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Mack-Cali Realty 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

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, 2005

 

or

 

o

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.)

 

 

 

 

 

11 Commerce Drive, Cranford, New Jersey

 

07016-3501




(Address of principal executive offices)

 

(Zip Code)

 

(908) 272-8000


(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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) YES X NO ___

 

As of April 29, 2005, there were 61,557,953 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:

 

Consolidated Balance Sheets as of March 31, 2005

and December 31, 2004

4

 

Consolidated Statements of Operations for the three months

ended March 31, 2005 and 2004

5

 

Consolidated Statement of Changes in Stockholders’ Equity for the

three months ended March 31, 2005

6

 

Consolidated Statements of Cash Flows for the three months

ended March 31, 2005 and 2004

7

 

Notes to Consolidated Financial Statements

8-34

 

Item 2.

Management’s Discussion and Analysis of Financial Condition

 

 

and Results of Operations

35-49

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

 

Item 4.

Controls and Procedures

50

 

Part II

Other Information

 

Item 1.

Legal Proceedings

51-52

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

Item 3.

Defaults Upon Senior Securities

53

 

Item 4.

Submission of Matters to a Vote of Security Holders

53

 

Item 5.

Other Information

53

 

Item 6.

Exhibits

53

 

Signatures

54

 

 

2

 

 



 

 

MACK-CALI REALTY CORPORATION

 

Part I – Financial Information

 

 

Item 1.

Financial Statements

 

The accompanying unaudited consolidated balance sheets, statements of operations, of changes in stockholders’ 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, 2004.

 

The results of operations for the three month periods ended March 31, 2005 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)

 

 

 

ASSETS

March 31,

2005

(unaudited)

 

December 31,

2004




Rental property

 

 

Land and leasehold interests

$       628,346

$       593,606

Buildings and improvements

3,504,083

3,296,789

Tenant improvements

258,081

262,626

Furniture, fixtures and equipment

7,383

7,938




 

4,397,893

4,160,959

Less – accumulated depreciation and amortization

(628,918)

(641,626)




 

3,768,975

3,519,333

Rental property held for sale, net

73,820

19,132




Net investment in rental property

3,842,795

3,538,465

Cash and cash equivalents

13,087

12,270

Investments in unconsolidated joint ventures

59,044

46,743

Unbilled rents receivable, net

85,828

82,586

Deferred charges and other assets, net

175,856

155,060

Restricted cash

9,545

10,477

Accounts receivable, net of allowance for doubtful accounts

 

 

of $1,215 and $1,235

7,057

4,564




 

 

 

Total assets

$4,193,212

$3,850,165




 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 




Senior unsecured notes

$1,180,396

$1,031,102

Revolving credit facilities

310,000

107,000

Mortgages, loans payable and other obligations

558,540

564,198

Dividends and distributions payable

47,969

47,712

Accounts payable, accrued expenses and other liabilities

75,905

57,002

Rents received in advance and security deposits

50,728

47,938

Accrued interest payable

12,734

22,144




Total liabilities

2,236,272

1,877,096




 

 

 

Minority interests:

 

 

Operating Partnership

417,069

416,855

Consolidated joint ventures

--

11,103




 

 

 

Total minority interests

417,069

427,958




 

 

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

Preferred stock, $0.01 par value, 5,000,000 shares authorized, 10,000

 

 

and 10,000 shares outstanding, at liquidation preference

25,000

25,000

Common stock, $0.01 par value, 190,000,000 shares authorized,

 

 

61,514,061 and 61,038,875 shares outstanding

615

610

Additional paid-in capital

1,665,958

1,650,834

Dividends in excess of net earnings

(143,688)

(127,365)

Unamortized stock compensation

(8,014)

(3,968)




Total stockholders’ equity

1,539,871

1,545,111




 

 

 

Total liabilities and stockholders’ equity

$4,193,212

$3,850,165




 

 

 

 

 

 

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

2005

2004




Base rents

$133,141

$121,068

Escalations and recoveries from tenants

18,412

15,197

Parking and other

1,896

3,473




Total revenues

153,449

139,738




 

 

 

EXPENSES

 

 




Real estate taxes

19,117

16,358

Utilities

11,949

11,033

Operating services

21,378

17,336

General and administrative

7,427

6,397

Depreciation and amortization

35,807

29,714

Interest expense

28,398

29,037

Interest income

(64)

(720)




Total expenses

124,012

109,155




Income from continuing operations before minority interests and

 

 

equity in earnings of unconsolidated joint ventures

29,437

30,583

Minority interest in Operating Partnership

(6,674)

(6,928)

Minority interest in consolidated joint ventures

(74)

--

Equity in earnings of unconsolidated joint ventures

 

 

(net of minority interest), net

(277)

157

Gain on sale of investment in unconsolidated joint ventures

 

 

(net of minority interest)

31

637




Income from continuing operations

22,443

24,449

Discontinued operations (net of minority interest):

 

 

Income from discontinued operations

1,298

2,374

Realized gains (losses) and unrealized losses on

 

 

disposition of rental property, net

(798)

--




Total discontinued operations, net

500

2,374




Net income

22,943

26,823

Preferred stock dividends

(500)

(500)




Net income available to common shareholders

$    22,443

$  26,323




 

 

 

Basic earnings per common share:

 

 

Income from continuing operations

$         0.36

$      0.40

Discontinued operations

             0.01

          0.04




Net income available to common shareholders

$         0.37

$      0.44




 

 

 

Diluted earnings per common share:

 

 

Income from continuing operations

$         0.36

$      0.40

Discontinued operations

                --

          0.04




Net income available to common shareholders

$         0.36

$      0.44




 

 

 

Dividends declared per common share

$         0.63

$      0.63




 

 

 

Basic weighted average shares outstanding

         61,184

59,800




 

 

 

Diluted weighted average shares outstanding

         69,273

      68,276




 

 

 

 

 

 

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

 

 

 

5

 

 



 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2005 (in thousands) (unaudited)

 

 

 

Shares

Preferred

Amount

Shares

Common

Par Value

Additional

Paid-In

Capital

Dividends

Excess of

Net Earnings

Unamortized

Stock

Compensation

Total

Stockholders’

Equity










Balance at January 1, 2005

10

$25,000

61,039

$610

$1,650,834

$ (127,365)

$(3,968)

$1,545,111

Net income

--

--

--

--

--

22,943

--

22,943

Preferred stock dividends

--

--

--

--

--

(500)

--

(500)

Common stock dividends

--

--

--

--

--

(38,766)

--

(38,766)

Redemption of common units

 

 

 

 

 

 

 

 

for shares of common stock

--

--

22

--

576

--

--

576

Shares issued under Dividend

 

 

 

 

 

 

 

 

Reinvestment and Stock

 

 

 

 

 

 

 

 

Purchase Plan

--

--

2

--

88

--

--

88

Proceeds from stock options

 

 

 

 

 

 

 

 

exercised

--

--

337

4

9,540

--

--

9,544

Stock options expense

--

--

--

--

37

--

--

37

Deferred compensation plan

 

 

 

 

 

 

 

 

for directors

--

--

--

--

78

--

--

78

Issuance of Restricted Stock

 

 

 

 

 

 

 

 

Awards

--

--

114

1

4,946

--

(4,947)

--

Amortization of stock

 

 

 

 

 

 

 

 

compensation

--

--

--

--

--

--

760

760

Adjustment to fair value of

 

 

 

 

 

 

 

 

Restricted Stock Awards

--

--

--

--

(141)

--

141

--










 

 

 

 

 

 

 

 

 

Balance at March 31, 2005

10

$25,000

61,514

$615

$1,665,958

$(143,688)

$(8,014)

$1,539,871










 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

6

 

 



 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

 

 

Three Months Ended

March 31,

CASH FLOWS FROM OPERATING ACTIVITIES

2005

2004




Net income

$   22,943

$ 26,823

Adjustments to reconcile net income to net cash provided by

 

 

operating activities:

 

 

Depreciation and amortization

35,807

29,714

Depreciation and amortization on discontinued operations

393

1,409

Stock options expense

37

49

Amortization of stock compensation

760

722

Amortization of deferred financing costs and debt discount

892

1,105

Equity in earnings of unconsolidated joint ventures

 

 

(net of minority interest), net

277

(157)

Gain on sale of investment in unconsolidated joint venture

 

 

(net of minority interest)

(31)

(637)

Realized gains (losses) and unrealized losses on disposition

 

 

of rental property (net of minority interest)

798

--

Minority interest in Operating Partnership

6,674

6,928

Minority interest in consolidated joint venture

74

--

Minority interest in income from discontinued operations

162

308

Changes in operating assets and liabilities:

 

 

Increase in unbilled rents receivable, net

(3,329)

(3,037)

Increase in deferred charges and other assets, net

(10,665)

(8,090)

(Increase) decrease in accounts receivable, net

(2,493)

1,039

Increase in accounts payable, accrued expenses and other

 

 

liabilities

3,796

3,393

Increase in rents received in advance and security deposits

2,790

2,616

Decrease in accrued interest payable

(9,410)

(11,676)




 

 

 

Net cash provided by operating activities

$   49,475

$ 50,509




 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 




Additions to rental property and related intangibles

$(356,416)

$ (16,024)

Investment in unconsolidated joint ventures

(15,254)

(13,326)

Distributions from unconsolidated joint ventures

--

1,705

Proceeds from sale of investment in unconsolidated joint venture

2,676

720

Acquisition of minority interest in consolidated joint venture

(7,713)

--

Proceeds from sales of rental property

20,126

--

Funding of note receivable

--

(4,619)

Decrease in restricted cash

932

293




 

 

 

Net cash used in investing activities

$(355,649)

$ (31,251)




 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 




Proceeds from senior unsecured notes

$ 149,078

$ 202,363

Borrowings from revolving credit facility

396,000

154,000

Repayment of senior unsecured notes

--

(300,000)

Repayment of revolving credit facility

(193,000)

(124,000)

Repayment of mortgages, loans payable and other obligations

(5,596)

(1,396)

Payment of financing costs

(1,323)

(1,898)

Proceeds from stock options exercised

9,544

28,283

Proceeds from stock warrants exercised

--

2,863

Payment of dividends and distributions

(47,712)

(46,873)




 

 

 

Net cash provided by (used in) financing activities

$ 306,991

$ (86,658)




 

 

 

Net increase (decrease) in cash and cash equivalents

$        817

$ (67,400)

Cash and cash equivalents, beginning of period

             12,270

78,375




 

 

 

Cash and cash equivalents, end of period

  $ 13,087

$ 10,975




 

 

 

 

 

 

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

 

 

 

 

7

 

 



 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share/unit amounts)

 

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. As of March 31, 2005, the Company owned or had interests in 270 properties plus developable land (collectively, the “Properties”). The Properties aggregate approximately 30.4 million square feet, which are comprised of 162 office buildings and 97 office/flex buildings, totaling approximately 30.0 million square feet (which include one office building and one office/flex building aggregating 538,000 square feet owned by unconsolidated joint ventures in which the Company has investment interests), six industrial/warehouse buildings totaling approximately 387,400 square feet, two retail properties totaling approximately 17,300 square feet, one hotel (which is owned by an unconsolidated joint venture in which the Company has an investment interest) and two 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 Investments in Unconsolidated Joint Ventures in Note 2 for the Company’s treatment of unconsolidated joint venture interests. Intercompany accounts and transactions have been eliminated.

