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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 September 30, 2016

 

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

Commission File Number: 333-57103  Mack-Cali Realty, L.P.

 

Mack-Cali Realty Corporation

Mack-Cali Realty, L.P.

(Exact name of registrant as specified in its charter)

 

Maryland (Mack-Cali Realty Corporation)

 

22-3305147 (Mack-Cali Realty Corporation)

Delaware (Mack-Cali Realty, L.P.)

 

22-3315804 (Mack-Cali Realty, L.P.)

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

Harborside 3, 210 Hudson St., Ste. 400, Jersey City, New Jersey

 

07311

(Address of principal executive offices)

 

(Zip Code)

 

(732) 590-1010

(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.

Mack-Cali Realty Corporation

 

YES x NO o

 

Mack-Cali Realty, L.P.

 

YES x NO o

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Mack-Cali Realty Corporation

 

YES x NO ¨

 

Mack-Cali Realty, L.P.

 

YES x NO ¨

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Mack-Cali Realty Corporation:

 

 

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

 

 

 

 

Mack-Cali Realty, L.P.:

 

 

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

 

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Mack-Cali Realty Corporation

 

YES ¨ NO x

 

Mack-Cali Realty, L.P.

 

YES ¨ NO x

 

 

As of October 21, 2016, there were 89,688,470 shares of Mack-Cali Realty Corporation’s Common Stock, par value $0.01 per share, outstanding.

 

Mack-Cali Realty, L.P. does not have any class of common equity that is registered pursuant to Section 12 of the Exchange Act.

 

 

 



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EXPLANATORY NOTE

 

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2016 of Mack-Cali Realty Corporation and Mack-Cali Realty, L.P. Unless stated otherwise or the context otherwise requires, references to the “Operating Partnership” mean Mack-Cali Realty, L.P., a Delaware limited partnership, and references to the “General Partner” mean Mack-Cali Realty Corporation, a Maryland corporation and real estate investment trust (“REIT”), and its subsidiaries, including the Operating Partnership. References to the “Company,” “we,” “us” and “our” mean collectively the General Partner, the Operating Partnership and those entities/subsidiaries consolidated by the General Partner.

 

The Operating Partnership conducts the business of providing leasing, management, acquisition, development, construction and tenant-related services for its General Partner.  The Operating Partnership, through its operating divisions and subsidiaries, including the Mack-Cali property-owning partnerships and limited liability companies is the entity through which all of the General Partner’s operations are conducted.  The General Partner is the sole general partner of the Operating Partnership and has exclusive control of the Operating Partnership’s day-to-day management.

 

As of September 30, 2016, the General Partner owned an approximate 89.5 percent common unit interest in the Operating Partnership. The remaining approximate 10.5 percent common unit interest is owned by limited partners.  The limited partners of the Operating Partnership are (1) persons who contributed their interests in properties to the Operating Partnership in exchange for common units (each, a “Common Unit”) or preferred units of limited partnership interest in the Operating Partnership or (2) recipients of long term incentive plan units of the Operating Partnership pursuant to the General Partner’s executive compensation plans.

 

A Common Unit of the Operating Partnership and a share of common stock of the General Partner (the “Common Stock”) have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Company.  The General Partner owns a number of common units of the Operating Partnership equal to the number of issued and outstanding shares of the General Partner’s common stock.  Common unitholders (other than the General Partner) have the right to redeem their Common Units, subject to certain restrictions under the Seconded Amended and Restated Agreement of Limited Partnership of the Operating Partnership, as amended (the “Partnership Agreement”) and agreed upon at the time of issuance of the units that may restrict such right for a period of time, generally one year from issuance.  The redemption is required to be satisfied in shares of Common Stock of the General Partner, cash, or a combination thereof, calculated as follows:  one share of the General Partner’s Common Stock, or cash equal to the fair market value of a share of the General Partner’s Common Stock at the time of redemption, for each Common Unit.  The General Partner, in its sole discretion, determines the form of redemption of Common Units (i.e., whether a common unitholder receives Common Stock of the General Partner, cash, or any combination thereof).  If the General Partner elects to satisfy the redemption with shares of Common Stock of the General Partner as opposed to cash, the General Partner is obligated to issue shares of its Common Stock to the redeeming unitholder.  Regardless of the rights described above, the common unitholders may not put their units for cash to the Company or the General Partner under any circumstances.  With each such redemption, the General Partner’s percentage ownership in the Operating Partnership will increase. In addition, whenever the General Partner issues shares of its Common Stock other than to acquire Common Units, the General Partner must contribute any net proceeds it receives to the Operating Partnership and the Operating Partnership must issue to the General Partner an equivalent number of Common Units. This structure is commonly referred to as an umbrella partnership REIT, or UPREIT.

 

The Company believes that combining the quarterly reports on Form 10-Q of the General Partner and the Operating Partnership into this single report provides the following benefits:

 

·          enhance investors’ understanding of the General Partner and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business of the Company;

 

·          eliminate duplicative disclosure and provide a more streamlined and readable presentation because a substantial portion of the disclosure applies to both the General Partner and the Operating Partnership; and

 

·          create time and cost efficiencies through the preparation of one combined report instead of two separate reports.

 

The Company believes it is important to understand the few differences between the General Partner and the Operating Partnership in the context of how they operate as a consolidated company.  The financial results of the Operating Partnership are consolidated into the financial statements of the General Partner.  The General Partner does not have any other significant assets, liabilities or operations, other than its interests in the Operating Partnership, nor does the Operating Partnership have employees of its

 

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own.  The Operating Partnership, not the General Partner, generally executes all significant business relationships other than transactions involving the securities of the General Partner.  The Operating Partnership holds substantially all of the assets of the General Partner, including ownership interests in joint ventures.  The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity.  Except for the net proceeds from equity offerings by the General Partner, which are contributed to the capital of the Operating Partnership in consideration of common or preferred units in the Operating Partnership, as applicable, the Operating Partnership generates all remaining capital required by the Company’s business. These sources include working capital, net cash provided by operating activities, borrowings under the Company’s unsecured revolving credit facility and unsecured term loan facility, the issuance of secured and unsecured debt and equity securities and proceeds received from the disposition of properties and joint ventures.

 

Shareholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of the General Partner and the Operating Partnership.  The limited partners of the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements as is the General Partner’s interest in the Operating Partnership.  The noncontrolling interests in the Operating Partnership’s financial statements comprise the interests of unaffiliated partners in various consolidated partnerships and development joint venture partners.  The noncontrolling interests in the General Partner’s financial statements are the same noncontrolling interests at the Operating Partnership’s level and include limited partners of the Operating Partnership.  The differences between shareholders’ equity and partners’ capital result from differences in the equity issued at the General Partner and Operating Partnership levels.

