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, 2014

 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 21, 2014, there were 88,657,814 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):
3
       
   
Consolidated Balance Sheets as of March 31, 2014 
4
   
     and December 31, 2013
 
       
   
Consolidated Statements of Operations for the three months 
5
   
     ended March 31, 2014 and 2013
 
       
   
Consolidated Statement of Changes in Equity for the three months 
6
   
     ended March 31, 2014
 
       
   
Consolidated Statements of Cash Flows for the three months 
7
   
     ended March 31, 2014 and 2013
 
       
   
Notes to Consolidated Financial Statements
8
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition 
50
   
     and Results of Operations
 
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
67
       
 
Item 4.
Controls and Procedures
68
       
Part II
Other Information
 
       
 
Item 1.
Legal Proceedings
69
       
 
Item 1A.
Risk Factors
69
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
69
       
 
Item 3.
Defaults Upon Senior Securities
69
       
 
Item 4.
Mine Safety Disclosures
69
       
 
Item 5.
Other Information
69
       
 
Item 6.
Exhibits
69
       
Signatures
   
70
       
Exhibit Index
   
71
       
 
 
 
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, 2013.
 
The results of operations for the three month period ended March 31, 2014 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
 
2014
   
2013
Rental property
         
Land and leasehold interests
$
736,058
 
$
750,658
Buildings and improvements
 
3,884,320
   
3,915,800
Tenant improvements
 
432,279
   
456,003
Furniture, fixtures and equipment
 
9,116
   
7,472
   
5,061,773
   
5,129,933
Less – accumulated depreciation and amortization
 
(1,396,795)
   
(1,400,988)
   
3,664,978
   
3,728,945
Rental property held for sale, net
 
 51,161
   
 -
Net investment in rental property
 
3,716,139
   
3,728,945
Cash and cash equivalents
 
58,734
   
221,706
Investments in unconsolidated joint ventures
 
179,656
   
181,129
Unbilled rents receivable, net
 
 139,218
   
136,304
Deferred charges, goodwill and other assets
 
228,730
   
 218,519
Restricted cash
 
20,620
   
19,794
Accounts receivable, net of allowance for doubtful accounts
         
of $1,962 and $2,832
 
11,246
   
8,931
           
Total assets
$
4,354,343
 
$
4,515,328
           
LIABILITIES AND EQUITY
         
Senior unsecured notes
$
1,416,843
 
$
1,616,575
Revolving credit facility
 
70,000
   
 -
Mortgages, loans payable and other obligations
 
745,444
   
746,191
Dividends and distributions payable
 
30,145
   
29,938
Accounts payable, accrued expenses and other liabilities
 
147,357
   
121,286
Rents received in advance and security deposits
 
50,175
   
53,730
Accrued interest payable
 
23,259
   
29,153
Total liabilities
 
2,483,223
   
2,596,873
Commitments and contingencies
         
           
Equity:
         
Mack-Cali Realty Corporation stockholders’ equity:
         
Common stock, $0.01 par value, 190,000,000 shares authorized,
         
88,630,146 and 88,247,591 shares outstanding
 
886
   
882
Additional paid-in capital
 
2,546,233
   
2,539,326
Dividends in excess of net earnings
 
(939,837)
   
(897,849)
Total Mack-Cali Realty Corporation stockholders’ equity
 
1,607,282
   
1,642,359
           
Noncontrolling interests in subsidiaries:
         
Operating Partnership
 
208,877
   
220,813
Consolidated joint ventures
 
54,961
   
55,283
Total noncontrolling interests in subsidiaries
 
 263,838
   
 276,096
           
Total equity
 
1,871,120
   
1,918,455
           
Total liabilities and equity
$
4,354,343
 
$
4,515,328


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
   
2014
   
2013
Base rents
 
$
 134,051 
 
$
133,623
Escalations and recoveries from tenants
   
 25,568 
   
19,488
Construction services
   
 -
   
8,226
Real estate services
   
 6,692 
   
6,443
Parking income
   
 2,114 
   
1,392
Other income
   
 1,171 
   
1,741
Total revenues
   
 169,596 
   
170,913
             
EXPENSES
           
Real estate taxes
   
 24,351 
   
21,649
Utilities
   
 28,281 
   
16,288
Operating services
   
 29,222 
   
25,308
Direct construction costs
   
 -
   
7,825
Real estate services expenses
   
 6,709 
   
4,953
General and administrative
   
 22,881
   
11,973
Depreciation and amortization
   
 44,985 
   
43,348
Total expenses
   
 156,429
   
131,344
Operating income
   
 13,167
   
39,569
             
OTHER (EXPENSE) INCOME
           
Interest expense
   
 (29,946)
   
(29,869)
Interest and other investment income
   
 386 
   
6
Equity in earnings (loss) of unconsolidated joint ventures
   
 (1,235)
   
(1,750)
Total other (expense) income
   
 (30,795)
   
(31,613)
Income (loss) from continuing operations
   
 (17,628)
   
7,956
Discontinued operations:
           
Income from discontinued operations
   
 -
   
5,133
Total discontinued operations
   
 -
   
5,133
Net income (loss)
   
 (17,628)
   
 13,089 
Noncontrolling interest in consolidated joint ventures
   
 322 
   
62
Noncontrolling interest in Operating Partnership
   
 2,008
   
(973)
Noncontrolling interest in discontinued operations
   
 -
   
(622)
Net income (loss) available to common shareholders
 
$
 (15,298)
 
$
11,556
             
Basic earnings per common share:
           
Income (loss) from continuing operations
 
$
 (0.17)
 
$
0.08
Discontinued operations
   
 -
   
0.05
Net income (loss) available to common shareholders
 
$
 (0.17)
 
$
0.13
             
Diluted earnings per common share:
           
Income (loss) from continuing operations
 
$
 (0.17)
 
$
0.08
Discontinued operations
   
.
   
0.05
Net income (loss) available to common shareholders
 
$
 (0.17)
 
$
0.13
             
Basic weighted average shares outstanding
   
 88,289 
   
87,669
             
Diluted weighted average shares outstanding
   
 99,876 
   
99,849


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, 2014
 
 88,248
 
$
 882
 
$
 2,539,326
 
$
 (897,849)
 
$
 276,096
 
$
 1,918,455
Net income (loss)
 
 -
   
 -
   
 -
   
 (15,298)
   
 (2,330)
   
 (17,628)
Common stock dividends
 
 -
   
 -
   
 -
   
 (26,690)
   
 -
   
 (26,690)
Common unit distributions
 
 -
   
 -
   
 -
   
 -
   
 (3,455)
   
 (3,455)
Redemption of common units
                                 
  for common stock
 
 347
   
 3
   
 6,449
   
 -
   
 (6,452)
   
 -
Shares issued under Dividend
                                 
  Reinvestment and Stock Purchase Plan
 
 2
   
 -
   
 45
   
 -
   
 -
   
 45
Director deferred compensation plan
 
 -
   
 -
   
 117
   
 -
   
 -
   
 117
Stock compensation
 
 33
   
 1
   
 275
   
 -
   
 -
   
 276
Rebalancing of ownership percentage
                                 
  between parent and subsidiaries
 
 -
   
 -
   
 21
   
 -
   
 (21)
   
 -
Balance at March 31, 2014
 
 88,630
 
$
 886
 
$
 2,546,233
 
$
 (939,837)
 
$
 263,838
 
$
 1,871,120


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
   
2014
   
2013
Net income (loss)
 
$
(17,628)
 
$
 13,089 
Adjustments to reconcile net income (loss) to net cash provided by
           
Operating activities:
           
Depreciation and amortization, including related intangible assets
   
45,461
   
 43,389
Depreciation and amortization on discontinued operations
   
 -
   
 3,453
Amortization of deferred stock units
   
117
   
 -
Amortization of stock compensation
   
4,543
   
 606 
Amortization of deferred financing costs and debt discount
   
769
   
 773 
Equity in loss of unconsolidated joint venture, net
   
1,235
   
 1,750 
Distributions of cumulative earnings from unconsolidated joint ventures
   
1,811
   
 453 
Changes in operating assets and liabilities:
           
Increase in unbilled rents receivable, net
   
(2,908)
   
 (6,335)
Increase in deferred charges, goodwill and other assets
   
(15,745)
   
 (8,862)
Decrease in accounts receivable, net
   
(2,316)
   
 74 
Increase in accounts payable, accrued expenses and other liabilities
   
21,579
   
 9,797 
Decrease in rents received in advance and security deposits
   
(3,554)
   
 (3,339)
Increase in accrued interest payable
   
(5,894)
   
 (5,783)
             
Net cash provided by operating activities
 
$
27,470
 
$
 49,065 
             
CASH FLOWS FROM INVESTING ACTIVITIES
           
Rental property acquisitions and related intangibles
 
$
 -
 
$
 (61,318)
Rental property additions and improvements
   
(14,600)
   
 (25,214)
Development of rental property, other related costs and deposits
   
(7,357)
   
 (9,121)
Investment in unconsolidated joint ventures
   
(1,889)
   
 (30,523)
Distributions in excess of cumulative earnings from
           
   unconsolidated joint ventures
   
456
   
 1,233 
Increase in restricted cash
   
(826)
   
 (1,080)
             
Net cash used in investing activities
 
$
(24,216)
 
$
 (126,023)
             
CASH FLOW FROM FINANCING ACTIVITIES
           
Borrowings from revolving credit facility
 
$
70,000
 
$
 153,500 
Repayment of revolving credit facility
   
 -
   
 (61,500)
Repayment of senior unsecured notes
   
(200,000)
   
 -
Proceeds from mortgages and loans payable
   
425
   
 1,363 
Repayment of mortgages, loans payable and other obligations
   
(2,793)
   
 (2,643)
Payment of contingent consideration
   
 (3,936)
   
 (2,755)
Payment of financing costs
   
 -
   
 (236)
Payment of dividends and distributions
   
(29,922)
   
 (44,832)
             
Net cash (used in) provided by financing activities
 
$
(166,226)
 
$
 42,897 
             
Net increase (decrease) in cash and cash equivalents
 
$
(162,972)
 
$
 (34,061)
Cash and cash equivalents, beginning of period
   
221,706
   
 58,245 
             
Cash and cash equivalents, end of period
 
$
58,734
 
$
 24,184 


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, 2014, the Company owned or had interests in 279 properties, consisting of 267 commercial properties, primarily class A office and office/flex properties, totaling approximately 31.0 million square feet, leased to approximately 2,000 commercial tenants, and 12 multi-family rental properties containing over 3,600 residential units, plus developable land (collectively, the “Properties”).  The Properties are comprised of 252 buildings, primarily office and office/flex buildings totaling approximately 30.5 million square feet (which include 22 buildings, primarily office buildings aggregating approximately 2.9 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, 12 multi-family properties totaling 3,678 apartments (which include seven properties aggregating 2,597 apartments owned by unconsolidated joint ventures in which the Company has investment interests), five parking/retail properties totaling approximately 121,500 square feet (which include two buildings aggregating 81,500 square feet  owned by unconsolidated joint ventures in which the Company has investment interests), 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 seven states, primarily in the Northeast, plus the District of Columbia.

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

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. 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.  The Company consolidates VIEs in which it is considered to be the primary beneficiary.  The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the variable interest entity’s performance: and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.

As of March 31, 2014 and December 31, 2013, the Company’s investments in consolidated real estate joint ventures in which the Company is deemed to be the primary beneficiary have total real estate assets of $223.1 million and $219.9 million, respectively, mortgages of $84.4 million and $81.9 million, respectively, and other liabilities of $14 million and $18.3 million, respectively.

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.

 

 
8

 

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.  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 $0.9 million and $0.9 million for the three months ended March 31, 2014 and 2013, respectively.  Included in total rental property is construction, tenant improvement and development in-progress of $49.2 million and $40.8 million as of March 31, 2014 and December 31, 2013, 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 substantial 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.

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 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 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.
 
 
 
 
9

 
 

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

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s 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 impairments may be realized in the future.

Rental Property
 
Held for Sale
 
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.
 
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. 
 
 
 
10

 
 

 
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.  The outside basis portion of the Company’s joint ventures is amortized over the anticipated useful lives of the underlying ventures’ tangible and intangible assets acquired and liabilities assumed.  Generally, the Company would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Company has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee.    If the venture subsequently generates income, the Company only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses.
 
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 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 4: Investments in Unconsolidated Joint Ventures. 
 
  
Cash and Cash
 
Equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
 
 
Deferred
Financing Costs
Costs incurred in obtaining financing are capitalized and amortized over the term of the related indebtedness. Amortization of such costs is included in interest expense and was $769,000 and $773,000 for the three months ended March 31, 2014 and 2013, respectively. If a financing obligation is extinguished early, any unamortized deferred financing costs are written off and included in gains (loss) from early extinguishment of debt.
 
 
Deferred
Leasing Costs
Costs incurred in connection with commercial 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 related to commercial leases, which is capitalized and amortized, approximated $1,031,000 and $1,173,000 for the three months ended March 31, 2014 and 2013, respectively.
 
 
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is allocated to various reporting units, as applicable.  Each of the Company’s segments consists of a reporting unit. Goodwill is not amortized.  Management performs an annual impairment test for goodwill during the fourth quarter and between annual tests, management evaluates the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be fully recoverable.  In its impairment tests of goodwill, management first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If based on this assessment, management determines that the fair value of the reporting unit is not less than its carrying amount, then performing the additional two-step impairment test is unnecessary. If the carrying amount of goodwill exceeds its fair value, an impairment charge is recognized.
 
 
 
 
11

 

Derivative
Instruments
The Company measures derivative instruments, including certain derivative instruments embedded in other contracts, at fair value and records them as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract.  For derivatives designated and qualifying as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings.  For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in earnings in the affected period.
 
