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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
COMMISSION FILE NUMBER: 1-13762
RECKSON OPERATING PARTNERSHIP, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 11-3233647
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
225 BROADHOLLOW ROAD, MELVILLE, NY 11747
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(631) 694-6900
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) YES X NO__, AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES ___ NO _X_.
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RECKSON OPERATING PARTNERSHIP, L.P.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 2004
TABLE OF CONTENTS
INDEX PAGE
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PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004
(unaudited) and December 31, 2003................ 2
Consolidated Statements of Income for the three
and six months ended June 30, 2004 and 2003
(unaudited)...................................... 3
Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and 2003
(unaudited)...................................... 4
Notes to the Consolidated Financial Statements
(unaudited)...................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.... 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...................................... 36
Item 4. Controls and Procedures............................ 37
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PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings.................................. 42
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities.............. 42
Item 3. Defaults Upon Senior Securities.................... 42
Item 4. Submission of Matters to a Vote of Securities
Holders............................................ 42
Item 5. Other Information.................................. 42
Item 6. Exhibits and Reports on Form 8-K................... 42
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SIGNATURES
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
(UNAUDITED)
ASSETS:
Commercial real estate properties, at cost:
Land .......................................... $ 384,137 $ 378,479
Building and improvements ..................... 2,608,867 2,211,566
Developments in progress:
Land .......................................... 95,600 90,706
Development costs ............................. 28,900 68,127
Furniture, fixtures and equipment ................ 11,625 11,338
----------- -----------
3,129,129 2,760,216
Less accumulated depreciation .................... (515,961) (464,382)
----------- -----------
Investment in real estate, net of
accumulated deprecation ....................... 2,613,168 2,295,834
Properties and related assets held for sale,
net of accumulated depreciation ............... 5,069 52,517
Investments in real estate joint ventures ........ 6,462 5,904
Investments in mortgage notes and notes
receivable .................................... 68,433 54,986
Investments in service companies and affiliate
loans and joint ventures ...................... 75,784 75,544
Cash and cash equivalents ........................ 82,670 22,512
Tenant receivables ............................... 11,661 11,929
Deferred rents receivable ........................ 122,672 111,962
Prepaid expenses and other assets ................ 81,626 34,944
Contract and land deposits and
pre-acquisition costs ......................... 60 20,203
Deferred leasing and loan costs .................. 69,573 64,345
----------- -----------
TOTAL ASSETS ..................................... $ 3,137,178 $ 2,750,680
=========== ===========
LIABILITIES:
Mortgage notes payable ........................... $ 965,561 $ 721,635
Liabilities associated with properties held
for sale ...................................... 311 881
Unsecured credit facility ........................ 90,000 169,000
Senior unsecured notes ........................... 549,132 499,445
Accrued expenses and other liabilities ........... 117,227 89,979
Distributions payable ............................ 32,994 28,290
----------- -----------
TOTAL LIABILITIES ................................ 1,755,225 1,509,230
----------- -----------
Minority partners' interests in consolidated
partnerships .................................. 223,405 233,070
----------- -----------
Commitments and contingencies .................... --
PARTNERS' CAPITAL:
Preferred Capital, 8,710,480 and 10,854,162
units outstanding, respectively ............... 225,235 281,690
General Partners' Capital:
Common units, 67,256,850 and 58,275,367
units outstanding, respectively ............ 886,654 682,172
Limited Partners' Capital:
Class A common units, 3,084,713 units
issued and outstanding ..................... 40,484 38,613
Class C common units, 465,854 units issued
and outstanding ............................ 6,175 5,905
----------- -----------
Total Partners' Capital ..................... 1,158,548 1,008,380
----------- -----------
Total Liabilities and Partners' Capital $ 3,137,178 $ 2,750,680
=========== ===========
(see accompanying notes to financial statements)
2
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Property operating revenues:
Base rents ...................................................... $ 109,765 $ 94,141 $ 220,800 $ 188,885
Tenant escalations and reimbursements ........................... 17,478 13,907 35,593 27,943
------------ ------------ ------------ ------------
Total property operating revenues .................................. 127,243 108,048 256,393 216,828
Interest income on mortgage notes and notes receivable
(including $539, $1,045, $1,128 and $2,078, respectively
from related parties) ........................................... 1,876 1,539 3,492 3,010
Investment and other income ........................................ 1,447 3,349 5,494 9,137
------------ ------------ ------------ ------------
TOTAL REVENUES .................................................. 130,566 112,936 265,379 228,975
------------ ------------ ------------ ------------
EXPENSES:
Property operating expenses ........................................ 50,626 42,438 102,091 85,818
Marketing, general and administrative .............................. 7,374 8,795 14,441 16,364
Interest ........................................................... 24,607 20,145 50,268 40,242
Depreciation and amortization ...................................... 29,617 26,983 58,738 55,763
------------ ------------ ------------ ------------
TOTAL EXPENSES .................................................. 112,224 98,361 225,538 198,187
Income before minority interests, preferred distributions,
equity in earnings of real estate joint ventures and
discontinued operations ......................................... 18,342 14,575 39,841 30,788
Minority partners' interests in consolidated partnerships .......... (4,422) (4,062) (10,603) (8,463)
Equity (loss) in earnings of real estate joint ventures ............ 294 (270) 408 (164)
------------ ------------ ------------ ------------
Income before discontinued operations and preferred distributions .. 14,214 10,243 29,646 22,161
Discontinued operations:
Gain on sales of real estate .................................... 3,830 -- 9,342 --
Income from discontinued operations ............................. 99 3,807 588 7,138
------------ ------------ ------------ ------------
Net Income ......................................................... 18,143 14,050 39,576 29,299
Preferred unit distributions ....................................... (4,399) (5,591) (8,932) (11,181)
------------ ------------ ------------ ------------
Net income allocable to common unit holders ........................ $ 13,744 $ 8,459 $ 30,644 $ 18,118
============ ============ ============ ============
Net income allocable to:
Common unit holders ............................................. $ 13,644 $ 6,643 $ 30,411 $ 14,234
Class B common unit holders ..................................... -- 1,816 -- 3,884
Class C common unit holders ..................................... 100 -- 233 --
------------ ------------ ------------ ------------
Total .............................................................. $ 13,744 $ 8,459 $ 30,644 $ 18,118
============ ============ ============ ============
Net income per weighted average common units:
Income from continuing operations ............................... $ .13 $ .07 $ .30 $ .16
Discontinued operations ......................................... .06 .05 .15 .10
------------ ------------ ------------ ------------
Basic net income per common unit ................................ $ .19 $ .12 $ .45 $ .26
============ ============ ============ ============
Class B common - income from continuing operations .............. $ -- $ .10 $ -- $ .24
Discontinued operations ......................................... -- .08 -- .15
------------ ------------ ------------ ------------
Basic net income per Class B common unit ........................ $ -- $ .18 $ -- $ .39
============ ============ ============ ============
Class C common - income from continuing operations .............. $ .15 $ -- $ .34 $ --
Discontinued operations ......................................... .06 -- .16 --
------------ ------------ ------------ ------------
Basic net income per Class C common unit ........................ $ .21 $ -- $ .50 $ --
============ ============ ============ ============
Weighted average common units outstanding:
Common units .................................................... 69,976,809 55,277,219 67,212,309 55,376,642
Class B common units ............................................ -- 9,915,313 -- 9,915,313
Class C common units ............................................ 465,845 -- 465,845 --
(see accompanying notes to financial statements)
3
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ........................................... $ 39,576 $ 29,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (including
discontinued operations) ....................... 59,069 61,887
Gain on sales of real estate ...................... (11,330) --
Minority partners' interests in consolidated
partnerships ................................... 13,136 9,025
(Equity) loss in earnings of real estate
joint ventures ................................. (408) 164
Changes in operating assets and liabilities:
Tenant receivables ................................ 278 6,326
Prepaid expenses and other assets ................. (8,204) (5,988)
Deferred rents receivable ......................... (8,983) (9,207)
Accrued expenses and other liabilities ............ (6,546) (9,149)
--------- ---------
Net cash provided by operating activities ......... 76,588 82,357
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to developments in progress ............. (12,977) (9,732)
Purchase of commercial real estate ................ (72,691) (6,505)
Additions to commercial real estate properties .... (17,802) (25,149)
Additions to furniture, fixtures and equipment .... (288) (94)
Payment of leasing costs .......................... (8,677) (8,765)
Distributions (contributions) from investments
in real estate joint ventures .................. (150) 243
Additions to mortgage notes and notes receivable .. (15,619) --
Repayment of mortgage notes and notes receivable .. 2,691 --
Proceeds from sales of real estate ................ 57,056 --
--------- ---------
Net cash used in investing activities ............. (68,457) (50,002)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of general partner common units ......... -- (4,538)
Principal payments on secured borrowings .......... (6,074) (5,878)
Payment of loan costs ............................. (2,635) (29)
Proceeds from issuance of senior unsecured notes .. 150,000 --
Repayment of senior unsecured notes ............... (100,000) --
Proceeds from unsecured credit facility ........... 90,000 55,000
Repayment of unsecured credit facility ............ (169,000) --
Distributions to minority partners in
consolidated partnerships ...................... (22,800) (11,507)
Contributions ..................................... 176,695 --
Distributions ..................................... (64,659) (71,057)
--------- ---------
Net cash provided by (used in)
financing activities ........................... 51,527 (38,009)
--------- ---------
Net increase in cash and cash equivalents ......... 59,658 (5,654)
Cash and cash equivalents at beginning of period .. 23,012 30,576
--------- ---------
Cash and cash equivalents at end of period ........ $ 82,670 $ 24,922
========= =========
(see accompanying notes to financial statements)
4
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
Reckson Operating Partnership, L.P. (The "Operating Partnership") commenced
operations on June 2, 1995. Reckson Associates Realty Corp. (the "Company"),
which serves as the sole general partner of the Operating Partnership, is a
fully integrated, self administered and self managed real estate investment
trust ("REIT"). The Operating Partnership and the Company (collectively the
"Company") were formed for the purpose of continuing the commercial real estate
business of Reckson Associates, the predecessor of the Operating Partnership,
its affiliated partnerships and other entities.
The Operating Partnership is engaged in the ownership, management, operation,
leasing and development of commercial real estate properties, principally office
and to a lesser extent industrial buildings and also owns land for future
development (collectively, the "Properties") located in the New York City
tri-state area (the "Tri-State Area").
The Company was incorporated in Maryland in September 1994. In June 1995, the
Company completed an initial public offering (the "IPO") and commenced
operations.
The Company became the sole general partner of Reckson Operating Partnership,
L.P. (the "Operating Partnership") by contributing substantially all of the net
proceeds of the IPO in exchange for an approximate 73% interest in the Operating
Partnership. At June 30, 2004, the Company's ownership percentage in the
Operating Partnership was approximately 94.8%. All Properties acquired by the
Company are held by or through the Operating Partnership. In conjunction with
the IPO, the Operating Partnership executed various option and purchase
agreements whereby it issued common units of limited partnership interest in the
Operating Partnership ("OP Units") to certain continuing investors in exchange
for (i) interests in certain property partnerships, (ii) fee simple and
leasehold interests in properties and development land, (iii) certain other
business assets and (iv) 100% of the non-voting preferred stock of Reckson
Management Group, Inc. and Reckson Construction Group, Inc.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Company, the Operating Partnership and the Service
Companies (as defined below) at June 30, 2004 and December 31, 2003 and the
results of their operations for the three and six months ended June 30, 2004 and
2003, respectively, and, their cash flows for the six months ended June 30, 2004
and 2003, respectively. The Operating Partnership's investments in majority
owned and controlled real estate joint ventures are reflected in the
accompanying financial statements on a consolidated basis with a reduction for
the minority partners' interest. The Operating Partnership also invests in real
estate joint ventures where it may own less than a controlling interest. Such
investments are reflected in the accompanying financial statements under the
equity method of accounting. The Service Companies which provide management,
development and construction services to the Company and the Operating
Partnership are Reckson Management Group, Inc., RANY Management Group, Inc.,
Reckson Construction Group New York, Inc., Reckson Construction Group, Inc. and
Reckson Construction & Development LLC (the "Service Companies"). All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.
Reckson Construction Group, Inc., Reckson Construction Group New York, Inc. and
Reckson Construction & Development LLC use the percentage-of-completion method
for recording amounts earned on their contracts. This method records amounts
earned as revenue in the proportion that actual costs incurred to date bear to
the estimate of total costs at contract completion.
Minority partners' interests in consolidated partnerships represent a 49%
non-affiliated interest in RT Tri-State LLC, owner of a seven property suburban
office portfolio, a 40% non-affiliated interest in Omni Partners, L.P., owner of
a 579,000 square foot suburban office property and a 49% non-affiliated interest
in Metropolitan 919 Third Avenue, LLC, owner of the property located at 919
Third Avenue, New York, NY.
The Operating Partnership follows the guidance provided for under the Financing
Accounting Standards Board ("FASB") Statement No. 66, "Accounting for Sales of
Real Estate" ("Statement No. 66"), which provides guidance on sales contracts
that are accompanied by agreements which require the seller to develop the
property in the future. Under Statement No. 66 profit is recognized and
allocated to the sale of the land and the later development or construction work
on the basis of estimated costs of each activity; the same rate of profit is
attributed to each activity. As a result, profits are recognized and reflected
over the improvement period on the basis of costs incurred (including land) as a
percentage of total costs estimated to be incurred. The Operating Partnership
uses the percentage of completion method, as the future costs of development and
profit are reliably estimated.
5
The accompanying interim unaudited financial statements have been prepared by
the Operating Partnership's management pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") may
have been condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate to not make the
information presented misleading. The unaudited financial statements as of June
30, 2004 and for the three and six month periods ended June 30, 2004 and 2003
include, in the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the financial information set
forth herein. The results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. These financial statements should be read in conjunction with
the Operating Partnership's audited financial statements and the notes thereto
included in the Operating Partnership's Form 10-K for the year ended December
31, 2003.
The Company intends to continue to qualify as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT,
the Company will not generally be subject to corporate Federal income taxes as
long as it satisfies certain technical requirements of the Code relating to
composition of its income and assets and requirements relating to distributions
of taxable income to shareholders.
The Operating Partnership considers highly liquid investments with maturity of
six months or less when purchased to be cash equivalents. Cash balances at June
30, 2004 include approximately $46.5 million of the remaining net proceeds
received during the six month period ended June 30, 2004 relating to property
sales, issuance of the Company's equity (see Note 7) and the Operating
Partnership's January 2004 issuance of senior unsecured notes (see Note 4).
Certain prior period amounts have been reclassified to conform to the current
period presentation.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement No. 144 provides
accounting guidance for financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement No. 144 supersedes Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". It also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
related to the disposal of a segment of a business. The Operating Partnership
adopted Statement No. 144 on January 1, 2002. The adoption of this statement did
not have a material effect on the results of operations or the financial
position of the Operating Partnership. The adoption of Statement No. 144 does
not have an impact on net income allocable to common shareholders. Statement No.
144 only impacts the presentation of the results of operations and gain on sales
of depreciable real estate assets for those properties sold or held for sale
during the period within the consolidated statements of income.
On July 1, 2001 and January 1, 2002, the Operating Partnership adopted FASB
Statement No.141, "Business Combinations" and FASB Statement No. 142, "Goodwill
and Other Intangibles", respectively. As part of the acquisition of real estate
assets, the fair value of the real estate acquired is allocated to the acquired
tangible assets, consisting of land, building and building improvements, and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, other value of in-place leases, and value
of tenant relationships, based in each case on their fair values. The Operating
Partnership assesses fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and available market
information. Estimates of future cash flows are based on a number of factors
including the historical operating results, known trends, and market/economic
conditions that may affect the property. If the Operating Partnership
incorrectly estimates the values at acquisition or the undiscounted cash flows,
initial allocation of purchase price and future impairment charges may be
different.
6
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes the current
practice in the accounting for, and disclosure of, guarantees. Guarantees and
indemnification agreements meeting the characteristics described in FIN 45 are
required to be initially recorded as a liability at fair value. FIN 45 also
requires a guarantor to make significant new disclosures for virtually all
guarantees even if the likelihood of the guarantor having to make payment under
the guarantee is remote. The disclosure requirements within FIN 45 are effective
for financial statements for annual or interim periods ending after December 15,
2002. The initial recognition and initial measurement provisions are applicable
on a prospective basis to guarantees issued or modified after December 31, 2002.
The Operating Partnership adopted FIN 45 on January 1, 2003. The adoption of
this interpretation did not have a material effect on the results of operations
or the financial position of the Operating Partnership.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which explains how to identify variable
interest entities ("VIEs") and how to assess whether to consolidate such
entities. The initial determination of whether an entity qualifies as a VIE
shall be made as of the date at which a primary beneficiary becomes involved
with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for
VIEs formed after January 31, 2003. In December 2003 the FASB issued FIN 46R,
deferring the effective date until the period ending March 31, 2004 for
interests held by public companies in VIEs created before February 1, 2003,
which were non-special purpose entities. The Operating Partnership adopted FIN
46R during the period ended March 31, 2004. The Operating Partnership has
determined that its consolidated and unconsolidated subsidiaries do not
represent VIEs requiring consolidation pursuant to such interpretation. The
Operating Partnership will continue to monitor any changes in circumstances
relating to certain of its consolidated and unconsolidated joint ventures which
could result in a change in the Operating Partnership's consolidation policy.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("Statement No. 150"). Statement No. 150 is effective for financial instruments
entered into or modified after May 15, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
The adoption of Statement No. 150 did not have a material effect on the
Operating Partnership's financial position or results of operations.
7
3. MORTGAGE NOTES PAYABLE
As of June 30, 2004, the Operating Partnership had approximately $965.6 million
of mortgage notes payable, which mature at various times between 2004 and 2027.
The notes are secured by 20 properties with an aggregate carrying value of
approximately $1.84 billion which are pledged as collateral against the mortgage
notes payable. In addition, approximately $43.5 million of the $965.6 million is
recourse to the Operating Partnership and certain of the mortgage notes payable
are guaranteed by certain limited partners in the Operating Partnership and / or
the Company.
The following table sets forth the Operating Partnership's mortgage notes
payable as of June 30, 2004, by scheduled maturity date (dollars in thousands):
Principal Interest Maturity Amortization
Property Outstanding Rate Date Term (Years)
- ------------------------------------------------ ---------------- ------------ --------------- ------------------
1185 Avenue of the Americas, NY, NY $ 250,000 4.95% August, 2004 Interest only
395 North Service Road, Melville, NY 19,097 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 18,704 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 73,431 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 43,465 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 16,981 8.50% April, 2007 15
333 Earle Ovington Blvd, Mitchel Field, NY (b) 52,343 7.72% August, 2007 25
810 Seventh Avenue, NY, NY (e) 80,498 7.73% August, 2009 25
100 Wall Street, NY, NY (e) 34,883 7.73% August, 2009 25
6900 Jericho Turnpike, Syosset, NY 7,165 8.07% July, 2010 25
6800 Jericho Turnpike, Syosset, NY 13,576 8.07% July, 2010 25
580 White Plains Road, Tarrytown, NY 12,365 7.86% September, 2010 25
919 Third Ave, NY, NY (c) 242,904 6.87% August, 2011 30
One Orlando Center, Orlando, FL (d) 37,439 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 62,710 6.82% November, 2027 28
--------------
Total/Weighted Average $ 965,561 6.65%
==============
- ------------------------
(a) Encompasses six Class A office properties.
(b) The Operating Partnership has a 60% general partnership interest in this
property and its proportionate share of the aggregate principal amount is
approximately $31.4 million.
(c) The Operating Partnership has a 51% membership interest in this property
and its proportionate share of the aggregate principal amount is
approximately $123.9 million.