 

To help investors better understand the key differences between the General Partner and the Operating Partnership, certain information for the General Partner and the Operating Partnership in this report has been separated, as set forth below:

 

·                                                      Item 1.         Financial Statements (unaudited), which includes the following specific disclosures for the General Partner and the Operating Partnership:

 

·                  Note 15. Mack-Cali Realty Corporation’s Stockholders’ Equity and Mack-Cali Realty, L.P.’s Partners’ Capital; and

 

·                  Note 16. Noncontrolling Interests in Subsidiaries.

 

·                                                      Item 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations includes information specific to each entity, where applicable;

 

Item 2.         Liquidity and Capital Resources includes separate reconciliations of amounts to each entity’s financial statements, where applicable;

 

This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for each of the General Partner and the Operating Partnership in order to establish that the requisite certifications have been made and that the General Partner and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

 

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MACK-CALI REALTY CORPORATION

MACK-CALI REALTY, L.P.

 

FORM 10-Q

 

INDEX

 

 

 

 

Page

Part I

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited):

5

 

 

Mack-Cali Realty Corporation

 

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

6

 

 

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015

7

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015

8

 

 

 

 

 

 

Consolidated Statement of Changes in Equity for the nine months ended September 30, 2016

9

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

10

 

 

 

 

 

 

Mack-Cali Realty, L.P.

 

 

 

Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

11

 

 

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015

12

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015

13

 

 

 

 

 

 

Consolidated Statement of Changes in Equity for the nine months ended September 30, 2016

14

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015

15

 

 

 

 

 

 

Mack-Cali Realty Corporation and Mack-Cali Realty, L.P.

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

16

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

50

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

71

 

 

 

 

 

Item 4.

Controls and Procedures

71

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

 

Mack-Cali Realty Corporation and Mack-Cali Realty, L.P.

 

 

 

 

 

 

Item 1.

Legal Proceedings

73

 

 

 

 

 

Item 1A.

Risk Factors

73

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

73

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

73

 

 

 

 

 

Item 4.

Mine Safety Disclosures

73

 

 

 

 

 

Item 5.

Other Information

73

 

 

 

 

 

Item 6.

Exhibits

73

 

 

 

 

Signatures

 

74

 

 

 

 

Exhibit Index

75

 

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MACK-CALI REALTY CORPORATION

MACK-CALI REALTY, L.P.

 

Part I — Financial Information

 

Item 1.                     Financial Statements

 

The accompanying unaudited consolidated balance sheets, statements of operations, of comprehensive income, of changes in equity, and of cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements.  The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair statement 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 and Mack-Cali Realty, L.P.’s Annual Reports on Form 10-K for the fiscal year ended December 31, 2015.

 

The results of operations for the three and nine-month periods ended September 30, 2016 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.

 

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MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

Rental property

 

 

 

 

 

Land and leasehold interests

 

$

667,095

 

$

735,696

 

Buildings and improvements

 

3,821,332

 

3,648,238

 

Tenant improvements

 

361,301

 

408,617

 

Furniture, fixtures and equipment

 

19,622

 

15,167

 

 

 

4,869,350

 

4,807,718

 

Less — accumulated depreciation and amortization

 

(1,351,825

)

(1,464,482

)

 

 

3,517,525

 

3,343,236

 

Rental property held for sale, net

 

102,798

 

 

Net investment in rental property

 

3,620,323

 

3,343,236

 

Cash and cash equivalents

 

21,555

 

37,077

 

Investments in unconsolidated joint ventures

 

319,807

 

303,457

 

Unbilled rents receivable, net

 

105,547

 

120,246

 

Deferred charges, goodwill and other assets, net

 

303,654

 

203,850

 

Restricted cash

 

54,784

 

35,343

 

Accounts receivable, net of allowance for doubtful accounts of $1,308 and $1,407

 

9,949

 

10,754

 

Total assets

 

$

4,435,619

 

$

4,053,963

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Senior unsecured notes, net

 

$

951,275

 

$

1,263,782

 

Unsecured term loan, net

 

347,830

 

 

Revolving credit facility

 

95,000

 

155,000

 

Mortgages, loans payable and other obligations, net

 

1,061,204

 

726,611

 

Dividends and distributions payable

 

15,233

 

15,582

 

Accounts payable, accrued expenses and other liabilities

 

185,326

 

135,057

 

Rents received in advance and security deposits

 

48,314

 

49,739

 

Accrued interest payable

 

17,613

 

24,484

 

Total liabilities

 

2,721,795

 

2,370,255

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

Mack-Cali Realty Corporation stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value, 190,000,000 shares authorized, 89,647,337 and 89,583,950 shares outstanding

 

897

 

896

 

Additional paid-in capital

 

2,574,999

 

2,570,392

 

Dividends in excess of net earnings

 

(1,053,910

)

(1,115,612

)

Accumulated other comprehensive loss

 

(6,739

)

 

Total Mack-Cali Realty Corporation stockholders’ equity

 

1,515,247

 

1,455,676

 

 

 

 

 

 

 

Noncontrolling interests in subsidiaries:

 

 

 

 

 

Operating Partnership

 

177,440

 

170,891

 

Consolidated joint ventures

 

21,137

 

57,141

 

Total noncontrolling interests in subsidiaries

 

198,577

 

228,032

 

 

 

 

 

 

 

Total equity

 

1,713,824

 

1,683,708

 

 

 

 

 

 

 

Total liabilities and equity

 

$

4,435,619

 

$

4,053,963

 

 

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

 

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MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

REVENUES

 

 

 

 

 

 

 

 

 

Base rents

 

$

129,523

 

$

119,707 

 

$

380,133

 

$

364,746 

 

Escalations and recoveries from tenants

 

16,177

 

15,050

 

45,248

 

49,291

 

Real estate services

 

6,650

 

7,510

 

19,931

 

22,555

 

Parking income

 

3,443

 

2,749

 

10,131

 

8,141

 

Other income

 

1,724

 

1,142

 

4,224

 

3,707

 

Total revenues

 

157,517

 

146,158

 

459,667

 

448,440

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Real estate taxes

 

20,606

 

19,143

 

66,250

 

63,005

 

Utilities

 

14,127

 

13,172

 

38,658

 

44,146

 

Operating services

 

25,553

 

24,535

 

76,309

 

78,607

 

Real estate services expenses

 

6,361

 

6,673

 

19,418

 

19,520

 

General and administrative

 

14,007

 

13,670

 

39,011

 

36,558

 

Acquisition-related costs

 

815

 

 

2,854

 

111

 

Depreciation and amortization

 

48,117

 

44,099

 

134,639

 

127,266

 

Impairments

 

 

164,176

 

 

164,176

 

Total expenses

 

129,586

 

285,468

 

377,139

 

533,389

 

Operating income (loss)

