UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended June 30, 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 July 23, 2012, there were 87,820,802 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 June 30, 2012
  and December 31, 2011
4
       
   
Consolidated Statements of Operations for the three and six months
  ended June 30, 2012 and 2011
5
       
   
Consolidated Statement of Changes in Equity for the six months
  ended June 30, 2012
6
       
   
Consolidated Statements of Cash Flows for the six months
  ended June 30, 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
34-53
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
53
       
 
Item 4.
Controls and Procedures
54
       
Part II
Other Information
   
       
 
Item 1.
Legal Proceedings
55
       
 
Item 1A.
Risk Factors
55
       
 
Item 2.
Unregistered Sales of Equity Securities  Proceeds and Use of
55
       
 
Item 3.
Defaults Upon Senior Securities
55
       
 
Item 4.
Mine Safety Disclosure
55
       
 
Item 5.
Other Information
55
       
 
Item 6.
Exhibits
55
       
Signatures
   
56
       
Exhibit Index
   
57-72

 
 
 
 
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 and six month periods ended June 30, 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)

           
           
   
June 30,
   
December 31,
ASSETS
 
2012
   
2011
Rental property
         
Land and leasehold interests
$
765,646
 
$
 773,026
Buildings and improvements
 
3,977,332
   
 4,001,943
Tenant improvements
 
466,711
   
 500,336
Furniture, fixtures and equipment
 
3,106
   
 4,465
   
5,212,795
   
 5,279,770
Less – accumulated depreciation and amortization
 
(1,416,190)
   
 (1,409,163)
   
3,796,605
   
 3,870,607
Rental property held for sale, net
 
22,404
   
 -
Net investment in rental property
 
3,819,009
   
 3,870,607
Cash and cash equivalents
 
19,303
   
 20,496
Investments in unconsolidated joint ventures
 
64,359
   
 32,015
Unbilled rents receivable, net
 
135,856
   
 134,301
Deferred charges and other assets, net
 
201,919
   
 210,470
Restricted cash
 
20,818
   
 20,716
Accounts receivable, net of allowance for doubtful accounts
         
of $2,975 and $2,697
 
8,943
   
 7,154
           
Total assets
$
4,270,207
 
$
 4,295,759
           
LIABILITIES AND EQUITY
         
Senior unsecured notes
$
1,198,294
 
$
 1,119,267
Revolving credit facility
 
10,000
   
 55,500
Mortgages, loans payable and other obligations
 
721,302
   
 739,448
Dividends and distributions payable
 
44,999
   
 44,999
Accounts payable, accrued expenses and other liabilities
 
109,220
   
 100,480
Rents received in advance and security deposits
 
53,220
   
 53,019
Accrued interest payable
 
26,895
   
 29,046
Total liabilities
 
2,163,930
   
 2,141,759
Commitments and contingencies
         
           
Equity:
         
Mack-Cali Realty Corporation stockholders’ equity:
         
Common stock, $0.01 par value, 190,000,000 shares authorized,
         
87,819,278 and 87,799,479 shares outstanding
 
878
   
 878
Additional paid-in capital
 
2,538,042
   
 2,536,184
Dividends in excess of net earnings
 
(690,664)
   
 (647,498)
Total Mack-Cali Realty Corporation stockholders’ equity
 
1,848,256
   
 1,889,564
           
Noncontrolling interests in subsidiaries:
         
