UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number 1-13274
Mack-Cali Realty Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 22-3305147
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11 Commerce Drive, Cranford, New Jersey 07016-3501
- --------------------------------------------------------------------------------
(Address or principal executive office)
(Zip Code)
(908) 272-8000
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(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 twelve (12) months (or such shorter period that the
Registrant was required to file such report) YES |X| NO |_| and (2) has been
subject to such filing requirements for the past ninety (90) days YES |X| NO
|_|.
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 30, 1999, there were 59,260,534 shares of $0.01 par value common
stock outstanding.
1
MACK-CALI REALTY CORPORATION
FORM 10-Q
INDEX
Part I Financial Information Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 ................................ 4
Consolidated Statements of Operations for the three
and six month periods ended June 30, 1999 and 1998 ... 5
Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 1999 ........ 6
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 .................. 7
Notes to Consolidated Financial Statements .............. 8-29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 30-45
Item 3. Quantitative and Qualitative Disclosures about Market
Risk ................................................. 45
Part II Other Information and Signatures
Item 1. Legal Proceedings ....................................... 46
Item 2. Changes in Securities and Use of Proceeds ............... 46
Item 3. Default Upon Senior Securities .......................... 46
Item 4. Submission of Matters to a Vote of Security Holders ..... 46
Item 5. Other Information ....................................... 46
Item 6. Exhibits ................................................ 47
Signatures .............................................. 50
2
MACK-CALI REALTY CORPORATION
Part I - Financial Information
Item I. Financial Statements
The accompanying unaudited consolidated balance sheets, statements of
operations, of changes in stockholders' equity, and of cash flows and
related notes, have been prepared in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and in
conjunction with the rules and regulations of the Securities and Exchange
Commission ("SEC"). Accordingly, they do not include all of the
disclosures required by GAAP for complete financial statements. The
financial statements reflect all adjustments consisting only of normal,
recurring adjustments, which are in the opinion of management, necessary
for a fair presentation for the interim periods.
The aforementioned financial statements should be read in conjunction with
the notes to the aforementioned financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
and the financial statements and notes thereto included in the company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
The results of operations for the three and six month periods ended June
30, 1999 are not necessarily indicative of the results to be expected for
the entire fiscal year or any other period.
3
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
================================================================================
June 30, December 31,
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------
Rental property
Land and leasehold interests $ 523,250 $ 510,534
Buildings and improvements 2,934,780 2,887,115
Tenant improvements 83,030 64,464
Furniture, fixtures and equipment 5,795 5,686
- -------------------------------------------------------------------------------------------
3,546,855 3,467,799
Less - accumulated depreciation and amortization (220,152) (177,934)
- -------------------------------------------------------------------------------------------
Total rental property 3,326,703 3,289,865
Cash and cash equivalents 11,519 5,809
Investments in unconsolidated joint ventures 86,380 66,508
Unbilled rents receivable 48,435 41,038
Deferred charges and other assets, net 52,703 39,020
Restricted cash 6,160 6,026
Accounts receivable, net of allowance for doubtful accounts
of $346 and $670 6,698 3,928
- -------------------------------------------------------------------------------------------
Total assets $ 3,538,598 $ 3,452,194
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------
Senior Unsecured Notes $ 597,344 $ --
Revolving credit facilities 148,600 671,600
Mortgages and loans payable 749,041 749,331
Dividends and distributions payable 40,926 40,564
Accounts payable and accrued expenses 39,644 33,253
Rents received in advance and security deposits 31,117 29,980
Accrued interest payable 14,729 2,246
- -------------------------------------------------------------------------------------------
Total liabilities 1,621,401 1,526,974
- -------------------------------------------------------------------------------------------
Minority interest of unitholders in Operating Partnership 458,544 501,313
- -------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 190,000,000 shares authorized,
58,915,684 and 57,266,137 shares outstanding 589 573
Additional paid-in capital 1,563,187 1,514,648
Dividends in excess of net earnings (105,123) (91,314)
- -------------------------------------------------------------------------------------------
Total stockholders' equity 1,458,653 1,423,907
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,538,598 $ 3,452,194
===========================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
================================================================================
Three Months Ended June 30, Six Months Ended June 30,
REVENUES 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
Base rents $ 116,499 $ 105,861 $ 232,579 $ 198,777
Escalations and recoveries from tenants 16,366 12,358 31,226 22,715
Parking and other 3,061 2,836 6,961 4,818
Interest income 215 916 470 1,459
Equity in earnings of unconsolidated joint ventures 834 70 628 95
- ------------------------------------------------------------------------------------------------------------
Total revenues 136,975 122,041 271,864 227,864
- ------------------------------------------------------------------------------------------------------------
EXPENSES
- ------------------------------------------------------------------------------------------------------------
Real estate taxes 14,208 11,854 28,051 21,926
Utilities 9,829 9,115 19,421 17,417
Operating services 17,227 15,629 34,143 28,321
General and administrative 5,770 6,394 13,904 12,591
Depreciation and amortization 22,465 19,093 44,434 35,324
Interest expense 25,697 21,786 49,319 40,265
Non-recurring charges 16,458 -- 16,458 --
- ------------------------------------------------------------------------------------------------------------
Total expenses 111,654 83,871 205,730 155,844
- ------------------------------------------------------------------------------------------------------------
Income before minority interest and extraordinary item 25,321 38,170 66,134 72,020
Minority interest 6,635 7,782 15,384 15,089
- ------------------------------------------------------------------------------------------------------------
Income before extraordinary item 18,686 30,388 50,750 56,931
Extraordinary item - loss on early retirement of debt
(net of minority interest's share of $297 in 1998) -- (2,373) -- (2,373)
- ------------------------------------------------------------------------------------------------------------
Net income $ 18,686 $ 28,015 $ 50,750 $ 54,558
============================================================================================================
Basic earnings per share:
Income before extraordinary item $ 0.32 $ 0.53 $ 0.87 $ 1.05
Extraordinary item - loss on early retirement of debt -- (0.04) -- (0.04)
- ------------------------------------------------------------------------------------------------------------
Net income $ 0.32 $ 0.49 $ 0.87 $ 1.01
============================================================================================================
Diluted earnings per share:
Income before extraordinary item $ 0.32 $ 0.53 $ 0.87 $ 1.04
Extraordinary item - loss on early retirement of debt -- (0.04) -- (0.04)
- ------------------------------------------------------------------------------------------------------------
Net income $ 0.32 $ 0.49 $ 0.87 $ 1.00
============================================================================================================
Dividends declared per common share $ 0.55 $ 0.50 $ 1.10 $ 1.00
- ------------------------------------------------------------------------------------------------------------
Basic weighted average shares outstanding 58,510 57,019 58,337 54,207
Diluted weighted average shares outstanding 67,486 64,626 67,385 61,671
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
5
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
================================================================================
Additional Dividends in Total
Common Stock Paid-In Excess of Stockholders'
Shares Par Value Capital Net Earnings Equity
- ---------------------------------------------------------------------------------------------------------------
Balance at January 1, 1999 57,266 $573 $1,514,648 $ (91,314) $1,423,907
Net income -- -- -- 50,750 50,750
Dividends -- -- -- (64,559) (64,559)
Redemption of common units for shares of
common stock 1,634 16 48,271 -- 48,287
Proceeds from stock options exercised 41 -- 933 -- 933
Proceeds from dividend reinvestment
and stock purchase plan 1 -- 10 -- 10
Repurchase of common stock (26) -- (713) -- (713)
Deferred compensation plan for directors -- -- 38 -- 38
- ---------------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 58,916 $589 $1,563,187 $(105,123) $1,458,653
===============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
6
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
================================================================================
Six Months Ended June 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998
- --------------------------------------------------------------------------------------------------------
Net income $ 50,750 $ 54,558
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 44,434 35,324
Amortization of deferred financing costs 1,518 654
Equity in earnings of unconsolidated joint ventures (628) (95)
Minority interest 15,384 15,089
Extraordinary item - loss on early retirement of debt -- 2,373
Changes in operating assets and liabilities:
Increase in unbilled rents receivable (7,397) (6,339)
Increase in deferred charges and other assets, net (10,794) (4,569)
Increase in accounts receivable, net (2,770) (1,793)
Increase in accounts payable and accrued expenses 5,891 366
Increase in rents received in advance and security deposits 1,137 8,425
Increase (decrease) in accrued interest payable 12,483 (1,476)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 110,008 $ 102,517
========================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
- --------------------------------------------------------------------------------------------------------
Additions to rental property $ (71,107) $ (625,434)
Issuance of mortgage note receivable -- (20,000)
Repayment of mortgage note receivable -- 20,000
Investments in unconsolidated joint ventures (29,941) (39,031)
Distributions from unconsolidated joint ventures 10,634 1,000
(Increase) decrease in restricted cash (134) 1,361
- --------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (90,548) $ (662,104)
========================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------------------
Proceeds from Senior Unsecured Notes $ 597,252 $ --
Proceeds from revolving credit facilities 130,900 1,307,452
Proceeds from mortgages and loans payable 45,500 --
Repayments of revolving credit facilities (653,900) (880,111)
Repayments of mortgages and loans payable (45,819) (69,704)
Repurchase of common stock (713) --
Redemption of common units -- (3,163)
Payment of financing costs (6,592) (7,492)
Net proceeds from common stock offerings -- 284,453
Proceeds from stock options exercised 933 5,271
Proceeds from dividend reinvestment and stock purchase plan 10 --
Payment of dividends and distributions (81,321) (63,228)
- --------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities $ (13,750) $ 573,478
========================================================================================================
Net increase in cash and cash equivalents $ 5,710 $ 13,891
Cash and cash equivalents, beginning of period $ 5,809 $ 2,704
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 11,519 $ 16,595
========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
7
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share/unit amounts)
================================================================================
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Mack-Cali Realty Corporation, a Maryland corporation, and subsidiaries (the
"Company"), is a fully-integrated, self-administered, self-managed real estate
investment trust ("REIT") providing leasing, management, acquisition,
development, construction and tenant-related services for its properties. As of
June 30, 1999, the Company owned or had interests in 254 properties plus
developable land (collectively, the "Properties"). The Properties aggregate
approximately 28.1 million square feet, and are comprised of 160 office
buildings and 81 office/flex buildings totaling approximately 27.7 million
square feet (which included four office buildings and one office/flex building,
aggregating 1.0 million square feet, owned by unconsolidated joint ventures in
which the Company has investment interests), six industrial/warehouse buildings
totaling approximately 387,400 square feet, two multi-family residential
complexes consisting of 453 units, two stand-alone retail properties and three
land leases. The Properties are located in 12 states, primarily in the
Northeast, plus the District of Columbia.
Basis of Presentation
The accompanying consolidated financial statements include all accounts of the
Company and its majority-owned subsidiaries, which consist principally of
Mack-Cali Realty, L.P. (the "Operating Partnership"). See Investments in
Unconsolidated Joint Ventures in Note 2 for the Company`s treatment of
unconsolidated joint venture interests. All significant intercompany accounts
and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
Rental
Property Rental properties are stated at cost less accumulated
depreciation and amortization. Costs directly related to the
acquisition and development of rental properties are
capitalized. Capitalized development costs include interest,
property taxes, insurance and other project costs incurred
during the period of construction. 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.
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
--------------------------------------------------------------
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be
impaired. A property's value is impaired only if management's
estimate of the aggregate future cash flows (undiscounted and
without interest charges) to be generated by the property are
less than the carrying value of the property. To the extent
impairment has occurred, the loss shall be measured as the
excess of the carrying amount of the property over the fair
value of the property. Management does not believe that the
value of any of its rental properties is impaired.
8
Investments in
Unconsolidated
Joint Ventures The Company accounts for its investments in unconsolidated
joint ventures under the equity method of accounting as the
Company exercises significant influence, but does not control
these entities. These investments are recorded initially at
cost, as Investments in Unconsolidated Joint Ventures, and
subsequently adjusted for equity in earnings (loss) and cash
contributions and distributions. Any difference between the
carrying amount of these investments on the balance sheet of
the Company and the underlying equity in net assets is
amortized as an adjustment to equity in earnings (loss) of
unconsolidated joint ventures over 40 years. See Note 4.
Cash and Cash
Equivalents All highly liquid investments with a maturity of three months
or less when purchased are considered to be cash equivalents.
Deferred
Financing Costs Costs incurred in obtaining financing are capitalized and
amortized on a straight-line basis, which approximates the
effective interest method, over the term of the related
indebtedness. Amortization of such costs is included in
interest expense and was $917 and $400 for the three months
ended June 30, 1999 and 1998, respectively, and $1,518 and
$654 for the six months ended June 30, 1999 and 1998,
respectively.
Deferred
Leasing Costs Costs incurred in connection with leases are capitalized and
amortized on a straight-line basis over the terms of the
related leases and included in depreciation and amortization.
Unamortized deferred leasing costs are charged to amortization
expense upon early termination of the lease. Certain employees
of the Operating Partnership provide leasing services to the
Properties and receive compensation based on space leased. The
portion of such compensation which is capitalized and
amortized, approximated $743 and $659 for the three months
ended June 30, 1999 and 1998, respectively, and $1,401 and
$1,236 for the six months ended June 30, 1999 and 1998,
respectively.
Revenue
Recognition Base rental revenue is recognized on a straight-line basis
over the terms of the respective leases. Unbilled rents
receivable represents the amount by which straight-line rental
revenue exceeds rents currently billed in accordance with the
lease agreements. Parking revenue includes income from parking
spaces leased to tenants. Rental income on residential
property under operating leases having terms generally of one
year or less is recognized when earned.
Reimbursements are received from tenants for certain costs as
provided in the lease agreements. These costs generally
include real estate taxes, utilities, insurance, common area
maintenance and other recoverable costs. See Note 13.
Income and
Other Taxes The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"). As a REIT, the Company generally will
not be subject to federal income tax to the extent it
distributes at least 95 percent of its REIT taxable income to
its shareholders and satisfies certain other requirements.
REITs are subject to a number of organizational and
operational requirements. If the Company fails to qualify as a
REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate tax
rates. The Company is subject to certain state and local
taxes.
Interest Rate
Contracts Interest rate contracts are utilized by the Company to reduce
interest rate risks. The Company does not hold or issue
derivative financial instruments for trading purposes. The
differentials to be received or paid under contracts
designated as hedges are recognized over the life of the
contracts as adjustments to interest expense.
9
In certain situations, the Company uses forward treasury lock
agreements to mitigate the potential effects of changes in
interest rates for prospective transactions. Gains and losses
are deferred and amortized as adjustments to interest expense
over the remaining life of the associated debt to the extent
that such debt remains outstanding.
Earnings
Per Share In accordance with the Statement of Financial Accounting
Standards No. 128 ("FASB No. 128"), the Company presents both
basic and diluted earnings per share ("EPS"). Basic EPS
excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average
number of shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock, where such exercise or conversion
would result in a lower EPS amount.
Dividends and
Distributions
Payable The dividends and distributions payable at June 30, 1999
represents dividends payable to shareholders of record on July
6, 1999 (59,109,277 shares), distributions payable to minority
interest common unitholders (8,299,690 common units) on that
same date and preferred distributions to preferred unitholders
(229,304 preferred units) for the second quarter 1999. The
second quarter 1999 dividends and common unit distributions of
$0.55 per share and per common unit (pro-rated for units
issued during the quarter), as well as the second quarter
preferred unit distribution of $16.875 per preferred unit,
were approved by the Board of Directors on June 10, 1999 and
paid on July 23,1999.
Underwriting
Commissions
and Costs Underwriting commissions and costs incurred in connection with
the Company's stock offerings are reflected as a reduction of
additional paid-in-capital.
Stock Options The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations ("APB No. 25"). Under
APB No. 25, compensation cost is measured as the excess, if
any, of the quoted market price of the Company's stock at the
date of grant over the exercise price of the option granted.
Compensation cost for stock options, if any, is recognized
ratably over the vesting period. The Company's policy is to
grant options with an exercise price equal to the quoted
closing market price of the Company's stock on the business
day preceding the grant date. Accordingly, no compensation
cost has been recognized for the Company's stock option plans.
See Note 14.
Extraordinary
Item Extraordinary item represents the effect resulting from the
early settlement of certain debt obligations, including
related deferred financing costs, prepayment penalties, yield
maintenance payments and other related items.
Non-Recurring
Charges The Company considers non-recurring charges as costs incurred
specific to significant non-recurring events that impact the
comparative measurement of the Company's performance.