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Certain reclassifications have been made to prior period amounts in order to conform with current period presentation.

 

 

2.

SIGNIFICANT ACCOUNTING POLICIES

 

Rental

Property

Rental properties are stated at cost less accumulated depreciation and amortization. Costs directly related to the acquisition, development and construction of rental properties are capitalized. Capitalized development and construction costs include pre-construction costs essential to the development of the property, development and construction costs, interest, property taxes, insurance, salaries and other project costs incurred during the period of development. Included in total rental property is construction and development in-progress of $95,414 and $86,916 (including land of $55,114 and $53,705) as of March 31, 2005 and December 31, 2004, respectively. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives. Fully-depreciated assets are removed from the accounts.

 

The Company considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity (as distinguished from activities such as routine maintenance and cleanup). If portions of a rental project are substantially completed and occupied by tenants, or held available for occupancy, and other portions have not yet reached that stage, the substantially completed portions are accounted for as a separate project. The Company allocates costs incurred between the portions under construction and the portions substantially completed and held available for occupancy, and capitalizes only those costs

 

8

 

 



 

associated with the portion under construction.

 

Properties are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives are as follows:

 

Leasehold interests

Remaining lease term



Buildings and improvements

5 to 40 years



Tenant improvements

The shorter of the term of the

 

related lease or useful life



Furniture, fixtures and equipment

5 to 10 years



 

Upon acquisition of rental property, the Company estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities, generally consisting of the fair value of (i) above and below market leases, (ii) in-place leases and (iii) tenant relationships. The Company allocates the purchase price to the assets acquired and liabilities assumed based on their relative fair values. In estimating the fair value of the tangible and intangible assets acquired, the Company considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

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

 

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

 

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s real estate properties may be impaired. 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

 

9

 

 



 

amount of the property over the fair value of the property. The Company’s estimates of aggregate future cash flows expected to be generated by each property are based on a number of assumptions that 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. Management does not believe that the value of any of the Company’s rental properties is impaired.

 

Rental Property

Held for Sale and

Discontinued

Operations

When assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets. If, in management’s opinion, the net sales price of the assets which have been identified as held for sale is less than the net book value of the assets, a valuation allowance is established. Properties identified as held for sale and/or sold are presented in discontinued operations for all periods presented. See Note 6 – Discontinued Operations.

 

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

 

Investments in

Unconsolidated

Joint Ventures, Net

The Company accounts for its investments in unconsolidated joint ventures for which Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) does not apply, under the equity method of accounting as the Company exercises significant influence, but does not control these entities. These investments are recorded initially at cost, as Investments in Unconsolidated Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions.

 

FIN 46 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 should consolidate the VIE (the “primary beneficiary”). Generally, FIN 46 applies when either (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest, (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company adopted FIN 46 in 2003. The effect of adoption was not material.

 

The Company has evaluated its joint ventures with regards to FIN 46. As of March 31, 2005, the Company has identified its Meadowlands Xanadu joint venture with the Mills Corporation as a VIE, but is not consolidating such venture as the Company is not the primary beneficiary. Disclosure about this VIE is included in Note 4 – Investments in Unconsolidated Joint Ventures.

 

On a periodic basis, management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated joint ventures may be impaired. An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than

 

10

 

 



 

temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the value of the investment. Management does not believe that the value of any of the Company’s investments in unconsolidated joint ventures is impaired. See Note 4 – Investments in Unconsolidated Joint Ventures.

 

Cash and Cash

Equivalents

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

 

Deferred

Financing Costs

Costs incurred in obtaining financing are capitalized and amortized on a straight-line basis, which approximates the effective interest method, over the term of the related indebtedness. Amortization of such costs is included in interest expense and was $892 and $1,105 for the three months ended March 31, 2005 and 2004, respectively.

 

Deferred

Leasing Costs

Costs incurred in connection with leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in depreciation and amortization. Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease. Certain employees of the Company are compensated for providing leasing services to the Properties. The portion of such compensation, which is capitalized and amortized, approximated $957 and $1,475 for the three months ended March 31, 2005 and 2004, respectively.

 

Derivative

Instruments

The Company measures derivative instruments, including certain derivative instruments embedded in other contracts, at fair value and records them as an asset or liability, depending on the Company’s rights or obligations under the applicable derivative contract. For derivatives designated and qualifying as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of the derivative are reported in other comprehensive income (“OCI”) and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging and ineffective portions of hedges are recognized in earnings in the affected period.

 

Revenue

Recognition

Base rental revenue is recognized on a straight-line basis over the terms of the respective leases. Unbilled rents receivable represents the 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 recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed-rate renewal options for below-market leases. The capitalized above-market lease values for acquired properties are amortized as a reduction of base rental revenue over the remaining term of the respective leases, and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed-rate renewal options of the respective leases. Parking and other revenue includes income from parking spaces leased to tenants, income from tenants for additional services arranged for the Company, income from tenants for early lease terminations and income from managing and/or leasing properties for third parties. Escalations and recoveries are received from tenants for certain costs as provided in the lease agreements. These costs generally include real estate taxes, utilities, insurance, common area maintenance and other recoverable costs. See Note 13 – Tenant Leases.

 

 

11

 

 



 

 

Allowance for

Doubtful Accounts

Management periodically performs a detailed review of amounts due from tenants to determine if accounts receivable balances are impaired based on factors affecting the collectibility of those balances. Management’s estimate of the allowance for doubtful accounts requires management to exercise significant judgment about the timing, frequency and severity of collection losses, which affects the allowance and net income.

 

Income and

Other Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company generally will not be subject to corporate federal income tax (including alternative minimum tax) on net income that it currently distributes to its shareholders, provided that the Company satisfies certain organizational and operational requirements including the requirement to distribute at least 90 percent of its REIT taxable income to its shareholders. The Company has elected to treat certain of its corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”). In general, a TRS of the Company may perform additional services for tenants of the Company and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated). A TRS is subject to corporate federal income tax. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. The Company is subject to certain state and local taxes.

 

Earnings

Per Share

The Company presents both basic and diluted earnings per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, where such exercise or conversion would result in a lower EPS amount.

 

Dividends and

Distributions

Payable

The dividends and distributions payable at March 31, 2005 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (61,532,961 shares), distributions payable to minority interest common unitholders of the Operating Partnership (7,657,428 common units) and preferred distributions payable to preferred unitholders of the Operating Partnership (215,018 preferred units) for all such holders of record as of April 5, 2005 with respect to the first quarter 2005. The first quarter 2005 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.63 per common share and unit, as well as the first quarter 2005 preferred unit distributions of $18.1818 per preferred unit, were approved by the Board of Directors on March 24, 2005. The preferred stock dividends payable were paid on April 15, 2005. The common stock dividends, and common and preferred unit distributions payable were paid on April 18, 2005.

 

The dividends and distributions payable at December 31, 2004 represents dividends payable to preferred shareholders (10,000 shares) and common shareholders (61,118,025 shares), distributions payable to minority interest common unitholders of the Operating Partnership (7,616,447 common units) and preferred distributions payable to preferred unitholders of the Operating Partnership (215,018 preferred units) for all such holders of record as of January 5, 2005 with respect to the fourth quarter 2004. The fourth quarter 2004 preferred stock dividends of $50.00 per share, common stock dividends and common unit distributions of $0.63 per common share and unit, as well as the fourth quarter 2004 preferred unit distributions of $18.1818 per preferred unit, were approved by the Board of Directors on

 

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December 7, 2004. The preferred stock dividends, common stock dividends, and common and preferred unit distributions payable were paid on January 18, 2005.

 

Costs Incurred

For Preferred

Stock Issuances

Costs incurred in connection with the Company’s preferred stock issuances are reflected as a reduction of additional paid-in capital.

 

Stock

Compensation

The Company accounts for stock options and restricted stock awards granted prior to 2002 using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations (“APB No. 25”). Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options is recognized ratably over the vesting period. The Company’s policy is to grant options with an exercise price equal to the quoted closing market price of the Company’s stock on the business day preceding the grant date. Accordingly, no compensation cost has been recognized under the Company’s stock option plans for the granting of stock options made prior to 2002. Restricted stock awards granted prior to 2002 are valued at the vesting dates of such awards with compensation cost for such awards recognized ratably over the vesting period.

 

In 2002, the Company adopted the provisions of FASB No. 123, which requires, on a prospective basis, that the estimated fair value of restricted stock (“Restricted Stock Awards”) and stock options at the grant date be amortized ratably into expense over the appropriate vesting period. For the three months ended March 31, 2005 and 2004, the Company recorded restricted stock and stock options expense of $797 and $771, respectively. FASB No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, was issued in December 2002 and amends FASB No. 123, Accounting for Stock Based Compensation. FASB No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation. In addition, this Statement amends the disclosure requirements of FASB No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. FASB No. 148 disclosure requirements are presented as follows:

 

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The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested stock awards in each period:

 

 

 

Three Month Ended

March 31,

 

 

2005

2004

 

 



 

 

Basic EPS

Basic EPS





Net income, as reported

 

$22,943

$26,823

Add:       Stock-based compensation expense included in

 

 

 

reported net income (net of minority interest)

 

709

682

Deduct:  Total stock-based compensation expense determined

 

 

 

under fair value based method for all awards

 

(933)

(999)

Add:       Minority interest on stock-based compensation

 

 

 

expenses under fair value based method

 

103

115





Pro forma net income

 

22,822

26,621

Deduct:  Preferred stock dividends

 

(500)

(500)





Pro forma net income available to common shareholders –

 

 

 

basic

 

$22,322

$26,121





 

 

 

 

Earnings Per Share:

 

 

 

Basic – as reported

 

        $    0.37

        $    0.44

Basic – pro forma

 

        $    0.37

        $    0.44

 

 

 

 

Diluted – as reported

 

        $    0.36

        $    0.44

Diluted – pro forma

 

        $    0.36

        $    0.43





 

 

3.

REAL ESTATE PROPERTY TRANSACTIONS

 

Property Acquisitions

The Company acquired the following office properties during the three months ended March 31, 2005:

 

Acquisition

 

 

# of

Rentable

Investment by

Date

Property/Address

Location

Bldgs.

Square Feet

Company (a)







03/02/05

101 Hudson Street (b)

Jersey City, Hudson County, NJ

1

1,246,283

$330,233

03/29/05

23 Main Street (b) (c)

Holmdel, Monmouth County, NJ

1

350,000

23,880







 

 

 

 

 

Total Property Acquisitions:

 

2

1,596,283

$354,113






 

 

 

 

 

(a)   Amounts are as of March 31, 2005.

(b)   Transaction was funded primarily through borrowing on the Company’s revolving credit facility.

(c)   In addition to its initial investment, the Company presently intends to make additional investments related to the property of approximately $12,122.

 

Property Sales

The Company sold the following office properties during the three months ended March 31, 2005:

 

Sale

 

 

# of

Rentable

Net Sales

Net Book

Realized

Date

Property/Address

Location

Bldgs.

