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

FORM 10-Q

(Mark One) 
[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
SECURITIES EXCHANGE ACT OF 1934 
 
 
 
For the quarterly period ended June 30, 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 July 23, 2014, there were 88,986,073 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 June 30, 2014 
4
   
     and December 31, 2013
 
       
   
Consolidated Statements of Operations for the three and six months 
5
   
     ended June 30, 2014 and 2013
 
       
   
Consolidated Statement of Changes in Equity for the six months 
6
   
     ended June 30, 2014
 
       
   
Consolidated Statements of Cash Flows for the six months 
7
   
     ended June 30, 2014 and 2013
 
       
   
Notes to Consolidated Financial Statements
8
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition 
39
   
     and Results of Operations
 
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
59
       
 
Item 4.
Controls and Procedures
60
       
Part II
Other Information
 
       
 
Item 1.
Legal Proceedings
61
       
 
Item 1A.
Risk Factors
61
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
61
       
 
Item 3.
Defaults Upon Senior Securities
61
       
 
Item 4.
Mine Safety Disclosures
61
       
 
Item 5.
Other Information
61
       
 
Item 6.
Exhibits
62
       
Signatures
   
63
       
Exhibit Index
   
64
       

 
 
 
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 and six month periods ended June 30, 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)


           
           
   
June 30,
   
December 31,
ASSETS
 
2014
   
2013
Rental property
         
Land and leasehold interests
$
 725,542
 
$
750,658
Buildings and improvements
 
 3,807,642
   
3,915,800
Tenant improvements
 
 423,988
   
456,003
Furniture, fixtures and equipment
 
 9,461
   
7,472
   
 4,966,633
   
5,129,933
Less – accumulated depreciation and amortization
 
 (1,389,202)
   
(1,400,988)
Net investment in rental property
 
 3,577,431
   
 3,728,945
Cash and cash equivalents
 
 80,943
   
221,706
Investments in unconsolidated joint ventures
 
 265,866
   
181,129
Unbilled rents receivable, net
 
 126,111
   
136,304
Deferred charges, goodwill and other assets
 
 266,760
   
 218,519
Restricted cash
 
 26,405
   
19,794
Accounts receivable, net of allowance for doubtful accounts
         
of $2,163 and $2,832
 
 11,256
   
8,931
           
Total assets
$
 4,354,772
 
$
4,515,328
           
LIABILITIES AND EQUITY
         
Senior unsecured notes
$
 1,417,141
 
$
1,616,575
Revolving credit facility
 
 56,000
   
 -
Mortgages, loans payable and other obligations
 
 735,127
   
746,191
Dividends and distributions payable
 
 15,173
   
29,938
Accounts payable, accrued expenses and other liabilities
 
 140,546
   
121,286
Rents received in advance and security deposits
 
 48,932
   
53,730
Accrued interest payable
 
 25,973
   
29,153
Total liabilities
 
 2,438,892
   
2,596,873
Commitments and contingencies
         
           
Equity:
         
Mack-Cali Realty Corporation stockholders’ equity:
         
Common stock, $0.01 par value, 190,000,000 shares authorized,
         
88,982,062 and 88,247,591 shares outstanding
 
 890
   
882
Additional paid-in capital
 
 2,554,841
   
2,539,326
Dividends in excess of net earnings
 
 (902,036)
   
(897,849)
Total Mack-Cali Realty Corporation stockholders’ equity
 
 1,653,695
   
1,642,359
           
Noncontrolling interests in subsidiaries:
         
Operating Partnership
 
 207,479
   
220,813
Consolidated joint ventures
 
 54,706
   
55,283
Total noncontrolling interests in subsidiaries
 
 262,185
   
 276,096
           
Total equity
 
 1,915,880
   
1,918,455
           
Total liabilities and equity
$
 4,354,772
 
$
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
   
    Six Months Ended
     
        June 30,
   
        June 30,
REVENUES
   
2014
   
2013
   
2014
   
2013
Base rents
 
$
 133,210 
 
$
135,438
 
$
 267,261 
 
$
269,061
Escalations and recoveries from tenants
   
 16,996 
   
17,456
   
 42,564 
   
36,944
Construction services
   
 -
   
6,746
   
 -
   
14,972
Real estate services
   
 7,009 
   
6,642
   
 13,701 
   
13,085
Parking income
   
 2,236 
   
1,597
   
 4,350 
   
2,989
Other income
   
 849 
   
467
   
 2,020 
   
2,208
Total revenues
   
 160,300 
   
 168,346 
   
 329,896 
   
339,259
                         
EXPENSES
                       
Real estate taxes
   
 23,375 
   
19,834
   
 47,726 
   
41,483
Utilities
   
 14,573 
   
13,739
   
 42,854 
   
30,027
Operating services
   
 27,840 
   
25,327
   
 57,062 
   
50,635
Direct construction costs
   
 -
   
6,511
   
 -
   
14,336
Real estate services expenses
   
 6,571 
   
5,304
   
 13,280 
   
10,257
General and administrative
   
 13,673 
   
13,111
   
 36,554 
   
25,084
Depreciation and amortization
   
 44,711 
   
45,665
   
 89,696 
   
89,013
Total expenses
   
 130,743 
   
 129,491 
   
 287,172 
   
260,835
Operating income
   
 29,557 
   
 38,855 
   
 42,724 
   
78,424
                         
OTHER (EXPENSE) INCOME
                       
Interest expense
   
 (28,159)
   
(31,270)
   
 (58,105)
   
(61,139)
Interest and other investment income
   
 922 
   
1,094
   
 1,308 
   
1,100
Equity in earnings (loss) of unconsolidated joint ventures
   
 443 
   
(80)
   
 (792)
   
(1,830)
Realized gains (losses) and unrealized losses on disposition
                       
   of rental property, net
   
 54,584 
   
 -
   
 54,584 
   
 -
Total other (expense) income
   
 27,790 
   
 (30,256)
   
 (3,005)
   
 (61,869)
Income from continuing operations
   
 57,347 
   
 8,599 
   
 39,719 
   
16,555
Discontinued operations:
                       
Income from discontinued operations
   
 -
   
 4,530 
   
 -
   
9,663
Loss from early extinguishment of debt
   
 -
   
 (703)
   
 -
   
(703)
Realized gains (losses) and unrealized losses on disposition
                       
   of rental property, net
   
 -
   
 13,758 
   
 -
   
13,758
Total discontinued operations
   
 -
   
17,585
   
 -
   
22,718
Net income
   
 57,347 
   
 26,184 
   
 39,719 
   
 39,273 
Noncontrolling interest in consolidated joint ventures
   
 290 
   
62
   
 612 
   
124
Noncontrolling interest in Operating Partnership
   
 (6,514)
   
 (1,048)
   
 (4,506)
   
(2,021)
Noncontrolling interest in discontinued operations
   
 -
   
(2,127)
   
 -
   
(2,749)
Net income available to common shareholders
 
$
 51,123 
 
$
 23,071 
 
$
 35,825 
 
$
34,627
                         
Basic earnings per common share:
                       