 
Revenue
Recognition
Base rental revenue is recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represents the 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 remaining 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 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 14: 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 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, development and leasing commission fees and other services, and payroll and related costs reimbursed from clients.  Fee income derived from the Company’s unconsolidated joint ventures (which are capitalized by such ventures) are recognized to the extent attributable to the unaffiliated ownership interests.

Parking income includes income from parking spaces leased to tenants and others.

Other income includes income from tenants for additional services arranged for by the Company and income from tenants for early lease terminations. 
 
 
 
 
 
12

 
 
 
 
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 (determined by excluding any net capital gains) to its shareholders.  If and to the extent the Company retains and does not distribute any net capital gains, the Company will be required to pay federal, state and local taxes on such net capital gains at the rate applicable to capital gains of a corporation.  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.   The Company has conducted business through its TRS entities for certain property management, development, construction and other related services, as well as to hold a joint venture interest in a hotel and other matters.  As of March 31, 2014, the Company had a deferred tax asset with a balance of approximately $14.4 million which has been fully reserved for through a valuation allowance.  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.

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, 2014, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are generally from the year 2009 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 from continuing operations amount.  Shares whose issuance is contingent upon the satisfaction of certain conditions shall be considered outstanding and included in the computation of diluted EPS as follows (i) if all necessary conditions have been satisfied by the end of the period (the events have occurred), those shares shall be included as of the beginning of the period in which the conditions were satisfied (or as of the date of the grant, if later) or (ii) if all necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares included in diluted EPS shall be based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period (for example, the number of shares that would be issuable based on current period earnings or period-end market price) and if the result would be dilutive. Those contingently issuable shares shall be included in the denominator of diluted EPS as of the beginning of the period (or as of the date of the grant, if later).
 
 
 
13

 
 

 
Dividends and
 
Distributions
Payable
The dividends and distributions payable at March 31, 2014 represents dividends payable to common shareholders (88,461,183 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (11,518,069 common units) for all such holders of record as of April 3, 2014 with respect to the first quarter 2014.  The first quarter 2014 common stock dividends and common unit distributions of $0.30 per common share and unit were approved by the Board of Directors on March 11, 2014.  The common stock dividends and common unit distributions payable were paid on April 11, 2014.

The dividends and distributions payable at December 31, 2013 represents dividends payable to common shareholders (87,928,002 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (11,864,775 common units) for all such holders of record as of January 6, 2014 with respect to the fourth quarter 2013.  The fourth quarter 2013 common stock dividends and common unit distributions of $0.30 per common share and unit were approved by the Board of Directors on December 10, 2013.  The common stock dividends and common unit distributions payable were paid on January 15, 2014.

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 compensation in accordance with the provisions of ASC 718, Compensation-Stock Compensation.  These provisions require that the estimated fair value of restricted stock (“Restricted Stock Awards”), TSR-based Performance Shares and stock options at the grant date be amortized ratably into expense over the appropriate vesting period.  The Company recorded stock compensation expense of $3,387,000 (which includes $3,203,000 related to the departure of executive vice presidents.  See Note 13: Commitments and Contingencies – Departure of Executive Vice Presidents) and $845,000 for the three months ended March 31, 2014 and 2013, 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.  There was no difference in other comprehensive income to net income for the three months ended March 31, 2014 and 2013, and no accumulated other comprehensive income as of March 31, 2014 and December 31, 2013.

Fair Value
 
Hierarchy
The standard Fair Value Measurements specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs). The following summarizes the fair value hierarchy:

•  
Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
•  
Level 2: Quoted prices for identical assets and liabilities in markets that are inactive, quoted prices for similar assets and liabilities inactive markets or financial instruments for which significant inputs are observable, either directly or indirectly, such as interest rates and yield curves that are observable at commonly quoted intervals and
•  
Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
 
 
 
14

 
 

 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Discontinued
 
Operations
In April 2014, the Financial Accounting Standards Board (“FASB”) issued guidance related to the reporting of discontinued operation and disclosures of disposals of components of an entity.  This guidance defines a discontinued operation as a component or group of components disposed or classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and final result; the guidance states that a strategic shift could include a disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major parts of an entity.  The guidance also provides for additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations.  The guidance will be effective for annual and interim periods beginning on or after December 15, 2014. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.  All entities may early adopt the guidance for new disposals (or new classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company has elected to early adopt this standard effective with the interim period beginning January 1, 2014. Prior to January 1, 2014, properties identified as held for sale and/or disposed of were presented in discontinued operations for all periods presented.  See Note 7: Discontinued Operations.


3.    REAL ESTATE TRANSACTIONS

Acquisitions

On April 10, 2014, the Company acquired Andover Place, a 220-unit multi-family rental property located in Andover, Massachusetts, for approximately $37.7 million in cash. The purchase price for the property was financed primarily through borrowings under the Company’s unsecured revolving credit facility.

Rental Property Held for Sale

On March 11, 2014, the Company entered into an agreement to sell its 249,409 square foot office property located at 22 Sylvan Way in Parsippany, New Jersey for approximately $96.6 million. The Company identified this property as held for sale at March 31, 2014. The Company early adopted the new discontinued operations standard.  As the sale of this property will not represent a strategic shift, it has not been reflected as part of discontinued operations. The Company completed the sale of the property on April 23, 2014.


 
15

 

The following table summarizes income from this property for the three months ended March 31, 2014 and 2013:

             
     
           Three Months Ended
     
             March 31,
     
2014
   
2013
Total revenues
 
$
 1,842
 
$
1,838
Operating and other expenses
   
 (317)
   
(311)
Depreciation and amortization
   
 (309)
   
(394)
             
Income from property held for sale
   
 1,216
   
1,133

Pending Partial Sale and Joint Venture

On February 24, 2014, the Company entered into agreements with affiliates of Keystone Property Group (“Keystone Entities”) to sell 15 of its office properties in New Jersey, New York and Connecticut, aggregating approximately 2.3 million square feet, for approximately $230.8 million, comprised of: $201.7 million in cash from a combination of Keystone Entities senior and pari-passu equity and mortgage financing; Company subordinated equity interests in each of the properties being sold with capital accounts aggregating $22.2 million; and pari passu equity interests in three of the properties being sold aggregating $6.9 million. The purchasers of the office properties will be joint ventures to be formed between the Company and the Keystone Entities. The senior and pari-passu equity will receive a 15 percent internal rate of return (“IRR”) after which the subordinated equity will receive a ten percent IRR and then all distributable cash flow will be split equally between the Keystone Entities and the Company.  As part of the transaction, the Company will participate in management, leasing and construction fees for the portfolio, and the Company and the Keystone Entities will jointly provide leasing representation for the properties.

The formation of the joint ventures and the completion of the sale of the properties to the joint ventures are subject to the Keystone Entities’ completion of due diligence by April 30, 2014, which may be extended for a 30-day period, and normal and customary closing conditions.  There can be no assurance that the transaction will be consummated.

 

 
16

 


4.    INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

As of March 31, 2014, the Company had an aggregate investment of approximately $179.7 million in its equity method joint ventures.  The Company formed these ventures with unaffiliated third parties, or acquired interests in them, to develop or manage primarily office and multi-family rental properties, or to acquire land in anticipation of possible development of office and multi-family rental properties.  As of March 31, 2014, the unconsolidated joint ventures owned: 21 office and two retail properties aggregating approximately 2.6 million square feet, seven multi-family properties totaling 2,597 apartments, a 350-room hotel, a senior mezzanine loan position in the capital stack of a 1.7 million square foot commercial property; development projects for up to approximately 2,976 apartments; and interests and/or rights to developable land parcels able to accommodate up to 3,708 apartments and 1.2 million square feet of office space.  The Company’s unconsolidated interests range from 7.5 percent to 80 percent subject to specified priority allocations in certain of the joint ventures.

On October 23, 2012, the Company acquired the real estate development and management businesses (the “Roseland Business”) of Roseland Partners, L.L.C. (“Roseland Partners”), a premier multi-family rental community developer and manager based in Short Hills, New Jersey, and the Roseland Partners’ interests (the “Roseland Transaction”), principally through unconsolidated joint venture interests in various entities which, directly or indirectly, own or have rights with respect to various residential and/or commercial properties or vacant land (collectively, the “Roseland Assets”).  The locations of the properties extend from New Jersey to Massachusetts, with the majority of the properties located in New Jersey.  Certain of the entities which own the Roseland Assets are controlled by the Company upon acquisition and are therefore consolidated. However, many of the entities are not controlled by the Company and, therefore, are accounted for under the equity method as investments in unconsolidated joint ventures.

The amounts reflected in the following tables (except for the Company’s share of equity in earnings) are based on the historical financial information of the individual joint ventures.  The Company does not record losses of the joint ventures in excess of its investment balances unless the Company is liable for the obligations of the joint venture or is otherwise committed to provide financial support to the joint venture.  The outside basis portion of the Company’s joint ventures is amortized over the anticipated useful lives of the underlying ventures’ tangible and intangible assets acquired and liabilities assumed.  Unless otherwise noted below, the debt of the Company’s unconsolidated joint ventures generally is non-recourse to the Company, except for customary exceptions pertaining to such matters as intentional misuse of funds, environmental conditions, and material misrepresentations.  The Company had $504,000 and $523,000 in accounts receivable due from its unconsolidated joint ventures as of March 31, 2014 and December 31, 2013.

Included in the Company’s investments in unconsolidated joint ventures as of March 31, 2014 are six unconsolidated development joint ventures, which are VIEs for which the Company is not the primary beneficiary. These joint ventures are primarily established to develop real estate property for long-term investment and were deemed VIEs primarily based on the fact that the equity investment at risk was not sufficient to permit the entities to finance their activities without additional financial support.  The initial equity contributed to these entities was not sufficient to fully finance the real estate construction as development costs are funded by the partners throughout the construction period.  The Company determined that it was not the primary beneficiary of these VIEs based on the fact that the Company has shared control of these entities along with the entity’s partners and therefore does not have controlling financial interests in these VIEs.  The Company’s aggregate investment in these VIEs was approximately $9.4 million as of March 31, 2014.  The Company’s maximum exposure to loss as a result of its involvement with these VIEs is estimated to be approximately $18.2 million, which includes the Company’s current investment and estimated future funding commitments of approximately $8.8 million.  The Company has not provided financial support to these VIEs that it was not previously contractually required to provide. In general, future costs of development not financed through third party will be funded with capital contributions from the Company and its outside partners in accordance with their respective ownership percentages.   




 
17

 


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, 2014 and December 31, 2013: (dollars in thousands)
             
     
March 31,
   
December 31,
     
2014
   
2013
Assets:
           
   Rental property, net
 
$
 914,163 
 
$
 755,049 
   Loan receivable
   
 45,772 
   
 45,050 
   Other assets
   
 437,516 
   
 582,990 
   Total assets
 
$
 1,397,451 
 
$
 1,383,089 
Liabilities and partners'/
           
members' capital:
           
   Mortgages and loans payable
 
$
 678,432 
 
$
 637,709 
   Other liabilities
   
 85,048 
   
 87,231 
   Partners'/members' capital
   
 633,971 
   
 658,149 
   Total liabilities and
           
   partners'/members' capital
 
$
 1,397,451 
 
$
 1,383,089 

The following is a summary of the Company’s investments in unconsolidated joint ventures as of March 31, 2014 and December 31, 2013: (dollars in thousands)
             
   
March 31,
   
December 31,
 
Entity
 
2014
   
2013
 
Plaza VIII & IX Associates, L.L.C.
$
 3,804 
 
$
 3,702 
 
South Pier at Harborside (a)
 
 -
   
 -
 
Red Bank Corporate Plaza, L.L.C.
 
 4,153 
   
 4,046 
 
12 Vreeland Associates, L.L.C.
 
 5,604 
   
 5,514 
 
Stamford SM LLC
 
 36,835 
   
 36,258 
 
Marbella RoseGarden, L.L.C.
 
 15,791 
   
 15,797 
 
RoseGarden Monaco Holdings, L.L.C.
 
 2,925 
   
 3,201 
 
Rosewood Lafayette Holdings, L.L.C.
 
 641 
   
 857 
 
PruRose Port Imperial South 15, LLC
 
 -
   
 -
 
Rosewood Morristown, L.L.C.
 
 6,336 
   
 6,455 
 
Overlook Ridge JV, L.L.C.
 
 -
   
 -
 
Overlook Ridge, L.L.C.
 
 -
   
 -
 
Overlook Ridge JV 2C/3B, L.L.C.
 
 -
   
 -
 
Roseland/North Retail, L.L.C.
 
 1,906 
   
 1,930 
 
BNES Associates III
 
 1,790 
   
 1,753 
 
Portside Master Company, L.L.C.
 
 2,950 
   
 3,207 
 
PruRose Port Imperial South 13, LLC
 
 1,982 
   
 2,206 
 
Roseland/Port Imperial Partners, L.P.
 
 2,017 
   
 2,068 
 
RoseGarden Marbella South, L.L.C.
 
 7,951 
   
 7,567 
 
PruRose Riverwalk G, L.L.C.
 
 2,579 
   
 3,117 
 
Elmajo Urban Renewal Associates, LLC
 
 91 
   
 203 
 
Estuary Urban Renewal Unit B, LLC
 
 -
   
 24 
 
RiverPark at Harrison I, L.L.C.
 
 3,808 
   
 3,655 
 
RoseGarden Monaco, L.L.C.
 
 1,239 
   
 1,224 
 
Hillsborough 206 Holdings, L.L.C.
 
 1,962 
   
 1,962 
 
Grand Jersey Waterfront Urban Renewal Associates, L.L.C.
 