10
3. ACQUISITIONS/TRANSACTIONS
OPERATING PROPERTY ACQUISITIONS
The Company acquired the following operating properties during the six months
ended June 30, 1999:
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition # of Rentable Investment by
Date Property/Portfolio Name Location Bldgs. Square Feet Company (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Office
- ------
3/05/99 Pacifica Portfolio - Phase III(b) Colorado Springs, El Paso County, CO 2 94,737 $ 5,709
- ------------------------------------------------------------------------------------------------------------------------------------
Total Office Property Acquisitions: 2 94,737 $ 5,709
====================================================================================================================================
The Company acquired the following operating properties during the year ended
December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition # of Rentable Investment by
Date Property/Portfolio Name Location Bldgs. Square Feet Company (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Office
- ------
2/05/98 500 West Putnam Avenue(c) Greenwich, Fairfield County, CT 1 121,250 $ 20,125
2/25/98 10 Mountainview Road Upper Saddle River, Bergen County, NJ 1 192,000 24,754
3/12/98 1250 Capital of Texas Highway South Austin, Travis County, TX 1 270,703 37,266
3/27/98 Prudential Business Campus(d) Parsippany, Morris County, NJ 5 703,451 130,437
3/27/98 Pacifica Portfolio- Phase I(b)(e) Denver & Colorado Springs, CO 10 620,017 74,966
3/30/98 Morris County Financial Center Parsippany, Morris County, NJ 2 301,940 52,763
5/13/98 3600 South Yosemite Denver, Denver County, CO 1 133,743 13,555
5/22/98 500 College Road East(f) Princeton, Mercer County, NJ 1 158,235 21,334
6/01/98 1709 New York Ave./1400 L Street N.W. Washington, D.C. 2 325,000 90,385
6/03/98 400 South Colorado Boulevard Denver, Denver County, CO 1 125,415 12,147
6/08/98 Pacifica Portfolio - Phase II(b)(e)(g) Denver & Colorado Springs, CO 6 514,427 85,910
7/16/98 4200 Parliament Drive(h) Lanham, Prince George's County, MD 1 122,000 15,807
9/10/98 40 Richards Avenue(e) Norwalk, Fairfield County, CT 1 145,487 19,587
9/15/98 Seven Skyline Drive(i) Hawthorne, Westchester County, NY 1 109,000 13,379
- ------------------------------------------------------------------------------------------------------------------------------------
Total Office Property Acquisitions: 34 3,842,668 $612,415
- ------------------------------------------------------------------------------------------------------------------------------------
Office/flex
- -----------
1/30/98 McGarvey Portfolio(j) Moorestown, Burlington County, NJ 17 748,660 $ 47,526
7/14/98 1510 Lancer Road(k) Moorestown, Burlington County, NJ 1 88,000 3,700
- ------------------------------------------------------------------------------------------------------------------------------------
Total Office/flex Property Acquisitions: 18 836,660 $ 51,226
- ------------------------------------------------------------------------------------------------------------------------------------
Total Operating Property Acquisitions: 52 4,679,328 $ 663,641
====================================================================================================================================
PROPERTIES PLACED IN SERVICE
The Company placed in service the following properties through the completion of
development during the six months ended June 30, 1999:
- ------------------------------------------------------------------------------------------------------------------------------------
Date Placed # of Rentable Investment by
in Service Property Name Location Bldgs. Square Feet Company (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Office/flex
- -----------
3/01/99 One Center Court Totowa, Passaic County, NJ 1 38,961 $ 2,140
- ------------------------------------------------------------------------------------------------------------------------------------
Total Office/flex Properties Placed in Service: 1 38,961 $ 2,140
- ------------------------------------------------------------------------------------------------------------------------------------
Land Lease
- ----------
2/01/99 Horizon Center Business Park(l) Hamilton Township, Mercer County, NJ N/A 27.7 acres $ 1,007
- ------------------------------------------------------------------------------------------------------------------------------------
Total Land Lease Transactions: 27.7 acres $ 1,007
- ------------------------------------------------------------------------------------------------------------------------------------
Total Properties Placed in Service: 1 38,961 $ 3,147
====================================================================================================================================
See footnotes to these schedules on subsequent page.
11
The Company placed in service the following properties through the completion of
development or redevelopment during the year ended December 31, 1998:
- ------------------------------------------------------------------------------------------------------------------------------------
Date Placed # of Rentable Investment by
in Service Property Name Location Bldgs Square Feet Company (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Office
- ------
1/15/98 224 Strawbridge Drive Moorestown, Burlington County, NJ 1 74,000 $ 7,796
8/01/98 228 Strawbridge Drive Moorestown, Burlington County, NJ 1 74,000 7,986
- ------------------------------------------------------------------------------------------------------------------------------------
Total Office Properties Placed in Service: 2 148,000 $ 15,782
- ------------------------------------------------------------------------------------------------------------------------------------
Office/flex
- -----------
6/08/98 Two Center Court Totowa, Passaic County, NJ 1 30,600 $ 2,231
10/23/98 650 West Avenue Stamford, Fairfield County, CT 1 40,000 4,952
- ------------------------------------------------------------------------------------------------------------------------------------
Total Office/flex Properties Placed in Service: 2 70,600 $ 7,183
- ------------------------------------------------------------------------------------------------------------------------------------
Total Properties Placed in Service: 4 218,600 $ 22,965
====================================================================================================================================
(a) Unless otherwise noted, transactions were funded by the Company primarily
with funds made available through draws on the Company's credit
facilities.
(b) The Company may be required to pay additional consideration due to
earn-out provisions in the agreement. William L. Mack, a director and
equity holder of the Company, was an indirect owner of an interest in
certain of the buildings contained in the Pacifica portfolio.
(c) The acquisition was funded with cash as well as the assumption of mortgage
debt (estimated fair value of approximately $12,104, with annual effective
interest rate of 6.52 percent).
(d) The acquisition was funded primarily from proceeds received from the sale
of 2,705,628 shares of common stock (see Note 14). Also included in the
acquisition, but excluded from this schedule, is (i) Nine Campus Drive,
which the Company has a 50 percent interest through an unconsolidated
joint venture (see Note 4), and (ii) developable land adjacent to the
acquired portfolio (see "1998 Redevelopment Properties/Developable Land
Acquisitions").
(e) The acquisition was funded with cash and the issuance of common units to
the seller (see Note 10).
(f) The property was acquired subject to a ground lease, which is prepaid
through 2031, and has two 10-year renewal options, at rent levels as
defined in the lease agreement.
(g) Also included in the acquisition, but excluded from this schedule, is
developable land adjacent to the acquired portfolio (see "1998
Redevelopment Properties/Developable Land Acquisitions").
(h) Includes land adjacent to the operating property, which may be sub-divided
for future development.
(i) The property was acquired through the exercise of a purchase option
obtained in connection with the Company's acquisition of 65 properties
from Robert Martin Company, LLC in January 1997. The acquisition was
funded with cash, net of the repayment by the seller of the remaining
balance of a note receivable.
(j) The acquisition was funded with cash as well as the assumption of mortgage
debt (aggregate estimated fair value of approximately $8,354, with a
weighted average annual effective interest rate of 6.24 percent). The
Company is under contract to acquire an additional four office/flex
properties and has a right of first refusal to acquire six additional
office/flex properties.
(k) The property was acquired through the exercise of a purchase option
obtained in the acquisition of the McGarvey portfolio in January 1998.
(l) On February 1, 1999, the Company entered into a ground lease agreement to
lease 27.7 acres of developable land located at the Company's Horizon
Center Business Park, located in Hamilton Township, Mercer County, New
Jersey on which Home Depot is developing a 134,000 square-foot retail
store.
- ----------
1999 REDEVELOPMENT PROPERTIES/DEVELOPABLE LAND TRANSACTIONS
On February 26, 1999, the Company acquired approximately 2.3 acres of vacant
land adjacent to one of the Company's operating properties located in San
Antonio, Bexar County, Texas for approximately $1,524, which was made available
from the Company's cash reserves.
On March 15, 1999, the Company entered into a joint venture with SJP 106 Allen
Road to form MC-SJP Pinson Development, LLC, which acquired vacant land located
in Bernards Township, Somerset County, New Jersey. The venture has commenced
construction of a 135,000 square-foot office building on this site. The Company
provided a construction loan with a total commitment of $22,859 (aggregate
borrowings of $4,987 as of June 30, 1999) to the venture. Upon completion of the
building, the Company's construction loan will convert to an equity interest in
the venture. The Company accounts for its investment in the joint venture on a
consolidated basis.
On May 4, 1999, the Company acquired, from an entity whose principals include
Timothy M. Jones, Martin S. Berger and Robert F. Weinberg, each of whom are
affiliated with the Company as the President of the Company, a current member of
the Board of Directors and a former member of the Board of Directors in the
Company, approximately 2.5 acres of vacant land in the Stamford Executive Park,
located in Stamford, Fairfield County, Connecticut. The Company acquired the
land for approximately $2,181. $1,681 of the purchase price was funded from the
Company's cash reserves with an additional $500 due three years from the closing
date contingent upon certain conditions per the acquisition contract and subject
to interest over the term.
12
On June 1, 1999, the Company acquired 795 Folsom Street, a 183,445 square-foot
office building located in San Francisco, San Francisco County, California. The
building was acquired for approximately $34,282, which was made available from
drawing on one of the Company's credit facilities. The Company is currently
redeveloping the property for lease-up and operation.
1998 REDEVELOPMENT PROPERTIES/DEVELOPABLE LAND TRANSACTIONS
On January 23, 1998, the Company acquired, from an entity whose principals
include Timothy M. Jones, Martin S. Berger and Robert F. Weinberg, each of whom
are affiliated with the Company as the President of the Company, a current
member of the Board of Directors and a former member of the Board of Directors
in the Company, approximately 10 acres of vacant land in the Stamford Executive
Park, located in Stamford, Fairfield County, Connecticut for approximately
$1,341, which was funded from the Company's cash reserves. In October 1998, the
Company completed and placed in service a 40,000 square-foot office/flex
property on the acquired land (see "Properties Placed in Service").
On February 2, 1998, the Company acquired 2115 Linwood Avenue, a 68,000
square-foot vacant office building located in Fort Lee, Bergen County, New
Jersey. The building was acquired for approximately $5,164, which was made
available from drawing on one of the Company's credit facilities. The Company is
currently redeveloping the property for future lease-up and operation.
On March 27, 1998, as part of the purchase of the Prudential Business Campus
(see "Operating Property Acquisitions"), the Company acquired approximately 95
acres of vacant land adjacent to the operating properties for approximately
$27,500.
On June 8, 1998, as part of the Pacifica portfolio-phase II acquisition (see
"Operating Property Acquisitions"), the Company acquired vacant land adjacent to
the operating properties for approximately $2,006.
On September 4, 1998, the Company acquired approximately 128 acres of vacant
land located at the Company's Horizon Center Business Park, Hamilton Township,
Mercer County, New Jersey, through the exercise of a purchase option obtained in
the Company's acquisition of the Horizon Center Business Park in November 1995.
The land was acquired for approximately $1,698, which was funded from the
Company's cash reserves. Subsequently in February 1999, the Company leased 27.7
acres of the acquired land to Home Depot (see "Properties Placed in Service").
On November 10, 1998, the Company acquired approximately 10.1 acres of land
located at Three Vaughn Drive, Princeton, Mercer County, New Jersey. The Company
acquired the land for approximately $2,146, which was funded from the Company's
cash reserves.
On December 3, 1998, the Company acquired, from an entity whose principals
include Timothy M. Jones, Martin S. Berger and Robert F. Weinberg, each of whom
are affiliated with the Company as the President of the Company, a current
member of the Board of Directors and a former member of the Board of Directors
in the Company, approximately 2.7 acres of land located at 12 Skyline Drive,
Hawthorne, Westchester County, New York. The Company acquired the land for
approximately $1,540, which was funded from the Company's cash reserves. The
Company is currently constructing a 47,000 square-foot office/flex property on
the land parcel.
SUBSEQUENT ACQUISITION
On July 21, 1999, the Company acquired 1201 Connecticut Avenue, NW, a 169,000
square-foot office property, located in Washington, D.C., for approximately
$32,200, which was made available from drawing on one of the Company's credit
facilities.
4. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
PRU-BETA 3 (Nine Campus Drive)
On March 27, 1998, the Company acquired a 50 percent interest in an existing
joint venture with The Prudential Insurance Company of America ("Prudential"),
known as Pru-Beta 3, which owns and operates Nine Campus Drive, a 156,495
square-foot office building, located in the Prudential Business Campus office
complex in Parsippany, Morris County, New Jersey (see Note 3). The Company
performs management and leasing services for the property owned by the joint
venture and received $75 and $43 in fees for such services in the six months
ended June 30, 1999 and 1998, respectively.
13
HPMC (Continental Grand II/Summit Ridge/Lava Ridge)
On April 23, 1998, the Company entered into a joint venture agreement with HCG
Development, L.L.C. and Summit Partners I, L.L.C. to form HPMC Development
Partners, L.P. and, on July 21, 1998, entered into a second joint venture HPMC
Development Partners II, L.P. (formerly known as HPMC Lava Ridge Partners,
L.P.), with these same parties. HPMC Development Partners, L.P.'s efforts have
focused on two development projects, commonly referred to as Continental Grand
II and Summit Ridge. Continental Grand II is a 4.2 acre site located in El
Segundo, Los Angeles County, California, acquired by the venture upon which it
has commenced construction of a 237,000 square-foot office property. Summit
Ridge is a 7.3 acre site located in San Diego, San Diego County, California,
acquired by the venture upon which it has commenced construction of a 132,000
square-foot office/flex property. HPMC Development Partners II, L.P. has
commenced construction of three two-story buildings aggregating 183,200
square-feet of office space on a 12.1 acre site located in Roseville, Placer
County, California and is currently in negotiations with the City of Daly City,
California, to purchase a parcel of land for future development into office
space, a hotel and other retail establishments. Among other things, the
partnership agreements provide for a preferred return on the Company's invested
capital in each venture, in addition to 50 percent of such venture's profit
above the preferred returns, as defined in each agreement.
G&G MARTCO (Convention Plaza)
On April 30, 1998, the Company acquired a 49.9 percent interest in an existing
joint venture, known as G&G Martco, which owns Convention Plaza, a 305,618
square-foot office building, located in San Francisco, San Francisco County,
California. A portion of its initial investment was financed through the
issuance of common units (see Note 10), as well as funds drawn from the
Company's credit facilities. Subsequently, on June 4, 1999, the Company acquired
an additional 0.1 percent interest in G&G Martco through the issuance of common
units (see Note 10). The Company performs management and leasing services for
the property owned by the joint venture and received $108 and none in fees for
such services in the six months ended June 30, 1999 and 1998, respectively.
AMERICAN FINANCIAL EXCHANGE L.L.C.
On May 20, 1998, the Company entered into a joint venture agreement with
Columbia Development Corp. to form American Financial Exchange L.L.C. The
venture was initially formed to acquire land for future development, located on
the Hudson River waterfront in Jersey City, Hudson County, New Jersey, adjacent
to the Company's Harborside Financial Center office complex. The Company holds a
50 percent interest in the joint venture. Among other things, the partnership
agreement provides for a preferred return on the Company's invested capital in
the venture, in addition to the Company's proportionate share of the venture's
profit, as defined in the agreement. The joint venture acquired land on which it
constructed a parking facility, which is currently leased to a parking operator
under a 10-year agreement. Such parking facility serves a ferry service between
the Company's Harborside property and Manhattan.
RAMLAND REALTY ASSOCIATES L.L.C. (One Ramland Road)
On August 20, 1998, the Company entered into a joint venture agreement with S.B.
New York Realty Corp. to form Ramland Realty Associates L.L.C. The venture was
formed to own, manage and operate One Ramland Road, a 232,000 square-foot
office/flex building plus adjacent developable land, located in Orangeburg,
Rockland County, New York. The office/flex building is being redeveloped for
future lease-up and operation. The Company holds a 50 percent interest in the
joint venture.
ASHFORD LOOP ASSOCIATES L.P. (1001 South Dairy Ashford/2100 West Loop South)
On September 18, 1998, the Company entered into a joint venture agreement with
Prudential to form Ashford Loop Associates L.P. The venture was formed to own,
manage and operate 1001 South Dairy Ashford, a 130,000 square-foot office
building acquired on September 18, 1998 and 2100 West Loop South, a 168,000
square-foot office building acquired on November 25, 1998, both located in
Houston, Harris County, Texas. The Company holds a 20 percent interest in the
joint venture. The joint venture may be required to pay additional consideration
due to earn-out provisions in the acquisition contracts. During the six months
ended June 30, 1999, the venture paid $2,317 ($463 representing the Company's
share) in accordance with the earn-out provisions in the acquisition contracts.
The Company performs management and leasing services for the properties owned by
the joint venture and received $63 and none in fees for such services in the six
months ended June 30, 1999 and 1998, respectively.
ARCAP INVESTORS, L.L.C.
On March 18, 1999, the Company invested in ARCap Investors, L.L.C., a joint
venture with several participants, which was formed to invest in sub-investment
grade tranches of commercial mortgage-backed securities ("CMBS"). The
Company has agreed to invest $20,000 in the venture. William L. Mack, a director
and equity holder of the Company, is a principal of the managing member of the
venture. During the six months ended June 30, 1999, the venture purchased
approximately $221,539 face value of CMBS bonds for an aggregate cost of
$107,981.