 

27,931

 

(139,310

)

82,528

 

(84,949

)

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

Interest expense

 

(24,233

)

(24,689

)

(72,158

)

(78,677

)

Interest and other investment income (loss)

 

1,262

 

5

 

739

 

563

 

Equity in earnings (loss) of unconsolidated joint ventures

 

21,790

 

3,135

 

19,622

 

(2,723

)

Gain on change of control of interests

 

 

 

15,347

 

 

Realized gains (losses) and unrealized losses on disposition of rental property, net

 

(17,053

)

18,718

 

68,664

 

53,261

 

Gain on sale of investment in unconsolidated joint venture

 

 

 

5,670

 

6,448

 

Loss from extinguishment of debt, net

 

(19,302

)

 

(6,882

)

 

Total other income (expense)

 

(37,536

)

(2,831

)

31,002

 

(21,128

)

Net income (loss)

 

(9,605

)

(142,141

)

113,530

 

(106,077

)

Noncontrolling interest in consolidated joint ventures

 

65

 

(281

)

460

 

582

 

Noncontrolling interest in Operating Partnership

 

999

 

15,530

 

(11,947

)

11,461

 

Net income (loss) available to common shareholders

 

$

(8,541

)

$

(126,892

)

$

102,043

 

$

(94,034

)

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

(0.10

)

$

(1.42

)

$

1.14

 

$

(1.05

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

(0.10

)

$

(1.42

)

$

1.13

 

$

(1.05

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

89,755

 

89,249

 

89,739

 

89,229

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

100,253

 

100,172

 

100,486

 

100,236

 

 

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

 

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MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(9,605

)

$

(142,141

)

$

113,530

 

$

(106,077

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on derivative instruments for interest rate swaps

 

1,725

 

 

(7,528

)

 

Comprehensive income (loss)

 

$

(7,880

)

$

(142,141

)

$

106,002

 

$

(106,077

)

Comprehensive (income) loss attributable to noncontrolling interest in consolidated joint ventures

 

65

 

(281

)

460

 

582

 

Comprehensive (income) loss attributable to noncontrolling interest in Operating Partnership

 

818

 

15,530

 

(11,158

)

11,461

 

Comprehensive income (loss) attributable to common shareholders

 

$

(6,997

)

$

(126,892

)

$

95,304

 

$

(94,034

)

 

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

 

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MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends in

 

Other

 

Noncontrolling

 

 

 

 

 

Common Stock

 

Paid-In

 

Excess of

 

Comprehensive

 

Interests

 

Total

 

 

 

Shares

 

Par Value

 

Capital

 

Net Earnings

 

Income (Loss)

 

in Subsidiaries

 

Equity

 

Balance at January 1, 2016

 

89,584

 

$

896

 

$

2,570,392

 

$

(1,115,612

)

$

 

$

228,032

 

$

1,683,708

 

Net income

 

 

 

 

102,043

 

 

11,487

 

113,530

 

Common stock dividends

 

 

 

 

(40,341

)

 

 

(40,341

)

Unit distributions

 

 

 

 

 

 

(4,947

)

(4,947

)

Acquisition/increase in noncontrolling interest in consolidated joint ventures

 

 

 

414

 

 

 

(35,544

)

(35,130

)

Redemption of common units for common stock

 

19

 

 

308

 

 

 

(308

)

 

Shares issued under Dividend

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reinvestment and Stock Purchase Plan

 

1

 

 

23

 

 

 

 

23

 

Directors’ deferred compensation plan

 

 

 

285

 

 

 

 

285

 

Stock compensation

 

47

 

1

 

2,787

 

 

 

1,511

 

4,299

 

Cancellation of restricted stock

 

(4

)

 

(75

)

 

 

 

(75

)

Other comprehensive income (loss)

 

 

 

 

 

(6,739

)

(789

)

(7,528

)

Rebalancing of ownership percentage between parent and subsidiaries

 

 

 

865

 

 

 

(865

)

 

Balance at September 30, 2016

 

89,647

 

$

897

 

$

2,574,999

 

$

(1,053,910

)

$

(6,739

)

$

198,577

 

$

1,713,824

 

 

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

 

9



Table of Contents

 

MACK-CALI REALTY CORPORATION AND SUBSIDIARIES

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income (loss)

 

$

113,530

 

$

(106,077

)

Adjustments to reconcile net income to net cash provided by Operating activities:

 

 

 

 

 

Depreciation and amortization, including related intangible assets

 

134,756

 

128,422

 

Amortization of directors deferred compensation stock units

 

285

 

297

 

Amortization of stock compensation

 

4,299

 

1,500

 

Amortization of deferred financing costs

 

3,583

 

2,846

 

Amortization of debt discount and mark-to-market

 

1,417

 

2,791

 

Equity in (earnings) loss of unconsolidated joint ventures

 

(19,622

)

2,723

 

Distributions of cumulative earnings from unconsolidated joint ventures

 

4,833

 

3,145

 

Gain on change of control of interests

 

(15,347

)

 

Realized (gains) losses and unrealized losses on disposition of rental property, net

 

(68,664

)

(53,261

)

Gain on sale of investments in unconsolidated joint ventures

 

(5,670

)

(6,448

)

Gain from extinguishment of debt

 

(12,420

)

 

Impairments

 

 

164,176

 

Changes in operating assets and liabilities:

 

 

 

 

 

(Increase) decrease in unbilled rents receivable, net

 

(9,860

)

17

 

Increase in deferred charges, goodwill and other assets

 

(11,173

)

(23,387

)

Decrease (increase) in accounts receivable, net

 

424

 

(603

)

Increase (decrease) in accounts payable, accrued expenses and other liabilities

 

(12,656

)

5,298

 

Decrease in rents received in advance and security deposits

 

(1,425

)

(4,502

)

(Decrease) increase in accrued interest payable

 

(1,500

)

7,751

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

104,790

 

$

124,688

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Rental property acquisitions and related intangibles

 

$

(405,808

)

$

(6,057

)

Rental property additions and improvements

 

(94,017

)

(59,700

)

Development of rental property and other related costs

 

(150,592

)

(49,959

)

Proceeds from the sales of rental property

 

409,101

 

81,049

 

Proceeds from the sale of investments in unconsolidated joint ventures

 

6,420

 

6,448

 

Repayment of notes receivable

 

375

 

7,750

 

Acquisition of noncontrolling interests

 

(37,946

)

 

Investment in unconsolidated joint ventures

 

(31,318

)

(68,468

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

20,906

 

4,329

 

Increase in restricted cash

 

(287

)

(5,823

)

 

 

 

 

 

 

Net cash used in investing activities

 

$

(283,166

)

$

(90,431

)

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

Borrowings from revolving credit facility

 

$

793,000

 

$

179,000

 