Operating Partnership
 
256,281
   
 262,499
Consolidated joint ventures
 
1,740
   
 1,937
Total noncontrolling interests in subsidiaries
 
258,021
   
 264,436
           
Total equity
 
2,106,277
   
 2,154,000
           
Total liabilities and equity
$
4,270,207
 
$
 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
   
Six Months Ended
     
         June 30,
   
           June 30,
REVENUES
   
2012
   
2011
   
2012
   
2011
Base rents
 
$
148,618
 
$
 147,992
 
$
297,285
 
$
 295,703
Escalations and recoveries from tenants
   
20,787
   
 23,748
   
40,937
   
 50,928
Construction services
   
4,603
   
 2,826
   
8,066
   
 6,625
Real estate services
   
1,113
   
 1,152
   
2,321
   
 2,384
Other income
   
3,341
   
 3,450
   
12,833
   
 7,741
Total revenues
   
178,462
   
 179,168
   
361,442
   
 363,381
                         
EXPENSES
                       
Real estate taxes
   
24,900
   
 24,133
   
47,803
   
 48,928
Utilities
   
14,444
   
 16,657
   
30,546
   
 36,399
Operating services
   
27,845
   
 28,267
   
54,449
   
 58,613
Direct construction costs
   
4,337
   
 2,784
   
7,615
   
 6,366
General and administrative
   
11,898
   
 9,209
   
22,705
   
 17,832
Depreciation and amortization
   
47,991
   
 47,846
   
95,813
   
 95,553
Total expenses
   
131,415
   
 128,896
   
258,931
   
 263,691
Operating income
   
47,047
   
 50,272
   
102,511
   
 99,690
                         
OTHER (EXPENSE) INCOME
                       
Interest expense
   
(31,645)
   
 (30,916)
   
(62,274)
   
 (61,808)
Interest and other investment income
   
7
   
 10
   
20
   
 20
Equity in earnings (loss) of unconsolidated joint ventures
   
1,733
   
 736
   
2,333
   
 635
Loss from early extinguishment of debt
   
(4,415)
   
 -
   
(4,415)
   
 -
Total other (expense) income
   
(34,320)
   
 (30,170)
   
(64,336)
   
 (61,153)
Income from continuing operations
   
12,727
   
 20,102
   
38,175
   
 38,537
Discontinued operations:
                       
Income (loss) from discontinued operations
   
318
   
 189
   
125
   
 329
Realized gains (losses) and unrealized losses
                       
on disposition of rental property, net
   
(1,634)
   
-
   
2,378
   
 -
Total discontinued operations, net
   
(1,316)
   
 189
   
2,503
   
 329
Net income
   
11,411
   
 20,291
   
40,678
   
 38,866
Noncontrolling interest in consolidated joint ventures
   
92
   
 102
   
171
   
 212
Noncontrolling interest in Operating Partnership
   
(1,562)
   
 (2,536)
   
(4,675)
   
 (4,973)
Noncontrolling interest in discontinued operations
   
160
   
 (24)
   
(306)
   
 (43)
Preferred stock dividends
   
 -
   
 (500)
   
 -
   
 (1,000)
Net income available to common shareholders
 
$
10,101
 
$
 17,333
 
$
35,868
 
$
 33,062
                         
Basic earnings per common share:
                       
Income from continuing operations
 
$
0.12
 
$
 0.20
 
$
0.38
 
$
 0.39
Discontinued operations
   
(0.01)
   
 -
   
0.03
   
 -
Net income available to common shareholders
 
$
0.11
 
$
 0.20
 
$
0.41
 
$
 0.39
                         
Diluted earnings per common share:
                       
Income from continuing operations
 
$
0.12
 
$
 0.20
 
$
0.38
 
$
 0.39
Discontinued operations
   
(0.01)
   
 -
   
0.03
   
 -
Net income available to common shareholders
 
$
0.11
 
$
 0.20
 
$
0.41
 
$
 0.39
                         
Basic weighted average shares outstanding
   
87,817
   
 86,936
   
87,808
   
 84,953
                         
Diluted weighted average shares outstanding
   
100,069
   
 99,887
   
100,065
   
 97,963
 

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
 -
   
 -
   
 -
   
 35,868
   
 4,810
   
 40,678
Common stock dividends
 -
   
 -
   
 -
   
 (79,034)
   
 -
   
 (79,034)
Common unit distributions
 -
   
 -
   
 -
   
 -
   
 (10,964)
   
 (10,964)
Decrease in noncontrolling interest
 -
   
 -
   
 -
   
 -
   
 (26)
   
 (26)
Redemption of common units
                               
  for common stock
 20
   
 -
   
 429
   
 -
   
 (429)
   
 -
Shares issued under Dividend
                               
  Reinvestment and Stock
                               
  Purchase Plan
 4
   
 -
   
 114
   
 -
   
 -
   
 114
Cancellation of shares
 (5)
   
 -
   
 (126)
   