14
SUMMARIES OF UNCONSOLIDATED JOINT VENTURES
The following is a summary of the financial position of the unconsolidated joint
ventures in which the Company had investment interests as of June 30, 1999 and
December 31, 1998:
June 30, 1999
-------------------------------------------------------------------------------------------------
American
G&G Financial Ramland Ashford Combined
Pru-Beta 3 HPMC Martco Exchange Realty Loop ARCap Total
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
Rental property, net $22,301 $ 50,252 $ 13,150 $ 10,678 $ 15,606 $ 21,309 $ -- $ 133,296
Other assets 3,598 1,283 3,287 495 273 1,365 147,781 158,082
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $25,899 $ 51,535 $ 16,437 $ 11,173 $ 15,879 $ 22,674 $ 147,781 $ 291,378
===================================================================================================================================
Liabilities and partners'/
members' capital:
Mortgages and loans payable $ -- $ 24,042 $ 42,671 $ -- $ -- $ -- $ 73,840 $ 140,553
Other liabilities 486 5,035 1,368 1 2,661 354 554 10,459
Partners'/members' capital 25,413 22,458 (27,602) 11,172 13,218 22,320 73,387 140,366
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
partners'/members' capital $25,899 $ 51,535 $ 16,437 $ 11,173 $ 15,879 $ 22,674 $ 147,781 $ 291,378
===================================================================================================================================
Company's net investment
in unconsolidated
joint ventures $17,381 $ 19,839 $ 8,956 $ 11,221 $ 6,923 $ 4,808 $ 17,252 $ 86,380
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------------------------------------------------
American
G&G Financial Ramland Ashford Combined
Pru-Beta 3 HPMC Martco Exchange Realty Loop ARCap Total
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
Rental property, net $22,711 $ 30,278 $ 11,099 $ 10,621 $ 8,467 $ 19,166 -- $ 102,342
Other assets 3,995 1,097 4,058 389 1,101 378 -- 11,018
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $26,706 $ 31,375 $ 15,157 $ 11,010 $ 9,568 $ 19,544 -- $ 113,360
===================================================================================================================================
Liabilities and partners'/
members' capital:
Mortgages and loans payable $ -- $ 632 $ 39,762 $ -- $ -- $ -- -- $ 40,394
Other liabilities 484 3,522 2,096 79 6 509 -- 6,696
Partners'/members' capital 26,222 27,221 (26,701) 10,931 9,562 19,035 -- 66,270
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
partners'/members' capital $26,706 $ 31,375 $ 15,157 $ 11,010 $ 9,568 $ 19,544 -- $ 113,360
===================================================================================================================================
Company's net investment
in unconsolidated
joint ventures $17,980 $ 17,578 $ 10,964 $ 10,983 $ 4,851 $ 4,152 -- $ 66,508
- -----------------------------------------------------------------------------------------------------------------------------------
The following is a summary of the results of operations of the unconsolidated
joint ventures for the period in which the Company had investment interests
during the three and six month periods ended June 30, 1999 and 1998:
Three Months Ended June 30, 1999
-------------------------------------------------------------------------------------------------
American
G&G Financial Ramland Ashford Combined
Pru-Beta 3 HPMC Martco Exchange Realty Loop ARCap Total
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,239 -- $ 2,160 $ 229 -- $ 1,071 $ 2,528 $ 7,227
Operating and other expenses (371) -- (699) (61) -- (575) (1,622) (3,328)
Depreciation and amortization (307) -- (230) (23) -- (108) -- (668)
Interest expense -- -- (738) -- -- -- (519) (1,257)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 561 -- $ 493 $ 145 -- $ 388 $ 387 $ 1,974
===================================================================================================================================
Company's equity
in earnings of unconsolidated
joint ventures $ 242 -- $ 89 $ 145 -- $ 78 $ 280 $ 834
- -----------------------------------------------------------------------------------------------------------------------------------
15
Three Months Ended June 30, 1998
-------------------------------------------------------------------------------------------------
American
G&G Financial Ramland Ashford Combined
Pru-Beta 3 HPMC Martco Exchange Realty Loop ARCap Total
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,105 -- $ 671 -- -- -- -- $ 1,776
Operating and other expenses (346) -- (306) -- -- -- -- (652)
Depreciation and amortization (344) -- (135) -- -- -- -- (479)
Interest expense -- -- (505) -- -- -- -- (505)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 415 -- $ (275) -- -- -- -- $ 140
===================================================================================================================================
Company's equity in earnings
(loss) of unconsolidated
joint ventures $ 207 -- $ (137) -- -- -- -- $ 70
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1999
-------------------------------------------------------------------------------------------------
American
G&G Financial Ramland Ashford Combined
Pru-Beta 3 HPMC Martco Exchange Realty Loop ARCap Total
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 2,470 -- $ 4,150 $ 417 -- $ 1,988 $ 2,775 $ 11,800
Operating and other expenses (745) -- (1,390) (130) -- (1,048) (2,012) (5,325)
Depreciation and amortization (625) -- (463) (46) -- (216) -- (1,350)
Interest expense -- -- (1,448) -- -- -- (544) (1,992)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,100 -- $ 849 $ 241 -- $ 724 $ 219 $ 3,133
===================================================================================================================================
Company's equity in earnings
(loss) of unconsolidated
joint ventures $ 356 -- $ (277) $ 191 -- $ 134 $ 224 $ 628
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 1998
-------------------------------------------------------------------------------------------------
American
G&G Financial Ramland Ashford Combined
Pru-Beta 3 HPMC Martco Exchange Realty Loop ARCap Total
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,135 -- $ 671 -- -- -- -- $ 1,806
Operating and other expenses (352) -- (306) -- -- -- -- (658)
Depreciation and amortization (344) -- (135) -- -- -- -- (479)
Interest expense -- -- (505) -- -- -- -- (505)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 439 -- $ (275) -- -- -- -- $ 164
===================================================================================================================================
Company's equity in earnings
(loss) of unconsolidated
joint ventures $ 232 -- $ (137) -- -- -- -- $ 95
- -----------------------------------------------------------------------------------------------------------------------------------
5. DEFERRED CHARGES AND OTHER ASSETS
June 30, December 31,
1999 1998
- --------------------------------------------------------------------------------
Deferred leasing costs $ 44,977 $ 35,151
Deferred financing costs 16,825 9,962
- --------------------------------------------------------------------------------
61,802 45,113
Accumulated amortization (15,761) (13,527)
- --------------------------------------------------------------------------------
Deferred charges, net 46,041 31,586
Prepaid expenses and other assets 6,662 7,434
- --------------------------------------------------------------------------------
Total deferred charges and other assets, net $ 52,703 $ 39,020
================================================================================
16
6. RESTRICTED CASH
Restricted cash includes security deposits for the Company's residential
properties and certain commercial properties, and escrow and reserve funds for
debt service, real estate taxes, property insurance, capital improvements,
tenant improvements, and leasing costs established pursuant to certain mortgage
financing arrangements, and is comprised of the following:
June 30, December 31,
1999 1998
- --------------------------------------------------------------------------------
Security deposits $5,986 $5,696
Escrow and other reserve funds 174 330
- --------------------------------------------------------------------------------
Total restricted cash $6,160 $6,026
================================================================================
7. SENIOR UNSECURED NOTES
On March 16, 1999, the Operating Partnership issued $600,000 of senior unsecured
notes ("Senior Unsecured Notes") under a shelf registration statement which was
declared effective by the SEC in September 1998. Interest on the Senior
Unsecured Notes is payable semi-annually in arrears. The Senior Unsecured Notes
are redeemable at any time at the option of the Company, subject to certain
conditions including yield maintenance. The total proceeds from the issuance
(net of selling commissions and discount) of approximately $593,500 were used to
pay down outstanding borrowings under the 1998 Unsecured Facility, as defined
below, and to pay off certain mortgage loans. The Senior Unsecured Notes were
issued at a discount of approximately $2,748, which is being amortized over the
terms of the respective tranches as an adjustment to interest expense. Including
amortization of offering costs, the weighted average effective annual interest
rate for the Senior Unsecured Notes is approximately 7.38 percent.
A summary of the terms of the Senior Unsecured Notes outstanding as of June 30,
1999 is presented below:
Effective
Amount Rate(1)
- --------------------------------------------------------------------------------
7.00% Senior Unsecured Notes, due March 15, 2004 $299,624 7.27%
7.25% Senior Unsecured Notes, due March 15, 2009 $297,720 7.49%
- --------------------------------------------------------------------------------
Total Senior Unsecured Notes $597,344 7.38%
================================================================================
(1) Includes the cost of terminated treasury lock agreements, offering and
transaction costs and the discount on the notes.
In August 1999, the Operating Partnership issued an additional $185,283 of
unsecured corporate debt with an interest rate of 7.18 percent payable monthly
and maturity date of December 31, 2003. The Company used the proceeds to retire
the TIAA Mortgage as defined below (see Note 9).
The terms of the Senior Unsecured Notes and the unsecured corporate debt include
certain restrictions and covenants which require compliance with financial
ratios relating to the maximum amount of debt leverage, the maximum amount of
secured indebtedness, the minimum amount of debt service coverage and the
maximum amount of unsecured debt as a percent of unsecured assets.
8. REVOLVING CREDIT FACILITIES
ORIGINAL UNSECURED FACILITY
The Original Unsecured Facility ("Original Unsecured Facility") was repaid in
full and retired in connection with the Company obtaining the 1998 Unsecured
Facility in April 1998, as defined below. On account of prepayment fees, loan
origination fees, legal fees, and other costs incurred in the retirement of the
Original Unsecured Facility, an extraordinary loss of $2,203, net of minority
interest's share of the loss ($275), was recorded for the year ended December
31, 1998.
17
1998 UNSECURED FACILITY
In April 1998, the Company repaid in full and terminated the Original Unsecured
Facility and obtained a new unsecured revolving credit facility ("1998 Unsecured
Facility") with a current borrowing capacity of $1,000,000 from a group of 28
lenders. The interest rate is based on the Company's achievement of investment
grade unsecured debt ratings and is currently 90 basis points over London
Inter-Bank Offered Rate ("LIBOR") (5.05 percent at June 30, 1999). The 1998
Unsecured Facility matures in April 2001.
The terms of the 1998 Unsecured Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the maximum leverage ratio, the maximum amount of secured
indebtedness, the minimum amount of tangible net worth, the minimum amount of
debt service coverage, the minimum amount of fixed charge coverage, the maximum
amount of unsecured indebtedness, the minimum amount of unencumbered property
debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not during any
four consecutive fiscal quarters make distributions with respect to common stock
or other equity interests in an aggregate amount in excess of 90 percent of
funds from operations for such period, subject to certain other adjustments. The
1998 Unsecured Facility also requires a 17.5 basis point fee on the unused
balance payable quarterly in arrears.
PRUDENTIAL FACILITY
The Company has a revolving credit facility ("Prudential Facility") from
Prudential Securities Corp. ("PSC") in the amount of $100,000, which currently
bears interest at 110 basis points over one-month LIBOR, with a maturity date of
June 30, 2000. The Prudential Facility is a recourse liability of the Operating
Partnership and is secured by the Company's equity interest in Harborside. The
Prudential Facility limits the ability of the Operating Partnership to make any
distributions during any fiscal quarter in an amount in excess of 100 percent of
the Operating Partnership's available funds from operations for the immediately
preceding fiscal quarter (except to the extent such excess distributions or
dividends are attributable to gains from the sale of the Operating Partnership's
assets or are required for the Company to maintain its status as a REIT under
the Code); provided, however, that the Operating Partnership may make
distributions and pay dividends in excess of 100 percent of available funds from
operations for the preceding fiscal quarter for not more than three consecutive
quarters. In addition to the foregoing, the Prudential Facility limits the liens
placed upon the subject property and certain collateral, the use of proceeds
from the Prudential Facility, and the maintenance of ownership of the subject
property and assets derived from said ownership.
SUMMARY
As of June 30, 1999, the Company had outstanding borrowings of $148,600 under
its revolving credit facilities (with aggregate borrowing capacity of
$1,100,000). The outstanding borrowings were comprised of $148,600 from the 1998
Unsecured Facility, with no outstanding borrowings on its Prudential Facility.
9. MORTGAGES AND LOANS PAYABLE
June 30, December 31,
1999 1998
- --------------------------------------------------------------------------------
Portfolio Mortgages $335,283 $335,283
Property Mortgages 413,758 414,048
- --------------------------------------------------------------------------------
Total Mortgages and Loans Payable $749,041 $749,331
================================================================================
PORTFOLIO MORTGAGES
TIAA Mortgage
The Company has a $185,283 non-recourse mortgage loan with Teachers Insurance
and Annuity Association of America, with interest only payable monthly at a
fixed annual rate of 7.18 percent ("TIAA Mortgage"). The TIAA Mortgage is
secured and cross collateralized by 43 properties and matures in December 2003.
The Company has the option to convert, without any yield maintenance obligation
or prepayment premium, the TIAA Mortgage to unsecured public debt as a result of
the achievement of an investment grade credit rating. The TIAA Mortgage is
prepayable in whole or in part subject to certain provisions, including yield
maintenance.
18
Using the proceeds from the issuance of $185,283 of unsecured corporate debt in
August 1999 (see Note 7), the Company repaid in full and retired the TIAA
Mortgage.
$150,000 Prudential Mortgage Loan
On April 30, 1998, the Company obtained a $150,000, interest-only, non-recourse
mortgage loan from Prudential ("$150,000 Prudential Mortgage Loan"). The loan,
which is secured by 12 properties, has an effective annual interest rate of 7.10
percent and a seven-year term. The Company has the option to convert the
mortgage loan to unsecured debt as a result of the achievement of an investment
grade credit rating. The mortgage loan is prepayable in whole or in part subject
to certain provisions, including yield maintenance.
Certain mortgages and loans payable were repaid and retired in connection with
the Company obtaining the $150,000 Prudential Mortgage Loan. On account of
prepayment fees, loan origination fees, legal fees, and other costs incurred in
the retirement of certain mortgages and loans payable in April 1998, an
extraordinary loss of $170, net of minority interest's share of the loss ($22),
was recorded in the year ended December 31, 1998.
PROPERTY MORTGAGES
Property mortgages are comprised of various non-recourse loans which are
collateralized by certain of the Company's rental properties. Payments on
property mortgages are generally due in monthly installments of principal and
interest, or interest only.
A summary of the Company's property mortgages as of June 30, 1999 and December
31, 1998 is as follows:
Principal Balance at
--------------------
Interest June 30, December 31, Date of
Property Name Lender Rate 1999 1998 Maturity
- -------------------------------------------------------------------------------------------------------------
Mack-Cali Centre VI CIGNA 7.600% $ -- $ 29,223 03/31/99
Mack-Cali Airport CIGNA 7.600% -- 6,849 03/31/99
Mack-Cali Murray Hill Horace Mann 7.850% -- 8,027 05/01/99
Mack-Cali Manhasset IDA Financing TENR 8,000 8,000 12/01/99
201 Commerce Drive Sun Life Assurance Co. 6.240% 1,090 1,121 09/01/00
3 & 5 Terri Lane First Union National Bank 6.220% 4,455 4,476 10/31/00
101 & 225 Executive Drive Sun Life Assurance Co. 6.270% 2,465 2,553 06/01/01
Mack-Cali Morris Plains Corestates Bank 7.510% 2,261 2,292 12/31/01
Harborside Financial Center(1) Contingent Obligation(1) 6.764% 6,358 6,150 11/04/02
Mack-Cali Willowbrook CIGNA 8.670% 10,560 10,918 10/01/03
1717 Route 208, Fair Lawn Prudential Insurance Co. 8.250% 17,348 17,586 10/01/03
400 Chestnut Ridge Prudential Insurance Co. 9.440% 14,781 14,983 07/01/04
Mack-Cali Centre VI Principal Life Insurance Co. 6.865% 35,000 -- 04/01/05
Mack-Cali Bridgewater I New York Life Ins. Co. 7.000% 23,000 23,000 09/10/05
Mack-Cali Woodbridge II New York Life Ins. Co. 7.500% 17,500 17,500 09/10/05
Mack-Cali Short Hills Prudential Insurance Co. 7.740% 27,110 27,696 10/01/05
500 West Putnam Avenue New York Life Ins. Co. 6.520% 11,127 11,471 10/10/05
Harborside - Plaza I U.S. West Pension Trust 6.990% 49,949 48,148 01/01/06
Harborside - Plaza II and III Northwestern Mutual Life Ins. 7.320% 100,051 101,852 01/01/06
Mack-Cali Airport Allstate Life Insurance Co. 7.050% 10,500 -- 04/01/07
Kemble Plaza II Mitsubishi Tr & Bk Co. LIBOR+0.65% 40,025 40,025 01/31/08
Kemble Plaza I Mitsubishi Tr & Bk Co. LIBOR+0.65% 32,178 32,178 01/31/09
- -------------------------------------------------------------------------------------------------------------
Total Property Mortgages $413,758 $414,048
=============================================================================================================
(1) As part of the Harborside acquisition in November 1996, the Company agreed
to make payments (with an estimated net present value of approximately
$5,252 at acquisition date) to the seller for development rights
("Contingent Obligation") if and when the Company commences construction
on the acquired site during the next several years. However, the agreement
provides, among other things, that even if the Company does not commence
construction, the seller may nevertheless require the Company to acquire
these rights during the six-month period after the end of the sixth year.
