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

FORM 10-Q

(Mark One) 

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
 
For the quarterly period ended March 31, 2016

 or 
 
 [  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

   
   
For the transition period from
                                                           to

   
Commission File Number:
1-13274

     
     
 
Mack-Cali Realty Corporation
 
(Exact name of registrant as specified in its charter)
     
Maryland
 
22-3305147
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
     
     
     
343 Thornall Street, Edison, New Jersey
 
08837-2206
(Address of principal executive offices)
 
(Zip Code)
     
     
     
     
 
(732) 590-1000
 
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.                                 YES  X NO _
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  X  NO _
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
 
Large accelerated filer  x                                                                                                           Accelerated filer  ¨
 
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)                           Smaller reporting company  ¨
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES _ NO X
 
As of April 25, 2016, there were 89,638,631 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
 
 




 
 

 











       
   
MACK-CALI REALTY CORPORATION
 
       
   
FORM 10-Q
 
       
   
INDEX
 
       
       
Part I
Financial Information
Page
       
 
Item 1.
Financial Statements (unaudited):
3
       
   
Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015
4
       
   
Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015
5
       
   
Consolidated Statements of Comprehensive Income (Loss) for the three months ended
6
   
  March 31, 2016 and 2015
 
       
   
Consolidated Statement of Changes in Equity for the three months ended March 31, 2016
7
       
   
Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015
8
       
   
Notes to Consolidated Financial Statements
9
       
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39
       
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
56
       
 
Item 4.
Controls and Procedures
56
       
Part II
Other Information
 
       
 
Item 1.
Legal Proceedings
57
       
 
Item 1A.
Risk Factors
57
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57
       
 
Item 3.
Defaults Upon Senior Securities
57
       
 
Item 4.
Mine Safety Disclosures
57
       
 
Item 5.
Other Information
57
       
 
Item 6.
Exhibits
57
       
Signatures
   
58
       
Exhibit Index
   
59
       
       
       


 
2

 

MACK-CALI REALTY CORPORATION
 
Part I – Financial Information



Item 1.        Financial Statements
 
The accompanying unaudited consolidated balance sheets, statements of operations, of comprehensive income, 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, 2015.
 
The results of operations for the three month period ended March 31, 2016 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.


 
3

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)
           
           
   
March 31,
   
December 31,
ASSETS
 
2016
   
2015
Rental property
         
Land and leasehold interests
$
 684,960
 
$
 735,696
Buildings and improvements
 
 3,557,813
   
 3,648,238
Tenant improvements
 
 353,842
   
 408,617
Furniture, fixtures and equipment
 
 16,576
   
 15,167
   
 4,613,191
   
 4,807,718
Less – accumulated depreciation and amortization
 
 (1,382,962)
   
 (1,464,482)
   
 3,230,229
   
 3,343,236
Rental property held for sale, net
 
 200,044
   
 -
Net investment in rental property
 
 3,430,273
   
 3,343,236
Cash and cash equivalents
 
 116,421
   
 37,077
Investments in unconsolidated joint ventures
 
 303,647
   
 303,457
Unbilled rents receivable, net
 
 120,035
   
 120,246
Deferred charges, goodwill and other assets, net
 
 220,997
   
 203,850
Restricted cash
 
 27,566
   
 35,343
Accounts receivable, net of allowance for doubtful accounts
         
of $602 and $1,407
 
 9,511
   
 10,754
           
Total assets
$
 4,228,450
 
$
 4,053,963
           
LIABILITIES AND EQUITY
         
Senior unsecured notes, net
$
 1,064,363
 
$
 1,263,782
Unsecured term loan, net
 
 347,351
   
 -
Revolving credit facility
 
 90,000
   
 155,000
Mortgages, loans payable and other obligations, net
 
 767,573
   
 726,611
Dividends and distributions payable
 
 15,047
   
 15,582
Accounts payable, accrued expenses and other liabilities
 
 137,030
   
 135,057
Rents received in advance and security deposits
 
 50,109
   
 49,739
Accrued interest payable
 
 23,994
   
 24,484
Total liabilities
 
 2,495,467
   
 2,370,255
Commitments and contingencies
         
           
Equity:
         
Mack-Cali Realty Corporation stockholders’ equity:
         
Common stock, $0.01 par value, 190,000,000 shares authorized,
         
89,638,312 and 89,583,950 shares outstanding
 
 896
   
 896
Additional paid-in capital
 
 2,571,509
   
 2,570,392
Dividends in excess of net earnings
 
 (1,066,867)
   
 (1,115,612)
Accumulated other comprehensive loss
 
 (5,675)
   
 -
Total Mack-Cali Realty Corporation stockholders’ equity
 
 1,499,863
   
 1,455,676
           
Noncontrolling interests in subsidiaries:
         
Operating Partnership
 
 175,688
   
 170,891
Consolidated joint ventures
 
 57,432
   
 57,141
Total noncontrolling interests in subsidiaries
 
 233,120
   
 228,032
           
Total equity
 
 1,732,983
   
 1,683,708
           
Total liabilities and equity
$
 4,228,450
 
$
 4,053,963

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

 
4

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
             
             
     
Three Months Ended
     
March 31,
REVENUES
   
2016
   
2015
Base rents
 
$
 126,387 
 
$
 123,793 
Escalations and recoveries from tenants
   
 14,961 
   
 18,399 
Real estate services
   
 6,812 
   
 7,644 
Parking income
   
 3,156 
   
 2,542 
Other income
   
 1,607 
   
 1,337 
Total revenues
   
 152,923 
   
 153,715 
             
EXPENSES
           
Real estate taxes
   
 23,226 
   
 22,452 
Utilities
   
 13,578 
   
 17,575 
Operating services
   
 26,732 
   
 28,228 
Real estate services expenses
   
 6,846 
   
 6,639 
General and administrative
   
 12,249 
   
 11,011 
Depreciation and amortization
   
 43,063 
   
 40,802 
Total expenses
   
 125,694 
   
 126,707 
Operating income
   
 27,229 
   
 27,008 
             
OTHER (EXPENSE) INCOME
           
Interest expense
   
 (24,993)
   
 (27,215)
Interest and other investment income (loss)
   
 (669)
   
 267 
Equity in earnings (loss) of unconsolidated joint ventures
   
 (1,554)
   
 (3,529)
Gain on change of control of interests
   
 10,156 
   
 -
Realized gains (losses) on disposition of rental property, net
   
 58,600 
   
 144 
Total other (expense) income
   
 41,540 
   
 (30,333)
Net income (loss)
   
 68,769 
   
 (3,325)
Noncontrolling interest in consolidated joint ventures
   
 706 
   
 490 
Noncontrolling interest in Operating Partnership
   
 (7,284)
   
 314 
Net income (loss) available to common shareholders
 
$
 62,191 
 
$
 (2,521)
             
Basic earnings per common share:
           
Net income (loss) available to common shareholders
 
$
 0.69 
 
$
 (0.03)
             
Diluted earnings per common share:
           
Net income (loss) available to common shareholders
 
$
 0.69 
 
$
 (0.03)
             
Basic weighted average shares outstanding
   
 89,721 
   
 89,192 
             
Diluted weighted average shares outstanding
   
 100,315 
   
 100,266 

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

 
5

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited)

             
             
     
Three Months Ended
     
March 31,
     
2016
   
2015
             
Net income (loss)
 
$
68,769
 
$
(3,325)
Other comprehensive income (loss):
           
Net unrealized loss on derivative instruments
           
for interest rate swaps
   
(6,340)
   
 -
Comprehensive income (loss)
 
$
62,429
 
$
(3,325)
Comprehensive income (loss) attributable to noncontrolling
           
interest in consolidated joint ventures
   
706
   
490
Comprehensive income (loss) attributable to noncontrolling
           
interest in Operating Partnership
   
(7,284)
   
314
Comprehensive income (loss) attributable to common shareholders
 
$
55,851
 
$
(2,521)

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

 
6

 


MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in thousands) (unaudited)
                                         
                                         
                           
Accumulated
           
         
Additional
   
Dividends in
   
Other
   
Noncontrolling
     
   
Common Stock
   
Paid-In
   
Excess of
   
Comprehensive
 
Interests
   
Total
   
Shares
   
Par Value
   
Capital
   
Net Earnings
   
Income (Loss)
   
in Subsidiaries
   
Equity
Balance at January 1, 2016
 
 89,584
 
$
 896
 
$
 2,570,392
 
$
 (1,115,612)
 
$
 -
 
$
 228,032
 
$
 1,683,708
Net income
 
 -
   
 -
   
 -
   
 62,191
   
 -
   
 6,578
   
 68,769
Common stock dividends
 
 -
   
 -
   
 -
   
 (13,446)
   
 -
   
 -
   
 (13,446)
Unit distributions
 
 -
   
 -
   
 -
   
 -
   
 -
   
 (1,601)
   
 (1,601)
Increase in noncontrolling interest
                                       
  in consolidated joint ventures
 
 -
   
 -
   
 -
   
 -
   
 -
   
 997
   
 997
Redemption of common units
                                       
  for common stock
 
 17
   
 -
   
 276
   
 -
   
 -
   
 (276)
   