(d) Subject to interest rate adjustment on November 1, 2004 to the greater of
8.82% per annum or the yield on non-callable U.S. treasury obligations
with a term of fifteen years plus 2% per annum. The Operating Partnership
has the ability to pre-pay the loan at that time. In addition, these
properties are cross-collateralized.
(e) These properties are cross-collateralized.
(f) Such rate is based on the greater of one month LIBOR or 2.15% plus a
weighted average spread of approximately 2.80%. An interest rate hedge
agreement was acquired to limit exposure to increases in LIBOR above
5.825%.
In addition, the Operating Partnership has a 60% interest in an unconsolidated
joint venture property. The Operating Partnership's share of the mortgage debt
at June 30, 2004 is approximately $7.6 million. This mortgage note payable bears
interest at 8.85% per annum and matures on September 1, 2005 at which time the
Operating Partnership's share of the mortgage debt will be approximately $6.9
million.
On March 19, 2004, the Operating Partnership entered into two anticipatory
interest rate hedge instruments, which are scheduled to coincide with an August
2004 debt maturity, totaling $100 million, to protect itself against potentially
rising interest rates. At June 30, 2004, the fair value of these instruments
exceeded their carrying value by approximately $5.2 million. Such amount has
been reflected as accumulated other comprehensive income with a corresponding
increase to prepaid expenses and other assets on the accompanying balance sheet.
In addition, on July 1, 2004, the Operating Partnership entered into an
additional anticipatory interest rate hedge instrument totaling $12.5 million to
coincide with the aforementioned August 2004 debt maturity.
8
4. SENIOR UNSECURED NOTES
On January 22, 2004, the Operating Partnership issued $150 million of seven-year
5.15% (5.196% effective rate) senior unsecured notes. Prior to the issuance of
these notes the Operating Partnership entered into several anticipatory interest
rate hedge instruments to protect itself against potentially rising interest
rates. At the time the notes were issued the Operating Partnership incurred a
net cost of approximately $980,000 to settle these instruments. Such costs are
being amortized over the term of the notes. Net proceeds of approximately $148
million received from this issuance were used to repay outstanding borrowings
under the Credit Facility (as defined below) and to invest in short-term liquid
investments.
On March 15, 2004, the Operating Partnership repaid $100 million of the
Operating Partnership's 7.4% senior unsecured notes at maturity.
As of June 30, 2004, the Operating Partnership had outstanding approximately
$549.1 million (net of issuance discounts) of senior unsecured notes (the
"Senior Unsecured Notes"). The following table sets forth the Operating
Partnership's Senior Unsecured Notes and other related disclosures by scheduled
maturity date (dollars in thousands):
FACE
ISSUANCE AMOUNT COUPON RATE TERM MATURITY
- ----------------- -------------- -------------- ----------- ----------------
June 17, 2002 $ 50,000 6.00% 5 years June 15, 2007
August 27, 1997 150,000 7.20% 10 years August 28, 2007
March 26, 1999 200,000 7.75% 10 years March 15, 2009
January 22, 2004 150,000 5.15% 7 years January 15, 2011
----------
$ 550,000
==========
Interest on the Senior Unsecured Notes are payable semi-annually with principal
and unpaid interest due on the scheduled maturity dates. In addition, certain of
the Senior Unsecured Notes were issued at discounts aggregating approximately
$1.2 million. Such discounts are being amortized over the term of the Senior
Unsecured Notes to which they relate.
5. UNSECURED CREDIT FACILITY
As of June 30, 2004, the Operating Partnership had a $500 million unsecured
revolving credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association, as syndication
agent, and Citicorp North America, Inc. and Wachovia Bank, National Association,
as co-documentation agents. The Credit Facility was scheduled to mature in
December 2005, contained options for a one-year extension subject to a fee of 25
basis points and, upon receiving additional lender commitments, increasing the
maximum revolving credit amount to $750 million. As of June 30, 2004, based on a
pricing grid of the Operating Partnership's unsecured debt ratings, borrowings
under the Credit Facility were priced off LIBOR plus 90 basis points and the
Credit Facility carried a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's unsecured credit ratings the
interest rates and facility fee are subject to change. At June 30, 2004, the
outstanding borrowings under the Credit Facility aggregated $90 million and
carried a weighted average interest rate of 2.18%.
On August 6, 2004, the Operating Partnership amended and extended the Credit
Facility to mature in August 2007 with similar terms and conditions as existed
prior to the amendment and extension.
The Operating Partnership utilizes the Credit Facility primarily to finance real
estate investments, fund its real estate development activities and for working
capital purposes. At June 30, 2004, the Operating Partnership had availability
under the Credit Facility to borrow approximately an additional $410 million,
subject to compliance with certain financial covenants.
In connection with the acquisition of certain properties, contributing partners
of such properties have provided guarantees on indebtedness of the Operating
Partnership. As a result, the Operating Partnership maintains certain
outstanding balances on its Credit Facility.
In accordance with the provisions of FASB Statement No. 144, the Operating
Partnership allocated approximately $2.6 million and $5.2 million of its
unsecured corporate interest expense to discontinued operations for the three
and six month periods ended June 30, 2003.
9
COMMERCIAL REAL ESTATE INVESTMENTS
As of June 30, 2004, the Operating Partnership owned and operated 76 office
properties (inclusive of nine office properties owned through joint ventures)
comprising approximately 14.4 million square feet and 9 industrial / R&D
properties comprising approximately 955,000 square feet located in the Tri-State
Area.
In June, 2004 the Operating Partnership entered into a contract to sell a 92,000
square foot industrial property located in Westchester for approximately $7.5
million. The Operating Partnership's basis in this property is approximately
$4.8 million and is included in properties and related assets held for sale on
the accompanying balance sheet.
As of June 30, 2004, the Operating Partnership also owned approximately 313
acres of land in 12 separate parcels of which the Operating Partnership can,
based on current estimates, develop approximately 3.0 million square feet of
office space. The Operating Partnership is currently evaluating alternative land
uses for certain of the land holdings to realize the highest economic value.
These alternatives may include rezoning certain land parcels from commercial to
residential use for potential disposition. As of June 30, 2004, the Operating
Partnership had invested approximately $124.5 million in these development
projects. Management has made subjective assessments as to the value and
recoverability of these investments based on current and proposed development
plans, market comparable land values and alternative use values. In addition,
during the three and six month periods ended June 30, 2004, the Operating
Partnership has capitalized approximately $2.3 million and $5.1 million,
respectively related to real estate taxes, interest and other carrying costs
related to these development projects. In October 2003, the Operating
Partnership entered into a contract to sell a 113 acre land parcel located in
New Jersey. The contract provides for a sales price ranging from $18 million to
$36 million. The sale is contingent upon obtaining zoning for residential use of
the land and other customary approvals. The proceeds ultimately received from
such sale will be based upon the number of residential units permitted by the
rezoning. The cost basis of the land parcel at June 30, 2004 was approximately
$5.7 million. The closing is scheduled to occur upon the rezoning, which is
anticipated to occur within 12 to 24 months. However, there can be no assurances
such rezoning will occur. During February 2004, a 3.9 acre land parcel located
on Long Island was condemned by the Town of Oyster Bay. As consideration for the
condemnation the Operating Partnership anticipates it will initially receive
approximately $1.8 million. The Operating Partnership's cost basis in this land
parcel was approximately $1.4 million. The Operating Partnership is currently
contesting this valuation and seeking payment of additional consideration from
the Town of Oyster Bay but there can be no assurances that the Operating
Partnership will be successful in obtaining any such additional consideration.
In July 2004, the Operating Partnership commenced the ground-up development of a
277,000 square foot Class A office building with a total anticipated investment
cost of approximately $60 million. This development is located within the
Operating Partnership's existing 404,000 square foot executive office park in
Melville, NY.
In November 2003, the Operating Partnership disposed of all but three of its 95
property, 5.9 million square foot, Long Island industrial building portfolio to
members of the Rechler family (the "Disposition") for approximately $315.5
million, comprised of $225.1 million in cash and debt assumption and 3,932,111
OP Units valued at approximately $90.4 million. Approximately $204 million of
cash sales proceeds from the Disposition were used to repay borrowings under the
Credit Facility. For information concerning certain litigation pertaining to
this transaction see Part II-Other Information; Item 1. Legal Proceedings of
this Form 10-Q.
In January 2004, the Operating Partnership sold a 104,000 square foot office
property located on Long Island for approximately $18.5 million. Net proceeds
from the sale were used to repay borrowings under the Credit Facility. As a
result, the Operating Partnership recorded a net gain of approximately $5.5
million. In accordance with FASB Statement No. 144, such gain has been reflected
in discontinued operations on the accompanying consolidated statements of
income.
In January 2004, the Operating Partnership acquired 1185 Avenue of the Americas,
a 42-story, 1.1 million square foot Class A office tower, located between 46th
and 47th Streets in New York, NY for $321 million. In connection with this
acquisition, the Operating Partnership assumed a $202 million mortgage and $48
million of mezzanine debt. The balance of the purchase price was paid through an
advance under the Credit Facility. The floating rate mortgage and mezzanine debt
both mature in August 2004 and presently have a weighted average interest rate
of 4.95%. Such rate is based on the greater of one month LIBOR or 2.15% plus a
weighted average spread of approximately 2.80%. An interest rate hedge agreement
was acquired to limit exposure to increases in LIBOR above 5.825%. The property
is also encumbered by a ground lease which has a remaining term of approximately
40 years with rent scheduled to be re-set at the end of 2005 and then remain
constant for the balance of the term. Pursuant to the terms of the ground lease,
the Operating Partnership and the ground lessor have commenced arbitration
proceedings relating to the re-setting of the ground lease. There can be no
assurances as to the outcome of the rent re-set process. In accordance with FASB
Statement No. 141, "Business Combinations", the Operating Partnership allocated
and recorded net deferred intangible lease income of approximately $14.2
million, representing the net value of acquired above and below market leases,
assumed lease origination costs and other value of in-place leases. The net
value of the above and below market leases is amortized over the remaining terms
of the respective leases to rental income which amounted to approximately $2.0
million and $3.8 million for the three and six month periods ended June 30,
2004. In addition, amortization expense on the value of lease origination costs
was approximately $746,000 and $1.3 million for the three and six month periods
ended June 30, 2004. At acquisition, there were 31 in-place leases aggregating
approximately one million square feet with a weighted average remaining lease
term of approximately 6 years.
10
In April 2004, the Operating Partnership sold a 175,000 square foot office
building located on Long Island for approximately $30 million, of which the
Operating Partnership owned a 51% interest, and a wholly owned 9,000 square foot
retail property for approximately $2.8 million. In addition, the Operating
Partnership completed the sale on two of the remaining three properties from the
Disposition for approximately $5.8 million. Proceeds from the sale were used to
establish an escrow account with a qualified intermediary for a future exchange
of real property pursuant to Section 1031 of the Code (a "Section 1031
Exchange"). A Section 1031 Exchange allows for the deferral of taxes related to
the gain attributable to the sale of property if qualified replacement property
is identified within 45 days and such qualified replacement property is then
acquired within 180 days from the initial sale. There can be no assurances that
the Operating Partnership will meet the requirements of Section 1031 by
identifying and acquiring qualified replacement properties in the required time
frame, in which case the Operating Partnership would incur the tax liability on
the capital gain realized of approximately $1.5 million. The disposition of the
other industrial property, which is subject to certain environmental issues, is
conditioned upon the approval of the buyer's lender, which has not been
obtained. As a result, the Operating Partnership will not dispose of this
property as part of the Disposition. Management believes that the cost to
remediate the environmental issues will not have a material adverse effect on
the Operating Partnership, but there can be no assurance in this regard.
In July 2004, the Operating Partnership acquired a 141,000 square foot Class A
office property, located in Chatham Township, NJ for approximately $22.7
million. The Operating Partnership made this acquisition through available
cash-on-hand.
During February 2003, the Operating Partnership, through Reckson Construction
Group, Inc., entered into a contract with an affiliate of First Data Corp. to
sell a 19.3-acre parcel of land located in Melville, New York and was retained
by the purchaser to develop a build-to-suit 195,000 square foot office building
for aggregate consideration of approximately $47 million. This transaction
closed on March 11, 2003 and development of the aforementioned office building
has been completed. In accordance with FASB Statement No. 66, the Operating
Partnership has recognized a book gain, before taxes, on this land sale and
build-to-suit transaction of approximately $23.8 million, of which $400,000 and
$5.0 million and, $4.3 million and $10.1 million has been recognized during the
three and six month periods ended June 30, 2004 and 2003, respectively, and is
included in investment and other income on the accompanying consolidated
statements of income.
The Operating Partnership holds a $17.0 million note receivable, which bears
interest at 12% per annum and is secured by a minority partnership interest in
Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class A office
property located in Uniondale, New York (the "Omni Note"). The Operating
Partnership currently owns a 60% majority partnership interest in Omni Partners,
L.P. and on March 14, 2007 may exercise an option to acquire the remaining 40%
interest for a price based on 90% of the fair market value of the property. The
Operating Partnership also holds a $30 million junior mezzanine loan which is
secured by a pledge of an indirect ownership interest of an entity which owns
the ground leasehold estate under a 1.1 million square foot office complex
located on Long Island, New York (the "Mezz Note"). The Mezz Note matures in
September 2005, currently bears interest at 12.73%, and the borrower has the
right to extend for three additional one-year periods. The Operating Partnership
also holds three other notes receivable aggregating $19.0 million which bear
interest at rates ranging from 10.5% to 12% per annum. These notes are secured
in part by a minority partner's preferred unit interest in the Operating
Partnership, an interest in real property and a personal guarantee (the "Other
Notes" and collectively with the Omni Note and the Mezz Note, the "Note
Receivable Investments"). During April 2004, approximately $2.7 million of the
Other Notes, including accrued interest, were repaid by the minority partner
exchanging, and the Operating Partnership redeeming, approximately 3,081
preferred units. The preferred units were redeemed at a par value of $3.1
million. Approximately $420,000 of the redemption proceeds was used to offset
interest due from the minority partner under the Other Notes and for prepaid
interest. In July 2004, the minority partner delivered notice to the Operating
Partnership stating his intention to repay $15.5 million of the 10.5% Other
Notes. When repaid, the remaining Other Notes will aggregate $3.5 million and
carry a weighted average interest rate of 11.57%. The Operating Partnership has
also agreed to extend the maturity of $2.5 million of such debt through January
31, 2005 and the remaining $1.0 million through January 31, 2010. As of June 30,
2004, management has made subjective assessments as to the underlying security
value on the Operating Partnership's Note Receivable Investments. These
assessments indicate an excess of market value over the carrying value related
to the Operating Partnership's Note Receivable Investments. Based on these
assessments the Operating Partnership's management believes there is no
impairment to the carrying value related to the Operating Partnership's Note
Receivable Investments.
The Operating Partnership also owns a 355,000 square foot office building in
Orlando, Florida. This non-core real estate holding was acquired in May 1999 in
connection with the Operating Partnership's initial New York City portfolio
acquisition. This property is cross-collateralized under a $100.1 million
mortgage note payable along with one of the Operating Partnership's New York
City buildings. The Operating Partnership has the right to prepay this note in
November 2004, prior to its maturity.
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. As of June 30, 2004, the 520JV had
total assets of $20.6 million, a mortgage note payable of $11.7 million and
other liabilities of $582,000. The Operating Partnership's allocable share of
the 520JV mortgage note payable is approximately $7.6 million. This mortgage
note payable bears interest at 8.85% per annum and matures on September 1, 2005.
The operating agreement of the 520JV requires joint decisions from all members
on all significant operating and capital decisions including sale of the
property, refinancing of the property's mortgage debt, development and approval
of leasing strategy and leasing of rentable space. As a result of the
decision-making participation relative to the operations of the property, the
Operating Partnership accounts for the 520JV under the equity method of
accounting. In accordance with the equity method of accounting the
11
Operating Partnership's proportionate share of the 520JV income (loss) was
approximately $294,000 and $408,000 and $(270,000) and $($164,000) for the three
and six month periods ended June 30, 2004 and 2003, respectively.
During September 2000, the Operating Partnership formed a joint venture (the
"Tri-State JV") with Teachers Insurance and Annuity Association ("TIAA") and
contributed nine Class A suburban office properties aggregating approximately
1.5 million square feet to the Tri-State JV for a 51% majority ownership
interest. TIAA contributed approximately $136 million for a 49% interest in the
Tri-State JV which was then distributed to the Operating Partnership. In August
2003, the Operating Partnership acquired TIAA's 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, for approximately $12.4 million.
In addition, during April 2004, the Tri-State JV sold a 175,000 square foot
office building located on Long Island for approximately $30 million. Net
proceeds from this sale were distributed to the members of the Tri-State JV. As
a result of these transactions, the Tri-State JV owns seven Class A suburban
office properties aggregating approximately 1.2 million square feet. The
Operating Partnership is responsible for managing the day-to-day operations and
business affairs of the Tri-State JV and has substantial rights in making
decisions affecting the properties such as leasing, marketing and financing. The
minority member has certain rights primarily intended to protect its investment.
For purposes of its financial statements the Operating Partnership consolidates
the Tri-State JV.
On December 21, 2001, the Operating Partnership formed a joint venture with the
New York State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby
NYSTRS acquired a 49% indirect interest in the property located at 919 Third
Avenue, New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Operating Partnership. The Operating
Partnership is responsible for managing the day-to-day operations and business
affairs of the 919JV and has substantial rights in making decisions affecting
the property such as developing a budget, leasing and marketing. The minority
member has certain rights primarily intended to protect its investment. For
purposes of its financial statements the Operating Partnership consolidates the
919JV.
7. STOCKHOLDERS' EQUITY
An OP Unit and a share of common stock have essentially the same economic
characteristics as they effectively share equally in the net income or loss and
distributions of the Operating Partnership. Subject to certain holding periods,
OP Units may either be redeemed for cash or, at the election of the Company,
exchanged for shares of common stock of the Company on a one-for-one basis. The
OP Units currently receive a quarterly distribution of $.4246 per unit. As of
June 30, 2004, the Operating Partnership had issued and outstanding 3,084,713
Class A OP Units and 465,845 Class C OP Units. The Class C OP Units were issued
in August 2003 in connection with the contribution of real property to the
Operating Partnership and currently receive a quarterly distribution of $.4664
per unit
During June, 2004, the Operating Partnership declared the following
distributions:
RECORD PAYMENT THREE MONTHS ANNUALIZED
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
-------- ------------ ---- ---- ----- ------------
Common unit $ .4246 July 7, 2004 July 20, 2004 June 30, 2004 $ 1.6984
Class C common unit $ .4664 July 7, 2004 July 20, 2004 June 30, 2004 $ 1.8656
Series A preferred stock $ .4766 July 15, 2004 August 2, 2004 July 31, 2004 $ 1.9063
On November 25, 2003 the Company exchanged all of its 9,915,313 outstanding
shares of Class B common stock for an equal number of shares of the Company's
common stock. The Board of Directors declared a final cash dividend on the
Company's Class B common stock to holders of record on November 25, 2003 in the
amount of $.1758 per share which was paid on January 12, 2004. This payment
covered the period from November 1, 2003 through November 25, 2003 and was based
on the previous quarterly Class B common stock dividend rate of $.6471 per
share. In order to align the regular quarterly dividend payment schedule of the
former holders of Class B common stock with the schedule of the holders of
common stock for periods subsequent to the exchange date for the Class B common
stock, the Board of Directors also declared a cash dividend with regard to the
common stock to holders of record on October 14, 2003 in the amount of $.2585
per share which was paid on January 12, 2004. This payment covered the period
from October 1, 2003 through November 25, 2003 and was based on the current
quarterly common stock dividend rate of $.4246 per share. As a result, the
Company declared dividends through November 25, 2003 to all holders of common
stock and Class B common stock. The Board of Directors also declared the common
stock cash dividend for the portion of the fourth quarter subsequent to November
25, 2003. The holders of record of common stock on January 2, 2004, giving
effect to the exchange transaction, received a dividend on the common stock in
the amount of $.1661 per share on January 12, 2004. This payment covered the
period from November 26, 2003 through December 31, 2003 and was based on the
current quarterly common stock dividend rate of $.4246 per share. In connection
with the Company's exchange of its Class B common stock, the Operating
Partnership exchanged its Class B common units held by the Company for an equal
number of OP Units. Further, with respect to the foregoing declarations on
dividends on the Company's common and Class B common stock, the Operating
Partnership made distributions on its OP Units and Class B common units in like
amounts on the same dates.