Square Feet

Proceeds

Value

Gain/(Loss)









02/04/05

210 South 16th Street

Omaha, Douglas County, Nebraska

1

318,224

$ 8,464

$ 8,210

$254

02/11/05

1122 Alma Road

Richardson, Dallas County, Texas

1

82,576

2,075

2,344

(269)

02/15/05

3 Skyline Drive

Hawthorne, Westchester County, New York

1

75,668

9,587

8,856

731









 

 

 

 

 

 

 

Total Office Property Sales:

 

3

476,468

$20,126

$19,410

$716








 

 

 

 

 

 

 

 

 

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4.

INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES

 

The debt of the Company’s unconsolidated joint ventures aggregating $122,969 as of March 31, 2005 is non-recourse to the Company, except for customary exceptions pertaining to such matters as intentional misuse of funds, environmental conditions and material misrepresentations, and except as otherwise indicated below.

 

MEADOWLANDS XANADU

On November 25, 2003, the Company and affiliates of The Mills Corporation (“Mills”) entered into a joint venture to form Meadowlands Mills/Mack-Cali Limited Partnership (“Meadowlands Venture”) for the purpose of developing a $1.3 billion family entertainment, recreation and retail complex with an office and hotel component to be built at the Meadowlands sports complex in East Rutherford, New Jersey (“Meadowlands Xanadu”). Meadowlands Xanadu’s approximately 4.76 million-square-foot complex is expected to feature a family entertainment, recreation and retail destination comprising five themed zones: sports; entertainment; children’s education; fashion; and food and home, in addition to four office buildings, aggregating approximately 1.8 million square feet, and a 520-room hotel.

 

On December 3, 2003, the Meadowlands Venture entered into a redevelopment agreement (the “Redevelopment Agreement”) with the New Jersey Sports and Exposition Authority (“NJSEA”) for the redevelopment of the area surrounding the Continental Airlines Arena in East Rutherford, New Jersey and the construction of the Meadowlands Xanadu project. The Redevelopment Agreement provides for a 75-year ground lease and requires the joint venture to pay the NJSEA a $160,000 development rights fee and fixed rent over the term. Fixed rent will be in the amount of $1 per year for the first 15 years, increasing to $7,500 from the 16th to the 18th years, increasing to $8,447 in the 19th year, increasing to $8,700 in the 20th year, increasing to $8,961 in the 21st year, then to $9,200 in the 23rd to 26th years, with additional increases over the remainder of the term, as set forth in the ground lease. The ground lease also allows for the potential for participation rent payments by the venture, as described in the ground lease agreement. A First Amendment to the Redevelopment Agreement and the ground lease, itself, were signed on October 5, 2004. The Meadowlands Venture received all necessary permits and approvals from the NJSEA and U.S. Army Corps of Engineers in March 2005 and commenced construction in the same month. As a condition to the commencement of work to fill wetlands pursuant to the permit issued by the U.S. Army Corps of Engineers and pursuant to the Redevelopment Agreement, as amended, the Meadowlands Venture conveyed certain vacant land, known as the Empire Tract, to a conservancy trust. Pursuant to the First Amendment to the Redevelopment Agreement, upon the NJSEA’s receipt of the $160,000 development rights fee, it will make a payment to the Meadowlands Venture of $26,800 for the Empire Tract. In March 2005, after receiving the permits and approvals required to commence construction of the project, and as a requirement of the NJSEA to allow commencement of construction, the Meadowlands Venture paid $50,000 into escrow, to be applied toward the development rights fee.

 

The Company and Mills own a 20 percent and 80 percent interest, respectively, in the Meadowlands Venture. These interests were subject to certain participation rights by The New York Giants, which were subsequently terminated in April 2004. The joint venture agreement required the Company to make an equity contribution up to a maximum of $32,500, which it fulfilled in April 2005. Pursuant to the joint venture agreement, Mills has received subordinated capital credit in the venture of approximately $118,000, which represents certain costs incurred by Mills in connection with the Empire Tract prior to the creation of the Meadowlands Venture. The joint venture agreement requires Mills to contribute the balance of the capital required to complete the entertainment phase, subject to certain limitations. The Company will receive a nine percent preferred return on its equity investment, only after Mills receives a nine percent preferred return on its equity investment. Residual returns, subject to participation by other parties, will be in proportion to each partner’s respective percentage interest.

 

Mills will develop, lease and operate the entertainment phase of the Meadowlands Xanadu project. The joint venture agreement provides the Company an option to cause the Meadowlands Venture to form component ventures for the future development of the office and hotel phases, which the Company will develop, lease and operate. The Company will own an 80 percent interest and Mills will own a 20 percent interest in such component ventures. The agreement provides for the first office or hotel component ventures to be formed no later than four years after the grand opening of the entertainment phase, and requires that all component ventures for the office and hotel phases be formed no later than 10 years from such date, but does not require that any or all components be developed. However, under the Meadowlands Venture agreement, Mills has the ability to accelerate such formation schedule, subject to certain conditions. Should the Company fail to meet the time schedule described above for the formation

 

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of the component ventures, the Company will forfeit its rights to cause the Meadowlands Venture to form additional component ventures. If this occurs, Mills will have the ability to develop the additional phases, subject to the Company’s right to participate, or to cause the Meadowlands Venture to sell such components to a third party, subject to a sales price limitation of 95 percent of the value that would have been the amount necessary to form such component ventures.

 

Commencing three years after the opening of the entertainment, recreation and retail phase of the Meadowlands Xanadu project, either Mills or the Company may sell its partnership interest to a third party subject to the following provisions:

 

  • Mills has certain “drag-along” rights and the Company has certain “tag-along” rights in connection with such sale of interest to a third party; and
  • Mills has a right of first refusal with respect of a sale by the Company of its partnership interests.

 

In addition, commencing on the sixth anniversary of the opening, the Company may cause Mills to purchase, and Mills may cause the Company to sell to Mills, all of the Company’s partnership interests at a price based on the fair market value of the project. Notwithstanding the exercise by Mills or the Company of any of the foregoing rights with respect to the sale of the Company’s partnership interest to Mills or a third party, the Company will retain its right to component ventures for the future development of the office and hotel phases.

 

On February 12, 2003, the New Jersey Sports and Exposition Authority selected The Mills Corporation and the Company to redevelop the Continental Airlines Arena site (“Arena Site”) for mixed uses, including retail. In March 2003, Hartz Mountain Industries, Inc., or Hartz, filed a lawsuit in the Superior Court of New Jersey, Law Division, for Bergen County, seeking to enjoin the New Jersey Sports and Exposition Authority, or NJSEA, from entering into a contract with Mills and the Company for the redevelopment of the Continental Arena site.  In May 2003, the court denied Hartz’s request for an injunction and dismissed its suit for failure to exhaust administrative remedies.  In June 2003, the NJSEA held hearings on Hartz’s protest, and on a parallel protest filed by another rejected developer, Westfield, Inc., or Westfield.  On September 10, 2003, the NJSEA ruled against Hartz’s and Westfield’s protests, and on May 14, 2004, the Appellate Division of the Superior Court of New Jersey rejected Hartz’s contention that the NJSEA lacks statutory authority to allow retail development of its property.   The Supreme Court of New Jersey has declined to review the Appellate Division’s decision. Hartz, Westfield and four taxpayers (the “Braha Appellants”) have also filed appeals from the NJSEA’s final decision based on other grounds. In a separate action commenced in January 2004, Hartz and Westfield also appealed the NJSEA’s approval and execution of the formal redevelopment agreement with the Meadowlands Venture. Several appeals filed by Hartz, Westfield and others, including certain environmental groups, that challenge certain approvals received by the Meadowlands Venture from the NJSEA, the New Jersey Meadowlands Commission and the New Jersey Department of Environmental Protection remain pending before the Appellate Division.  The Appellate Division, in a decision rendered on November 24, 2004, completed its review of Hartz’s Open Public Records Act appeal and the remand proceeding it earlier ordered and upheld the findings of the Law Division in the remand proceeding. The Supreme Court of New Jersey has declined to review the Appellate Division’s decision.  The NJSEA held further hearings on December 15 and 16, 2004, at Hartz’s request to review certain additional facts in support of its bid protest. The Hearing Officer rendered his Supplemental Report and Recommendation to the NJSEA on March 4, 2005, finding no merit in the protests presented by Hartz and Westfield. The NJSEA accepted the Supplemental Report and Recommendation on March 30, 2005 and Hartz has appealed that decision to the Appellate Division. Hartz has also filed an application with the Appellate Division seeking an Order staying the construction of the Meadowlands Xanadu project, which officially commenced on March 24, 2005, and on April 27, 2005, the Braha Appellants filed a separate appeal with the Appellate Division also challenging the NJSEA’s decision to allow construction to begin and seeking an Order staying the construction of the Meadowlands Xanadu project. The Appellate Division has not made any determinations with respect to these appeals. On April 5, 2005 the New York Football Giants filed a Verified Complaint seeking an emergency order halting construction pending a final decision on its contention that construction of the Meadowlands Xanadu project violates its lease agreements with the NJSEA. The Superior Court of New Jersey, Chancery Division, has scheduled a hearing on that application for May 6, 2005. On March 18, 2005, the U.S. Army Corps of Engineers issued a permit to the Meadowlands Venture to authorize the filling of 7.69 acres of wetlands and other waters of the United States in connection with the Meadowlands Xanadu project. On March 30, 2005 the Sierra Club, the New Jersey Public Interest Research Group, Citizen Lobby, Inc. and the New Jersey Environmental Federation filed a complaint in the United States District Court for the District of New Jersey, challenging the Corps’ decision to issue the permit to the Meadowlands Venture and seeking to set aside the permit

 

16

 

 



 

and remand the matter to the Corps for further proceedings consistent with the National Environmental Policy Act and the Clean Water Act. The complaint also stated that the plaintiffs were seeking a preliminary injunction to halt the filling activities authorized by the Corps’ permit pending the resolution of the plaintiffs’ claims on the merits. The complaint names both the Corps and the Meadowlands Venture as defendants. Answers to the complaint must be filed by June 13, 2005. It is expected that the parties will file cross motions for summary judgment later this year.

 

The Company believes that the Meadowlands Venture’s proposal and the planned project comply with applicable laws, and the Meadowlands Venture intends to continue its vigorous defense of its rights under the executed Redevelopment Agreement and recently executed Ground Lease. Although there can be no assurance, the Company does not believe that the pending appeals will have any material affect on its ability to develop the Meadowlands Xanadu project.

 

HPMC

On July 21, 1998, the Company entered into a joint venture with HCG Development, L.L.C. and Summit Partners I, L.L.C. to form HPMC Development Partners II, L.P. (formerly known as HPMC Lava Ridge Partners, L.P.). HPMC Development Partners II, L.P.’s efforts have focused on three development projects, commonly referred to as Lava Ridge, Pacific Plaza I & II and Stadium Gateway.