After such period, the seller's option lapses, but any development in
years 7 through 30 will require a payment, on an increasing scale, for the
development rights. The Company is currently in the pre-development phase
of a long-range plan to develop the Harborside site on a multi-property,
multi-use basis.
19
INTEREST RATE CONTRACTS
On May 24, 1995, the Company entered into an interest rate swap agreement with a
commercial bank. The swap agreement fixes the Company's one-month LIBOR base to
6.285 percent per annum on a notional amount of $24,000. The swap agreement
expires on August 15, 1999.
On January 23, 1996, the Company entered into an interest rate swap agreement
with a commercial bank. The swap agreement fixed the Company's one-month LIBOR
base to 5.265 percent per annum on a notional amount of $26,000. The swap
agreement expired in January 1999.
On October 1, 1998, the Company entered into a forward treasury rate lock
agreement with a commercial bank. The agreement locked an interest rate of 4.089
percent per annum for the three-year U.S. Treasury Note effective November 4,
1999, on a notional amount of $50,000. The agreement will be used to fix the
Index Rate on $50,000 of the Harborside- Plaza I mortgage, for which the
Company's interest rate re-sets for three years beginning November 4, 1999 to
the three-year U.S. Treasury Note plus 110 basis points (see "Property
Mortgages: Harborside-Plaza I").
In connection with the issuance of the Senior Unsecured Notes, the Company
entered into and settled forward treasury rate lock agreements in March 1999.
These agreements were settled at a cost of approximately $517, which is being
amortized to interest expense over the terms of the respective tranches.
The Company is exposed to credit loss in the event of non-performance by the
other parties to the interest rate contracts. However, the Company does not
anticipate non-performance by any of the counterparties. The Company is also
exposed to market risk from the movement in interest rates pertaining to the
forward treasury rate lock agreement.
SCHEDULED PRINCIPAL PAYMENTS
Scheduled principal payments and related weighted average annual interest rates
for the Company's Senior Unsecured Notes, revolving credit facilities and
mortgages and loans payable as of June 30, 1999 are as follows:
Weighted Avg.
Scheduled Principal Interest Rate of
Year Amortization Maturities Total Future Repayments(a)
- -------------------------------------------------------------------------------------------------
July through December 1999 $ 1,503 $ 8,000 $ 9,503 6.26%
2000 3,336 5,419 8,755 6.77%
2001 3,583 152,811 156,394 6.01%
2002 3,823 7,814 11,637 7.09%
2003 4,180 206,971 211,151 7.31%
Thereafter 4,721 1,092,824 1,097,545 7.19%
- -------------------------------------------------------------------------------------------------
Totals/Weighted Average $ 21,146 $1,473,839 $1,494,985 7.08%
=================================================================================================
(a) Assumes LIBOR rate at June 30, 1999 of 5.05 percent in calculating
revolving credit facility and other variable rate debt interest rates.
CASH PAID FOR INTEREST & INTEREST CAPITALIZED
Cash paid for interest for the six months ended June 30, 1999 and 1998, was
$38,216 and $61,440, respectively. Interest capitalized by the Company for the
six months ended June 30, 1999 and 1998 was $3,019 and $1,293, respectively.
SUMMARY OF INDEBTEDNESS
As of June 30, 1999, the Company's total indebtedness of $1,494,985 (weighted
average interest rate of 7.08 percent) was comprised of $228,803 of credit
facility borrowings and other variable rate mortgage debt (average rate of 5.84
percent), fixed rate debt of $1,259,824 (average rate of 7.31 percent), and a
Contingent Obligation of $6,358.
10. MINORITY INTEREST
Minority interest in the accompanying consolidated financial statements relates
to common units in the Operating Partnership, in addition to preferred units
("Preferred Units") and warrants to purchase common units ("Unit Warrants")
issued in connection with the Company's December 1997 acquisition of 54 office
properties ("Mack Properties") from the Mack Company and Patriot American Office
Group ("Mack Transaction"), held by parties other than the Company.
20
PREFERRED UNITS
In connection with the Mack Transaction in December 1997, the Company issued
15,237 Series A Preferred Units and 215,325 Series B Preferred Units, with an
aggregate value of $236,491. The Preferred Units have a stated value of $1,000
per unit and are preferred as to assets over any class of common units or other
class of preferred units of the Company, based on circumstances per the
applicable unit certificates.
The quarterly distribution on each Preferred Unit (representing 6.75 percent of
the Preferred Unit stated value of $1,000 on an annualized basis) is an amount
equal to the greater of (i) $16.875 or (ii) the quarterly distribution
attributable to a Preferred Unit determined as if such unit had been converted
into common units, subject to adjustment for customary anti-dilution rights.
Each of the Series A Preferred Units may be converted at any time into common
units at a conversion price of $34.65 per unit, and, after the one year
anniversary of the date of the Series A Preferred Units' initial issuance,
common units received pursuant to such conversion may be redeemed into common
stock. Each of the Series B Preferred Units may be converted at any time into
common units at a conversion price of $34.65 per unit, and, after the three year
anniversary of the date of the Series B Preferred Units' initial issuance,
common units received pursuant to such conversion may be redeemed into common
stock. Each of the common units are redeemable for an equal number of shares of
common stock.
During 1998, the Company issued 19,694 additional Preferred Units (11,895 of
Series A and 7,799 of Series B), convertible into 568,369 common units and
valued at approximately $20,200, in connection with the achievement of certain
performance goals at the Mack Properties in redemption of an equivalent number
of contingent Preferred Units.
During the six months ended June 30, 1999, 20,952 Series A Preferred Units were
converted into 604,675 common units.
As of June 30, 1999, there was 229,304 Preferred Units outstanding (convertible
into 6,617,721 common units).
COMMON UNITS
Certain individuals and entities own common units in the Operating Partnership.
A common unit and a share of common stock of the Company have substantially the
same economic characteristics in as much as they effectively share equally in
the net income or loss of the Operating Partnership.
Common units are redeemable by the common unitholders at their option, subject
to certain restrictions, on the basis of one common unit for either one share of
common stock or cash equal to the fair market value of a share at the time of
the redemption. The Company has the option to deliver shares of common stock in
exchange for all or any portion of the cash requested. When a unitholder redeems
a common unit, minority interest is reduced and the Company's investment in the
Operating Partnership is increased.
During 1998, the Operating Partnership redeemed a total of 82,880 common units
in exchange for an aggregate of $3,163 in cash. Additionally, the Operating
Partnership redeemed an aggregate of 29,300 common units for an equivalent
number of shares of common stock in the Company.
On March 26, 1998, in connection with the Pacifica portfolio-phase I
acquisition, the Company issued 100,175 common units, valued at approximately
$3,779.
On April 30, 1998, in connection with the acquisition of a 49.9 percent interest
in the G&G Martco joint venture (see Note 4), the Company issued 218,105 common
units, valued at approximately $8,334.
On June 8, 1998, in connection with the Pacifica portfolio-phase II acquisition,
the Company issued 585,263 common units, valued at approximately $20,753.
On July 20, 1998, in connection with the expansion of one of the Mack
Properties, the Company issued 52,245 common units, valued at approximately
$1,632.
On September 10, 1998, in connection with the acquisition of 40 Richards Avenue,
the Company issued 414,114 common units, valued at approximately $12,615.
21
During 1998, the Company also issued 1,731,386 common units, valued at
approximately $58,936, in connection with the achievement of certain performance
goals at the Mack Properties in redemption of an equivalent number of contingent
common units.
On June 4, 1999, in connection with the acquisition of a 0.1 percent interest in
G&G Martco joint venture (see Note 4), the Company issued 437 common units,
valued at approximately $17.
During the six months ended June 30, 1999, the Operating Partnership redeemed an
aggregate of 1,634,164 common units for an equivalent number of shares of common
stock in the Company.
During the six months ended June 30, 1999, the Company also issued 242,157
common units, valued at approximately $7,241, in connection with the achievement
of certain performance goals at the Mack Properties in redemption of an
equivalent number of contingent common units.
As of June 30, 1999, there were 8,299,690 common units outstanding.
CONTINGENT COMMON & PREFERRED UNITS
In connection with the Mack Transaction in December 1997, 2,006,432 contingent
common units, 11,895 Series A contingent Preferred Units and 7,799 Series B
contingent Preferred Units were issued as contingent non-participating units
("Contingent Units"). Such Contingent Units have no voting, distribution or
other rights until such time as they are redeemed into common units, Series A
Preferred Units, and Series B Preferred Units, respectively. Redemption of such
Contingent Units shall occur upon the achievement of certain performance goals
relating to certain of the Mack Properties, specifically the achievement of
certain leasing activity. When Contingent Units are redeemed for common and
Preferred Units, an adjustment to the purchase price of certain of the Mack
Properties is recorded, based on the value of the units issued.
On account of certain of the performance goals at the Mack Properties having
been achieved during 1998, the Company redeemed 1,731,386 contingent common
units and 19,694 contingent Preferred Units and issued an equivalent number of
common and Preferred Units, as indicated above.
On account of certain of the performance goals at the Mack Properties having
been achieved during the six months ended June 30, 1999, the Company redeemed
242,157 contingent common units and issued an equivalent number of common units,
as indicated above. There were no contingent Preferred Units outstanding and
32,889 contingent common units outstanding as of June 30, 1999.
UNIT WARRANTS
The Company has 2,000,000 Unit Warrants outstanding. The Unit Warrants are
exercisable at $37.80 per common unit and expire on December 11, 2002.
MINORITY INTEREST OWNERSHIP
As of June 30, 1999 and December 31, 1998, the minority interest common
unitholders owned 12.3 percent (20.2 percent, including the effect of the
conversion of Preferred Units into common units) and 13.7 percent (22.2 percent
including the effect of the conversion of Preferred Units into common units) of
the Operating Partnership, respectively (excluding any effect for the exercise
of Unit Warrants).
11. EMPLOYEE BENEFIT PLAN
All employees of the Company who meet certain minimum age and period of service
requirements are eligible to participate in a 401(k) defined contribution plan
(the "401(k) Plan"). The 401(k) Plan allows eligible employees to defer up to 15
percent of their annual compensation. The amounts contributed by employees are
immediately vested and non-forfeitable. The Company, at management's discretion,
may match employee contributions, although no employer contributions have been
made to date.
22
12. COMMITMENTS AND CONTINGENCIES
TAX ABATEMENT AGREEMENTS
Grove Street Property
Pursuant to an agreement with the City of Jersey City, New Jersey, as
amended, expiring in 2004, the Company is required to make payments in
lieu of property taxes ("PILOT") on its property at 95 Christopher
Columbus Drive, Jersey City, Hudson County, New Jersey. Such PILOT, as
defined, is $1,267 per annum through May 31, 1999 and $1,584 per annum
through May 31, 2004.
Harborside Financial Center Property
Pursuant to an agreement with the City of Jersey City, New Jersey obtained
by the former owner of the Harborside property in 1988 and assumed by the
Company as part of the acquisition of the property in November 1996, the
Company is required to make PILOT payments on its Harborside property. The
agreement, which commenced in 1990, is for a term of 15 years. Such PILOT
is equal to two percent of Total Project Costs, as defined, in year one
and increases by $75 per annum through year fifteen. Total Project Costs,
as defined, are $145,644. Such PILOT totaled $1,302 and $1,239 for the six
months ended June 30, 1999 and 1998, respectively.
GROUND LEASE AGREEMENTS
Future minimum rental payments under the terms of all non-cancelable ground
leases, under which the Company is the lessee as of June 30, 1999, are as
follows:
Year Amount
- --------------------------------------------------------------------------------
July 1, 1999 to December 31, 1999 $ 213
2000 425
2001 427
2002 427
2003 427
Thereafter 21,934
- --------------------------------------------------------------------------------
Total $23,853
================================================================================
OTHER
On April 19, 1999, the Company announced the following changes in the membership
of its Board of Directors and the identities, titles and responsibilities of its
executive officers: (i) Thomas A. Rizk resigned from the Board of Directors, the
Executive Committee of the Board of Directors, his position as Chief Executive
Officer and as an employee of the Company; (ii) Mitchell E. Hersh was appointed
Chief Executive Officer of the Company simultaneous with his resignation from
his positions as President and Chief Operating Officer of the Company; (iii)
Timothy M. Jones was appointed President of the Company simultaneous with his
resignation from his positions as Executive Vice President and Chief Investment
Officer of the Company; and (iv) Brant Cali was appointed to the Board of
Directors of the Company to fill the remainder of Thomas A. Rizk's term as a
Class III Director and was appointed Chief Operating Officer of the Company,
also remaining as an Executive Vice President and Assistant Secretary of the
Company.
Pursuant to the terms of Mr. Rizk's employment agreement entered into with the
Company in December 1997 and an agreement entered into simultaneous with his
resigning from the Company, Mr. Rizk received a payment of approximately $14,490
in April 1999 and will receive $500 annually over the next three years. All
costs associated with Mr. Rizk's resignation are included in non-recurring
charges for the three and six month periods ended June 30, 1999.
The Company is a defendant in certain litigation arising in the normal course of
business activities. Management does not believe that the resolution of these
matters will have a materially adverse effect upon the Company.
13. TENANT LEASES
The Properties are leased to tenants under operating leases with various
expiration dates through 2016. Substantially all of the leases provide for
annual base rents plus recoveries and escalation charges based upon the tenant's
proportionate share of and/or increases in real estate taxes and certain
operating costs, as defined, and the pass through of charges for electrical
usage.
23
14. STOCKHOLDERS' EQUITY
To maintain its qualification as a REIT, not more than 50 percent in value of
the outstanding shares of the Company may be owned, directly or indirectly, by
five or fewer individuals at any time during the last half of any taxable year
of the Company, other than its initial taxable year (defined to include certain
entities), applying certain constructive ownership rules. To help ensure that
the Company will not fail this test, the Company's Articles of Incorporation
provide for, among other things, certain restrictions on the transfer of the
common stock to prevent further concentration of stock ownership. Moreover, to
evidence compliance with these requirements, the Company must maintain records
that disclose the actual ownership of its outstanding common stock and will
demand written statements each year from the holders of record of designated
percentages of its common stock requesting the disclosure of the beneficial
owners of such common stock.
COMMON STOCK
On February 25, 1998, the Company completed an underwritten public offer and
sale of 2,500,000 shares of its common stock and used the net proceeds, which
totaled approximately $92,194 (after offering costs) to pay down a portion of
its outstanding borrowings under the Company's credit facilities and fund the
acquisition of 10 Mountainview Road (see Note 3).
On March 18, 1998, in connection with the acquisition of Prudential Business
Campus, the Company completed an offer and sale of 2,705,628 shares of its
common stock using the net proceeds of approximately $99,899 (after offering
costs) in the funding of such acquisition (see Note 3).
On March 27, 1998, the Company completed an underwritten public offer and sale
of 650,407 shares of its common stock and used the net proceeds, which totaled
approximately $23,690 (after offering costs) to pay down a portion of its
outstanding borrowings under the Company's credit facilities.
On April 29, 1998, the Company completed an underwritten offer and sale of
994,228 shares of its common stock and used the net proceeds, which totaled
approximately $34,570 (after offering costs), primarily to pay down a portion of
its outstanding borrowings under the Company's credit facilities.
On May 29, 1998, the Company completed an underwritten offer and sale of 984,615
shares of its common stock and used the net proceeds, which totaled
approximately $34,100 (after offering costs), primarily to pay down a portion of
its outstanding borrowings under the Company's credit facilities.
On December 31, 1998, the Company completed an offer and sale of 132,710 shares
of its common stock, using the net proceeds of approximately $3,940 for general
corporate purposes.
On August 6, 1998, the Board of Directors of the Company authorized a share
repurchase program ("Repurchase Program") under which the Company was permitted
to purchase up to $100,000 of the Company's outstanding common stock. Purchases
could be made from time to time in open market transactions at prevailing prices
or through privately negotiated transactions.
For the year ended December 31, 1998, the Company purchased, for constructive
retirement, 854,700 shares of its outstanding common stock for an aggregate cost
of approximately $25,058. Concurrent with these purchases, the Company sold to
the Operating Partnership 854,700 common units for approximately $25,058.
For the six months ended June 30, 1999, the Company purchased, for constructive
retirement, 26,000 shares of its outstanding common stock for an aggregate cost
of approximately $713. Concurrent with these purchases, the Company sold to the
Operating Partnership 26,000 common units for approximately $713.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company filed a registration statement with the SEC for the Company's
dividend reinvestment and stock purchase plan ("Plan") which was declared
effective in February 1999. The Plan commenced on March 1, 1999.
During the six months ended June 30, 1999, 320 shares were issued and proceeds
of approximately $10 were received from stock purchases and/or dividend
reinvestments under the Plan.
24
SHAREHOLDER RIGHTS PLAN
On June 10, 1999, the Board of Directors of the Company authorized a dividend
distribution of one preferred share purchase right ("Right") for each
outstanding share of common stock to be distributed to all holders of record of
the common stock on July 6, 1999. Each Right entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series A junior
participating preferred stock, par value $0.01 per share ("the Preferred
Shares"), at a price of $100.00 per one one-thousandth of a Preferred Share
("Purchase Price"), subject to adjustment as provided in the rights agreement.