 337 
   
 337 
 
Crystal House Apartments Investors LLC
 
 26,326 
   
 26,838 
 
KPG-P 100 IMW JV, LLC
 
 1,234 
   
 1,887 
 
Capitol Place Mezz LLC
 
 47,302 
   
 46,628 
 
Other
 
 93 
   
 693 
 
Company's investment in unconsolidated joint ventures
$
 179,656 
 
$
 181,129 
 

(a)
The negative investment balance for this joint venture of $2,308,018 and $1,706,000 as of March 31, 2014 and December 31, 2013, respectively, were included in accounts payable, accrued expenses and other liabilities. 


 
18

 

The following is a summary of the results from operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended March 31, 2014 and 2013: (dollars in thousands)
             
     
                Three Months Ended
     
              March 31,
     
2014
   
2013
Total revenues
 
$
 30,993
 
$
 12,420 
Operating and other expenses
   
 (18,353)
   
 (7,948)
Depreciation and amortization
   
 (8,368)
   
 (3,091)
Interest expense
   
 (6,341)
   
 (2,012)
Net income (loss)
 
$
 (2,069)
 
$
 (631)

The following is a summary of the Company’s equity in earnings (loss) of unconsolidated joint ventures for the three months ended March 31, 2014 and 2013: (dollars in thousands)
             
     
                Three Months Ended
     
                March 31,
Entity
   
2014
   
2013
Plaza VIII & IX Associates, L.L.C.
 
$
 102 
 
$
 9 
South Pier at Harborside
   
 398 
   
 (511)
Red Bank Corporate Plaza, L.L.C.
   
 99 
   
 101 
12 Vreeland Associates, L.L.C.
   
 89 
   
 (92)
Stamford SM LLC
   
 916 
   
 885 
Marbella RoseGarden, L.L.C.
   
 (6)
   
 (111)
RoseGarden Monaco Holdings, L.L.C.
   
 (277)
   
 (399)
Rosewood Lafayette Holdings, L.L.C.
   
 (216)
   
 (290)
PruRose Port Imperial South 15, LLC
   
 -
   
 (606)
Rosewood Morristown, L.L.C.
   
 (98)
   
 (124)
Overlook Ridge JV, L.L.C.
   
 (46)
   
 -
Overlook Ridge, L.L.C.
   
 -
   
 -
Overlook Ridge JV 2C/3B, L.L.C.
   
 62 
   
 (73)
Roseland/North Retail, L.L.C.
   
 (24)
   
 (49)
BNES Associates III
   
 36 
   
 (69)
Portside Master Company, L.L.C.
   
 (213)
   
 (45)
PruRose Port Imperial South 13, LLC
   
 (206)
   
 (133)
Roseland/Port Imperial Partners, L.P.
   
 (164)
   
 -
RoseGarden Marbella South, L.L.C.
   
 -
   
 (18)
PruRose Riverwalk G, L.L.C.
   
 (538)
   
 (186)
Elmajo Urban Renewal Associates, LLC
   
 (112)
   
 (115)
Estuary Urban Renewal Unit B, LLC
   
 (15)
   
 -
RiverPark at Harrison I, L.L.C.
   
 -
   
 -
RoseGarden Monaco, L.L.C.
   
 -
   
 -
Hillsborough 206 Holdings, L.L.C.
   
 (5)
   
 -
Grand Jersey Waterfront Urban Renewal Associates, L.L.C.
   
 (37)
   
 -
Crystal House Apartments Investors LLC
   
 (327)
   
 13 
KPG-P 100 IMW JV, LLC
   
 (653)
   
 -
Capitol Place Mezz LLC
   
 -
   
 -
Other
   
 -
   
 63 
Company's equity in earnings (loss) of unconsolidated joint ventures
 
$
 (1,235)
 
$
 (1,750)


 
19

 


Plaza VIII and IX Associates, L.L.C. 
The Company has a joint venture with Columbia Development Company, L.L.C. (“Columbia”), which owns land for future development currently used as a parking facility and located on the Hudson River waterfront in Jersey City, New Jersey, adjacent to the Company’s Harborside office complex.  The Company holds a 50 percent interest in the venture.
 
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, Jersey City, New Jersey.  The Company holds a 50 percent interest in the venture.   
 
The venture has a non-recourse mortgage loan with a balance as of March 31, 2014 of $62.5 million collateralized by the hotel property.  The loan carries an interest rate of 6.15 percent and matures in November 2016.  The venture also has a loan with a balance as of March 31, 2014 of $4.6 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 $4.6 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 has a $16.4 million mortgage loan collateralized by the office property, which bears interest at a rate of the London Interbank Offered Rate (“LIBOR”) plus 300 basis points and matures in May 2016.  LIBOR was 0.15 percent at March 31, 2014.  The loan includes contingent guarantees for a portion of the principal by the Company based on certain conditions.  On September 22, 2011, the venture entered into an interest rate swap agreement with a commercial bank.  The swap agreement fixes the all-in rate to 3.99375 percent per annum on an initial notional amount of $13.65 million and then adjusting in accordance with an amortization schedule, which is effective from October 17, 2011 through loan maturity.
 
The Company performed management, leasing, and other services for the property owned by the joint venture and recognized $26,700 and $27,000 in fees for such services in the three months ended March 31, 2014 and 2013, respectively. 

12 Vreeland Associates, L.L.C.  
The Company entered into a joint venture to form M-C Vreeland, LLC (“M-C Vreeland”), which acquired a 50 percent interest in 12 Vreeland Associates, L.L.C., which owns a 139,750 square foot office property located at 12 Vreeland Road, Florham Park, New Jersey. 
 
On June 18, 2013, 12 Vreeland Associates, L.L.C. obtained a mortgage loan which is collateralized by its office property.  The venture subsequently distributed $14.8 million of the loan proceeds, of which the Company’s share was $7.4 million.  The amortizable loan with a balance of $15.1 million as of March 31, 2014 bears interest at 2.87 percent and matures in July 2023.

The operating agreement of M-C Vreeland provides, among other things, for the Participation Rights (see Note 16: Noncontrolling Interests in Subsidiaries – Participation Rights).  
 
 
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 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 $45.8 million as of March 31, 2014.  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 2014.
 
 
 
20

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

Marbella RoseGarden, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 24.27 percent indirect residual interest in an entity that owns a 412-unit, 40-story, multi-family rental property which aggregates 369,607 square feet and is located in Jersey City, New Jersey, (the “Marbella Property”).

The Company owns 48.5325 percent of Marbella RoseGarden, L.L.C. (“RoseGarden”), with the remaining interest owned by MG Marbella Partners, L.L.C.

RoseGarden owns a 50 percent interest in the property-owning entity, PruRose/Marbella I, L.L.C. (“PruRose/Marbella”), with the remaining interest owned by Prudential-Marbella Partnership (“Prudential-Marbella”).

In general, the operating agreement of PruRose/Marbella provides that operating cash flows are distributed to members first to Prudential-Marbella and then to RoseGarden based on a 9.5 percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Prudential-Marbella had a capital balance of $7.6 million and RoseGarden had a capital balance of $0.1 million.  There was no accumulated unpaid operating return as of March 31, 2014.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

In general, the operating agreement of RoseGarden provides for the distribution of available cash flow to the members in accordance with their ownership percentages.

PruRose/Marbella has a mortgage loan, with a balance of $95 million as of March 31, 2014, which bears interest at 4.99 percent and matures in May 2018.  The interest-only loan is collateralized by the Marbella Property.

The Company performed management, leasing, and other services for PruRose/Marbella and recognized $100,000 and $95,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

RoseGarden Monaco Holdings, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 15 percent indirect residual interest in an entity that owns two 50-story multi-family rental properties with 523 units (the “Monaco Property”). The Monaco Property aggregates 477,254 square feet and is located in Jersey City, New Jersey.

The Company owns 50 percent of RoseGarden Monaco Holdings L.L.C. (“RoseGarden Monaco”) with the remaining interest owned by MG Monaco, L.L.C.  RoseGarden Monaco holds a 60 percent interest in Monaco Holdings, L.L.C. (“Monaco Holdings”) with the remaining interest owned by Hudson Hotel Monaco L.L.C.

Monaco Holdings owns a 50 percent interest in the property-owning entity, PruRose Monaco Holdings, L.L.C. (“PruRose Monaco”) with the remaining interest owned by The Prudential Insurance Company of America (“Prudential”).

In general, the operating agreement of PruRose Monaco provides that operating cash flows are distributed to members first to Prudential and then to Monaco Holdings based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Prudential had a capital balance of $76 million and an accumulated unpaid operating return of $5.3 million.  It is not anticipated that Monaco Holdings will be required to fund any capital.
 
 
 
21

 
 

 
Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

The operating agreement of Monaco Holdings provides, among other things, for the distributions of net cash flows to the members, first, in respect of unrecovered capital on a pro rata basis, with any remaining cash flow in accordance with their ownership percentages.

The operating agreement of RoseGarden Monaco provides, among other things, for the distribution of available cash flow to the members in accordance with their ownership percentages.

PruRose Monaco has an interest-only mortgage loan, collateralized by the property with a balance of $165 million as of March 31, 2014.  The mortgage loan bears interest at 4.19 percent and matures in February 2021.

The Company performed management, leasing, and other services for PruRose Monaco and recognized $119,000 and $121,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

Rosewood Lafayette Holdings, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 25 percent indirect residual interest in an entity that owns a 217-unit multi-family rental property which aggregates 185,733 square feet and is located in Morristown, New Jersey (the “Highlands Property”).

The Company owns 50 percent of Rosewood Lafayette Holdings, L.L.C. (“Rosewood”) with the remaining interest owned by Woodmont Transit Village, L.L.C.

Rosewood owns a 50 percent interest in the property-owning entity, Rosewood Lafayette Commons, L.L.C. (“Rosewood Lafayette”) with the remaining interest owned by Prudential.

In general, the operating agreement of Rosewood Lafayette provides that operating cash flows are distributed to members first to Prudential and then to Rosewood based on an eight percent operating return to December 23, 2012 and nine percent thereafter on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Prudential had a capital balance of $29.9 million and an accumulated unpaid operating return of $2.9 million.  It is anticipated that Rosewood will be required to fund capital of approximately $160,000, of which the Company’s share is $80,000.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

In general, the operating agreement of Rosewood provides for the distribution of available cash flow to the members in accordance with their ownership percentages.

Rosewood Lafayette has a mortgage loan, with a balance of $39.2 million as of March 31, 2014, which bears interest at four percent and matures in July 2015.  The loan requires principal and interest payments based on a 30-year amortization schedule and is collateralized by the Highlands Property.

The Company performed management, leasing, and other services for Rosewood Lafayette and recognized $49,000 and $46,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

PruRose Port Imperial South 15, LLC
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent residual interest in PruRose Port Imperial South 15, LLC (“Port Imperial 15”), an entity that owns a 236-unit multi-family rental property which aggregates 214,402 square feet and is located in Weehawken, New Jersey (the “RiversEdge Property”).

Port Imperial 15 is owned 50 percent by the Company and 50 percent by PRII Port Imperial South 15, LLC (“Prudential-Port”).
 
 
 
22

 
 

 
In general, the operating agreement of Port Imperial 15 provides that operating cash flows are distributed to members first to Prudential-Port and then to the Company based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Prudential-Port had a capital balance of $34.5 million and an accumulated unpaid operating return of $5.0 million.  It is not anticipated that the Company will be required to fund any capital.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

Subject to a letter agreement, 20 percent of distributions received by the Company, in excess of an eight percent internal rate of return (“IRR”) shall be paid to a third party based on certain conditions.

Port Imperial 15 had a mortgage loan, with a balance of $57 million which bore interest at LIBOR plus 235 basis points and was scheduled to mature in August 2013.  On August 29, 2013, Port Imperial 15 refinanced such mortgage loan.  The new loan has a balance of $57.5 million as of March 31, 2014, bears interest at 4.32 percent and matures in September 2020.   The interest-only loan is collateralized by the RiversEdge Property.

The Company performed management, leasing, and other services for Port Imperial 15 and recognized $59,000 and $61,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

Rosewood Morristown, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent interest in Rosewood Morristown, L.L.C. (“Rosewood Morristown”) with the remaining interest owned by Woodmont Epsteins, L.L.C.

Rosewood Morristown owns a 50 percent interest in Morristown Epsteins, L.L.C. (“Morristown”) with the remaining 50 percent owned by a third party.  Morristown owns an interest in a 76-unit-for-sale luxury condominium community (the “40 Park Condominiums Property”), three of which were unsold at acquisition and subsequently sold by the second quarter 2013.  Morristown also owns land where it intends to build a 59-unit, five-story multi-family rental property (the “Lofts at 40 Park Property”).  Morristown also owns a 50 percent residual interest in the entity that owns a 130-unit multi-family rental and 10,034 square feet retail building (the “Metropolitan Property”) and a 50,973 square feet of retail building (the “Shops at 40 Park Property”), Epsteins B Rentals, L.L.C. (“Epsteins”), with the remaining interest owned by Prudential.  All of the properties are located in Morristown, New Jersey.

The operating agreement of Morristown provides, among other things, for the distribution of net available cash to the members, as follows:

·  
to pay accrued and unpaid interest at a rate of eight percent on the balance note, as defined;
·  
to Rosewood Morristown in an amount equal to its current year’s annual preferred return rate of eight percent on its adjusted capital, as defined;
·  
to pay the outstanding balance remaining on the balance note, which was $975,000 as of March 31, 2014;
·  
to Rosewood Morristown in an amount equal to its adjusted capital balance, which was $3.2 million as of March 31, 2014; and
·  
to the members in accordance with their ownership percentages.

The operating agreement of Rosewood Morristown provides, among other things, for the distribution of net cash flow to the members in accordance with their ownership percentages.