Repayment of revolving credit facility

 

(853,000

)

(144,000

)

Repayment of senior unsecured notes

 

(314,755

)

 

Borrowings from unsecured term loan

 

350,000

 

 

Proceeds from mortgages and loans payable

 

426,613

 

6,193

 

Repayment of mortgages, loans payable and other obligations

 

(187,969

)

(29,307

)

Payment of financing costs

 

(7,050

)

(98

)

Contributions from noncontrolling interests

 

1,065

 

251

 

Payment of dividends and distributions

 

(45,050

)

(44,979

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

$

162,854

 

$

(32,940

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

$

(15,522

)

$

1,317

 

Cash and cash equivalents, beginning of period

 

37,077

 

29,549

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

21,555

 

$

30,866

 

 

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

 

10



Table of Contents

 

MACK-CALI REALTY, L.P. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (in thousands, except per unit amounts) (unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

Rental property

 

 

 

 

 

Land and leasehold interests

 

$

667,095

 

$

735,696

 

Buildings and improvements

 

3,821,332

 

3,648,238

 

Tenant improvements

 

361,301

 

408,617

 

Furniture, fixtures and equipment

 

19,622

 

15,167

 

 

 

4,869,350

 

4,807,718

 

Less — accumulated depreciation and amortization

 

(1,351,825

)

(1,464,482

)

 

 

3,517,525

 

3,343,236

 

Rental property held for sale, net

 

102,798

 

 

Net investment in rental property

 

3,620,323

 

3,343,236

 

Cash and cash equivalents

 

21,555

 

37,077

 

Investments in unconsolidated joint ventures

 

319,807

 

303,457

 

Unbilled rents receivable, net

 

105,547

 

120,246

 

Deferred charges, goodwill and other assets, net

 

303,654

 

203,850

 

Restricted cash

 

54,784

 

35,343

 

Accounts receivable, net of allowance for doubtful accounts of $1,308 and $1,407

 

9,949

 

10,754

 

 

 

 

 

 

 

Total assets

 

$

4,435,619

 

$

4,053,963

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Senior unsecured notes, net

 

$

951,275

 

$

1,263,782

 

Unsecured term loan, net

 

347,830

 

 

Revolving credit facility

 

95,000

 

155,000

 

Mortgages, loans payable and other obligations, net

 

1,061,204

 

726,611

 

Distributions payable

 

15,233

 

15,582

 

Accounts payable, accrued expenses and other liabilities

 

185,326

 

135,057

 

Rents received in advance and security deposits

 

48,314

 

49,739

 

Accrued interest payable

 

17,613

 

24,484

 

Total liabilities

 

2,721,795

 

2,370,255

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Partners’ Capital:

 

 

 

 

 

General Partner, 89,647,337 and 89,583,950 common units outstanding

 

1,464,864

 

1,399,419

 

Limited partners, 10,497,946 and 10,516,844 common units outstanding

 

234,562

 

227,148

 

Accumulated other comprehensive loss

 

(6,739

)

 

Total Mack-Cali Realty, L.P. partners’ capital

 

1,692,687

 

1,626,567

 

 

 

 

 

 

 

Noncontrolling interests in consolidated joint ventures

 

21,137

 

57,141

 

 

 

 

 

 

 

Total equity

 

1,713,824

 

1,683,708

 

 

 

 

 

 

 

Total liabilities and equity

 

$

4,435,619

 

$

4,053,963

 

 

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

 

11



Table of Contents

 

MACK-CALI REALTY, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit amounts) (unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

Base rents

 

$

129,523

 

$

119,707

 

$

380,133

 

$

364,746

 

Escalations and recoveries from tenants

 

16,177

 

15,050

 

45,248

 

49,291

 

Real estate services

 

6,650

 

7,510

 

19,931

 

22,555

 

Parking income

 

3,443

 

2,749

 

10,131

 

8,141

 

Other income

 

1,724

 

1,142

 

4,224

 

3,707

 

Total revenues

 

157,517

 

146,158

 

459,667

 

448,440

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Real estate taxes

 

20,606

 

19,143

 

66,250

 

63,005

 

Utilities

 

14,127

 

13,172

 

38,658

 

44,146

 

Operating services

 

25,553

 

24,535

 

76,309

 

78,607

 

Real estate services expenses

 

6,361

 

6,673

 

19,418

 

19,520

 

General and administrative

 

14,007

 

13,670

 

39,011

 

36,558

 

Acquisition-related costs

 

815

 

 

2,854

 

111

 

Depreciation and amortization

 

48,117

 

44,099

 

134,639

 

127,266

 

Impairments

 

 

164,176

 

 

164,176

 

Total expenses

 

129,586

 

285,468

 

377,139

 

533,389

 

Operating income (loss)

 

27,931

 

(139,310

)

82,528

 

(84,949

)

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME

 

 

 

 

 

 

 

 

 

Interest expense

 

(24,233

)

(24,689

)

(72,158

)

(78,677

)

Interest and other investment income (loss)

 

1,262

 

5

 

739

 

563

 

Equity in earnings (loss) of unconsolidated joint ventures

 

21,790

 

3,135

 

19,622

 

(2,723

)

Gain on change of control of interests

 

 

 

15,347

 

 

Realized gains (losses) and unrealized losses on disposition of rental property, net

 

(17,053

)

18,718

 

68,664

 

53,261

 

Gain on sale of investment in unconsolidated joint venture

 

 

 

5,670

 

6,448

 

Loss from extinguishment of debt, net

 

(19,302

)

 

(6,882

)

 

Total other income (expense)

 

(37,536

)

(2,831

)

31,002

 

(21,128

)

Net income (loss)

 

(9,605

)

(142,141

)

113,530

 

(106,077

)

Noncontrolling interest in consolidated joint ventures

 

65

 

(281

)

460

 

582

 

Net income (loss) available to common unitholders

 

$

(9,540

)

$

(142,422

)

$

113,990

 

$

(105,495

)

 

 

 

 

 

 

 

 

 

 

Basic earnings per common unit:

 

 

 

 

 

 

 

 

 

Net income (loss) available to common unitholders

 

$

(0.10

)

$

(1.42

)

$

1.14

 

$

(1.05

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common unit:

 

 

 

 

 

 

 

 

 

Net income (loss) available to common unitholders

 

$

(0.10

)

$

(1.42

)

$

1.13

 

$

(1.05

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average units outstanding

 

100,253

 

100,172

 

100,241

 

100,236

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average units outstanding

 

100,253

 

100,172

 

100,486

 

100,236

 

 

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

 

12



Table of Contents

 

MACK-CALI REALTY, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(9,605

)

$

(142,141

)

$

113,530

 

$

(106,077

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) on derivative instruments for interest rate swaps

 

1,725

 

 

(7,528

)

 