The Rights expire on July 6, 2009, unless the expiration date is extended or the
Right is redeemed or exchanged earlier by the Company.
The Rights will be attached to each share of common stock. The Rights will
generally be exercisable only if a person or group becomes the beneficial owner
of 15 percent or more of the outstanding common stock or announces a tender
offer for 15 percent or more of the outstanding common stock ("Acquiring
Person"). In the event that a person or group becomes an Acquiring Person, each
holder of a Right will have the right to receive, upon exercise, common stock
having a market value equal to two times the Purchase Price of the Right.
STOCK OPTION PLANS
In 1994, and as subsequently amended, the Company established the Mack-Cali
Employee Stock Option Plan ("Employee Plan") and the Mack-Cali Director Stock
Option Plan ("Director Plan") under which a total of 5,380,188 shares (subject
to adjustment) of the Company's common stock have been reserved for issuance
(4,980,188 shares under the Employee Plan and 400,000 shares under the Director
Plan). Stock options granted under the Employee Plan in 1994 and 1995 become
exercisable over a three-year period and those options granted under the
Employee Plan in 1996, 1997 and 1998 become exercisable over a five-year period.
All stock options granted under the Director Plan become exercisable in one
year. All options were granted at the fair market value at the dates of grant
and have terms of ten years. As of June 30, 1999 and December 31, 1998, the
stock options outstanding had a weighted average remaining contractual life of
approximately 7.6 and 8.5 years, respectively.
Information regarding the Company's stock option plans is summarized below:
Weighted
Shares Average
Under Exercise
Options Price
- --------------------------------------------------------------------------------
Outstanding at January 1, 1998 3,287,290 $31.47
Granted 1,048,620 $35.90
Exercised (267,660) $20.47
Lapsed or canceled (128,268) $36.61
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 3,939,982 $33.22
Granted 37,000 $31.63
Exercised (41,063) $22.87
Lapsed or canceled (289,434) $37.38
- --------------------------------------------------------------------------------
Outstanding at June 30, 1999 3,646,485 $32.99
================================================================================
Options exercisable at December 31, 1998 1,334,137 $27.84
Options exercisable at June 30, 1999 1,904,177 $30.49
- --------------------------------------------------------------------------------
Available for grant at December 31, 1998 709,223
Available for grant at June 30, 1999 961,657
- --------------------------------------------------------------------------------
STOCK WARRANTS
The Company has outstanding a total of 400,000 warrants to purchase an equal
number of shares of common stock ("Stock Warrants") at $33 per share (the market
price at date of grant). Such warrants generally vest equally over a three-year
period through January 31, 2000 and expire on January 31, 2007.
The Company also has outstanding a total of 514,976 Stock Warrants to purchase
an equal number of shares of common stock at $38.75 per share (the market price
at date of grant). Such warrants vest equally over a five-year period through
December 12, 2002 and expire on December 12, 2007.
25
As of June 30, 1999 and December 31, 1998, there were 914,976 Stock Warrants
outstanding. As of June 30, 1999 and December 31, 1998, there were 585,989 and
565,991 Stock Warrants exercisable, respectively. No Stock Warrants have been
exercised or canceled.
EXECUTIVE STOCK COMPENSATION
Effective July 1, 1999, the Company entered into amended and restated employment
contracts with six of its key executive officers which provided for, among other
things, compensation in the form of stock awards ("Restricted Stock Awards") and
associated tax obligation payments. In connection with the Restricted Stock
Awards, the executive officers are to receive up to a total of 193,593 shares of
the Company's common stock vesting over a five-year period contingent upon the
Company meeting certain performance and/or stock price appreciation objectives.
DEFERRED STOCK COMPENSATION PLAN FOR DIRECTORS
The Deferred Compensation Plan for Directors ("Deferred Compensation Plan")
commenced January 1, 1999 and is a plan which allows non-employee directors of
the Company to elect to defer up to 100 percent of their annual retainer fee
into deferred stock units. The deferred stock units are convertible into an
equal number of shares of common stock upon the directors' termination of
service from the Board of Directors or a change in control of the Company, as
defined in the plan. Deferred stock units are credited to each director
quarterly using the closing price of the Company's common stock on the
applicable dividend record date for the respective quarter. Each participating
director's account is also credited for an equivalent amount of deferred stock
units based on the dividend rate for each quarter.
During the six months ended June 30, 1999, 1,309 deferred stock units were
earned.
EARNINGS PER SHARE
FASB No. 128 requires a dual presentation of basic and diluted EPS on the face
of the income statement for all companies with complex capital structures even
where the effect of such dilution is not material. Basic EPS excludes dilution
and is computed by dividing net income available to common stockholders by the
weighted average number of shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The following information presents the Company's results for the three and six
month periods ended June 30, 1999 and 1998 in accordance with FASB No. 128.
Three Months Ended June 30,
1999 1998
---- ----
Basic EPS Diluted EPS Basic EPS Diluted EPS
- --------------------------------------------------------------------------------
Net income $18,686 $18,686 $28,015 $28,015
Add: Net income attributable
to potentially dilutive
securities -- 2,766 -- 3,500
- --------------------------------------------------------------------------------
Adjusted net income $18,686 $21,452 $28,015 $31,515
================================================================================
Weighted average shares 58,510 67,486 57,019 64,626
- --------------------------------------------------------------------------------
Per Share $ 0.32 $ 0.32 $ 0.49 $ 0.49
================================================================================
26
Six Months Ended June 30,
1999 1998
---- ----
Basic EPS Diluted EPS Basic EPS Diluted EPS
- --------------------------------------------------------------------------------
Net income $50,750 $50,750 $54,558 $54,558
Add: Net income attributable
to potentially dilutive
securities -- 7,646 -- 6,896
- --------------------------------------------------------------------------------
Adjusted net income $50,750 $58,396 $54,558 $61,454
================================================================================
Weighted average shares 58,337 67,386 54,207 61,671
- --------------------------------------------------------------------------------
Per Share $ 0.87 $ 0.87 $ 1.01 $ 1.00
================================================================================
The following schedule reconciles the shares used in the basic EPS calculation
to the shares used in the diluted EPS calculation.
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Basic EPS Shares: 58,510 57,019 58,337 54,207
Add: Operating Partnership units 8,663 7,126 8,755 6,848
Stock options 313 444 293 529
Stock Warrants -- 37 -- 87
- --------------------------------------------------------------------------------
Diluted EPS Shares: 67,486 64,626 67,385 61,671
================================================================================
Preferred Units and Contingent Units outstanding in 1999 and 1998 were not
included in the computation of diluted EPS as such units were anti-dilutive
during the period.
Pursuant to the Repurchase Program, during 1998, the Company purchased for
constructive retirement, 854,700 shares of its outstanding common stock for
approximately $25,058. Additionally, during the six months ended June 30, 1999,
the Company purchased for constructive retirement, 26,000 shares of its
outstanding common stock for approximately $713.
15. SEGMENT REPORTING
The Company operates in one business segment - real estate. The Company provides
leasing, management, acquisition, development, construction and tenant-related
services for its portfolio. The Company does not have any foreign operations.
The accounting policies of the segments are the same as those described in Note
2, excluding straight-line rent adjustments and depreciation and amortization.
The Company evaluates performance based upon net operating income from the
combined properties in the segment.
Selected results of operations for the three and six month periods ended June
30, 1999 and 1998 and selected asset information as of June 30, 1999 and
December 31, 1998 regarding the Company's operating segment are as follows:
27
Total Corporate & Total
Segment Other(e) Company
- -------------------------------------------------------------------------------------------
Total contract revenues(a):
Three months ended:
June 30, 1999 $ 132,575 $ 567 $ 133,142 (f)
June 30, 1998 116,878 2,021 118,899 (g)
Six months ended:
June 30, 1999 $ 264,344 $ 142 264,486 (h)
June 30, 1998 218,479 3,040 221,519 (i)
Total operating and interest expenses(b):
Three months ended:
June 30, 1999 $ 28,110 $ 61,079 $ 89,189
June 30, 1998 38,750 26,028 64,778
Six months ended:
June 30, 1999 $ 71,265 $ 90,031 $ 161,296
June 30, 1998 71,696 48,824 120,520
Net operating income(c):
Three months ended:
June 30, 1999 $ 104,465 $ (60,512) $ 43,953 (f)
June 30, 1998 78,128 (24,007) 54,121 (g)
Six months ended:
June 30, 1999 $ 193,079 $ (89,889) $ 103,190 (h)
June 30, 1998 146,783 (45,784) 100,999 (i)
Total assets:
June 30, 1999 $3,512,260 $ 26,338 $3,538,598
December 31, 1998 3,430,865 21,329 3,452,194
Total long-lived assets(d):
June 30, 1999 $3,457,321 $ 4,196 $3,461,517
December 31, 1998 3,393,313 4,098 3,397,411
- --------------------------------------------------------------------------------
(a) Total contract revenues represents all revenues during the period
(including the Company's share of net income from unconsolidated joint
ventures), excluding adjustments for straight-lining of rents and the
Company's share of straight-line rent adjustments from unconsolidated
joint ventures. All interest income is excluded from segment amounts and
is classified in Corporate and Other for all periods.
(b) Total operating and interest expenses represents the sum of real estate
taxes, utilities, operating services, general and administrative and
interest expense. All interest expense (including for property-level
mortgages) is excluded from segment amounts and is classified in Corporate
and Other for all periods.
(c) Net operating income represents total contract revenues [as defined in
Note (a)] less total operating and interest expenses [as defined in Note
(b)] for the period.
(d) Long-lived assets is comprised of total rental property, unbilled rents
receivable and investments in unconsolidated joint ventures.
(e) Corporate & Other represents all corporate-level items (including interest
income, interest expense and non-property general and administrative
expense) as well as intercompany eliminations necessary to reconcile to
consolidated Company totals.
(f) Excludes $3,859 of adjustments for straight-lining of rents and $(26) for
the Company's share of straight-line rent adjustments from unconsolidated
joint ventures.
(g) Excludes $3,136 of adjustments for straight-lining of rents and $6 for the
Company's share of straight-line rent adjustments from unconsolidated
joint ventures.
(h) Excludes $7,422 of adjustments for straight-lining of rents and $(44) for
the Company's share of straight-line rent adjustments from unconsolidated
joint ventures.
(i) Excludes $6,339 of adjustments for straight-lining of rents and $6 for the
Company's share of straight-line rent adjustments from unconsolidated
joint ventures.
28
16. IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Cost of Start-Up Activities" ("SOP 98-5"), which is effective
for fiscal years beginning after December 15, 1998. SOP 98-5 requires costs of
start-up and organizational activities be expensed as incurred. The adoption of
SOP 98-5 did not have a material effect on the Company's financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("FASB No.
133"). FASB No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. In June 1999, the FASB delayed the implementation
date of FASB No. 133 by one year (January 1, 2001 for the Company). FASB No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Management of the Company anticipates that, due to its
limited use of derivative instruments, the adoption of FASB No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
17. PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information for the six months ended June 30,
1999 and 1998 are presented as if all acquisitions and common stock offerings
completed during the six months ended June 30, 1999 and the year ended December
31, 1998 had occurred on January 1, 1998. In management's opinion, all
adjustments necessary to reflect the effects of these transactions have been
made.
This pro forma financial information is not necessarily indicative of what the
actual results of operations of the Company would have been assuming such
transactions had been completed as of January 1, 1998, nor do they represent the
results of operations of future periods.
Six Months
Ended June 30,
1999 1998
- --------------------------------------------------------------------------------
Total revenues $271,864 $252,675
Operating and other expenses 81,615 74,327
General and administrative 13,904 13,746
Depreciation and amortization 44,434 39,211
Interest expense 49,319 50,090
Non-recurring charges 16,458 --
- --------------------------------------------------------------------------------
Income before minority interest 66,134 75,301
Minority interest 15,384 12,613
- --------------------------------------------------------------------------------
Net income $ 50,750 $ 62,688
================================================================================
Basic earnings per common share $ 0.87 $ 1.08
Diluted earnings per common share $ 0.87 $ 1.01
- --------------------------------------------------------------------------------
Basic weighted average shares outstanding 58,337 57,861
Diluted weighted average shares outstanding 67,385 66,441
- --------------------------------------------------------------------------------
29
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
Item 2:
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D
R E S U L T S O F O P E R A T I O N S
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Mack-Cali Realty Corporation and the notes thereto.
Certain defined terms used herein have the meaning ascribed to them in the
Consolidated Financial Statements.
The following comparisons for the three and six month periods ended June 30,
1999 ("1999"), as compared to the three and six month periods ended June 30,
1998 ("1998") make reference to the following: (i) the effect of the "Same-Store
Properties," which represents all in-service properties owned by the Company at
March 31, 1998 (for the three-month period comparisons), and which represents
all in-service properties owned by the Company at December 31, 1997 (for the
six-month period comparisons) and (ii) the effect of the "Acquired Properties,"
which represents all properties acquired or placed in service by the Company
from April 1, 1998 through June 30, 1999 (for the three-month period
comparisons) and which represents all properties acquired or placed in service
by the Company from January 1, 1998 through June 30, 1999 (for the six-month
period comparisons).
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Quarter Ended
June 30, Dollar Percent
(in thousands) 1999 1998 Change Change(%)
- -----------------------------------------------------------------------------------------
Revenue from rental operations:
Base rents $ 116,499 $ 105,861 $ 10,638 10.0%
Escalations and recoveries from tenants 16,366 12,358 4,008 32.4
Parking and other 3,061 2,836 225 7.9
- -----------------------------------------------------------------------------------------
Sub-total 135,926 121,055 14,871 12.3
Interest income 215 916 (701) (76.5)
Equity in earnings of
unconsolidated joint ventures 834 70 764 1,091.4
- -----------------------------------------------------------------------------------------
Total revenues 136,975 122,041 14,934 12.2
- -----------------------------------------------------------------------------------------
Property expenses:
Real estate taxes 14,208 11,854 2,354 19.9
Utilities 9,829 9,115 714 7.8
Operating services 17,227 15,629 1,598 10.2
- -----------------------------------------------------------------------------------------
Sub-total 41,264 36,598 4,666 12.7
General and administrative 5,770 6,394 (624) (9.8)
Depreciation and amortization 22,465 19,093 3,372 17.7
Interest expense 25,697 21,786 3,911 18.0
Non-recurring charges 16,458 -- 16,458 --
- -----------------------------------------------------------------------------------------
Total expenses 111,654 83,871 27,783 33.1
- -----------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item 25,321 38,170 (12,849) (33.7)
Minority interest (6,635) (7,782) 1,147 (14.7)
- -----------------------------------------------------------------------------------------
Income before extraordinary item 18,686 30,388 (11,702) (38.5)
- -----------------------------------------------------------------------------------------
Extraordinary item - loss on early
retirement of debt (net of minority
interest's share of $297 in 1998) -- (2,373) 2,373 100.0
- -----------------------------------------------------------------------------------------
Net income $ 18,686 $ 28,015 $ (9,329) (33.3)%
=========================================================================================
30
The following is a summary of the changes in revenue from rental operations and
property expenses divided into Acquired Properties and Same-Store Properties (in
thousands).
Acquired Same-Store
Total Company Properties Properties
------------- ---------- ----------
Dollar Percent Dollar Percent Dollar Percent
Change Change Change Change Change Change
- --------------------------------------------------------------------------------------------------------
Revenue from rental operations:
Base rents $10,638 10.0% $ 7,529 7.1% $ 3,109 2.9%
Escalations and recoveries from tenants 4,008 32.4 994 8.0 3,014 24.4
Parking and other 225 7.9 96 3.4 129 4.5
- --------------------------------------------------------------------------------------------------------
Total $14,871 12.3% $ 8,619 7.1% $ 6,252 5.2%
========================================================================================================
Property expenses:
Real estate taxes $ 2,354 19.9% $ 959 8.1% $ 1,395 11.8%
Utilities 714 7.8 645 7.0 69 0.8
Operating services 1,598 10.2 1,255 8.0 343 2.2
- --------------------------------------------------------------------------------------------------------
Total $ 4,666 12.7% $ 2,859 7.8% $ 1,807 4.9%
========================================================================================================
OTHER DATA:
Number of wholly-owned properties 249 22 227
Square feet (in thousands) 27,152 2,161 24,991
Base rents for the Same-Store Properties increased $3.1 million, or 2.9 percent,
for 1999 as compared to 1998, due primarily to occupancy and rental rate
increases in 1999. Escalations and recoveries from tenants for the Same-Store
Properties increased $3.0 million, or 24.4 percent, for 1999 over 1998, due to
the recovery of an increased amount of total property expenses, as well as
additional settle-up billings in 1999. Parking and other income for the
Same-Store Properties increased $0.1 million, or 4.5 percent, due primarily to
lease termination fees received in 1999.
