the “Series C Preferred Units”), which had terms essentially identical to the Series C Preferred Stock.  In connection with the Company’s redemption of Series C Preferred Stock on October 28, 2011, the Operating Partnership redeemed from the company all issued and outstanding Series C Preferred Units.  See Note 13: 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.


 
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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, 2012:

 
Common
 
Units
Balance at January 1, 2012
12,197,122
Redemption of common units for shares of common stock
(10,000)
   
Balance at March 31, 2012
12,187,122

Pursuant to ASC 810, Consolidation, on the accounting and reporting for noncontrolling interests and changes in ownership interests of a subsidiary, changes in a parent’s ownership interest (and transactions with noncontrolling interest unitholders in the subsidiary) while the parent retains its controlling interest in its subsidiary should be accounted for as equity transactions.  The carrying amount of the noncontrolling interest shall be adjusted to reflect the change in its ownership interest in the subsidiary, with the offset to equity attributable to the parent.  Accordingly, as a result of equity transactions which caused changes in ownership percentages between Mack-Cali Realty Corporation stockholders’ equity and noncontrolling interests in the Operating Partnership that occurred during the three months ended March 31, 2012, the Company has increased noncontrolling interests in the Operating Partnership and decreased additional paid-in capital in Mack-Cali Realty Corporation stockholders’ equity by approximately $0.1 million as of March 31, 2012.

NONCONTROLLING INTEREST OWNERSHIP
As of March 31, 2012 and December 31, 2011, the noncontrolling interest common unitholders owned 12.2 percent and 12.2 percent of the Operating Partnership, respectively.

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

PARTICIPATION RIGHTS
The Company’s interests in certain real estate projects (four office buildings aggregating 860,246 square feet and two future developments) acquired in 2006 each provide for the initial distributions of net cash flow solely to the Company, and thereafter, other parties, including Mark Yeager, a former executive officer of the Company, have participation rights (“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.


15.      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, 2012 and 2011.  The Company had no long lived assets in foreign locations as of March 31, 2012 and December 31, 2011.  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.

 
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Selected results of operations for the three months ended March 31, 2012 and 2011 and selected asset information as of March 31, 2012 and December 31, 2011 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, 2012
$178,887
$3,833
$       260
$182,980
 
March 31, 2011
179,736
3,915
562
184,213
 
           
Total operating and interest expenses(a):
         
 Three months ended:
         
March 31, 2012
$   65,230
$3,890
$41,190
$110,310
(e)
March 31, 2011
74,881
4,122
38,967
117,970
(f)
           
Equity in earnings (loss) of unconsolidated
         
joint ventures:
         
 Three months ended:
         
March 31, 2012
$        600
--
--
$        600
 
March 31, 2011
(101)
--
--
(101)
 
           
Net operating income (b):
         
 Three months ended:
         
March 31, 2012
$114,257
$     (57)
$(40,930)
$   73,270
(e)
March 31, 2011
104,754
(207)
(38,405)
66,142
(f)
           
Total assets:
         
March 31, 2012
$4,285,146
$6,862
$    7,426
$4,299,434
 
December 31, 2011
4,272,469  
7,022
    16,268  
4,295,759
 
           
Total long-lived assets (c):
         
March 31, 2012
$4,035,730
--
$    2,178
$4,037,908
 
December 31, 2011
4,034,651  
--
      2,272
4,036,923
 
 
 

(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 $47,822 of depreciation and amortization.
(f)
Excludes $47,707 of depreciation and amortization.



 
33

 

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 277 properties (collectively, the “Properties”), primarily class A office and office/flex buildings, totaling approximately 32.2 million square feet, leased to over 2,000 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 12.3 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 87.9 percent at March 31, 2012 as compared to 88.3 percent at December 31, 2011 and 88.2 percent at March 31, 2011.  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, 2012, December 31, 2011 and March 31, 2011 aggregate 148,404, 193,213 and 144,219 square feet, respectively, or 0.5, 0.6 and 0.5 percentage of the net rentable square footage, respectively.  The Company believes that vacancy rates may continue to increase and rental rates may continue to decline in some of its markets through 2012 and possibly beyond.  As a result, the Company’s future earnings and cash flow may continue to be negatively impacted by current market conditions.
 