Comprehensive income (loss)

 

$

(7,880

)

$

(142,141

)

$

106,002

 

$

(106,077

)

Comprehensive (income) loss attributable to noncontrolling interest in consolidated joint ventures

 

65

 

(281

)

460

 

582

 

Comprehensive income (loss) attributable to common unitholders

 

$

(7,815

)

$

(142,422

)

$

106,462

 

$

(105,495

)

 

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

 

13



Table of Contents

 

MACK-CALI REALTY, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Noncontrolling

 

 

 

 

 

 

 

 

 

General Partner

 

Limited Partner

 

Other

 

Interest

 

 

 

 

 

General Partner

 

Limited Partner

 

Common

 

Common

 

Comprehensive

 

in Consolidated

 

 

 

 

 

Common Units

 

Common Units

 

Unitholders

 

Unitholders

 

Income (Loss)

 

Joint Ventures

 

Total Equity

 

Balance at January 1, 2016

 

89,584

 

10,517

 

$

1,399,419

 

$

227,148

 

$

 

$

57,141

 

$

1,683,708

 

Net income

 

 

 

102,043

 

11,947

 

 

(460

)

113,530

 

Distributions

 

 

 

(40,341

)

(4,947

)

 

 

(45,288

)

Acquisition/increase in noncontrolling interest

 

 

 

414

 

 

 

(35,544

)

(35,130

)

Redemption of limited partner common units for shares of general partner common units

 

19

 

(19

)

308

 

(308

)

 

 

 

Shares issued under Dividend Reinvestment and Stock Purchase Plan

 

1

 

 

23

 

 

 

 

23

 

Directors’ deferred compensation plan

 

 

 

285

 

 

 

 

285

 

Cancellation of restricted shares

 

(4

)

 

(75

)

 

 

 

(75

)

Stock compensation

 

47

 

 

2,788

 

1,511

 

 

 

4,299

 

Other comprehensive income (loss)

 

 

 

 

(789

)

(6,739

)

 

 

(7,528

)

Balance at September 30, 2016

 

89,647

 

10,498

 

$

1,464,864

 

$

234,562

 

$

(6,739

)

$

21,137

 

$

1,713,824

 

 

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

 

14



Table of Contents

 

MACK-CALI REALTY, L.P. AND SUBSIDIARIES

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2016

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income (loss)

 

$

113,530

 

$

(106,077

)

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

Operating activities:

 

 

 

 

 

Depreciation and amortization, including related intangible assets

 

134,756

 

128,422

 

Amortization of directors deferred compensation stock units

 

285

 

297

 

Amortization of stock compensation

 

4,299

 

1,500

 

Amortization of deferred financing costs

 

3,583

 

2,846

 

Amortization of debt discount and mark-to-market

 

1,417

 

2,791

 

Equity in (earnings) loss of unconsolidated joint ventures

 

(19,622

)

2,723

 

Distributions of cumulative earnings from unconsolidated joint ventures

 

4,833

 

3,145

 

Gain on change of control of interests

 

(15,347

)

 

Realized (gains) losses and unrealized losses on disposition of rental property, net

 

(68,664

)

(53,261

)

Gain on sale of investments in unconsolidated joint ventures

 

(5,670

)

(6,448

)

Gain from extinguishment of debt

 

(12,420

)

 

Impairments

 

 

164,176

 

Changes in operating assets and liabilities:

 

 

 

 

 

(Increase) decrease in unbilled rents receivable, net

 

(9,860

)

17

 

Increase in deferred charges, goodwill and other assets

 

(11,173

)

(23,387

)

Decrease (increase) in accounts receivable, net

 

424

 

(603

)

Increase (decrease) in accounts payable, accrued expenses and other liabilities

 

(12,656

)

5,298

 

Decrease in rents received in advance and security deposits

 

(1,425

)

(4,502

)

(Decrease) increase in accrued interest payable

 

(1,500

)

7,751

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

104,790

 

$

124,688

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Rental property acquisitions and related intangibles

 

$

(405,808

)

$

(6,057

)

Rental property additions and improvements

 

(94,017

)

(59,700

)

Development of rental property and other related costs

 

(150,592

)

(49,959

)

Proceeds from the sales of rental property

 

409,101

 

81,049

 

Proceeds from the sale of investments in unconsolidated joint ventures

 

6,420

 

6,448

 

Repayment of notes receivable

 

375

 

7,750

 

Acquisition of noncontrolling interests

 

(37,946

)

 

Investment in unconsolidated joint ventures

 

(31,318

)

(68,468

)

Distributions in excess of cumulative earnings from unconsolidated joint ventures

 

20,906

 

4,329

 

Increase in restricted cash

 

(287

)

(5,823

)

 

 

 

 

 

 

Net cash used in investing activities

 

$

(283,166

)

$

(90,431

)

 

 

 

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

Borrowings from revolving credit facility

 

$

793,000

 

$

179,000

 

Repayment of revolving credit facility

 

(853,000

)

(144,000

)

Repayment of senior unsecured notes

 

(314,755

)

 

Borrowings from unsecured term loan

 

350,000

 

 

Proceeds from mortgages and loans payable

 

426,613

 

6,193

 

Repayment of mortgages, loans payable and other obligations

 

(187,969

)

(29,307

)

Payment of financing costs

 

(7,050

)

(98

)

Contributions from noncontrolling interests

 

1,065

 

251

 

Payment of distributions

 

(45,050

)

(44,979

)

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

$

162,854

 

$

(32,940

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

$

(15,522

)

$

1,317

 

Cash and cash equivalents, beginning of period

 

37,077

 

29,549

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

21,555

 

$

30,866

 

 

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

 

15



Table of Contents

 

MACK-CALI REALTY CORPORATION, MACK-CALI REALTY, L.P. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1.              ORGANIZATION AND BASIS OF PRESENTATION

 

ORGANIZATION

 

Mack-Cali Realty Corporation, a Maryland corporation, together with its subsidiaries (collectively, the “General Partner”) is a fully-integrated self-administered, self-managed real estate investment trust (“REIT”). The General Partner controls Mack-Cali Realty, L.P., a Delaware limited partnership, together with its subsidiaries (collectively, the “Operating Partnership”), as its sole general partner and owned an 89.5 percent common unit interest in the Operating Partnership as of both September 30, 2016 and December 31, 2015.  The General Partner’s business is the ownership of interests in and operation of the Operating Partnership and all of the General Partner’s expenses are incurred for the benefit of the Operating Partnership.  The General Partner is reimbursed by the Operating Partnership for all expenses it incurs relating to the ownership and operation of the Operating Partnership.