 -
Shares issued under Dividend
                                       
  Reinvestment and Stock Purchase Plan
 
 -
   
 -
   
 10
   
 -
   
 -
   
 -
   
 10
Directors' deferred compensation plan
 
 -
   
 -
   
 101
   
 -
   
 -
   
 -
   
 101
Stock compensation
 
 37
   
 -
   
 612
   
 -
   
 -
   
 173
   
 785
Other comprehensive income (loss)
 
 -
   
 -
   
 -
   
 -
   
 (5,675)
   
 (665)
   
 (6,340)
Rebalancing of ownership percentage
                                       
  between parent and subsidiaries
 
 -
   
 -
   
 118
   
 -
   
 -
   
 (118)
   
 -
Balance at March 31, 2016
 
 89,638
 
$
 896
 
$
 2,571,509
 
$
 (1,066,867)
 
$
 (5,675)
 
$
 233,120
 
$
 1,732,983

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

 

 
7

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
             
             
     
Three Months Ended
     
March 31,
CASH FLOWS FROM OPERATING ACTIVITIES
   
2016
   
2015
Net income (loss)
 
$
 68,769 
 
$
 (3,325)
Adjustments to reconcile net income to net cash provided by
           
Operating activities:
           
Depreciation and amortization, including related intangible assets
   
 43,413 
   
 41,185 
Amortization of deferred stock units
   
 101 
   
 98 
Amortization of stock compensation
   
 785 
   
 313 
Amortization of deferred financing costs
   
 1,169 
   
 953 
Amortization of debt discount and mark-to-market
   
 610 
   
 997 
Equity in (earnings) loss of unconsolidated joint ventures
   
 1,554 
   
 3,529 
Distributions of cumulative earnings from unconsolidated joint ventures
   
 574 
   
 815 
Realized (gains) loss on disposition of rental property, net
   
 (58,600)
   
 (144)
Gain on change of control of interests
   
 (10,156)
   
 -
Changes in operating assets and liabilities:
           
(Increase) decrease in unbilled rents receivable, net
   
 (2,169)
   
 347 
Increase in deferred charges, goodwill and other assets
   
 (19,323)
   
 (10,828)
Decrease (increase) in accounts receivable, net
   
 1,243 
   
 (866)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
   
 (2,370)
   
 8,159 
Increase (decrease) in rents received in advance and security deposits
   
 370 
   
 (4,717)
(Decrease) Increase in accrued interest payable
   
 (489)
   
 2,671 
             
Net cash provided by operating activities
 
$
 25,481 
 
$
 39,187 
             
CASH FLOWS FROM INVESTING ACTIVITIES
           
Rental property acquisitions and related intangibles
 
$
 (47,818)
 
$
 -
Rental property additions and improvements
   
 (34,603)
   
 (19,658)
Development of rental property and other related costs
   
 (16,131)
   
 (12,519)
Proceeds from the sales of rental property
   
 94,710 
   
 1,072 
Repayment of notes receivable
   
 125 
   
 -
Investment in unconsolidated joint ventures
   
 (7,225)
   
 (20,880)
Distributions in excess of cumulative earnings from unconsolidated joint ventures
   
 1,771 
   
 1,097 
Decrease (increase) in restricted cash
   
 7,777 
   
 (1,535)
             
Net cash used in investing activities
 
$
 (1,394)
 
$
 (52,423)
             
CASH FLOW FROM FINANCING ACTIVITIES
           
Borrowings from revolving credit facility
 
$
 150,000 
 
$
 56,000 
Repayment of revolving credit facility
   
 (215,000)
   
 (14,000)
Repayment of senior unsecured notes
   
 (200,000)
   
 -
Borrowings from unsecured term loan
   
 350,000 
   
 -
Proceeds from mortgages and loans payable
   
 77,666 
   
 1,150 
Repayment of mortgages, loans payable and other obligations
   
 (89,712)
   
 (25,228)
Payment of financing costs
   
 (3,392)
   
 (30)
Contributions from noncontrolling interests
   
 703 
   
 94 
Payment of dividends and distributions
   
 (15,008)
   
 (14,984)
             
Net cash provided by financing activities
 
$
 55,257 
 
$
 3,002 
             
Net increase (decrease) in cash and cash equivalents
 
$
 79,344 
 
$
 (10,234)
Cash and cash equivalents, beginning of period
   
 37,077 
   
 29,549 
             
Cash and cash equivalents, end of period
 
$
 116,421 
 
$
 19,315 


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


 
8

 

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

1.    ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION
Mack-Cali Realty Corporation, a Maryland corporation, together with its subsidiaries (collectively, the “Company”), is a fully-integrated, self-administered, self-managed real estate investment trust (“REIT”) providing leasing, management, acquisition, development, construction and tenant-related services for its properties and third parties.  As of March 31, 2016, the Company owned or had interests in 273 properties, consisting of 145 office and 109 flex properties, totaling approximately 29.7 million square feet, leased to approximately 1,900  commercial tenants, and 19 multi-family rental properties containing  5,644 residential units, plus developable land (collectively, the “Properties”).  The Properties are comprised of 145 office buildings totaling approximately 24.4 million square feet (which include 36 buildings, aggregating approximately 5.6 million square feet owned by unconsolidated joint ventures in which the Company has investment interests), 94 office/flex buildings totaling approximately 4.8 million square feet, six industrial/warehouse buildings totaling approximately 387,400 square feet, 19 multi-family properties totaling 5,644 apartments (which include 12 properties aggregating 3,972 apartments owned by unconsolidated joint ventures in which the Company has investment interests), five parking/retail properties totaling approximately 121,700 square feet (which include two buildings aggregating 81,700 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 (i) the ability to make decisions about the entity's activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (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.

On January 1, 2016, the Company adopted accounting guidance under ASC 810, Consolidation, modifying the analysis it must perform to determine whether it should consolidate certain types of legal entities.  The guidance does not amend the existing disclosure requirements for variable interest entities or voting interest model entities.  The guidance, however, modified the requirements to qualify under the voting interest model.  Under the revised guidance, the Operating Partnership will be a variable interest entity of the parent company, Mack-Cali Realty Corporation.  As the Operating Partnership is already consolidated in the balance sheets of Mack-Cali Realty Corporation, the identification of this entity as a variable interest entity has no impact on the consolidated financial statements of Mack-Cali Realty Corporation.  There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption.

As of March 31, 2016 and December 31, 2015, 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 $287.1 million and $273.4 million, respectively, mortgages of $93.8 million and $89.5 million, respectively, and other liabilities of $18.4 million and $17.5 million, respectively. 

The financial statements have been prepared in conformity with GAAP.  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.  These estimates and assumptions are based on management’s historical experience that are believed to be reasonable at the time.  However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment.
 
 
 
9

 
 

 
Actual results could differ from those estimates.  Certain reclassifications have been made to prior period amounts in order to conform with current period presentation. 
 

2.    SIGNIFICANT ACCOUNTING POLICIES

Rental
Property
Rental properties are stated at cost less accumulated depreciation and amortization.  Costs directly related to the acquisition, development and construction of rental properties are capitalized.  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 $0.6 million and $1.3 million for the three months ended March 31, 2016 and 2015, respectively.  Included in total rental property is construction, tenant improvement and development in-progress of $144.9 million and $88.7 million as of March 31, 2016 and December 31, 2015, 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.
 
 
 
10

 

 

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.

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 value 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.  The Company generally considers assets to be held for sale when the transaction has received appropriate corporate authority, and there are no significant contingencies relating to the sale.   If, in management’s opinion, the estimated net sales price, net of selling costs, 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 value 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. 

 
 
11

 
 
 
Investments in
Unconsolidated
Joint Ventures
The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting.  The Company applies the equity method by initially recording these investments at cost, as Investments in Unconsolidated Joint Ventures, subsequently adjusted for equity in earnings and cash contributions and distributions.  The outside basis portion of the Company’s joint ventures is amortized over the anticipated useful lives of the underlying ventures’ tangible and intangible assets acquired and liabilities assumed.  Generally, the Company would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Company has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee.    If the venture subsequently generates income, the Company only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses.
 
On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated joint ventures may be impaired.  An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying value 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 an original 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. Deferred financing costs are presented in the balance sheet as a direct deduction from the carrying value of the debt liability to which they relate, except deferred financing costs related to the revolving credit facility, which are presented in Deferred charges, goodwill and other assets.  In all cases, amortization of such costs is included in interest expense and was $1,169,000 and $953,000 for the three months ended March 31, 2016 and 2015, respectively.  If a financing obligation is extinguished early, any unamortized deferred financing costs are written off and included in gains (losses) from early extinguishment of debt.  No such unamortized costs were written off for the three months ended March 31, 2016 and 2015.
 
 
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, was approximately $780,000 and $970,000 for the three months ended March 31, 2016 and 2015, 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 value 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 value.  If, based on this assessment, management determines that the fair value of the reporting unit is not less than its carrying value, then performing the additional two-step impairment test is unnecessary. If the carrying value of goodwill exceeds its fair value, an impairment charge is recognized.
 