Real estate taxes on the Same-Store Properties increased $1.4 million, or 11.8
percent, for 1999 as compared to 1998, due primarily to property tax rate
increases in certain municipalities in 1999. Utilities for the Same-Store
Properties increased $0.1 million, or 0.8 percent, for 1999 as compared to 1998,
due primarily to increased usage in 1999. Operating services for the Same-Store
Properties increased $0.3 million, or 2.2 percent, due primarily to additional
maintenance costs incurred.
Equity in earnings of unconsolidated joint ventures increased $0.8 million in
1999 as compared to 1998. This is due to additional joint ventures being entered
into by the Company (see Note 4 to the Financial Statements).
Interest income decreased by approximately $0.7 million, or 76.5 percent, for
1999 as compared to 1998. This decrease was due primarily to repayment by a
borrower of a mortgage note receivable in 1998 with no interest income from
mortgage note receivables in 1999.
General and administrative decreased by $0.6 million, or 9.8 percent for 1999 as
compared to 1998. This decrease is due primarily to decreased payroll and
related costs in 1999.
Depreciation and amortization increased by $3.4 million, or 17.7 percent, for
1999 over 1998. Of this increase, $1.7 million or 8.8 percent, is attributable
to the Acquired Properties, and $1.7 million, or 8.9 percent, is due to the
Same-Store Properties.
Interest expense increased $3.9 million, or 18.0 percent, for 1999 as compared
to 1998. This increase is due primarily to the replacement in 1999 of short-term
credit facility borrowings with long-term fixed rate unsecured debt and net
additional drawings from the Company's revolving credit facilities generally as
a result of Company acquisitions in 1998. These increases were partially offset
by a reduction in LIBOR in 1999, the reduction in spread over LIBOR due to the
1998 Unsecured Facility signed in April 1998 and the achievement by the Company
of investment grade credit ratings in November 1998.
Non-recurring charges of $16.5 million were incurred in 1999, as a result of the
resignation of Thomas A. Rizk (see Note 12 to the Financial Statements).
Income before minority interest and extraordinary item decreased to $25.3
million in 1999 from $38.2 million in 1998. The decrease of $12.9 million is due
to the factors discussed above.
31
Net income decreased by $9.3 million for 1999, from $28.0 million in 1998 to
$18.7 million in 1999. This decrease is a result of a decrease in income before
minority interest and extraordinary item of $12.9 million (as discussed above),
offset by an extraordinary item of $2.4 million (net of minority interest) in
1998 and a decrease of $1.2 million in minority interest.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Six Months Ended
June 30, Dollar Percent
(in thousands) 1999 1998 Change Change(%)
- -----------------------------------------------------------------------------------------
Revenue from rental operations:
Base rents $ 232,579 $ 198,777 $ 33,802 17.0%
Escalations and recoveries from tenants 31,226 22,715 8,511 37.5
Parking and other 6,961 4,818 2,143 44.5
- -----------------------------------------------------------------------------------------
Sub-total 270,766 226,310 44,456 19.6
Interest income 470 1,459 (989) (67.8)
Equity in earnings of
unconsolidated joint ventures 628 95 533 561.1
- -----------------------------------------------------------------------------------------
Total revenues 271,864 227,864 44,000 19.3
- -----------------------------------------------------------------------------------------
Property expenses:
Real estate taxes 28,051 21,926 6,125 27.9
Utilities 19,421 17,417 2,004 11.5
Operating services 34,143 28,321 5,822 20.6
- -----------------------------------------------------------------------------------------
Sub-total 81,615 67,664 13,951 20.6
General and administrative 13,904 12,591 1,313 10.4
Depreciation and amortization 44,434 35,324 9,110 25.8
Interest expense 49,319 40,265 9,054 22.5
Non-recurring charges 16,458 -- 16,458 --
- -----------------------------------------------------------------------------------------
Total expenses 205,730 155,844 49,886 32.0
- -----------------------------------------------------------------------------------------
Income before minority interest and
extraordinary item 66,134 72,020 (5,886) (8.2)
Minority interest (15,384) (15,089) (295) 2.0
- -----------------------------------------------------------------------------------------
Income before extraordinary item 50,750 56,931 (6,181) (10.9)
- -----------------------------------------------------------------------------------------
Extraordinary item - loss on early
retirement of debt (net of minority
interest's share of $297 in 1998) -- (2,373) 2,373 100.0
- -----------------------------------------------------------------------------------------
Net income $ 50,750 $ 54,558 $ (3,808) (7.0)%
=========================================================================================
32
The following is a summary of the changes in revenue from rental operations and
property expenses divided into Acquired Properties and Same-Store Properties (in
thousands).
Acquired Same-Store
Total Company Properties Properties
------------- ---------- ----------
Dollar Percent Dollar Percent Dollar Percent
Change Change Change Change Change Change
- -------------------------------------------------------------------------------------------------------------
Revenue from rental operations:
Base rents $ 33,802 17.0% $ 26,271 13.2% $ 7,531 3.8%
Escalations and recoveries from tenants 8,511 37.5 4,735 20.9 3,776 16.6
Parking and other 2,143 44.5 1,430 29.7 713 14.8
- -------------------------------------------------------------------------------------------------------------
Total $ 44,456 19.6% $ 32,436 14.3% $ 12,020 5.3%
=============================================================================================================
Property expenses:
Real estate taxes $ 6,125 27.9% $ 4,206 19.2% $ 1,919 8.7%
Utilities 2,004 11.5 2,200 12.6 (196) (1.1)
Operating services 5,822 20.6 5,004 17.7 818 2.9
- -------------------------------------------------------------------------------------------------------------
Total $ 13,951 20.6% $ 11,410 16.9% $ 2,541 3.7%
=============================================================================================================
OTHER DATA:
Number of wholly-owned properties 249 60 189
Square feet (in thousands) 27,152 5,187 21,965
Base rents for the Same-Store Properties increased $7.5 million, or 3.8 percent,
for 1999 as compared to 1998, due primarily to occupancy and rental rate
increases in 1999. Escalations and recoveries from tenants for the Same-Store
Properties increased $3.8 million, or 16.6 percent, for 1999 over 1998, due to
the recovery of an increased amount of total property expenses, as well as
additional settle-up billings in 1999. Parking and other income for the
Same-Store Properties increased $0.7 million, or 14.8 percent, which is
primarily attributable to lease termination fees received in 1999.
Real estate taxes on the Same-Store Properties increased $1.9 million, or 8.7
percent, for 1999 as compared to 1998, due primarily to property tax rate
increases in certain municipalities in 1999. Utilities for the Same-Store
Properties decreased $0.2 million, or 1.1 percent, for 1999 as compared to 1998,
due primarily to decreased electric rates and usage in early 1999. Operating
services for the Same-Store Properties increased $0.8 million, or 2.9 percent,
due primarily to increased snow removal costs incurred at the Same-Store
Properties in 1999.
Equity in earnings of unconsolidated joint ventures increased $0.5 million in
1999 as compared to 1998. This is due to additional joint ventures being entered
into by the Company (see Note 4 to the Financial Statements).
Interest income decreased by approximately $1.0 million, or 67.8 percent, for
1999 as compared to 1998. This decrease was due primarily to repayment by a
borrower of a mortgage note receivable in 1998 with no interest income from
mortgage note receivables in 1999.
General and administrative increased by $1.3 million, or 10.4 percent for 1999
as compared to 1998. This increase is due primarily to an increase in payroll
and related costs and professional fees as a result of the Company's expansion
in 1998.
Depreciation and amortization increased by $9.1 million, or 25.8 percent, for
1999 over 1998. Of this increase, $6.8 million or 19.4 percent, is attributable
to the Acquired Properties, and $2.3 million, or 6.4 percent, is due to the
Same-Store Properties.
Interest expense increased $9.1 million, or 22.5 percent, for 1999 as compared
to 1998. This increase is due primarily to the replacement in 1999 of short-term
credit facility borrowings with long-term fixed rate unsecured debt and net
additional drawings from the Company's revolving credit facilities generally as
a result of Company acquisitions in 1998. These increases were partially offset
by a reduction in LIBOR in 1999, the reduction in spread over LIBOR due to the
1998 Unsecured Facility signed in April 1998 and the achievement by the Company
of investment grade credit ratings in November 1998.
Non-recurring charges of $16.5 million were incurred in 1999, as a result of the
resignation of Thomas A. Rizk (see Note 12 to the Financial Statements).
33
Income before minority interest and extraordinary item decreased to $66.1
million in 1999 from $72.0 million in 1998. The decrease of $5.9 million is due
to the factors discussed above.
Net income decreased by $3.8 million for 1999, from $54.6 million in 1998 to
$50.8 million in 1999. This decrease is a result of a decrease in income before
minority interest and extraordinary item of $5.9 million (as discussed above),
and an increase of $0.3 million in minority interest, offset by an extraordinary
item of $2.4 million (net of minority interest) in 1998.
Liquidity and Capital Resources
Statement of Cash Flows
During the six months ended June 30, 1999, the Company generated $110.0 million
in cash flows from operating activities, and together with $773.6 million in
borrowings from the Company's revolving credit facilities, the issuance of
unsecured notes and funds from additional mortgage debt, $0.9 million in
proceeds from stock options exercised, $10.6 million in distributions received
from unconsolidated joint ventures, used an aggregate of approximately $895.1
million to acquire properties and land parcels and pay for other tenant and
building improvements totaling $71.1 million, repay outstanding borrowings on
its revolving credit facilities and other mortgage debt of $699.7 million, pay
quarterly dividends and distributions of $81.3 million, invest $29.9 million in
unconsolidated joint ventures, repurchase 26,000 shares of its outstanding
common stock for $0.7 million, pay deferred financing costs of $6.6 million, add
$0.1 million to restricted cash and increase the Company's cash and cash
equivalents by $5.7 million.
Capitalization
During the six months ended June 30, 1999, in conjunction with the redemption of
certain of the contingent units issued in the Mack Transaction, the Company
issued a total of 242,157 common units with a total value of approximately $7.2
million at time of issuance.
In August 1998, the Board of Directors of the Company authorized a share
repurchase program under which the Company was permitted to purchase up to
$100.0 million of the Company's outstanding common stock. Purchases could be
made from time to time in open market transactions at prevailing prices or
through privately negotiated transactions. Subsequently, through June 30, 1999,
the Company purchased, for constructive retirement, 880,700 shares of its
outstanding common stock for an aggregate cost of approximately $25.8 million.
Concurrent with these purchases, the Company sold to the Operating Partnership
880,700 common units for approximately $25.8 million.
On June 10, 1999, the Board of Directors of the Company authorized a dividend
distribution of one preferred share purchase right for each outstanding share of
common stock to be distributed to all holders of record of the common stock on
July 6, 1999. Each Right entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series A junior participating preferred
stock, par value $0.01 per share, at a price of $100.00 per one one-thousandth
of a Preferred Share, subject to adjustment as provided in the rights agreement.
The Rights expire on July 6, 2009, unless the expiration date is extended or the
Right is redeemed or exchanged earlier by the Company.
The Rights will be attached to each share of common stock. The Rights will
generally be exercisable only if a person or group becomes the beneficial owner
of 15 percent or more of the outstanding common stock or announces a tender
offer for 15 percent or more of the outstanding common stock. In the event that
a person or group becomes an Acquiring Person, each holder of a Right will have
the right to receive, upon exercise, common stock having a market value equal to
two times the Purchase Price of the Right. The Company's adoption of the
shareholder rights plan was not taken in response to any known effort to acquire
control of the Company.
As of June 30, 1999, the Company's total indebtedness of $1.5 billion (weighted
average interest rate of 7.08 percent) was comprised of $228.8 million of
revolving credit facility borrowings and other variable rate mortgage debt
(average rate of 5.84 percent), fixed rate debt of $1.3 billion (average rate of
7.31 percent), and a Contingent Obligation of $6.4 million.
As of June 30, 1999, the Company had outstanding borrowings of $148.6 million
under its revolving credit facilities (with aggregate borrowing capacity of $1.1
billion). The total outstanding borrowings were from the 1998 Unsecured
Facility, with no outstanding borrowings on its Prudential Facility. The 1998
Unsecured Facility, with 28 lender banks, carries an interest rate of 90 basis
points over LIBOR and matures in April 2001. The Prudential Facility carries an
interest rate of 110 basis points over LIBOR and matures in June 2000.
34
The terms of the 1998 Unsecured Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the maximum leverage ratio, the maximum amount of secured
indebtedness, the minimum amount of tangible net worth, the minimum amount of
debt service coverage, the minimum amount of fixed charge coverage, the maximum
amount of unsecured indebtedness, the minimum amount of unencumbered property
debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Company to
continue to qualify as a REIT under the Code, the Company will not during any
four consecutive fiscal quarters make distributions with respect to common stock
or other equity interests in an aggregate amount in excess of 90 percent of
funds from operations for such period, subject to certain other adjustments. The
1998 Unsecured Facility also requires a 17.5 basis point fee on the unused
balance payable quarterly in arrears.
The Company has three investment grade credit ratings. Duff & Phelps Credit
Rating Co. ("DCR") and Standard & Poors Rating Services ("S&P") have each
assigned their BBB rating to the $785.3 million of total unsecured corporate
debt of the Operating Partnership. DCR and S&P have also assigned their BBB-
rating to prospective preferred stock offerings of the Company. Moody's
Investors Service has assigned its Baa3 rating to the unsecured corporate debt
and its Ba1 rating to prospective preferred stock offerings of the Company.
The terms of the unsecured corporate debt include certain restrictions and
covenants which require compliance with financial ratios relating to the maximum
amount of debt leverage, the maximum amount of secured indebtedness, the minimum
amount of debt service coverage and the maximum amount of unsecured debt as a
percent of unsecured assets.
In May 1995, the Company entered into an interest rate swap agreement with a
commercial bank. The swap agreement fixes the Company's one-month LIBOR base to
6.285 percent per annum on a notional amount of $24.0 million. The swap
agreement expires on August 15, 1999.
In October 1998, the Company entered into a forward treasury rate lock agreement
with a commercial bank. The agreement locked an interest rate of 4.089 percent
per annum for the three-year U.S. Treasury Note effective November 4, 1999, on a
notional amount of $50.0 million. The agreement will be used to fix the Index
Rate on $50.0 million of the Harborside - Plaza I mortgage, for which the
Company's interest rate re-sets for three years beginning November 4, 1999 to
the interpolated three-year U.S. Treasury Note plus 110 basis points (see Note 9
to the Financial Statements - "Property Mortgages: Harborside-Plaza I").
Using the proceeds from the issuance of $185.3 million of unsecured corporate
debt in August 1999, the Company repaid in full and retired the TIAA Mortgage,
which was secured by 43 properties aggregating 3.1 million square feet.
Following the repayment, the Company had 217 unencumbered properties, totaling
20.1 million square feet, representing 73.5 percent of the Company's total
portfolio on a square footage basis. The Company is currently reviewing its
option to convert the $150.0 Million Prudential Mortgage Loan, encumbering 12
properties aggregating 2.4 million square feet, to unsecured corporate debt.
The Company has an effective shelf registration statement with the SEC for an
aggregate amount of $2.0 billion in equity securities of the Company. The
Company and Operating Partnership also have an effective shelf registration
statement with the SEC for an aggregate of $2.0 billion in debt securities,
preferred stock and preferred stock represented by depositary shares, under
which the Operating Partnership has issued an aggregate of $785.3 million of
unsecured corporate debt. The Company also has an effective registration
statement with the SEC for a dividend reinvestment and stock purchase plan,
which commenced on March 1, 1999.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures. Management believes that the Company will
have access to the capital resources necessary to expand and develop its
business. To the extent that the Company's cash flow from operating activities
is insufficient to finance its non-recurring capital expenditures such as
property acquisition and construction project costs and other capital
expenditures, the Company expects to finance such activities through borrowings
under its credit facilities and other debt and equity financing.
The Company expects to meet its short-term liquidity requirements generally
through its working capital and net cash provided by operating activities, along
with the 1998 Unsecured Facility and the Prudential Facility. The Company is
frequently examining potential property acquisitions and construction projects
and, at any given time, one or more of such acquisitions may be under
consideration. Accordingly, the ability to fund property acquisitions is a major
part of the Company's financing
35
requirements. The Company expects to meet its financing requirements through
funds generated from operating activities, long-term or short-term borrowings
(including draws on the Company's revolving credit facilities) and the issuance
of additional debt or equity securities. In addition, the Company anticipates
utilizing the 1998 Unsecured Facility and the Prudential Facility primarily to
fund property acquisitions.
As of quarter end, the Company's total debt had a weighted average term to
maturity of 5.9 years. The Company does not intend to reserve funds to retire
the unsecured corporate debt, Harborside mortgages, $150.0 Million Prudential
Mortgage Loan, its other property mortgages or other long-term mortgages and
loans payable upon maturity. Instead, the Company will seek to refinance such
debt at maturity or retire such debt through the issuance of additional equity
or debt securities. The Company is reviewing various refinancing options,
including the issuance of additional unsecured corporate debt, preferred stock,
and/or obtaining additional mortgage debt, some or all of which may be completed
during 1999. The Company anticipates that its available cash and cash
equivalents and cash flows from operating activities, together with cash
available from borrowings and other sources, will be adequate to meet the
Company's capital and liquidity needs both in the short and long-term. However,
if these sources of funds are insufficient or unavailable, the Company's ability
to make the expected distributions discussed below may be adversely affected.