 -
   
 -
   
 (126)
Stock compensation
 -
   
 -
   
 1,635
   
 -
   
 -
   
 1,635
Rebalancing of ownership percent
                               
  between parent and subsidiaries
 -
   
 -
   
 (194)
   
 -
   
 194
   
 -
Balance at June 30, 2012
87,819
 
$
878
 
$
2,538,042
 
$
(690,664)
 
$
258,021
 
$
2,106,277
 

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


 
6

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
             
     
     Six Months Ended
     
        June 30,
CASH FLOWS FROM OPERATING ACTIVITIES
   
2012
   
2011
Net income
 
$
40,678
 
$
 38,866
Adjustments to reconcile net income to net cash provided by
           
Operating activities:
           
Depreciation and amortization, including related intangible assets
   
95,735
   
 95,289
Depreciation and amortization on discontinued operations
   
428
   
 863
Amortization of stock compensation
   
1,635
   
 1,594
Amortization of deferred financing costs and debt discount
   
1,272
   
 1,168
Write off of unamortized discount on senior unsecured notes
   
370
   
 -
Equity in earnings of unconsolidated joint venture, net
   
(2,333)
   
 (635)
Realized gains and unrealized losses on disposition
           
   of rental property, net
   
(2,378)
   
 -
Distributions of cumulative earnings from unconsolidated
           
   joint ventures
   
1,494
   
 1,471
Changes in operating assets and liabilities:
           
Increase in unbilled rents receivable, net
   
(1,610)
   
 (4,066)
Increase in deferred charges and other assets, net
   
(7,322)
   
 (18,468)
(Increase) decrease in accounts receivable, net
   
(1,829)
   
 3,554
Increase in accounts payable, accrued expenses
           
   and other liabilities
   
10,229
   
 5,749
Increase (decrease) in rents received in advance and security deposits
   
201
   
 (2,327)
(Decrease) increase in accrued interest payable
   
(6)
   
 706
             
Net cash provided by operating activities
 
$
136,564
 
$
 123,764
             
CASH FLOWS FROM INVESTING ACTIVITIES
           
Rental property additions and improvements
 
$
(33,348)
 
$
 (43,252)
Development of rental property
   
(8,352)
   
 -
Investment in unconsolidated joint ventures
   
(32,475)
   
 (201)
Distributions in excess of cumulative earnings from
           
unconsolidated joint ventures
   
988
   
 929
Increase in restricted cash
   
(195)
   
 (3,077)
             
Net cash used in investing activities
 
$
(73,382)
 
$
 (45,601)
             
CASH FLOW FROM FINANCING ACTIVITIES
           
Borrowings from revolving credit facility
 
$
302,526
 
$
 139,000
Repayment of revolving credit facility
   
(348,026)
   
 (358,000)
Proceeds from senior unsecured notes
   
299,403
   
 -
Repayment of senior unsecured notes
   
(221,019)
   
 -
Proceeds from offering of common stock
   
 -
   
 227,374
Repayment of mortgages, loans payable and other obligations
   
(4,674)
   
 (4,160)
Payment of financing costs
   
(2,635)
   
 (6)
Proceeds from stock options exercised
   
 -
   
 1,463
Payment of dividends and distributions
   
(89,950)
   
 (87,591)
             
Net cash used in financing activities
 
$
(64,375)
 
$
 (81,920)
             
Net decrease in cash and cash equivalents
 
$
(1,193)
 
$
 (3,757)
Cash and cash equivalents, beginning of period
   
20,496
   
 21,851
             
Cash and cash equivalents, end of period
 
$
19,303
 
$
 18,094

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 June 30, 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. Capitalized development and construction salaries and related costs approximated $770,000, and $909,000 for the three months ended June 30, 2012 and 2011, respectively, and $1,570,000 and $1,979,000 for the six months ended June 30, 2012 and 2011, respectively.  Included in total rental property is construction, tenant improvement and development in-progress of $34,862,000 and $37,069,000 as of June 30, 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, primarily based on a percentage of the relative square footage of each portion, 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 6: Discontinued Operations.

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

 
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.