PR II/Morristown Prudential, LLC, an affiliate of Prudential, has a 15 percent participating interest in the net sales proceeds from the sale of the 40 Park Condominiums Property units, as defined, pursuant to an August 2011 Participation Agreement, related to a previously satisfied mezzanine loan.

In general, the operating agreement of Epsteins provides that operating cash flows are distributed to members first to Prudential and then to Rosewood Morristown based on a nine percent return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Prudential had a capital balance of $20.7 million and Rosewood Morristown had a capital balance of $0.7 million.  There was no accumulated unpaid operating return as of March 31, 2014.
 
 
 
23

 
 

 
Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return balance and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

Epsteins had a mortgage loan with a balance of $48.5 million bearing interest at LIBOR plus 275 basis points which was refinanced on August 14, 2013 with loan proceeds and Prudential capital.  The new loan, collateralized by the Metropolitan Property, with a balance of $38.6 million, bears interest at 3.25 percent, matures in September 2020 and is interest-only through September 2015.  The new loan, collateralized by the Shops at 40 Park Property, with a balance of $6.5 million, bears interest at 3.63 percent, matures in August 2018 and is interest-only through July 2015.  The loan provides for additional borrowing proceeds of $1 million based on certain operating thresholds being achieved.

Morristown has a mortgage loan, with a balance of $1.1 million as of March 31, 2014, which bears interest at LIBOR plus 250 basis points and matures in September 2014.  The loan is collateralized by the Lofts at 40 Park Property and is fully guaranteed by the Company.

The Company performed management, leasing, and other services for Epsteins and recognized $46,000 and $43,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

Overlook Ridge JV, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 25 percent indirect interest in an entity that owns a 251-unit multi-family rental property (“Quarrystone I Property”) and a 50 percent indirect interest in an entity that owns a land parcel located in Malden, Massachusetts (“Overlook Phase III”).  The Quarrystone I Property aggregates 278,721 square feet and is located in Malden, Massachusetts.

The Company owns 50 percent of Overlook Ridge JV, L.L.C. (“Overlook Ridge JV”), with the remaining interest owned by Rowe Contracting Company (“Rowe”).

Overlook Ridge JV owns a 50 percent interest in the property-owning entity, LR JV-C Associates, L.L.C. (“LR Overlook”), with the remaining interest owned by Lennar Massachusetts Properties Inc. (“Lennar”) and a 100 percent interest in the property-owning entity LR Overlook Phase III, L.L.C. (“LR Overlook Phase III”).

In general, the operating agreement of LR Overlook provides, among other things, for distributions of cash flow to the members in accordance with their ownership percentages, subject to the repayment of priority partnership loans.  As of March 31, 2014, Lennar has a priority partnership loan of $18.8 million, which has an accrued interest balance of $16.5 million.

The operating agreement of Overlook Ridge JV provides, among other things, for the distribution of distributable cash, as defined, to the members, as follows:

·  
First, to the members in proportion to their respective unrecovered capital percentages, as defined in the agreement, until each member’s unrecovered capital has been reduced to zero; and
·  
Second, to the members in accordance with their ownership percentages.

LR Overlook has mortgage loans, with a balance of $69.7 million as of March 31, 2014, which mature in March 2016.  The senior loan, with a balance of $52.7 million, which bears interest at LIBOR plus 200 basis points is collateralized by the Quarrystone I property.  The junior loan, with a balance of $17 million, which bears interest at LIBOR plus 90 basis points is collateralized by a $17 million letter of credit provided by an affiliate of Lennar.

LR Overlook Phase III has a mortgage loan, with a balance of $5.7 million as of March 31, 2014, which bears interest at a rate of LIBOR plus 250 basis points and matures in April 2015.  The loan provides, subject to certain conditions a one-year extension option with a fee of 25 basis points.  The interest-only loan is collateralized by the Overlook Phase III Land.  The Company has guaranteed repayment of up to $1.5 million and all interest under the loan.
 
 
 
24

 
 

 
The Company performed management, leasing, and other services for LR Overlook and recognized $47,000 and $45,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

Overlook Ridge, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent interest in land parcels at Overlook Ridge, L.L.C. (“Overlook Ridge”), referred to as Sites IIIA, IIIC, and IIID (“Overlook Land”), which are located in Malden and Revere, Massachusetts.  The remaining interest in the property-owning entity, Overlook Ridge, is owned by Rowe.

The operating agreement of Overlook Ridge provides, among other things, for the distribution of net cash flow to the members, as follows:

·  
First, to the members in proportion to their unrecovered capital percentages, as defined, until the cumulative amounts distributed  equal such member’s return of six percent on the unrecovered capital; and
·  
Second, to the members in accordance with their ownership percentages.

In addition, the operating agreement provides that both Rowe and the Company receive a notional land capital account based on the development of each Overlook Land, as defined.  Based on the anticipated development of each remaining Overlook Land, the total notional land capital account is approximately $20 million, and is allocated approximately 97 percent to Rowe and three percent to the Company.

Overlook Ridge has a mortgage loan collateralized by Overlook Land, not to exceed $17.4 million, with a balance of $16.8 million as of March 31, 2014.  The loan bears interest at a rate of LIBOR plus 350 basis points and matures in June 2014.  The loan provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.  The Company has guaranteed repayment of the outstanding principal balance of the loan.

Overlook Ridge JV 2C/3B, LLC
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 25 percent indirect residual interest in a to-be-built, 371-unit multi-family rental development spanning four buildings (the “Overlook 2C/3B Project”) which is located in Malden, Massachusetts.  Construction began in January 2013 with initial deliveries (available for rental) in February 2014.

The Company owns a 50 percent interest in Overlook Ridge JV 2C/3B, L.L.C. (“Overlook 2C/3B”) with the remaining interest owned by Rowe.  Overlook 2C/3B owns a 50 percent interest in the development project-owning entity, Overlook Ridge Apartments Investors LLC (“Overlook Apartments Investors”) with the remaining interests owned by Overlook Ridge Apartments Member LLC (“Overlook Apartments Member”).  Pursuant to the operating agreement Overlook Apartments Member is required to fund $23.9 million of the total development costs of $79.4 million, with the balance to be funded by a $55.5 million construction loan.

In general, the operating agreement of Overlook Apartments Investors provides that operating cash flows are distributed to members first to Overlook Apartments Member and then to Overlook 2C/3B based on a 6.5 percent preferred return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Overlook Apartments Member had a capital balance of $23.9 million with an accumulated unpaid preferred return of $1.9 million. It is anticipated that Overlook 2C/3B will not be required to fund any capital.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid preferred return, then to repay each members’ capital balance in the same priority as operating cash flows, then 100 percent to Overlook Apartments Member until it receives a nine percent IRR, and then 70 percent to Overlook Apartments Member and 30 percent to Overlook 2C/3B, pari passu, until Overlook Apartments Member receives an 11 percent IRR, as defined, with any excess distributed to the members in accordance with their ownership percentages.

Overlook 2C/3B and its affiliates are restricted from commencing any new residential real property development at Overlook Ridge until January 2015, without the prior written consent of Overlook Apartments Member.  Thereafter, Overlook Apartments Member has a right of first offer to participate in future Overlook Ridge Projects, all as more fully set forth in the operating agreement of Overlook Ridge Apartments Investors.
 
 
 
25

 
 

 
Overlook Apartments Investors has a construction loan not to exceed $55.5 million with a balance of $30 million as of March 31, 2014, which bears interest at LIBOR plus 250 basis points and matures in December 2015.  The loan provides, subject to certain conditions, two one-year extension options with a fee of 25 basis points each.  The Company has guaranteed construction lien-free completion of the project to the lender and Overlook Apartments Member.  The Company has also guaranteed repayment of $8.3 million of the loan.  Upon the project achieving a debt service coverage ratio of 1.25, as defined, the repayment guaranty ends.  Additionally, the Company has guaranteed payment of all interest due under the loan.  On January 18, 2013, Overlook Apartments Investors entered into an interest rate swap agreement with a commercial bank.  The swap agreement fixes the all-in rate to 3.0875 percent per annum on an initial notional amount of $1.84 million, increasing to $50.8 million, for the period from September 3, 2013 to November 2, 2015.

The operating agreement of Overlook 2C/3B provides, among other things, for the distribution of net operating cash flow to the members, as follows:

·  
First, to each member in proportion to and to the extent of such member’s unrecovered return of nine percent on unrecovered capital; and
·  
Second, to the members in accordance with their ownership percentages.

Rowe had an unrecovered notional capital account balance of $7.2 million and the Company has an unrecovered capital account with $0.2 million associated with its land capital as of March 31, 2014.

The Company performed development, management and other services for Overlook Apartments Investors and recognized $278,000 and $69,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

Roseland/North Retail, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 20 percent residual interest in Port Imperial North Retail, L.L.C. (“PI North Retail”), an entity that owns commercial condominium units (the “Riverwalk Property”), with the remaining interest owned by PR II Port Imperial Retail, LLC (“Prudential-PI”).  The Riverwalk Property aggregates 30,745 square feet of retail space and is located in West New York, New Jersey.

In general, the operating agreement of PI North Retail provides that operating cash flows are distributed first to Prudential-PI and then to the Company based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with ownership percentages.  As of March 31, 2014, Prudential-PI had a capital balance of $4.3 million and an accumulated unpaid operating return of $1.9 million and the Company had no capital balance.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

The Company performed management, leasing, and other services for PI North Retail and recognized $8,000 and $8,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

BNES Associates III
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 31.25 percent indirect interest in an entity that owns a 106,345 square foot fully-leased office property located in West Orange, New Jersey.

The Company owns 50 percent of BNES Associates III (“BNES”), with the remaining interest owned by L.A.H. Partners Crystal Lake, L.L.C.  BNES owns a 62.50 percent interest in the property-owning entity, The Offices at Crystal Lake, L.L.C. (“Crystal Lake”).

The operating agreement of Crystal Lake provides, among other things, for the distribution of net cash flow to the members in accordance with their percentage interests.
 
 
 
26

 
 

 
Crystal Lake has a mortgage loan, with a balance of $7.2 million as of March 31, 2014 collateralized by the office property, which bears interest at 4.76 percent and matures in November 2023.

Portside Master Company, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 38.25 percent indirect residual interest in a to-be-built, 176-unit multi-family rental property (“Portside at Pier One Building Seven Property”).  The Portside at Pier One Building Seven Property is located in East Boston, Massachusetts and began construction in December 2012 with anticipated initial deliveries (available for rental) in the fourth quarter 2014.  The project is subject to a ground lease with the Massachusetts Port Authority.  The ground lease provides for fixed and percentage rent.

The Company owns 85 percent of Portside Master Company, L.L.C. (“Portside Master”) with the remaining interest owned by Portside Boston, L.L.C.  Portside Master holds a 45 percent interest in the development project-owning entity, Portside Apartment Holdings, L.L.C. (“Portside Apartment Holdings”) with the remaining interest owned by PR II Portside Investors L.L.C. (“Prudential Portside”).  Pursuant to the operating agreement, Prudential Portside is required to fund $23.8 million of the estimated total development costs of $66.3 million, with the balance to be funded by a $42.5 million construction loan.

In general, the operating agreement of Portside Apartment Holdings provides that operating cash flows are distributed to members first to Prudential Portside and then to Portside Master based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Prudential Portside had a capital balance of $23.8 million and an unpaid operating return of $1.7 million.  It is anticipated that Portside Master will not be required to fund any capital.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return, then to repay each members’ capital balance in the same priority as operating cash flows, and then 65 percent to Prudential Portside and 35 percent to Portside Master, pari passu, until Prudential Portside receives a 12 percent IRR, as defined, with any excess distributed to the members in accordance with their ownership percentages.

The operating agreement of Portside Master provides, among other things, for the distribution of net cash flow to the members in accordance with their ownership percentages.

Portside Apartment Holdings has a construction loan in an amount not to exceed $42.5 million with a balance of $9.4 million as of March 31, 2014, which bears interest at LIBOR plus 250 basis points and matures in December 2015.  The loan provides, subject to certain conditions, two two-year extension options with a fee of 12.5 basis points for the first two-year extension and 25 basis points for the second two-year extension.  The Company has guaranteed construction lien-free completion of the project to the lender, Prudential Portside and Massachusetts Port Authority.  The Company has also guaranteed repayment of 50 percent of the loan until project completion, when the repayment guaranty is reduced to 25 percent.  The Company’s repayment guaranty is further reduced to 10 percent upon achieving a debt service coverage ratio of 1.25, as defined.  Additionally, the Company has guaranteed payment of all interest due under the loan.

Sites 5 and 6, adjacent to The Portside at Pier One Building 7 Property, which the Company controls through a consolidated joint venture, are presently ground leased to an affiliate of Portside Apartment Holdings.  A to-be-determined investment fund of Prudential Real Estate Investors, has the right to participate in the development, operation and ownership of Sites 5 and/or 6 on terms, covenants and conditions substantially similar and consistent with those contained in The Portside at Pier One Building 7 Property agreements.

The Company performed development, management and other services for Portside Apartment Holdings and recognized $235,000 and $42,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

PruRose Port Imperial South 13, LLC
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 20 percent residual interest in a to-be-built, 280-unit multi-family rental property (“Port Imperial 13”) located in Weehawken, New Jersey.  Port Imperial 13 began construction in January 2013 with anticipated initial deliveries (available for rental) in the first quarter 2015.
 
 
 
27

 
 

 
The remaining interest in the PruRose Port Imperial South 13, LLC (“PruRose 13”) is owned by PR II Port Imperial South 13 Investor LLC (“Prudential 13”).  Pursuant to the operating agreement, Prudential 13 is required to fund $23.1 million of the estimated total development costs of $96.4 million, not including contributed land capital of $21 million, which is allocated $19.2 million to Prudential 13 and $1.8 million to the Company, with the balance to be funded by a $73.4 million construction loan.