 

The Company has a 50 percent ownership interest and HCG Development, L.L.C. and Summit Partners I, L.L.C. (both of which are not affiliated with the Company) collectively have a 50 percent ownership interest in HPMC Development Partners II, L.P. Significant terms of the applicable partnership agreements, among other things, call for the Company to provide 80 percent and HCG Development, L.L.C. and Summit Partners I, L.L.C. to collectively provide 20 percent of the development equity capital. As the Company has agreed to fund development equity capital disproportionate to its ownership interest, it was granted a preferred return of 10 percent on its invested capital as a priority. Profits and losses are allocated to the partners based upon the priority of distributions specified in the respective agreements and entitle the Company to a preferred return, as well as 50 percent of residual profits above the preferred returns. Equity in earnings recognized by the Company consists of preferred returns and the Company’s equity in earnings (loss) after giving effect to the payment of such preferred returns.

 

Lava Ridge

Lava Ridge is an office complex comprised of three two-story buildings, aggregating 183,200 square feet, located in Roseville, California, which was constructed and placed in service by the venture. On May 30, 2002, the venture sold the office complex for approximately $31,700.

 

Stadium Gateway

Stadium Gateway is a development joint venture project, located in Anaheim, California between HPMC Development Partners II, L.P. and a third-party entity. The venture constructed a six-story, 273,194 square foot office building, which commenced initial operations in January 2002. On April 1, 2003, the venture sold the office property for approximately $52,500.

 

Pacific Plaza I & II

Pacific Plaza I & II is a two-phase development joint venture project, located in Daly City, California between, HPMC Development Partners II, L.P. and a third-party entity. Phase I of the project, which commenced initial operations in August 2001, consists of a nine-story office building, aggregating 364,384 square feet. Phase II, which comprises a three-story retail and theater complex, commenced initial operations in June 2002. On August 27, 2004, the venture sold the Pacific Plaza I & II complex for approximately $143,000. The Company performed management services for the property while it was owned by the venture and recognized $0 and $89 in fees for such services in the three months ended March 31, 2005 and 2004, respectively.

 

G&G MARTCO (Convention Plaza)

The Company holds a 50 percent interest in G&G Martco, which owns Convention Plaza, a 305,618 square foot office building, located in San Francisco, California. The venture has a mortgage loan with a $43,880 balance at March 31, 2005 collateralized by its office property. The loan also provides the venture the ability to increase the balance of the loan up to an additional $3,896 for the funding of qualified leasing costs. The loan bears interest at a rate of the London Inter-Bank Offered Rate (“LIBOR”) (2.87 percent at March 31, 2005) plus 162.5 basis points and matures in August 2006. The Company performs management and leasing services for the property owned by the

 

17

 

 



 

joint venture and recognized $34 and $36 in fees for such services in the three months ended March 31, 2005 and 2004, respectively.

 

PLAZA VIII AND IX ASSOCIATES, L.L.C./AMERICAN FINANCIAL EXCHANGE L.L.C.

On May 20, 1998, the Company entered into a joint venture with Columbia Development Company, L.L.C. (“Columbia”) to form American Financial Exchange L.L.C. The venture was formed to acquire land for future development, located on the Hudson River waterfront in Jersey City, New Jersey, adjacent to the Company’s Harborside Financial Center office complex. Among other things, the partnership agreement provides for a preferred return on the Company’s invested capital in the venture, in addition to the Company’s proportionate share of the venture’s profit, as defined in the agreement. The joint venture acquired land on which it initially constructed a parking facility. In the fourth quarter 2000, the joint venture started construction of Plaza 10, a 577,575 square foot office building, which was 100 percent pre-leased to Charles Schwab & Co. Inc. (“Schwab”) for a 15-year term, on certain of the land owned by the venture. The lease agreement with Schwab obligated the venture, among other things, to deliver space to the tenant by required timelines and offers expansion options, at the tenant’s election.

 

On September 29, 2003, the Company sold its interest in AFE, in which it held a 50 percent interest, and received approximately $162,145 in net sales proceeds from the transaction, which the Company used primarily to repay outstanding borrowings under its revolving credit facility. Following completion of the sale of its interest, the Company no longer has any remaining obligations to Schwab.

 

In advance of the transaction, AFE distributed its interests in Plaza VIII and IX Associates, L.L.C., which owned the undeveloped land currently used as a parking facility, to its then partners, the Company and Columbia. The Company and Columbia subsequently entered into a new joint venture to own and manage the undeveloped land and related parking operations through Plaza VIII and IX Associates, L.L.C. The Company and Columbia each hold a 50 percent interest in the new venture.

 

RAMLAND REALTY ASSOCIATES L.L.C. (One Ramland Road)

On August 20, 1998, the Company entered into a joint venture with S.B. New York Realty Corp. to form Ramland Realty Associates L.L.C. The venture was formed to own, manage and operate One Ramland Road, a 232,000 square foot office/flex building and adjacent developable land, located in Orangeburg, New York. In August 1999, the joint venture completed redevelopment of the property and placed the office/flex building in service. The Company holds a 50 percent interest in the joint venture. The venture has a mortgage loan with a $14,936 balance at March 31, 2005 secured by its office/flex property. The mortgage bears interest at a rate of LIBOR plus 175 basis points and matures in January 2007, with two one-year extension options, subject to certain conditions.

 

The Company performs management, leasing and other services for the property owned by the joint venture and recognized $9 and $3 in fees for such services in the three months ended March 31, 2005 and 2004 respectively.

 

ASHFORD LOOP ASSOCIATES L.P. (1001 South Dairy Ashford/2100 West Loop South)

On September 18, 1998, the Company entered into a joint venture with Prudential to form Ashford Loop Associates L.P. The venture was formed to own, manage and operate 1001 South Dairy Ashford, a 130,000 square foot office building acquired on September 18, 1998, and 2100 West Loop South, a 168,000 square foot office building acquired on November 25, 1998, both located in Houston, Texas. The Company held a 20 percent interest in the joint venture. Included in depreciation and amortization in the results of operations for the fourth quarter 2004 for the joint venture was a valuation allowance of $24,575 on account of the carrying value of the venture’s assets exceeding the net realizable value as of December 31, 2004. Included in the Company’s equity in earnings (loss) of unconsolidated joint venture for the fourth quarter 2004 was a $4,915 loss representing the Company’s share of the valuation allowance. On February 25, 2005, the Company sold its interest in the venture to Prudential for $2,664 and recognized a gain on the sale of $31 (net of minority interest of $4.)

 

SOUTH PIER AT HARBORSIDE – HOTEL DEVELOPMENT

On November 17, 1999, the Company entered into a joint venture with Hyatt Corporation (“Hyatt”) to develop a 350-room hotel on the South Pier at Harborside Financial Center, Jersey City, New Jersey, which was completed and commenced initial operations in July 2002. The Company owns a 50 percent interest in the venture.

 

The venture had a mortgage loan with a commercial bank with a $62,902 balance at December 31, 2003 collateralized by its hotel property. The debt bore interest at a rate of LIBOR plus 275 basis points, which was

 

18

 

 



 

scheduled to mature in December 2003, and was extended through January 29, 2004. On that date, the venture repaid the mortgage loan using the proceeds from a new $40,000 mortgage loan, (with a balance as of March 31, 2005 or $39,942), collateralized by the hotel property, as well as capital contributions from the Company and Hyatt of $10,750 each. The new loan carries an interest rate of LIBOR plus 200 basis points and matures in February 2006. The loan provides for three one-year extension options subject to certain conditions. The final two one-year extension options require payment of a fee. On May 25, 2004, the venture obtained a second mortgage loan with a commercial bank for $20,000 (with a balance as of March 31, 2005 of $14,000) collateralized by the hotel property, in which each partner, including the Company, has severally guaranteed repayment of approximately $8,000. The loan carries an interest rate of LIBOR plus 175 basis points and matures in February 2006. The loan provides for three one-year extension options subject to certain conditions. The final two one-year extension options require payment of a fee. The proceeds from this loan were used to make distributions to the Company and Hyatt in the amount of $10,000 each. Additionally, the venture has an $8,000 loan (with a balance as of March 31, 2005 of $7,570) with the City of Jersey City, provided by the U.S. Department of Housing and Urban Development. The loan currently bears interest at fixed rates ranging from 6.09 percent to 6.62 percent and matures in August 2020. The Company has posted an $8,000 letter of credit in support of this loan, $4,000 of which is indemnified by Hyatt.

 

NORTH PIER AT HARBORSIDE – RESIDENTIAL DEVELOPMENT

On April 3, 2001, the Company sold its North Pier at Harborside Financial Center, Jersey City, New Jersey to an entity which planned on developing residential housing on the site. At the time, the Company received net sales proceeds of approximately $3,357 (which included a note receivable of $2,027 subsequently repaid in 2002), and recognized a gain of $439 (before minority interest) from the transaction. On March 31, 2004, the Company received additional purchase consideration of $720, for which the Company recorded a gain of $637 (net of minority interest of $83) in gain on sale of investment in unconsolidated joint ventures for the three months ended March 31, 2004.

 

 

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SUMMARIES OF UNCONSOLIDATED JOINT VENTURES

The following is a summary of the financial position of the unconsolidated joint ventures in which the Company had investment interests as of March 31, 2005 and December 31, 2004:

 

 

March 31, 2005

 


 

 

 

 

Plaza

 

 

 

 

 

Meadowlands

 

G&G

VIII & IX

Ramland

Ashford

Harborside

Combined

 

Xanadu

HPMC

Martco

Associates

Realty

Loop

South Pier

Total










Assets:

 

 

 

 

 

 

 

 

Rental property, net

$248,620

--

$ 8,624

$12,474

$12,913

--

$78,293

$360,924

Other assets

52,063

--

5,185

1,490

1,445

--

10,254

70,437










Total assets

$300,683

--

$ 13,809

$13,964

$14,358

--

$88,547

$431,361










Liabilities and partners’/ members capital (deficit):

 

 

 

 

 

 

 

 

Mortgages, loans payable and other obligations

$ --

--

$ 43,880

$ --

$14,936

--

$64,153

$122,969

Other liabilities

2,110

--

936

1,360

371

--

2,947

7,724

Partners’/members’ capital (deficit)

298,573

--

(31,007)

12,604

(949)

--

21,447

300,668










Total liabilities and partners’/members’

 

 

 

 

 

 

 

 

capital (deficit)

$300,683

--

$ 13,809

$13,964

$14,358

--

$88,547

$431,361










Company’s investment in unconsolidated

 

 

 

 

 

 

 

 

joint ventures, net

$ 32,606

--

$ 6,990

$ 6,220

$ --

--

$13,228

$ 59,044










 

 

 

December 31, 2004

 


 

 

 

 

Plaza

 

 

 

 

 

Meadowlands

 

G&G

VIII & IX

Ramland

Ashford

Harborside

Combined

 

Xanadu

HPMC

Martco

Associates

Realty

Loop

South Pier

Total










Assets:

 

 

 

 

 

 

 

 

Rental property, net

$235,254

--

$ 8,571

$12,629

$13,030

$11,256

$79,721

$360,461

Other assets

1,420

--

4,589

1,463

1,559

539

12,034

21,604










Total assets

$236,674

--

$ 13,160

$14,092

$14,589

$11,795

$91,755

$382,065










Liabilities and partners’/ members capital (deficit):

 

 

 

 

 

 

 

 