Income from continuing operations
 
$
 0.58 
 
$
 0.09 
 
$
 0.40 
 
$
0.16
Discontinued operations
   
 -
   
 0.17 
   
 -
   
0.23
Net income available to common shareholders
 
$
 0.58 
 
$
 0.26 
 
$
 0.40 
 
$
0.39
                         
Diluted earnings per common share:
                       
Income from continuing operations
 
$
 0.58 
 
$
 0.09 
 
$
 0.40 
 
$
 0.16 
Discontinued operations
   
 -
   
 0.17 
   
 -
   
 0.23 
Net income available to common shareholders
 
$
 0.58 
 
$
 0.26 
 
$
 0.40 
 
$
 0.39 
                         
Basic weighted average shares outstanding
   
 88,691 
   
87,708
   
 88,491 
   
87,688
                         
Diluted weighted average shares outstanding
   
 100,023 
   
99,895
   
 99,964 
   
99,892


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
 
 -
   
 -
   
 -
   
 35,825
   
 3,894
   
 39,719
Common stock dividends
 
 -
   
 -
   
 -
   
 (40,012)
   
 -
   
 (40,012)
Common unit distributions
 
 -
   
 -
   
 -
         
 (5,129)
   
 (5,129)
Increase in noncontrolling interest
 
 -
   
 -
   
 -
   
 -
   
 35
   
 35
Redemption of common units
                                 
  for common stock
 
 701
   
 7
   
 12,866
   
 -
   
 (12,873)
   
 -
Shares issued under Dividend
                                 
  Reinvestment and Stock Purchase Plan
 
 4
   
 -
   
 77
   
 -
   
 -
   
 77
Director deferred compensation plan
 
 -
   
 -
   
 213
   
 -
   
 -
   
 213
Stock compensation
 
 29
   
 1
   
 2,521
   
 -
   
 -
   
 2,522
Rebalancing of ownership percentage
                                 
  between parent and subsidiaries
 
 -
   
 -
   
 (162)
   
 -
   
 162
   
 -
Balance at June 30, 2014
 
 88,982
 
$
 890
 
$
 2,554,841
 
$
 (902,036)
 
$
 262,185
 
$
 1,915,880


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

 
6

 

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

             
       
     
                    Six Months Ended
     
                      June 30,
CASH FLOWS FROM OPERATING ACTIVITIES
   
2014
   
2013
Net income
 
$
 39,719 
 
$
 39,273 
Adjustments to reconcile net income to net cash provided by
           
Operating activities:
           
Depreciation and amortization, including related intangible assets
   
 90,460
   
 88,950 
Depreciation and amortization on discontinued operations
   
 -
   
 6,442 
Amortization of deferred stock units
   
 213 
   
 -
Amortization of stock compensation
   
 5,563 
   
 1,687 
Amortization of deferred financing costs and debt discount
   
 1,528 
   
 1,582 
Equity in (earnings) loss of unconsolidated joint venture, net
   
 792 
   
 1,830 
Distributions of cumulative earnings from unconsolidated joint ventures
   
 3,756 
   
 4,712 
Realized (gains) and unrealized losses on disposition of rental property, net
   
 (54,584)
   
 (13,758)
Changes in operating assets and liabilities:
           
Increase in unbilled rents receivable, net
   
 (3,551)
   
 (8,216)
Increase in deferred charges, goodwill and other assets
   
 (8,592)
   
 (16,859)
(Increase) decrease in accounts receivable, net
   
 (2,325)
   
 1,171 
Increase in accounts payable, accrued expenses and other liabilities
   
 19,946 
   
 3,120 
Decrease in rents received in advance and security deposits
   
 (4,798)
   
 (6,758)
(Decrease) increase in accrued interest payable
   
 (3,180)
   
 1,007 
             
Net cash provided by operating activities
 
$
84,947
 
$
 104,183
             
CASH FLOWS FROM INVESTING ACTIVITIES
           
Rental property acquisitions and related intangibles
 
$
 (37,696)
 
$
 (149,200)
Rental property additions and improvements
   
 (41,825)
   
 (39,688)
Development of rental property, other related costs and deposits
   
 (7,896)
   
 (12,204)
Proceeds from the sale of rental property
   
 190,798
   
 161,727 
Investments in notes receivable
   
 (62,276)
   
 -
Repayment of notes receivable
   
 250 
   
 83 
Investment in unconsolidated joint ventures
   
 (38,948)
   
 (31,500)
Distributions in excess of cumulative earnings from unconsolidated joint ventures
   
 837 
   
 20,354 
Increase in restricted cash
   
 (6,611)
   
 (300)
             
Net cash used in investing activities
 
$
(3,367)
 
$
 (50,728)
             
CASH FLOW FROM FINANCING ACTIVITIES
           
Borrowings from revolving credit facility
 
$
 233,500 
 
$
 289,000 
Repayment of revolving credit facility
   
 (177,500)
   
 (289,000)
Proceeds from senior unsecured notes
   
 -
   
 268,928 
Repayment of senior unsecured notes
   
 (200,000)
   
 (100,000)
Proceeds from mortgages and loans payable
   
 28,135 
   
 1,798 
Repayment of mortgages, loans payable and other obligations
   
 (42,469)
   
 (9,420)
Payment of contingent consideration
   
 (3,936)
   
 (2,755)
Payment of financing costs
   
 (198)
   
 (2,643)
Payment of dividends and distributions
   
(59,875)
   
 (89,669)
             
Net cash (used in) provided by financing activities
 
$
(222,343)
 
$
66,239
             
Net (decrease) increase in cash and cash equivalents
 
$
 (140,763)
 
$
 119,694 
Cash and cash equivalents, beginning of period
   
 221,706
   
 58,245 
             
Cash and cash equivalents, end of period
 
$
80,943
 
$
 177,939 


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

 
7

 


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

1.    ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION
Mack-Cali Realty Corporation, a Maryland corporation, together with its subsidiaries (collectively, the “Company”), is a fully-integrated, self-administered, self-managed real estate investment trust (“REIT”) providing leasing, management, acquisition, development, construction and tenant-related services for its properties and third parties.  As of June 30, 2014, the Company owned or had interests in 279 properties, consisting of 266 commercial properties, primarily class A office and office/flex properties, totaling approximately 31.5 million square feet, leased to approximately 2,000 commercial tenants, and 13 multi-family rental properties containing 3,898 residential units, plus developable land (collectively, the “Properties”).  The Properties are comprised of 251 buildings, primarily office and office/flex buildings totaling approximately 30.9 million square feet (which include 30 buildings, primarily office buildings aggregating approximately 5.1 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, 13 multi-family properties totaling 3,898 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 June 30, 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 $227 million and $219.9 million, respectively, mortgages of $85.8 million and $81.9 million, respectively, and other liabilities of $15.1 million and $18.3 million, respectively.

The preparation of financial statements in conformity with 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 June 30, 2014 and 2013, respectively, and $1.8 and $1.7 million for the six months ended June 30, 2014 and 2013, respectively.  Included in total rental property is construction, tenant improvement and development in-progress of $44.2 million and $40.8 million as of June 30, 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.

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant.  Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases.  In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions.  In estimating costs to execute similar leases, management considers leasing commissions, legal and other related expenses.  Characteristics considered by management in valuing tenant relationships include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals.  The value of in-place leases are amortized to expense over the remaining initial terms of the respective leases.  The value of tenant relationship intangibles are amortized to expense over the anticipated life of the relationships.
 