To maintain its qualification as a REIT, the Company must make annual
distributions to its stockholders of at least 95 percent of its REIT taxable
income, determined without regard to the dividends paid deduction and by
excluding net capital gains. Moreover, the Company intends to continue to make
regular quarterly distributions to its stockholders which, based upon current
policy, in the aggregate would equal approximately $130.4 million on an
annualized basis. However, any such distribution, whether for federal income tax
purposes or otherwise, would only be paid out of available cash after meeting
both operating requirements and scheduled debt service on mortgages and loans
payable.
36
SIGNIFICANT TENANTS
The following table sets out a schedule of the Company's 20 largest tenants, for
the Company's wholly-owned properties as of June 30, 1999, based upon annualized
base rents:
Percentage of
Annualized Company Square Percentage of Year of
Number of Base Rental Annualized Base Feet Total Company Lease
Properties Revenue($)(1) Rental Revenue(%) Leased Leased Sq.Ft.(%) Expiration
- ---------------------------------------------------------------------------------------------------------------------------
AT&T Corporation 6 15,433,135 3.5 1,034,779 4.0 2009 (2)
Donaldson, Lufkin &
Jenrette Securities Corp. 2 9,960,413 2.3 527,506 2.1 2009 (3)
AT&T Wireless Services 2 7,826,368 1.8 365,593 1.4 2007 (4)
International Business
Machines Corporation 5 7,522,499 1.7 390,370 1.5 2007 (5)
Allstate Insurance Company 10 6,377,507 1.4 293,820 1.1 2009 (6)
Prentice-Hall Inc. 1 5,794,893 1.3 474,801 1.9 2014
Nabisco Inc. 2 5,467,178 1.2 300,378 1.2 2000
Toys 'R' US - NJ, Inc. 1 5,342,672 1.2 242,518 0.9 2012
American Institute of Certified
Public Accountants 1 4,981,357 1.1 249,768 1.0 2012
CMP Media Inc 1 4,826,107 1.1 206,274 0.8 2014
Board of Gov./Federal Reserve 1 4,605,090 1.0 117,008 0.5 2009 (7)
Winston & Strawn 1 4,214,885 1.0 108,100 0.4 2003
Dow Jones Telerate Systems Inc. 1 3,660,064 0.8 194,219 0.8 2006 (8)
KPMG Peat Marwick, LLP 2 3,510,412 0.8 161,760 0.6 2007 (9)
Bank of Tokyo - Mitsubishi Ltd. 1 3,378,923 0.8 137,076 0.5 2009
Bankers Trust Harborside Inc. 1 3,272,500 0.7 385,000 1.5 2003
Morgan Stanley Dean Witter 1 3,188,532 0.7 179,131 0.7 2008
Dean Witter Reynolds Inc. 4 3,185,372 0.7 137,181 0.5 2008 (10)
Deloitte & Touche USA LLP 1 3,162,933 0.7 118,864 0.5 2000
Cendant Operations Inc. 1 3,117,051 0.7 148,431 0.6 2008
- ---------------------------------------------------------------------------------------------------------------------------
Totals 45 108,827,891 24.5 5,772,577 22.5
===========================================================================================================================
(1) Annualized base rental revenue is based on actual June 1999 billings times
12. For leases whose rent commences after June 30, 1999, annualized base
rental revenue is based on the first month's billing times 12. As
annualized base rental revenue is not derived from historical GAAP
results, historical results may differ from those set forth above.
(2) 39,183 square feet expire February 2000; 66,268 square feet expire
December 2000; 3,950 square feet expire August 2002; 63,278 square feet
expire May 2004; 475,100 square feet expire January 2008; 387,000 square
feet expire January 2009.
(3) 426,691 square feet expire July 2009; 100,815 square feet expire November
2009.
(4) 341,512 square feet expire March 2007; 24,081 square feet expire June
2007.
(5) 29,157 square feet expire October 2000; 85,000 square feet expire December
2000; 26,749 square feet expire January 2002; 1,065 square feet expire
November 2002; 248,399 square feet expire December 2007.
(6) 22,444 square feet expire July 2001; 70,517 square feet expire June 2002;
71,030 square feet expire September 2002; 18,882 square feet expire April
2003; 2,867 square feet expire January 2004; 36,305 square feet expire
January 2005; 23,024 square feet expire October 2005; 6,108 square feet
expire August 2006; 31,143 square feet expire April 2008; 11,500 square
feet expire April 2009.
(7) 94,719 square feet expire May 2005; 22,289 square feet expire June 2009.
(8) 144,332 square feet expire June 2000; 4,700 square feet expire March 2001;
45,187 square feet expire June 2006.
(9) 104,556 square feet expire September 2002; 57,204 square feet expire July
2007.
(10) 13,140 square feet expire April 2005; 19,390 square feet expire October
2007; 85,151 square feet expire February 2008; 19,500 square feet expire
June 2008.
37
SCHEDULE OF LEASE EXPIRATIONS
The following table sets forth a schedule of the lease expirations for the total
of the Company's wholly-owned office, office/flex, industrial/warehouse and
stand-alone retail properties beginning July 1, 1999, assuming that none of the
tenants exercises renewal options:
Average Annual
Percentage Of Rent Per Net
Net Rentable Total Leased Annualized Rentable Percentage Of
Area Subject Square Feet Base Rental Square Foot Annual Base
Number Of To Expiring Represented By Revenue Under Represented Rent Under
Year Of Leases Leases Expiring Expiring By Expiring Expiring
Expiration Expiring(1) (Sq. Ft.) Leases(%)(2) Leases($)(3) Leases($) Leases(%)
- -----------------------------------------------------------------------------------------------------------------
1999 ........ 284 1,268,000 5.0 23,022,486 18.16 5.2
2000 ........ 512 3,826,970 14.9 65,672,700 17.16 14.8
2001 ........ 491 2,879,134 11.2 47,247,344 16.41 10.6
2002 ........ 461 3,435,094 13.4 59,678,362 17.37 13.4
2003 ........ 375 3,798,347 14.8 64,709,328 17.04 14.6
2004 ........ 217 1,988,936 7.8 35,264,420 17.73 7.9
2005 ........ 87 1,381,554 5.4 27,012,032 19.55 6.1
2006 ........ 51 869,866 3.4 16,718,122 19.22 3.8
2007 ........ 37 1,200,573 4.7 23,166,129 19.30 5.2
2008 ........ 36 1,506,175 5.9 23,403,100 15.54 5.3
2009 ........ 30 1,369,950 5.3 24,385,015 17.80 5.5
2010 and thereafter 38 2,114,619 8.2 33,883,564 16.02 7.6
- -----------------------------------------------------------------------------------------------------------------
Totals/Weighted
Average 2,619 25,639,218 100.0(4) 444,162,602 17.32 100.0
=================================================================================================================
(1) Includes office, office/flex, industrial/warehouse and stand-alone retail
property tenants only. Excludes leases for amenity, retail, parking and
month-to-month tenants. Some tenants have multiple leases.
(2) Excludes all space vacant as of June 30, 1999.
(3) Annualized base rental revenue is based on actual June 1999 billings times
12. For leases whose rent commences after June 30, 1999, annualized base
rental revenue is based on the first month's billing times 12. As
annualized base rental revenue is not derived from historical GAAP
results, historical results may differ from those set forth above.
(4) Reconciliation to Company's total net rentable square footage is as
follows:
Square Feet Percentage of Total
----------- -------------------
Square footage leased to commercial tenants 25,639,218 94.7%
Square footage used for corporate offices, management offices,
building use, retail tenants, food services, other ancillary
service tenants and occupancy adjustments 442,122 1.6
Square footage vacant 1,002,786 3.7
---------- ---
Total net rentable square footage (does not include
residential, land lease, retail or not-in-service properties) 27,084,126 100.0%
========== =====
38
SCHEDULE OF LEASE EXPIRATIONS: OFFICE PROPERTIES
The following table sets forth a schedule of the lease expirations for the
office properties beginning July 1, 1999, assuming that none of the tenants
exercises renewal options:
Average Annual
Percentage Of Rent Per Net
Net Rentable Total Leased Annualized Rentable Percentage Of
Area Subject Square Feet Base Rental Square Foot Annual Base
Number Of To Expiring Represented By Revenue Under Represented Rent Under
Year Of Leases Leases Expiring Expiring By Expiring Expiring
Expiration Expiring(1) (Sq. Ft.) Leases(%)(2) Leases($)(3) Leases($) Leases(%)
- -----------------------------------------------------------------------------------------------------------------
1999............ 238 1,033,094 4.8 20,710,575 20.05 5.2
2000............ 436 3,281,927 15.3 59,699,510 18.19 15.0
2001............ 406 2,298,371 10.7 40,607,660 17.67 10.2
2002............ 375 2,624,143 12.2 51,060,129 19.46 12.8
2003............ 314 3,211,580 14.9 58,891,050 18.34 14.8
2004............ 179 1,560,537 7.3 30,467,625 19.52 7.7
2005............ 67 1,136,112 5.3 24,235,117 21.33 6.1
2006............ 42 662,641 3.1 13,191,575 19.91 3.3
2007............ 31 1,086,992 5.1 21,561,795 19.84 5.4
2008............ 33 1,356,580 6.3 22,461,242 16.56 5.7
2009............ 22 1,240,750 5.8 22,842,195 18.41 5.7
2010 and thereafter 33 1,979,931 9.2 32,071,515 16.20 8.1
- -----------------------------------------------------------------------------------------------------------------
Totals/Weighted
Average 2,176 21,472,658 100.0 397,799,988 18.53 100.0
=================================================================================================================
(1) Includes office tenants only. Excludes leases for amenity, retail, parking
and month-to-month office tenants. Some tenants have multiple leases.
(2) Excludes all space vacant as of June 30, 1999.
(3) Annualized base rental revenue is based on actual June 1999 billings times
12. For leases whose rent commences after June 30, 1999, annualized base
rental revenue is based on the first month's billing times 12. As
annualized base rental revenue is not derived from historical GAAP
results, historical results may differ from those set forth above.
39
SCHEDULE OF LEASE EXPIRATIONS: OFFICE/FLEX PROPERTIES
The following table sets forth a schedule of the lease expirations for the
office/flex properties beginning July 1, 1999, assuming that none of the tenants
exercises renewal options:
Average Annual
Percentage Of Rent Per Net
Net Rentable Total Leased Annualized Rentable Percentage Of
Area Subject Square Feet Base Rental Square Foot Annual Base
Number Of To Expiring Represented By Revenue Under Represented Rent Under
Year Of Leases Leases Expiring Expiring By Expiring Expiring
Expiration Expiring(1) (Sq. Ft.) Leases(%)(2) Leases($)(3) Leases($) Leases(%)
- -----------------------------------------------------------------------------------------------------------------
1999............ 43 229,521 6.1 2,262,141 9.86 5.4
2000............ 72 524,939 13.9 5,736,473 10.93 13.6
2001............ 80 549,216 14.6 6,035,657 10.99 14.3
2002............ 84 764,511 20.3 8,123,571 10.63 19.2
2003............ 58 495,293 13.1 5,386,530 10.88 12.7
2004............ 30 245,579 6.5 2,896,790 11.80 6.8
2005............ 20 245,442 6.5 2,776,915 11.31 6.6
2006............ 9 207,225 5.5 3,526,547 17.02 8.3
2007............ 6 113,581 3.0 1,604,334 14.13 3.8
2008............ 3 149,595 4.0 941,858 6.30 2.2
2009............ 7 117,400 3.1 1,436,620 12.24 3.4
2010 and thereafter 4 126,688 3.4 1,547,049 12.21 3.7
- -----------------------------------------------------------------------------------------------------------------
Totals/Weighted.
Average 416 3,768,990 100.0 42,274,485 11.22 100.0
=================================================================================================================
(1) Includes office/flex tenants only. Excludes leases for amenity, retail,
parking and month-to-month office/flex tenants. Some tenants have multiple
leases.
(2) Excludes all space vacant as of June 30, 1999.
(3) Annualized base rental revenue is based on actual June 1999 billings times
12. For leases whose rent commences after June 30, 1999, annualized base
rental revenue is based on the first month's billing times 12. As
annualized base rental revenue is not derived from historical GAAP
results, historical results may differ from those set forth above.
40
SCHEDULE OF LEASE EXPIRATIONS: INDUSTRIAL/WAREHOUSE PROPERTIES
The following table sets forth a schedule of the lease expirations for the
industrial/warehouse properties beginning July 1, 1999, assuming that none of
the tenants exercises renewal options:
Average Annual
Percentage Of Rent Per Net
Net Rentable Total Leased Annualized Rentable Percentage Of
Area Subject Square Feet Base Rental Square Foot Annual Base
Number Of To Expiring Represented By Revenue Under Represented Rent Under
Year Of Leases Leases Expiring Expiring By Expiring Expiring
Expiration Expiring(1) (Sq. Ft.) Leases(%)(2) Leases($)(3) Leases($) Leases(%)
- -----------------------------------------------------------------------------------------------------------------
1999............ 3 5,385 1.4 49,770 9.24 1.4
2000............ 4 20,104 5.3 236,717 11.77 6.5
2001............ 5 31,547 8.3 604,027 19.15 16.7
2002............ 2 46,440 12.2 494,662 10.65 13.6
2003............ 3 91,474 24.1 431,748 4.72 11.9
2004............ 7 173,520 45.6 1,705,005 9.83 47.0
2009............ 1 11,800 3.1 106,200 9.00 2.9
- -----------------------------------------------------------------------------------------------------------------
Totals/Weighted.
Average 25 380,270 100.0 3,628,129 9.54 100.0
=================================================================================================================
(1) Includes industrial/warehouse tenants only. Excludes leases for amenity,
retail, parking and month-to-month industrial/warehouse tenants. Some
tenants have multiple leases.
(2) Excludes all space vacant as of June 30, 1999.
(3) Annualized base rental revenue is based on actual June 1999 billings times
12. For leases whose rent commences after June 30, 1999, annualized base
rent revenue is based on the first month's billing times 12. As annualized
base rental revenue is not derived from historical GAAP results, the
historical results may differ from those set forth above.
SCHEDULE OF LEASE EXPIRATIONS: STAND-ALONE RETAIL PROPERTIES
The following table sets forth a schedule of the lease expirations for the
stand-alone retail properties beginning July 1, 1999, assuming that none of the
tenants exercises renewal options:
Average Annual
Percentage Of Rent Per Net
Net Rentable Total Leased Annualized Rentable Percentage Of
Area Subject Square Feet Base Rental Square Foot Annual Base
Number Of To Expiring Represented By Revenue Under Represented Rent Under
Year Of Leases Leases Expiring Expiring By Expiring Expiring
Expiration Expiring(1) (Sq. Ft.) Leases(%)(2) Leases($)(3) Leases($) Leases(%)
- -----------------------------------------------------------------------------------------------------------------
2004............ 1 9,300 53.8 195,000 20.97 42.4
2012 ........... 1 8,000 46.2 265,000 33.12 57.6
- -----------------------------------------------------------------------------------------------------------------
Totals/Weighted.
Average 2 17,300 100.0 460,000 26.59 100.0
=================================================================================================================
(1) Includes stand-alone retail property tenants only.
(2) Annualized base rental revenue is based on actual June 1999 billings times
12. For leases whose rent commences after June 30, 1999 annualized base
rental revenue is based on the first month's billing times 12. As
annualized base rental revenue is not derived from historical GAAP
results, historical results may differ from those set forth above.
41
Funds from Operations
The Company considers funds from operations ("FFO"), after adjustment for
straight-lining of rents, one measure of REIT performance. Funds from operations
is defined as net income (loss) before minority interest of unitholders,
computed in accordance with generally accepted accounting principles ("GAAP"),
excluding gains (or losses) from debt restructuring, other extraordinary and
significant non-recurring items, and sales of property, plus real estate-related
depreciation and amortization. Funds from operations should not be considered as
an alternative to net income as an indication of the Company's performance or to
cash flows as a measure of liquidity. Funds from operations presented herein is
not necessarily comparable to funds from operations presented by other real
estate companies due to the fact that not all real estate companies use the same
definition. However, the Company's funds from operations is comparable to the
funds from operations of real estate companies that use the current definition
of the National Association of Real Estate Investment Trusts ("NAREIT"), after
the adjustment for straight-lining of rents.
NAREIT's definition of funds from operations indicates that the calculation
should be made before any extraordinary item (determined in accordance with
GAAP), and before any deduction of significant non-recurring events that
materially distort the comparative measurement of the Company's performance.