Mortgages, loans payable and other obligations

$ --

--

$ 43,236

$ --

$14,936

$ --

$66,191

$124,363

Other liabilities

8,205

--

963

1,376

334

670

4,006

15,554

Partners’/members’ capital (deficit)

228,469

--

(31,039)

12,716

(681)

11,125

21,558

242,148










Total liabilities and partners’/members’

 

 

 

 

 

 

 

 

capital (deficit)

$236,674

--

$ 13,160

$14,092

$14,589

$11,795

$91,755

$382,065










Company’s investment in unconsolidated

 

 

 

 

 

 

 

 

joint ventures, net

$ 17,359

--

$ 7,157

$ 6,279

$ --

$ 2,664

$13,284

$ 46,743










 

 

20

 

 



 

 

SUMMARIES OF UNCONSOLIDATED JOINT VENTURES

The following is a summary of the results of operations of the unconsolidated joint ventures for the period in which the Company had investment interests during the three months ended March 31, 2005 and 2004:

 

 

 

Three Months Ended March 31, 2005

 


 

 

 

 

 

 

 

 

Minority

 

 

 

 

 

Plaza

 

 

 

Interest in

 

 

Meadowlands

 

G&G

VIII & IX

Ramland

Ashford

Harborside

Operating

Combined

 

Xanadu

HPMC

Martco

Associates

Realty

Loop

South Pier

Partnership

Total











Total revenues

--

--

$1,581

$ 76

$ 368

$ 405

$ 6,729

 

$ 9,159

Operating and other expenses

--

--

(830)

(34)

(318)

(397)

(4,532)

 

(6,111)

Depreciation and amortization

--

--

(255)

(154)

(156)

(160)

(1,594)

 

(2,319)

Interest expense

--

--

(463)

--

(162)

--

(714)

 

(1,339)











 

 

 

 

 

 

 

 

 

 

Net income

--

--

$ 33

$(112)

$(268)

$(152)

$ (111)

 

$ (610)











Company’s equity in earnings (loss)

 

 

 

 

 

 

 

 

 

of unconsolidated joint ventures

--

--

$ (167)

$ (59)

$ --

$ (30)

$ (56)

$35

$ (277)











 

 

 

 

Three Months Ended March 31, 2004

 


 

 

 

 

 

 

 

 

Minority

 

 

 

 

 

Plaza

 

 

 

Interest in

 

 

Meadowlands

 

G&G

VIII & IX

Ramland

Ashford

Harborside

Operating

Combined

 

Xanadu

HPMC

Martco

Associates

Realty

Loop

South Pier

Partnership

Total











Total revenues

--

$ 75

$1,926

$ 65

$ 104

$ 776

$ 5,710

 

$ 8,656

Operating and other expenses

--

(166)

(901)

(48)

(251)

(576)

(4,154)

 

(6,096)

Depreciation and amortization

--

--

(279)

(154)

(139)

(244)

(1,546)

 

(2,362)

Interest expense

--

--

(287)

--

(107)

--

(551)

 

(945)











 

 

 

 

 

 

 

 

 

 

Net income

--

$ (91)

$ 459

$(137)

$(393)

$ (44)

$ (541)

 

$ (747)











Company’s equity in earnings (loss)

 

 

 

 

 

 

 

 

 

of unconsolidated joint ventures

--

$ 521

$ 229

$ (69)

$(225)

$ (9)

$ (270)

$(20)

$ 157











 

 

21

 

 



 

 

5.

DEFERRED CHARGES AND OTHER ASSETS

 

 

March 31,

December 31,

 

2005

2004




Deferred leasing costs

$154,397

$152,525

Deferred financing costs

18,240

17,137




 

172,637

169,662

Accumulated amortization

(56,869)

(58,170)




Deferred charges, net

115,768

111,492

In-place lease values and related intangible assets, net

42,990

17,560

Prepaid expenses and other assets, net

17,098

26,008




 

 

 

Total deferred charges and other assets, net

$175,856

$155,060




 

 

6.

DISCONTINUED OPERATIONS

 

On February 3, 2005, the Company entered into agreements to sell its office building located at 600 Community Drive in North Hempstead, New York and its office building located at 111 East Shore Road in North Hempstead, New York, which aggregate 292,849 square feet, for a total sales price of $72,500. The two agreements are with buyers affiliated with each other and represent a single indivisible transaction. The sale is expected to close in the second quarter of 2005.

 

On March 31, 2005, the Company also identified its 178,329 square foot office building located at 201 Willowbrook Boulevard in Wayne, New Jersey as held for sale. In April 2005, the Company entered into an agreement to sell 201 Willowbrook for approximately $18,265, which is expected to close in the second quarter of 2005. In conjunction with the sale, the Company has agreed to provide loan financing to the buyer for up to $12,000 at terms to be negotiated. The Company determined that the carrying amount of this property identified as held for sale was not expected to be recovered from estimated net sales proceeds and, accordingly, recognized a valuation allowance of $1,434 (net of minority interest of $179) during the three months ended March 31, 2005.

 

The above referenced properties are identified as held for sale as of March 31, 2005 and carried an aggregate book value of $73,820, net of accumulated depreciation of $12,640, and a valuation allowance of $1,613. The Company has presented these assets as discontinued operations for the periods presented.

 

As the Company sold 3030 L.B.J. Freeway, Dallas, Texas; 84 N. E. Loop 410, San Antonio, Texas; and 340 Mt. Kemble Avenue, Morris Township, New Jersey during the year ended December 31, 2004 and 210 South 16th Street, Omaha, Nebraska; 3 Skyline Drive, Hawthorne, New York; and 1122 Alma Road, Richardson, Texas during the three months ended March 31, 2005, the Company has also presented these assets as discontinued operations in its statements of operations for the periods presented.

 

The following tables summarize income from discontinued operations (net of minority interest) and the related realized gains (losses) and unrealized losses on disposition of rental property (net of minority interest), net for the three months ended March 31, 2005 and 2004:

 

 

Three Months Ended

March 31,

 

2005

2004




Total revenues

$2,714

$6,156

Operating and other expenses

(870)

(1,907)

Depreciation and amortization

(393)

(1,409)

Interest expense (net of interest income)

9

(158)

Minority interest

(162)

(308)




 

 

 

Income from discontinued operations (net of minority interest)

$1,298

$2,374




 

 

22

 

 



 

 

 

Three Months Ended

March 31,

 

2005

2004




Realized gains on disposition of rental property

 

       $     716

--

Unrealized losses on disposition of rental property

 

(1,613)

--

Minority interest

 

99

--





 

 

 

 

Realized gains (losses) and unrealized losses

 

 

 

on disposition of rental property

 

 

 

(net of minority interest), net

 

       $    (798)

--





 

 

7.

SENIOR UNSECURED NOTES

 

A summary of the Company’s senior unsecured notes as of March 31, 2005 and December 31, 2004 is as follows:

 

 

March 31,

December 31,

Effective

 

2005

2004

Rate (1)





7.250% Senior Unsecured Notes, due March 15, 2009

      $   299,070

      $   299,012

7.49%

7.835% Senior Unsecured Notes, due December 15, 2010

15,000

15,000

7.95%

7.750% Senior Unsecured Notes, due February 15, 2011

298,992

298,948

7.93%

6.150% Senior Unsecured Notes, due December 15, 2012

91,121

90,998

6.89%

5.820% Senior Unsecured Notes, due March 15, 2013

25,226

25,199

6.45%

4.600% Senior Unsecured Notes, due June 15, 2013

99,765

99,758

4.74%

5.125% Senior Unsecured Notes, due February 15, 2014

202,127

202,187

5.11%

5.125% Senior Unsecured Notes, due January 15, 2015

149,095

--

5.30%





 

 

 

 

Total Senior Unsecured Notes

$1,180,396

$1,031,102

6.61%





 

 

 

 

(1)   Includes the cost of terminated treasury lock agreements (if any), offering and other transaction costs and the discount on the notes, as applicable.

 

On January 25, 2005, the Company issued $150,000 face amount of 5.125 percent senior unsecured notes due January 15, 2015 with interest payable semi-annually in arrears. The proceeds from the issuance (net of selling commissions and discount) of approximately $148,103 were used primarily to reduce outstanding borrowings under the 2004 unsecured facility.

 

On April 15, 2005, the Company issued $150,000 face amount of 5.05 percent senior unsecured notes due April 15, 2010 with interest payable semi-annually in arrears. The proceeds from the issuance (net of selling commissions and discount) of approximately $148,826 were used to reduce outstanding borrowings under the 2004 unsecured facility.

 

 

8.

UNSECURED REVOLVING CREDIT FACILITY

 

2004 Unsecured Facility

On November 23, 2004, the Company obtained an unsecured revolving credit facility (the “2004 Unsecured Facility”) with a current borrowing capacity of $600.0 million from a group of 27 lenders. The interest rate on outstanding borrowings (not electing the Company’s competitive bid feature) under the 2004 Unsecured Facility is currently LIBOR plus 65 basis points. The facility has a competitive bid feature, which allows the Company to solicit bids from lenders under the facility to borrow up to $300,000 at interest rates less than the current LIBOR plus 65 basis point spread. As of March 31, 2005, the Company’s outstanding borrowings carried a weighted average interest rate of LIBOR plus 51 points. The Company may also elect an interest rate representing the higher of the lender’s prime rate or the Federal Funds rate plus 50 basis points. The 2004 Unsecured Facility also currently requires a 20 basis point facility fee on the current borrowing capacity payable quarterly in arrears. The 2004

 

23

 

 



 

Unsecured Facility matures in November 2007, with an extension option of one year, which would require a payment of 25 basis points of the then borrowing capacity of the facility upon exercise.

 

In the event of a change in the Operating Partnership’s unsecured debt rating, the interest and facility fee rates will be adjusted in accordance with the following table:

 

Operating Partnership’s

Interest Rate –

 

Unsecured Debt Ratings:

Applicable Basis Points

Facility Fee

S&P Moody’s/Fitch (a)

Above LIBOR

Basis Points




No ratings or less than BBB-/Baa3/BBB-

112.5

25.0

BBB-/Baa3/BBB-

80.0

20.0

BBB/Baa2/BBB (current)

65.0

20.0

BBB+/Baa1/BBB+

55.0

15.0

A-/A3/A- or higher

50.0

15.0

 

 

 

(a)    If the Operating Partnership has debt ratings from two rating agencies, one of which is Standard & Poor’s Rating Services (“S&P”) or Moody’s Investors Service (“Moody’s”), the rates per the above table shall be based on the lower of such ratings. If the Operating Partnership has debt ratings from three rating agencies, one of which is S&P or Moody’s, the rates per the above table shall be based on the lower of the two highest ratings. If the Operating Partnership has debt ratings from only one agency, it will be considered to have no rating or less than BBB-/Baa3/BBB- per the above table.