 

The Operating Partnership conducts the business of providing leasing, management, acquisition, development, construction and tenant-related services for its General Partner.  The Operating Partnership, through its operating divisions and subsidiaries, including the Mack-Cali property-owning partnerships and limited liability companies, is the entity through which all of the General Partner’s operations are conducted.  Unless stated otherwise or the context requires, the “Company” refers to the General Partner and its subsidiaries, including the Operating Partnership and its subsidiaries.

 

As of September 30, 2016, the Company owned or had interests in 263 properties, consisting of 136 office and 110 flex properties, totaling approximately 29.0 million square feet, leased to approximately 1,800 commercial tenants, and 17 multi-family rental properties containing 5,214 residential units, plus developable land (collectively, the “Properties”).  The Properties are comprised of 136 office buildings totaling approximately 23.7 million square feet (which include 36 buildings, aggregating approximately 5.6 million square feet owned by unconsolidated joint ventures in which the Company has investment interests), 94 office/flex buildings totaling approximately 4.8 million square feet, six industrial/warehouse buildings totaling approximately 387,400 square feet, 17 multi-family properties totaling 5,214 apartments (which include ten properties aggregating 3,587 apartments owned by unconsolidated joint ventures in which the Company has investment interests), six parking/retail properties totaling approximately 130,100 square feet (which include two buildings aggregating 81,700 square feet owned by unconsolidated joint ventures in which the Company has investment interests), one hotel (which is owned by an unconsolidated joint venture in which the Company has an investment interest) and three parcels of land leased to others.  The Properties are located in seven states, primarily in the Northeast, plus the District of Columbia.

 

BASIS OF PRESENTATION

 

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

 

Accounting Standards Codification (“ASC”) 810, Consolidation, provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when either: (1) the equity investors (if any) lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.  The Company consolidates VIEs in which it is considered to be the primary beneficiary.  The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the variable interest entity’s performance: and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.

 

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

 

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consolidated financial statements of Mack-Cali Realty Corporation.  There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption.

 

As of September 30, 2016 and December 31, 2015, the Company’s investments in consolidated real estate joint ventures, which are variable interest entities in which the Company is deemed to be the primary beneficiary have total real estate assets of $193.1 million and $273.4 million, respectively, mortgages of $70.1 million and $89.5 million, respectively, and other liabilities of $20.7 million and $17.5 million, respectively.

 

The financial statements have been prepared in conformity with GAAP.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates and assumptions are based on management’s historical experience that are believed to be reasonable at the time.  However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment.

 

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

 

2.              SIGNIFICANT ACCOUNTING POLICIES

 

Rental

Property                                                                        Rental properties are stated at cost less accumulated depreciation and amortization.  Costs directly related to the acquisition, development and construction of rental properties are capitalized.  Acquisition—related costs are expensed as incurred.  Capitalized development and construction costs include pre-construction costs essential to the development of the property, development and construction costs, interest, property taxes, insurance, salaries and other project costs incurred during the period of development.  Capitalized development and construction salaries and related costs approximated $0.7 million and $0.9 million for the three months ended September 30, 2016 and 2015, respectively, and $1.9 million and $3.5 million for the nine months ended September 30, 2016 and 2015, respectively.  Included in total rental property is construction, tenant improvement and development in-progress of $301 million and $88.7 million as of September 30, 2016 and December 31, 2015, respectively.  Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.  Fully-depreciated assets are removed from the accounts.

 

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

 

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

 

Leasehold interests

 

Remaining lease term

Buildings and improvements

 

5 to 40 years

Tenant improvements

 

The shorter of the term of the related lease or useful life

Furniture, fixtures and equipment

 

5 to 10 years

 

Upon acquisition of rental property, the Company estimates the fair value of acquired tangible assets, consisting of land, building and improvements, and identified intangible assets and liabilities assumed, generally consisting of the fair value of (i) above and below-market leases, (ii) in-place leases and (iii) tenant relationships.  The Company allocates the purchase price to the assets acquired and liabilities assumed based on their fair values.  The Company records goodwill or a gain on bargain purchase (if any) if the net assets acquired/liabilities assumed differ from the purchase consideration of a transaction.

 

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In estimating the fair value of the tangible and intangible assets acquired, the Company considers information obtained about each property as a result of its due diligence and marketing and leasing activities, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs net of depreciation, and available market information.  The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

 

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

 

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

 

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

 

Rental Property

Held for Sale                                               When assets are identified by management as held for sale, the Company discontinues depreciating the assets and estimates the sales price, net of selling costs, of such assets.  The Company generally considers assets to be held for sale when the transaction has received appropriate corporate authority, and there are no significant contingencies relating to the sale.  If, in management’s opinion, the estimated net sales price, net of selling costs, of the assets which have been identified as held for sale is less than the carrying value of the assets, a valuation allowance is established.

 

If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classified as held for sale, the property is reclassified as held and used.  A property that is reclassified is measured and recorded individually at the lower of (a) its carrying value before the property was

 

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classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the property been continuously classified as held and used, or (b) the fair value at the date of the subsequent decision not to sell.

 

Investments in

Unconsolidated

Joint Ventures                                       The Company accounts for its investments in unconsolidated joint ventures under the equity method of accounting.  The Company applies the equity method by initially recording these investments at cost, as Investments in Unconsolidated Joint Ventures, subsequently adjusted for equity in earnings and cash contributions and distributions.  The outside basis portion of the Company’s joint ventures is amortized over the anticipated useful lives of the underlying ventures’ tangible and intangible assets acquired and liabilities assumed.  Generally, the Company would discontinue applying the equity method when the investment (and any advances) is reduced to zero and would not provide for additional losses unless the Company has guaranteed obligations of the venture or is otherwise committed to providing further financial support for the investee.  If the venture subsequently generates income, the Company only recognizes its share of such income to the extent it exceeds its share of previously unrecognized losses.

 

If the venture subsequently makes distributions and the Company does not have an implied or actual commitment to support the operations of the venture, including a general partner interest in the investee, the Company will not record a basis less than zero, rather such amounts will be recorded as equity in earnings of 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 temporary.  To the extent impairment has occurred, the loss shall be measured as the excess of the carrying value of the investment over the value of the investment.  The Company’s estimates of value for each investment (particularly in real estate joint ventures) are based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for space, competition for tenants, changes in market rental rates, and operating costs.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its impairment analyses may not be realized, and actual losses or impairment may be realized in the future.  See Note 4: Investments in Unconsolidated Joint Ventures.