 
 
 
 
12

 

Derivative
Instruments
The Company measures derivative instruments, including certain derivative instruments embedded in other contracts, at fair value and records them as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract.  For derivatives designated and qualifying as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings.  For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in earnings in the affected period.
 
 
Revenue
Recognition
Base rental revenue is recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represents the cumulative amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements.

Above-market and below-market lease values for acquired properties are initially recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed-rate renewal options for below-market leases.  The capitalized above-market lease values for acquired properties are amortized as a reduction of base rental revenue over the remaining terms of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases.

Escalations and recoveries from tenants are received from tenants for certain costs as provided in the lease agreements.  These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs.  See Note 14: Tenant Leases.

Real estate services revenue includes property management, development, construction 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.
 
 
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.
 
 
 
13

 
 

 
As of March 31, 2016, the Company had a deferred tax asset related to its TRS activity with a balance of approximately $23.4 million which has been fully reserved for through a valuation allowance.  If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.  The Company is subject to certain state and local taxes.

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

In the normal course of business, the Company or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable.  As of March 31, 2016, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are generally from the year 2011 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 March 31, 2016 represents dividends payable to common shareholders (89,638,337 shares) and distributions payable to noncontrolling interest unitholders of the Operating Partnership (10,499,844 common units and 657,373 LTIP units) for all such holders of record as of April 5, 2016 with respect to the first quarter 2016.  The first quarter 2016 common stock dividends and unit distributions of $0.15 per common share and unit were approved by the Board of Directors on March 8, 2016 and paid on April 15, 2016.

The dividends and distributions payable at December 31, 2015 represents dividends payable to common shareholders (89,584,008 shares) and distributions payable to noncontrolling interest common unitholders of the Operating Partnership (10,516,844 common units) for all such holders of record as of January 6, 2016 with respect to the fourth quarter 2015.  The fourth quarter 2015 common stock dividends and common unit distributions of $0.15 per common share and unit were approved by the Board of Directors on December 8, 2015 and paid on January 15, 2016.

 
 
14

 
 
 
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”), restricted stock units (“RSUs”), performance share units (“PSUs”), long-term incentive plan awards and stock options at the grant date be amortized ratably into expense over the appropriate vesting period.  The Company recorded stock compensation expense of $785,000 and $313,000 for the three months ended March 31, 2016 and 2015, respectively.

Other
 
Comprehensive
 
Income
Other comprehensive income (loss) includes items that are recorded in equity, such as effective portions of derivatives designated as cash flow hedges or unrealized holding gains or losses on marketable securities available for sale.

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 in active 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 Financial Accounting Standards Board (“FASB”) issued guidance related to the reporting of discontinued operation and disclosures of disposals of components of an entity.  This guidance defines a discontinued operation as a component or group of components disposed or classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and final result; the guidance states that a strategic shift could include a disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major parts of an entity.  The guidance also provides for additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations.  The guidance is effective for all companies 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 could early adopt the guidance for new disposals (or new classifications as held for sale) that had not been reported in financial statements previously issued or available for issuance. The Company 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. 
 
 
 
15

 
 

 
Impact Of
Recently-Issued
Accounting
Standards
In May 2014, the 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, 2017, and early adoption is permitted for periods beginning after December 15, 2016.  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. 

In August 2014, the FASB issued ASU 2014-15, which requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ended December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The adoption of ASU 2014-15 is not expected to materially impact the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, modifying the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.  This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively.  A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for in the same manner as operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The guidance is expected to impact the consolidated financial statements as the Company has certain operating and land lease arrangements for which it is the lessee.  The guidance supersedes previously issued guidance under ASC Topic 840 “Leases.” The guidance is effective on January 1, 2019, with early adoption permitted.  The Company is currently in the process of evaluating the impact the adoption of ASU 2016-02 will have on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, which eliminates a requirement for the retroactive adjustment on a step by step basis of the investment, results of operations, and retained earnings as if the equity method had been effective during all previous periods that the investment had been held when an investment qualifies for equity method accounting due to an increase in the level of ownership or degree of influence. The cost of acquiring the additional interest in the investee is to be added to the current basis of the investor’s previously held interest and the equity method of accounting should be adopted as of the date the investment becomes qualified for equity method accounting. This guidance is to be applied on a prospective basis and is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-07 will have on the Company’s consolidated financial statements. 
 
 
 
16

 
 

 
 
In March 2016, the FASB issued ASU 2016-09, intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. This guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-09 will have on the Company’s consolidated financial statements. 
 
 
 
3.    RECENT TRANSACTIONS

Acquisitions
On January 5, 2016, the Company, which held a 50 percent subordinated interest in the unconsolidated joint venture, Overlook Ridge Apartment Investors LLC, a 371-unit multi-family operating property located in Malden, Massachusetts, acquired the remaining interest for $39.8 million in cash plus the assumption of a first mortgage loan secured by the property with a principal balance of $52.7 million.  The cash portion of the acquisition was funded primarily through borrowings under the Company’s unsecured revolving credit facility.  Upon acquisition, the Company consolidated the asset and accordingly, remeasured its equity interests, as required by the FASB’s consolidation guidance, at fair value (based upon the income approach using current rates and market cap rates and discount rates).  As a result, the Company recorded a gain on change of control of interests of $10.2 million in the three months ended March 31, 2016.  On January 19, 2016, the Company repaid the assumed loan and obtained a new loan secured by the property in the amount of $72.5 million, which bears interest at 3.625 percent and matures in February 2023.  See Note 10: Mortgages, Loans Payable and Other Obligations. 

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

     
     
   
Overlook
   
Ridge
Land
$
11,072
Buildings and improvements
 
87,793
Furniture, fixtures and equipment
 
1,695
In-place lease values (1)
 
4,389
Below market lease values (1)
 
(489)
Other assets
 
237
Sub Total
 
104,697
     
Less: Debt assumed
 
(52,662)
     
Net assets recorded upon consolidation
$
 52,035

(1)      In-place lease values and below market lease values will be amortized over one year or less.

On April 1, 2016, the Company, which held a 50 percent interest in the unconsolidated Portside Apts LLC, acquired the equity interests of one of its joint venture partners for $38.1 million in cash plus the assumption of a first mortgage loan secured by the property with a principal balance of $42.5 million and interest at LIBOR plus 250 basis points maturing in December 2017.  The cash portion of the acquisition was funded primarily through borrowings under the Company’s unsecured revolving credit facility.  As a result, the Company increased its ownership to 85 percent of the 175-unit operating multi-family property located in East Boston, Massachusetts.

Also on April 1, 2016, the Company bought out a partner for $11.3 million and increased its subordinated interest in PruRose Riverwalk G, L.L.C. from 25 percent to 50 percent using borrowings on the Company’s unsecured credit facility.  PruRose Riverwalk G, L.L.C., owns a 316-unit operating multi-family property located in Weehawken, New Jersey.
 
 
 
17

 
 

 
On April 22, 2016, the Company entered into an agreement to acquire a 566,000 square-foot office property located in Hoboken, New Jersey, for approximately $235 million, subject to certain conditions.  The acquisition is expected to be completed in the second quarter of 2016.

Dispositions
The Company disposed of the following office properties during the three months ended March 31, 2016 (dollars in thousands):

                             
       
Rentable
   
Net
   
Net
       
Disposition
   
# of
Square
   
Sales
   
Book
   
Realized
 
Date
Property/Address
Location
Bldgs.
 Feet
   
Proceeds
   
Value
   
Gain (loss)
 
03/11/16
2 Independence Way (a)
Princeton, New Jersey
1
67,401
 
$
4,119
 
$
4,283
 
$
 (164)
 
03/24/16
1201 Connecticut Avenue, NW
Washington, D.C.
1
169,549
   
90,591
   
31,827
   
 58,764
 
                             
Totals
   
2
 236,950
 
$
 94,710
 
$
 36,110
 
$
 58,600
 
                             
(a)  The Company recorded an impairment charge of $3.2 million on this property during the year ended December 31, 2015 as it estimated that the carrying value of the property may not be recoverable over its anticipated holding period.
 
                             
Rental Properties Held for Sale
During the three months ended March 31, 2016, the Company signed agreements to dispose of two office properties totaling approximately 683,000 square feet, located at 1400 L Street, NW in Washington, D.C. and 125 Broad Street in New York, New York, subject to certain conditions.  The total estimated sales proceeds expected from the two separate sales are approximately $272 million.  The dispositions are expected to be completed in the second quarter of 2016.  The Company identified these properties as held for sale at March 31, 2016.

The following table summarizes the rental property held for sale, net, as of March 31, 2016: (dollars in thousands)

       
       
     
March 31,
     
2016
Land
 
$
 46,883
Buildings and improvements
   
 210,925
Less: Accumulated depreciation
   
 (57,764)
Rental property held for sale,net
 
$
 200,044

Other assets and liabilities related to the rental properties held for sale, as of March 31, 2016, include $13.2 million in Deferred charges, and other assets, $20.1 million in Unbilled rents receivable, net, $1.3 million in Accounts receivable, net of allowance, $3.4 million in Accounts payable, accrued expenses and other liabilities, and $1.2 million in Rents received in advance and security deposits.  Approximately $31.3 million of these assets and $796,000 of these liabilities are expected to be written off with the completion of the sales.

