Search the web
Welcome, Guest
[Sign Out, My Account]

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
CLI > SEC Filings for CLI > Form 10-Q on 24-Oct-2013All Recent SEC Filings

Show all filings for MACK CALI REALTY CORP



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


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

Executive Overview

Mack-Cali Realty Corporation together with its subsidiaries, (the "Company") is one of the largest real estate investment trusts (REITs) in the United States. The Company has been involved in all aspects of commercial real estate development, management and ownership for over 60 years and has been a publicly-traded REIT since 1994. As of September 30, 2013, the Company owns or has interests in 275 properties (collectively, the "Properties"), primarily class A office and office/flex buildings, totaling approximately 30.7 million square feet, leased to approximately 1,800 tenants and nine multi-family rental properties containing over 3,300 residential units. The Properties are located primarily in suburban markets of the Northeast, some with adjacent, Company-controlled developable land sites able to accommodate up to 8.4 million square feet of additional commercial space and up to 5,824 apartment units.

The Company's historical strategy has been to focus its operations, acquisition and development of office properties in high-barrier-to-entry markets and sub-markets where it believes it is, or can become, a significant and preferred owner and operator. The Company intends to aggressively pursue multi-family residential investments in its core Northeast markets, both through acquisitions and developments, with the goal of materially expanding its holdings in the multi-family sector. This strategy may include, over time, the repositioning of a portion of its portfolio from office properties to multi-family properties.

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

the general economic climate;
the occupancy rates of the Properties;
rental rates on new or renewed leases;
tenant improvement and leasing costs incurred to obtain and retain tenants;
the extent of early lease terminations;
operating expenses;
cost of capital; and
the extent of acquisitions, development and sales of real estate.

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

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

The Company's core office markets continue to be weak. The percentage leased in the Company's consolidated portfolio of stabilized operating commercial properties was 86.1 percent at September 30, 2013 as compared to 86.2 percent at June 30, 2013 and 87.5 percent at September 30, 2012. Percentage leased includes all leases in effect as of the period end date, some of which have commencement dates in the future and leases that expire at the period end date. Leases that expired as of September 30, 2013, June 30, 2013 and September 30, 2012 aggregate 62,054, 306,496 and 113,335 square feet, respectively, or 0.2, 1.0 and 0.4 percentage of the net rentable square footage, respectively. Rental rates (including escalations) on the Company's space that was renewed (based on first rents payable) during the three months ended September 30, 2013 (on 643,490 square feet of renewals) decreased an average of 11.3 percent compared to rates that were in effect under the prior leases, as compared to a 5.9 percent increase during the three months ended September 30, 2012 (on 463,883 square feet of renewals). Estimated lease costs for the renewed leases during the three months ended September 30, 2013 averaged $2.01 per square foot per year for a weighted average lease term of 3.6 years and estimated lease costs for the renewed leases during the three months ended September 30, 2012 averaged $1.24 per square foot per year for a weighted average lease term of 3.9 years. The Company believes that commercial vacancy rates may continue to increase and rental rates may continue to decline in some of its markets through 2013 and possibly beyond. As of September 30, 2013, commercial leases which comprise approximately 11.3 percent of the Company's annualized base rent are scheduled to expire during the year ended December 31, 2014. With the decline of rental rates in the Company's markets over the past few years, as leases expire in 2014, assuming no further changes in current market rental rates, the Company expects that the rental rates at its commercial properties it is likely to achieve on new leases will generally be lower than the rates currently being paid, thereby resulting in less revenue from the same space. As a result of the above factors, the Company's future earnings and cash flow may continue to be negatively impacted by current market conditions.

The Company expects that the impact of the current state of the economy, including high unemployment will continue to have a negative effect on the fundamentals of its business, including lower occupancy, reduced effective rents, and increases in defaults and past due accounts. These conditions would negatively affect the Company's future net income and cash flows and could have a material adverse effect on the Company's financial condition.

As a result of the continued weakness in the Company's core office markets, the Company intends to continue to expand its holdings in the multi-family rental sector, which it believes has traditionally been a more stable product type.

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

recent transactions;
critical accounting policies and estimates;
results of operations for the three and nine months ended September 30, 2013 as compared to the three and nine months ended September 30, 2012 and
liquidity and capital resources.

Recent Transactions

On January 18, 2013, the Company acquired Alterra at Overlook Ridge 1A, a 310-unit multi-family rental property located in Revere, Massachusetts, for approximately $61.3 million in cash, which was funded primarily through borrowings under the Company's unsecured revolving credit facility.

On April 4, 2013, the Company acquired Alterra at Overlook Ridge IB, a 412-unit multi-family rental property located in Revere, Massachusetts, for approximately $88 million in cash, which was funded primarily through borrowings under the Company's unsecured revolving credit facility.