 

The terms of the 2004 Unsecured Facility include certain restrictions and covenants which limit, among other things, the payment of dividends (as discussed below), the incurrence of additional indebtedness, the incurrence of liens and the disposition of real estate properties (to the extent that: (i) such property dispositions cause the Company to default on any of the financial ratios of the facility described below, or (ii) the property dispositions are completed while the Company is under an event of default under the facility, unless, under certain circumstances, such disposition is being carried out to cure such default), and which require compliance with financial ratios relating to the maximum leverage ratio, the maximum amount of secured indebtedness, the minimum amount of tangible net worth, the minimum amount of interest coverage, the minimum amount of fixed charge coverage, the maximum amount of unsecured indebtedness, the minimum amount of unencumbered property interest coverage and certain investment limitations. The dividend restriction referred to above provides that, except to enable the Company to continue to qualify as a REIT under the Code, the Company will not during any four consecutive fiscal quarters make distributions with respect to common stock or other common equity interests in an aggregate amount in excess of 90 percent of funds from operations (as defined in the facility agreement) for such period, subject to certain other adjustments.

 

The lending group for the 2004 Unsecured Facility consists of: JPMorgan Chase Bank, N.A., as administrative agent; Bank of America, N.A., as syndication agent; The Bank of Nova Scotia, New York Agency, as documentation agent; Wachovia Bank, National Association, as documentation agent; Wells Fargo Bank, National Association, as documentation agent; SunTrust Bank, as senior managing agent; PNC Bank, National Association, as managing agent; Citicorp North America, Inc., as managing agent; US Bank National Association, as managing agent; Allied Irish Bank; Amsouth Bank; Bank of China, New York Branch; The Bank of New York; Chevy Chase Bank, F.S.B.; Deutsche Bank Trust Company Americas; Bank Hapoalim B.M.; Mizuho Corporate Bank, Ltd.; UFJ Bank Limited, New York Branch; Bank of Ireland; Comerica Bank; Chang HWA Commercial Bank, Ltd., New York Branch; First Commercial Bank, New York Agency; First Horizon Bank, A Division of First Tennessee Bank, N.A.; Bank of Taiwan; Chiao Tung Bank, Ltd.; Citizens Bank; Hua Nan Commercial Bank, New York Agency; and Taipei Bank, New York Agency.

 

2002 Unsecured Facility

On September 27, 2002, the Company obtained an unsecured revolving credit facility (the “2002 Unsecured Facility”) with a borrowing capacity of $600,000 from a group of 15 lenders. The interest rate on borrowings under the 2002 Unsecured Facility was LIBOR plus 70 basis points. The Company could have instead elected an interest rate representing the higher of the lender’s prime rate or the Federal Funds rate plus 50 basis points. The 2002 Unsecured Facility also required a 20 basis point facility fee on the borrowing capacity payable quarterly in arrears.

 

 

24

 

 



 

Although the 2002 Unsecured Facility was scheduled to mature in September 2005, in conjunction with obtaining the 2004 Unsecured Facility, the Company drew funds on the new facility to repay in full and terminate the 2002 Unsecured Facility on November 23, 2004.

 

SUMMARY

As of March 31, 2005 and December 31, 2004, the Company had outstanding borrowings of $310,000 and $107,000, respectively, under the unsecured facility.

 

 

9.

MORTGAGES, LOANS PAYABLE AND OTHER OBLIGATIONS

 

The Company has mortgages, loans payable and other obligations which primarily consist of various loans collateralized by certain of the Company’s rental properties. Payments on mortgages, loans payable and other obligations are generally due in monthly installments of principal and interest, or interest only.

 

A summary of the Company’s mortgages, loans payable and other obligations as of March 31, 2005 and December 31, 2004 is as follows:

 

 

 

Effective

Principal Balance at

 

 

 

Interest

March 31,

December 31,

 

Property Name

Lender

Rate (a)

2005

2004

Maturity







Mack-Cali Centre VI

Principal Life Insurance Co.

6.87%

$    35,000

$  35,000

(b)

One River Centre

New York Life Ins. Co.

5.50%

45,490

45,490

(c)

Mack-Cali Bridgewater I

New York Life Ins. Co.

7.00%

23,000

23,000

09/10/05

Mack-Cali Woodbridge II

New York Life Ins. Co.

7.50%

17,500

17,500

09/10/05

Mack-Cali Short Hills

Prudential Insurance Co.

7.74%

22,560

22,789

10/01/05

500 West Putnam Avenue

New York Life Ins. Co.

6.52%

6,240

6,500

10/10/05

Harborside – Plaza 2 and 3

Northwestern/Principal

7.37%

148,298

149,473

01/01/06

Mack-Cali Airport

Allstate Life Insurance Co.

7.05%

9,802

9,852

04/01/07

Various

Prudential Insurance

4.84%

150,000

150,000

01/15/10 (d)

2200 Renaissance Boulevard

TIAA

5.89%

18,427

18,509

12/01/12

Soundview Plaza

TIAA

6.02%

18,721

18,816

01/01/13

Assumed obligations

various

4.84%

63,502

67,269

05/01/09 (e)







 

 

 

 

 

 

Total mortgages, loans payable and other obligations

 

$558,540

$564,198

 






 

(a)    Effective interest rate for mortgages, loans payable and other obligations reflects effective rate of debt, including deferred financing costs, comprised of the cost of terminated treasury lock agreements (if any), debt initiation costs and other transaction costs, as applicable.

(b)   On April 29, 2005, the Company repaid this mortgage loan at par, using borrowings under the 2004 Unsecured Facility.

(c)    On April 1, 2005, the Company repaid this mortgage loan at par, using borrowings under the 2004 Unsecured Facility.

(d)   Mortgage is collateralized by seven properties.

(e)    The obligations mature at various times between May 2006 and May 2009.

 

CASH PAID FOR INTEREST AND INTEREST CAPITALIZED

Cash paid for interest for the three months ended March 31, 2005 and 2004 was $37,999 and $40,464, respectively. Interest capitalized by the Company for the three months ended March 31, 2005 and 2004 was $1,237 and $914, respectively.

 

SUMMARY OF INDEBTEDNESS

As of March 31, 2005, the Company’s total indebtedness of $2,048,936 (weighted average interest rate of 5.98 percent) was comprised of $310,000 of revolving credit facility borrowings (weighted average rate of 3.32 percent) and fixed rate debt and other obligations of $1,738,936 (weighted average rate of 6.45 percent).

 

 

25

 

 



 

As of December 31, 2004, the Company’s total indebtedness of $1,702,300 (weighted average interest rate of 6.32 percent) was comprised of $107,000 of revolving credit facility borrowings (weighted average rate of 2.77 percent) and fixed rate debt of $1,595,300 (weighted average rate of 6.55 percent).

 

 

10.

MINORITY INTERESTS

 

OPERATING PARTNERSHIP

Minority interests in the accompanying consolidated financial statements relate to (i) preferred units (“Preferred Units”) and common units in the Operating Partnership, held by parties other than the Company, and (ii) interests in consolidated joint ventures for the portion of such properties not owned by the Company.

 

PREFERRED UNITS

The Operating Partnership has two classes of Preferred Units – Series B and Series C, which are described as follows:

 

Series B

The Series B Preferred Units have a stated value of $1,000 per unit and are preferred as to assets over any class of common units or other class of preferred units of the Company, based on circumstances per the applicable unit certificates. The quarterly distribution on each Series B Preferred Unit is an amount equal to the greater of (i) $16.875 (representing 6.75 percent of the Series B Preferred Unit stated value of an annualized basis) or (ii) the quarterly distribution attributable to a Series B Preferred Unit determined as if such unit had been converted into common units, subject to adjustment for customary anti-dilution rights. Each of the Series B Preferred Units may be converted at any time into common units at a conversion price of $34.65 per unit. Common units received pursuant to such conversion may be redeemed for an equal number of shares of common stock. At any time after June 11, 2005, the Company may cause the mandatory conversion of the Series B Preferred Units into common units at the conversion price of $34.65 per unit if, for at least 20 of the prior consecutive 30 days, the closing price of the Company’s common stock equals or exceeds $34.65. The Company is prohibited from taking certain actions that would adversely affect the rights of the holders of Series B Preferred Units without the consent of at least 66 2/3 percent of the outstanding Series B Preferred Units, including authorizing, creating or issuing any additional preferred units ranking senior to or equal with the Series B Preferred Units; provided, however, that such consent is not required if the Company issues preferred units ranking equal (but not senior) to the Series B Preferred Units in an aggregate amount up to the greater of (a) $200,000 in stated value or (b) 10 percent of the sum of (1) the combined market capitalization of the Company’s common stock and the Operating Partnership’s common units and Series B Preferred Units, as if converted into common stock, and (2) the aggregate liquidation preference on any of the Company’s non-convertible preferred stock or the Operating Partnership’s non-convertible preferred units. As of March 31, 2005, the calculation in the above clause (b) was $321,721.

 

Series C

In connection with the Company’s issuance of $25,000 of Series C cumulative redeemable perpetual preferred stock, the Company acquired from the Operating Partnership $25,000 of Series C Preferred Units (the “Series C Preferred Units”), which have terms essentially identical to the Series C preferred stock and rank equal with the Series B Preferred Units. See Note 14 – Stockholders’ Equity – Preferred Stock.

 

COMMON UNITS

Certain individuals and entities own common units in the Operating Partnership. A common unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. Common units are redeemable by the common unitholders at their option, subject to certain restrictions, on the basis of one common unit for either one share of common stock or cash equal to the fair market value of a share at the time of the redemption. The Company has the option to deliver shares of common stock in exchange for all or any portion of the cash requested. The common unitholders may not put the units for cash to the Company or the Operating Partnership. When a unitholder redeems a common unit, minority interest in the Operating Partnership is reduced and the Company’s investment in the Operating Partnership is increased.

 

26

 

 



 

 

UNIT TRANSACTIONS

The following table sets forth the changes in minority interest which relate to the Series B Preferred Units and common units in the Operating Partnership for the three months ended March 31, 2005:

 

 

Series B

 

Series B

 

 

 

Preferred

Common

Preferred

Common

 

 

Units

Units

Unitholders

Unitholders

Total







Balance at January 1, 2005

215,018

7,616,447

$220,547

$196,308

$416,855

Net income

--

--

3,909

2,797

6,706

Distributions

--

--

(3,909)

(4,793)

(8,702)

Redemption of common

 

 

 

 

 

units for shares

 

 

 

 

 

of Common Stock

--

(22,347)

--

(576)

(576)

Issuance of common units

--

63,328

--

2,786

2,786







 

 

 

 

 

 

Balance at March 31, 2005

215,018

7,657,428

$220,547

$196,522

$417,069







 

MINORITY INTEREST OWNERSHIP

As of March 31, 2005 and December 31, 2004, the minority interest common unitholders owned 11.1 percent (18.4 percent, including the effect of the conversion of Series B Preferred Units into common units) and 11.1 percent (18.5 percent including the effect of the conversion of Series B Preferred Units into common units) of the Operating Partnership, respectively.

 

CONSOLIDATED JOINT VENTURES

On November 23, 2004, the Company acquired a 62.5 percent interest in One River Centre, a three-building 457,472 square-foot office complex located in Middletown, New Jersey, through the Company’s conversion of its note receivable into a controlling equity interest. Minority interests: Consolidated joint ventures as of December 31, 2004 consisted of the 37.5 percent non-controlling interest owned by the third party. In March 2005, the Company acquired the remaining 37.5 percent non-controlling interest in One River Centre for $10,499, comprised of $7,713 in cash and the issuance of 63,328 common units in the Operating Partnership.

 

 

11.