The following table summarizes income (loss) for the three month periods ended March 31, 2016 and 2015 from the properties disposed of during the three months ended March 31, 2016 and the six properties disposed of during the year ended December 31, 2015: (dollars in thousands)
             
     
Three Months Ended
     
March 31,
     
2016
   
2015
Total revenues
 
$
 1,608
 
$
 7,629
Operating and other expenses
   
 (1,379)
   
 (2,524)
Depreciation and amortization
   
 (2,797)
   
 (1,685)
Interest expense
   
 (626)
   
 (2,710)
             
Income (loss) from properties disposed of
 
$
 (3,194)
 
$
 710
             
Realized gains on dispositions
   
 58,600
   
 144
             
Total income (loss)  from properties disposed of
 
$
 55,406
 
$
 854
 
 
 
 
 
18

 
 

 
4.    INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

As of March 31, 2016, the Company had an aggregate investment of approximately $303.6 million in its equity method joint ventures.  The Company formed these ventures with unaffiliated third parties, or acquired interests in them, to develop or manage primarily office and multi-family rental properties, or to acquire land in anticipation of possible development of office and multi-family rental properties.  As of March 31, 2016, the unconsolidated joint ventures owned: 36 office and two retail properties aggregating approximately 5.7 million square feet, 12 multi-family properties totaling 3,972 apartments, a 350-room hotel, development projects for up to approximately 1,074 apartments; and interests and/or rights to developable land parcels able to accommodate up to 2,910 apartments and 1.4 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.

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 investments in 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 March 31, 2016, such debt had a total facility amount of $492.1 million of which the Company agreed to guarantee up to $66.3 million.  As of March 31, 2016, the outstanding balance of such debt totaled $286.7 million of which $44.8 million was guaranteed by the Company.  The Company also posted a $3.6 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 $1.0 million and $1.6 million for such services in the three months ended March 31, 2016 and 2015, respectively.  The Company had $0.7 million and $0.8 million in accounts receivable due from its unconsolidated joint ventures as of March 31, 2016 and December 31, 2015.

Included in the Company’s investments in unconsolidated joint ventures as of March 31, 2016 are five 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 $177.1 million as of March 31, 2016.  The Company’s maximum exposure to loss as a result of its involvement with these VIEs is estimated to be approximately $210.8 million, which includes the Company’s current investment and estimated future funding commitments/guarantees of approximately $33.7 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.   

 
19

 



The following is a summary of the Company's unconsolidated joint ventures as of March 31, 2016 and December 31, 2015: (dollars in thousands, including footnotes)

                                   
                         
Property Debt
 
 
Number of
Company's
   
Carrying Value
   
As of March 31, 2016
 
 
Apartment Units
Effective
   
March 31,
   
December 31,
     
Maturity
Interest
 
Entity / Property Name
or Square Feet (sf)
Ownership % (a)
   
2016
   
2015
   
Balance
Date
Rate
 
Multi-family
                                 
Marbella RoseGarden, L.L.C./ Marbella  (b)
 412
units
 24.27
%
 
$
 15,486
 
$
 15,569
 
$
 95,000
05/01/18
 4.99
%
 
RoseGarden Monaco Holdings, L.L.C./ Monaco   (b)
 523
units
 15.00
%
   
 646
   
 937
   
 165,000
02/01/21
 4.19
%
 
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
%
   
 5,741
   
 5,723
   
 45,756
(e)
(e)
   
PruRose Riverwalk G, L.L.C./ RiverTrace at Port Imperial   (b) (f)
 316
units
 25.00
%
   
 -
   
 -
   
 79,392
07/15/21
 6.00
%
(g)
Elmajo Urban Renewal Associates, LLC / Lincoln Harbor (Bldg A&C)  (b)
 355
units
 7.50
%
   
 -
   
 -
   
 128,100
03/01/30
 4.00
%
 
Crystal House Apartments Investors LLC / Crystal House  (h)
 798
units
 25.00
%
   
 28,855
   
 28,114
   
 165,000
04/01/20
 3.17
%
 
Portside Master Company, L.L.C./ Portside at Pier One - Bldg 7  (b) (f)
 175
units
 38.25
%
   
 -
   
 -
   
 42,500
12/04/17
L+2.50
%
(i)
PruRose Port Imperial South 13, LLC / RiverParc at Port Imperial  (b)
 280
units
 20.00
%
   
 -
   
 -
   
 70,731
06/27/16
L+2.15
%
(j)
Roseland/Port Imperial Partners, L.P./ Riverwalk C  (b) (k)
 363
units
 20.00
%
   
 1,678
   
 1,678
   
 -
-
-
   
RoseGarden Marbella South, L.L.C./ Marbella II
 311
units
 24.27
%
   
 17,155
   
 16,728
   
 69,681
03/30/17
L+2.25
%
(l)
Estuary Urban Renewal Unit B, LLC / Lincoln Harbor (Bldg B)  (b)
 227
units
 7.50
%
   
 -
   
 -
   
 81,900
03/01/30
 4.00
%
 
Riverpark at Harrison I, L.L.C./ Riverpark at Harrison
 141
units
 45.00
%
   
 2,426
   
 2,544
   
 30,000
08/01/25
 3.70
%
 
Capitol Place Mezz LLC / Station Townhouses
 378
units
 50.00
%
   
 45,500
   
 46,267
   
 100,700
07/01/33
 4.82
%
(m)
Harborside Unit A Urban Renewal, L.L.C. / URL Harborside
 763
units
 85.00
%
   
 97,615
   
 96,799
   
 92,937
08/01/29
 5.197
%
(n)
RoseGarden Monaco, L.L.C./ San Remo Land
 250
potential units
 41.67
%
   
 1,356
   
 1,339
   
 -
-
-
   
Grand Jersey Waterfront URA, L.L.C./ Liberty Landing
 850
potential units
 50.00
%
   
 337
   
 337
   
 -
-
-
   
Hillsborough 206 Holdings, L.L.C./ Hillsborough 206
 160,000
sf
 50.00
%
   
 1,962
   
 1,962
   
 -
-
-
   
Plaza VIII & IX Associates, L.L.C./ Vacant land (parking operations)
 1,225,000
sf
 50.00
%
   
 4,132
   
 4,055
   
 -
-
-
   
                                   
                                   
Office
                                 
Red Bank Corporate Plaza, L.L.C./ Red Bank
 92,878
sf
 50.00
%
   
 4,250
   
 4,140
   
 14,950
05/17/16
L+3.00
%
(o)
12 Vreeland Associates, L.L.C./ 12 Vreeland Road
 139,750
sf
 50.00
%
   
 5,974
   
 5,890
   
 12,171
07/01/23
 2.87
%
 
BNES Associates III / Offices at Crystal Lake
 106,345
sf
 31.25
%
   
 2,101
   
 2,295
   
 5,973
11/01/23
 4.76
%
 
KPG-P 100 IMW JV, LLC / 100 Independence Mall West
 339,615
sf
 33.33
%
   
 -
   
 -
   
 61,500
09/09/16
L+7.00
%
(p)
Keystone-Penn
 1,842,820
sf
(q)
     
 -
   
 -
   
 228,600
(r)
(r)
   
Keystone-TriState
 1,266,384
sf
(s)
     
 3,480
   
 3,958
   
 212,536
(t)
(t)
   
KPG-MCG Curtis JV, L.L.C./ Curtis Center  (u)
 885,000
sf
 50.00
%
   
 62,247
   
 59,858
   
(v)
(v)
(v)
   
                                   
Other
                                 
Roseland/North Retail, L.L.C./ Riverwalk at Port Imperial  (b)
 30,745
sf
 20.00
%
   
 1,742
   
 1,758
   
 -
-
-
   
South Pier at Harborside / Hyatt Regency Jersey City on the Hudson
 350
rooms
 50.00
%
   
(w)
   
(w)
   
 63,384
(x)
(x)
   
Other (y)
           
 964
   
 3,506
   
 -
-
-
   
Totals:
         
$
 303,647
 
$
 303,457
 
$
 1,823,311
       



   
   