During the six month period ended June 30, 2004, approximately 1.3 million
shares of the Company's common stock was issued in connection with the exercise
of outstanding options to purchase stock under its stock option plans resulting
in proceeds to the Company of approximately $27.2 million. Such proceeds were
then contributed to the Operating Partnership in exchange for an equal number of
OP Units.
12
In March 2004, the Company completed an equity offering of 5.5 million shares of
its common stock raising approximately $149.5 million, net of an underwriting
discount, or $27.18 per share. Net proceeds received from this transaction were
used to repay outstanding borrowings under the Credit Facility, repay $100
million of the Operating Partnership's 7.4% senior unsecured notes and to invest
in short-term liquid investments.
The Board of Directors of the Operating Partnership authorized the purchase of
up to five million shares of the Company's common stock. Transactions conducted
on the New York Stock Exchange have been, and will continue to be, effected in
accordance with the safe harbor provisions of the Securities Exchange Act of
1934 and may be terminated by the Company at any time. Since the Board's initial
authorization, the Company has purchased 3,318,600 shares of its common stock
for an aggregate purchase price of approximately $71.3 million. In June 2004,
the Board of Directors re-set the Company's common stock repurchase program back
to five million shares. No purchases were made during the six months ended June
30, 2004.
The Board of Directors of the Company also formed a pricing committee to
consider purchases of up to $75 million of the Company's outstanding preferred
securities.
On June 30, 2004, the Company had issued and outstanding 8,693,900 shares of
7.625% Series A Convertible Cumulative Preferred Stock (the "Series A preferred
stock"). The Series A preferred stock is redeemable by the Company on or after
April 13, 2004 at a price of $25.7625 per share with such price decreasing, at
annual intervals, to $25.00 per share on April 13, 2008. In addition, the Series
A preferred stock, at the option of the holder, is convertible at any time into
the Company's common stock at a price of $28.51 per share. On May 13, 2004, the
Company purchased and retired 140,600 shares of the Series A preferred stock for
approximately $3.4 million or $24.45 per share. In addition, during July 2004,
the Company exchanged 1,350,000 shares of the Series A preferred stock for
1,304,602 shares of its common stock. In connection with the Company purchasing
and exchanging its Series A preferred stock, the Operating Partnership purchased
and exchanged its Series A preferred units with the Company. As a result of
these transactions annual preferred distributions will decrease by approximately
$2.8 million. In accordance with the Emerging Issues Task Force ("EITF") Topic
D-42 the Operating Partnership will incur an accounting charge during the third
quarter of 2004 of approximately $3.4 million in connection with the July 2004
exchange of the Company's Series A preferred stock.
On January 1, 2004, the Company had issued and outstanding two million shares of
Series B Convertible Cumulative Preferred Stock (the "Series B preferred
stock"). The Series B preferred stock was redeemable by the Company as follows:
(i) on or after June 3, 2003 to and including June 2, 2004, at $25.50 per share
and (ii) on or after June 3, 2004 and thereafter, at $25.00 per share. The
Series B preferred stock, at the option of the holder, was convertible at any
time into the Company's common stock at a price of $26.05 per share. On January
16, 2004, the Company exercised its option to redeem the two million shares of
outstanding Series B preferred stock for approximately 1,958,000 shares of its
common stock. In connection with the Company exercising its option to redeem the
Series B Preferred Stock, the Operating Partnership redeemed its Series B
preferred units with the Company for approximately 1,958,000 OP Units. As a
result of this redemption annual preferred distributions will decrease by
approximately $4.4 million.
On April 1, 2004, the Operating Partnership had issued and outstanding
approximately 19,662 preferred units of limited partnership interest with a
liquidation preference value of $1,000 per unit and a current annualized
distribution of $55.60 per unit (the "Preferred Units"). The Preferred Units are
held by a third party and were issued in 1998 in connection with the
contribution of real property to the Operating Partnership. On April 12, 2004,
the Operating Partnership redeemed approximately 3,081 Preferred Units, at the
election of the holder, for approximately $3.1 million, including accrued and
unpaid dividends which is being applied to amounts owed from the unit holder
under the Other Notes. In addition, during July 2004, the holder of
approximately 15,381 of the outstanding Preferred Units exchanged them into OP
Units. The Operating Partnership converted the Preferred Units, including
accrued and unpaid dividends, into approximately 531,000 OP Units, which were
valued at approximately $14.7 million at the time of the conversion. Subsequent
to the conversion, the OP Units were exchanged for an equal number of shares of
the Company's common stock. In connection with the July 2004 exchanges and
conversions, the preferred unit holder delivered notice to the Operating
Partnership of his intent to repay $15.5 million owed from the unit holder under
the Other Notes.
The Company had historically structured long term incentive programs ("LTIP")
using restricted stock and stock loans. In July 2002, as a result of certain
provisions of the Sarbanes Oxley legislation, the Operating Partnership
discontinued the use of stock loans in its LTIP. In connection with LTIP grants
made prior to the enactment of the Sarbanes Oxley legislation the Company made
stock loans to certain executive and senior officers to purchase 487,500 shares
of its common stock at market prices ranging from $18.44 per share to $27.13 per
share. The stock loans were set to bear interest at the mid-term Applicable
Federal Rate and were secured by the shares purchased. Such stock loans
(including accrued interest) were scheduled to vest and be ratably forgiven each
year on the anniversary of the grant date based upon vesting periods ranging
from four to ten years based on continued service and in part on attaining
certain annual performance measures. These stock loans had an initial aggregate
weighted average vesting period of approximately nine years. As of June 30,
2004, there remains 222,429 shares of common stock subject to the original stock
loans which are anticipated to vest between 2005 and 2011. Approximately
$248,000 and $556,000 of compensation expense was recorded for the three and six
month periods ended June 30, 2004, respectively related to these LTIP. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of income.
13
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $4.7 million at June 30, 2004, and have been included
as a reduction of additional paid in capital on the accompanying consolidated
balance sheets. Other outstanding loans to executive and senior officers at June
30, 2004 amounted to approximately $1.9 million primarily related to tax payment
advances on stock compensation awards and life insurance contracts made to
certain executive and non-executive officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively, and collectively, the "Rights"). Each Right represents the right
to receive, upon vesting, one share of common stock if shares are then available
for grant under one of the Company's stock option plans or, if shares are not so
available, an amount of cash equivalent to the value of such stock on the
vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 62,835 shares of the Company's common stock and the 2003 Rights
aggregate 26,042 shares of common stock. As of June 30, 2004, there remains
47,126 shares of common stock related to the 2002 Rights and 26,042 shares of
common stock related to the 2003 Rights. During the three and six month periods
ended June 30, 2004 the Operating Partnership recorded approximately$100,000 and
$201,000, respectively of compensation expense related to the Rights. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of income.
In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award, which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award, which provides for compensation to be earned at the end of a four-year
period if the Company attains certain four-year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available 827,776 shares of its
common stock under one of its existing stock option plans in connection with the
core award of this LTIP for eight of its executive and senior officers. On March
13, 2004, the Company met its annual performance measure with respect to the
prior annual period. As a result, the Company issued to the participants 206,944
shares of its common stock related to the core component of this LTIP. As of
June 30, 2004, there remains 620,832 shares of common stock reserved for future
issuance under the core award of this LTIP. With respect to the core award of
this LTIP, the Operating Partnership recorded approximately $699,000 and $1.4
million of compensation expense for the three and six month periods ended June
30, 2004, respectively. Such amount has been included in marketing, general and
administrative expenses on the accompanying consolidated statements of income.
Further, no provision will be made for the special outperformance award of this
LTIP until such time as achieving the requisite performance measures is
determined to be probable.
As of June 30, 2004, the Company had approximately 4.3 million shares of its
common stock reserved for issuance under its stock option plans, in certain
cases subject to vested terms, at a weighted average exercise price of $ 23.32
per option. In addition, the Company has approximately 815,000 shares of its
common stock reserved for future issuance under its stock option plans.
Net income per common partnership unit is determined by allocating net income
after preferred distributions and minority partners' interest in consolidated
partnerships income to the general and limited partners' based on their weighted
average distribution per common partnership units outstanding during the
respective periods presented.
Holders of preferred units of limited and general partnership interest are
entitled to distributions based on the stated rates of return (subject to
adjustment) for those units.
The Operating Partnership issues additional units to the Company, and thereby
increases the Company's general partnership interest in the Operating
Partnership, with terms similar to the terms of any securities (i.e., common
stock or preferred stock) issued by the Company (including any securities issued
by the Company upon the exercise of stock options). Any consideration received
by the Company in respect of the issuance of its securities is contributed to
the Operating Partnership. In addition, the Operating Partnership or a
subsidiary funds the compensation of personnel, including any amounts payable
under the Company's LTIP.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
2004 2003
-------- --------
Cash paid during the period for interest ............... $ 50,277 $ 47,304
======== ========
Interest capitalized during the period ................. $ 4,000 $ 3,675
======== ========
14
9. SEGMENT DISCLOSURE
The Operating Partnership's portfolio consists of Class A office properties
located within the New York City metropolitan area and Class A suburban office
properties located and operated within the Tri-State Area (the "Core
Portfolio"). The Operating Partnership's portfolio also includes one office
property located in Orlando, Florida. The Company has formed an Operating
Committee that reports directly to the President and Chief Financial Officer who
have been identified as the Chief Operating Decision Makers due to their final
authority over resource allocation, decisions and performance assessment.
The Operating Partnership does not consider (i) interest incurred on its Credit
Facility and Senior Unsecured Notes, (ii) the operating performance of the
office property located in Orlando, Florida, (iii) the operating performance of
those properties reflected as discontinued operations in the Operating
Partnership's consolidated statements of income, and (iv) the operating results
of the Service Companies as part of its Core Portfolio's property operating
performance for purposes of its component disclosure set forth below.
The accounting policies of the reportable segments are the same as those
described in the summary of significant account policies. In addition, amounts
reflected have been adjusted to give effect to the Operating Partnership's
discontinued operations in accordance with FASB Statement No. 144.
The following table sets forth the components of the Operating Partnership's
revenues and expenses and other related disclosures (in thousands):
THREE MONTHS ENDED
------------------------------------------------------------------------------
JUNE 30, 2004 JUNE 30, 2003
------------------------------------- --------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
--------- --------- ------------ --------- --------- ------------
REVENUES:
Base rents, tenant
escalations and reimbursements ................... $ 125,324 $ 1,919 $ 127,243 $ 106,041 $ 2,007 $ 108,048
Interest, investment and other income ............... 562 2,761 3,323 1,097 3,791 4,888
--------- --------- --------- --------- --------- ---------
Total Revenues ...................................... 125,886 4,680 130,566 107,138 5,798 112,936
--------- --------- --------- --------- --------- ---------
EXPENSES:
Property operating expenses ......................... 49,785 841 50,626 41,426 1,012 42,438
Marketing, general and administrative ............... 4,076 3,298 7,374 3,987 4,808 8,795
Interest ............................................ 15,847 8,760 24,607 10,054 10,091 20,145
Depreciation and amortization ....................... 28,026 1,591 29,617 25,453 1,530 26,983
--------- --------- --------- --------- --------- ---------
Total Expenses ...................................... 97,734 14,490 112,224 80,920 17,441 98,361
--------- --------- --------- --------- --------- ---------
Income (loss) before minority interests, preferred
dividends and distributions, equity (loss) in
earnings of real estate joint ventures and
discontinued operations .......................... $ 28,152 $ (9,810) $ 18,342 $ 26,218 $ (11,643) $ 14,575
========= ========= ========= ========= ========= =========
15
SIX MONTHS ENDED OR AS OF
------------------------------------------------------------------------------
JUNE 30, 2004 JUNE 30, 2003
------------------------------------- --------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
--------- --------- ------------ --------- --------- ------------
REVENUES:
Base rents, tenant
escalations and reimbursements .................. $ 252,483 $ 3,910 $ 256,393 $ 213,221 $ 3,607 $ 216,828
Interest, investment and other
income ............................................. 1,986 7,000 8,986 1,797 10,350 12,147
---------- --------- ---------- --------- --------- ----------
Total Revenues ..................................... 254,469 10,910 265,379 215,018 13,957 228,975
---------- --------- ---------- --------- --------- ----------
EXPENSES:
Property operating expenses ........................ 100,608 1,483 102,091 83,962 1,856 85,818
Marketing, general and administrative .............. 8,280 6,161 14,441 7,963 8,401 16,364
Interest ........................................... 31,477 18,791 50,268 20,060 20,182 40,242
Depreciation and amortization ...................... 55,516 3,222 58,738 52,634 3,129 55,763
---------- --------- ---------- --------- --------- ----------
Total Expenses ..................................... 195,881 29,657 225,538 164,619 33,568 198,187
---------- --------- ---------- --------- --------- ----------
Income (loss) before minority interests, preferred
dividends and distributions, equity (loss) in
earnings of real estate joint ventures and
discontinued operations ......................... $ 58,588 $ (18,747) $ 39,841 $ 50,399 $ (19,611) $ 30,788
========== ========= ========== ========== ========= ==========
Total Assets ....................................... $2,893,110 $ 239,744 $3,132,854 $2,425,189 $ 475,805 $2,900,994
========== ========= ========== ========== ========= ==========
10. NON-CASH INVESTING AND FINANCING ACTIVITIES
During January 2004, in connection with the Operating Partnership's acquisition
of 1185 Avenue of the Americas, New York, NY, the Operating Partnership assumed
a $202 million mortgage note payable and $48 million of mezzanine debt (see Note
6).
During January 2004, as a result of the Company redeeming its Series B preferred
stock, the Operating Partnership redeemed its outstanding Series B preferred
units for approximately 1,958,000 OP Units.
During April 2004, the Operating Partnership redeemed approximately 3,081
Preferred Units, which were valued at approximately $3.1 million which was
applied to amounts owned from the unit holder under the Other Notes.
11. RELATED PARTY TRANSACTIONS
In connection with the Disposition, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, New York (the Company's current headquarters) for five years and
to release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
In addition, in April 2004, the Operating Partnership completed the sale to the
Rechler family two of the three properties remaining in connection with the
Disposition. The third property has subsequently been excluded from the
Disposition and will not be transferred to the Rechler family (see Note 6).
As part of the Company's REIT structure it is provided management, leasing and
construction related services through taxable REIT subsidiaries as defined by
the Code. During the three and six month periods ended June 30, 2004 and 2003,
Reckson Construction Group, Inc. or its successor, Reckson Construction &
Development, LLC billed approximately $217,000 and $678,000 and $105,000 and
$231,000, respectively, of market rate services and Reckson Management Group,
Inc. billed approximately $72,000 and $138,000 and $69,000 and $140,000,
respectively, of market rate management fees to the Remaining Option Properties.
16
Reckson Management Group, Inc. leases approximately 26,000 square feet of office
space at the Remaining Option Property located at 225 Broadhollow Road,
Melville, New York for its corporate offices at an annual base rent of
approximately $750,000. Reckson Management Group, Inc. had also entered into a
short term license agreement at the property for 6,000 square feet of temporary
space which expired in January 2004. Reckson Management Group, Inc. also leases
10,722 square feet of warehouse space used for equipment, materials and
inventory storage at a property owned by certain members of the Rechler family
at an annual base rent of approximately $75,000. In addition, commencing April
1, 2004, Reckson Construction & Development, LLC ("RCD") has been leasing
approximately 17,000 square feet of space at the Remaining Option Property,
located at 225 Broadhollow Road, Melville, New York, which was formerly occupied
by an affiliate of First Data Corp. through September 30, 2006 (see Note 6).
Base rent of approximately $121,000 was paid by RCD during the three months
ended June 30, 2004. RCD anticipates it will mitigate this obligation by
sub-letting the space to a third party. However, there can be no assurances that
RCD will be successful in sub-leasing the aforementioned space and mitigating
its aggregate costs.
A company affiliated with an Independent Director of the Company leases 15,566
square feet in a property owned by the Operating Partnership at an annual base
rent of approximately $445,000.
During 1997, the Operating Partnership formed FrontLine Capital Group, formerly
Reckson Service Industries, Inc. ("FrontLine") and Reckson Strategic Venture
Partners, LLC ("RSVP"). RSVP is a real estate venture capital fund which
invested primarily in real estate and real estate operating companies outside
the Operating Partnership's core office and industrial / R&D focus and whose
common equity is held indirectly by FrontLine. In connection with the formation
and spin-off of FrontLine, the Operating Partnership established an unsecured
credit facility with FrontLine (the "FrontLine Facility") in the amount of $100
million for FrontLine to use in its investment activities, operations and other
general corporate purposes. The Operating Partnership has advanced approximately
$93.4 million under the FrontLine Facility. The Operating Partnership also
approved the funding of investments of up to $100 million relating to RSVP (the
"RSVP Commitment"), through RSVP-controlled joint ventures (for REIT-qualified
investments) or advances made to FrontLine under an unsecured loan facility (the
"RSVP Facility") having terms similar to the FrontLine Facility (advances made
under the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine
Loans"). During March 2001, the Operating Partnership increased the RSVP
Commitment to $110 million and as of June 30, 2004 approximately $109.1 million
had been funded through the RSVP Commitment, of which $59.8 million represents
investments by the Operating Partnership in RSVP-controlled (REIT-qualified)
joint ventures and $49.3 million represents loans made to FrontLine under the
RSVP Facility. As of June 30, 2004, interest accrued (net of reserves) under the
FrontLine Facility and the RSVP Facility was approximately $19.6 million.
A committee of the Board of Directors, comprised solely of independent
directors, considers any actions to be taken by the Company in connection with
the FrontLine Loans and its investments in joint ventures with RSVP. During the
third quarter of 2001, the Company noted a significant deterioration in
FrontLine's operations and financial condition and, based on its assessment of
value and recoverability and considering the findings and recommendations of the
committee and its financial advisor, the Company recorded a $163 million
valuation reserve charge, inclusive of anticipated costs, in its consolidated
statements of operations relating to its investments in the FrontLine Loans and
joint ventures with RSVP. The Operating Partnership has discontinued the accrual
of interest income with respect to the FrontLine Loans. The Operating
Partnership has also reserved against its share of GAAP equity in earnings from
the RSVP controlled joint ventures funded through the RSVP Commitment until such
income is realized through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code, charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest, and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
In September 2003, RSVP completed the restructuring of its capital structure and
management arrangements. In connection with the restructuring, RSVP redeemed the
interest of the preferred equity holders of RSVP for an aggregate of
approximately $137 million in cash and the transfer to the preferred equity
holders of the assets that comprised RSVP's parking investment valued at
approximately $28.5 million. RSVP also restructured its management arrangements
whereby a management company formed by its former managing directors has been
retained to manage RSVP pursuant to a management agreement and the employment
contracts of the managing directors with RSVP have been terminated. The
management agreement provides for an annual base management fee, and disposition
fees equal to 2% of the net proceeds received by RSVP on asset sales. (The base
management fee and disposition fees are subject to a maximum over the term of
the agreement of $7.5 million.) In addition, the managing directors retained a
one-third residual interest in RSVP's assets which is subordinated to the
distribution of an aggregate amount of $75 million to RSVP and/or the Operating
Partnership in respect of its joint ventures with RSVP. The management agreement
has a three-year term, subject to early termination in the event of the
disposition of all of the assets of RSVP.