 
 
9

 
 

 
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s rental properties held for use may be impaired.  In addition to identifying any specific circumstances which may affect a property or properties, management considers other criteria for determining which properties may require assessment for potential impairment.  The criteria considered by management include reviewing low leased percentages, significant near-term lease expirations, recently acquired properties, current and historical operating and/or cash flow losses, near-term mortgage debt maturities or other factors that might impact the Company’s intent and ability to hold the property.  A property’s value is impaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property.  The Company’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions.  These assumptions are generally based on management’s experience in its local real estate markets and the effects of current market conditions.  The assumptions are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and costs to operate each property.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved, and actual losses or 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. 

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.
 
 
 
 
10

 
 
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated joint ventures may be impaired.  An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the value of the investment.  The Company’s estimates of value for each investment (particularly in 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 $759,000 and $809,000 for the three months ended June 30, 2014 and 2013, respectively, $1,528,000 and $1,582,000 for the six months ended June 30, 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 $845,000 and $1,033,000 for the three months ended June 30, 2014 and 2013, respectively, and $1,876,000 and $2,206,000 for the six months ended June 30, 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.
 
 
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.
 
 

 
 
11

 
 
 
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.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on the Company’s financial position or results of operations. 
 
 
Allowance for
Doubtful Accounts
Management performs a detailed review of amounts due from tenants to determine if an allowance for doubtful accounts is required based on factors affecting the collectability of the accounts receivable balances. The factors considered by management in determining which individual tenant receivable balances, or aggregate receivable balances, require a collectability allowance include the age of the receivable, the tenant’s payment history, the nature of the charges, any communications regarding the charges and other related information. 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 June 30, 2014, the Company had a deferred tax asset with a balance of approximately $14.1 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.
 
 
 
12

 
 

 
Pursuant to the amended provisions related to uncertain tax provisions of ASC 740, Income Taxes, the Company recognized no material adjustments regarding its tax accounting treatment.  The Company expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which is included in general and administrative expense.

In the normal course of business, the Company or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable.  As of June 30, 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).

Dividends and
 
Distributions
Payable
The dividends and distributions payable at June 30, 2014 represents dividends payable to common shareholders (88,730,563 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (11,161,018 common units) for all such holders of record as of July 3, 2014 with respect to the second quarter 2014.  The second quarter 2014 common stock dividends and common unit distributions of $0.15 per common share and unit were approved by the Board of Directors on May 30, 2014.  The common stock dividends and common unit distributions payable were paid on July 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.


 
13

 

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 $877,000 and $461,000 for the three months ended June 30, 2014 and 2013, respectively, and $4,264,000 (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 $1,306,000 for the six months ended June 30, 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 and six months ended June 30, 2014 and 2013, and no accumulated other comprehensive income as of June 30, 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.

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 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.
 
 
 
 
 
14

 
 
 
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, which was funded primarily through borrowing under the Company’s unsecured revolving credit facility.

The purchase price was allocated to the net assets acquired, as follows (in thousands):

     
   
Andover
   
Place
Land
$
 8,535
Buildings and improvements
 
 27,609
Furniture, fixtures and equipment
 
 459
In-place lease values (1)
 
 1,118
   
37,721
     
Less: Below market lease values (1)
 
 (25)
     
Net cash paid at acquisition
$
37,696
     
(1)      In-place lease values and below market lease values will be amortized over one year or less.

Sales

The Company sold the following office properties during the six months ended June 30, 2014 (dollars in thousands):

                           
       
Rentable
   
Net
   
Net
     
Sale
   
# of
Square
   
Sales
   
Book
   
Realized
Date
Property/Address
Location
Bldgs.
 Feet
   
Proceeds
   
Value
   
Gain
04/23/14
22 Sylvan Way
Parsippany, New Jersey
1
 249,409
 
$
 94,897
 
$
 60,244
 
$
 34,653
06/23/14
30 Knightsbridge Road (a)
Piscataway, New Jersey
4
 680,350
   
 54,641
   
 52,361
   
 2,280
06/23/14
470 Chestnut Ridge Road (a) (b)
Woodcliff Lake, New Jersey
1
 52,500
   
 7,195
   
 7,109
   
 86
06/23/14
530 Chestnut Ridge Road (a) (b)
Woodcliff Lake, New Jersey
1
 57,204
   
 6,299
   
 6,235
   
 64
06/27/14
400 Rella Boulevard
Suffern, New York
1
 180,000
   
 27,539
   
 10,938
   
 16,601
06/30/14
412 Mount Kemble Avenue (a)
Morris Township, New Jersey
1
 475,100
   
 44,751
   
 43,851
   
 900
                         
Totals:
 
9
1,694,563
 
$
235,322
 
$
180,738
 
$
54,584
                           
(a)
The Company completed the sale of these properties for approximately $117 million: $114.6 million in cash and subordinated equity interests in each of the properties sold with capital accounts aggregating $2.4 million. Net sale proceeds from the sale aggregated $112.9 million which was comprised of the $117 million gross sales price less the subordinated equity interests of $2.4 million and $1.7 million in closing costs.  The purchasers of these properties are joint ventures formed between the Company and affiliates of the Keystone Property Group (“Keystone Entities”).  The senior 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. In connection with these partial sale transactions, because the buyer receives a preferential return, the Company only recognized profit to the extent that they received net proceeds in excess of their entire carrying value of the properties, effectively reflecting their retained subordinate equity interest at zero.  The Company has contracts with Keystone Entities to sell an additional seven of its office properties in New Jersey, New York and Connecticut, aggregating approximately 928,258 square feet, for approximately $104 million, comprised of: $78.3 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 $18.8 million; and Company pari passu equity interests in three of the properties being sold aggregating $6.9 million.
(b)
The Company recorded an impairment charge of $3.9 million on these properties at December 31, 2013 as it estimated that the carrying value of the properties may not be recoverable over their anticipated holding periods.

On January 1, 2014, the Company early adopted the new discontinued operations standard and as the properties sold in the six months ended June 30, 2014 will not represent a strategic shift (as the Company is not entirely exiting markets or property types), they have not been reflected as part of discontinued operations.


 
15

 


The following table summarizes income from the properties sold during the six months ended June 30, 2014 for the three and six months ended June 30, 2014 and 2013: (dollars in thousands)  See Note 7: Discontinued Operations for properties sold in 2013.

                         
     
               Three Months Ended
   
            Six Months Ended
     
            June 30,
   
            June 30,
     
2014
   
2013
   
2014
   
2013
Total revenues
 
$
 6,547
 
$
9,235
 
$
 16,302
 
$
18,478
Operating and other expenses
   
 (3,208)
   
(3,918)
   
 (8,764)
   
(7,099)
Depreciation and amortization
   
 (1,433)
   
 (2,190)
   
 (3,379)
   
 (4,376)
Interest income
   
 3
   
 -
   
 3
   
 -
                         
Income from properties sold
   
 1,909
   
 3,127
   
 4,162
   
 7,003
                         

For the three and six months ended June 30, 2014, included in general and administrative expense was an aggregate of approximately $1.9 million in transactions costs related to the Company’s property and joint venture acquisitions.