(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 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 December 31, 2015), 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, with a balance of $38,218, bears interest at 3.25 percent, matures in September 2020; (ii) an amortizable loan, collateralized by the Shops at 40 Park, with a balance of $6,421, bears interest at 3.63 percent, matures in August 2018; and (iii) a loan, collateralized by the Lofts at 40 Park, with a balance of $1,117, bears interest at LIBOR plus 250 basis points and matures in September 2016.  The Shops at 40 Park mortgage loan also provides for additional borrowing proceeds of $1 million based on certain preferred thresholds being achieved.
(f)      
On April 1, 2016, the Company acquired the equity interests of its joint venture partner in Portside Apartment Holdings, L.L.C and PruRose Riverwalk G, L.L.C. for $38.1 million and $11.3 million, respectively, which increased its ownership to 85 percent in Portside Apartment Holdings, LLC and 50 percent in PruRose Riverwalk G, L.L.C.  (See Note 3: Recent Transactions – Acquisitions).
(g)  
The permanent loan has a maximum borrowing amount of $80,249.
(h)      
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.
(i)       
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.
(j)     
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.
(k)      
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.
(l)      
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.
(m)       
The construction/permanent loan has a maximum borrowing amount of $100,700 with amortization starting in August 2017.
(n)    
The construction/permanent loan has a maximum borrowing amount of $192,000.
(o)      
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.
(p)       
The mortgage loan has two one-year extension options, subject to certain conditions.
(q)      
The Company’s equity interests in the joint ventures will be subordinated to Keystone Entities receiving a 15 percent internal rate of return (“IRR”) after which the Company will receive a 10 percent IRR on its subordinate equity and then all profit will be split equally.
(r)      
Principal balance of $127,600 bears interest at 5.114 percent and matures on August 27, 2023; principal balance of $45,500 bears interest at 5.01 percent and matures on September 6, 2025; principal balance of $33,825 bears interest at rates ranging from LIBOR+5.0 percent to LIBOR+5.75 percent and matures on August 27, 2016; principal balance of $11,250 bears interest at LIBOR+5.5 percent and matures on January 9, 2019; principal balance of $10,425 bears interest at LIBOR+6.0 percent matures on August 31, 2016.
(s)     
Includes the Company’s pari-passu interests of $3.5 million in five properties and Company’s subordinated equity interests to Keystone Entities receiving a 15 percent internal rate of return (“IRR”) after which the Company will receive a 10 percent IRR on its subordinate equity and then all profit will be split equally.
(t)      
Principal balance of $43,954 bears interest at 5.38 percent and matures on July 1, 2017; principal balance of $75,882 bears interest at rates ranging from 5.65 percent to 6.75 percent and matures on September 9, 2017; principal balance of $14,250 bears interest at 4.88 percent and matures on July 6, 2024; principal balance of $63,400 bears interest at 4.93 percent and matures on July 6, 2044; principal balance of $15,050 bears interest at 4.71 percent and matures on August 6, 2044.
(u)
Includes undivided interests in the same manner as investments in noncontrolling partnership, pursuant to ASC 970-323-25-12.
(v)
See Note 10: Mortgages, Loans Payable and Other Obligations for debt secured by interests in these assets.
(w)
The negative carrying value for this venture of $4,235 and $3,317 as of March 31, 2016 and 2015, respectively, were included in accounts payable, accrued expenses and other liabilities.
(x)      
Balance includes: (i) mortgage loan, collateralized by the hotel property, with a balance of $59,790, bears interest at 6.15 percent and matures in November 2016, and (ii) loan with a balance of $3,594, bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 1, 2020.  The Company posted a $3.6 million letter of credit in support of this loan, half of which is indemnified by the partner.
(y)
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. 
 
 
 
20

 

 

The following is a summary of the Company’s equity in earnings (loss) of unconsolidated joint ventures for the three months ended March 31, 2016 and 2015: (dollars in thousands)
           
     
   
Three Months Ended
   
 March 31,
Entity / Property Name
 
2016
   
2015
Multi-family
         
Marbella RoseGarden, L.L.C./ Marbella
$
 84
 
$
 61
RoseGarden Monaco Holdings, L.L.C./ Monaco
 
 (291)
   
 (317)
PruRose Port Imperial South 15, LLC /RiversEdge at Port Imperial
 
 -
   
 -
Rosewood Morristown, L.L.C. / Metropolitan at 40 Park
 
 (81)
   
 (94)
PruRose Riverwalk G, L.L.C./ RiverTrace at Port Imperial
 
 -
   
 (254)
Elmajo Urban Renewal Associates, LLC / Lincoln Harbor (Bldg A&C)
 
 -
   
 -
Crystal House Apartments Investors LLC / Crystal House
 
 (112)
   
 (10)
Portside Master Company, L.L.C./ Portside at Pier One - Bldg 7
 
 -
   
 (719)
PruRose Port Imperial South 13, LLC / RiverParc at Port Imperial
 
 -
   
 (225)
Roseland/Port Imperial Partners, L.P./ Riverwalk C
 
 -
   
 (184)
RoseGarden Marbella South, L.L.C./ Marbella II
 
 -
   
 -
Estuary Urban Renewal Unit B, LLC / Lincoln Harbor (Bldg B)
 
 -
   
 -
Riverpark at Harrison I, L.L.C./ Riverpark at Harrison
 
 (28)
   
 (173)
Capitol Place Mezz LLC / Station Townhouses
 
 (767)
   
 75
Harborside Unit A Urban Renewal, L.L.C. / URL Harborside
 
 (17)
   
 -
RoseGarden Monaco, L.L.C./ San Remo Land
 
 -
   
 -
Grand Jersey Waterfront URA, L.L.C./ Liberty Landing
 
 (60)
   
 (19)
Hillsborough 206 Holdings, L.L.C./ Hillsborough 206
 
 (19)
   
 -
Plaza VIII & IX Associates, L.L.C./ Vacant land (parking operations)
 
 77
   
 86
Office
         
Red Bank Corporate Plaza, L.L.C./ Red Bank
 
 101
   
 110
12 Vreeland Associates, L.L.C./ 12 Vreeland Road
 
 84
   
 (14)
BNES Associates III / Offices at Crystal Lake
 
 (194)
   
 68
KPG-P 100 IMW JV, LLC / 100 Independence Mall West
 
 -
   
 (384)
Keystone-Penn
 
 -
   
 -
Keystone-TriState
 
 (477)
   
 (1,348)
KPG-MCG Curtis JV, L.L.C./ Curtis Center
 
 179
   
 196
Other
         
Roseland/North Retail, L.L.C./ Riverwalk at Port Imperial
 
 (16)
   
 (18)
South Pier at Harborside / Hyatt Regency Jersey City on the Hudson
 
 (167)
   
 (84)
Other
 
 150
   
 (282)
Company's equity in earnings (loss) of unconsolidated joint ventures
$
 (1,554)
 
$
 (3,529)


 
21

 

The following is a summary of the financial position of the unconsolidated joint ventures in which the Company had investment interests as of March 31, 2016 and December 31, 2015: (dollars in thousands)
             
             
     
March 31,
   
December 31,
     
2016
   
2015
Assets:
           
   Rental property, net
 
$
 1,736,842 
 
$
 1,781,621 
   Other assets
   
 294,444 
   
 307,000 
   Total assets
 
$
 2,031,286 
 
$
 2,088,621 
Liabilities and partners'/
           
members' capital:
           
   Mortgages and loans payable
 
$
 1,279,688 
 
$
 1,298,293 
   Other liabilities
   
 215,552 
   
 215,951 
   Partners'/members' capital
   
 536,046 
   
 574,377 
   Total liabilities and
           
   partners'/members' capital
 
$
 2,031,286 
 
$
 2,088,621 
 
 
The following is a summary of the results from operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended March 31, 2016 and 2015: (dollars in thousands)
           
           
   
Three Months Ended
   
March 31,
   
2016
   
2015
Total revenues
$
 70,122 
 
$
 74,477 
Operating and other expenses
 
 (45,561)
   
 (57,356)
Depreciation and amortization
 
 (18,842)
   
 (16,993)
Interest expense
 
 (14,049)
   
 (11,334)
Net loss
$
 (8,330)
 
$
 (11,206)


5.    DEFERRED CHARGES, GOODWILL AND OTHER ASSETS, NET
           
           
   
March 31,
   
December 31,
(dollars in thousands)
 
2016
   
2015
Deferred leasing costs
$
 237,209
 
$
 239,690
Deferred financing costs - revolving credit facility (1)
 
 5,359
   
 5,394
   
 242,568
   
 245,084
Accumulated amortization
 
 (103,316)
   
 (118,014)
Deferred charges, net
 
 139,252
   
 127,070
Notes receivable (2)
 
 13,435
   
 13,496
In-place lease values, related intangibles and other assets, net
 
 12,736
   
 10,931
Goodwill
 
 2,945
   
 2,945
Prepaid expenses and other assets, net (3)
 
 52,629
   
 49,408
           
Total deferred charges, goodwill and other assets, net
$
 220,997
 
$
 203,850

(1)
Pursuant to recently issued accounting standards, deferred financing costs related to all other debt liabilities (other than for the revolving credit facility) are classified to net against those debt liabilities for all periods presented. See Note 2: Significant Accounting Policies – Deferred Financing Costs.
(2)
Includes as of March 31, 2016: a mortgage receivable for $10.4 million which bears interest at LIBOR plus six percent and matures in August 2016; and an interest-free note receivable with a net present value of $3.0 million and matures in April 2023.  The Company believes these balances are fully collectible.
(3)
Includes as of March 31, 2016, deposits of $12.7 million for acquisitions and developments.


 
22

 

DERIVATIVE FINANCIAL INSTRUMENTS

Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy.  As of March 31, 2016, the Company had outstanding interest rate swaps with a combined notional value of $350 million that were designated as cash flow hedges of interest rate risk. During the three months ending March 31, 2016, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2016, the Company recorded ineffectiveness of $913,000 in expense, which is included in interest and other investment income (loss) in the consolidated statements of operations, attributable to a floor mismatch in the underlying indices of the derivatives and the hedged interest payments made on its variable-rate debt.  Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $3.1 million will be reclassified as an increase to interest expense.