17
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of assets sales by RSVP and or a joint
venture between RSVP and a subsidiary of the Operating Partnership.
In April 2004, American Campus Communities, Inc. ("ACC"), a student housing
company owned by RSVP and the joint venture between RSVP and a subsidiary of the
Operating Partnership, filed a registration statement on Form S-11 with the
Securities and Exchange Commission in connection with a proposed initial public
offering ("IPO") of its common stock. RSVP and the joint venture between RSVP
and a subsidiary of the Operating Partnership plan to liquidate the ownership
position in ACC in connection with the IPO transaction.
As a result of the foregoing, the net carrying value of the Operating
Partnership's investments in the FrontLine Loans and joint venture investments
with RSVP, inclusive of the Operating Partnership's share of previously accrued
GAAP equity in earnings on those investments, is approximately $65 million which
was reassessed with no change by management as of June 30, 2004. Such amount has
been reflected in investments in service companies and affiliate loans and joint
ventures on the Operating Partnership's consolidated balance sheet.
Scott H. Rechler, who serves as Chief Executive Officer, President and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP and has agreed to serve as a member of the
board of ACC upon consummation of its initial public offering.
12. SUBSEQUENT EVENTS
On August 9, 2004, the Operating Partnership made an advance under its Credit
Facility in the amount of $222.5 million and along with cash-on-hand paid off
the $250 million balance of the mortgage debt on the property located at 1185
Avenue of the Americas in New York City.
On August 10, 2004, the Operating Partnership priced an offering of $150 million
of 5.875% senior unsecured notes due August 15, 2014. Interest on the notes will
be payable semi-annually on February 15 and August 15, commencing February 15,
2005. The notes were priced at 99.151% of par value to yield 5.989%. Settlement
is scheduled for August 13, 2004. Prior to the issuance of these notes the
Operating Partnership entered into several anticipatory interest rate hedge
instruments to protect itself against potentially rising interest rates. At the
time the notes are issued and these instruments are settled the Company
anticipates receiving a benefit of approximately $1.9 million. Such benefit will
be amortized against interest expense over the term of the notes. The Operating
Partnership intends to use the net proceeds from this offering to repay a
portion of the Credit Facility borrowings used to pay off the outstanding
mortgage debt on 1185 Avenue of the Americas.
The Company is currently evaluating the redemption of some or all of its Series
A preferred stock. In connection with the Company's redemption, if any, of its
Series A preferred stock, the Operating Partnership will redeem an equal number
of Series A preferred units.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of Reckson Operating Partnership, L.P. (the "Operating
Partnership") and related notes thereto.
The Operating Partnership considers certain statements set forth herein to be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, with respect to the Operating Partnership's expectations for future
periods. Certain forward-looking statements, including, without limitation,
statements relating to the timing and success of acquisitions and the completion
of development or redevelopment of properties, the financing of the Operating
Partnership's operations, the ability to lease vacant space and the ability to
renew or relet space under expiring leases, involve risks and uncertainties.
Many of the forward-looking statements can be identified by the use of words
such as "believes", "may", "expects", "anticipates", "intends" or similar
expressions. Although the Operating Partnership believes that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, the actual results may differ materially from those set forth in
the forward-looking statements and the Operating Partnership can give no
assurance that its expectation will be achieved. Among those risks, trends and
uncertainties are: the general economic climate, including the conditions
affecting industries in which our principal tenants compete; changes in the
supply of and demand for office in the New York Tri-State area; changes in
interest rate levels; changes in the Operating Partnership's credit ratings;
changes in the Operating Partnership's cost and access to capital; downturns in
rental rate levels in our markets and our ability to lease or re-lease space in
a timely manner at current or anticipated rental rate levels; the availability
of financing to us or our tenants; financial condition of our tenants; changes
in operating costs, including utility, security, real estate tax and insurance
costs; repayment of debt owed to the Operating Partnership by third parties
(including FrontLine Capital Group); risks associated with joint ventures;
liability for uninsured losses or environmental matters; and other risks
associated with the development and acquisition of properties, including risks
that development may not be completed on schedule, that the tenants will not
take occupancy or pay rent, or that development or operating costs may be
greater than anticipated. Consequently, such forward-looking statements should
be regarded solely as reflections of the Operating Partnership's current
operating and development plans and estimates. These plans and estimates are
subject to revisions from time to time as additional information becomes
available, and actual results may differ from those indicated in the referenced
statements.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Operating Partnership include
accounts of the Operating Partnership and all majority-owned subsidiaries. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the Operating Partnership's consolidated financial statements and related
notes. In preparing these financial statements, management has utilized
information available including its past history, industry standards and the
current economic environment among other factors in forming its estimates and
judgments of certain amounts included in the consolidated financial statements,
giving due consideration to materiality. It is possible that the ultimate
outcome as anticipated by management in formulating its estimates inherent in
these financial statements may not materialize. However, application of the
critical accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of the Operating Partnership's results
of operations to those of companies in similar businesses.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Minimum rental revenue is recognized on a straight-line basis, which averages
minimum rents over the terms of the leases. The excess of rents recognized over
amounts contractually due are included in deferred rents receivable on the
Operating Partnership's balance sheets. The leases also typically provide for
tenant reimbursements of common area maintenance and other operating expenses
and real estate taxes. Ancillary and other property related income is recognized
in the period earned.
The Operating Partnership makes estimates of the collectibility of its tenant
accounts receivables related to base rents, tenant escalations and
reimbursements and other revenue or income. The Operating Partnership
specifically analyzes tenant receivables and analyzes historical bad debts,
customer credit worthiness, current economic trends, changes in customer payment
terms, publicly available information and, to the extent available, guidance
provided by the tenant when evaluating the adequacy of its allowance for
doubtful accounts. In addition, when tenants are in bankruptcy the Operating
Partnership makes estimates of the expected recovery of pre-petition
administrative and damage claims. In some cases, the ultimate resolution of
those claims can exceed a year. These estimates have a direct impact on the
Operating Partnership's net income because a higher bad debt reserve results in
less net income.
The Operating Partnership incurred approximately $700,000 and $1.8 million, and
$1.6 million and $3.6 million of bad debt expense during the three and six month
periods ended June 30, 2004 and 2003, respectively, related to tenant
receivables and deferred rents receivable which accordingly reduced total
revenues and reported net income during the periods presented.
19
The Operating Partnership records interest income on investments in mortgage
notes and notes receivable on an accrual basis of accounting. The Operating
Partnership does not accrue interest on impaired loans where, in the judgment of
management, collection of interest according to the contractual terms is
considered doubtful. Among the factors the Operating Partnership considers in
making an evaluation of the collectibility of interest are: (i) the status of
the loan, (ii) the value of the underlying collateral, (iii) the financial
condition of the borrower and (iv) anticipated future events.
Reckson Construction Group, Inc., Reckson Construction & Development LLC, (the
successor to Reckson Construction Group, Inc.) and Reckson Construction Group
New York, Inc. use the percentage-of-completion method for recording amounts
earned on their contracts. This method records amounts earned as revenue in the
proportion that actual costs incurred to date bear to the estimate of total
costs at contract completion.
Gain on sales of real estate are recorded when title is conveyed to the buyer,
subject to the buyer's financial commitment being sufficient to provide economic
substance to the sale and the Operating Partnership having no substantial
continuing involvement with the buyer.
The Operating Partnership follows the guidance provided for under the Financing
Accounting Standards Board ("FASB") Statement No. 66, "Accounting for Sales of
Real Estate" ("Statement No. 66"), which provides guidance on sales contracts
that are accompanied by agreements which require the seller to develop the
property in the future. Under Statement No. 66 profit is recognized and
allocated to the sale of the land and the later development or construction work
on the basis of estimated costs of each activity; the same rate of profit is
attributed to each activity. As a result, profits are recognized and reflected
over the improvement period on the basis of costs incurred (including land) as a
percentage of total costs estimated to be incurred. The Operating Partnership
uses the percentage of completion method, as the future costs of development and
profit are reliably estimated.
REAL ESTATE
Land, buildings and improvements, furniture, fixtures and equipment are recorded
at cost. Tenant improvements, which are included in buildings and improvements,
are also stated at cost. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred. Renovations and / or replacements, which
improve or extend the life of the asset, are capitalized and depreciated over
their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the estimated
useful lives of ten to thirty years for buildings and improvements and five to
ten years for furniture, fixtures and equipment. Tenant improvements are
amortized on a straight-line basis over the term of the related leases.
The Operating Partnership is required to make subjective assessments as to the
useful lives of its properties for purposes of determining the amount of
depreciation to reflect on an annual basis with respect to those properties.
These assessments have a direct impact on the Operating Partnership's net
income. Should the Operating Partnership lengthen the expected useful life of a
particular asset, it would be depreciated over more years and result in less
depreciation expense and higher annual net income.
Assessment by the Operating Partnership of certain other lease related costs
must be made when the Operating Partnership has a reason to believe that the
tenant will not be able to execute under the term of the lease as originally
expected.
On July 1, 2001 and January 1, 2002, the Operating Partnership adopted FASB
Statement No.141, "Business Combinations" and FASB Statement No. 142, "Goodwill
and Other Intangibles", respectively. As part of the acquisition of real estate
assets, the fair value of the real estate acquired is allocated to the acquired
tangible assets, consisting of land, building and building improvements, and
identified intangible assets and liabilities, consisting of the value of
above-market and below-market leases, other value of in-place leases, and value
of tenant relationships, based in each case on their fair values. The Operating
Partnership assesses fair value based on estimated cash flow projections that
utilize appropriate discount and capitalization rates and available market
information. Estimates of future cash flows are based on a number of factors
including the historical operating results, known trends, and market/economic
conditions that may affect the property. If the Operating Partnership
incorrectly estimates the values at acquisition or the undiscounted cash flows,
initial allocation of purchase price and future impairment charges may be
different.
LONG LIVED ASSETS
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. Such cash flows consider factors
such as expected future operating income, trends and prospects, as well as the
effects of demand, competition and other factors. To the extent impairment has
occurred, the loss will be measured as the excess of the carrying amount of the
property over the fair value of the property.
20
The Operating Partnership is required to make subjective assessments as to
whether there are impairments in the value of its real estate properties and
other investments. These assessments have a direct impact on the Operating
Partnership's net income because recognizing an impairment results in an
immediate negative adjustment to net income. In determining impairment, if any,
the Operating Partnership has adopted FASB Statement No. 144, "Accounting for
the Impairment or Disposal of Long Lived Assets." In accordance with the
provisions of Statement No. 144, the Operating Partnership allocated
approximately $2.6 million and $5.2 million of its unsecured corporate interest
expense to discontinued operations for the three and six months ended June 30,
2003.
CASH AND CASH EQUIVALENTS
The Operating Partnership considers highly liquid investments with a maturity of
six months or less when purchased to be cash equivalents. Cash balances at June
30, 2004 include approximately $46.5 million of the remaining net proceeds
received during the six month period ended June 30, 2004 relating to property
sales, the issuance of the Company's equity and the Operating Partnership's
January 2004 issuance of senior unsecured notes.
OVERVIEW AND BACKGROUND
The Operating Partnership, which commenced operations on June 2, 1995, is
engaged in the ownership, operation, acquisition, leasing, financing, management
and development of office and to a lesser extent industrial properties and also
owns land for future development located in the commercial real estate markets
in and around the New York City tri-state area (the "Tri-State Area"). Reckson
Associates Realty Corp. ("the Company"), is a self administered self managed
real estate investment trust ("REIT"), and serves the sole general partner of
the Operating Partnership. The Operating Partnership conducts its management,
leasing, construction and development related services through the Company's
taxable REIT subsidiaries. Reckson Management Group, Inc., RANY Management
Group, Inc. and Reckson Construction & Development LLC (the "Service Companies")
currently provide these services. The Operating Partnership and the Company
(collectively the "Company") were formed for the purpose of continuing the
commercial real estate business of Reckson Associates, the predecessor of the
Operating Partnership, its affiliated partnerships and other entities.
As of June 30, 2004, the Operating Partnership owned and operated 76 office
properties (inclusive of nine office properties owned through joint ventures)
comprising approximately 14.4 million square feet and 9 industrial / R&D
properties comprising approximately 955,000 located in the Tri-State Area.
In June 2004, the Operating Partnership entered into a contract to sell a 92,000
square foot industrial property located in Westchester for approximately $7.5
million. The Operating Partnership's basis in this property is approximately
$4.8 million and is included in properties and related assets held for sale on
the Operating Partnership's balance sheet.
As of June 30, 2004, the Operating Partnership also owned approximately 313
acres of land in 12 separate parcels of which the Operating Partnership can
develop approximately 3.0 million square feet of office space. The Operating
Partnership is currently evaluating alternative land uses for certain of the
land holdings to realize the highest economic value. These alternatives may
include rezoning certain land parcels from commercial to residential use for
potential disposition. As of June 30, 2004, the Operating Partnership had
invested approximately $124.5 million in these development projects. Management
has made subjective assessments as to the value and recoverability of these
investments based on current and proposed development plans, market comparable
land values and alternative use values. In addition, during the three and six
month periods ended June 30, 2004, the Operating Partnership has capitalized
approximately $2.3 million and $5.1 million, respectively related to real estate
taxes, interest and other carrying costs related to these development projects.
In October 2003, the Operating Partnership entered into a contract to sell a 113
acre land parcel located in New Jersey. The contract provides for a sales price
ranging from $18 million to $36 million. The sale is contingent upon obtaining
zoning for residential use of the land and other customary approvals. The
proceeds ultimately received from such sale will be based upon the number of
residential units permitted by the rezoning. The cost basis of the land parcel
at June 30, 2004 was approximately $5.7 million. The closing is scheduled to
occur upon the rezoning, which is anticipated to occur within 12 to 24 months.
However, there can be no assurances such rezoning will occur. During February
2004, a 3.9 acre land parcel located on Long Island was condemned by the Town of
Oyster Bay. As consideration from the condemnation the Operating Partnership
anticipates it will initially receive approximately $1.8 million. The Operating
Partnership's cost basis in this land parcel was approximately $1.4 million. The
Operating Partnership is currently contesting this valuation and seeking payment
of additional consideration from the Town of Oyster Bay but there can be no
assurances that the Operating Partnership will be successful in obtaining any
such additional consideration. In July 2004, the Operating Partnership commenced
the ground-up development of a 277,000 square foot Class A office building with
a total anticipated investment cost of approximately $60 million. This
development is located within the Operating Partnership's existing 404,000
square foot executive office park in Melville, NY.
21
In November 2003, the Operating Partnership disposed of all but three of its 95
property, 5.9 million square foot, Long Island industrial building portfolio to
members of the Rechler family (the "Disposition") for approximately $315.5
million, comprised of $225.1 million in cash and debt assumption and 3,932,111
common units of limited partnership interest in the Operating Partnership ("OP
Units") valued at approximately $90.4 million. Approximately $204 million of
cash sales proceeds from the Disposition were used to repay borrowings under the
Operating Partnership's unsecured credit facility. For information concerning
certain litigation matters pertaining to this transaction see Part II-Other
Information; Item 1. Legal Proceedings of this Form 10-Q.
In connection with the Disposition, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, New York (the Company's current headquarters) for five years and
to release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
In January 2004, the Operating Partnership sold a 104,000 square foot office
property located on Long Island for approximately $18.5 million. Net proceeds
from the sale were used to repay borrowings under the Operating Partnership's
unsecured credit facility. As a result, the Operating Partnership recorded a net
gain of approximately $5.5 million. In accordance with FASB Statement No. 144,
such gain has been reflected in discontinued operations on the Operating
Partnership's consolidated statements of income.
In January 2004, the Operating Partnership acquired 1185 Avenue of the Americas,
a 42-story, 1.1 million square foot Class A office tower, located between 46th
and 47th Streets in New York, NY for $321 million. In connection with this
acquisition, the Operating Partnership assumed a $202 million mortgage and $48
million of mezzanine debt. The balance of the purchase price was paid through an
advance under the Credit Facility. The floating rate mortgage and mezzanine debt
both mature in August 2004 and presently have a weighted average interest rate
of 4.95%. Such rate is based on the greater of one month LIBOR or 2.15% plus a
weighted average spread of approximately 2.80%. An interest rate hedge agreement
was acquired to limit exposure to increases in LIBOR above 5.825%. The property
is also encumbered by a ground lease which has a remaining term of approximately
40 years with rent scheduled to be re-set at the end of 2005 and then remain
constant for the balance of the term. Pursuant to the terms of the ground lease,
the Operating Partnership and the ground lessor have commenced arbitration
proceedings related to the re-setting of the ground lease. There can be no
assurances as to the outcome of the rent re-set process. In accordance with FASB
Statement No. 141, "Business Combinations", the Operating Partnership allocated
and recorded net deferred intangible lease income of approximately $14.2
million, representing the net value of acquired above and below market leases,
assumed lease origination costs and other value of in-place leases. The net
value of the above and below market leases is amortized over the remaining terms
of the respective leases to rental income which amounted to approximately $2.0
million and $3.8 million for the three and six month periods ended June 30,
2004. In addition, amortization expense on the value of lease origination costs
was approximately $746,000 and $1.3 million for the three and six month periods
ended June 30, 2004, respectively. At acquisition, there were 31 in-place leases
aggregating approximately one million square feet with a weighted average
remaining lease term of approximately 6 years.
During February 2004, the Operating Partnership executed a lease with Nassau
County for the entire building and concourse level at 60 Charles Lindbergh
Blvd., Long Island, comprising approximately 200,000 square feet, including
127,000 square feet previously vacated by WorldCom/MCI. 60 Charles Lindbergh
Blvd. will be repositioned to satisfy Nassau County's use.
In April 2004, the Operating Partnership sold a 175,000 square foot office
building located on Long Island for approximately $30 million, of which the
Operating Partnership owned a 51% interest, and a wholly owned 9,000 square foot
retail property for approximately $2.8 million. In addition, the Operating
Partnership completed the sale on two of the remaining three properties from the
Disposition for approximately $5.8 million. Proceeds from the sale were used to
establish an escrow account with a qualified intermediary for a future exchange
of real property pursuant to Section 1031 of the Code (a "Section 1031
Exchange"). A Section 1031 Exchange allows for the deferral of taxes related to
the gain attributable to the sale of property if qualified replacement property
is identified within 45 days and such qualified replacement property is then
acquired within 180 days from the initial sale. There can be no assurances that
the Operating Partnership will meet the requirements of Section 1031 by
identifying and acquiring qualified replacement properties in the required time
frame, in which case the Operating Partnership would incur the tax liability on
the capital gain realized of approximately $1.5 million. The disposition of the
other industrial property, which is subject to certain environmental issues, is
conditioned upon the approval of the buyer's lender, which has not been
obtained. As a result, the Operating Partnership will not dispose of this
property as part of the Disposition. Management believes that the cost to
remediate the environmental issues will not have a material adverse effect on
the Operating Partnership, but there can be no assurance in this regard.
22
In July 2004, the Operating Partnership acquired a 141,000 square foot Class A
office property, located in Chatham Township, NJ for approximately $22.7
million. The Operating Partnership made this acquisition through available
cash-on-hand.