 
 
10

 
 

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 $661,000 and $584,000 for the three months ended June 30, 2012 and 2011, respectively, and $1,272,000 and $1,168,000 for the six months ended June 30, 2012 and 2011, respectively.  If a financing obligation is extinguished early, any unamortized deferred financing costs are written off and included in gains (loss) on early extinguishment of debt.
 
 
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 $1,060,000 and $982,000 for the three months ended June 30, 2012 and 2011, respectively, and $2,156,000 and $2,036,000 for the six months ended June 30, 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 13: Tenant Leases.  Construction services revenue includes fees earned and reimbursements received by the Company for providing construction management and general contractor services to clients.  Construction services revenue is recognized on the percentage of completion method.  Using this method, profits are recorded on the basis of estimates of the overall profit and percentage of completion of individual contracts.  A portion of the estimated profits is accrued based upon estimates of the percentage of completion of the construction contract.  This revenue recognition method involves inherent risks relating to profit and cost estimates.  Real estate services revenue includes property management, facilities management, leasing commission fees and other services, and payroll and related costs reimbursed from clients.  Other income includes income from parking spaces leased to tenants, income from tenants for additional services arranged for by the Company and income from tenants for early lease terminations.
 
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.

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.
 
 
 
12

 

 
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 June 30, 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 June 30, 2012 represents dividends payable to common shareholders (87,819,863 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (12,177,122 common units) for all such holders of record as of July 5, 2012 with respect to the second quarter 2012.  The second 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 June 5, 2012.  The common stock dividends and common unit distributions payable were paid on July 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.

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 $579,000 and $690,000 for the three months ended June 30, 2012 and 2011, respectively, and $1,393,000 and $1,380,000 for the six months ended June 30, 2012 and 2011, respectively.
 

 
 
13

 
 
 
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 June 30, 2012 of $64.6 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 June 30, 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 $17.7 million at June 30, 2012, bears interest at a rate of LIBOR plus 300 basis points and matures on May 17, 2016.  LIBOR was 0.24 percent at June 30, 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.

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 June 30, 2012 and 2011, respectively, and $50,000 and $48,000 for the six months ended June 30, 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.
 
 
 
14

 

 
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.  The Gramercy Agreement has a  maturity date of September 28, 2012.

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.
 
 
 
15

 

 
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 $112,000 and $113,000 in income for such services in the three months ended June 30, 2012 and 2011, respectively, and $237,000 and $274,000 in income for the six months ended June 30, 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 15: Noncontrolling Interests in Subsidiaries – Participation Rights).

The office property at 12 Vreeland is a 139,750 square foot office building.  The property had a fully-amortizing mortgage loan, the balance of which was fully satisfied at maturity on July 1, 2012.

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 (“Vornado”) and JP Morgan Chase Bank (“JPM”) 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.

On May 15, 2012, the Company and JPM granted Vornado an option to purchase their interest for $45 million, subject to certain conditions, through May 16, 2013.


 
16

 

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 15: 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 $40,000 in income for such services in the three months ended June 30, 2012 and 2011, respectively, and $96,000 and $79,000 in income for the six months ended June 30, 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 $41 million as of June 30, 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.  On June 27, 2012, the borrowers of the Mezz Loan notified Stamford SM of their election to exercise the first extension option to extend the maturity date to August 2013, the approval of which is subject to the satisfaction of the extension conditions pursuant to the Mezz Loan agreement.

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 equally decision-making on all major decisions involving the operations of the joint venture.



 
17

 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the financial position of the unconsolidated joint ventures in which the Company had investment interests as of June 30, 2012 and December 31, 2011: (dollars in thousands)

                                                     
                                                     
   
June 30, 2012
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Assets:
                                                   
Rental property, net
$
8,028
 
$
57,319
 
$
22,549
 
$
38,704
 
$
14,021
   
 -
   
 -
   
 -
 
$
140,621
Loan receivable
 
 -
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
$
40,954
   
40,954
Other assets
 
1,289
   
16,913
   
2,836
   
5,599
   
1,024
 
$
46,213
 
$
2,830
   
227
   
76,931
Total assets
$
9,317
 
$
74,232
 
$
25,385
 
$
44,303
 
$
15,045
 
$
46,213
 
$
2,830
 
$
41,181
 
$
258,506
Liabilities and partners'/members' capital (deficit):
                                                   