Excluded from the cash flow statement for the six months ended June 30, 2014 was $4.4 million of sale proceeds and $40 million of acquisition and other investment fundings, which were handled through a qualified intermediary. 




 
16

 

4.    INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

As of June 30, 2014, the Company had an aggregate investment of approximately $265.9 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 June 30, 2014, the unconsolidated joint ventures owned: 29 office and two retail properties aggregating approximately 4.7 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 3,317 apartments; and interests and/or rights to developable land parcels able to accommodate up to 4,130 apartments and 1.5 million square feet of office space.  The Company’s unconsolidated interests range from 7.5 percent to 85 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 has agreed to guarantee repayment of a portion of the debt of its unconsolidated joint ventures.  As of June 30, 2014, such debt had a total facility amount of $311.1 million of which the Company agreed to guarantee up to $89.9 million.  As of June 30, 2014, the outstanding balance of such debt totaled $200.6 million of which $79.8 million was guaranteed by the Company.  The Company also posted a $4.6 million letter of credit in support of the South Pier at Harborside joint venture, half of which is indemnified by Hyatt Corporation, the Company’s joint venture partner.  The Company performed management, leasing, development and other services for the properties owned by the unconsolidated joint ventures and recognized $1.4 million and $1.3 for such services in the three months ended June 30, 2014 and 2013, respectively, and $2.8 million and $2.3 million for the six months ended June 30, 2014 and 2013, respectively.  The Company had $824,000 and $523,000 in accounts receivable due from its unconsolidated joint ventures as of June 30, 2014 and December 31, 2013.

Included in the Company’s investments in unconsolidated joint ventures as of June 30, 2014 are eight 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 $94.5 million as of June 30, 2014.  The Company’s maximum exposure to loss as a result of its involvement with these VIEs is estimated to be approximately $110.8 million, which includes the Company’s current investment and estimated future funding commitments of approximately $16.3 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 Company's unconsolidated joint ventures as of June 30, 2014: (dollars in thousands)

                             
                             
 
Number of
Company's
   
Company's
   
Property Debt
 
 
Apartment Units
Effective
   
Carrying
     
Maturity
Interest
 
Entity / Property Name
or Square Feet (sf)
Ownership % (a)
   
Amount
   
Balance
Date
Rate
 
Multi-family
                           
Marbella RoseGarden, L.L.C./ Marbella  (b)
 412
units
 24.27
%
 
$
 15,782
 
$
 95,000
05/01/18
 4.99
%
 
RoseGarden Monaco Holdings, L.L.C./ Monaco (North and South)  (b)
 523
units
 15.00
%
   
 2,686
   
 165,000
02/01/21
 4.19
%
 
Rosewood Lafayette Holdings, L.L.C./ Highlands at Morristown Station  (b)
 217
units
 25.00
%
   
 496
   
 39,021
07/01/15
 4.00
%
 
PruRose Port Imperial South 15, LLC /RiversEdge at Port Imperial (b)
 236
units
 50.00
%
   
 -
   
 57,500
09/01/20
 4.32
%
 
Rosewood Morristown, L.L.C. / Metropolitan at 40 Park  (c) (d)
 130
units
 12.50
%
   
 6,257
   
 46,217
(e)
(e)
   
Overlook Ridge JV, L.L.C./ Quarrystone  (b) (f)
 251
units
 25.00
%
   
 -
   
 75,366
(g)
(g)
   
Overlook Ridge JV 2C/3B, L.L.C./Overlook Ridge 2C & 3B  (b)
 371
units
 25.00
%
   
 -
   
 41,006
12/28/15
L+2.50
%
(h)
PruRose Riverwalk G, L.L.C./ RiverTrace at Port Imperial   (b)
 316
units
 25.00
%
   
 1,950
   
 76,334
07/15/21
 6.00
%
(i)
Elmajo Urban Renewal Associates, LLC / Lincoln Harbor (Bldg A&C)  (b)
 355
units
 7.50
%
   
 -
   
 72,619
06/27/16
L+2.10
%
(j)
Crystal House Apartments Investors LLC / Crystal House  (k)
 828
units
 25.00
%
   
 26,458
   
 165,000
03/19/20
 3.17
%
 
Portside Master Company, L.L.C./ Portside at Pier One - Bldg 7  (b)
 176
units
 38.25
%
   
 2,655
   
 20,007
12/05/15
L+2.50
%
(l)
PruRose Port Imperial South 13, LLC / Port Imperial Bldg 13  (b)
 280
units
 20.00
%
   
 1,685
   
 26,097
06/27/16
L+2.15
%
(m)
Roseland/Port Imperial Partners, L.P./ Riverwalk C  (b) (n)
 363
units
 20.00
%
   
 1,926
   
 -
-
-
   
RoseGarden Marbella South, L.L.C./ Marbella II  (b)
 311
units
 24.27
%
   
 8,580
   
 12,503
03/30/17
L+2.25
%
(o)
Estuary Urban Renewal Unit B, LLC / Lincoln Harbor (Bldg B) (b)
 227
units
 7.50
%
   
 -
   
 22,157
01/25/17
L+2.10
%
(p)
Riverpark at Harrison I, L.L.C./ Riverpark at Harrison
 141
units
 36.00
%
   
 4,247
   
 13,370
06/27/16
L+2.35
%
(q)
Capitol Place Mezz LLC / Station Townhouses
 377
units
 50.00
%
   
 47,978
   
 45,039
07/01/33
 4.82
%
(r)
Harborside Unit A Urban Renewal, L.L.C. / URL Harborside
 763
units
 85.00
%
   
 22,150
   
 -
-
-
   
Overlook Ridge, L.L.C./Overlook Ridge Land
 896
potential units
 50.00
%
   
 -
   
 16,940
03/02/15
L+3.50
%
 
RoseGarden Monaco, L.L.C./ San Remo Land
 300
potential units
 41.67
%
   
 1,255
   
 -
-
-
   
Grand Jersey Waterfront URA, L.L.C./ Liberty Landing
 1,000
potential units
 50.00
%
   
 337
   
 -
-
-
   
                             
Office
                           
Red Bank Corporate Plaza, L.L.C./ Red Bank
 92,878
sf
50.00
%
   
 3,771
   
 16,240
05/17/16
L+3.00
%
(s)
12 Vreeland Associates, L.L.C./ 12 Vreeland Road
 139,750
sf
50.00
%
   
 5,658
   
 14,717
07/01/23
 2.87
%
 
BNES Associates III / Offices at Crystal Lake
 106,345
sf
31.25
%
   
 1,899
   
 7,057
11/01/23
 4.76
%
 
Hillsborough 206 Holdings, L.L.C./ Hillsborough 206
 160,000
sf
50.00
%
   
 1,962
   
 -
-
-
   
KPG-P 100 IMW JV, LLC / 100 Independence Mall West
 339,615
sf
33.33
%
   
 751
   
 61,500
09/09/16
L+7.00
%
(t)
Keystone-Penn
 1,842,820
sf
(u)
     
 -
   
 200,601
(v)
(v)
   
Keystone-TriState
 1,266,384
sf
(u)
     