In general, the operating agreement of PruRose 13 provides that operating cash flows are distributed to members first to Prudential 13 and then to the Company based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Prudential 13 had a capital balance of $42.2 million and an accumulated unpaid operating return of $4.8 million and the Company had a capital balance of $1.8 million and an accumulated unpaid operating return of $0.2 million.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

Subject to an agreement, 20 percent of distributions received by the Company, in excess of an eight percent IRR, shall be paid to another party.

PruRose 13 has a construction loan in an amount not to exceed $73.4 million with a balance of $15.7 million as of March 31, 2014.  The loan bears interest at a rate of LIBOR plus 215 basis points and matures in June 2016.  The loan provides, subject to certain conditions, one-year extension option followed by a six-month extension option with a fee of 25 basis points each.  The Company has guaranteed construction lien-free completion of the project to the lender and Prudential.  The Company has also guaranteed repayment of up to $11 million of the loan.  The Company’s guaranty of repayment is reduced to $7.4 million upon achieving a debt service coverage ratio of 1.25, and to zero upon achieving a debt service coverage ratio of 1.40, as defined.  Additionally, the Company has guaranteed payment of all interest due under the loan.  On December 28, 2012, PruRose 13 entered into an interest rate swap agreement with a commercial bank.  The swap agreement fixes the all-in rate to  2.79 percent per annum on an initial notional amount of $1.62 million, increasing to $69.5 million, for the period from July 1, 2013 to January 1, 2016.

The Company performed development, management and other services for PruRose 13 and recognized $243,000 and $42,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

Roseland/Port Imperial Partners, L.P.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 20 percent residual interest in a to-be-built, 363-unit multi-family rental property (the “Parcel C Project”), undeveloped land parcels, parcels 6, I and J (“Port Imperial North Land”), and a parcel of land with a ground lease to a retail tenant all located in West New York, New Jersey.

The remaining interests in the development project-owning entity, Roseland/Port Imperial Partners, L.P. (“Roseland/PI”) are owned 79 percent by Prudential and one percent by Prudential-Port Imperial LLC (“Prudential LLC”).

The operating agreement of Roseland/PI provides, among other things, for the distribution of net cash flow to the members, as follows:

·  
to Prudential and Prudential LLC, in proportion to the excess of their operating return of ten percent on Prudential’s Parcel C contribution, as defined, accrued to the date of such distribution over the aggregate amounts previously distributed to such partner for such return;
·  
to the partners, to the extent of any excess of such partner’s operating return of ten percent on its additional capital contributions over the aggregate amounts previously distributed for such return; and
·  
to the partners in accordance with their percentage interests.
 
 
 
28

 
 

 
As of March 31, 2014, Prudential and Prudential LLC had a Parcel C capital balance of $18.5 million and an accumulated unpaid operating return of $4.9 million and the Company had a capital balance of $96,000 and an accumulated unpaid operating return of $4,000.  Construction of the Parcel C Project is expected to start in 2015.

In addition, the operating agreement provides each member a land capital account associated with the Port Imperial North Land.  As of March 31, 2014, Prudential and Prudential LLC had a land capital account balance of $58.7 million and the Company had a land capital account of $5.2 million.  The land capital account balances do not earn a return and will be contributed to a development entity upon construction start for each development parcel, as defined.  Also, as of March 31, 2014, Prudential and Prudential LLC had a capital balance of $970,000 and an accumulated unpaid operating return of $64,000 and the Company had a capital balance of $242,000 and an accumulated unpaid operating return of $16,000 related to the Port Imperial North land.

RoseGarden Marbella South, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 24.27 percent indirect residual interest in a to-be-built, 311-unit high-rise multi-family rental property (the “Marbella II Project”) which is located in Jersey City, New Jersey.  The Marbella II Project began construction in the fourth quarter 2013.

The Company owns 48.5325 percent of RoseGarden Marbella South, L.L.C. (“RoseGarden South”), with the remaining interest owned by MG Marbella Partners II, L.L.C. (“MG Marbella II”).

RoseGarden South holds a 50 percent interest in the development project-owning entity, PruRose Marbella II, L.L.C. (“PruRose/Marbella II”), with the remaining interest owned by PRISA III Investments LLC, (“Prudential-Marbella II”).

In general, the operating agreement of PruRose/Marbella II provides that operating cash flows are distributed to members pro-rata based on a nine percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Prudential-Marbella II had a capital balance of $12.5 million and an accumulated unpaid operating return of $0.9 million.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return and then to repay each members’ capital balance in the same priority as operating cash flows, with any excess distributed to the members in accordance with their ownership percentages.

In general, the operating agreement of RoseGarden South  provides that distributable cash from operations is distributed pro-rata based on a nine percent return on each member’s unrecovered capital balance with any excess distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, the Company had an unrecovered capital balance of $4 million with an unpaid return of $0.2 million and MG Marbella II had no unrecovered capital balance.

Net cash flows from a capital event are distributed first, to the extent of any accumulated unpaid return, and then to repay each member’s unrecovered capital balance, with any excess distributed to the members in accordance with their ownership percentages.

On October 1, 2013, PruRose/Marbella II obtained a construction loan in an amount not to exceed $77.4 million with a balance of $8.5 million as of March 31, 2014.  The loan bears interest at a rate of LIBOR plus 225 basis points, matures in March 2017 and provides, subject to certain conditions, two one year extension options with a fee of 25 basis points for each year.  The Company has guaranteed construction lien-free completion of the project to the lender and Prudential-Marbella II.  Additionally, the Company has guaranteed payments of all interest, operating deficits and deferred equity due under the loan.

The Company performed development, management and other services for PruRose Marbella II and recognized $57,000 and $15,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

PruRose Riverwalk G, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 25 percent indirect residual interest in a to-be-built, 12-story, 316-unit multi-family rental property (the “RiverTrace Project”).  The RiverTrace Project is located in West New York, New Jersey. The RiverTrace Project began construction in November 2011 with initial deliveries (available for rental) in December 2013.
 
 
 
29

 
 

 
The Company owns 50 percent of PruRose Riverwalk G. L.L.C. (“PruRose Riverwalk”) with the remaining interest owned by Prudential.

PruRose Riverwalk owns a 50 percent interest in the project-owning entity, Riverwalk G Urban Renewal, L.L.C. (“Riverwalk G”), with the remaining interest owned by West New York Parcel G Apartments Investors, LLC (“Investor”).  Pursuant to the operating agreement, Investor is required to fund $35 million of the estimated total development costs of $118.1 million, with the balance to be funded by an $83.1 million construction loan.

In general, the operating agreement of Riverwalk G provides that operating cash flows are distributed to members first to Investor and then to PruRose Riverwalk based on a 7.75 percent operating return on each members’ capital balance in priorities as detailed in the operating agreement.  Excess operating cash flows are distributed to the members in accordance with their ownership percentages.  As of March 31, 2014, Investor had a capital balance of $35 million and an unpaid operating return of $7.7 million.  It is not anticipated that PruRose Riverwalk will be required to fund any capital.

Net cash flows from a capital event are distributed first to the extent of any accumulated unpaid operating return, then to repay each members’ capital balance in the same priority as operating cash flows, and then 100 percent to Investor until Investor receives a 7.75 percent IRR, as defined, with any excess distributed to the members in accordance with their ownership percentages.

The operating agreement of PruRose Riverwalk provides, among other things, for the distribution of net cash flow to the members in accordance with their ownership percentages.  In addition, the operating agreement requires that the initial $1.3 million in distributions to the Company be redirected to Prudential.

Riverwalk G has a construction loan in an amount not to exceed $83.1 million, with a balance of $72 million as of March 31, 2014, which bears interest at six percent and matures in July 2021.  The interest-only loan is collateralized by the RiverTrace Project.  The Company has guaranteed construction lien-free completion of the project to the lender and Investor.  The Company guarantees $15.0 million of the loan principal until six months after completion of the project.

The Company performed development, management and other services for Riverwalk G and recognized $30,000 and $175,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

ELMAJO Urban Renewal Associates, LLC/Estuary Urban Renewal Unit B, LLC
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 7.5 percent residual interest in a to-be-built, three-building, 582-unit multi-family rental property located in Weehawken, New Jersey (the “Lincoln Harbor Project”), with the remaining interest owned by ELMAJO Management, Inc. (“EMI”).  The first phase, Building A, with 181 units, and Building C, with 174 units, began construction in 2012 with initial deliveries (available for rental) in February 2014.  The second phase, Building B, with 227 units, began construction in January 2013 with anticipated initial deliveries (available for rental) in the first quarter 2015.  On March 13, 2013, Estuary Urban Renewal Unit B, LLC (“Estuary UR”) was formed to own and develop the second phase, Building B.  Estimated total development costs for the Lincoln Harbor Project is $219.5 million. EMI is required to fund any capital requirements in excess of construction financing.  The Company has no funding requirements to the venture.

The operating agreements of ELMAJO Urban Renewal Associates, LLC (“ELMAJO UR”), the entity which owns the Lincoln Harbor Project, Building A and C, and Estuary UR, the entity that owns the Lincoln Harbor Project Building B, provides, among other things, for the distribution of net distributable cash to the members, as follows:

·  
First, to the members to the extent of and in proportion to their respective preferred return of 8.50 percent on the members’ unrecovered capital; and
·  
Second, to the members in accordance with their ownership percentages.

As of March 31, 2014, EMI had a combined capital balance of $74 million and an unpaid preferred return of $17.2 million in ELMAJO UR and Estuary UR.
 
 
 
30

 
 

 
ELMAJO UR has a construction loan for Building A and Building C in an amount not to exceed $91 million, with a balance of $66.8 million as of March 31, 2014, which bears interest at LIBOR plus 210 basis points and matures in June 2016.  The loan provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.

Estuary UR has a construction loan for Building B in an amount not to exceed $57 million, with a balance of $16 million as of March 31, 2014, which bears interest at LIBOR plus 210 basis points and matures in January 2017.  The loan provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.

The Company performed development and other services for ELMAJO UR and Estuary UR and recognized $166,000 and $240,000 in income for such services in the three months ended March 31, 2014 and 2013, respectively.

Riverpark at Harrison I, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 36 percent interest in a multi-phase project located in Harrison, New Jersey (the “Riverpark Project”).  Construction of a 141-unit multi-family rental property of the Riverpark Project is projected to start in the near term.  Estimated total development costs of $27.9 million, not including land capital of $8 million, are expected to be funded with a $23.4 million construction loan, with the balance to be funded with member capital.  The Company is required to fund 40.5 percent of capital.

The remaining interests in the development project-owning entity, Riverpark at Harrison I Urban Renewal, L.L.C. (“Riverpark”) are owned 36 percent by Chall Enterprises, L.L.C. and 28 percent by an investor group.
 
 
In general, the operating agreement of Riverpark provides, among other things, for the distribution of net cash flow to the members in accordance with their ownership percentages.

On June 27, 2013, Riverpark obtained a construction loan in an amount not to exceed $23.4 million with a balance of $5.8 million as of March 31, 2014. The loan, which bears interest at LIBOR plus 235 basis points, matures in June 2016 and provides, subject to certain conditions, two one-year extension options with a fee of 20 basis points for each year.  The Company has guaranteed construction lien-free completion of the project to the lender and repayment of 25 percent of the principal amount at maturity.  The Company’s repayment guaranty is reduced to 10 percent upon project completion, achieving a debt service coverage ratio of 1.30 and satisfaction of the loan-to-value ratio of 65 percent, as defined.  Additionally, the Company has guaranteed payment of all interest due under the loan.

RoseGarden Monaco, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 41.67 percent interest in the rights to acquire a land parcel (“San  Remo Land”) located in Jersey City, New Jersey, pursuant to an agreement which expires in 2017.

The remaining interest in the rights-owning entity, RoseGarden Monaco, L.L.C. is owned by MG Monaco Partners, L.L.C.  The operating agreement requires capital contributions and distributions in accordance with their ownership percentages.

Hillsborough 206 Holdings, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent interest in a site zoned for retail uses (excluding supermarkets) which is located in Hillsborough, New Jersey.

The remaining interest in the property-owning entity, Hillsborough 206 Holdings, L.L.C. (“Hillsborough 206”) is owned by BNE Investors VIII, L.L.C.

The operating agreement of Hillsborough 206 provides, among other things, for the distribution of distributable cash to the members, in accordance with their ownership percentages.

Grand Jersey Waterfront Urban Renewal Associates, L.L.C.
On October 23, 2012, as part of the Roseland Transaction, the Company acquired a 50 percent interest in an entity designated as redeveloper of a land parcel (“Liberty Landings”) located in Jersey City, New Jersey.  The remaining interest in the entity, Grand Jersey Waterfront Urban Renewal Associates, L.L.C., is owned by Waterfront Realty Company, L.L.C.
 
 
 
31

 
 

 
Capital requirements are funded in accordance with ownership percentages.

Crystal House Apartments Investors LLC
On March 20, 2013, the Company entered into a joint venture with a fund advised by UBS Global Asset Management (“UBS”) to form Crystal House Apartments Investors LLC (“CHAI”) which acquired the 828-unit multi-family property known as Crystal House located in Arlington, Virginia (“Crystal House Property”) for approximately $262.5 million.  The Company acquired a 25 percent interest in the Crystal House property and a 50 percent interest in the vacant land for approximately $30.2 million.  The acquisition included vacant land to accommodate the development of approximately 295 additional units of which 252 are currently approved.