Mortgages, loans payable
                                                   
  and other obligations
 
 -
 
$
70,127
 
$
17,728
 
$
50,978
   
-
   
 -
   
 -
   
 -
 
$
138,833
Other liabilities
$
537
   
9,095
   
42
   
1,106
 
$
725
   
 -
   
 -
   
 -
   
11,505
Partners’/members’
                                                   
  capital (deficit)
 
8,780
   
(4,990)
   
7,615
   
(7,781)
   
14,320
 
$
46,213
 
$
2,830
 
$
41,181
   
108,168
Total liabilities and
                                                   
  partners’/members’
                                                   
  capital (deficit)
$
9,317
 
$
74,232
 
$
25,385
 
$
44,303
 
$
15,045
 
$
46,213
 
$
2,830
 
$
41,181
 
$
258,506
Company’s investments
                                                   
  in unconsolidated
                                                   
  joint ventures, net
$
4,312
 
$
(1,289)
 
$
3,702
   
-
 
$
10,558
 
$
13,010
 
$
1,121
 
$
32,945
 
$
64,359
                                                     
                                                     
   
December 31, 2011
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
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



 
18

 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended June 30, 2012 and 2011:  (dollars in thousands)

                                                       
 
Three Months Ended June 30, 2012
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Total revenues
$
235
 
$
10,906
 
$
799
 
$
1,552
 
$
652
   
 -
 
$
69
 
$
1,141
 
$
15,354
Operating and other
 
(60)
   
(6,814)
   
(182)
   
(999)
   
(266)
 
$
(755)
   
 -
   
 (4)
   
(9,080)
Depreciation and amortization
 
(153)
   
(1,410)
   
(228)
   
(453)
   
(154)
   
 -
   
 -
   
 -
   
(2,398)
Interest expense
 
 -
   
(1,098)
   
(186)
   
(386)
   
18
   
 -
   
 -
   
 -
   
(1,652)
                                                     
Net income
$
22
 
$
1,584
 
$
203
 
$
(286)
 
$
250
 
$
(755)
 
$
69
 
$
1,137
 
$
2,224
Company’s equity in earnings
                                                   
  (loss) of unconsolidated
                                                   
  joint ventures
$
12
 
$
792
 
$
101
   
 -
 
$
125
 
$
(227)
 
$
20
 
$
910
 
$
1,733
                                                       
                                                       
                                                       
 
Three Months Ended June 30, 2011
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Total revenues
$
 255
 
$
 10,815
 
$
 865
 
$
 1,525
 
$
 594
   
 -
 
$
 76
   
 -
 
$
 14,130
Operating and other
 
 (51)
   
 (6,830)
   
 (243)
   
 (975)
   
 (34)
 
$
 (377)
   
 -
   
 -
   
 (8,510)
Depreciation and amortization
 
 (153)
   
 (1,415)
   
 (226)
   
 (539)
   
 (315)
   
 -
   
 -
   
 -
   
 (2,648)
Interest expense
 
 -
   
 (1,120)
   
 (129)
   
 (381)
   
 (52)
   
 -
   
 -
   
 -
   
 (1,682)
                                                     
Net income
$
 51
 
$
 1,450
 
$
 267
 
$
 (370)
 
$
 193
 
$
 (377)
 
$
 76
   
 -
 
$
 1,290
Company’s equity in earnings
                                                   
  (loss) of unconsolidated
                                                   
  joint ventures
$
 25
 
$
 568
 
$
 134
   
 -
 
$
 96
 
$
 (113)
 
$
 26
   
 -
 
$
 736



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 six months ended June 30, 2012 and 2011: (dollars in thousands)

                                                       
 
Six Months Ended June 30, 2012
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Total revenues
$
464
 
$
19,067
 
$
1,646
 
$
2,898
 
$
1,246
   
 -
 
$
129
 
$
1,608
 
$
27,058
Operating and other
 
(115)
   
(12,445)
   
(416)
   
(1,880)
   
(288)
 
$
(1,089)
   
 -
   
 (26)
   
(16,259)
Depreciation and amortization
 
(306)
   
(2,813)
   
(456)
   
(906)
   
(307)
   