During February 2003, the Operating Partnership, through Reckson Construction
Group, Inc., entered into a contract with an affiliate of First Data Corp. to
sell a 19.3-acre parcel of land located in Melville, New York and was retained
by the purchaser to develop a build-to-suit 195,000 square foot office building
for aggregate consideration of approximately $47 million. This transaction
closed on March 11, 2003 and development of the aforementioned office building
has been completed. In accordance with FASB Statement No. 66, the Operating
Partnership has recognized a book gain, before taxes, on this land sale and
build-to-suit transaction of approximately $23.8 million, of which $400,000 and
$5.0 million and $4.3 million and $10.1 million has been recognized during the
three and six month periods ended June 30, 2004 and 2003, respectively, and is
included in investment and other income on the Operating Partnership's
consolidated statements of income.
The Operating Partnership holds a $17.0 million note receivable, which bears
interest at 12% per annum and is secured by a minority partnership interest in
Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class A office
property located in Uniondale, New York (the "Omni Note"). The Operating
Partnership currently owns a 60% majority partnership interest in Omni Partners,
L.P. and on March 14, 2007 may exercise an option to acquire the remaining 40%
interest for a price based on 90% of the fair market value of the property. The
Operating Partnership also holds a $30 million junior mezzanine loan which is
secured by a pledge of an indirect ownership interest of an entity which owns
the ground leasehold estate under a 1.1 million square foot office complex
located on Long Island, New York (the "Mezz Note"). The Mezz Note matures in
September 2005, currently bears interest at 12.73%, and the borrower has the
right to extend for three additional one-year periods. The Operating Partnership
also holds three other notes receivable aggregating $19.0 million which bear
interest at rates ranging from 10.5% to 12% per annum. These notes are secured
in part by a minority partner's preferred unit interest in the Operating
Partnership, an interest in real property and a personal guarantee (the "Other
Notes" and collectively with the Omni Note and the Mezz Note, the "Note
Receivable Investments"). During April 2004, approximately $2.7 million of the
Other Notes, including accrued interest, were repaid by the minority partner
exchanging, and the Operating Partnership redeeming, approximately 3,081
preferred units. The preferred units were redeemed at a par value of $3.1
million. Approximately $420,000 of the redemption proceeds was used to offset
interest due from the minority partner under the Other Notes and for prepaid
interest. In July 2004, the minority partner delivered notice to the Operating
Partnership stating his intention to repay $15.5 million of the 10.5% Other
Notes. When repaid, the remaining Other Notes will aggregate $3.5 million and
carry a weighted average interest rate of 11.57%. The Operating Partnership has
also agreed to extend the maturity of $2.5 million of such debt through January
31, 2005 and the remaining $1.0 million through January 31, 2010. As of June 30,
2004, management has made subjective assessments as to the underlying security
value on the Operating Partnership's Note Receivable Investments. These
assessments indicate an excess of market value over the carrying value related
to the Operating Partnership's Note Receivable Investments. Based on these
assessments the Operating Partnership's management believes there is no
impairment to the carrying value related to the Operating Partnership's Note
Receivable Investments.
The Operating Partnership also owns a 355,000 square foot office building in
Orlando, Florida. This non-core real estate holding was acquired in May 1999 in
connection with the Operating Partnership's initial New York City portfolio
acquisition. This property is cross-collateralized under a $100.1 million
mortgage note payable along with one of the Operating Partnership's New York
City buildings. The Operating Partnership has the right to prepay this note in
November 2004, prior to its maturity.
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. As of June 30, 2004, the 520JV had
total assets of $20.6 million, a mortgage note payable of $11.7 million and
other liabilities of $582,000. The Operating Partnership's allocable share of
the 520JV mortgage note payable is approximately $7.6 million. This mortgage
note payable bears interest at 8.85% per annum and matures on September 1, 2005.
The operating agreement of the 520JV requires joint decisions from all members
on all significant operating and capital decisions including sale of the
property, refinancing of the property's mortgage debt, development and approval
of leasing strategy and leasing of rentable space. As a result of the
decision-making participation relative to the operations of the property, the
Operating Partnership accounts for the 520JV under the equity method of
accounting. In accordance with the equity method of accounting the Operating
Partnership's proportionate share of the 520JV income (loss) was approximately
$294,000 and $408,000 and $(270,000) and $(164,000) for the three and six month
periods ended June 30, 2004 and 2003, respectively.
As part of the Company's REIT structure it is provided management, leasing and
construction related services through taxable REIT subsidiaries as defined by
the Code. During the three and six months ended June 30, 2004 and 2003, Reckson
Construction Group, Inc. or its successor, Reckson Construction & Development,
LLC billed approximately $217,000 and $678,000 and $105,900 and $231,000,
respectively, of market rate services and Reckson Management Group, Inc. billed
approximately $72,000 and $138,000, and $69,000 and $140,000, respectively, of
market rate management fees to the Remaining Option Properties.
23
Reckson Management Group, Inc. leases approximately 26,000 square feet of office
space at the Remaining Option Property located at 225 Broadhollow Road,
Melville, New York for its corporate offices at an annual base rent of
approximately $750,000. Reckson Management Group, Inc. had also entered into a
short term license agreement at the property for 6,000 square feet of temporary
space which expired in January 2004. Reckson Management Group, Inc. also leases
10,722 square feet of warehouse space used for equipment, materials and
inventory storage at a property owned by certain members of the Rechler family
at an annual base rent of approximately $75,000. In addition, commencing April
1, 2004, Reckson Construction & Development, LLC ("RCD") has been leasing
approximately 17,000 square feet of space at the Remaining Option Property,
located at 225 Broadhollow Road, Melville, New York, which was formerly occupied
by an affiliate of First Data Corp. through September 30, 2006. Base rent of
approximately $121,000 was paid by RCD during the three months ended June 30,
2004. RCD anticipates it will mitigate this obligation by sub-letting the space
to a third party. However, there can be no assurances that RCD will be
successful in sub-leasing the aforementioned space and mitigating its aggregate
costs.
A company affiliated with an Independent Director of the Company leases 15,566
square feet in a property owned by the Operating Partnership at an annual base
rent of approximately $445,000.
During July 1998, the Operating Partnership formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. Currently the Company owns, through Metropolitan and the Operating
Partnership, six Class A office properties, located in the New York City borough
of Manhattan, aggregating approximately 4.5 million square feet.
During September 2000, the Operating Partnership formed a joint venture (the
"Tri-State JV") with Teachers Insurance and Annuity Association ("TIAA") and
contributed nine Class A suburban office properties aggregating approximately
1.5 million square feet to the Tri-State JV for a 51% majority ownership
interest. TIAA contributed approximately $136 million for a 49% interest in the
Tri-State JV which was then distributed to the Operating Partnership. In August
2003, the Operating Partnership acquired TIAA's 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, for approximately $12.4 million.
In addition, during April 2004, the Tri-State JV sold a 175,000 square foot
office building located on Long Island for approximately $30 million. Net
proceeds from this sale were distributed to the members of the Tri-State JV. As
a result of these transactions, the Tri-State JV owns seven Class A suburban
office properties aggregating approximately 1.2 million square feet. The
Operating Partnership is responsible for managing the day-to-day operations and
business affairs of the Tri-State JV and has substantial rights in making
decisions affecting the properties such as leasing, marketing and financing. The
minority member has certain rights primarily intended to protect its investment.
For purposes of its financial statements the Operating Partnership consolidates
the Tri-State JV.
On December 21, 2001, the Operating Partnership formed a joint venture with the
New York State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby
NYSTRS acquired a 49% indirect interest in the property located at 919 Third
Avenue, New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Operating Partnership. The Operating
Partnership is responsible for managing the day-to-day operations and business
affairs of the 919JV and has substantial rights in making decisions affecting
the property such as developing a budget, leasing and marketing. The minority
member has certain rights primarily intended to protect its investment. For
purposes of its financial statements the Operating Partnership consolidates the
919JV.
The total market capitalization of the Operating Partnership at June 30, 2004
was approximately $3.7 billion. The Operating Partnership's total market
capitalization is based on the sum of (i) the market value of the Operating
Partnership's OP Units (assuming conversion) which for this purpose is based on
the closing price of the Company's common stock on June 30, 2004 of $27.46 per
unit, (ii) the liquidation preference value of the Operating Partnership's
preferred units and (iii) the approximately $1.5 billion (including its share of
consolidated and unconsolidated joint venture debt and net of minority partners'
interests share of consolidated joint venture debt) of debt outstanding at June
30, 2004. As a result, the Operating Partnership's total debt to total market
capitalization ratio at June 30, 2004 equaled approximately 40.3%.
During 1997, the Operating Partnership formed FrontLine Capital Group, formerly
Reckson Service Industries, Inc. ("FrontLine") and Reckson Strategic Venture
Partners, LLC ("RSVP"). RSVP is a real estate venture capital fund, which
invested primarily in real estate and real estate, operating companies outside
the Operating Partnership's core office and industrial / R&D focus and whose
common equity is held indirectly by FrontLine. In connection with the formation
and spin-off of FrontLine, the Operating Partnership established an unsecured
credit facility with FrontLine (the "FrontLine Facility") in the amount of $100
million for FrontLine to use in its investment activities, operations and other
general corporate purposes. The Operating Partnership has advanced approximately
$93.4 million under the FrontLine Facility. The Operating Partnership also
approved the funding of investments of up to $100 million relating to RSVP (the
"RSVP Commitment"), through RSVP-controlled joint ventures (for REIT-qualified
investments) or advances made to FrontLine under an unsecured loan facility (the
"RSVP Facility") having terms similar to the FrontLine Facility (advances made
under the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine
Loans"). During March 2001, the Operating Partnership increased the RSVP
Commitment to $110 million and as of June 30, 2004, approximately $109.1 million
had been funded through the RSVP Commitment, of which $59.8 million represents
investments by the Operating Partnership in RSVP-controlled (REIT-qualified)
joint ventures and $49.3 million represents loans made to FrontLine under the
RSVP Facility. As of June 30, 2004, interest accrued (net of reserves) under the
FrontLine Facility and the RSVP Facility was approximately $19.6 million.
24
In September 2003, RSVP completed the restructuring of its capital structure. In
connection with the restructuring, RSVP redeemed the interest of the preferred
equity holders of RSVP for an aggregate of $137 million in cash and the transfer
to the preferred equity holders of the assets that comprised RSVP's parking
investments valued at approximately $28.5 million. As a result of this
transaction amounts formerly invested in the privatization, parking and medical
office platforms have been reinvested as part of the buyout transaction.
A committee of the Board of Directors, comprised solely of independent
directors, considers any actions to be taken by the Company in connection with
the FrontLine Loans and its investments in joint ventures with RSVP. During the
third quarter of 2001, the Company noted a significant deterioration in
FrontLine's operations and financial condition and, based on its assessment of
value and recoverability and considering the findings and recommendations of the
committee and its financial advisor, the Company recorded a $163 million
valuation reserve charge, inclusive of anticipated costs, in its consolidated
statements of operations relating to its investments in the FrontLine Loans and
joint ventures with RSVP. The Operating Partnership has discontinued the accrual
of interest income with respect to the FrontLine Loans. The Operating
Partnership has also reserved against its share of GAAP equity in earnings from
the RSVP controlled joint ventures funded through the RSVP Commitment until such
income is realized through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code, charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest, and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
RSVP also restructured its management arrangements whereby a management company
formed by its former managing directors has been retained to manage RSVP
pursuant to a management agreement and the employment contracts of the managing
directors with RSVP have been terminated. The management agreement provides for
an annual base management fee, and disposition fees equal to 2% of the net
proceeds received by RSVP on asset sales. (The base management fee and
disposition fees are subject to a maximum over the term of the agreement of $7.5
million.) In addition, the managing directors retained a one-third residual
interest in RSVP's assets which is subordinated to the distribution of an
aggregate amount of $75 million to RSVP and/or the Operating Partnership in
respect of its joint ventures with RSVP. The management agreement has a
three-year term, subject to early termination in the event of the disposition of
all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of assets sales by RSVP and or a joint
venture between RSVP and a subsidiary of the Operating Partnership.
In April 2004, American Campus Communities, Inc. ("ACC"), a student housing
company owned by RSVP and the joint venture between RSVP and a subsidiary of the
Operating Partnership, filed a registration statement on Form S-11 with the
Securities and Exchange Commission in connection with a proposed initial public
offering ("IPO") of its common stock. RSVP and the joint venture between RSVP
and a subsidiary of the Operating Partnership plan to liquidate the ownership
position in ACC in connection with the IPO transaction.
As a result of the foregoing, the net carrying value of the Operating
Partnership's investments in the FrontLine Loans and joint venture investments
with RSVP, inclusive of the Operating Partnership's share of previously accrued
GAAP equity in earnings on those investments, is approximately $65 million,
which was reassessed with no change by management as of June 30, 2004. Such
amount has been reflected in investments in service companies and affiliate
loans and joint ventures on the Operating Partnership's consolidated balance
sheet.
Scott H. Rechler, who serves as Chief Executive Officer, President and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP and has agreed to serve as a member of the
board of ACC upon consummation of its initial public offering.
25
RESULTS OF OPERATIONS
The following table is a comparison of the results of operations for the three
month period ended June 30, 2004 to the three month period ended June 30, 2003
(dollars in thousands):
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------
CHANGE
-------------------------
2004 2003 DOLLARS PERCENT
---------- ---------- ---------- ----------
PROPERTY OPERATING REVENUES:
Base rents .............................. $ 109,765 $ 94,141 $ 15,624 16.6%
Tenant escalations and reimbursements ... 17,478 13,907 3,571 25.7%
---------- ---------- ----------
TOTAL PROPERTY OPERATING REVENUES ........ $ 127,243 $ 108,048 $ 19,195 17.8%
========== ========== ==========
PROPERTY OPERATING EXPENSES:
Operating expenses ....................... $ 30,532 $ 25,351 $ 5,181 20.4%
Real estate taxes ........................ 20,094 17,087 3,007 17.6%
---------- ---------- ----------
TOTAL PROPERTY OPERATING EXPENSES ........ $ 50,626 $ 42,438 $ 8,188 19.3%
========== ========== ==========
INVESTMENT AND OTHER INCOME ............... $ 3,323 $ 4,888 $ (1,565) (32.0)%
========== ========== ==========
OTHER EXPENSES:
Interest expense ......................... $ 24,607 $ 20,145 $ 4,462 22.1%
Marketing, general and administrative .... 7,374 8,795 (1,421) (16.2)%
---------- ---------- ----------
TOTAL OTHER EXPENSES ..................... $ 31,981 $ 28,940 $ 3,041 10.5%
========== ========== ==========
The Operating Partnership's property operating revenues, which include
base-rents and tenant escalations and reimbursements ("Property Operating
Revenues") increased by $19.2 million for the three months ended June 30, 2004
as compared to the 2003 period. Property Operating Revenues increased $14.6
million attributable to lease up of redeveloped properties and from the
acquisitions of 1185 Avenue of the Americas in January 2004 and 1055 Washington
Avenue in August 2003. In addition, Property Operating Revenues increased by
$1.3 million from built-in rent increases for existing tenants in our "same
store" properties and by an $800,000 increase in termination fees. Property
Operating Revenues also increased by approximately $1.6 million due to the
reduction in tenant receivable write-offs and to a weighted average occupancy
increase in our "same store" properties. Tenant escalations and reimbursements
increased $2.3 million attributable to increased operating expense and real
estate tax costs being passed through to tenants as base years for 2002 take
effect. These increases were offset by $500,000 in same space rental rate
decreases and $800,000 of free rent concessions.
The Operating Partnership's property operating expenses, real estate taxes and
ground rents ("Property Expenses") increased by approximately $8.2 million for
the three months ended June 30, 2004 as compared to the 2003 period. The
increase is primarily attributable the Operating Partnership's acquisitions of
1185 Avenue of the Americas and 1055 Washington Avenue amounting to
approximately $7.6 million. The remaining increase in property operating
expenses is attributable to $ 600,000 in real estate taxes and operating
expenses from the Operating Partnership's "same store" properties. Increases in
real estate taxes is attributable to the significant increases levied by certain
municipalities, particularly in New York City and Nassau County, New York which
have experienced fiscal budget issues.
Investment and other income decreased by $1.6 million or 32.0%. This decrease is
primarily attributable to the decrease in the gain recognized of the Operating
Partnership's land sale and build-to-suit transaction of approximately $3.9
million. This decrease was off-set by cost savings achieved by the Operating
Partnership's service companies related to the November 2003 restructuring.
Interest expense increased by $4.5 million or 22.1%. This increase is
attributable to approximately $3.4 million of interest expense incurred on the
mortgage debt on 1185 Avenue of the Americas which was acquired in January 2004
and approximately $2.8 million of corporate interest expense allocable to
discontinued operations for the three month period ended June 30, 2003 with no
such allocation in the current period. These increases were offset by decreases
in interest expense of approximately $400,000 incurred under the Operating
Partnership's "same store" mortgage portfolio and a decrease in interest expense
of approximately $1.7 million incurred under the Operating Partnership's
unsecured credit facility as a result of a decrease in the weighted average
balance outstanding. The weighted average balance outstanding under the
Operating Partnership's unsecured credit facility was $90 million for the three
months ended June 30, 2004 as compared to $319.9 million for the three months
ended June 30, 2003.
26
Marketing, general and administrative expenses decreased by $1.4 million or
16.2%. This overall decrease is attributable to the efficiencies the Operating
Partnership achieved as a result of its November 2003 restructuring and the
related termination of certain employees and settlement of the employment
contracts of certain former executive officers of the Operating Partnership.
Discontinued operations, net of minority interests, increased by approximately
$122,000. This net increase is attributable to the gain on sales related to
those properties sold during the current period of approximately $3.8 million,
which was offset by the decrease of the operations for those properties sold
between July 1, 2003 and March 31, 2004.
The following table is a comparison of the results of operations for the six
month period ended June 30, 2004 to the six month period ended June 30, 2003
(dollars in thousands):
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------
CHANGE
-------------------------
2004 2003 DOLLARS PERCENT
---------- ---------- ---------- ----------
PROPERTY OPERATING REVENUES:
Base rents ............................... $ 220,800 $ 188,885 $ 31,915 16.9%
Tenant escalations and reimbursements .... 35,593 27,943 7,650 27.4%
---------- ---------- ----------
TOTAL PROPERTY OPERATING REVENUES ........ $ 256,393 $ 216,828 $ 39,565 18.2%
========== ========== ==========
PROPERTY OPERATING EXPENSES:
Operating expenses ....................... $ 61,406 $ 51,789 $ 9,617 18.6%
Real estate taxes ........................ 40,685 34,029 6,656 19.6%
---------- ---------- ----------
TOTAL PROPERTY OPERATING EXPENSES ........ $ 102,091 $ 85,818 $ 16,273 19.0%
========== ========== ==========
INVESTMENT AND OTHER INCOME ............... $ 8,986 $ 12,147 $ (3,161) (26.0)%
========== ========== ==========
OTHER EXPENSES:
Interest expense ......................... $ 50,268 $ 40,242 $ 10,026 24.9%
Marketing, general and
administrative ........................... 14,441 16,364 (1,923) (11.8)%
---------- ---------- ----------
TOTAL OTHER EXPENSES ..................... $ 64,709 $ 56,606 $ 8,103 14.3%
========== ========== ==========
The Operating Partnership's Property Operating Revenues increased by $39.6
million for the six months ended June 30, 2004 as compared to the 2003 period.