 

Cash and Cash

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

 

Deferred

Financing Costs                             Costs incurred in obtaining financing are capitalized and amortized over the term of the related indebtedness. Deferred financing costs are presented in the balance sheet as a direct deduction from the carrying value of the debt liability to which they relate, except deferred financing costs related to the revolving credit facility, which are presented in deferred charges, goodwill and other assets.  In all cases, amortization of such costs is included in interest expense and was $1,234,000 and $945,000 for the three months ended September 30, 2016 and 2015, respectively, and $3,583,000 and $2,846,000 for the nine months ended September 30, 2016 and 2015, respectively.  If a financing obligation is extinguished early, any unamortized deferred financing costs are written off and included in gains (losses) from extinguishment of debt.  Included in loss from extinguishment of debt, net of gains, of $19.3 million and $6.9 million for the three and nine months ended September 30, 2016, respectively, were unamortized deferred financing costs which were written off of $346,000 for both the three and nine months ended September 30, 2016.

 

Deferred

Leasing Costs                                           Costs incurred in connection with commercial leases are capitalized and amortized on a straight-line basis over the terms of the related leases and included in depreciation and amortization.  Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease.  Certain employees of the Company are compensated for providing leasing services to the Properties.  The portion of such compensation related to commercial leases, which is capitalized and amortized, and included in deferred charges, goodwill and other assets, net, was approximately $790,000 and $922,000 for the three months ended September 30, 2016 and 2015, respectively, and $2,440,000 and $2,738,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

Goodwill                                                                     Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is allocated to various reporting units, as applicable.  Each of the Company’s segments consists of a reporting unit. Goodwill is not amortized.  Management performs an annual impairment test for goodwill during the fourth quarter and between annual tests, management evaluates the

 

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recoverability of goodwill whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable.  In its impairment tests of goodwill, management first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.  If, based on this assessment, management determines that the fair value of the reporting unit is not less than its carrying value, then performing the additional two-step impairment test is unnecessary. If the carrying value of goodwill exceeds its fair value, an impairment charge is recognized.

 

Derivative

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

 

Revenue

Recognition                                                    Base rental revenue is recognized on a straight-line basis over the terms of the respective leases.  Unbilled rents receivable represents the cumulative amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements.

 

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

 

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

 

Real estate services revenue includes property management, development, construction and leasing commission fees and other services, and payroll and related costs reimbursed from clients.  Fee income derived from the Company’s unconsolidated joint ventures (which are capitalized by such ventures) are recognized to the extent attributable to the unaffiliated ownership interests.

 

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

 

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

 

Allowance for

Doubtful Accounts                 Management performs a detailed review of amounts due from tenants to determine if an allowance for doubtful accounts is required based on factors affecting the collectability of the accounts receivable balances.  The factors considered by management in determining which individual tenant receivable balances, or aggregate receivable balances, require a collectability allowance include the age of the receivable, the tenant’s payment history, the nature of the charges, any communications regarding the charges and other related information.  Management’s estimate of the allowance for doubtful accounts requires management to exercise significant judgment about the timing, frequency and severity of collection losses, which affects the allowance and net income.

 

Income and

Other Taxes                                                     The General Partner 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 General Partner generally will not be subject to corporate federal income tax (including alternative minimum tax) on net income that it currently distributes to

 

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its shareholders, provided that the General Partner satisfies certain organizational and operational requirements including the requirement to distribute at least 90 percent of its REIT taxable income (determined by excluding any net capital gains) to its shareholders.  If and to the extent the General Partner retains and does not distribute any net capital gains, the General Partner will be required to pay federal, state and local taxes, as applicable, on such net capital gains at the rate applicable to capital gains of a corporation.

 

The Operating Partnership is a partnership, and, as a result, all income and losses of the partnership are allocated to the partners for inclusion in their respective tax returns.  Accordingly, no provision or benefit for income taxes has been made in the accompanying financial statements.

 

The Company has elected to treat certain of its corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”).  In general, a TRS of the Company may perform additional services for tenants of the Company and generally may engage in any real estate or non-real estate related business (except for the operation or management of health care facilities or lodging facilities or the providing to any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated).  A TRS is subject to corporate federal income tax.   The Company has conducted business through its TRS entities for certain property management, development, construction and other related services, as well as to hold a joint venture interest in a hotel and other matters.

 

As of September 30, 2016, the Company had a deferred tax asset related to its TRS activity with a balance of approximately $21.8 million which has been fully reserved for through a valuation allowance.  If the General Partner fails to qualify as a REIT in any taxable year, the General Partner will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.  The General Partner is subject to certain state and local taxes.

 

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

 

In the normal course of business, the Company or one of its subsidiaries is subject to examination by federal, state and local jurisdictions in which it operates, where applicable.  As of September 30, 2016, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are generally from the year 2011 forward.

 

Earnings

Per Share

or Unit                                                                                 The Company presents both basic and diluted earnings per share or unit (“EPS or EPU”).  Basic EPS or EPU excludes dilution and is computed by dividing net income available to common shareholders or unitholders by the weighted average number of shares or units outstanding for the period.  Diluted EPS or EPU 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 or EPU from continuing operations amount.  Shares or Units whose issuance is contingent upon the satisfaction of certain conditions shall be considered outstanding and included in the computation of diluted EPS or EPU as follows (i) if all necessary conditions have been satisfied by the end of the period (the events have occurred), those shares or units shall be included as of the beginning of the period in which the conditions were satisfied (or as of the date of the grant, if later) or (ii) if all necessary conditions have not been satisfied by the end of the period, the number of contingently issuable shares or units included in diluted EPS or EPU shall be based on the number of shares or units, if any, that would be issuable if the end of the reporting period were the end of the contingency period (for example, the number of shares or units that would be issuable based on current period earnings or period-end market price) and if the result would be dilutive. Those contingently issuable shares or units shall be included in the denominator of diluted EPS or EPU as of the beginning of the period (or as of the date of the grant, if later).

 

Dividends and

Distributions

Payable                                                                           The dividends and distributions payable at September 30, 2016 represents dividends payable to common shareholders (89,647,443 shares) and distributions payable to noncontrolling interest unitholders of the Operating Partnership (10,497,946 common units and 657,373 LTIP units) for all such holders of record as of October 5, 2016 with respect to the third quarter 2016.  The third quarter 2016 common stock dividends and

 

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unit distributions of $0.15 per common share and unit were approved by the General Partner’s Board of Directors on September 27, 2016 and paid on October 14, 2016.