In general, the operating agreement of CHAI provides that net operating cash flows are distributed to the members in accordance with ownership percentages.  Net cash flows from a capital event are distributed first to the members in accordance with ownership percentages until they receive a nine percent IRR, as defined, with any excess distributed 50 percent to the Company and 50 percent to UBS.

CHAI obtained a mortgage loan on the acquired property, which has a balance of $165 million as of March 31, 2014, bears interest at 3.17 percent and matures in March 2020.  The loan, which is interest-only during the initial 5-year term and amortizable over a 30-year period for the remaining term, is collateralized by the Crystal House Property.

The Company performed management, leasing and other services for CHAI and recognized $108,000 and zero in income for such services in the three months ended March 31, 2014 and 2013, respectively.

KPG-P 100 IMW JV, LLC
On December 9, 2013, the Company entered into a joint venture partnership with the Keystone Property Group (“KPG”) and Parkway Corporation (“Parkway”) to form KPG-P 100 IMW JV, LLC (“KPG-P”).  The Company acquired a 33.33 percent indirect interest in KPG-IMW Owner, LLC (“KPG-IMW”), an entity that owns a nine-story, approximately 400,000 square-foot office building located at 100 Independence Mall West in Philadelphia, Pennsylvania (“100 IMW Property”) for $2.8 million.  The 100 IMW Property was acquired for approximately $40.5 million.  As part of a more than $20-million reinvestment strategy for 100 IMW Property, the partnership is planning upgrades to the building’s common areas, as well as build-out of offices and the conversion of approximately 55,000 square feet of lower-level space into a 110-space parking garage that will be managed by Parkway.

The Company, through subsidiaries, owns 57.7677 percent of KPG-MCG IMW, LLC (“KPG-MCG”) with the remaining interest owned by Fawkes Investments, LP.  KPG-MCG owns a 57.7024 percent interest in KPG-P and the remaining interests are owned 17.8928 percent by KPG and 24.4048 percent by Parkway.

In general, the operating agreement of KPG-P provides that net operating cash flows are distributed first, to the members in proportion to their unreturned capital contributions, until each member’s unreturned capital contributions have been reduced to zero; and, thereafter, to the members, in accordance with their percentage interests.  Net cash flows from a capital event are distributed first, to the members in proportion to the members’ unreturned capital contributions, until each member’s unreturned capital contributions have been reduced to zero; second, to the members in proportion to the members’ unreturned deferred capital contributions, until each member’s deferred unreturned capital contributions have been reduced to zero; and, thereafter, to the members in accordance with their percentage interests.
 
 
KPG-IMW obtained a mortgage loan collateralized by 100 IMW Property, which has a balance of $61.5 million as of March 31, 2014, bears interest at LIBOR plus 700 basis points and matures in September 2016.  The loan has two one-year extension options, subject to certain conditions, and includes a $25 million construction reserve.

Capitol Place Mezz LLC
On December 23, 2013, the Company entered into a joint venture with FB Capitol Place LLC (“FB”) to form Capitol Place Mezz LLC (“Capitol”).  The Company acquired a 50 percent ownership interest in an entity that owns a 377-unit multi-family development project that includes approximately 25,000 square feet of retail space and a 309-space underground parking garage, which are currently under construction, located at 701 2nd Street, NE in Washington, D.C. (the “WDC Project”) for approximately $46.5 million. It is expected that the WDC Project will be completed by mid-2015, with leasing beginning in the first quarter 2015.  The venture expects to incur approximately $120.7 million in total estimated costs to complete the WDC Project, of which $46.8 million has been incurred through March 31, 2014.  The Company is not required to fund any additional costs (with some limitation) for the completion of the WDC Project beyond its $46.5 million initial contribution.
 
 
 
32

 
 

 
In general, the operating agreement of Capitol provides that net cash flows from a capital event are distributed first, to each holder of a member loan, as defined, until all member loans have been paid in full; second, to FB until FB has received the aggregate amount of $2,500,000; and third, to the members in accordance with their percentage interests.  The operating agreement also includes specific provisions, including a right of first offer on all development deals in the D.C. metro area that involve either party, with specific qualifications on any properties in Arlington County, Virginia.
 
 
The WDC Project has a 20-year construction loan of $100.7 million with a balance of $36 million as of March 31, 2014.  The loan bears interest at 4.82 percent and matures in July 2033.  The loan is amortizable over a 30-year period starting in August 2017.

Other
The Company owns other interests in various unconsolidated ventures, including interests in assets previously owned and interests in ventures whose businesses are related to its core operations. These ventures are not expected to significantly impact the Company's operations in the near term.

 
5.    DEFERRED CHARGES, GOODWILL AND OTHER ASSETS
           
   
        March 31,
   
December 31,
(dollars in thousands)
 
2014
   
2013
Deferred leasing costs
$
 239,665
 
$
 258,648
Deferred financing costs
 
 21,718
   
 25,366
   
 261,383
   
 284,014
Accumulated amortization
 
 (111,750)
   
 (131,669)
Deferred charges, net
 
 149,633
   
 152,345
Notes receivable (1)
 
 21,925
   
 21,986
In-place lease values, related intangibles and other assets, net
 
 11,159
   
 13,659
Goodwill
 
 2,945
   
 2,945
Prepaid expenses and other assets, net
 
 43,068
   
 27,584
           
Total deferred charges, goodwill and other assets
$
 228,730
 
$
 218,519

(1)
Includes: a mortgage receivable for $10.4 million which bears interest at LIBOR plus six percent; a note receivable for $8 million which bears interest at eight percent; and an interest-free note receivable with a net present value of $3.5 million as of March 31, 2014.

 

 
33

 

6.    RESTRICTED CASH

Restricted cash includes tenant and resident 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)
           
   
March 31,
   
December 31,
   
2014
   
2013
Security deposits
$
8,575
 
$
 8,534
Escrow and other reserve funds
 
12,045
   
 11,260
           
Total restricted cash
$
20,620
 
$
 19,794


 
7.    DISCONTINUED OPERATIONS

The Company disposed of 24 office properties located in New York, New Jersey, Pennsylvania and Connecticut aggregating 3 million square feet and three developable land parcels for total net sales proceeds of approximately $390.6 million during the year ended December 31, 2013.  The Company has presented these properties as discontinued operations in its statements of operations for the three months ended March 31, 2013.

The following table summarizes income from discontinued operations for the three months ended March 31, 2013: (dollars in thousands)
       
   
Three Months Ended
   
March 31,
     
2013
Total revenues
 
$
14,871
Operating and other expenses
   
(6,203)
Depreciation and amortization
   
(3,453)
Interest expense
   
(82)
       
Income from discontinued operations
   
5,133
       
Total discontinued operations
 
$
5,133

On January 1, 2014, the Company early adopted the new discontinued operations standard and as the agreement to sell its property located at 22 Sylvan Way in Parsippany, New Jersey will not represent a strategic shift, it has not been reflected as part of discontinued operations.  See Note 3: Real Estate Transactions – Rental Property Held for Sale.

 

 
34

 

8.    SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of March 31, 2014 and December 31, 2013 is as follows:  (dollars in thousands)

                   
     
March 31,
   
December 31,
 
Effective
 
     
2014
   
2013
 
Rate (1)
 
5.125% Senior Unsecured Notes, due February 15, 2014 (2)
   
 -
 
$
200,030
 
 5.110
%
5.125% Senior Unsecured Notes, due January 15, 2015
 
$
149,925
   
149,902
 
 5.297
%
5.800% Senior Unsecured Notes, due January 15, 2016
   
200,142
   
200,161
 
 5.806
%
2.500% Senior Unsecured Notes, due  December 15, 2017
   
248,929
   
248,855
 
 2.803
%
7.750% Senior Unsecured Notes, due August 15, 2019
   
248,853
   
248,799
 
 8.017
%
4.500% Senior Unsecured Notes, due April 18, 2022
   
299,520
   
299,505
 
 4.612
%
3.150% Senior Unsecured Notes, due May 15, 2023
   
269,474
   
269,323
 
 3.517
%
                   
Total senior unsecured notes
 
$
1,416,843
 
$
 1,616,575
     

(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)
On February 17, 2014, the Company repaid these notes at their maturity using available cash and borrowings on the Company’s unsecured revolving credit facility.

The terms of the Company’s senior unsecured notes include certain restrictions and covenants which require compliance with financial ratios relating to the maximum amount of debt leverage, the maximum amount of secured indebtedness, the minimum amount of debt service coverage and the maximum amount of unsecured debt as a percent of unsecured assets. 

 
9.    UNSECURED REVOLVING CREDIT FACILITY

On July 16, 2013, the Company amended and restated its unsecured revolving credit facility with a group of 17 lenders.  The $600 million facility is expandable to $1 billion and matures in July 2017.  It has two six-month extension options each requiring the payment of a 7.5 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
 
170.0
 
35.0
BBB- or Baa3
 
130.0
 
30.0
BBB or Baa2(current)
 
110.0
 
20.0
BBB+ or Baa1
 
100.0
 
15.0
A- or A3 or higher
 
92.5
 
12.5

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 (60 percent), the maximum amount of secured indebtedness (40 percent), the minimum amount of fixed charge coverage (1.5 times), the maximum amount of unsecured indebtedness (60 percent), the minimum amount of unencumbered property interest coverage (2.0 times) and certain investment limitations (generally 15 percent of total capitalization).  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.
 
 
 
35

 
 

 
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 AG New York Branch; U.S. Bank National Association and Wells Fargo Bank, N.A., as documentation agents; Capital One, National Association; Citibank N.A.; Comerica Bank; PNC Bank, National Association; SunTrust Bank; The Bank of Tokyo-Mitsubishi UFJ, LTD.; The Bank of New York Mellon; as managing agents; and Compass Bank; Branch Banking and Trust Company; TD Bank, N.A.; Citizens Bank of Pennsylvania; Mega International Commercial Bank Co., LTD.  New York Branch, as participants.

As of March 31, 2014, the Company had outstanding borrowings of $70 million under its unsecured revolving credit facility and no outstanding borrowings as of December 31, 2013.

Through July 15, 2013, the Company had a $600 million unsecured revolving credit facility, which had an interest rate on outstanding borrowings of LIBOR plus 125 basis points and a facility fee of 25 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, 2014 and December 31, 2013, the Company had no outstanding borrowings under the Money Market Loan.

 
10.   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, 2014, 30 of the Company’s properties, with a total book value of approximately $898 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 March 31, 2014 and December 31, 2013 is as follows: (dollars in thousands)

                       
                       
     
Effective
     
March 31,
 
December 31,
   
Property Name
Lender
 
Rate (a)
     
2014
 
2013
 
Maturity
6301 Ivy Lane (b)
RGA Reinsurance Company
 
 5.520 
%
 
$
5,393
$
5,447
 
04/01/14
395 West Passaic
State Farm Life Insurance Co.
 
 6.004 
%
   
9,578
 
9,719
 
05/01/14
Port Imperial South 4/5
Wells Fargo Bank N.A.
LIBOR+3.50
%
   
36,950
 
36,950
 
06/30/14
35 Waterview Boulevard
Wells Fargo CMBS
 
 6.348 
%
   
18,328
 
18,417
 
08/11/14
6 Becker, 85 Livingston,
Wells Fargo CMBS
 
 10.220 
%
   
64,527
 
64,233
 
08/11/14
75 Livingston &
                     
20 Waterview (c)
                     
4 Sylvan
Wells Fargo CMBS
 
 10.190 
%
   
14,552
 
14,538
 
08/11/14
10 Independence (d)
Wells Fargo CMBS
 
 12.440 
%
   
16,742
 
16,638
 
08/11/14
9200 Edmonston Road (e)
Principal Commercial Funding L.L.C.
 
 5.534 
%
   
4,085
 
4,115
 
05/01/15
Port Imperial South
Wells Fargo Bank N.A.
LIBOR+1.75
%
   
43,487
 
43,278
 
09/19/15
4 Becker
Wells Fargo CMBS
 
 9.550 
%
   
38,952
 
38,820
 
05/11/16
5 Becker (f)
Wells Fargo CMBS
 
 12.830 
%
   
13,275
 
13,092
 
05/11/16
210 Clay
Wells Fargo CMBS
 
 13.420 
%
   
12,901
 
12,767
 
05/11/16
Various (g)
Prudential Insurance
 
 6.332 
%
   
147,008
 
147,477
 
01/15/17
150 Main St.
Webster Bank
LIBOR+2.35
%
   
216
 
 -
 
03/30/17
23 Main Street
JPMorgan CMBS
 
 5.587 
%
   
29,682
 
29,843
 
09/01/18
Harborside Plaza 5
The Northwestern Mutual Life
 
 6.842 
%
   
224,268
 
225,139
 
11/01/18
 
Insurance Co. & New York Life
                   
 
Insurance Co.
                   
233 Canoe Brook Road
The Provident Bank
 
 4.375 
%
   
3,859
 
3,877
 
02/01/19
100 Walnut Avenue
Guardian Life Insurance Co.
 
 7.311 
%
   
18,731
 
18,792
 
02/01/19
One River Center (h)
Guardian Life Insurance Co.
 
 7.311 
%
   
42,910
 
43,049
 
02/01/19
                       
Total mortgages, loans payable and other obligations
       
$
745,444
$
 746,191 
   
 
 
 
36

 
 
 
(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 April 1, 2014, the Company repaid the mortgage loan at par, using available cash.
(c)  
Mortgage is cross collateralized by the four properties.
(d)  
The Company is negotiating a deed-in-lieu of foreclosure in satisfaction of this mortgage loan.
(e)  
The mortgage loan originally matured on May 1, 2013.  The maturity date was extended until May 1, 2015 with the same interest rate.  Excess cash flow, as defined, is being held by the lender for re-leasing costs.  The deed for the property was placed in escrow and is available to the lender in the event of default or non-payment at maturity.
(f)  
The cash flow from this property is insufficient to cover operating costs and debt service.  Consequently, the Company notified the lender and suspended debt service payments in August 2013.  The Company has begun discussions with the lender regarding deed-in-lieu of foreclosure and began remitting available cash flow to the lender effective August 2013.
(g)  
Mortgage is cross collateralized by seven properties. The Operating Partnership has agreed, subject to certain conditions, to guarantee repayment of a portion of the loan. 
(h)  
Mortgage is collateralized by the three properties comprising One River Center. 