Property Operating Revenues increased $27.3 million attributable to lease up of
redeveloped properties and from the acquisitions of 1185 Avenue of the Americas
in January 2004 and 1055 Washington Avenue in August 2003. In addition, Property
Operating Revenues increased by $2.6 million from built-in rent increases for
existing tenants in our "same store" properties and by a $5.0 million increase
in termination fees. Property Operating Revenues also increased by approximately
$2.8 million due to the reduction in tenant receivable write-offs and to a
weighted average occupancy increase in our "same store" properties. Tenant
escalations and reimbursements increased $4.3 million attributable to increased
operating expense and real estate tax costs being passed through to tenants as
base years for 2002 take effect. These increases were offset by $800,000 in same
space rental rate decreases and $1.5 million of free rent concessions.
The Operating Partnership's Property Expenses increased by approximately $16.3
million for the six months ended June 30, 2004 as compared to the 2003 period.
The increase is primarily attributable the Operating Partnership's acquisitions
of 1185 Avenue of the Americas and 1055 Washington Avenue amounting to
approximately $12.7 million. The remaining increase in Property Expenses is
attributable to approximately $3.6 million in real estate taxes and operating
expenses from the Operating Partnership's "same store" properties. Increases in
real estate taxes is attributable to the significant increases levied by certain
municipalities, particularly in New York City and Nassau County, New York which
have experienced fiscal budget issues.
Investment and other income decreased by $3.2 million or 26.0 % from the six
month period ended June 30, 2003 as compared to the same quarterly period of
2004. The decrease is primarily attributable to a decrease in the gain
recognized on the Operating Partnership's land sale and build-to-suit
transaction of approximately $5.1 million. This decrease was off-set by net
increases in interest income on mortgage notes and notes receivable of
approximately $403,000, net increases in real estate tax recoveries, related to
prior periods, of approximately $600,000 and cost savings achieved by the
Operating Partnership's service companies related to the November 2003
restructuring.
27
Interest expense increased by $10.0 million or 24.9 % from the six month period
ended June 30, 2003 as compared to the same quarterly period of 2004. The
increase is attributable to the net increase of $50 million in the Operating
Partnership's senior unsecured notes which resulted in approximately $ 1.3
million of additional interest expense and approximately $6.5 million of
interest expense incurred on the mortgage debt on 1185 Avenue of the Americas
which was acquired in January 2004. In addition, during the six month period
ended June 30, 2003, the Operating Partnership allocated approximately $5.5
million of its interest expense to discontinued operations in accordance with
FASB Statement No. 144 with no such allocation in the current period. This
allocation resulted in an additional increase in interest expense from
continuing operations. These increases were offset by decreases in interest
expense of approximately $691,000 incurred under the Operating Partnership's
"same store" mortgage portfolio, in capitalized interest expense of
approximately $326,000 attributable to a decrease in development projects and in
interest expense of approximately $2.3 million incurred under the Operating
Partnership's unsecured credit facility as a result of a decrease in the
weighted average balance outstanding. The weighted average balance outstanding
under the Operating Partnership's unsecured credit facility was $104.9 million
for the six months ended June 30, 2004 as compared to $303.0 million for the six
months ended June 30, 2003.
Marketing, general and administrative expenses decreased by $1.9 million or
11.8% from the six month period ended June 30, 2003 as compared to the same
quarterly period of 2004. This overall decrease is attributable to the
efficiencies the Operating Partnership achieved as a result of its November 2003
restructuring and the related termination of certain employees and settlement of
the employment contracts of certain former executive officers of the Operating
Partnership.
Discontinued operations, net of minority interests, increased by approximately
$2.8 million. This net increase is attributable to the gain on sales of real
estate for those properties sold during the current period of approximately $9.3
million, which was off-set by the decrease of the operations for those
properties sold between July 1, 2003 and January 1, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and non-incremental capital expenditures,
excluding incremental capital expenditures of the Operating Partnership. The
Operating Partnership expects to meet its short-term liquidity requirements
generally through its net cash provided by operating activities along with its
unsecured credit facility described below. The credit facility contains several
financial covenants with which the Operating Partnership must be in compliance
in order to borrow funds thereunder. During recent quarterly periods, the
Operating Partnership has incurred significant leasing costs as a result of
increased market demands from tenants and high levels of leasing transactions
that result from the re-tenanting of scheduled expirations or early terminations
of leases. The Operating Partnership is currently experiencing high tenanting
costs including tenant improvement costs, leasing commissions and free rent in
all of its markets. For the three and six month periods ended June 30, 2004, the
Operating Partnership paid $11.5 million and $21.6 million, respectively for
tenanting costs including tenant improvement costs and leasing commissions. As a
result of these and / or other operating factors, the Operating Partnership's
cash flow from operating activities was not sufficient to pay 100% of the
distributions paid on its common stock. To meet the short-term funding
requirements relating to these leasing costs, the Operating Partnership has used
proceeds of property sales or borrowings under its credit facility. Based on the
Operating Partnership's forecasted leasing for 2004 it anticipates that it will
incur similar shortfalls. The Operating Partnership currently intends to fund
any shortfalls with proceeds from non-income producing asset sales or borrowings
under its credit facility. The Operating Partnership periodically reviews its
distribution policy to determine the appropriateness of the Operating
Partnership's distribution rate relative to the Operating Partnership's cash
flows. The Operating Partnership adjusts its distribution rate based on such
factors as leasing activity, market conditions and forecasted increases and
decreases in its cash flow as well as required distributions of the Company's
taxable income to maintain its status as a REIT. There can be no assurance that
the Operating Partnership will maintain the current quarterly distribution level
on its common units.
The Operating Partnership expects to meet certain of its financing requirements
through long-term secured and unsecured borrowings and the issuance of debt and
equity securities of the Operating Partnership. During the six months ended June
30, 2004, the Company issued $150 million of common equity securities and the
Operating Partnership issued $150 million of senior unsecured debt securities.
There can be no assurance that there will be adequate demand for the Operating
Partnership's equity at the time or at the price in which the Operating
Partnership desires to raise capital through the sale of additional equity.
Similarly, there can be no assurance that the Operating Partnership will be able
to access the unsecured debt markets at the time when the Operating Partnership
desires to sell its unsecured notes. In addition, when valuations for commercial
real estate properties are high, the Operating Partnership will seek to sell
certain land inventory to realize value and profit created. The Operating
Partnership will then seek opportunities to reinvest the capital realized from
these dispositions back into value-added assets in the Operating Partnership's
core Tri-State Area markets. However, there can be no assurances that the
Operating Partnership will be able to identify such opportunities that meet the
Operating Partnership's underwriting criteria. The Operating Partnership will
refinance existing mortgage indebtedness, senior unsecured notes or indebtedness
under its credit facility at maturity or retire such debt through the issuance
of additional debt securities or additional equity securities. The Operating
Partnership anticipates that the current balance of cash and cash equivalents
and cash flows from operating activities, together with cash available from
borrowings, equity offerings and proceeds from sales of land and non-income
producing assets, will be adequate to meet the capital and liquidity
requirements of the Operating Partnership in both the short and long-term. The
Operating Partnership's senior unsecured debt is currently rated "BBB-" by
Fitch, "BBB-" by Standard & Poors and "Ba1" by Moody's. The rating agencies
review the
28
ratings assigned to an issuer such as the Operating Partnership on an ongoing
basis. Negative changes in the Operating Partnership's ratings would result in
increases in the Operating Partnership's borrowing costs, including borrowings
under the Operating Partnership's unsecured credit facility.
As a result of current economic conditions, certain tenants have either not
renewed their leases upon expiration or have paid the Operating Partnership to
terminate their leases. In addition, a number of U.S. companies have filed for
protection under federal bankruptcy laws. Certain of these companies are tenants
of the Operating Partnership. The Operating Partnership is subject to the risk
that other companies that are tenants of the Operating Partnership may file for
bankruptcy protection. This may have an adverse impact on the financial results
and condition of the Operating Partnership. Our results reflect vacancy rates in
our markets that are at the higher end of the range of historical cycles and in
some instances our asking rents in our markets have trended lower and landlords
have been required to grant greater concessions such as free rent and tenant
improvements. Our markets have also been experiencing higher real estate taxes
and utility rates. However, our markets have begun to recover as evidenced by an
increased level of leasing activity, increased occupancy rates in our portfolio
and decreases in vacancy rates in certain of our markets.
The Operating Partnership carries comprehensive liability, fire, extended
coverage and rental loss insurance on all of its properties. Six of the
Operating Partnership's properties are located in New York City. As a result of
the events of September 11, 2001, insurance companies were limiting coverage for
acts of terrorism in "all risk" policies. In November 2002, the Terrorism Risk
Insurance Act of 2002 was signed into law, which, among other things, requires
insurance companies to offer coverage for losses resulting from defined "acts of
terrorism" through 2004. The Operating Partnership's current insurance coverage
provides for full replacement cost of its properties, including for acts of
terrorism up to $500 million on a per occurrence basis, except for one asset
which is insured up to $393 million.
The potential impact of terrorist attacks in the New York City and Tri-State
Area may adversely affect the value of the Operating Partnership's properties
and its ability to generate cash flow. As a result, there may be a decrease in
demand for office space in metropolitan areas that are considered at risk for
future terrorist attacks, and this decrease may reduce the Operating
Partnership's revenues from property rentals.
In order to qualify as a REIT for federal income tax purposes, the Company is
required to make distributions to its stockholders of at least 90% of REIT
taxable income. As a result, it is anticipated that the Operating Partnership
will make distributions in amounts sufficient to meet this requirement. The
Operating Partnership expects to use its cash flow from operating activities for
distributions and for payment of recurring, non-incremental revenue-generating
expenditures. The Operating Partnership intends to invest amounts accumulated
for distribution in short-term liquid investments.
As of June 30, 2004, the Operating Partnership had a $500 million unsecured
revolving credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association, as syndication
agent, and Citicorp North America, Inc. and Wachovia Bank, National Association,
as co-documentation agents. The Credit Facility was scheduled to mature in
December 2005, contained options for a one-year extension subject to a fee of 25
basis points and, upon receiving additional lender commitments, increasing the
maximum revolving credit amount to $750 million. As of June 30, 2004, based on a
pricing grid of the Operating Partnership's unsecured debt ratings, borrowings
under the Credit Facility were priced off LIBOR plus 90 basis points and the
Credit Facility carried a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's unsecured credit ratings the
interest rates and facility fee are subject to change. At June 30, 2004, the
outstanding borrowings under the Credit Facility aggregated $90 million and
carried a weighted average interest rate of 2.18%.
On August 6, 2004, the Operating Partnership amended and extended the Credit
Facility to mature in August 2007 with similar terms and conditions as existed
prior to the amendment and extension.
The Operating Partnership utilizes the Credit Facility primarily to finance real
estate investments, fund its real estate development activities and for working
capital purposes. At June 30, 2004, the Operating Partnership had availability
under the Credit Facility to borrow an additional $410 million, subject to
compliance with certain financial covenants.
In connection with the acquisition of certain properties, contributing partners
of such properties have provided guarantees on indebtedness of the Operating
Partnership. As a result, the Operating Partnership maintains certain
outstanding balances on its Credit Facility.
On August 9, 2004, the Operating Partnership made an advance under its Credit
Facility in the amount of $222.5 million and along with cash-on-hand paid off
the $250 million balance of the mortgage debt on the property located at 1185
Avenue of the Americas in New York City.
On January 22, 2004, the Operating Partnership issued $150 million of seven-year
5.15% (5.196% effective rate) senior unsecured notes. Prior to the issuance of
these senior unsecured notes the Operating Partnership entered into several
anticipatory interest rate hedge instruments to protect itself against
potentially rising interest rates. At the time the notes were issued the
Operating Partnership incurred a net cost of approximately $980,000 to settle
these instruments. Such costs are being amortized over the term of the senior
unsecured notes. During March 2004, the Company also completed an equity
offering of 5.5 million shares of its common stock raising approximately $149.5
million, net of an underwriting discount, or $27.18 per share. Net proceeds
received from these transactions were used to repay
29
outstanding borrowings under the Credit Facility, repay $100 million of the
Operating Partnership's 7.4% senior unsecured notes and to invest in short-term
liquid investments.
On August 10, 2004, the Operating Partnership priced an offering of $150 million
of 5.875% senior unsecured notes due August 15, 2014. Interest on the notes will
be payable semi-annually on February 15 and August 15, commencing February 15,
2005. The notes were priced at 99.151% of par value to yield 5.989%. Settlement
is scheduled for August 13, 2004. Prior to the issuance of these notes the
Operating Partnership entered into several anticipatory interest rate hedge
instruments to protect itself against potentially rising interest rates. At the
time the notes are issued and these instruments are settled the Company
anticipates receiving a benefit of approximately $1.9 million. Such benefit will
be amortized against interest expense over the term of the notes. The Operating
Partnership intends to use the net proceeds from this offering to repay a
portion of the Credit Facility borrowings used to pay off the outstanding
mortgage debt on 1185 Avenue of the Americas.
The Operating Partnership continues to seek opportunities to acquire real estate
assets in its markets. The Operating Partnership has historically sought to
acquire properties where it could use its real estate expertise to create
additional value subsequent to acquisition. As a result of increased market
values for the Operating Partnership's commercial real estate assets, the
Operating Partnership has sold certain non-core assets or interests in assets
where significant value has been created. During 2003, the Operating Partnership
sold assets or interests in assets with aggregate sales prices of approximately
$350.6 million. In addition, during the six months ended June 30, 2004, the
Operating Partnership has sold assets or interests in assets with aggregate
sales prices of approximately $44.1 million, net of minority partner's joint
venture interest. The Operating Partnership used the proceeds from these sales
primarily to pay down borrowings under the Credit Facility, for general
corporate purposes and to invest in short-term liquid investments until such
time as alternative real estate investments can be made.
An OP Unit and a share of common stock have essentially the same economic
characteristics as they effectively share equally in the net income or loss and
distributions of the Operating Partnership. Subject to certain holding periods,
OP Units may either be redeemed for cash or, at the election of the Company,
exchanged for shares of common stock of the Company on a one-for-one basis. The
OP Units currently receive a quarterly distribution of $.4246 per unit. As of
June 30, 2004, the Operating Partnership had issued and outstanding 3,084,708
Class A OP Units and 465,845 Class C OP Units. The Class C OP Units were issued
in August 2003 in connection with the contribution of real property to the
Operating Partnership and currently receive a quarterly distribution of $.4664
per unit.
On November 25, 2003, the Company exchanged all of its 9,915,313 outstanding
shares of Class B common stock for an equal number of shares of the Company
common stock. The Board of Directors declared a final cash dividend on the
Company's Class B common stock to holders of record on November 25, 2003 in the
amount of $.1758 per share which was paid on January 12, 2004. This payment
covered the period from November 1, 2003 through November 25, 2003 and was based
on the previous quarterly Class B common stock dividend rate of $.6471 per
share. In order to align the regular quarterly dividend payment schedule of the
former holders of Class B common stock with the schedule of the holders of
common stock for periods subsequent to the exchange date for the Class B common
stock, the Board of Directors also declared a cash dividend with regard to the
common stock to holders of record on October 14, 2003 in the amount of $.2585
per share which was paid on January 12, 2004. This payment covered the period
from October 1, 2003 through November 25, 2003 and was based on the current
quarterly common stock dividend rate of $.4246 per share. As a result, the
Company declared dividends through November 25, 2003 to all holders of common
stock and Class B common stock. The Board of Directors also declared the common
stock cash dividend for the portion of the fourth quarter subsequent to November
25, 2003. The holders of record of common stock on January 2, 2004, giving
effect to the exchange transaction, received a dividend on the common stock in
the amount of $.1661 per share on January 12, 2004. This payment covered the
period from November 26, 2003 through December 31, 2003 and was based on the
current quarterly common stock dividend rate of $.4246 per share. In connection
with the Company's exchange of its Class B common stock, the Operating
Partnership exchanged its Class B common units held by the Company for an equal
number of OP Units. Further, with respect to the foregoing declarations on
dividends on the Company's common and Class B common stock, the Operating
Partnership made distributions on its OP Units and Class B common units in like
amounts on the same dates.
During the six month period ended June 30, 2004, approximately 1.3 million
shares of the Company's common stock was issued in connection with the exercise
of outstanding options to purchase stock under its stock option plans resulting
in proceeds to the Operating Partnership of approximately $27.2 million.
The Board of Directors of the Company authorized the purchase of up to five
million shares of the Company's common stock. Transactions conducted on the New
York Stock Exchange have, and will continue to be, effected in accordance with
the safe harbor provisions of the Securities Exchange Act of 1934 and may be
terminated by the Company at any time. Since the Board's initial authorization,
the Company has purchased 3,318,600 shares of its common stock for an aggregate
purchase price of approximately $71.3 million. In June 2004, the Board of
Directors re-set the Company's common stock repurchase program back to five
million shares. No purchases were made during the six months ended June 30,
2004.
The Board of Directors of the Company also formed a pricing committee to
consider purchases of up to $75 million of the Company's outstanding preferred
securities.
30
The Company is currently evaluating the redemption of some or all of its Series
A preferred stock. In connection with the Company's redemption, if any, of its
Series A preferred stock, the Operating Partnership will redeem an equal number
of Series A preferred units.
On June 30, 2004, the Company had issued and outstanding 8,693,900 shares of
7.625% Series A Convertible Cumulative Preferred Stock (the "Series A preferred
stock"). The Series A preferred stock is redeemable by the Company on or after
April 13, 2004 at a price of $25.7625 per share with such price decreasing, at
annual intervals, to $25.00 per share on April 13, 2008. In addition, the Series
A preferred stock, at the option of the holder, is convertible at any time into
the Company's common stock at a price of $28.51 per share. On May 13, 2004, the
Company purchased and retired 140,600 shares of the Series A preferred stock for
approximately $3.4 million or $24.45 per share. In addition, during July 2004,
the Company exchanged 1,350,000 shares of the Series A preferred stock for
1,304,602 shares of its common stock. In connection with the Company purchasing
and exchanging its Series A preferred stock, the Operating Partnership purchased
and exchanged its Series A preferred units with the Company. As a result of
these transactions annual preferred distributions will decrease by approximately
$2.8 million. In accordance with the Emerging Issues Task Force ("EITF") Topic
D-42 the Operating Partnership will incur an accounting charge during the third
quarter of 2004 of approximately $3.4 million in connection with the July 2004
exchange of the Company's Series A preferred stock.
On January 1, 2004, the Company had issued and outstanding two million shares of
Series B Convertible Cumulative Preferred Stock (the "Series B preferred
stock"). The Series B preferred stock was redeemable by the Company as follows:
(i) on or after June 3, 2003 to and including June 2, 2004, at $25.50 per share
and (ii) on or after June 3, 2004 and thereafter, at $25.00 per share. The
Series B preferred stock, at the option of the holder, was convertible at any
time into the Company's common stock at a price of $26.05 per share. On January
16, 2004, the Company exercised its option to redeem the two million shares of
outstanding Series B preferred stock for approximately 1,958,000 shares of its
common stock. In connection with the Company exercising its option to redeem the
Series B Preferred Stock, the Operating Partnership redeemed its Series B
preferred units with the Company for approximately 1,958,000 OP Units. As a
result of this redemption, annual preferred distributions will decrease by
approximately $4.4 million.