 

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

 

Costs Incurred

For Stock

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

 

Stock

Compensation                                        The Company accounts for stock compensation in accordance with the provisions of ASC 718, Compensation-Stock Compensation.  These provisions require that the estimated fair value of restricted stock (“Restricted Stock Awards”), restricted stock units (“RSUs”), performance share units (“PSUs”), long-term incentive plan awards and stock options at the grant date be amortized ratably into expense over the appropriate vesting period.  The Company recorded stock compensation expense of $2,046,000 and $695,000 for the three months ended September 30, 2016 and 2015, respectively, and $4,299,000 and $1,500,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

Other

Comprehensive

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

 

Fair Value

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

 

·                  Level 1: Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

·                  Level 2: Quoted prices for identical assets and liabilities in markets that are inactive, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant inputs are observable, either directly or indirectly, such as interest rates and yield curves that are observable at commonly quoted intervals and

·                  Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

 

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

 

Discontinued

Operations                                                           In April 2014, the Financial Accounting Standards Board (“FASB”) issued guidance related to the reporting of discontinued operation and disclosures of disposals of components of an entity.  This guidance defines a discontinued operation as a component or group of components disposed or classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and final result; the guidance states that a strategic shift could include a disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major parts of an entity.  The guidance also provides for additional disclosure requirements in connection with both discontinued operations and other

 

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dispositions not qualifying as discontinued operations.  The guidance is effective for all companies for annual and interim periods beginning on or after December 15, 2014.  The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date.  The Company adopted this standard effective with the interim period beginning January 1, 2014.  Prior to January 1, 2014, properties identified as held for sale and/or disposed of were presented in discontinued operations.

 

Impact Of

Recently-Issued

Accounting

Standards                                                                In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services.  In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach.  Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted for periods beginning after December 15, 2016.  The Company is currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on the Company’s financial position or results of operations.

 

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

 

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

 

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

 

In March 2016, the FASB issued ASU 2016-09, intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.  The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur.  In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate

 

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without causing the award to be classified as a liability.  The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows.  This guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period.  Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption.  The Company is currently in the process of evaluating the impact the adoption of ASU 2016-09 will have on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues and intends to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted. The Company is currently in the process of evaluating the impact the adoption of ASU 2016-15 will have on the Company’s consolidated statement of cash flows.

 

3.              RECENT TRANSACTIONS

 

Acquisitions

 

The Company acquired the following office properties during the nine months ended September 30, 2016 (dollars in thousands):

 

Acquisition

 

 

 

 

 

# of

 

Rentable

 

Acquisition

 

Date

 

Property Address

 

Location

 

Bldgs.

 

Square Feet

 

Cost

 

04/04/16

 

11 Martine Avenue (a)

 

White Plains, New York

 

1

 

82,000

 

$

10,750

 

04/07/16

 

320, 321 University Avenue (b)

 

Newark, New Jersey

 

2

 

147,406

 

23,000

 

06/02/16

 

101 Wood Avenue South (c)

 

Edison, New Jersey

 

1

 

262,841

 

82,300

 

07/01/16

 

111 River Street (c)

 

Hoboken, New Jersey

 

1

 

566,215

 

210,761

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Acquisitions

 

 

 

 

 

5

 

1,058,462

 

$

326,811

 

 


(a) Acquisition represented four units of condominium interests which collectively comprise floors 2 through 5. Upon completion of the acquisition, the Company owns the entire 14-story 262,000 square-foot building. The acquisition was funded using available cash.

(b) This acquisition was funded through borrowings under the Company’s unsecured revolving credit facility.

(c) This acquisition was funded using available cash and through borrowings under the Company’s unsecured revolving credit facility.

 

The purchase prices were preliminarily allocated to the net assets acquired, as follows (in thousands):

 

 

 

 

 

320, 321

 

 

 

 

 

 

 

11 Martine

 

University

 

101 Wood

 

111 River

 

 

 

Avenue

 

Avenue

 

Avenue

 

Street

 

Land and leasehold interest

 

$

2,460

 

$

7,305

 

$

8,509

 

$

204

 

Buildings and improvements

 

8,290

 

15,695

 

72,738

 

198,609

 

Above market leases (a)

 

 

 

58

 

617

 

In-place lease values (a)

 

 

 

6,743

 

43,801

 

Other assets

 

 

 

 

11,279

 

 

 

 

 

 

 

88,048

 

254,510

 

Less: Below market lease values (a)

 

 

 

(5,748

)

(43,749

)

Net assets recorded upon acquisition

 

$

10,750

 

$

23,000

 

$

82,300

 

$

210,761

 

 


(a)         Above market, in-place and below market leases will be amortized over a weighted-average term of 8.1 years.

 

Consolidations

 

On January 5, 2016, the Company, which held a 50 percent subordinated interest in the unconsolidated joint venture, Overlook Ridge Apartment Investors LLC, a 371-unit multi-family operating property located in Malden, Massachusetts, acquired the remaining interest for $39.8 million in cash plus the assumption of a first mortgage loan secured by the property with a principal balance of $52.7 million.  The cash portion of the acquisition was funded primarily through borrowings under the Company’s unsecured revolving credit facility.  Upon acquisition, the Company consolidated the asset and accordingly, remeasured its equity interests, as required by the FASB’s consolidation guidance, at fair value (based upon the income approach using current rates and market cap rates and discount rates).  As a result, the Company recorded a gain on change of control of interests of $10.2 million in the nine months ended September 30, 2016.  On January 19, 2016, the Company repaid the assumed loan and obtained a new loan secured by the property in the amount of $72.5 million, which bears interest at 3.625 percent and matures in February 2023.  See Note 10: Mortgages, Loans Payable and Other Obligations.

 

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During the second quarter 2016, the Company, which held a 38.25 percent subordinate interest in the unconsolidated Portside Apartment Developers, L.L.C., a joint venture which owns a 175-unit operating multi-family property located in East Boston, Massachusetts, acquired the remaining interests of its joint venture partners for $39.6 million in cash plus the assumption of a mortgage loan secured by the property with a principal balance of $42.5 million.  The cash portion of the acquisition was funded primarily through borrowings under the Company’s unsecured revolving credit facility.  Upon acquisition, the Company consolidated the asset and accordingly, remeasured its equity interests, as required by the FASB’s consolidation guidance, at fair value (based upon the income approach using current rates and market cap rates and discount rates).  As a result, the Company recorded a gain on change of control of interests of $5.2 million in the nine months ended September 30, 2016.  On July 8, 2016, the Company repaid the assumed loan and obtained a new loan secured by the property in the amount of $59 million, which bears interest at 3.44 percent and matures in August 2023.  See Note 10: Mortgages, Loans Payable and Other Obligations.

 

The purchase prices were preliminarily allocated to the net assets acquired upon consolidation, as follows (in thousands):

 

 

 

Overlook

 

Portside

 

 

 

Ridge

 

Apts

 

Land and leasehold interest

 

$

11,072

 

$

 

Buildings and improvements

 

87,793

 

73,713

 

Furniture, fixtures and equipment

 

1,695

 

1,038

 

Other assets

 

237

 

10,181

 

In-place lease values (a)

 

4,389

 

2,637

 

Less: Below market lease values (a)

 

(489

)

(242

)

Sub Total

 

104,697

 

87,327

 

 

 

 

 

 

 

Less: Debt assumed

 

(52,662

)

(42,500

)

 

 

 

 

 

 

Net assets recorded upon consolidation

 

$

52,035