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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 SEPTEMBER 30, 2004
COMMISSION FILE NUMBER: 1-13762
RECKSON ASSOCIATES REALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 11-3233650
- -------- ----------
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)
225 BROADHOLLOW ROAD, MELVILLE, NY 11747
- ---------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(631) 694-6900
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
---------------------------------------------
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 _X_ NO ___.
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THE COMPANY HAS ONE CLASS OF COMMON STOCK, PAR VALUE $.01 PER SHARE,
WITH 76,028,209 SHARES OUTSTANDING AS OF NOVEMBER 2, 2004
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RECKSON ASSOCIATES REALTY CORP.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
INDEX PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004
(unaudited) and December 31, 2003.......................... 2
Consolidated Statements of Income for the three
and nine months ended September 30, 2004 and
2003 (unaudited).......................................... 3
Consolidated Statements of Cash Flows for the nine
months ended September 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....................... 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 39
Item 4. Controls and Procedures...................................... 40
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings............................................ 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.. 45
Item 3. Defaults Upon Senior Securities.............................. 45
Item 4. Submission of Matters to a Vote of Securities Holders........ 45
Item 5. Other Information............................................ 46
Item 6. Exhibits..................................................... 46
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SIGNATURES
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1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
(UNAUDITED)
ASSETS:
Commercial real estate properties, at cost:
Land ....................................................................... $ 398,790 $ 378,479
Building and improvements .................................................. 2,664,258 2,211,566
Developments in progress:
Land ....................................................................... 98,468 90,706
Development costs .......................................................... 27,889 68,127
Furniture, fixtures and equipment .............................................. 11,862 11,338
----------- -----------
3,201,267 2,760,216
Less accumulated depreciation .................................................. (542,124) (464,382)
----------- -----------
Investment in real estate, net of accumulated deprecation ...................... 2,659,143 2,295,834
Properties and related assets held for sale, net of accumulated depreciation ... -- 52,517
Investments in real estate joint ventures ...................................... 6,574 5,904
Investments in mortgage notes and notes receivable ............................. 53,525 54,986
Investments in affiliate loans and joint ventures .............................. 60,270 71,614
Cash and cash equivalents ...................................................... 53,275 22,330
Tenant receivables ............................................................. 10,903 11,929
Deferred rents receivable ...................................................... 127,672 111,962
Prepaid expenses and other assets .............................................. 61,645 35,371
Contract and land deposits and pre-acquisition costs ........................... 77 20,203
Deferred leasing and loan costs ................................................ 74,880 64,345
----------- -----------
TOTAL ASSETS ................................................................... $ 3,107,964 $ 2,746,995
=========== ===========
LIABILITIES:
Mortgage notes payable ......................................................... $ 712,337 $ 721,635
Unsecured credit facility ...................................................... 90,000 169,000
Senior unsecured notes ......................................................... 697,911 499,445
Liabilities associated with properties held for sale ........................... -- 881
Accrued expenses and other liabilities ......................................... 111,634 93,885
Dividends and distributions payable ............................................ 35,174 28,290
----------- -----------
TOTAL LIABILITIES .............................................................. 1,647,056 1,513,136
Minority partners' interests in consolidated partnerships ...................... 212,057 233,070
Preferred unit interest in the operating partnership ........................... 1,200 19,662
Limited partners' minority interest in the operating partnership ............... 50,737 44,518
----------- -----------
TOTAL MINORITY INTERESTS ....................................................... 263,994 297,250
----------- -----------
Commitments and contingencies .................................................. -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 25,000,000 shares authorized Series A
preferred stock, 5,320,485 and 8,834,500 shares issued and
outstanding, respectively .................................................. 53 88
Series B preferred stock, 0 and 2,000,000 shares issued
and outstanding, respectively .............................................. -- 20
Common Stock, $.01 par value, 100,000,000 shares authorized
75,535,562 and 58,275,367 shares issued and outstanding, respectively ...... 755 583
Retained earnings .............................................................. -- 35,757
Additional paid in capital ..................................................... 1,264,598 968,653
Treasury stock, 3,318,600 shares ............................................... (68,492) (68,492)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ..................................................... 1,196,914 936,609
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 3,107,964 $ 2,746,995
=========== ===========
(see accompanying notes to financial statements)
2
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
PROPERTY OPERATING REVENUES:
Base rents ...................................................... $ 111,260 $ 93,225 $ 332,060 $ 282,110
Tenant escalations and reimbursements ........................... 19,517 16,244 55,110 44,186
------------ ------------ ------------ ------------
Total property operating revenues .......................... 130,777 109,469 387,170 326,296
------------ ------------ ------------ ------------
EXPENSES:
Property operating expenses ..................................... 54,644 46,222 156,735 132,041
Marketing, general and administrative ........................... 7,681 8,163 22,122 24,527
Depreciation and amortization ................................... 29,584 25,063 86,496 79,121
------------ ------------ ------------ ------------
Total operating expenses...................................... 91,909 79,448 265,353 235,689
------------ ------------ ------------ ------------
Operating income ............................................. 38,868 30,021 121,817 90,607
------------ ------------ ------------ ------------
NON-OPERATING INCOME AND EXPENSES:
Interest income on mortgage notes and notes receivable
(including $479, $1,100, $1,608 and $3,100, respectively,
from related parties) .......................................... 1,963 1,724 5,455 4,814
Investment and other income ........................................ 5,358 4,660 10,852 13,717
Interest:
Expense incurred ................................................ (24,120) (19,883) (74,388) (60,125)
Amortization of deferred financing costs ........................ (1,005) (807) (2,831) (2,513)
------------ ------------ ------------ ------------
Total non-operating income and expenses ........................ (17,804) (14,306) (60,912) (44,107)
------------ ------------ ------------ ------------
Income before minority interests, preferred dividends and
distributions, equity (loss) in earnings of real estate
joint ventures and discontinued operations ...................... 21,064 15,715 60,905 46,500
Minority partners' interests in consolidated partnerships .......... (4,135) (4,117) (14,738) (12,580)
Distributions to preferred unit holders ............................ (41) (273) (541) (820)
Limited partners' minority interest in the operating partnership ... (334) (658) (1,434) (1,793)
Equity (loss) in earnings of real estate joint ventures ............ 112 134 520 (30)
------------ ------------ ------------ ------------
Income before discontinued operations .............................. 16,666 10,801 44,712 31,277
Discontinued operations (net of limited partners' and minority
interests):
Gain on sales of real estate .................................... 2,228 -- 11,069 --
Income from discontinued operations ............................. 100 4,524 653 10,930
------------ ------------ ------------ ------------
Net Income ......................................................... 18,994 15,325 56,434 42,207
Dividends to preferred shareholders ................................ (3,437) (5,316) (11,868) (15,950)
Redemption charges on Series A preferred stock ..................... (6,717) -- (6,717) --
------------ ------------ ------------ ------------
Net income allocable to common shareholders ........................ $ 8,840 $ 10,009 $ 37,849 $ 26,257
============ ============ ============ ============
Net income allocable to:
Common shareholders ............................................. $ 8,840 $ 7,613 $ 37,849 $ 19,977
Class B common shareholders ..................................... -- 2,396 -- 6,280
------------ ------------ ------------ ------------
Total .............................................................. $ 8,840 $ 10,009 $ 37,849 $ 26,257
============ ============ ============ ============
Basic net income per weighted average common share:
Income from continuing operations ............................... $ .10 $ .09 $ .39 $ .25
Discontinued operations ......................................... .03 .07 .18 .17
------------ ------------ ------------ ------------
Basic net income per common share ............................... $ .13 $ .16 $ .57 $ .42
============ ============ ============ ============
Class B common - income from continuing operations .............. $ -- $ .13 $ -- $ .37
Discontinued operations ......................................... -- .11 -- .26
------------ ------------ ------------ ------------
Basic net income per Class B common share ....................... $ -- $ .24 $ -- $ .63
============ ============ ============ ============
Basic weighted average common shares outstanding:
Common stock .................................................... 70,236,721 48,009,138 66,178,835 48,069,657
Class B common stock ............................................ -- 9,915,313 -- 9,915,313
Diluted net income per weighted average common share:
Common share .................................................... $ .13 $ .16 $ .57 $ .41
============ ============ ============ ============
Class B common share ............................................ $ -- $ .17 $ -- $ .45
============ ============ ============ ============
Diluted weighted average common shares outstanding:
Common stock .................................................... 70,510,301 48,179,428 66,533,225 48,205,207
Class B common stock ............................................ -- 9,915,313 -- 9,915,313
(see accompanying notes to financial statements)
3
RECKSON ASSOCIATES REALTY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME .............................................................................. $ 56,434 $ 42,207
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of real estate ...................................................... (13,724) --
Depreciation and amortization (including discontinued operations) ................. 86,496 89,959
Minority partners' interests in consolidated partnerships ......................... 17,271 13,404
Limited partners' minority interest in the operating partnership .................. 2,090 3,072
(Equity) loss in earnings of real estate joint ventures ........................... (520) 30
Changes in operating assets and liabilities:
Tenant receivables ................................................................ 450 (654)
Prepaid expenses and other assets ................................................. (1,936) 4,822
Deferred rents receivable ......................................................... (13,863) (13,755)