Undesignated Cash Flow Hedges of Interest Rate Risk
Interest rate caps not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.  The Company recognized expenses of $1,000 and $63,000 during the three months ended March 31, 2016 and 2015, respectively, which is included in interest and other investment income (loss) in the consolidated statements of operations.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2016 and December 31, 2015.  (dollars in thousands)

                     
     
Fair Value
       
Liability Derivatives designated
   
March 31,
   
December 31,
       
as hedging instruments
   
2016
   
2015
   
Balance sheet location
 
Interest rate swaps
 
$
 7,253 
 
$
 -
   
Accounts payable, accrued expenses and other liabilities
 
                     
Asset Derivatives not designated
                   
as hedging instruments
                   
Interest rate caps
 
$
 -
 
$
 2 
   
Deferred charges, goodwill and other assets
 

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement for the three months ending March 31, 2016 and 2015. (dollars in thousands)

                                           
Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
   
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
   
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion, Reclassification for Forecasted Transactions No Longer Probable of Occurring and Amount Excluded from Effectiveness Testing)
   
2016
   
2015
       
2016
   
2015
       
2016
   
2015
Three months ended March 31,
                                     
                                           
Interest rate swaps
$
(7,187)
 
$
 -
 
Interest expense
 
$
(847)
 
$
 -
 
Interest and other investment income (loss)
 
$
(913)
 
$
 -

Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. As of March 31, 2016, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $7.7 million. As of March 31, 2016, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at March 31, 2016, it could have been required to settle its obligations under the agreements at their termination value of $7.7 million. 
 
 
 
23

 

 
 
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)
           
   
March 31,
   
December 31,
   
2016
   
2015
Security deposits
$
 8,297
 
$
 7,785
Escrow and other reserve funds
 
 19,269
   
 27,558
           
Total restricted cash
$
 27,566
 
$
 35,343

 
 
7.    SENIOR UNSECURED NOTES

A summary of the Company’s senior unsecured notes as of March 31, 2016 and December 31, 2015 is as follows:  (dollars in thousands)

                   
     
March 31,
   
December 31,
 
Effective
 
     
2016
   
2015
 
Rate (1)
 
5.800% Senior Unsecured Notes, due January 15, 2016 (2)
   
 -
 
$
 200,000
 
 5.806
%
2.500% Senior Unsecured Notes, due  December 15, 2017
 
$
 250,000
   
 250,000
 
 2.803
%
7.750% Senior Unsecured Notes, due August 15, 2019
   
 250,000
   
 250,000
 
 8.017
%
4.500% Senior Unsecured Notes, due April 18, 2022
   
 300,000
   
 300,000
 
 4.612
%
3.150% Senior Unsecured Notes, due May 15, 2023
   
 275,000
   
 275,000
 
 3.517
%
Principal balance outstanding
   
 1,075,000
   
 1,275,000
     
Adjustment for unamortized debt discount
   
 (5,872)
   
 (6,156)
     
Unamortized deferred financing costs
   
 (4,765)
   
 (5,062)
     
                   
Total senior unsecured notes, net
 
$
 1,064,363
 
$
 1,263,782
     

(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 January 15, 2016, the Company repaid these notes at their maturity using proceeds from a new unsecured term loan and borrowings under 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 under the indenture relating to its senior unsecured notes as of March 31, 2016.
 

8.    UNSECURED TERM LOAN

On January 7, 2016, the Company obtained a new $350 million unsecured term loan, which matures in January 2019 with two one-year extension options.  The interest rate for the new term loan is currently 140 basis points over LIBOR, subject to adjustment on a sliding scale based on the Operating Partnership’s unsecured debt ratings, or at the Company's option, a defined leverage ratio.  The Company entered into interest rate swap arrangements to fix LIBOR for the duration of the term loan. Including costs, the current all-in fixed rate is 3.13 percent.  The proceeds from the loan were used primarily to repay outstanding borrowings on the Company’s unsecured revolving credit facility and to repay the Company's $200 million, 5.8 percent senior unsecured notes that matured on January 15, 2016. 
 
 
 
 
24

 

 
The interest rate on the unsecured term loan is based upon the Operating Partnership’s unsecured debt ratings, as follows:

     
Operating Partnership's
 
Interest Rate -
Unsecured Debt Ratings:
 
Applicable Basis Points
Higher of S&P or Moody's
 
Above LIBOR
No ratings or less than BBB-/Baa3
 
185.0
BBB- or Baa3 (current interest rate based on Company's election)
 
140.0
BBB or Baa2
 
115.0
BBB+ or Baa1
 
100.0
A- or A3 or higher
 
90.0

If the Company elected to use a defined leverage ratio, the interest rate under the unsecured term loan would be based on the following total leverage ratio grid:

     
   
Interest Rate -
   
Applicable Basis
Total Leverage Ratio
 
Points above LIBOR
<45%
 
145
≥45% and <50% (current ratio)
 
155
≥50% and <55%
 
165
≥55%
 
195

The terms of the unsecured term loan 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 term loan described below, or (ii) the property dispositions are completed while the Company is under an event of default under the term loan, 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 under its unsecured term loan as of March 31, 2016. 


9.    UNSECURED REVOLVING CREDIT FACILITY

The Company has a $600 million unsecured revolving credit facility with a group of 17 lenders.  The 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 (current)
 
130.0
 
30.0
BBB or Baa2
 
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.
 
 
 
25

 
 

 
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 under its revolving credit facility as of March 31, 2016.
 
As of March 31, 2016 and December 31, 2015, the Company had outstanding borrowings of $90 million and $155 million, respectively, under its unsecured revolving credit facility. 
 

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, land and development projects.  As of March 31, 2016, 24 of the Company’s properties, with a total carrying value of approximately $853 million, and four of the Company’s land and development projects, with a total carrying value of approximately $222 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 under its mortgages and loans payable as of March 31, 2016.

A summary of the Company’s mortgages, loans payable and other obligations as of March 31, 2016 and December 31, 2015 is as follows: (dollars in thousands)
                           
     
Effective
     
March 31,
   
December 31,
     
Property/Project Name
Lender
 
Rate (a)
     
2016
   
2015
 
Maturity
 
Port Imperial South (b)
Wells Fargo Bank N.A.
LIBOR+1.75
%
   
 -
 
$
 34,962 
 
01/17/16
 
6 Becker, 85 Livingston,
                         
75 Livingston & 20 Waterview
Wells Fargo CMBS
 
 10.260 
%
 
$
 63,279 
   
 63,279 
 
08/11/14
(c)
9200 Edmonston Road
Principal Commercial Funding L.L.C.
 
 9.780 
%
   
 3,793 
   
 3,793 
 
05/01/15
(d)
4 Becker
Wells Fargo CMBS
 
 9.550 
%
   
 40,478 
   
 40,631 
 
05/11/16
 
Curtis Center (e)
CCRE & PREFG
LIBOR+5.912
%
(f)
 
 64,000 
   
 64,000 
 
10/09/16
 
Various (g)
Prudential Insurance
 
 6.332 
%
   
 142,983 
   
 143,513 
 
01/15/17
 
150 Main St. (h)
Webster Bank
LIBOR+2.35
%
   
 16,103 
   
 10,937 
 
03/30/17
 
23 Main Street
JPMorgan CMBS
 
 5.587 
%
   
 28,367 
   
 28,541 
 
09/01/18
 
Harborside Plaza 5
The Northwestern Mutual Life
 
 6.842 
%
   
 216,738 
   
 217,736 
 
11/01/18
 
 
Insurance Co. & New York Life
                       
 
Insurance Co.
                       
100 Walnut Avenue
Guardian Life Insurance Co.
 
 7.311 
%
   
 18,202 
   
 18,273 
 
02/01/19
 
One River Center (i)
Guardian Life Insurance Co.
 