 -
   
 -
   
 -
   
(4,788)
Interest expense
 
 -
   
(2,200)
   
(365)
   
(774)
   
(3)
   
 -
   
 -
   
 -
   
(3,342)
                                                     
Net income
$
43
 
$
1,609
 
$
409
 
$
(662)
 
$
648
 
$
(1,089)
 
$
129
 
$
1,582
 
$
2,669
Company’s equity in earnings
                                                   
  (loss) of unconsolidated
                                                   
  joint ventures
$
22
 
$
804
 
$
204
   
 -
 
$
324
 
$
(327)
 
$
40
 
$
1,266
 
$
2,333
                                                       
                                                       
                                                       
 
Six Months Ended June 30, 2011
   
Plaza
VIII & IX
Associates
   
Harborside
South Pier
   
Red Bank
Corporate Plaza
   
Gramercy
Agreement
   
12
Vreeland
   
Boston-
Downtown
Crossing
   
Gale
Jefferson
   
Stamford
SM LLC
   
Combined
Total
Total revenues
$
 449
 
$
 18,450
 
$
 1,592
 
$
 3,334
 
$
 990
   
 -
 
$
 142
   
 -
 
$
 24,957
Operating and other
 
 (102)
   
 (12,564)
   
 (370)
   
 (1,892)
   
 (52)
 
$
 (751)
   
 -
   
 -
   
 (15,731)
Depreciation and amortization
 
 (306)
   
 (2,839)
   
 (451)
   
 (1,332)
   
 (631)
   
 -
   
 -
   
 -
   
 (5,559)
Interest expense
 
 -
   
 (2,245)
   
 (209)
   
 (783)
   
 (88)
   
 -
   
 -
   
 -
   
 (3,325)
                                                     
Net income
$
 41
 
$
 802
 
$
 562
 
$
 (673)
 
$
 219
 
$
 (751)
 
$
 142
   
 -
 
$
 342
Company’s equity in earnings
                                                   
  (loss) of unconsolidated
                                                   
  joint ventures
$
 20
 
$
 407
 
$
 281
   
 -
 
$
 109
 
$
 (225)
 
$
 43
   
 -
 
$
 635



 
19

 

4.   DEFERRED CHARGES AND OTHER ASSETS
           
           
   
June 30,
   
December 31,
(dollars in thousands)
 
2012
   
2011
Deferred leasing costs
$
255,954
 
$
 261,106
Deferred financing costs
 
18,630
   
 16,158
   
274,584
   
 277,264
Accumulated amortization
 
(117,616)
   
 (123,597)
Deferred charges, net
 
156,968
   
 153,667
In-place lease values, related intangible and other assets, net
 
21,672
   
 28,055
Prepaid expenses and other assets, net
 
23,279
   
 28,748
           
Total deferred charges and other assets, net
$
201,919
 
$
 210,470




5.   RESTRICTED CASH

Restricted cash includes security deposits for certain of the Company’s properties, and escrow and reserve funds for debt service, real estate taxes, property insurance, capital improvements, tenant improvements, and leasing costs established pursuant to certain mortgage financing arrangements, and is comprised of the following:  (dollars in thousands)
           
           
   
June 30,
   
December 31,
   
2012
   
2011
Security deposits
$
7,457
 
$
 7,198
Escrow and other reserve funds
 
13,361
   
 13,518
           
Total restricted cash
$
20,818
 
$
 20,716


 
6.   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 at 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 Company determined that the aggregate carrying amount of these properties was not expected to be recovered from estimated net sales proceeds and, accordingly, recognized a valuation allowance of $1.6 million at June 30, 2012.   The four properties held for sale at June 30, 2012 carried an aggregate book value of $22.4 million, net of accumulated depreciation of $10.0 million, and a valuation allowance of $2.1 million.  The fair values of these properties are categorized as a level 3 basis, and the Company considered purchase prices from prospective buyers (net of estimated selling costs) in determining the values.