On October 23, 2012, as part of the Roseland transaction, the Company had acquired a 26.25 percent interest in a to-be-built, 108-unit multi-family rental property located in Eastchester, New York (the "Eastchester Project") for approximately $4.9 million. The remaining interests in the development project-owning entity, 150 Main Street, L.L.C. ("Eastchester") was owned 26.25 percent by JMP Eastchester, L.L.C. and 47.5 percent by Hudson Valley Land Holdings, L.L.C. ("HVLH"). The Eastchester Project is expected to start in the near term. Estimated total development costs of $46 million are expected to be funded with a $27.5 million construction loan and the balance of $18.5 million to be funded with member capital.

On August 22, 2013, the operating agreement of Eastchester was modified which increased the Company's effective ownership to 76.25 percent, with the remaining 23.75 percent owned by HVLH. The agreement also provided the Company with control of all major decisions. Accordingly, effective from this date, the Company is consolidating Eastchester under the provisions of ASC 810, Consolidation. As the carrying value approximated the fair value of the net assets acquired, there was no holding period gain or loss recognized on this transaction.

Properties Commencing Initial Operations The following properties commenced initial operations during the nine months ended September 30, 2013 (dollars in thousands, except per square foot):

                                                                         Garage        Development         Development
                                                       # of    Rentable Parking     Costs Incurred           Costs Per
Date     Property/Address Location    Type           Bldgs. Square Feet  Spaces         by Company         Square Foot
06/05/13 14 Sylvan Way    New Jersey  Office           1        203,506       -   $        51,484  (a)   $        253
         Port Imperial    Weehawken,
08/01/13 South 4/5        New Jersey  Parking/Retail   1         16,736    850             71,107  (b)             N/A

Totals                                                 2        220,242    850    $       122,591

(a) Development costs included approximately $13.0 million in land costs and $4.3 million in leasing costs. Amounts are as of September 30, 2013.
(b) Development costs included approximately $13.1 million in land costs. Amounts are as of September 30, 2013.

Property Sales
On August 27, 2013, the Company completed the sale of its 1.66 million square foot Pennsylvania office portfolio and three developable land parcels for approximately $233 million: $201 million in cash, a $10 million mortgage on one of the properties ($8 million of which was funded at closing) and subordinated equity interests in each of the properties being sold with capital accounts aggregating $22 million. Net sale proceeds from the sale aggregated $207 million which was comprised of the $233 million gross sales price less the subordinated equity interests of $22 million and $4 million in closing costs. As of September 30, 2013, approximately $55.3 million of the cash received from the sale was being held by a qualified intermediary pending reinvestment, which is a noncash item included in deferred charges, goodwill and other assets. The purchasers of the Pennsylvania office portfolio are joint ventures formed between the Company and affiliates of the Keystone Property Group (the "Keystone Affiliates"). The mortgage loan has a term of two years with a one year extension option and bears interest at LIBOR plus six percent. The Company's equity interests in the joint ventures will be subordinated to Keystone Affiliates receiving a 15 percent internal rate of return ("IRR") after which the Company will receive a ten percent IRR on its subordinated equity and then all profit will be split equally. In connection with these partial sale transactions, because the buyer receives a preferential return, the Company only recognized profit to the extent that they received net proceeds in excess of their entire carrying value of the properties, effectively reflecting their retained subordinate equity interest at zero.

As part of the transaction, the Company has rights to own, after zoning-approval-subdivision, land at the 150 Monument Road property located in Bala Cynwyd, Pennsylvania, for a contemplated multi-family residential development.

The Company sold the following office properties during the nine months ended September 30, 2013 (dollars in thousands): See Note 7: Discontinued Operations.

                                                     Rentable           Net          Net
Sale                                         # of      Square         Sales         Book        Realized
Date     Property/Address Location         Bldgs.        Feet      Proceeds        Value     Gain (loss)
         19 Skyline Drive Hawthorne, New
04/10/13 (a)              York               1       248,400    $    16,131   $  16,005    $         126
         55 Corporate     Bridgewater, New
04/26/13 Drive            Jersey             1       204,057         70,967      51,308           19,659
                          Little Ferry,
05/02/13 200 Riser Road   New Jersey         1       286,628         31,775      14,852           16,923
         777 Passaic      Clifton, New
05/13/13 Avenue           Jersey             1        75,000          5,640       3,713            1,927
         16 and 18 Sentry Blue Bell,
05/30/13 Parkway West (b) Pennsylvania       2       188,103         19,041      19,721            (680)
         51 Imclone Drive Branchburg, New
05/31/13 (c)              Jersey             1        63,213          6,101       5,278              823
         40 Richards      Norwalk,
06/28/13 Avenue           Connecticut        1       145,487         15,858       17,027         (1,169)
                          Township, New
07/10/13 106 Allen Road   Jersey             1       132,010        17,677        13,522          4,155
         Pennsylvania     Suburban

office portfolio Philadelphia,
08/27/13 (d) (e) Pennsylvania 15 1,663,511 207,425 164,259 43,166