CASH PAID FOR INTEREST AND INTEREST CAPITALIZED
Cash paid for interest for the three months ended March 31, 2014 and 2013 was $36,119,000 and $36,200,000, respectively.  Interest capitalized by the Company for the three months ended March 31, 2014 and 2013 was $3,141,000 and $3,467,000, respectively (of which these amounts included $918,000 and $298,000 for the three months ended March 31, 2014 and 2013, respectively, for interest capitalized on the Company’s investments in unconsolidated joint ventures which were substantially in development).

SUMMARY OF INDEBTEDNESS
As of March 31, 2014, the Company’s total indebtedness of $2,232,287,000 (weighted average interest rate of 5.54 percent) was comprised of $150,653,000 of revolving credit facility borrowings and other variable rate mortgage debt (weighted average rate of 2.04 percent) and fixed rate debt and other obligations of $2,081,634,000 (weighted average rate of 5.79 percent).

As of December 31, 2013, the Company’s total indebtedness of $2,362,766,000 (weighted average interest rate of 5.62 percent) was comprised of $80,228,000 of variable rate mortgage debt (weighted average rate of 2.74 percent) and fixed rate debt and other obligations of $2,282,538,000 (weighted average rate of 5.72 percent).

 
11.
EMPLOYEE BENEFIT 401(k) PLANS AND DEFERRED RETIREMENT COMPENSATION AGREEMENTS

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 401(k) Plan was recently amended to provide for employees of the Roseland Business to receive matching contributions.  Total expense recognized by the Company for the 401(k) Plan for the three months ended March 31, 2014 and 2013 was $25,000 and $38,000, respectively.

On September 12, 2012, the Board of Directors of the Company approved multi-year deferred retirement compensation agreements for those executive officers in place on such date (the “Deferred Retirement Compensation Agreements”).  Pursuant to the Deferred Retirement Compensation Agreements, the Company will make annual contributions of stock units (“Stock Units”) representing shares of the Company’s common stock on January 1 of each year from 2013 through 2017 into a deferred compensation account maintained on behalf of each Messrs. Hersh, Lefkowitz and Thomas.  The annual contribution for Messrs. Hersh, Lefkowitz and Thomas shall be in an amount of Stock Units equal to $500,000, $160,000 and $100,000, respectively.  The Company granted 35,957 Stock Units, including 575 additional Stock Units on accrued dividends, in the three months ended March 31, 2014.  Vesting of each annual contribution of Stock Units will occur on December 31 of each year, subject to continued employment. Upon the payment of dividends on the Company’s common stock, Messrs. Hersh, Lefkowitz and Thomas shall be entitled to dividend equivalent payments in respect of both vested and unvested Stock Units payable in the form of additional Stock Units.  The Stock Units shall become payable within 30 days after the earliest of any of the following triggering events: (a) the executive’s death or disability; (b) the date of the executive’s separation from service to the Company; and (c) the effective date of a change in control, in each case as such terms are defined in the employment agreements of Messrs. Hersh, Lefkowitz and Thomas.  Upon the occurrence of a triggering event, the Stock Units shall be paid in cash based on the closing price of the Company’s common stock on the date of such triggering event.  In connection with Messrs. Lefkowitz and Thomas’ separation from service to the Company effective March 31, 2014, the Company agreed to make cash payments totaling $1.2 million for all vested and unvested Stock Units and future cash contributions pursuant to their respective Deferred Retirement Compensation Agreements (see Note 13: Commitments and Contingencies – Departure of Executive Vice Presidents).  Total expense recognized by the Company under the Deferred Retirement Compensation Agreements for the three months ended March 31, 2014 and 2013 was $1.2 million and $188,000, respectively.
 
 
 
37

 
 

 
 
12.  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, 2014 and December 31, 2013.  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, 2014 and December 31, 2013.

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 $2,288,708,000 and $2,407,802,000 as compared to the book value of approximately $2,232,287,000 and $2,362,766,000 as of March 31, 2014 and December 31, 2013, respectively.  The fair value of the Company’s long-term debt is categorized as a level 3 basis (as provided by ASC 820, Fair Value Measurements and Disclosures).  The fair value is estimated using a discounted cash flow analysis valuation based 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, 2014 and December 31, 2013.  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, 2014 and current estimates of fair value may differ significantly from the amounts presented herein.

 
13.  COMMITMENTS AND CONTINGENCIES

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

The Harborside Plaza 4-A agreement with the City of Jersey City, as amended, which commenced in 2002, is for a term of 20 years.  The annual 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, 2014 and 2013, respectively.
 
 
 
38

 
 

 
The Harborside Plaza 5 agreement, also with the City of Jersey City, as amended, which commenced in 2002, is for a term of 20 years.  The annual 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, 2014 and 2013, respectively.

The Company also has an agreement with the City of Weehawken for its Port Imperial 4/5 garage development project (acquired in the Roseland Transaction).  The agreement was executed in March 2011 and has a term of five years beginning when the project is substantially complete, which occurred in the third quarter 2013.  The agreement provides that real estate taxes be paid initially on the land value of the project only and allows for a phase in of real estate taxes on the value of the improvements over a five year period.

The Company also has an agreement with the City of Rahway for its Park Square multi-family rental property.  The agreement executed in 2009 provides that real estate taxes will be partially abated, on a declining scale, for four years from 2011 through 2015.

At the conclusion of the above-referenced 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, 2014, are as follows: (dollars in thousands)
     
Year
 
Amount
April 1 through December 31, 2014
$
275
2015
 
371
2016
 
371
2017
 
267
2018
 
232
2019 through 2084
 
15,819
     
Total
$
17,335

Ground lease expense incurred by the Company during the three months ended March 31, 2014 and 2013 amounted to $102,000 and $102,000, respectively.

ROSELAND CONTINGENT CONSIDERATION
The purchase price for the Roseland Transaction included the fair value of contingent consideration pursuant to an earn-out (“Earn Out”) agreement of approximately $10 million.  The Earn Out largely represents contingent consideration and requires the Company to pay Roseland Partners up to an aggregate maximum of $15.6 million.  The Earn Out is based on defined criteria, as follows: (i) the Roseland Assets component of up to $8.6 million for the completion of certain developments ($2.8 million), and the start of construction on others ($2.8 million), obtaining tax credits/grants on others ($3.0 million), all of which are payable over various periods of up to three years; and (ii) total return to shareholders for up to an additional $7 million, based on a total return to shareholders measured on a three year cumulative basis and on discrete years, both on an absolute basis and in comparison to a peer group.  Each of the Earn Out elements were separately valued as of the acquisition date with an aggregate fair value of contingent consideration of approximately $10 million (representing $6.3 million for the Roseland Assets and $3.7 million for the total return to shareholders component).  Prospectively, the Earn Out liability will be remeasured at fair value quarterly until the contingency has been resolved, with any changes in fair value representing a charge or benefit directly to earnings (with no adjustment to purchase accounting).  The measures of the Earn Out are based on significant inputs that are not observable in the market, which ASC 820 refers to as Level 3 inputs.  In addition to an appropriate discount rate, the key assumption affecting the valuation for the Roseland Assets component was the probability of occurrence of the payment events under the relevant provisions (management assumed between 92 and 99 percent for completion/start criteria and 50 percent for the tax credit/grant criteria in its initial valuation).  The valuation of the TRS component includes assumptions for the risk-free rate and various other factors (i.e., stock price, dividend levels and volatility) for the Company and the relevant peer group, as defined in the Earn Out agreement.  As a result of the achievement of certain of the defined criteria, the Company paid Roseland Partners $2.8 million on January 25, 2013 and $1.4 million on March 21, 2014 related to the Roseland Assets component of the Earn Out.  The Company previously recorded the $2.8 million payment of contingent consideration described above in the three-month period ended March 31, 2013 as a cash out flow from investing activity.   Management subsequently concluded that the payment should be appropriately classified as a cash out flow from financing activity and had reflected it as such in the annual financial statements for 2013.  The cash flow statement for the three month period ended March 31, 2013 presented herein has been revised to reflect this change in classification.  The Company has determined that the impact to the 2013 quarterly financial statements is not material.  The cash flow statements for the six-month periods ended June 30, 2013 and for the nine-month periods ended September 30, 2013 will be revised in future filings.
 

 
39

 
 

 
The purchase consideration for the Roseland Transaction is subject to the return of a portion of the purchase price of up to $2.0 million upon the failure to achieve a certain level of fee revenue from the Roseland Business during the 33-month period following the closing date.  Because the fee target was highly probable, no discount was ascribed to this contingently returnable consideration.  Also, at the closing, approximately $34 million in cash of the purchase price was deposited in escrow to secure certain of the indemnification obligations of Roseland Partners and its affiliates.  In April 2013, $6.7 million of the escrow was released to Roseland Partners.

DEPARTURE OF EXECUTIVE VICE PRESIDENTS
On March 3, 2014, the Company announced that Barry Lefkowitz was leaving his position as Executive Vice President and Chief Financial Officer of the Company effective March 31, 2014.  In connection with Mr. Lefkowitz’s departure, he will receive severance benefits payable pursuant to his employment agreement and outstanding equity compensation awards, including an aggregate cash payment of approximately $3.4 million, vesting of 11,457 newly issued shares of common stock of the Company, and vesting of 68,667 unvested shares of Restricted Stock Awards. The Company also will pay the premiums for the continuation of Mr. Lefkowitz’s existing health insurance for a period up to 48 months following March 31, 2014.
 
Also on March 3, 2014, the Company announced that Roger W. Thomas was leaving his position as Executive Vice President, General Counsel and Secretary of the Company effective March 31, 2014.  In connection with Mr. Thomas’ departure, he will receive severance benefits payable pursuant to his employment agreement and outstanding equity compensation awards, including an aggregate cash payment of approximately $3.1 million, acceleration and discretionary full vesting of 33,605 newly issued shares of common stock of the Company, and vesting of 41,000 unvested shares of Restricted Stock Awards. The Company also will pay the premiums for the continuation of Mr. Thomas’ existing health insurance for a period of up to 48 months following September 30, 2014. Mr. Thomas will serve as a consultant to the Company from April 1, 2014 through September 30, 2014 for an aggregate cash compensation of $300,000.

The Company’s total estimated costs for the departure of the two executive vice presidents of approximately $11 million during the quarter ended March 31, 2014 was included in general and administration expense for the period and reflected in accounts payable, accrued expenses and other liabilities as of March 31, 2014.

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 $123.1 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, a former director and current member of its Advisory Board), and the Cali Group (which includes John R. Cali, a former director and current member of its Advisory Board).  121 of the Company’s properties, with an aggregate net book value of approximately $1.5 billion, have lapsed restrictions and are subject to these conditions.


 
40

 

In December 2011, the Company entered into a development agreement (the “Development Agreement”) with Ironstate Development LLC (“Ironstate”) for the development of multi-family rental towers with associated parking and ancillary retail space on land owned by the Company at its Harborside complex in Jersey City, New Jersey (the “URL Harborside Project”).  The first phase of the project is expected to consist of a parking pedestal to support a high-rise tower of approximately 763 apartment units and is estimated to cost approximately $320 million, of which development costs of $10.2 million have been incurred through March 31, 2014.  The parties anticipate the first phase will be ready for occupancy by approximately the third quarter of 2016.   In October 2013, the first phase of the project was awarded up to $33 million in future tax credits (“URL Tax Credits”), subject to certain conditions, from the New Jersey Economic Development Authority.

Pursuant to the Development Agreement, the Company and Ironstate shall co-develop the URL Harborside Project with Ironstate responsible for obtaining all required development permits and approvals.  Major decisions with respect to the URL Harborside Project will require the consent of the Company and Ironstate.  The Company and Ironstate will have 85 and 15 percent interests, respectively, in the URL Harborside Project.  The Company will receive capital credit of $30 per approved developable square foot for its land aggregating to approximately $20.6 million at March 31, 2014.  In addition to the capital credit it will receive for its land contribution, the Company currently expects that it will fund approximately $88 million of the development costs of the project (which is expected to be reduced due to the effects of sales proceeds from the anticipated sale of the URL Tax Credits).

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 URL Harborside 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.

In July 2012, the Company entered into a ground lease with Wegmans Food Markets, Inc. (“Wegmans”) at the Company’s undeveloped site located at Sylvan Way and Ridgedale Avenue in Hanover Township, New Jersey. Subject to receiving all necessary governmental approvals, Wegmans intends to construct a store of approximately 140,000 square feet on a finished pad to be delivered by the Company in the fourth quarter of 2014.  The Company expects to incur costs of approximately $15.7 million for the development of the site through the third quarter of 2015 (of which the Company has incurred $5.0 million through March 31, 2014).

 
14.  TENANT LEASES

The Properties are leased to tenants under operating leases with various expiration dates through 2033.  Substantially all of the commercial 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 commercial operating leases at March 31, 2014 are as follows (dollars in thousands):

     
     
Year
 
Amount
April 1 through December 31, 2014
$
382,827
2015
 
465,589
2016
 
421,184
2017
 
368,003
2018
 
284,030
2019 and thereafter
 
1,101,344
     
Total
$
3,022,977
 
Multi-family rental property residential leases are excluded from the above table as they generally expire within one year.
 
 
 
41

 
 

 
 
15.  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.