Funds from operations for the three and six month periods ended June 30, 1999
and 1998 as calculated in accordance with NAREIT's definition as published in
March 1995, after adjustment for straight-lining of rents, are summarized in the
following table (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------
Income before non-recurring charges,
distributions to preferred unitholders,
minority interest and extraordinary item $ 41,779 38,170 $ 82,592 $ 72,020
Add: Real estate-related depreciation and
amortization(1) 22,769 19,211 45,720 35,330
Deduct: Rental income adjustment for
straight-lining of rents(1) (3,833) (3,142) (7,378) (6,345)
- -------------------------------------------------------------------------------------------------------------
Funds from operations, after adjustment
for straight-lining of rents, before
distributions to preferred unitholders $ 60,715 54,239 $ 120,934 $ 101,005
Deduct: Distributions to preferred unitholders (3,869) (3,985) (7,738) (7,896)
- -------------------------------------------------------------------------------------------------------------
Funds from operations, after adjustment for
straight-lining of rents, after distributions
to preferred unitholders $ 56,846 $ 50,254 $ 113,196 $ 93,109
=============================================================================================================
Cash flows provided by operating activities $ 110,008 $ 102,517
Cash flows used in investing activities $ (90,548) $(662,104)
Cash flows (used in) provided by financing
activities $ (13,750) $ 573,478
- -------------------------------------------------------------------------------------------------------------
Basic weighted average shares/units
outstanding(2) 67,173 64,145 67,092 61,055
- -------------------------------------------------------------------------------------------------------------
Diluted weighted average shares/units
outstanding(2) 74,104 71,444 74,040 68,425
- -------------------------------------------------------------------------------------------------------------
(1) Includes FFO adjustments related to the Company's investments in
unconsolidated joint ventures.
(2) See calculations for the amounts presented in the following
reconciliation.
42
The following schedule reconciles the Company's basic weighted average shares to
the basic and diluted weighted average shares/units presented above:
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------------
Basic weighted average shares: 58,510 57,019 58,337 54,207
Add: Weighted average common units 8,663 7,126 8,755 6,848
- -----------------------------------------------------------------------------------
Basic weighted average shares/units: 67,173 64,145 67,092 61,055
Add: Weighted average preferred units 6,618 6,818 6,655 6,754
(after conversion to common units)
Stock options 313 444 293 529
Stock warrants -- 37 -- 87
- -----------------------------------------------------------------------------------
Diluted weighted average shares/units: 74,104 71,444 74,040 68,425
===================================================================================
Inflation
The Company's leases with the majority of its tenants provide for recoveries and
escalation charges based upon the tenant's proportionate share of, and/or
increases in, real estate taxes and certain operating costs, which reduce the
Company's exposure to increases in operating costs resulting from inflation.
Disruption in Operations Due To Year 2000 Problems.
General
The Year 2000 issue is the result of computer programs and embedded chips using
a two-digit format, as opposed to four digits, to indicate the year. Such
computer systems may be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, leading to disruptions in
operations. We have developed a three-phase Year 2000 project (the "Project") to
determine our Year 2000 systems compliance. Phase I was to identify those
systems with which we have exposure to Year 2000 issues. Phase II was the
development and implementation of action plans to be Year 2000 compliant in all
areas. Phase III is the final testing of each major area of exposure to assure
compliance. We have identified three major areas critical for successful Year
2000 compliance: (i) our central accounting and operating computer system at our
Cranford, New Jersey headquarters and local networks and related systems in our
regional offices, (ii) inquiries of our tenants and key vendors as to their Year
2000 readiness and (iii) assessment of our individual buildings as to the Year
2000 readiness of their operating systems. We believe that progress in all such
areas is proceeding on schedule and that we will experience no material adverse
effect as a result of the Year 2000 issue. There can, however, be no assurance
that this will be the case. Set forth below is a more detailed analysis of the
Project and its anticipated impact on us.
Central Accounting and Operating Systems
We have completed a review of key computer hardware and software and other
equipment, and have modified, upgraded or replaced all identified hardware and
equipment in our corporate and regional offices that we believe may be affected
by problems associated with Year 2000. Such hardware includes, but is not
limited to, desktop and laptop computers, servers, printers, telecopier machines
and telephones. We, as part of our routine modernization efforts, have completed
necessary upgrades to identified secondary software systems, such as word
processing, spreadsheet applications, telephone voicemail systems and computer
calendar programs. The software supplier of our accounting system completed its
Year 2000 upgrade and supplied us with Year 2000 compliant software at no cost
to us. We have substantially completed our internal testing of such software
with satisfactory results.
Tenant Compliance
We believe that the completion of the Project as scheduled will minimize Year
2000 related issues in our internal operations. However, we may still be
adversely impacted by Year 2000 related issues as a result of problems outside
our control, such as the inability of tenants to pay rent when due. In order to
gauge such risk, we sent questionnaires to each of our then existing tenants in
August 1998 to assess their Year 2000 compliance status. The responses to these
questionnaires continue to be received, reviewed and evaluated. Based on the
responses received, we do not anticipate any material adverse impact on the
orderly payment of monthly rent. Therefore, while there can be no assurance that
Year 2000 problems of tenants
43
will not have a material adverse effect on our operating results or financial
condition, the information available to us indicates such an occurrence is not
likely.
Property Compliance
Our property managers have completed Phase I of the Project, a building by
building survey of all of our properties to determine whether building support
systems such as heat, power, light, security, garages and elevators will be
affected by the advent of the Year 2000. Most of such systems either are already
Year 2000 compliant or contain no computerized parts. Our property managers have
completed Phase II of the Project, the development and implementation of action
plans to modify, upgrade or replace non-compliant building systems. The
compliance testing of these installed building systems is in progress pursuant
to Phase III of the Project.
We have communicated with vendors of building systems or other services to our
buildings regarding their Year 2000 compliance. In many instances, we will rely
on the written representations from these vendors regarding the Year 2000
compliance of their product or service. We are also relying on assurances
requested from utility providers of their Year 2000 compliance and their
continued ability to provide uninterrupted service to our buildings. We
anticipate incurring a total cost of approximately $1.0 million in costs to
modify, upgrade and/or replace identified building support systems for Year 2000
compliance.
Worst Case Exposure
We are aware that it is generally believed that the Year 2000 problem, if
uncorrected, may result in a worldwide economic crisis. We are unable to
determine whether such predictions are true or false. However, if such
predictions prove true, we assume that all companies (including ours) will
experience the effects in one way or another. The most reasonably likely worst
case scenario we anticipate in connection with the Year 2000 issue relates to
the failure of the upgrade to our accounting system to effectively become Year
2000 compliant. We believe that such an event is most unlikely, but an
occurrence of the foregoing might have a material adverse impact on our
operations. We cannot currently assess the financial impact of such a worst case
scenario.
Contingency Plans
We are developing contingency plans to address the Year 2000 non-compliance of
(i) critical building support systems and (ii) our accounting system.
Critical Building Systems. We believe that the failure of any of the
following critical building support systems due to Year 2000 issues could have a
material adverse impact on the performance of an individual building: security
systems, elevator systems or fire/life safety systems. We believe that in the
event of a Year 2000 related failure in a building security system, we would be
able to maintain adequate security at the building through the use of security
guards. We believe that in the event of a Year 2000 related failure in a
building elevator system, adequate access would exist at most of our buildings
through existing stairways. We believe that in the event of a Year 2000 related
failure in a building fire/life safety system, our property management staff
would be able to manually operate such system.
Accounting Software. We believe that failure of the Year 2000 compliance
upgrade to our accounting software might have a material adverse impact on our
operations. However, we believe that financial data within any given fiscal year
will remain intact and retrievable. We believe that alternative accounting
software and/or manual bookkeeping would minimize the impact of a Year 2000
related failure of our current accounting software.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect our results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party vendors and tenants, we are unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on our results of operations, liquidity or financial
condition. The Project is expected to significantly reduce our level of
uncertainty about the Year 2000 problem. We believe that, with the
implementation and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
44
Disclosure Regarding Forward-Looking Statements
The Company considers portions of this information to be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of The Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Approximately $1.3 billion of the Company's long-term debt bears interest at
fixed rates, and therefore the fair value of these instruments is affected by
changes in the market interest rates. The following table presents principal
cash flows (in thousands) based upon maturity dates of the debt obligations and
the related weighted-average interest rates by expected maturity dates for the
fixed rate debt. The interest rate on the variable rate debt as of June 30, 1999
ranged from LIBOR plus 0.65 percent to LIBOR plus 0.90 percent.
June 30, 1999
Long-term debt, Fair
including current portion 1999 2000 2001 2002 2003 Thereafter Total Value
- ------------------------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rate .............. $1,503 $8,755 $ 7,794 $11,637 $211,151 $1,025,342 $1,266,182 $1,237,813
Average Interest Rate ... 7.65% 6.77% 7.27% 7.09% 7.31% 7.27% 7.30%
Variable Rate ........... $8,000 $148,600 $ 72,203 $ 228,803 $ 228,803
45
MACK-CALI REALTY CORPORATION
Part II -- Other Information
Item 1. Legal Proceedings
Reference is made to "Other" in Note 12 (Commitments and Contingencies) to
the Consolidated Financial Statements, which is specifically incorporated
by reference herein.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On May 19, 1999, the Company held its Annual Meeting of Stockholders to
elect four directors to the Board of Directors of the Company, among other
things. At the Annual Meeting, the Shareholders elected the following
Class II directors to serve until the Annual Meeting of Stockholders to be
held in 2002: Nathan Gantcher (Number of shares for: 49,900,926, Number of
shares against: 746,198), Earle I. Mack (Number of shares for: 49,903,860,
Number of shares against: 743,264),William L. Mack (Number of shares for:
49,278,310, Number of shares against: 1,368,814) and Alan G. Philibosian
(Number of shares for: 49,901,769, Number of shares against: 745,355). The
remaining members of the 13 member Board of Directors and their respective
terms of offices are as follows: Class I directors, Brendan T. Byrne,
Martin D. Gruss, Jeffrey B. Lane and Vincent Tese, whose terms expire at
the Annual Meeting of Stockholders to be held in 2001 and Class III
directors, Martin Berger, John J. Cali, Mitchell E. Hersh, Irvin D. Reid
and Roy Zuckerberg, whose terms expire at the Annual Meeting of
Stockholders to be held in 2000. At the Annual Meeting, the stockholders
also voted upon and approved the ratification of the appointment of
PricewaterhouseCoopers LLP, independent accountants, as the Company's
independent accountants for the ensuing year (Number of shares for:
49,870,271, Number of shares against: 36,112, Number of shares abstained:
740,741).
Item 5. Other Information
Not Applicable.
46
MACK-CALI REALTY CORPORATION
Part II -- Other Information (continued)
Item 6 - Exhibits
(a) Exhibits
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed:
Exhibit Number Exhibit Title
- -------------- -------------
3.1 Restated Charter of Mack-Cali Realty Corporation dated June
10, 1999, together with Articles Supplementary thereto (filed
as Exhibit 3.1 to the Company's Form 8-K dated June 10, 1999
and as Exhibit 4.2 to the Company's Form 8-K dated July 6,
1999 and each incorporated herein by reference).
3.2 Amended and Restated Bylaws of Mack-Cali Realty Corporation
dated June 10, 1999 (filed as Exhibit 3.2 to the Company's
Form 8-K dated June 10, 1999 and incorporated herein by
reference).
3.3 Second Amended and Restated Agreement of Limited Partnership
dated December 11, 1997, for Mack-Cali Realty, L.P. (filed as
Exhibit 10.110 to the Company's Form 8-K dated December 11,
1997 and incorporated herein by reference).
3.4 Amendment No. 1 to the Second Amended and Restated Agreement
of Limited Partnership of Mack-Cali Realty, L.P. (filed as
Exhibit 3.1 to the Company's Registration Statement on Form
S-3, Registration No. 333-57103, and incorporated herein by
reference).
3.5 Second Amendment to the Second Amended and Restated Agreement
of Limited Partnership of Mack-Cali Realty, L.P. (filed as
Exhibit 10.2 to the Company's Form 8-K dated July 6, 1999 and
incorporated herein by reference).
4.1 Shareholder Rights Agreement, dated as of July 6, 1999,
between Mack-Cali Realty Corporation and ChaseMellon
Shareholder Services, LLC, as Rights Agent (filed as Exhibit
4.1 to the Company's Form 8-K dated July 6, 1999 and
incorporated herein by reference).
4.2 Indenture dated as of March 16, 1999, by and among Mack-Cali
Realty, L.P., as issuer, Mack-Cali Realty Corporation, as
guarantor, and Wilmington Trust Company, as trustee (filed as
Exhibit 4.1 to the Company's Form 8-K dated March 16, 1999 and
incorporated herein by reference).
4.3 Supplemental Indenture No. 1 dated as of March 16, 1999, by
and among Mack-Cali Realty, L.P., as issuer, and Wilmington
Trust Company, as trustee (filed as Exhibit 4.2 to the
Company's Form 8-K dated March 16, 1999 and incorporated
herein by reference).
4.4 Supplemental Indenture No. 2 dated as of August 2, 1999, by
and among Mack-Cali Realty, L.P., as issuer, and Wilmington
Trust Company, as trustee.
10.1 Note Purchase Agreement dated as of August 2, 1999 by and
among Mack-Cali Realty, L.P. and Teachers Insurance and\
Annuity Association of America.
47
10.2 Amended and Restated Employment Agreement dated as of July 1,
1999 between Mitchell E. Hersh and Mack-Cali Realty
Corporation.
10.3 Second Amended and Restated Employment Agreement dated as of
July 1, 1999 between Timothy M. Jones and Mack-Cali Realty
Corporation.
10.4 Amended and Restated Employment Agreement dated as of July 1,
1999 between John R. Cali and Mack-Cali Realty Corporation.
10.5 Amended and Restated Employment Agreement dated as of July 1,
1999 between Brant Cali and Mack-Cali Realty Corporation.
10.6 Second Amended and Restated Employment Agreement dated as of
July 1, 1999 between Barry Lefkowitz and Mack-Cali Realty
Corporation.
10.7 Second Amended and Restated Employment Agreement dated as of
July 1, 1999 between Roger W. Thomas and Mack-Cali Realty
Corporation.
10.8 Restricted Share Award Agreement dated as of July 1, 1999
between Mitchell E. Hersh and Mack-Cali Realty Corporation.
10.9 Restricted Share Award Agreement dated as of July 1, 1999
between Timothy M. Jones and Mack-Cali Realty Corporation.
10.10 Restricted Share Award Agreement dated as of July 1, 1999
between John R. Cali and Mack-Cali Realty Corporation.
10.11 Restricted Share Award Agreement dated as of July 1, 1999
between Brant Cali and Mack-Cali Realty Corporation.
10.12 Restricted Share Award Agreement dated as of July 1, 1999
between Barry Lefkowitz and Mack-Cali Realty Corporation.
10.13 Restricted Share Award Agreement dated as of July 1, 1999
between Roger W. Thomas and Mack-Cali Realty Corporation.
10.14 Purchase and Sale Agreement dated as of April 28, 1999 between
AT&T Corp. and Mack-Cali Realty Acquisition Corp.
10.15 Purchase and Sale Agreement dated as of June 30, 1999 between
The Equitable Life Assurance Society of the United States and
Mack-Cali Realty Acquisition Corp.
10.16 Credit Agreement, dated as of December 10, 1997, by and among
Cali Realty, L.P. and the other signatories thereto (filed as
Exhibit 10.122 to the Company's Form 8-K dated December 11,
1997 and incorporated herein by reference).
10.17 Amendment No. 1 to Revolving Credit Agreement dated July 20,
1998, by and among Mack-Cali Realty, L.P. and The Chase
Manhattan Bank, Fleet National Bank and Other Lenders Which
May Become Parties Thereto (filed as Exhibit 10.5 to the
Company's Form 10-K dated December 31, 1998 and incorporated
herein by reference).
10.18 Amendment No. 2 to Revolving Credit Agreement dated December
30, 1998, by and among Mack-Cali Realty, L.P. and The Chase
Manhattan Bank, Fleet National Bank and Other Lenders Which
May Become Parties Thereto (filed as Exhibit 10.6 to the
Company's Form 10-K dated December 31, 1998 and incorporated
herein by reference).
48
10.19 Contribution and Exchange Agreement among The MK Contributors,
The MK Entities, The Patriot Contributors, The Patriot
Entities, Patriot American Management and Leasing Corp., Cali
Realty, L.P. and Cali Realty Corporation, dated September 18,
1997 (filed as Exhibit 10.98 to the Company's Form 8-K dated
September 19, 1997 and incorporated herein by reference).
10.20 First Amendment to Contribution and Exchange Agreement, dated
as of December 11, 1997, by and among the Company and the Mack
Group (filed as Exhibit 10.99 to the Company's Form 8-K dated
December 11, 1997 and incorporated herein by reference).
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended June 30, 1999, the Company filed Current Reports
on Form 8-K dated April 19, 1999, May 24, 1999 and June 10, 1999.
49
MACK-CALI REALTY CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mack-Cali Realty Corporation
(Registrant)
Date: August 5, 1999 /s/ Mitchell E. Hersh
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Mitchell E. Hersh
Chief Executive Officer
Date: August 5, 1999 /s/ Barry Lefkowitz
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Barry Lefkowitz
Executive Vice President &
Chief Financial Officer
50