 7.311 
%
   
 41,698 
   
 41,859 
 
02/01/19
 
Park Square
Wells Fargo Bank N.A.
LIBOR+1.872
%
(j)
 
 27,500 
   
 27,500 
 
04/10/19
 
Port Imperial South 4/5 Retail
American General Life & A/G PC
 
 4.559 
%
   
 4,000 
   
 4,000 
 
12/01/21
 
The Chase at Overlook Ridge
New York Community Bank
 
 3.740 
%
   
 72,500 
   
 -
 
02/01/23
 
Port Imperial South 4/5 Garage
American General Life & A/G PC
 
 4.853 
%
   
 32,600 
   
 32,600 
 
12/01/29
 
                           
Principal balance outstanding
         
 772,241 
   
 731,624 
     
Adjustment for unamortized debt discount
         
 (222)
   
 (548)
     
Unamortized deferred financing costs
           
 (4,446)
   
 (4,465)
     
                           
Total mortgages, loans payable and other obligations, net
       
$
 767,573 
 
$
 726,611 
     
 
 
   
(a)
Reflects effective rate of debt, including deferred financing costs, comprised of the cost of terminated treasury lock agreements (if any), debt initiation costs, mark-to-market adjustment of acquired debt and other transaction costs, as applicable.
(b)
The loan was repaid in full at maturity, using borrowings from the Company's revolving credit facility.
(c)
Mortgage is cross collateralized by the four properties.  On April 22, 2016, the loan was repaid for $51.5 million.
(d)
Excess cash flow, as defined, is being held by the lender for re-leasing costs.  The deed for the property was placed in escrow and is available to the lender in the event of default or non-payment at maturity.  The mortgage loan was not repaid at maturity on May 1, 2015.  The Company is in discussions with the lender regarding a further extension of the loan.
(e)
The Company owns a 50 percent tenants-in-common interest in the Curtis Center property.  The Company’s $64.0 million loan consists of its 50 percent interest in a $102 million senior loan with a current rate of 3.7311 percent at March 31, 2016 and its 50 percent interest in a $26 million mezzanine loan (with a maximum borrowing capacity of $48 million) with a current rate of 9.937 percent at March 31, 2016.  The senior loan rate is based on a floating rate of one-month LIBOR plus 329 basis points and the mezzanine loan rate is based on a floating rate of one-month LIBOR plus 950 basis points.  The Company has entered into LIBOR caps for the periods of the loans.  The loans provide for three one-year extension options.
(f)
The effective interest rate includes amortization of deferred financing costs of 1.362 percent.
(g)
Mortgage is cross collateralized by seven properties. The Company has agreed, subject to certain conditions, to guarantee repayment of $61.1 million of the loan. 
(h)
This construction loan has a maximum borrowing capacity of $28.8 million. 
(i)
Mortgage is collateralized by the three properties comprising One River Center. 
(j)
The effective interest rate includes amortization of deferred financing costs of 0.122 percent.
 
 
 
 
26

 
 
 
CASH PAID FOR INTEREST AND INTEREST CAPITALIZED
Cash paid for interest for the three months ended March 31, 2016 and 2015 was $28,090,000 and $25,922,000, respectively.  Interest capitalized by the Company for the three months ended March 31, 2016 and 2015 was $4,561,000 and $3,607,000, respectively (which amounts included $1,458,000 and $1,256,000 for the three months ended March 31, 2016 and 2015, respectively, of interest capitalized on the Company’s investments in unconsolidated joint ventures which were substantially in development).

SUMMARY OF INDEBTEDNESS
As of March 31, 2016, the Company’s total indebtedness of $2,281,147,000 (weighted average interest rate of 4.95 percent) was comprised of $197,603,000 of revolving credit facility borrowings and other variable rate mortgage debt (weighted average rate of 3.40 percent) and fixed rate debt and other obligations of $2,089,638,000 (weighted average rate of 5.10 percent).

As of December 31, 2015, the Company’s total indebtedness of $2,154,920,000 (weighted average interest rate of 5.22 percent) was comprised of $292,399,000 of revolving credit facility borrowings and other variable rate mortgage debt (weighted average rate of 2.81 percent) and fixed rate debt and other obligations of $1,862,521,000 (weighted average rate of 5.60 percent). 

 
11.  EMPLOYEE BENEFIT 401(k) PLANS

Employees of the Company, who meet certain minimum age and service requirements, are eligible to participate in the Mack-Cali Realty Corporation 401(k) Savings/Retirement Plan (the “401(k) Plan”).  Eligible employees may elect to defer from one percent up to 60 percent of their annual compensation on a pre-tax basis to the 401(k) Plan, subject to certain limitations imposed by federal law.  The amounts contributed by employees are immediately vested and non-forfeitable.  The Company may make discretionary matching or profit sharing contributions to the 401(k) Plan on behalf of eligible participants in any plan year.  Participants are always 100 percent vested in their pre-tax contributions and will begin vesting in any matching or profit sharing contributions made on their behalf after two years of service with the Company at a rate of 20 percent per year, becoming 100 percent vested after a total of six years of service with the Company.  All contributions are allocated as a percentage of compensation of the eligible participants for the Plan year.  The assets of the 401(k) Plan are held in trust and a separate account is established for each participant.  A participant may receive a distribution of his or her vested account balance in the 401(k) Plan in a single sum or in installment payments upon his or her termination of service with the Company.  Total expense recognized by the Company for the 401(k) Plan for the three months ended March 31, 2016 and 2015 was $237,000 and zero, respectively.      

 
12.  DISCLOSURE OF FAIR VALUE OF ASSETS AND LIABILITIES

The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop estimated fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the assets and liabilities at March 31, 2016 and December 31, 2015.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash equivalents, receivables, notes receivables, accounts payable, and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of March 31, 2016 and December 31, 2015.

The fair value of the Company’s long-term debt, consisting of senior unsecured notes, an unsecured term loan, an unsecured revolving credit facility and mortgages, loans payable and other obligations aggregated approximately $2,299,752,000 and $2,150,507,000 as compared to the book value of approximately $2,269,287,000 and $2,145,393,000 as of March 31, 2016 and December 31, 2015, respectively.  The fair value of the Company’s long-term debt was categorized as a level 3 basis (as provided by ASC 820, Fair Value Measurements and Disclosures).  The fair value was estimated using a discounted cash flow analysis valuation based on the borrowing rates currently available to the Company for loans with similar terms and maturities.  The fair value of the mortgage debt and the unsecured notes was determined by discounting the future contractual interest and principal payments by a market rate.  Although the Company has determined that the majority of the inputs used to value its derivative financial instruments fall within level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivative financial instruments utilize level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. The Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivative financial instruments. As a result, the Company has determined that its derivative financial instruments valuations in their entirety are classified in level 2 of the fair value hierarchy.

The fair value measurements used in the evaluation of the Company’s rental properties are considered to be Level 3 valuations within the fair value hierarchy, as there are significant unobservable inputs. Examples of inputs utilized in the fair value calculations include estimated holding periods, discount rates, market capitalization rates, expected lease rental rates, and third party broker information.   For rental properties identified as held for sale, fair value measurements used represent estimated fair value of properties, less selling costs, based on contract prices when available.
 
 
 
27

 
 

 
Disclosure about fair value of assets and liabilities is based on pertinent information available to management as of March 31, 2016 and December 31, 2015.  Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since March 31, 2016 and current estimates of fair value may differ significantly from the amounts presented herein.  

 
13.  COMMITMENTS AND CONTINGENCIES

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

The Harborside Plaza 4-A agreement with the City of Jersey City, as amended, which commenced in 2002, is for a term of 20 years.  The annual PILOT is equal to two percent of Total Project Costs, as defined.  Total Project Costs are $49.5 million.  The PILOT totaled $247,000 and $247,000 for the three months ended March 31, 2016 and 2015, respectively.

The Harborside Plaza 5 agreement, also with the City of Jersey City, as amended, which commenced in 2002, is for a term of 20 years.  The annual PILOT is equal to two percent of Total Project Costs, as defined.  Total Project Costs are $170.9 million.  The PILOT totaled $854,000 and $854,000 for the three months ended March 31, 2016 and 2015, respectively.

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

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

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


 
28

 

GROUND LEASE AGREEMENTS
Future minimum rental payments under the terms of all non-cancelable ground leases under which the Company is the lessee, as of March 31, 2016, are as follows: (dollars in thousands)
     
Year
 
Amount
April 1 through December 31, 2016
$
 290
2017
 
 267
2018
 
 232
2019
 
 235
2020
 
 235
2021 through 2084
 
 15,348
     
Total
$
 16,607
 
Ground lease expense incurred by the Company during the three months ended March 31, 2016 and 2015 amounted to $102,000 and $102,000, respectively.

CONSTRUCTION PROJECTS
The Company owns a 76.25 percent interest in a consolidated joint venture which is constructing a 108-unit multi-family development rental property located in Eastchester, New York (the “Eastchester Project”).  The project is expected to be ready for occupancy by the second quarter of 2016.  The Eastchester Project is estimated to cost a total of $50.0 million (of which development costs of $35.9 million have been incurred through March 31, 2016).  The venture has a $28.8 million construction loan (with $16.1 million outstanding as of March 31, 2016).  The Company expects to fund costs of approximately $20.9 million for the development of the project (of which, as of March 31, 2016, the Company has incurred $16.1 million of the development costs and estimates it will need to fund an additional $4.8 million for the completion of the project).

On April 1, 2015, the Company acquired vacant land in Worcester, Massachusetts to accommodate a two-phase development of the CitySquare Project for a purchase price of $3.1 million with an additional $1.25 million to be paid (which is accrued as of March 31, 2016), subject to certain conditions, in accordance with the terms of the purchase and sale agreement.  The first phase with 237 units started construction in the third quarter 2015 with anticipated initial deliveries in the second quarter 2017.  The Company has a construction loan with a maximum borrowing amount of $41.5 million (with no outstanding balance as of March 31, 2016).   Total development costs are estimated to be approximately $92.5 million (of which $10.6 million was incurred by the Company through March 31, 2016 and estimates it will need to fund an additional $40.4 million for the completion of the project).