On April 1, 2004, the Operating Partnership had issued and outstanding
approximately 19,662 preferred units of limited partnership interest with a
liquidation preference value of $1,000 per unit and a current annualized
distribution of $55.60 per unit (the "Preferred Units"). The Preferred Units are
held by a third party and were issued in 1998 in connection with the
contribution of real property to the Operating Partnership. On April 12, 2004,
the Operating Partnership redeemed approximately 3,081 Preferred Units, at the
election of the holder, for approximately $3.1 million, including accrued and
unpaid dividends which is being applied to amounts owed from the unit holder
under the Other Notes. In addition, during July 2004, the holder of
approximately 15,381 of the outstanding Preferred Units exchanged them into OP
Units. The Operating Partnership converted the Preferred Units, including
accrued and unpaid dividends, into approximately 531,000 OP Units, which were
valued at approximately $14.7 million at the time of the conversion. Subsequent
to the conversion, the OP Units were exchanged for an equal number of shares of
the Company's common stock. In connection with the July 2004 exchanges and
conversions, the preferred unit holder delivered notice to the Operating
Partnership of his intent to repay $15.5 million owed from the unit holder under
the Other Notes.
The Operating Partnership's indebtedness at June 30, 2004 totaled approximately
$1.5 billion (including its share of consolidated and unconsolidated joint
venture debt and net of minority partners' interests share of consolidated joint
venture debt) and was comprised of $90 million outstanding under the Credit
Facility, approximately $549.1 million of senior unsecured notes and
approximately $833.2 million of mortgage indebtedness. Based on the Operating
Partnership's total market capitalization of approximately $3.7 billion at June
30, 2004 (calculated based on the sum of (i) the market value of the OP Units,
assuming conversion (which, for this purpose is based upon the closing price of
the Company's common stock on June 30, 2004 of $27.46 per unit), (ii) the
liquidation preference value of the Operating Partnership's preferred units and
(iii) the $1.5 billion of debt), the Operating Partnership's debt represented
approximately 40.3% of its total market capitalization.
31
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Operating Partnership's significant
consolidated debt obligations, by scheduled principal cash flow payments and
maturity date, and its commercial commitments by scheduled maturity at June 30,
2004 (in thousands):
MATURITY DATE
----------------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---------- ----------- ---------- ---------- ---------- ---------- ----------
Mortgage notes payable (1) $ 6,779 $ 13,887 $ 13,478 $ 10,969 $ 9,989 $105,178 $ 160,280
Mortgage notes payable (2) (3) 250,000 18,553 129,920 60,539 --- 346,269 805,281
Senior unsecured notes --- --- --- 200,000 --- 350,000 550,000
Unsecured credit facility --- 90,000 --- --- --- --- 90,000
Land lease obligations (4) 3,737 3,776 3,828 3,753 3,753 78,672 97,519
Operating leases 1,119 1,282 1,198 844 359 --- 4,802
Air rights lease 333 333 333 333 333 3,680 5,345
obligations
---------- ---------- ---------- ---------- ---------- ---------- -----------
$ 261,968 $ 127,831 $ 148,757 $ 276,438 $14,434 $883,799 $1,713,227
========== ========== ========== ========== ========== ========== ===========
(1) Scheduled principal amortization payments.
(2) Principal payments due at maturity.
(3) In addition, the Operating Partnership has a 60% interest in an
unconsolidated joint venture property. The Operating Partnership's share
of the mortgage debt at March 31, 2004 is approximately $7.6 million. This
mortgage note bears interest at 8.85% per annum and matures on September
1, 2005 at which time the Operating Partnership's share of the mortgage
debt will be approximately $6.9 million.
(4) The Operating Partnership leases, pursuant to noncancellable operating
leases, the land on which twelve of its buildings were constructed. The
leases, certain of which contain renewal options at the direction of the
Operating Partnership, expire between 2006 and 2090. The leases either
contain provisions for scheduled increases in the minimum rent at
specified intervals or for adjustments to rent based upon the fair market
value of the underlying land or other indices at specified intervals.
Minimum ground rent is recognized on a straight-line basis over the terms
of the leases.
Certain of the mortgage notes payable are guaranteed by certain limited partners
in the Operating Partnership and/or the Company. In addition, consistent with
customary practices in non-recourse lending, certain non-recourse mortgages may
be recourse to the Operating Partnership under certain limited circumstances
including environmental issues and breaches of material representations.
During August 2004 the mortgage note payable and mezzanine debt, aggregating
$250 million, on the property located at 1185 Avenue of the Americas, New York,
NY, matures. On March 19, 2004, the Operating Partnership entered into two
anticipatory interest rate hedge instruments which are scheduled to coincide
with an August 2004 debt maturity, totaling $100 million, to protect itself
against potentially rising interest rates. At June 30, 2004, the fair value of
these instruments exceeded their carrying value by approximately $5.2 million.
Such amount has been reflected as accumulated other comprehensive income with a
corresponding increase to prepaid expenses and other assets on the Operating
Partnership's balance sheet. On July 1, 2004, the Operating Partnership entered
into an additional anticipatory interest rate hedge instrument totaling $12.5
million to coincide with the aforementioned August 2004 debt maturity.
At June 30, 2004, the Operating Partnership had approximately $940,000 in
outstanding undrawn standby letters of credit issued under the Credit Facility.
In addition, approximately $43.5 million, or 4.5%, of the Operating
Partnership's mortgage debt is recourse to the Operating Partnership.
OTHER MATTERS
Seven of the Operating Partnership's office properties which were acquired by
the issuance of OP Units are subject to agreements limiting the Operating
Partnership's ability to transfer them prior to agreed upon dates without the
consent of the limited partner who transferred the respective property to the
Operating Partnership. In the event the Operating Partnership transfers any of
these properties prior to the expiration of these limitations, the Operating
Partnership may be required to make a payment relating to taxes incurred by the
limited partner. These limitations expire between 2007 and 2013.
Three of the Operating Partnership's office properties are held in joint
ventures which contain certain limitations on transfer. These limitations
include requiring the consent of the joint venture partner to transfer a
property prior to various specified dates, rights of first offer, and buy / sell
provisions.
With the recent appointment of Messrs. Crocker, Steinberg, Ruffle and Ms. McCaul
as additional independent directors and the retirement of Mr. Kevenides, the
Company's Board of Directors currently consists of seven independent directors
and two insiders. Mr. Peter Quick serves as the Lead Director of the Board. In
addition, each of the Audit, Compensation and Nominating and Governance
Committees is comprised solely of independent directors.
In May 2003, the Company revised its policy with respect to compensation of its
independent directors to provide that a substantial portion of the independent
director's compensation shall be in the form of common stock of the Company.
Such common stock may not be sold until such time as the director is no longer a
member of the Company's Board.
32
Recently, the Company has taken certain additional actions to enhance its
corporate governance policies. These actions included opting out of the Maryland
Business Combination Statute, de-staggering the Board of Directors to provide
that each director is subject to election by shareholders on an annual basis and
modifying the Company's "five or fewer" limitation on the ownership of its
common stock so that such limitation may only be used to protect the Company's
REIT status and not for anti-takeover purposes.
The Company has also adopted a policy which requires that each independent
director acquire $100,000 of common stock of the Company and a policy which
requires that at least one independent director be rotated off the Board every
three years.
The Company had historically structured long term incentive programs ("LTIP")
using restricted stock and stock loans. In July 2002, as a result of certain
provisions of the Sarbanes Oxley legislation, the Operating Partnership
discontinued the use of stock loans in its LTIP. In connection with LTIP grants
made prior to the enactment of the Sarbanes Oxley legislation the Company made
stock loans to certain executive and senior officers to purchase 487,500 shares
of its common stock at market prices ranging from $18.44 per share to $27.13 per
share. The stock loans were set to bear interest at the mid-term Applicable
Federal Rate and were secured by the shares purchased. Such stock loans
(including accrued interest) were scheduled to vest and be ratably forgiven each
year on the anniversary of the grant date based upon vesting periods ranging
from four to ten years based on continued service and in part on attaining
certain annual performance measures. These stock loans had an initial aggregate
weighted average vesting period of approximately nine years. As of June 30,
2004, there remains 222,429 shares of common stock subject to the original stock
loans which are anticipated to vest between 2005 and 2011. Approximately
$248,000 and $556,000 of compensation expense was recorded for the three and six
month periods ended June 30, 2004, respectively related to these LTIP. Such
amount has been included in marketing, general and administrative expenses on
the Operating Partnership's consolidated statements of income.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $4.7 million at June 30, 2004, and have been included
as a reduction of additional paid in capital on the Operating Partnership's
consolidated balance sheets. Other outstanding loans to executive and senior
officers at June 30, 2004 amounted to approximately $1.9 million primarily
related to tax payment advances on stock compensation awards and life insurance
contracts made to certain executive and non-executive officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively, and collectively, the "Rights"). Each Right represents the right
to receive, upon vesting, one share of common stock if shares are then available
for grant under one of the Company's stock option plans or, if shares are not so
available, an amount of cash equivalent to the value of such stock on the
vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 62,835 shares of the Company's common stock and the 2003 Rights
aggregate 26,042 shares of common stock. As of June 30, 2004, there remains
47,126 shares of common stock related to the 2002 Rights and 26,042 shares of
common stock related to the 2003 Rights. During the three and six month periods
ended June 30, 2004 the Operating Partnership recorded approximately $100,000
and $201,000, respectively compensation expense related to the Rights. Such
amount has been included in marketing, general and administrative expenses on
the Operating Partnership's consolidated statements of income.
In March 2003, the Company established a new LTIP for its executive and senior
officers. The four-year plan has a core award, which provides for annual stock
based compensation based upon continued service and in part based on attaining
certain annual performance measures. The plan also has a special outperformance
award, which provides for compensation to be earned at the end of a four-year
period if the Company attains certain four-year cumulative performance measures.
Amounts earned under the special outperformance award may be paid in cash or
stock at the discretion of the Compensation Committee of the Board. Performance
measures are based on total shareholder returns on a relative and absolute
basis. On March 13, 2003, the Company made available 827,776 shares of its
common stock under one of its existing stock option plans in connection with the
core award of this LTIP for eight of its executive and senior officers. On March
13, 2004, the Company met its annual performance measure with respect to the
prior annual period. As a result, the Company issued to the participants 206,944
shares of its common stock related to the core component of this LTIP. As of
June 30, 2004, there remains 620,832 shares of common stock reserved for future
issuance under the core award of this LTIP. With respect to the core award of
this LTIP, the Operating Partnership recorded approximately $699,000 and $1.4
million of compensation expense for the three and six month periods ended June
30, 2004, respectively. Such amount has been included in marketing, general and
administrative expenses on the Operating Partnership's consolidated statements
of income. Further, no provision will be made for the special outperformance
award of this LTIP until such time as achieving the requisite performance
measures is determined to be probable.
33
Under various Federal, state and local laws, ordinances and regulations, an
owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. These laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
any required remediation and the owner's liability therefore as to any property
is generally not limited under such enactments and could exceed the value of the
property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at a disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition, or in the event of
renovation or demolition. Such laws impose liability for release of ACMs into
the air and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Operating Partnership may be considered an owner or operator of
such properties or as having arranged for the disposal or treatment of hazardous
or toxic substances and, therefore, potentially liable for removal or
remediation costs, as well as certain other related costs, including
governmental fines and injuries to persons and property.
All of the Operating Partnership's office and industrial / R&D properties have
been subjected to a Phase I or similar environmental audit after April 1, 1994
(which involved general inspections without soil sampling, ground water analysis
or radon testing and, for the Operating Partnership's properties constructed in
1978 or earlier, survey inspections to ascertain the existence of ACMs were
conducted) completed by independent environmental consultant companies (except
for 35 Pinelawn Road which was originally developed by Reckson Associates, the
predecessor to the Operating Partnership, and subjected to a Phase 1 in April
1992). These environmental audits have not revealed any environmental liability
that would have a material adverse effect on the Operating Partnership's
business.
Soil, sediment and groundwater contamination, consisting of volatile organic
compounds ("VOCs") and metals, has been identified at the property at 32 Windsor
Place, Central Islip, New York. The contamination is associated with industrial
activities conducted by a tenant at the property over a number of years. The
contamination, which was identified through an environmental investigation
conducted on behalf of the Operating Partnership, has been reported to the New
York State Department of Environmental Conservation. The Operating Partnership
has notified the tenant of the findings and has demanded that the tenant take
appropriate actions to fully investigate and remediate the contamination. Under
applicable environmental laws, both the tenant and the Operating Partnership are
liable for the cost of investigation and remediation. The Operating Partnership
does not believe that the cost of investigation and remediation will be material
and the Operating Partnership has recourse against the tenant. However, there
can be no assurance that the Operating Partnership will not incur liability that
would have a material adverse effect on the Operating Partnership's business.
In March 2004, the Operating Partnership received notification from the Internal
Revenue Service indicating that they have selected the 2001 tax return of the
Operating Partnership for examination. The examination process is currently on
going.
34
FUNDS FROM OPERATIONS
Management believes that Funds from Operations ("FFO") is a widely recognized
and appropriate measure of performance of an equity REIT. Although FFO is a
non-GAAP financial measure, the Operating Partnership believes it provides
useful information to the Company's shareholders, potential investors and
management. The Operating Partnership computes FFO in accordance with the
standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"). FFO is defined by NAREIT as net income or loss, excluding
gains or losses from sales of depreciable properties plus real estate
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated from
operating activities in accordance with GAAP and is not indicative of cash
available to fund cash needs. FFO should not be considered as an alternative to
net income as an indicator of the Operating Partnership's operating performance
or as an alternative to cash flow as a measure of liquidity.
Since all companies and analysts do not calculate FFO in a similar fashion, the
Operating Partnership's calculation of FFO presented herein may not be
comparable to similarly titled measures as reported by other companies.
The following table presents the Operating Partnership's FFO calculation
(unaudited and in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income allocable to common unit holders ........................................ $ 13,744 $ 8,459 $ 30,644 $ 18,118
Adjustments for basic funds from operations:
Add:
Real estate depreciation and amortization .................................... 28,854 29,127 57,411 60,454
Minority partners' interests in consolidated partnerships .................... 6,811 4,335 13,136 9,025
Less:
Gain on sales of depreciable real estate...................................... 6,174 -- 11,330 --
Amounts distributable to minority partners in consolidated partnerships ...... 6,411 6,769 14,915 13,576
--------- --------- --------- ---------
Funds From Operations ("FFO") ...................................................... $ 36,824 $ 35,152 $ 74,946 $ 74,021
========= ========= ========= =========
Weighted average units outstanding ................................................. 70,443 65,192 67,679 65,292
========= ========= ========= =========
INFLATION
The office leases generally provide for fixed base rent increases or indexed
escalations. In addition, the office leases provide for separate escalations of
real estate taxes, operating expenses and electric costs over a base amount. The
industrial / R&D leases generally provide for fixed base rent increases, direct
pass through of certain operating expenses and separate real estate tax
escalations over a base amount. The Operating Partnership believes that
inflationary increases in expenses will be offset by contractual rent increases
and expense escalations described above. As a result of the impact of the events
of September 11, 2001, the Operating Partnership has realized increased
insurance costs, particularly relating to property and terrorism insurance, and
security costs. The Operating Partnership has included these costs as part of
its escalatable expenses. The Operating Partnership has billed these escalatable
expense items to its tenants consistent with the terms of the underlying leases
and believes they are collectible. To the extent the Operating Partnership's
properties contain vacant space, the Operating Partnership will bear such
inflationary increases in expenses.
The Credit Facility, $250 million of the Operating Partnership's mortgage notes
payable and the Mezz Note, bear interest at variable rates, which will be
influenced by changes in short-term interest rates, and are sensitive to
inflation.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Operating Partnership is interest rate risk
on its long term debt, mortgage notes and notes receivable. The Operating
Partnership will, when advantageous, hedge its interest rate risk using
financial instruments. The Operating Partnership is not subject to foreign
currency risk.
The Operating Partnership manages its exposure to interest rate risk on its
variable rate indebtedness by borrowing on a short-term basis under its Credit
Facility until such time as it is able to retire the short-term variable rate
debt with either a long-term fixed rate debt offering, long term mortgage debt,
equity offerings or through sales or partial sales of assets.
The Operating Partnership will recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges will be adjusted to fair value
through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability, or firm commitment
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. On March 19, 2004, the
Operating Partnership entered into two anticipatory interest rate hedge
instruments which are scheduled to coincide with an August 2004 debt maturity,
totaling $100 million, to protect itself against potentially rising interest
rates. At June 30, 2004, the fair value of these instruments exceeded their
carrying value by approximately $5.2 million. On July 1, 2004, the Operating
Partnership entered into an additional anticipatory interest rate hedge
instrument totaling $12.5 million to coincide with the aforementioned August
2004 debt maturity.
The fair market value ("FMV") of the Operating Partnership's long term debt,
mortgage notes and notes receivable is estimated based on discounting future
cash flows at interest rates that management believes reflect the risks
associated with long term debt, mortgage notes and notes receivable of similar
risk and duration.
The following table sets forth the Operating Partnership's long-term debt
obligations by scheduled principal cash flow payments and maturity date,
weighted average interest rates and estimated FMV at June 30, 2004 (dollars in
thousands):
For the Year Ended December 31,
----------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) FMV
--------------------------------------------------------------------------------------------------------
Long term debt:
Fixed rate ............. $ 6,779 $ 32,440 $ 143,398 $ 271,508 $ 9,989 $ 801,447 $ 1,265,561 $1,340,918
Weighted average
interest rate ....... 7.47% 6.90% 7.37% 7.14% 7.23% 7.40% 7.33%
Variable rate .......... $ 250,000 $ 90,000 $ -- $ -- $ -- $ -- $ 340,000 $ 340,000
Weighted average
interest rate ....... 4.95% 2.18% -- -- -- -- 4.22%
(1) Includes aggregate unamortized issuance discounts of approximately
$868,000 on certain of the senior unsecured notes which are due at
maturity.
In addition, a one percent increase in the LIBOR rate would have a $900,000
annual increase in interest expense on the $90 million of variable rate debt due
in 2005. A one percent increase in LIBOR would have no impact to interest
expense on the $250 million of variable rate debt due in 2004, as interest
reported in the current period is calculated using a LIBOR rate in excess of one
percent over the LIBOR rate at June 30, 2004.
The following table sets forth the Operating Partnership's mortgage notes and
note receivables by scheduled maturity date, weighted average interest rates and
estimated FMV at June 30, 2004 (dollars in thousands):
For the Year Ended December 31,
---------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) FMV
--------------------------------------------------------------------------------------------------------
Mortgage notes and
notes receivable:
Fixed rate ................ $ 19,000 $ -- $ -- $ 16,990 $ -- $ -- $ 35,990 $ 39,239
Weighted average
interest rate ....... 10.70% -- -- 12.00% -- -- 11.31%
Variable rate ............. $ -- $ 30,000 $ -- $ -- $ -- $ -- $ 30,000 $ 30,000
Weighted average
interest rate ....... -- 12.73% -- -- -- -- 12.73%
(1) Excludes interest receivables and unamortized acquisition costs
aggregating approximately $2.4 million dollars.
36
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is reported within the time periods specified in the SEC's
rules and forms. In this regard, the Operating Partnership has formed a
Disclosure Committee currently comprised of all of the Company's executive
officers as well as certain other employees with knowledge of information that
may be considered in the SEC reporting process. The Committee has responsibility
for the development and assessment of the financial and non-financial
information to be included in the reports filed by the Operating Partnership
with the SEC and assists the Company's Chief Executive Officer and Chief
Financial Officer in connection with their certifications contained in the
Operating Partnership's SEC reports. The Committee meets regularly and reports
to the Audit Committee on a quarterly or more frequent basis. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated, with the
participation of the Operating Partnership's management, our disclosure controls
and procedures as of the end of the period covered by this Quarterly Report on
Form 10-Q. Based upon the evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that such disclosure controls and procedures
are effective.