 -
   
 118,890
(w)
(w)
   
KPG-MCG Curtis JV, L.L.C./ Curtis Center
 885,000
sf
50.00
%
   
 2,187
   
 -
-
-
   
Curtis Center TIC I and II LLC / Curtis Center
n/a
 
(x)
     
 61,296
   
 -
 -
 -
   
                             
Other
                           
Plaza VIII & IX Associates, L.L.C./ Vacant land (parking operations)
 1,225,000
sf
 50.00
%
   
 3,848
   
 -
-
-
   
Roseland/North Retail, L.L.C./ Riverwalk at Port Imperial  (b)
 30,745
sf
 20.00
%
   
 1,883
   
 -
-
-
   
South Pier at Harborside / Hyatt Regency Jersey City on the Hudson
 350
rooms
 50.00
%
   
 -
   
 66,799
(y)
(y)
   
Stamford SM LLC / Senior Mezzanine Loan  (z)
n/a
n/a
 80.00
%
   
 37,418
   
 -
-
-
   
Other (aa)
           
 751
   
 -
-
-
   
Totals:
         
$
 265,866
 
$
 1,474,980
       

(a)  
Company's effective ownership % represents the Company's entitlement to residual distributions after payments of priority returns, where applicable.
 
(b)  
The Company's ownership interests in this venture are subordinate to its partner's preferred capital balance and the Company is not expected to meaningfully participate in the venture's cash flows in the near term.
 
(c)  
Through the joint venture, the Company also owns a 12.5 percent interest in a 50,973 square feet of retail building ("Shops at 40 Park") and a 25 percent interest in a to-be-built 59-unit, five story multi-family rental development property ("Lofts at 40 Park").
 
(d)  
The Company's ownership interests in this venture are subordinate to its partner's preferred capital balance and the payment of the outstanding balance remaining on a note ($975 as of June 30, 2014), and is not expected to meaningfully participate in the venture's cash flows in the near term.
 
(e)  
Property debt balance consists of: (i) a loan, collateralized by the Metropolitan at 40 Park, has a balance of $38,600, bears interest at 3.25 percent, matures in September 2020 and is interest only through September 2015; (ii) loan, collateralized by the Shops at 40 Park, has a balance of $6,500, bears interest at 3.63 percent, matures in August 2018 and is interest-only through July 2015; and (iii) the loan, collateralized by the Lofts at 40 Park, has a balance of $1,117, bears interest at LIBOR plus 250 basis points and matures in September 2015.  The Shops at 40 Park mortgage loan also provides for additional borrowing proceeds of $1 million based on certain preferred thresholds being achieved.
 
(f)  
Through the joint venture, the Company also owns a 50 percent interest in a land parcel ("Overlook Phase III Land") that can accommodate the development of approximately 240 apartment units.
 
(g)  
Property debt balance consists of: (i) a loan, collateralized by the Overlook Phase III Land, has a balance of $5,709, bears interest at a rate of LIBOR plus 250 basis points, matures in April 2015 and, subject to certain conditions, provides for a one-year extension option with a fee of 25 basis points, and (ii) the senior loan, collateralized by the Quarrystone property, has a balance of $52,657, bears interest at LIBOR plus 200 basis, matures in March 2016 and (iii) the junior loan, with a balance of $17,000, bears interest at LIBOR plus 90 basis points, matures in March 2016 and is collateralized by a $17,000 letter of credit provided by an affiliate of the partner.
 
(h)  
The construction loan has a maximum borrowing amount of $55,500 and provides, subject to certain conditions, two one-year extension options with a fee of 25 basis points each.  The joint venture has a swap agreement that fixes the all-in rate to 3.0875 percent per annum on an initial notional amount of $1,840, increasing to $50,800, for the period from September 3, 2013 to November 2, 2015.
 
(i)  
The construction loan has a maximum borrowing amount of $83,113.
 
 
 
18

 
 
 
(j)  
The construction loan has a maximum borrowing amount of $91,000 and provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.
 
(k)  
The Company also owns a 50 percent interest in a vacant land to accommodate the development of approximately 295 additional units of which 252 are currently approved.
 
(l)  
The construction loan has a maximum borrowing amount of $42,500 and 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.
 
(m)  
The construction loan has a maximum borrowing amount of $73,350 and 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 joint venture has a swap agreement that fixes the all-in rate to 2.79 percent per annum on an initial notional amount of $1,620, increasing to $69,500 for the period from July 1, 2013 to January 1, 2016.
 
(n)  
The Company also owns a 20 percent residual interest in undeveloped land parcels: parcels 6, I, and J ("Port Imperial North Land") that can accommodate the development of 836 apartment units.
 
(o)  
The construction loan has a maximum borrowing amount of $77,400 and provides, subject to certain conditions, two one-year extension options with a fee of 25 basis points for each year.
 
(p)  
The construction loan has a maximum borrowing amount of $57,000 and provides, subject to certain conditions, a one-year extension option with a fee of 25 basis points.
 
(q)  
The construction loan has a maximum borrowing amount of $23,400 and provides, subject to certain conditions, two one-year extension options with a fee of 20 basis points for each year.
 
(r)  
The construction loan has a maximum borrowing amount of $100,700 with amortization starting in August 2017.
 
(s)  
The joint venture has a swap agreement that fixes the all-in rate to 3.99375 percent per annum on an initial notional amount of $13,650 and then adjusting in accordance with an amortization schedule, which is effective from October 17, 2011 through loan maturity.
 
(t)  
The mortgage loan has two one-year extension options, subject to certain conditions, and includes a $25 million construction reserve.
 
(u)  
The Company’s equity interests in the joint ventures will be subordinated to affiliates of the Keystone Property Group receiving a 15 percent internal rate of return (“IRR”) after which the Company will receive a ten percent IRR on its subordinate equity and then all profit will be split equally.
 
(v)  
Principal balance of $127,600 bears interest at 5.114 percent and matures in August 27, 2023; principal balance of $62,577 bears interest at rates ranging from LIBOR+5.0 percent to LIBOR+5.75 percent and matures in August 27, 2016; principal balance of $10,425 bears interest at LIBOR+6.0 percent matures in August 27, 2015.
 
(w)  
Principal balance of $77,650 bears interest at rates ranging from 4.888 percent to 4.93 percent and matures on July 6, 2024; principal balance of $41,240 bears interest at LIBOR+4.95 percent and matures on July 1, 2017.
 
(x)  
Includes undivided interests in the same manner as investments in noncontrolled partnership, pursuant to ASC 970-323-25-12.  See discussion in Recent Transactions following in this footnote.
 
(y)  
Balance includes: (i) mortgage loan, collateralized by the hotel property, has a balance of $62,175, bears interest at 6.15 percent and matures in November 2016, and (ii) loan with a balance of $4.6 million, bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 1, 2020.  The Company posted a $4.6 million letter of credit in support of this loan, half of which is indemnified by the partner.
 
(z)  
The joint venture owns a senior mezzanine loan  ("Mezz Loan") with a face value of $50,000 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.  The interest-only Mezz Loan has a carrying value of $46,505 and is subject to an agreement that provides, subject to certain conditions, for the payment of principal proceeds above $47,000 to another party. The Mezz loan bears interest at LIBOR plus 325 basis points and matures in August 2014.  The joint venture is evaluating its option regarding its investment as the loan approaches maturity.
 