EMPLOYEE BENEFIT 401(k) PLAN

 

All employees of the Company who meet certain minimum age and period of service requirements are eligible to participate in a 401(k) defined contribution plan (the “401(k) Plan”). The 401(k) Plan allows eligible employees to defer up to 15 percent of their annual compensation, subject to certain limitations imposed by federal law. The amounts contributed by employees are immediately vested and non-forfeitable. The Company, at management’s discretion, may match employee contributions and/or make discretionary contributions. Total expense recognized by the Company for the three months ended March 31, 2005 and 2004 was $100 and $100, respectively.

 

 

12.

COMMITMENTS AND CONTINGENCIES

 

TAX ABATEMENT AGREEMENTS

Pursuant to agreements with the City of Jersey City, New Jersey, the Company is required to make payments in lieu of property taxes (“PILOT”) on certain of its properties located in Jersey City, as follows:

 

The Harborside Plaza 5 agreement, as amended, which commenced in 2002 upon substantial completion of the property, as defined, is for a term of 20 years. The PILOT is equal to two percent of Total Project Costs. Total Project Costs, as defined are $159,625. The PILOT totaled $798 and $798 for the three months ended March 31, 2005 and 2004, respectively.

 

The Harborside Plaza 4-A agreement, which commenced in 2000, is for a term of 20 years. The PILOT is equal to two percent of Total Project costs, as defined, and increases by 10 percent in years 7, 10 and 13 and by 50

 

27

 

 



 

percent in year 16. Total Project costs, as defined, are $45,497. The PILOT totaled $227 and $227 for the three months ended March 31, 2005 and 2004.

 

The 101 Hudson Street agreement commenced in 1991 for a term of 15 years and expires in 2006. The PILOT currently provides for the payment of a minimum annual service charge of approximately $4,193, subject to certain adjustments as provided in the PILOT agreement. The PILOT totaled $373 for the period of time during the three months ended March 31, 2005 for which the Company owned the property.

 

The Harborside Plaza 2 and 3 agreement, commenced in 1990 and expires in 2005. Such PILOT is equal to two percent of Total Project Costs, as defined, in year one and increases by $75 per annum through year 15. Total Project Costs, as defined, are $145,644. The PILOT totaled $991 and $972 for the three months ended March 31, 2005 and 2004, respectively.

 

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

 

LITIGATION

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

 

GROUND LEASE AGREEMENTS

Future minimum rental payments under the terms of all non-cancelable ground leases under which the Company is the lessee, as of March 31, 2005, are as follows:

 

Year

Amount



2005

$     398

2006

530

2007

528

2008

507

2009

510

2010 through 2080

20,142



 

 

Total

$22,615



 

Ground lease expense incurred by the Company during the three months ended March 31, 2005 and 2004 amounted to $141 and $258, respectively.

 

OTHER

The Company may not dispose of or distribute certain of its properties, currently comprising 72 properties with an aggregate net book value of approximately $1,215,871, which were originally contributed by members of either the Mack Group (which includes William L. Mack, Chairman of the Company’s Board of Directors; David S. Mack, director; Earle I. Mack, a former director; and Mitchell E. Hersh, president, chief executive officer and director), the Robert Martin Group (which includes Martin W. Berger, a former director; Robert F. Weinberg, director; and Timothy M. Jones, former president) or the Cali Group (which includes John R. Cali, director and John J. Cali, a former director) without the express written consent of a representative of the Mack Group, the Robert Martin Group or the Cali Group, as applicable, except in a manner which does not result in recognition of any built-in-gain (which may result in an income tax liability) or which reimburses the appropriate Mack Group, Robert Martin Group or Cali Group members for the tax consequences of the recognition of such built-in-gains (collectively, the “Property Lock-Ups”). The aforementioned restrictions do not apply in the event that the Company sells all of its properties or in connection with a sale transaction which the Company’s Board of Directors determines is reasonably necessary to satisfy a material monetary default on any unsecured debt, judgment or liability of the Company or to cure any material monetary default on any mortgage secured by a property. The Property Lock-Ups expire periodically through 2008. Upon the expiration of the Property Lock-Ups, the Company is 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 appropriate Mack Group, Robert Martin Group or Cali Group

 

28

 

 



 

members.

 

 

13.

TENANT LEASES

 

The Properties are leased to tenants under operating leases with various expiration dates through 2021. Substantially all of the leases provide for annual base rents plus recoveries and escalation charges based upon the tenant’s proportionate share of and/or increases in real estate taxes and certain operating costs, as defined, and the pass-through of charges for electrical usage.

 

Future minimum rentals to be received under non-cancelable operating leases at March 31, 2005 are as follows:

 

Year

Amount



April 1 through December 31, 2005

$   397,568

2006

499,427

2007

441,951

2008

382,225

2009

331,766

2010 and thereafter

1,074,244



 

 

Total

$3,127,181



 

 

14.

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 Articles of Incorporation provide for, among other things, certain restrictions on the transfer of common stock to prevent further concentration of stock ownership. Moreover, to evidence compliance with these requirements, the Company must maintain records that disclose the actual ownership of its outstanding common stock and demands written statements each year from the holders of record of designated percentages of its common stock requesting the disclosure of the beneficial owners of such common stock.

 

PREFERRED STOCK

On March 14, 2003, in a publicly registered transaction with a single institutional buyer, the Company completed the sale and issuance of 10,000 shares of eight-percent Series C cumulative redeemable perpetual preferred stock (“Series C Preferred Stock”) in the form of 1,000,000 depositary shares ($25 stated value per depositary share). Each depositary share represents 1/100th of a share of Series C Preferred Stock. The Company received net proceeds of approximately $24,836 from the sale. See Note 10 – Minority Interests – Operating Partnership – Preferred Units.

 

The Series C Preferred Stock has preference rights with respect to liquidation and distributions over the common stock. Holders of the Series C Preferred Stock, except under certain limited conditions, will not be entitled to vote on any matters. In the event of a cumulative arrearage equal to six quarterly dividends, holders of the Series C Preferred Stock will have the right to elect two additional members to serve on the Company’s Board of Directors until dividends have been paid in full. At March 31, 2005, there were no dividends in arrears. The Company may issue unlimited additional preferred stock ranking on a parity with the Series C Preferred Stock but may not issue any preferred stock senior to the Series C Preferred Stock without the consent of two-thirds of its holders. The Series C Preferred Stock is essentially on an equivalent basis in priority with the Preferred Units.

 

Except under certain conditions relating to the Company’s qualification as a REIT, the Series C Preferred Stock is not redeemable prior to March 14, 2008. On and after such date, the Series C Preferred Stock will be redeemable at the option of the Company, in whole or in part, at $25 per depositary share, plus accrued and unpaid dividends.

 

29

 

 



 

SHARE REPURCHASE PROGRAM

On September 13, 2000, the Board of Directors authorized an increase to the Company’s repurchase program under which the Company was permitted to purchase up to an additional $150,000 of the Company’s outstanding common stock (“Repurchase Program”). From that date through its last purchases on January 10, 2003, the Company purchased and retired, under the Repurchase Program, 3,746,400 shares of its outstanding common stock for an aggregate cost of approximately $104,512. The Company has a remaining authorization to repurchase up to an additional $45,488 of its outstanding common stock, which it may repurchase from time to time in open market transactions at prevailing prices or through privately negotiated transactions.

 

STOCK OPTION PLANS

In May 2004, the Company established the 2004 Incentive Stock Plan under which a total of 2,500,000 shares have been reserved for issuance. No options have been granted through March 31, 2005 under this plan. In September 2000, the Company established the 2000 Employee Stock Option Plan (“2000 Employee Plan”) and the 2000 Director Stock Option Plan (“2000 Director Plan”). In May 2002, shareholders of the Company approved amendments to both plans to increase the total shares reserved for issuance under both of the 2000 plans from 2,700,000 to 4,350,000 shares of the Company’s common stock (from 2,500,000 to 4,000,000 shares under the 2000 Employee Plan and from 200,000 to 350,000 shares under the 2000 Director Plan). In 1994, and as subsequently amended, the Company established the Mack-Cali Employee Stock Option Plan (“Employee Plan”) and the Mack-Cali Director Stock Option Plan (“Director Plan”) under which a total of 5,380,188 shares (subject to adjustment) of the Company’s common stock have been reserved for issuance (4,980,188 shares under the Employee Plan and 400,000 shares under the Director Plan). Stock options granted under the Employee Plan in 1994 and 1995 became exercisable over a three-year period. Stock options granted under the 2000 Employee Plan and those options granted subsequent to 1995 under the Employee Plan become exercisable over a five-year period. All stock options granted under both the 2000 Director Plan and Director Plan become exercisable in one year. All options were granted at the fair market value at the dates of grant and have terms of ten years. As of March 31, 2005 and December 31, 2004, the stock options outstanding had a weighted average remaining contractual life of approximately 6.4 and 6.5 years, respectively.

 

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

 

 

 

Weighted Average

 

Shares Under Options

Exercise Price




Outstanding at January 1, 2005

1,703,631

$29.31

Granted

--

--

Exercised

(337,319)

$28.29

Lapsed or canceled

(21,300)

$28.60




Outstanding at March 31, 2005

1,345,012

$29.58




Options exercisable at March 31, 2005

717,572

$30.39

Available for grant at March 31, 2005

4,629,858

--




 

The Company recognized stock options expense of $37 and $49 for the three months ended March 31, 2005 and 2004, respectively.

 

STOCK COMPENSATION

The Company has granted stock awards to officers, certain other employees, and non-employee members of the Board of Directors of the Company, which allow the holders to each receive a certain amount of shares of the Company’s common stock generally over a one to five-year vesting period. Certain Restricted Stock Awards are contingent upon the Company meeting certain performance and/or stock price appreciation objectives. All Restricted Stock Awards provided to the officers and certain other employees were granted under the 2000 Employee Plan and the Employee Plan. Restricted Stock Awards granted to directors were granted under the 2000 Director Plan.

 

30

 

 



 

 

Information regarding the Restricted Stock Awards is summarized below:

 

 

Shares



Outstanding at January 1, 2005

198,703

Granted

113,500

Vested

(70,459)



 

 

Outstanding at March 31, 2005

241,744



 

DEFERRED STOCK COMPENSATION PLAN FOR DIRECTORS

The Deferred Compensation Plan for Directors, which commenced January 1, 1999, allows non-employee directors of the Company to elect to defer up to 100 percent of their annual retainer fee into deferred stock units. The deferred stock units are convertible into an equal number of shares of common stock upon the directors’ termination of service from the Board of Directors or a change in control of the Company, as defined in the plan. Deferred stock units are credited to each director quarterly using the closing price of the Company’s common stock on the applicable dividend record date for the respective quarter. Each participating director’s account is also credited for an equivalent amount of deferred stock units based on the dividend rate for each quarter.

 

During the three months ended March 31, 2005 and 2004, 1,889 and 1,537 deferred stock units were earned, respectively. As of March 31, 2005 and December 31, 2004, there were 30,800 and 29,222 director stock units outstanding, respectively.