SHARE REPURCHASE PROGRAM
In September 2012, the Board of Directors renewed and authorized an increase to the Company’s repurchase program (“Repurchase Program”).  The Company has authorization to repurchase up to $150 million of its outstanding common stock under the renewed Repurchase Program, which it may repurchase from time to time in open market transactions at prevailing prices or through privately negotiated transactions.  The Company has purchased and retired 394,625 shares of its outstanding common stock for an aggregate cost of approximately $11 million through March 31, 2014 (none of which occurred in the three months ended March 31, 2014 and the year ended December 31, 2013) , with a remaining authorization under the Repurchase Program of $139 million.
 
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 approximately 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 SEC for the approximately 5.5 million shares of the Company’s common stock reserved for issuance under the DRIP.

STOCK OPTION PLANS
In May 2013, the Company established the 2013 Incentive Stock Plan (the “2013 Plan”) under which a total of 4,600,000 shares have been reserved for issuance.  In May 2004, the Company established the 2004 Incentive Stock Plan (the “2004 Plan”) under which a total of 2,500,000 shares had been reserved for issuance.  The 2004 Plan was terminated upon establishment of the 2013 Plan.  No options were granted under the 2004 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” and together with the 2000 Employee Plan, the “2000 Plans”).  In May 2002, shareholders of the Company approved amendments to both of the 2000 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).  As the 2000 Plans expired in 2010, stock options may no longer be issued under those plans.  Stock options granted under the 2000 Employee Plan became exercisable over a five-year period.  All stock options granted under the 2000 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, 2014 and December 31, 2013, the stock options outstanding, which were all exercisable, had a weighted average remaining contractual life of approximately 3.8 and 0.7 years, respectively.


 
42

 

Information regarding the Company’s stock option plans is summarized below:
               
 
Shares
Under Options
   
Weighted Average Exercise Price
   
Aggregate Intrinsic Value $(000’s)
Outstanding at January 1, 2014
 15,000
 
$
 40.54
 
$
 -
Granted
 5,000
   
 21.25
   
 -
Lapsed or Cancelled
 (5,000)
   
 40.55
   
 -
Outstanding at March 31, 2014  ($21.25 – $45.47)
 15,000
 
$
 34.10
 
$
 -
Options exercisable at March 31, 2014
 10,000
           
Available for grant at March 31, 2014
4,460,505
           

The weighted average fair value of options granted during the three months ended March 31, 2014 was $1.71 per option. The fair value of each option grant is estimated on the date of grant using the Black-Scholes model.  The following weighted average assumptions are included in the Company’s fair value calculations of stock options granted during the three months ended March 31, 2014:

       
Expected life (in years)
 
6
 
Risk-free interest rate
 
1.50
%
Volatility
 
20.26
%
Dividend yield
 
5.65
%

No cash was received from options exercised under all stock option plans for the three months ended March 31,2014 and 2013, respectively.  The total intrinsic value of options exercised during each of the three months ended March 31, 2014 and 2013 was zero.  The Company has a policy of issuing new shares to satisfy stock option exercises.

The Company recognized stock options expense of $1,000 and zero for the three months ended March 31, 2014 and 2013, respectively.

RESTRICTED STOCK AWARDS
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 414,483 unvested shares were legally outstanding at March 31, 2014.  Of the Restricted Stock Awards issued to executive officers and senior management, 210,000 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 (“Performance Shares”), with the remaining based on time and service. These Performance Shares are not considered granted until the performance goals are set.  All currently outstanding and unvested Restricted Stock Awards provided to the officers and certain other employees were issued under the 2013 Plan and 2004 Plan.  Currently outstanding and unvested Restricted Stock Awards provided to directors were issued under the 2013 Plan and 2004 Plan.

On September 12, 2012, the Board of Directors of the Company approved the recommendations and ratified the determinations of the Executive Compensation and Option Committee of the Board of Directors (the “Committee”) with respect to new Restricted Stock Awards totaling 319,667 shares for those executive officers in place on such date.  The new Restricted Stock Awards may vest commencing January 1, 2014 and with the number of Restricted Stock Awards scheduled to be vested and earned on each vesting date on an annual basis over a five to seven year vesting schedule, with each annual vesting of each tranche of Restricted Stock Awards being subject to the attainment of annual performance targets to be set by the Committee for each year.  As the Committee determined that the performance targets for the year ended December 31, 2013 were not satisfied, 63,933 shares due to vest on January 1, 2014 did not vest. Such shares may vest on any subsequent vesting date provided that the performance targets for the subsequent calendar year are met. Amounts recorded as compensation expense pertaining to these shares during the year ended December 31, 2013 were reversed.  In connection with the departure of two executive officers effective March 31, 2014, the Company agreed to grant and accelerate vesting of 109,667 shares of Restricted Stock Awards on April 1, 2014.
 
 
 
43

 
 

 
Information regarding the Restricted Stock Awards grant activity is summarized below:
         
       
Weighted-Average
       
Grant – Date
 
Shares
   
Fair Value
Outstanding at January 1, 2014 (a)
 153,560
 
$
 25.20
Granted (b)
 163,527
   
 20.94
Vested
 (28,485)
   
 25.28
Forfeited
 (119)
   
 26.36
Outstanding at March 31, 2014
 288,483
 
$
 22.77

(a)
Includes 63,933 Performance Shares which were legally granted in 2013 for which the 2013 performance goals were not met, which may be earned if subsequent years’ performance goals are met.
(b)
Includes 42,000 Performance Shares which were legally granted in 2013 for which the 2014 performance goals were set by the Committee on March 31, 2014.  Also includes 87,734 shares which were additionally granted to two executive officers in connection with their departure affective March 31, 2014 and which vested on April 1, 2014. 
 
TSR-BASED AWARDS
Also on September 12, 2012, the Board of Directors of the Company approved the recommendations and ratified the determinations of the Committee with respect to new multi-year total stockholder return (“TSR”) based awards (the “TSR-Based Awards”) totaling 5,160 performance shares (the “Performance Shares”) for those executive officers in place on such date, each Performance Share evidencing the right to receive $1,000 in the Company’s common stock upon vesting.  In accordance with the amended and restated TSR-Based Awards agreements entered into between the Company and those executive officers in June 2013, the Performance Shares may vest commencing December 31, 2014, with the number of Performance Shares scheduled to be granted annually over the next four years.  The vesting of each tranche of Performance Shares is subject to the attainment at each performance period end of a minimum stock price and either an absolute TSR target or a relative TSR target (the “TSR Performance Targets”) in comparison to a selection of Peer Group REITs, in each case as shall be fixed by the Committee for each performance period.  TSR, for purposes of the TSR-Based Performance Agreements, shall be equal to the share appreciation in the relevant period.  The Company granted 1,032 Performance Shares in the year ended December 31, 2013, which were valued in accordance with ASC 718, Compensation - Stock Compensation, at their fair value, utilizing a Monte-Carlo simulation to estimate the probability of the vesting conditions being satisfied.  The Company has reserved shares of common stock under the 2004 Plan for issuance upon vesting of the Performance Shares in accordance with the terms and conditions of the TSR-Based Awards.  In connection with the departure of two executive vice presidents effective March 31, 2014, the Company agreed to vest 357 Performance Shares and to grant and accelerate the vesting of 528 Performance Shares, for which the Company issued 45,062 shares of Common Stock on April 2, 2014.  See Note 13: Commitments and Contingencies – Departure of Executive Vice Presidents.

As of March 31, 2014, the Company had $3.4 million of total unrecognized compensation cost related to unvested stock compensation granted under the Company’s stock compensation plans.  That cost is expected to be recognized over a weighted average period of 1.4 years.

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.

During the three months ended March 31, 2014 and 2013, 5,707 and 5,154 deferred stock units were earned, respectively.  As of March 31, 2014 and December 31, 2013, there were 142,500 and 136,440 deferred stock units outstanding, respectively.
 
 
 
44

 
 

 
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, 2014 and 2013 in accordance with ASC 260, Earning Per Share: (dollars in thousands, except per share amounts)
 

 

             
     
Three Months Ended
     
March 31,
Computation of Basic EPS
   
2014
   
2013
Income (loss) from continuing operations
 
$
 (17,628)
 
$
 7,956
Add: Noncontrolling interest in consolidated joint ventures
   
 322
   
 62
Add (deduct):  Noncontrolling interest in Operating Partnership
   
 2,008
   
 (973)
Income (loss) from continuing operations available to common shareholders
   
 (15,298)
   
 7,045
Income from discontinued operations available to common shareholders
   
 -
   
 4,511
Net income (loss) available to common shareholders
 
$
 (15,298)
 
$
 11,556
             
Weighted average common shares
   
88,289
   
 87,669
             
Basic EPS:
           
Income (loss) from continuing operations available to common shareholders
 
$
(0.17)
 
$
 0.08
Income from discontinued operations available to common
           
   shareholders
   
 -
   
 0.05
Net income (loss) available to common shareholders
 
$
(0.17)
 
$
 0.13

 

             
     
Three Months Ended
     
March 31,
Computation of Diluted EPS
   
2014
   
2013
Income (loss) from continuing operations available to common shareholders
 
$
(15,298)
 
$
 7,045
(Deduct) add: Noncontrolling interest in Operating Partnership
   
(2,008)
   
 973
Income (loss) from continuing operations for diluted earnings per share
   
(17,306)
   
 8,018
Income from discontinued operations for diluted earnings per share
   
 -
   
 5,133
Net income (loss) available to common shareholders
 
$
(17,306)
 
$
 13,151
             
Weighted average common shares
   
 99,876
   
 99,849
             
Diluted EPS:
           
Income (loss) from continuing operations available to common shareholders
 
$
(0.17)
 
$
 0.08
Income from discontinued operations available to common
           
   shareholders
   
 -
   
 0.05
Net income (loss) available to common shareholders
 
$
(0.17)
 
$
 0.13

 
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,
 
2014
2013
Basic EPS shares
88,289
 87,669
Add:   Operating Partnership – common units
11,587
 12,098
           Restricted Stock Awards
 -
 82
Diluted EPS Shares
99,876
 99,849


 
45

 

Contingently issuable shares under the TSR Award plan were excluded from the denominator in 2014 and 2013 because they were anti-dilutive for the period ended March 31, 2014 and because the criteria had not been met for the period ended March 31, 2013.  Not included in the computations of diluted EPS were 15,000 and 15,000 stock options as such securities were anti-dilutive during the three months ended March 31, 2014 and 2013, respectively.  Also not included in the computations of diluted EPS were 414,483 shares of unvested restricted stock as such securities were anti-dilutive during the three months ended March 31, 2014.  Unvested restricted stock outstanding as of March 31, 2014 and 2013 were 414,483 and 352,358 shares, respectively.

Dividends declared per common share for each of the three month periods ended March 31, 2014 and 2013 was $0.30 per share.

 
16.   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 ventures not owned by the Company.

OPERATING PARTNERSHIP

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

Unit Transactions
The following table sets forth the changes in noncontrolling interests in subsidiaries which relate to the common units in the Operating Partnership for the three months ended March 31, 2014:

   
 
Common
 
Units
Balance at January 1, 2014
 11,864,775
Redemption of common units for shares of common stock
(346,706)
   
Balance at March 31, 2014
 11,518,069

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, 2014, the Company has decreased noncontrolling interests in the Operating Partnership and increased additional paid-in capital in Mack-Cali Realty Corporation stockholders’ equity by approximately $21,000 as of March 31, 2014.


 
46

 

NONCONTROLLING INTEREST OWNERSHIP
As of March 31, 2014 and December 31, 2013, the noncontrolling interest common unitholders owned 11.5 percent and 11.9 percent of the Operating Partnership, respectively.

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

PARTICIPATION RIGHTS
The Company’s interests in certain real estate projects (three properties and a future development) each provide for the initial distributions of net cash flow solely to the Company, and thereafter, other parties 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 IRR of 10 percent per annum.

 
17.   SEGMENT REPORTING

The Company operates in three business segments: (i) commercial and other real estate, (ii) multi-family real estate, and (iii) multi-family services.  The Company provides leasing, property management, acquisition, development, construction and tenant-related services for its commercial and other real estate and multi-family real estate portfolio.  The Company’s multi-family services business also provides similar services for third parties.  The Company no longer considers construction services as a reportable segment as it has significantly reduced its operations.  The Company had no revenues from foreign countries recorded for the three months ended March 31, 2014 and 2013.  The Company had no long lived assets in foreign locations as of March 31, 2014 and December 31, 2013.  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 each of its real estate segments (commercial and other, and multi-family) and from its multi-family services segment.


 
47

 

Selected results of operations for the three months ended March 31, 2014 and 2013 and selected asset information as of March 31, 2014 and December 31, 2013 regarding the Company’s operating segments are as follows.  Amounts for prior periods have been restated to conform to the current period segment reporting presentation: (dollars in thousands)

                               
   
Real Estate
                   
   
Commercial
   
Multi-
   
Multi-family
     
Corporate
   
Total
   
& Other
   
family
   
Services
     
 & Other (d)
   
Company
Total revenues:
                             
Three months ended:
                             
March 31, 2014
$
 157,520 
 
$
 5,801 
 
$
 6,948 
(e)
 
$
 (673)
 
$
 169,596 
March 31, 2013
 
 155,595 
   
 1,281 
   
 5,484 
(f)
   
 8,553 
   
 170,913 
                               
Total operating and
                             
   interest expenses (a):
                             
March 31, 2014
$
 86,933 
 
$
 2,701 
 
$
 10,159 
   
$
 41,211 
 
$
 141,004 
March 31, 2013
 
 70,393 
   
 536 
   
 7,475 
     
 39,455 
   
 117,859 
                               
Equity in earnings (loss) of