On October 6, 2015, the Company entered into a joint venture partnership with XS Port Imperial Hotel, LLC (“XS”) to form XS Hotel Urban Renewal Associates LLC (“XS Hotel URA”) for the development and ownership of a 364-key dual branded hotel property located in Weehawken, New Jersey (“Port Imperial Hotel”).  Concurrently, the Company and XS entered into a separate joint venture partnership to form XS Hotel Associates, L.L.C. (“XS Hotel”) for the management and operations of the completed hotel development.  The Company holds a 90 percent interest and XS holds the remaining 10 percent interest in the consolidated joint ventures, XS Hotel URA and XS Hotel, with the Company having full and complete authority, power, and discretion to manage and control the ventures’ business, affairs, and property.  The construction of the Port Imperial Hotel is estimated to cost a total of $105.9 million.  The venture has a $94 million construction loan (with no outstanding balance as of March 31, 2016).  As of March 31, 2016, the Company incurred development costs of $4.7 million and estimates it will need to fund an additional $0.5 million for the completion of the project.

The Company owns developable land to accommodate a multi-phase development project of approximately 1,034-unit multi-family rental property located in Malden, Massachusetts.  The initial phase commenced construction of 292 units in the third quarter of 2015 (the “Chase II Project”).  The Chase II project is estimated to cost a total of $74.9 million (of which the Company has incurred $26.4 million through March 31, 2016) and is expected to be ready for occupancy by second quarter of 2017.  The Company has a construction loan with a maximum borrowing amount of $48 million (with no outstanding balance as of March 31, 2016).  The Company estimates it will need to fund additional costs of $0.5 million for the completion of the Chase II Project.

The Company owns an office property that it repurposed for residential use.  The 197-unit multi-family development project, which is located in Morris Plains, New Jersey (“Signature Place Project”), is expected to be ready for occupancy by the fourth quarter of 2017. The Signature Place Project, which is estimated to cost a total of $61.4 million (of which development costs of $5.1 million have been incurred through March 31, 2016) is expected to be funded by a $42 million construction loan.  The Company expects to fund costs of approximately $19.4 million for the development of the project, of which the Company has incurred $4.7 million as of March 31, 2016.
 
 
 
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The Company owns an 85 percent interest in a consolidated joint venture, which is constructing a 296-unit multi-family development rental property located in East Boston, Massachusetts (“Portside 5/6 Project”).  The project is expected to be ready for occupancy by the first quarter of 2018.  The Portside 5/6 Project, which is estimated to cost a total of $112.4 million (of which development costs of $8.5 million have been incurred through March 31, 2016), is expected to be funded by a $73 million construction loan.  The Company expects to fund costs of approximately $33.5 million for the development of the project, of which the Company has incurred $6.2 million as of March 31, 2016.

OTHER
Through February 2016, the Company could not dispose of or distribute certain of its properties which were originally contributed by certain unrelated common unitholders of the Operating Partnership, without the express written consent of such common unitholders, as applicable, except in a manner which did not result in recognition of any built-in-gain (which could result in an income tax liability) or which reimbursed the appropriate specific common unitholders for the tax consequences of the recognition of such built-in-gains (collectively, the “Property Lock-Ups”).  The aforementioned restrictions did not apply in the event that the Company sold all of its properties or in connection with a sale transaction which the Company’s Board of Directors determined was reasonably necessary to satisfy a material monetary default on any unsecured debt, judgment or liability of the Company or to cure any material monetary default on any mortgage secured by a property.  The Property Lock-Ups expired as of February 2016.  Upon the expiration of the Property Lock-Ups, the Company is generally required to use commercially reasonable efforts to prevent any sale, transfer or other disposition of the subject properties from resulting in the recognition of built-in gain to the specific common unitholders, which include members of the Mack Group (which includes William L. Mack, Chairman of the Company’s Board of Directors; David S. Mack, director; and Earle I. Mack, a former director); the Robert Martin Group (which includes Robert F. Weinberg, a former director and current member of its Advisory Board), and the Cali Group (which includes John R. Cali, a former director and current member of its Advisory Board).  As of March 31, 2016, 117 of the Company’s properties, with an aggregate net book value of approximately $1.3 billion, have lapsed restrictions and are subject to these conditions.
 

14.  TENANT LEASES

The Properties are leased to tenants under operating leases with various expiration dates through 2035.  Substantially all of the commercial leases provide for annual base rents plus recoveries and escalation charges based upon the tenant’s proportionate share of and/or increases in real estate taxes and certain operating costs, as defined, and the pass-through of charges for electrical usage.

Future minimum rentals to be received under non-cancelable commercial operating leases at March 31, 2016 are as follows (dollars in thousands):

     
Year
 
Amount
April 1 through December 31, 2016
$
 344,351
2017
 
 435,004
2018
 
 361,934
2019
 
 299,626
2020
 
 259,333
2021 and thereafter
 
 1,048,288
     
Total
$
 2,748,536

 
Multi-family rental property residential leases are excluded from the above table as they generally expire within one year.

 
15.  MACK-CALI REALTY CORPORATION STOCKHOLDERS’ EQUITY

To maintain its qualification as a REIT, not more than 50 percent in value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any taxable year of the Company, other than its initial taxable year (defined to include certain entities), applying certain constructive ownership rules.  To help ensure that the Company will not fail this test, the Company’s Charter provides, among other things, certain restrictions on the transfer of common stock to prevent further concentration of stock ownership.  Moreover, to evidence compliance with these requirements, the Company must maintain records that disclose the actual ownership of its outstanding common stock and demands written statements each year from the holders of record of designated percentages of its common stock requesting the disclosure of the beneficial owners of such common stock.
 
 
 
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SHARE REPURCHASE PROGRAM
In September 2012, the Board of Directors renewed and authorized an increase to the Company’s repurchase program (“Repurchase Program”).  The Company has authorization to repurchase up to $150 million of its outstanding common stock under the renewed Repurchase Program, which it may repurchase from time to time in open market transactions at prevailing prices or through privately negotiated transactions.  The Company has purchased and retired 394,625 shares of its outstanding common stock for an aggregate cost of approximately $11 million (all of which occurred in the year ended December 31, 2012), with a remaining authorization under the Repurchase Program of $139 million.
 
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has a Dividend Reinvestment and Stock Purchase Plan (the “DRIP”) which commenced in March 1999 under which approximately 5.5 million shares of the Company’s common stock have been reserved for future issuance.  The DRIP provides for automatic reinvestment of all or a portion of a participant’s dividends from the Company’s shares of common stock.  The DRIP also permits participants to make optional cash investments up to $5,000 a month without restriction and, if the Company waives this limit, for additional amounts subject to certain restrictions and other conditions set forth in the DRIP prospectus filed as part of the Company’s effective registration statement on Form S-3 filed with the SEC for the approximately 5.5 million shares of the Company’s common stock reserved for issuance under the DRIP.

STOCK OPTION PLANS
In May 2013, the Company established the 2013 Incentive Stock Plan (the “2013 Plan”) under which a total of 4,600,000 shares have been reserved for issuance.  In September 2000, the Company established the 2000 Employee Stock Option Plan (“2000 Employee Plan”) and the Amended and Restated 2000 Director Stock Option Plan (“2000 Director Plan” and together with the 2000 Employee Plan, the “2000 Plans”).  In May 2002, shareholders of the Company approved amendments to both of the 2000 Plans to increase the total shares reserved for issuance under both of the 2000 Plans from 2,700,000 to 4,350,000 shares of the Company’s common stock (from 2,500,000 to 4,000,000 shares under the 2000 Employee Plan and from 200,000 to 350,000 shares under the 2000 Director Plan).  As the 2000 Plans expired in 2010, stock options may no longer be issued under those plans.  Stock options granted under the 2000 Employee Plan became exercisable over a five-year period.  All stock options granted under the 2000 Director Plan became exercisable in one year.  All options were granted at the fair market value at the dates of grant and have terms of 10 years.  As of March 31, 2016 and December 31, 2015, the stock options outstanding had a weighted average remaining contractual life of approximately 9.2 and 9.4 years, respectively.

On June 5, 2015, in connection with employment agreements entered into with each of Messrs. Rudin and DeMarco (together, the “Executive Employment Agreements”), the Company granted options to purchase a total of 800,000 shares of the Company’s common stock, exercisable for a period of ten years with an exercise price equal to the closing price of the Company’s common stock on the grant date of $17.31 per share, with 400,000 of such options vesting in three equal annual installments commencing on the first anniversary of the grant date (“Time Vesting Options”), and 400,000 of such options vesting if the Company’s common stock trades at or above $25.00 per share for 30 consecutive trading days while the executive is employed (“Price Vesting Options”), or on or before June 30, 2019, subject to certain conditions.   

Information regarding the Company’s stock option plans is summarized below:
               
               
       
Weighted
   
Aggregate
       
Average
   
Intrinsic
 
Shares
   
Exercise
   
Value
 
Under Options
   
Price
   
$(000’s)
Outstanding at January 1, 2016
 805,000
 
$
 17.33
  $
 4,843
Lapsed or Cancelled
 -
   
 -
     
Outstanding at March 31, 2016 ($17.31 – $21.25)
 805,000
 
$
 17.33
 
$
 4,963
Options exercisable at March 31, 2016
 5,000
           
Available for grant at March 31, 2016
 2,722,338
           
 
 
 
 
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There were no stock options exercised under all stock option plans for the three months ended March 31, 2016 and 2015, res