 

EARNINGS PER SHARE

Basic EPS excludes dilution and is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

The following information presents the Company’s results for the three months ended March 31, 2005 and 2004 in accordance with FASB No. 128:

 

 

Three Months Ended

March 31,

Computation of Basic EPS

2005

2004




Income from continuing operations

$22,443

$24,449

Deduct: Preferred stock dividends

(500)

(500)




Income from continuing operations available to common shareholders

21,943

23,949

Income from discontinued operations

500

2,374




Net income available to common shareholders

$22,443

$26,323




 

 

 

Weighted average common shares

61,184

59,800




 

 

 

Basic EPS:

 

 

Income from continuing operations

     $     0.36

      $    0.40

Income from discontinued operations

            0.01

            0.04




Net income available to common shareholders

     $     0.37

      $    0.44




 

 

31

 

 



 

 

 

Three Months Ended

March 31,

Computation of Diluted EPS

2005

2004




Income from continuing operations available to common shareholders

$21,943

$23,949

Add:   Income from continuing operations attributable to Operating Partnership –

 

 

common units

2,734

3,122




Income from continuing operations for diluted earnings per share

24,677

27,071

Income from discontinued operations for diluted earnings per share

563

2,682




Net income available to common shareholders

$25,240

$29,753




 

 

 

Weighted average common shares

69,273

68,276




 

 

 

Diluted EPS:

 

 

Income from continuing operations

     $     0.36

      $    0.40

Income from discontinued operations

                --

            0.04




Net income available to common shareholders

     $     0.36

      $    0.44




 

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

 

 

Three Months Ended

March 31,

 

2005

2004

 




 

Basic EPS shares

61,184

59,800

 

Add:   Operating Partnership – common units

7,623

7,794

 

Stock options

466

660

 

Stock Warrants

--

22

 




 

Diluted EPS Shares

69,273

68,276

 




 

 

Not included in the computations of diluted EPS were 6,205,425 and 6,205,425 Series B Preferred Units, as such securities were anti-dilutive during the three months ended March 31, 2005 and 2004, respectively. Unvested restricted stock outstanding as of March 31, 2005 and 2004 were 241,744 and 226,272, respectively.

 

 

15.

SEGMENT REPORTING

 

The Company operates in one business segment - real estate. The Company provides leasing, management, acquisition, development, construction and tenant-related services for its portfolio. The Company does not have any foreign operations. The accounting policies of the segments are the same as those described in Note 2, excluding straight-line rent adjustments, rent adjustments on above/below market leases, and depreciation and amortization.

 

The Company evaluates performance based upon net operating income from the combined properties in the segment.

 

32

 

 



 

 

Selected results of operations for the three months ended March 31, 2005 and 2004 and selected asset information as of March 31, 2005 and December 31, 2004 regarding the Company’s operating segment are as follows:

 

 

Total Segment

Corporate & Other (e)

Total Company

 






Total contract revenues (a):

 

 

 

 

Three months ended:

 

 

 

 

March 31, 2005

        $   149,332

$       272

$   149,604

(f)

March 31, 2004

136,051

868

136,919

(g)

 

 

 

 

 

Total operating and interest (b):

 

 

 

 

Three months ended:

 

 

 

 

March 31, 2005

        $     52,346

$ 35,860

$     88,206

(h)

March 31, 2004

44,599

34,842

79,441

(i)

 

 

 

 

 

Equity in earnings of unconsolidated

 

 

 

 

joint ventures (net of minority interest):

 

 

 

 

Three months ended:

 

 

 

 

March 31, 2005

        $         (277)

$         --

$         (277)

 

March 31, 2004

157

--

157

 

 

 

 

 

 

Net operating income (c):

 

 

 

 

Three months ended:

 

 

 

 

March 31, 2005

        $     96,709

$(35,588)

$     61,121

(f) (h)

March 31, 2004

91,609

(33,974)

57,635

(g) (i)

 

 

 

 

 

Total assets:

 

 

 

 

March 31, 2005

$4,170,726

$ 22,486

$4,193,212

 

December 31, 2004

3,809,320

40,845

3,850,165

 

 

 

 

 

 

Total long-lived assets (d):

 

 

 

 

March 31, 2005

$3,984,303

$   3,364

$3,987,667

 

December 31, 2004

3,663,618

4,176

3,667,794

 

 

 

 

 

 

 


 

(a)   Total contract revenues represent all revenues during the period (including the Company’s share of net income from unconsolidated joint ventures), excluding adjustments for straight-lining of rents, the Company’s share of straight-line rent adjustments from unconsolidated joint ventures and rent adjustments on above/below market leases.

(b)   Total operating and interest expenses represent the sum of real estate taxes, utilities, operating services, general and administrative and interest expense. All interest expense (including for property-level mortgages) is excluded from segment amounts and classified in Corporate & Other for all periods.

(c)   Net operating income represents total contract revenues [as defined in Note (a)] less total operating and interest expenses [as defined in Note (b)] for the period.

(d)   Long-lived assets are comprised of total rental property, unbilled rents receivable and investments in unconsolidated joint ventures.

(e)   Corporate & Other represents all corporate-level items (including interest and other investment income, interest expense and non-property general and administrative expense) as well as intercompany eliminations necessary to reconcile to consolidated Company totals.

(f)    Excludes $3,242 of adjustments for straight-lining of rents, $556 for rent adjustments on above/below market leases, and $47 for the Company’s share of straight-line rent adjustments from unconsolidated joint ventures.

(g)   Excludes $2,664 of adjustments for straight-lining of rents, $12 for rent adjustments on above/below market leases, and $143 for the Company’s share of straight-line rent adjustments from unconsolidated joint ventures.

(h)   Excludes $35,806 of depreciation and amortization.

(i)    Excludes $29,714 of depreciation and amortization.

 

 

33

 

 



 

 

16.

IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS

 

SFAS No. 123 (revised 2004), Share-Based Payment

In October 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires companies to categorize share-based payments as either liability or equity awards. For liability awards, companies will remeasure the award at fair value at each balance sheet date until the award is settled. Equity classified awards are measured at the grant-date fair value and are not remeasured. SFAS 123R will be effective for annual periods beginning after June 15, 2005. Awards issued, modified, or settled after the effective date will be measured and recorded in accordance with SFAS 123R. The Company believes that the implementation of this standard will not have a material effect on the Company’s consolidated financial position or results of operations.

 

SFAS No. 153, Accounting for Non-monetary Transactions

In December 2004, the FASB issued SFAS No. 153, “Accounting for Non-monetary Transactions” (“SFAS 153”). SFAS 153 requires non-monetary exchanges to be accounted for at fair value, recognizing any gain or loss, if the transactions meet a commercial-substance criterion and fair value is determinable. SFAS No. 153 is effective for non-monetary transactions occurring in fiscal years beginning after June 15, 2005. The Company believes that the implementation of this standard will not have a material effect on the Company’s consolidated financial position or results of operations.

 

 

34

 

 



 

 

Item 2.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

 

GENERAL

 

The following discussion should be read in conjunction with the Consolidated Financial Statements of Mack-Cali Realty Corporation and the notes thereto (collectively, the “Financial Statements”). Certain defined terms used herein have the meaning ascribed to them in the Financial Statements.

 

Executive Overview

 

Mack-Cali Realty Corporation (the “Company”) is one of the largest real estate investment trusts (REITs) in the United States, with a total market capitalization of approximately $5.3 billion at March 31, 2005. The Company has been involved in all aspects of commercial real estate development, management and ownership for over 50 years and has been a publicly-traded REIT since 1994. The Company owns or has interests in 270 properties (collectively, the “Properties”), primarily class A office and office/flex buildings, totaling approximately 30.4 million square feet, leased to approximately 2,100 tenants. The properties are located primarily in suburban markets of the Northeast, some with adjacent, Company-controlled developable land sites able to accommodate up to 8.5 million square feet of additional commercial space.

 

The Company’s strategy is to be a significant real estate owner and operator in its core, high-barriers-to-entry markets, primarily in the Northeast.

 

As an owner of real estate, almost all of the Company’s earnings and cash flow is derived from rental revenue received pursuant to leased office space at the Properties. Key factors that affect the Company’s business and financial results include the following:

 

the general economic climate;

the occupancy rates of the Properties;

rental rates on new or renewed leases;

tenant improvement and leasing costs incurred to obtain and retain tenants;

the extent of early lease terminations;

operating expenses;

cost of capital; and

the extent of acquisitions, development and sales of real estate.

 

Any negative effects of the above key factors could potentially cause a deterioration in the Company’s revenue and/or earnings. Such negative effects could include: (1) failure to renew or execute new leases as current leases expire; (2) failure to renew or execute new leases with rental terms at or above the terms of in-place leases; and (3) tenant defaults.

 

A failure to renew or execute new leases as current leases expire or to execute new leases with rental terms at or above the terms of in-place leases may be affected by several factors such as: (1) the local economic climate, which may be adversely impacted by business layoffs or downsizing, industry slowdowns, changing demographics and other factors; and (2) local real estate conditions, such as oversupply of office and office/flex space or competition within the market.

 

As a result of the economic climate since 2001, substantially all of the real estate markets the Company operates in materially softened. Demand for office space declined significantly and vacancy rates increased in each of the Company’s core markets over the period. Through May 2, 2005, the Company’s core markets continued to be weak. The percentage leased in the Company’s consolidated portfolio of stabilized operating properties decreased to 91.1 percent at March 31, 2005 as compared to 91.2 percent at December 31, 2004 and 91.1 percent at March 31, 2004. Percentage leased includes all leases in effect as of the period end date, some of which have commencement dates in the future, and leases that expire at the period end date. Excluded from percentage leased at December 31, 2004 was a non-strategic, non-core 318,224 square foot property acquired through a deed in lieu of foreclosure,

 

35

 

 



 

which was 12.7 percent leased at December 31, 2004 and subsequently sold on February 4, 2005. Leases that expired as of March 31, 2005, December 31, 2004 and March 31, 2004 aggregate 117,183, 439,697 and 31,291 square feet, respectively, or 0.4, 1.5 and 0.01 percentage of the net rentable square footage, respectively. Market rental rates have declined in most markets from peak levels in late 2000 and early 2001. Rental rates on the Company’s space that was re-leased (based on first rents payable) during the three months ended March 31, 2005 decreased an average of 4.4 percent compared to rates that were in effect under expiring leases, as compared to a 10.2 percent decrease for the same period in 2004. The Company believes that vacancy rates may continue to increase in most of its markets in 2005. As a result, the Company’s future earnings and cash flow may continue to be negatively impacted by current market conditions.

 

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

 

property transactions during the period;

critical accounting policies and estimates;

results of operations for the current quarter as compared to the same period last year;

results of operations for the three months ended March 31, 2005, as compared to the three months ended March 31, 2004; and

liquidity and capital resources.

 

 

Property Transactions in 2005

 

Property Acquisitions

The Company acquired the following office properties during the three months ended March 31, 2005:

 

 

 

 

 

 

Investment by

Acquisition

 

 

# of

Rentable

Company (a)

Date

Property/Address

Location

Bldgs.

Square Feet

(in thousands)







03/02/05

101 Hudson Street (b)

Jersey City, Hudson County, NJ

1

1,246,283

$330,233

03/29/05

23 Main Street (b)(c)

Holmdel, Monmouth County, NJ

1

350,000

23,880