There were no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
37
SELECTED PORTFOLIO INFORMATION
The following table sets forth the Operating Partnership's schedule of its top
25 tenants based on base rental revenue as of June 30, 2004:
WTD. AVG. PERCENT OF PRO-RATA PERCENT OF CONSOLIDATED
TERM REMAINING TOTAL SHARE OF ANNUALIZED ANNUALIZED BASE
TENANT NAME (1) (2) (YEARS) SQUARE FEET BASE RENTAL REVENUE RENTAL REVENUE
----------------------------- ---------------- -------------------- ------------------------- -------------------------
*Debevoise & Plimpton 17.5 465,420 3.3% 5.6%
King & Spalding 7.8 176,204 2.3% 2.0%
*Verizon Communications Inc. 2.7 263,569 1.9% 1.7%
*American Express 9.2 129,818 1.9% 1.7%
*Schulte Roth & Zabel 16.4 279,746 1.6% 2.7%
*Fuji Photo Film USA 8.4 186,484 1.3% 1.2%
Dun & Bradstreet Corp. 8.3 123,000 1.2% 1.0%
United Distillers 0.7 137,918 1.2% 1.0%
*Bank of America/Fleet Bank 6.7 125,903 1.2% 1.0%
*WorldCom/MCI 2.6 244,730 1.1% 1.1%
Arrow Electronics 9.5 163,762 1.1% 1.0%
Amerada Hess Corporation 8.5 127,300 1.1% 1.0%
T.D. Waterhouse 3.1 103,381 1.0% 0.9%
Westdeutsche Landesbank 11.8 53,000 1.0% 0.9%
D.E. Shaw 11.5 79,515 0.9% 0.8%
Practicing Law Institute 9.7 77,500 0.9% 0.8%
*Banque Nationale De Paris 12.1 145,834 0.9% 1.5%
North Fork Bank 11.5 126,770 0.9% 0.8%
Vytra Healthcare 3.5 105,613 0.9% 0.8%
*Kramer Levin Nessen Kamin 0.8 158,144 0.9% 1.5%
Heller Ehrman White 0.9 64,526 0.9% 0.7%
P.R. Newswire Associates 3.9 67,000 0.8% 0.7%
*JP Morgan Chase/ Bank One 5.6 87,737 0.8% 0.8%
*HQ Global 4.3 126,487 0.8% 0.8%
Laboratory Corp. Of America 2.9 108,000 0.8% 0.7%
(1) Ranked by pro-rata share of annualized base rental revenue adjusted for
pro rata share of joint venture interests.
(2) Excludes One Orlando Centre in Orlando, Florida.
* Part or all of space occupied by tenant is in a 51% or more owned joint
venture building.
HISTORICAL NON-INCREMENTAL REVENUE-GENERATING CAPITAL EXPENDITURES, TENANT
IMPROVEMENT COSTS AND LEASING COMMISSIONS
The following table sets forth annual and per square foot non-incremental
revenue-generating capital expenditures in which the Operating Partnership paid
or accrued, during the respective periods, to retain revenues attributable to
existing leased space (at 100% of cost) for the years 2000 through 2003 and for
the six month period ended June 30, 2004 for the Operating Partnership's
consolidated office and industrial / R&D properties other than One Orlando
Center in Orlando, FL:
Average YTD
2000 2001 2002 2003 2000-2003 2004
----------- ----------- ----------- ----------- ----------- -----------
Suburban Office Properties
Total $ 3,289,116 $ 4,606,069 $ 5,283,674 $ 6,791,336 $ 4,992,549 $ 2,835,587
Per Square Foot $ 0.33 $ 0.45 $ 0.53 $ 0.67 $ 0.49 $ 0.28
NYC Office Properties
Total $ 946,718 $ 1,584,501 $ 1,939,111 $ 1,922,209 $ 1,598,135 $ 1,210,758
Per Square Foot $ 0.38 $ 0.45 $ 0.56 $ 0.55 $ 0.48 $ 0.27
Industrial Properties
Total $ 813,431 $ 711,666 $ 1,881,627 $ 1,218,401(1) $ 1,156,281 $ 22,923
Per Square Foot $ 0.11 $ 0.11 $ 0.28 $ 0.23 $ 0.18 $ 0.02
TOTAL PORTFOLIO
----------- ----------- ----------- ----------- ----------- -----------
Total $ 5,049,265 $ 6,902,236 $ 9,104,412 $ 9,931,946 $ 7,746,965 $ 4,069,268
Per Square Foot $ 0.25 $ 0.34 $ 0.45 $ 0.52 $ 0.39 $ 0.26
(1) Excludes non-incremental capital expenditures of $435,140 incurred during
the fourth quarter 2003 for the industrial properties which were sold
during the period.
38
The following table sets forth annual and per square foot non-incremental
revenue-generating tenant improvement costs and leasing commissions in which the
Operating Partnership committed to perform, during the respective periods, to
retain revenues attributable to existing leased space for the years 2000 through
2003 and for the six month period ended June 30, 2004 for the Operating
Partnership's consolidated office and industrial / R&D properties other than One
Orlando Center in Orlando, FL:
Average YTD
2000 2001 2002 2003 2000-2003 2004(1) New Renewal
--------------------------------------------------------------------------------------------------------
Long Island
Office Properties
Tenant Improvements $2,853,706 $2,722,457 $ 1,917,466 $ 3,774,722 $ 2,817,088 $ 2,394,114 $1,327,529 $1,066,585
Per Square Foot Improved $ 6.99 $ 8.47 $ 7.81 $ 7.05 $ 7.58 $ 9.05 $ 12.67 $ 6.67
Leasing Commissions $2,208,604 $1,444,412 $ 1,026,970 $ 2,623,245 $ 1,825,808 $ 1,333,976 $ 529,537 $ 804,439
Per Square Foot Leased $ 4.96 $ 4.49 $ 4.18 $ 4.90 $ 4.63 $ 5.04 $ 5.05 $ 5.03
--------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 11.95 $ 12.96 $ 11.99 $ 11.95 $ 12.21 $ 14.09 $ 17.72 $ 11.70
========================================================================================================
Westchester
Office Properties
Tenant Improvements $1,860,027 $2,584,728 $ 6,391,589(2) $ 3,732,370 $ 3,642,178 $ 4,937,356 $4,216,913 $ 720,443
Per Square Foot Improved $ 5.72 $ 5.91 $ 15.05 $ 15.98 $ 10.66 $ 14.64 $ 21.48 $ 5.12
Leasing Commissions $ 412,226 $1,263,012 $ 1,975,850(2) $ 917,487 $ 1,142,144 $ 2,003,752 $1,571,958 $ 431,794
Per Square Foot Leased $ 3.00 $ 2.89 $ 4.65 $ 3.93 $ 3.62 $ 5.94 $ 8.01 $ 3.07
--------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 8.72 $ 8.80 $ 19.70 $ 19.91 $ 14.28 $ 20.58 $ 29.49 $ 8.19
========================================================================================================
Connecticut
Office Properties
Tenant Improvements $ 385,531 $ 213,909 $ 491,435 $ 588,087 $ 419,740 $ 2,400,708 $1,047,111 $1,353,597
Per Square Foot Improved $ 4.19 $ 1.46 $ 3.81 $ 8.44 $ 4.47 $ 14.13 $ 29.54 $ 10.06
Leasing Commissions $ 453,435 $ 209,322 $ 307,023 $ 511,360 $ 370,285 $ 1,382,615 $ 347,634 $1,034,981
Per Square Foot Leased $ 4.92 $ 1.43 $ 2.38 $ 7.34 $ 4.02 $ 8.14 $ 9.81 $ 7.69
--------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 9.11 $ 2.89 $ 6.19 $ 15.78 $ 8.49 $ 22.27 $ 39.35 $ 17.75
========================================================================================================
New Jersey
Office Properties
Tenant Improvements $1,580,323 $1,146,385 $ 2,842,521 $ 4,327,295 $ 2,474,131 $ 710,890 $ 665,124 $ 45,766
Per Square Foot Improved $ 6.71 $ 2.92 $ 10.76 $ 11.57 $ 7.99 $ 7.50 $ 13.42 $ 1.01
Leasing Commissions $1,031,950 $1,602,962 $ 1,037,012 $ 1,892,635 $ 1,391,140 $ 252,534 $ 232,829 $ 19,705
Per Square Foot Leased $ 4.44 $ 4.08 $ 3.92 $ 5.06 $ 4.38 $ 2.66 $ 4.70 $ 0.44
--------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 11.15 $ 7.00 $ 14.68 $ 16.63 $ 12.37 $ 10.16 $ 18.12 $ 1.45
========================================================================================================
New York City
Office Properties
Tenant Improvements $ 65,267 $ 788,930 $ 4,350,106 $ 5,810,017(3) $ 2,753,580 $ 3,497,494(4) $2,393,044 $1,104,450(4)
Per Square Foot Improved $ 1.79 $ 15.69 $ 18.39 $ 32.84 $ 17.18 $ 21.01 $ 27.11 $ 14.12
Leasing Commissions $ 418,185 $1,098,829 $ 2,019,837 $ 2,950,330(3) $ 1,621,795 $ 1,041,336(4) $ 470,445 $ 570,891(4)
Per Square Foot Leased $ 11.50 $ 21.86 $ 8.54 $ 16.68 $ 14.64 $ 6.25 $ 5.33 $ 7.30
--------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 13.29 $ 37.55 $ 26.93 $ 49.52 $ 31.82 $ 27.26 $ 32.44 $ 21.42
========================================================================================================
Industrial Properties
Tenant Improvements $ 650,216 $1,366,488 $ 1,850,812 $ 1,249,200 $ 1,279,179 $ 205,104 $ 157,661 $ 47,443
Per Square Foot Improved $ 0.95 $ 1.65 $ 1.97 $ 2.42 $ 1.75 $ 2.11 $ 1.73 $ 7.46
Leasing Commissions $ 436,506 $ 354,572 $ 890,688 $ 574,256 $ 564,005 $ 225,539 $ 225,539 $ 0
Per Square Foot Leased $ 0.64 $ 0.43 $ 0.95 $ 1.11 $ 0.78 $ 2.32 $ 2.48 $ 0.00
--------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 1.59 $ 2.08 $ 2.92 $ 3.53 $ 2.53 $ 4.43 $ 4.21 $ 7.46
========================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL PORTFOLIO
Tenant Improvements $7,395,070 $8,822,897 $17,843,929 $19,481,691 $13,385,896 $14,145,666 $9,807,382 $4,338,284
Per Square Foot Improved $ 4.15 $ 4.05 $ 7.96 $ 10.22 $ 6.66 $ 12.51 $ 17.35 $ 7.68
Leasing Commissions $4,960,906 $5,973,109 $ 7,257,380 $ 9,469,313 $ 6,915,177 $ 6,239,752 $3,377,942 $2,861,810
Per Square Foot Leased $ 3.05 $ 2.75 $ 3.24 $ 4.97 $ 3.54 $ 5.52 $ 5.97 $ 5.07
--------------------------------------------------------------------------------------------------------
Total Per Square Foot $ 7.20 $ 6.80 $ 11.20 $ 15.19 $ 10.20 $ 18.03 $ 23.32 $ 12.75
========================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Excludes $2.8 million of deferred leasing costs attributable to space
marketed but not yet leased.
(2) Excludes tenant improvements and leasing commissions related to a 163,880
square foot leasing transaction with Fuji Photo Film U.S.A. Leasing
commissions on this transaction amounted to $5.33 per square foot and
tenant improvement allowance amounted to $40.88 per square foot.
(3) Excludes $5.8 million of tenant improvements and $2.2 million of leasing
commissions related to a new 121,108 square foot lease to Debevoise with a
lease commencement date in 2005. Also excludes tenant improvements of $0.2
million for Sandler O'Neil & Partners (7,446 SF) for expansion space with
a lease commencement date in 2004.
(4) Excludes 86,800 square foot Westpoint Stevens early renewal. There were no
tenant improvement or leasing costs associated with this transaction. Also
excludes $1.4 million of tenant improvements and $1.2 million of leasing
commissions related to a 74,293 square foot lease to Harper Collins
Publishers with a lease commencement date in 2006.
- --------------------------------------------------------------------------------
39
The following table sets forth the Operating Partnership's lease expiration
table, as adjusted for pre-leased space, at July 1, 2004 for its Total Portfolio
of properties, its Office Portfolio and its Industrial / R&D Portfolio:
TOTAL PORTFOLIO (1)
- --------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- --------------------------------------------------------------------------------
2004 92 545,148 3.5% 3.5%
2005 185 1,523,110 9.9% 13.4%
2006 184 1,692,820 11.0% 24.4%
2007 109 1,140,838 7.4% 31.8%
2008 109 959,655 6.2% 38.1%
2009 102 1,131,680 7.4% 45.4%
2010 and thereafter 315 7,327,050 47.6% 93.0%
- --------------------------------------------------------------------------------
Total/Weighted Average 1,096 14,320,301 93.0%
- --------------------------------------------------------------------------------
Total Portfolio Square Feet 15,396,244
- --------------------------------------------------------------------------------
OFFICE PORTFOLIO (1)
- --------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Office % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- --------------------------------------------------------------------------------
2004 89 513,528 3.6% 3.6%
2005 182 1,383,960 9.6% 13.1%
2006 180 1,595,854 11.1% 24.2%
2007 105 1,071,346 7.4% 31.6%
2008 106 916,812 6.3% 38.0%
2009 101 1,086,699 7.5% 45.5%
2010 and thereafter 310 6,981,186 48.3% 93.8%
- --------------------------------------------------------------------------------
Total/Weighted Average 1,073 13,549,385 93.8%
- --------------------------------------------------------------------------------
Total Office Portfolio Square Feet 14,440,849
- --------------------------------------------------------------------------------
INDUSTRIAL/R&D PORTFOLIO
- --------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Industrial/R&D % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- --------------------------------------------------------------------------------
2004 3 31,620 3.3% 3.3%
2005 3 139,150 14.6% 17.9%
2006 4 96,966 10.1% 28.0%
2007 4 69,492 7.3% 35.3%
2008 3 42,843 4.5% 39.8%
2009 1 44,981 4.7% 44.5%
2010 and thereafter 5 345,864 36.2% 80.7%
- --------------------------------------------------------------------------------
Total/Weighted Average 23 770,916 80.7%
- --------------------------------------------------------------------------------
Total Industrial/R&D Portfolio
Square Feet 955,395
- --------------------------------------------------------------------------------
(1) Excludes One Orlando Centre in Orlando, Florida
40
The following table sets forth the Operating Partnership's components of its
paid or accrued non-incremental and incremental revenue-generating capital
expenditures, tenant improvements and leasing costs for the periods presented as
reported on its "Statements of Cash Flows - Investment Activities" contained in
its consolidated financial statements (in thousands):
SIX MONTHS ENDED
JUNE 30,
-----------------------
2004 2003
--------- ---------
Capital expenditures:
Non-incremental ................................... $ 4,069 $ 4,297
Incremental ....................................... 1,085 899
Tenant improvements:
Non-incremental ................................... 9,671 19,901
Incremental ....................................... 2,976 52
--------- ---------
Additions to commercial real estate properties ....... $ 17,801 $ 25,149
========= =========
Leasing costs:
Non-incremental ................................... $ 6,764 $ 6,554
Incremental ....................................... 1,913 2,211
--------- ---------
Payment of deferred leasing costs .................... $ 8,677 $ 8,765
========= =========
Acquisition and development costs .................... $ 335,668 $ 16,237
========= =========
41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A number of shareholder derivative actions have been commenced purportedly on
behalf of the Operating Partnership against the Board of Directors in the
Supreme Court of the State of New York, County of Nassau (Lowinger v. Rechler et
al., Index No. 01 4162/03 (9/16/03)), the Supreme Court of the State of New
York, County of Suffolk (Steiner v. Rechler et al., Index No. 03 32545 (10/2/03)
and Lighter v. Rechler et al., Index No. 03 23593 (10/3/03)), the United States
District Court, Eastern District of New York (Tucker v. Rechler et al., Case No.
cv 03 4917 (9/26/03), Clinton Charter Township Police and Fire Retirement System
v. Rechler et al., Case No. cv 03 5008 (10/1/03) and Teachers' Retirement System
of Louisiana v. Rechler et al., Case No. cv 03 5178 (10/14/03)) and the Circuit
Court for Baltimore County (Sekuk Global Enterprises Profit Sharing Plan v.
Rechler et al., Civil No. 24-C- 03007496 (10/16/03), Hoffman v. Rechler et al.,
24-C-03-007876 (10/27/03) and Chirko v. Rechler et al., 24-C-03-008010
(10/30/03)), relating to the sale of the Long Island Industrial Portfolio to
certain members of the Rechler family. The complaints allege, among other
things, that the process by which the directors agreed to the transaction was
not sufficiently independent of the Rechler family and did not involve a "
market check" or third party auction process and as a result was not for
adequate consideration. The Plaintiffs seek similar relief, including a
declaration that the directors violated their fiduciary duties, an injunction
against the transaction and damages. The Operating Partnership believes that
complaints are without merit.
Kramer Levin Naftalis & Frankel commenced an action against Metropolitan 919 3rd
Avenue LLC in the Supreme Court of the State of New York, County of New York
(Kramer Levin Naftalis & Frankel LLP v. Metropolitan 919 3rd Avenue LLC, Index
No. 604512/2002 (12/16/02)) relating to alleged overcharges of approximately
$700,000 with respect to its lease at 919 3rd Avenue, New York, NY. Such
overcharges were primarily incurred during the period prior to the Operating
Partnership's ownership of the property. Subsequent to the filing of the
complaint, the parties agreed to pursue private mediation. As of May 2004, the
mediation effort was discontinued and the parties have resumed litigation. The
Operating Partnership believes that the complaint is without merit.
Except as provided above, the Operating Partnership is not presently subject to
any material litigation nor, to the Operating Partnership's knowledge, is any
litigation threatened against the Operating Partnership, other than routine
actions for negligence or other claims and administrative proceedings arising in
the ordinary course of business, some of which are expected to be covered by
liability insurance and all of which collectively are not expected to have a
material adverse effect on the liquidity, results of operations or business or
financial condition of the Operating Partnership.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities- None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information
a) None
b) There have been no material changes to the procedures by which
stockholders may recommend nominees to the Company's Board of
Directors.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Third amended and restated credit agreement dated August 6,
2004 between Reckson Operating Partnership, L.P., as Borrower
and the institutions from time to time party thereto as
Lenders.
31.1 Certification of Scott H. Rechler, Chief Executive Officer and
President of Reckson Associates Realty Corp., the sole general
partner of the Registrant, pursuant to Rule 13a - 14(a) or
Rule 15(d) - 14(a).
31.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of Reckson Associates
Realty Corp., the sole general partner of the Registrant,
pursuant to Rule 13a - 14(a) or Rule 15(d) - 14(a).
32.1 Certification of Scott H. Rechler, Chief Executive Officer and
President of Reckson Associates Realty Corp., the sole general
partner of the Registrant, pursuant to Section 1350 of Chapter
63 of Title 18 of the United States Code.
32.2 Certification of Michael Maturo, Executive Vice President,
Treasurer and Chief Financial Officer of Reckson Associates
Realty Corp., the sole general partner of the Registrant,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code.
b) During the three months ended June 30, 2004, the Registrant filed
the following reports on Form 8-K:
On May 6, 2004, the Registrant submitted a report on Form 8-K under
Items 7 and 12 thereof in order to file a press release announcing
the Company's consolidated financial results for the quarter ended
March 31, 2004.
42
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 hereunto duly authorized.
RECKSON OPERATING PARTNERSHIP, L.P.
By: /s/ Scott H. Rechler By: /s/ Michael Maturo
------------------------------------- ---------------------------------
Scott H. Rechler, Chief Executive Michael Maturo, Executive
Officer and President Vice President, Treasurer and
Chief Financial Officer
DATE: August 9, 2004
43