(aa)  
The Company owns other interests in various unconsolidated joint ventures, including interests in assets previously owned and interest 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.
 

 
19

 

The following is a summary of the financial position of the unconsolidated joint ventures in which the Company had investment interests as of June 30, 2014 and December 31, 2013: (dollars in thousands)
             
     
June 30,
   
December 31,
     
2014
   
2013
Assets:
           
   Rental property, net
 
$
 1,202,271
 
$
 755,049 
   Loan receivable
   
 46,505 
   
 45,050 
   Other assets
   
 486,239
   
 582,990 
   Total assets
 
$
 1,735,015
 
$
 1,383,089 
Liabilities and partners'/
           
members' capital:
           
   Mortgages and loans payable
 
$
 844,476
 
$
 637,709 
   Other liabilities
   
 211,959
   
 87,231 
   Partners'/members' capital
   
 678,580
   
 658,149 
   Total liabilities and
           
   partners'/members' capital
 
$
 1,735,015
 
$
 1,383,089 

The following is a summary of the Company’s investments in unconsolidated joint ventures as of June 30, 2014 and December 31, 2013: (dollars in thousands)
   
   
June 30,
   
December 31,
Entity / Property Name
 
2014
   
2013
Marbella RoseGarden, L.L.C./ Marbella
$
 15,782 
 
$
 15,797 
RoseGarden Monaco Holdings, L.L.C./ Monaco (North and South)
 
 2,686 
   
 3,201 
Rosewood Lafayette Holdings, L.L.C./ Highlands at Morristown Station
 
 496 
   
 857 
PruRose Port Imperial South 15, LLC /RiversEdge at Port Imperial
 
 -
   
 -
Rosewood Morristown, L.L.C. / Metropolitan at 40 Park
 
 6,257 
   
 6,455 
Overlook Ridge JV, L.L.C./ Quarrystone
 
 -
   
 -
Overlook Ridge JV 2C/3B, L.L.C./Overlook Ridge 2C & 3B
 
 -
   
 -
PruRose Riverwalk G, L.L.C./ RiverTrace at Port Imperial
 
 1,950 
   
 3,117 
Elmajo Urban Renewal Associates, LLC / Lincoln Harbor (Bldg A&C)
 
 -
   
 203 
Crystal House Apartments Investors LLC / Crystal House
 
 26,458 
   
 26,838 
Portside Master Company, L.L.C./ Portside at Pier One - Bldg 7
 
 2,655 
   
 3,207 
PruRose Port Imperial South 13, LLC / Port Imperial Bldg 13
 
 1,685 
   
 2,206 
Roseland/Port Imperial Partners, L.P./ Riverwalk C
 
 1,926 
   
 2,068 
RoseGarden Marbella South, L.L.C./ Marbella II
 
 8,580 
   
 7,567 
Estuary Urban Renewal Unit B, LLC / Lincoln Harbor (Bldg B)
 
 -
   
 24 
Riverpark at Harrison I, L.L.C./ Riverpark at Harrison
 
 4,247 
   
 3,655 
Capitol Place Mezz LLC / Station Townhouses
 
 47,978 
   
 46,628 
Harborside Unit A Urban Renewal, L.L.C. / URL Harborside (a)
 
 22,150 
   
 -
Overlook Ridge, L.L.C./Overlook Ridge Land
 
 -
   
 -
RoseGarden Monaco, L.L.C./ San Remo Land
 
 1,255 
   
 1,224 
Grand Jersey Waterfront URA, L.L.C./ Liberty Landing
 
 337 
   
 337 
Red Bank Corporate Plaza, L.L.C./ Red Bank
 
 3,771 
   
 4,046 
12 Vreeland Associates, L.L.C./ 12 Vreeland Road
 
 5,658 
   
 5,514 
BNES Associates III / Offices at Crystal Lake
 
 1,899 
   
 1,753 
Hillsborough 206 Holdings, L.L.C./ Hillsborough 206
 
 1,962 
   
 1,962 
KPG-P 100 IMW JV, LLC / 100 Independence Mall West
 
 751 
   
 1,887 
Keystone-Penn
 
 -
   
 -
Keystone-TriState
 
 -
   
 -
KPG-MCG Curtis JV, L.L.C./ Curtis Center (a)
 
 2,187 
   
 -
Curtis Center TIC I and II LLC / Curtis Center (b)
 
 61,296 
   
 -
Plaza VIII & IX Associates, L.L.C./ Vacant land (parking operations)
 
 3,848 
   
 3,702 
Roseland/North Retail, L.L.C./ Riverwalk at Port Imperial
 
 1,883 
   
 1,930 
South Pier at Harborside / Hyatt Regency Jersey City on the Hudson (c)
 
 -
   
 -
Stamford SM LLC / Senior Mezzanine Loan
 
 37,418 
   
 36,258 
Other
 
 751 
   
 693 
Company's investment in unconsolidated joint ventures
$
 265,866 
 
$
 181,129 

(a)
See discussion in Recent Transactions following in this footnote.
(b)
Includes undivided interests in the same manner as investments in noncontrolled partnership, pursuant to ASC 970-323-25-12.  See discussion in Recent Transactions following in this footnote.
(c)
The negative investment balance for this joint venture of $710 and $1,706 as of June 30, 2014 and December 31, 2013, respectively, were included in accounts payable, accrued expenses and other liabilities.
 
 

 
20

 

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 and six months ended June 30, 2014 and 2013: (dollars in thousands)
                       
   
Three Months Ended
   
Six Months Ended
   
June 30,
   
June 30,
   
2014
   
2013
   
2014
   
2013
Total revenues
$
 113,118
 
$
 91,274 
 
$
 144,111
 
$
 103,693 
Operating and other expenses
 
 (96,605)
   
 (81,321)
   
 (114,958)
   
 (89,268)
Depreciation and amortization
 
 (8,213)
   
 (10,083)
   
 (16,581)
   
 (13,174)
Interest expense
 
 (8,786)
   
 (3,310)
   
 (15,127)
   
 (5,322)
Net income (loss)
$
 (486)
 
$
 (3,440)
 
$
 (2,555)
 
$
 (4,071)

The following is a summary of the Company’s equity in earnings (loss) of unconsolidated joint ventures for the three and six months ended June 30, 2014 and 2013: (dollars in thousands)
           
   
Three Months Ended
   
Six Months Ended
   
June 30,
   
June 30,
Entity / Property Name
 
2014
   
2013
   
2014
   
2013
Marbella RoseGarden, L.L.C./ Marbella
$
 (9)
 
$
 (165)
 
$
 (15)
 
$
 (276)
RoseGarden Monaco Holdings, L.L.C./ Monaco (North and South)
 
 (238)
   
 (423)
   
 (515)
   
 (822)
Rosewood Lafayette Holdings, L.L.C./ Highlands at Morristown Station
 
 (203)
   
 (284)
   
 (419)
   
 (574)
PruRose Port Imperial South 15, LLC /RiversEdge at Port Imperial
 
 -
   
 -
   
 -
   
 (606)
Rosewood Morristown, L.L.C. / Metropolitan at 40 Park
 
 (76)
   