Totals: 24 3,006,409 $ 390,615 $ 305,685 $ 84,930

(a) The Company recognized a valuation allowance of $7.1 million on this property at December 31, 2012. In connection with the sale, the Company provided an interest-free note receivable to the buyer of $5 million (with a net present value of $3.6 million at September 30, 2013) which matures in ten years and requires monthly payments of principal. See Note 5: Deferred charges, goodwill and other assets.

(b) The Company recorded an $8.4 million impairment charge on these properties at December 31, 2012. The Company has retained a subordinated interest in these properties.

(c) The property was encumbered by a mortgage loan which was satisfied by the Company at the time of the sale. The Company incurred $0.7 million in costs for the debt satisfaction, which was included in discontinued operations: loss from early extinguishment of debt for the nine months ended September 30, 2013.

(d) In order to reduce the carrying value of five of the properties to their estimated fair market values, the Company recorded impairment charges of $23.9 million at June 30, 2013. The fair value used in the impairment charges was based on the purchase and sale agreement for the properties ultimately sold.

(e) The portfolio sale also included three developable land parcels.

The Company's nine office properties located in Roseland, New Jersey, Parsippany, New Jersey, Warren, New Jersey, and Lyndhurst, New Jersey, aggregating approximately 1.3 million square feet, are collateral for mortgage loans scheduled to mature on August 11, 2014 and May 11, 2016, with principal balances totaling $159.2 million as of September 30, 2013. As of September 30, 2013, the Company estimated that the carrying value of the properties may not be recoverable over their anticipated holding periods. In order to reduce the carrying value of the properties to their estimated fair market values, the Company recorded impairment charges of $48.5 million at September 30, 2013, which resulted from the current decline in leasing activity and market rents of the properties identified. The Company's estimated fair values were derived utilizing a discounted cash flow ("DCF") model including all estimated cash inflows and outflows over a specified holding period. These cash flows were comprised of inputs which included contractual revenues and forecasted revenues and expenses based upon market conditions and expectations for growth. The capitalization rate of 8.5 percent and discount rates ranging from 10 percent to 15 percent utilized in DCF were based upon the risk profile of the properties' cash flows and observable rates that the Company believes to be within a reasonable range of current market rates for each respective property. Based on these inputs the Company determined that its valuation of these investments was classified within Level 3 of the fair value hierarchy, as provided by ASC 820, Fair Value Measurements and Disclosures.

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

On April 23, 2013, the Company and JPM sold their interests in the Boston Downtown Crossing joint venture for $45 million, of which the Company's share was $13.5 million. The Company realized its share of the gain on the sale of $754,000 which is included in equity in earnings.

On June 18, 2013, 12 Vreeland Associates, L.L.C. obtained a mortgage loan which is collateralized by its office property. The amortizable loan with a balance of $15.8 million as of September 30, 2013 bears interest at 2.87 percent and matures on July 2023. The venture subsequently distributed $14.8 million of the loan proceeds, of which the Company's share was $7.4 million.

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

On August 29, 2013, Port Imperial 15 refinanced the mortgage loan of $57 million. The new loan has a balance of $57.5 million as of September 30, 2013, bears interest at 4.32 percent and matures in September 2020. The interest-only loan is collateralized by the RiversEdge Property.

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

Critical Accounting Policies and Estimates

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

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

The Financial Statements have been prepared in conformity with generally accepted accounting principles. The preparation of the Financial Statements 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 reported 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. The Company's critical accounting policies are those which require assumptions to be made about matters that are highly uncertain. Different estimates could have a material effect on the Company's financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions and circumstances.

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. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives. Fully-depreciated assets are removed from the accounts.

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

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

                 Leasehold interests                         Remaining lease term
                 Buildings and improvements                         5 to 40 years
                 Tenant improvements               The shorter of the term of the
                                                     related lease or useful life
                 Furniture, fixtures and equipment                  5 to 10 years

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

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

Other intangible assets acquired include amounts for in-place lease values and tenant relationship values, which are based on management's evaluation of the specific characteristics of each tenant's lease and the Company's overall relationship with the respective tenant. Factors to be considered by management in its analysis of in-place lease values include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, management considers leasing commissions, legal and other . . .

  Add CLI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for CLI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.