 
 
34

 
 

 
The Company expects that the impact of the current state of the economy, including high unemployment will continue to have a negative effect on the fundamentals of its business, including lower occupancy, reduced effective rents, and increases in defaults and past due accounts.  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.

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

· 
critical accounting policies and estimates;
· 
results of operations for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011; and
· 
liquidity and capital resources.


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.

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, 2012 and 2011 was $0.2 million and $0.6 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 fair values. The Company records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed exceed the purchase consideration of a transaction. 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.
 
 
 
35

 
 

 
Above-market and below-market lease values for acquired properties are initially 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.

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s rental properties may be impaired.  In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment.  The criteria considered by management include reviewing low leased percentages, significant near-term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near-term mortgage debt maturities or other factors that might impact the Company’s intent and ability to hold the property.  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.  These assumptions are generally based on management’s experience in its local real estate markets and the effects of current market conditions.  The assumptions 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, and actual losses or impairments may be realized in the future.

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.
 
 
 
36

 
 

 
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 under the equity method of accounting.  The Company applies the equity method by initially recording these investments at cost, as Investments in Unconsolidated Joint Ventures, subsequently adjusted for equity in earnings and cash contributions and distributions.

Accounting Standards Codification (“ASC”) 810, Consolidation, 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 VIEs (the “primary beneficiary”).  Generally, the consideration of whether an entity is a VIE 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 January 1, 2010, the Company adopted the updated provisions of ASC 810, which amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  Additionally, ASC 810 amends FIN 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.  ASC 810 amends certain guidance in Interpretation 46(R) for determining whether an entity is a variable interest entity.  Also, ASC 810 amends FIN 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity.  The adoption of this guidance did not have a material impact to the Financial Statements.  See Note 3: Investments in Unconsolidated Joint Ventures to the Financial Statements for disclosures regarding the Company’s unconsolidated joint ventures.

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

Revenue Recognition:
Base rental revenue is recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represents the cumulative 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 initially 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.
 
 
 
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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 collectability 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, 2012 (“2012”), as compared to the three months ended March 31, 2011 (“2011”), 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, 2010, excluding properties sold or held for sale through March 31, 2012, and (ii) the effect of the “Acquired Properties,” which represent all properties acquired by the Company, commencing initial operations, or initially consolidated by the Company, from January 1, 2011 through March 31, 2012.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

   
Three Months Ended
             
   
March 31,
   
Dollar
   
Percent
 
(dollars in thousands)
 
2012
   
2011
   
Change
   
Change
 
Revenue from rental operations and other:
                       
Base rents
  $ 148,667     $ 147,711     $ 956       0.6 %
Escalations and recoveries from tenants
    20,150       27,180       (7,030 )     (25.9 )
Other income
    9,492       4,291       5,201       121.2  
Total revenues from rental operations
    178,309       179,182       (873 )     (0.5 )
                                 
Property expenses:
                               
Real estate taxes
    22,903       24,795       (1,892 )     (7.6 )
Utilities
    16,102       19,742       (3,640 )     (18.4 )
Operating services
    26,604       30,346       (3,742 )     (12.3 )
Total property expenses
    65,609       74,883       (9,274 )     (12.4 )
                                 
Non-property revenues:
                               
Construction services
    3,463       3,799       (336 )     (8.8 )
Real estate services
    1,208       1,232       (24 )     (1.9 )
Total non-property revenues
    4,671       5,031       (360 )     (7.2 )
                                 
Non-property expenses:
                               
Direct construction costs
    3,278       3,582       (304 )     (8.5 )
General and administrative
    10,807       8,623       2,184       25.3  
Depreciation and amortization
    47,822       47,707       115       0.2  
Total non-property expenses
    61,907       59,912       1,995       3.3  
Operating income
    55,464       49,418       6,046       12.2  
Other (expense) income:
                               
Interest expense
    (30,629 )     (30,892 )     263       0.9  
Interest and other investment income
    13       10       3       30.0  
Equity in earnings (loss) of unconsolidated joint ventures
    600       (101 )     701       694.1  
Total other (expense) income
    (30,016 )     (30,983 )     967       3.1  
Income from continuing operations
    25,448       18,435       7,013       38.0  
Discontinued operations:
                               
Income (loss) from discontinued operations
    (193 )     140       (333