 (117)
   
 (174)
   
 (241)
Overlook Ridge JV, L.L.C./ Quarrystone
 
 -
   
 -
   
 -
   
 -
Overlook Ridge JV 2C/3B, L.L.C./Overlook Ridge 2C & 3B
 
 -
   
 224 
   
 62 
   
 151 
PruRose Riverwalk G, L.L.C./ RiverTrace at Port Imperial
 
 (613)
   
 (192)
   
 (1,151)
   
 (378)
Elmajo Urban Renewal Associates, LLC / Lincoln Harbor (Bldg A&C)
 
 (91)
   
 (82)
   
 (203)
   
 (168)
Crystal House Apartments Investors LLC / Crystal House
 
 53 
   
 (1,535)
   
 (274)
   
 (1,522)
Portside Master Company, L.L.C./ Portside at Pier One - Bldg 7
 
 (220)
   
 (68)
   
 (434)
   
 (113)
PruRose Port Imperial South 13, LLC / Port Imperial Bldg 13
 
 (213)
   
 (145)
   
 (418)
   
 (278)
Roseland/Port Imperial Partners, L.P./ Riverwalk C
 
 (180)
   
 -
   
 (345)
   
 -
RoseGarden Marbella South, L.L.C./ Marbella II
 
 -
   
 (19)
   
 -
   
 (37)
Estuary Urban Renewal Unit B, LLC / Lincoln Harbor (Bldg B)
 
 -
   
 (34)
   
 (15)
   
 (63)
Riverpark at Harrison I, L.L.C./ Riverpark at Harrison
 
 -
   
 -
   
 -
   
 -
Capitol Place Mezz LLC / Station Townhouses
 
 -
   
 -
   
 -
   
 -
Harborside Unit A Urban Renewal, L.L.C. / URL Harborside (a)
 
 (212)
   
 -
   
 (212)
   
 -
Overlook Ridge, L.L.C./Overlook Ridge Land
 
 (213)
   
 -
   
 (259)
   
 -
RoseGarden Monaco, L.L.C./ San Remo Land
 
 -
   
 -
   
 -
   
 -
Grand Jersey Waterfront URA, L.L.C./ Liberty Landing
 
 (16)
   
 -
   
 (54)
   
 -
Red Bank Corporate Plaza, L.L.C./ Red Bank
 
 106 
   
 106 
   
 205 
   
 207 
12 Vreeland Associates, L.L.C./ 12 Vreeland Road
 
 54 
   
 116 
   
 144 
   
 24 
BNES Associates III / Offices at Crystal Lake
 
 110 
   
 (2)
   
 147 
   
 (71)
Hillsborough 206 Holdings, L.L.C./ Hillsborough 206
 
 -
   
 -
   
 (5)
   
 -
KPG-P 100 IMW JV, LLC / 100 Independence Mall West
 
 (483)
   
 -
   
 (1,136)
   
 -
Keystone-Penn
 
 -
   
 -
   
 -
   
 -
Keystone-TriState
 
 -
   
 -
   
 -
   
 -
KPG-MCG Curtis JV, L.L.C./ TIC I and II LLC / Curtis Center (b)
 
 251 
   
 -
   
 251 
   
 -
Plaza VIII & IX Associates, L.L.C./ Vacant land (parking operations)
 
 44 
   
 19 
   
 146 
   
 28 
Roseland/North Retail, L.L.C./ Riverwalk at Port Imperial
 
 (23)
   
 (83)
   
 (47)
   
 (132)
South Pier at Harborside / Hyatt Regency Jersey City on the Hudson
 
 892 
   
 1,056 
   
 1,290 
   
 545 
Stamford SM LLC / Senior Mezzanine Loan
 
 928 
   
 897 
   
 1,844 
   
 1,782 
Other
 
 795 
   
 651 
   
 795 
   
 714 
Company's equity in earnings (loss) of unconsolidated joint ventures
$
 443 
 
$
 (80)
 
$
 (792)
 
$
 (1,830)

(a)
See discussion in Recent Transactions following in this footnote.
(b)
Includes undivided interests in the same manner as investments in noncontrolled partnership, pursuant to ASC 970-323-25-12.  See discussion in Recent Transactions following in this footnote.


 
21

 

Recent Transactions
Harborside Unit A Urban Renewal, L.L.C.
Pursuant to a developer agreement entered into in December 2011, on May 21, 2014, the Company entered into a joint venture agreement with Ironstate Harborside-A LLC (“ISA”) to form Harborside Unit A Urban Renewal, L.L.C. (“URL-Harborside”), a newly-formed joint venture that will develop, own and operate a high-rise tower of approximately 763 multi-family apartment units above a parking pedestal to be located on land contributed by the Company at its Harborside complex in Jersey City, New Jersey (the “URL Project”).  The construction of the URL Project is estimated to cost a total of approximately $320 million and is projected to be ready for occupancy by the fourth quarter of 2016.   The URL Project has been awarded up to $33 million in future tax credits (“URL Tax Credits”), subject to certain conditions, from the New Jersey Economic Development Authority.  The venture has an agreement to sell these credits, subject to certain conditions.  The Company currently expects that it will fund approximately $88 million of the development costs of the project net of future financing.

The Company owns an 85 percent interest in URL-Harborside and the remaining interest owned by ISA, with shared control over major decisions such as, approval of budgets, property financings and leasing guidelines.  Upon entering into the joint venture, the Company’s initial contribution was $30.6 million, which included a capital credit of $30 per approved developable square foot for its contributed land aggregating approximately $20.6 million with the balance consisting of previously incurred development costs, and ISA’s initial contribution was approximately $5.4 million.  Included in the Company’s investment in the joint venture is the land contribution with a carrying amount of $5.5 million.

In general, the operating agreement of URL-Harborside provides that net operating cash flows are distributed first, to the members in respect of preferred return, as defined, until each member shall have received payment of the accrued and unpaid preferred return; and, thereafter, to each member as follows: 75 percent to the Company and 25 percent to ISA.

Net cash flows from a capital event are distributed first, to the members in respect of preferred return, as defined, until each member shall have received payment of the accrued and unpaid preferred return; second, to the members pro rata based upon the ratio that their respective capital accounts bear to each other until each member shall have received their respective net capital, as defined; third, to the members at the rate of 75 percent to the Company and 25 percent to ISA until the Company shall have received distributions equal to an 18 percent internal rate of return on the Company’s capital contributions; and, thereafter, to the members, at the rate of 65 percent to the Company and 35 percent to ISA.

KPG-MCG Curtis JV, LLC / Curtis Center TIC I and II, L.L.C.
On June 6, 2014, the Company and an affiliate of Keystone Property Group (“KPG”) acquired 50 percent tenants-in-common interests each for $62.5 million in Curtis Center, an 885,000 square foot commercial office property  located at 601 Walnut Street in Philadelphia, Pennsylvania (the “Curtis Center Property”), which amounted to a total purchase of  approximately $125.0 million for the property.  In connection with the transaction, the Company provided short-term loans to KPG affiliates, as follows:  a 90-day, $52.3 million loan which bears interest at an annual rate of 3.5 percent payable at maturity, which is collateralized by the KPG affiliates’ interest in the Curtis Center Property; and a 90-day, $10 million loan which also bears interest at an annual rate of 3.5 percent payable at maturity.  The investments were funded by the Company primarily through borrowing under its revolving credit facility.  The venture plans to reposition the property into a mixed-use environment by converting a portion of existing office space into multi-family rental apartments.