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

 
20

 

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 and six month periods ended June 30, 2012 and 2011:  (dollars in thousands)
                         
                         
     
Three Months Ended
   
Six Months Ended
     
         June 30,
   
        June 30,
     
2012
   
2011
   
2012
   
2011
Total revenues
 
$
938
 
$
1,940
 
$
2,466
 
$
4,056
Operating and other expenses
   
(607)
   
(882)
   
(1,485)
   
(1,970)
Depreciation and amortization
   
(13)
   
(422)
   
(428)
   
(863)
Interest expense (net of interest income)
   
-
   
(447)
   
(428)
   
(894)
                         
Income from discontinued operations before
                       
gains (losses) and unrealized losses on
                       
disposition of rental property
   
318
   
189
   
125
   
329
Realized gains (losses) and unrealized losses on
                       
disposition of rental property, net
   
(1,634)
   
-
   
2,378
   
-
                         
Total discontinued operations, net
 
$
(1,316)
 
$
189
 
$
2,503
 
$
329


7.   SENIOR UNSECURED NOTES

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.

A summary of the Company’s senior unsecured notes as of June 30, 2012 and December 31, 2011 is as follows:  (dollars in thousands)
                   
                   
     
June 30,
2012
   
December 31,
2011
 
Effective
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)
   
-
   
 94,438
 
6.894
%
5.820% Senior Unsecured Notes, due March 15, 2013 (4)
   
-
   
 25,972
 
6.448
%
4.600% Senior Unsecured Notes, due June 15, 2013
 
$
99,973
   
 99,958
 
4.742
%
5.125% Senior Unsecured Notes, due February 15, 2014
   
200,390
   
 200,509
 
5.110
%
5.125% Senior Unsecured Notes, due January 15, 2015
   
149,763
   
 149,717
 
5.297
%
5.800% Senior Unsecured Notes, due January 15, 2016
   
200,275
   
 200,313
 
5.806
%
7.750% Senior Unsecured Notes, due August 15, 2019
   
248,478
   
 248,372
 
8.017
%
4.500% Senior Unsecured Notes, due April 18, 2022
   
299,415
   
-
 
4.612
%
                   
Total Senior Unsecured Notes
 
$
1,198,294
 
$
 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 May 25, 2012, the Operating Partnership redeemed $94.9 million principal amount of its 6.15 percent senior unsecured notes due December 15, 2012 (the “2002 Notes”). The redemption price, including a make-whole premium, was 103.191672 percent of the principal amount of the 2002 Notes, plus accrued and unpaid interest up to the redemption date. The Operating Partnership funded the redemption price, including accrued and unpaid interest, of approximately $100.5 million from borrowing on its unsecured revolving credit facility, as well as cash on hand. In connection with the redemption, the Company recorded approximately $3.3 million as a loss from early extinguishment of debt.
(4)   On May 25, 2012, the Operating Partnership redeemed $26.1 million principal amount of its 5.82 percent senior unsecured notes due March 15, 2013 (the “2003 Notes”). The redemption price, including a make-whole premium, was 103.868592 percent of the principal amount of the 2003 Notes, plus accrued and unpaid interest up to the redemption date. The Operating Partnership funded the redemption price, including accrued and unpaid interest, of approximately $27.4 million from borrowing on its unsecured revolving credit facility, as well as cash on hand. In connection with the redemption, the Company recorded approximately $1.1 million as a loss from early extinguishment of debt.


 
21

 


8.   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.

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 June 30, 2012 and December 31, 2011, the Company had outstanding borrowings of $10 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 June 30, 2012 and December 31, 2011, the Company had no outstanding borrowings under the Money Market Loan.
 
 
 
22

 

 

9.   MORTGAGES, LOANS PAYABLE AND OTHER OBLIGATIONS

The Company has mortgages, loans payable and other obligations which primarily consist of various loans collateralized by certain of the Company’s rental properties.  As of June 30, 2012, 31 of the Company’s properties, with a total book value of approximately $919.1 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.

A summary of the Company’s mortgages, loans payable and other obligations as of June 30, 2012 and December 31, 2011 is as follows: (dollars in thousands)
                                           
                                           
Property Name
Lender
 
Effective
Rate (a)
     
June 30,
2012
 
December 31,
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
%
   
15,240
 
 15,531
 
01/01/13
                   
9200 Edmonston Road
Principal Commercial Funding L.L.C.
 
5.534
%
   
4,393
 
 4,479
 
05/01/13
                   
6305 Ivy Lane