Simultaneous with the acquisition of the Curtis Center Property, the Company and a KPG affiliate formed a new joint venture named KPG-MCG Curtis JV, LLC (the “Curtis Center JV”), which master leased the Curtis Center Property from the acquisition entities for approximately 29 years at market-based terms.  The Company and the KPG affiliate both own a 50 percent interest in the Curtis Center JV, with shared control over major decisions.

In general, the operating agreement of the Curtis Center JV provides that net cash flows from operations and capital events are distributed first, to the members, pro rata in proportion to their unreturned capital contributions, until each member’s unreturned capital contributions have been reduced to zero; and, thereafter, to each member, pro rata, in accordance with their percentage interests.


 
22

 

5.    DEFERRED CHARGES, GOODWILL AND OTHER ASSETS

           
   
June 30,
   
December 31,
(dollars in thousands)
 
2014
   
2013
Deferred leasing costs
$
 227,930
 
$
 258,648
Deferred financing costs
 
 21,916
   
 25,366
   
 249,846
   
 284,014
Accumulated amortization
 
 (112,249)
   
 (131,669)
Deferred charges, net
 
 137,597
   
 152,345
Notes receivable (1)
 
 83,889
   
 21,986
In-place lease values, related intangibles and other assets, net
 
 9,515
   
 13,659
Goodwill
 
 2,945
   
 2,945
Prepaid expenses and other assets, net
 
 32,814
   
 27,584
           
Total deferred charges, goodwill and other assets
$
 266,760
 
$
 218,519

(1)
Includes: a mortgage receivable for $10.4 million which bears interest at LIBOR plus six percent; a note receivable for $7.8 million which bears interest at eight percent; notes receivable for $62.3 million which bear interest at 3.5 percent (See Note 4: Unconsolidated joint ventures – Recent Transactions); and an interest-free note receivable with a net present value of $3.4 million as of June 30, 2014.  .

 
6.    RESTRICTED CASH

Restricted cash generally 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)
           
   
June 30,
   
December 31,
   
2014
   
2013
Security deposits
$
8,782
 
$
 8,534
Escrow and other reserve funds
 
17,623
   
 11,260
           
Total restricted cash
$
26,405
 
$
 19,794


 
7.    DISCONTINUED OPERATIONS

On January 1, 2014, the Company early adopted the new discontinued operations standard and as the properties sold in the six months ended June 30, 2014 will not represent a strategic shift (as the Company is not entirely exiting markets or property types), they have not been reflected as part of discontinued operations.  See Note 3: Real Estate Transactions – Sales.

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 and six months ended June 30, 2013.


 
23

 


The following table summarizes income from discontinued operations for the three and six months ended June 30, 2013: (dollars in thousands)
           
 
Three Months Ended
 
Six Months Ended
   
June 30,
 
June 30,
   
2013
   
2013
Total revenues
$
 12,333
 
$
27,205
Operating and other expenses
 
 (4,778)
   
(10,982)
Depreciation and amortization
 
 (2,989)
   
(6,442)
Interest expense
 
 (36)
   
(118)
           
Income from discontinued operations
 
 4,530
   
9,663
           
Loss from early extinguishment of debt
 
 (703)
   
(703)
Impairments (1)
 
 (23,851)
   
 (23,851)
           
Realized gains on disposition of rental property
 
 37,609
   
 37,609
Realized gains (losses) and unrealized losses on
         
  disposition of rental property and impairments, net
 13,758
   
 13,758
           
Total discontinued operations
$
 17,585
 
$
 22,718

(1)      Represents impairment charges recorded on certain properties prior to their sale.

 
8.    SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of June 30, 2014 and December 31, 2013 is as follows:  (dollars in thousands)

                   
     
June 30,
   
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
 
$
149,948
   
149,902
 
 5.297
%
5.800% Senior Unsecured Notes, due January 15, 2016
   
200,123
   
200,161
 
 5.806
%
2.500% Senior Unsecured Notes, due  December 15, 2017
   
249,003
   
248,855
 
 2.803
%
7.750% Senior Unsecured Notes, due August 15, 2019
   
248,906
   
248,799
 
 8.017
%
4.500% Senior Unsecured Notes, due April 18, 2022
   
299,535
   
299,505
 
 4.612
%
3.150% Senior Unsecured Notes, due May 15, 2023
   
269,626
   
269,323
 
 3.517
%
                   
Total senior unsecured notes
 
$
1,417,141
 
$
 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.   The Company was in compliance with its debt covenants as of June 30, 2014.
 


 
24

 

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.   The Company was in compliance with its debt covenants as of June 30, 2014.

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 June 30, 2014, the Company had outstanding borrowings of $56 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 June 30, 2014 and December 31, 2013, the Company had no outstanding borrowings under the Money Market Loan.



 


 
25

 


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 June 30, 2014, 27 of the Company’s properties, with a total book value of approximately $879 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.  Except as noted below, the Company was in compliance with its debt covenants as of June 30, 2014.

A summary of the Company’s mortgages, loans payable and other obligations as of June 30, 2014 and December 31, 2013 is as follows: (dollars in thousands)

                         
     
Effective
     
June 30,
   
December 31,
   
Property Name
Lender
 
Rate (a)
     
2014
   
2013
 
Maturity
6301 Ivy Lane (b)
RGA Reinsurance Company
 
 5.520 
%
 
$
 -
 
$
5,447
 
 -
395 West Passaic (c)
State Farm Life Insurance Co.
 
 6.004 
%
   
 -
   
9,719
 
 -
35 Waterview Boulevard (d)
Wells Fargo CMBS
 
 6.348 
%
   
 -
   
18,417
 
 -
233 Canoe Brook Road (e)
The Provident Bank
 
 4.375 
%
   
 -
   
3,877
 
 -
6 Becker, 85 Livingston,
Wells Fargo CMBS
 
 10.220 
%
   
64,829
   
64,233
 
8/11/2014 (l)
75 Livingston &
                       
20 Waterview (f)
                       
4 Sylvan
Wells Fargo CMBS
 
 10.190 
%
   
14,565
   
14,538
 
8/11/2014 (l)
10 Independence (g)
Wells Fargo CMBS
 
 12.440 
%
   
16,850
   
16,638
 
08/11/14
Port Imperial South 4/5
Wells Fargo Bank N.A.
LIBOR+3.50
%
   
36,950
   
36,950
 
08/30/14
9200 Edmonston Road (h)
Principal Commercial Funding L.L.C.
 
 5.534 
%
   
4,026
   
4,115
 
05/01/15
Port Imperial South
Wells Fargo Bank N.A.
LIBOR+1.75
%
   
43,697
   
43,278
 
09/19/15
4 Becker
Wells Fargo CMBS
 
 9.550 
%
   
39,108
   
38,820
 
05/11/16
5 Becker (i)