Accrued expenses and other liabilities ............................................ (2,369) 3,932
--------- ---------
Net cash provided by operating activities ......................................... 130,329 143,017
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to developments in progress ............................................. (20,454) (15,104)
Purchases of commercial real estate ............................................... (138,894) (40,500)
Additions to commercial real estate properties .................................... (28,014) (36,080)
Additions to furniture, fixtures and equipment .................................... (528) (192)
Payment of leasing costs .......................................................... (13,951) (13,185)
Distributions from (contributions to) investments in real estate joint ventures ... (150) 243
Additions to mortgage notes and notes receivable .................................. (15,619) (15,000)
Repayments of mortgage notes & notes receivable ................................... 17,658 --
Proceeds from sales of real estate ................................................ 64,337 --
--------- ---------
Net cash used in investing activities ............................................. (135,615) (119,818)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock net of issuance costs ...................... 286,990 --
Proceeds from options exercised ................................................... 57,796 74
Repurchases of common stock ....................................................... -- (4,538)
Redemption of Series A preferred stock ............................................ (47,580) --
Principal payments on secured borrowings .......................................... (259,298) (8,932)
Payment of loan and equity issuance costs ......................................... (4,232) (164)
Proceeds from issuance of senior unsecured notes .................................. 300,000 --
Repayment of senior unsecured notes ............................................... (100,000) --
Proceeds from unsecured credit facility ........................................... 312,498 112,000
Repayment of unsecured credit facility ............................................ (391,498) (5,000)
Distribution from affiliate joint venture ......................................... 10,603 --
Distributions to minority partners in consolidated partnerships ................... (29,786) (16,313)
Distributions to limited partners in the operating partnership .................... (3,805) (9,264)
Distributions to preferred unit holders ........................................... (723) (820)
Dividends to common shareholders .................................................. (81,462) (80,496)
Dividends to preferred shareholders ............................................... (13,829) (15,950)
--------- ---------
Net cash provided by (used in) financing activities ............................... 35,674 (29,403)
--------- ---------
Net increase (decrease) in cash and cash equivalents .............................. 30,388 (6,204)
Cash and cash equivalents at beginning of period .................................. 22,887 30,827
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 53,275 $ 24,623
========= =========
(see accompanying notes to financial statements)
4
RECKSON ASSOCIATES REALTY CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Reckson Associates Realty Corp. (the "Company") is a self-administered and self
managed real estate investment trust ("REIT") 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 September 30, 2004, the Company's ownership percentage in the
Operating Partnership was approximately 95.7%. 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) interests in 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 September 30, 2004 and December 31, 2003 and the
results of their operations for the three and nine months ended September 30,
2004 and 2003, respectively, and, their cash flows for the nine months ended
September 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. and Reckson Construction &
Development LLC (the "Service Companies"). All significant intercompany balances
and transactions have been eliminated in the consolidated financial statements.
Minority partners' interests in consolidated partnerships represent a 49%
non-affiliated interest in RT Tri-State LLC, owner of a six 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. Limited partners' minority interest in the Operating
Partnership was approximately 4.3% and 11.1% at September 30, 2004 and 2003,
respectively.
Reckson Construction Group New York, Inc. and Reckson Construction & Development
LLC (the successor to Reckson Construction Group, 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.
The Company follows the guidance provided for under the Financial 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 Company 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 Company'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 September 30, 2004 and for
the three and nine month periods ended September 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
Company's audited financial statements and the notes thereto included in the
Company'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 Company considers highly liquid investments with maturity of three months or
less when purchased to be cash equivalents.
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 Company 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 Company. 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 Company 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 Company allocates a portion of the purchase price to tangible assets
including the fair value of the building and building improvements on an
as-if-vacant basis and to land determined either by real estate tax assessments,
independent appraisals or other relevant data. Additionally, the Company
assesses fair value of identified intangible assets and liabilities 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 Company incorrectly estimates the values at
acquisition or the undiscounted cash flows, initial allocation of purchase price
and future impairment charges may be different.
Effective January 1, 2002 the Company elected to follow FASB Statement No. 123,
"Accounting for Stock Based Compensation" ("Statement No. 123"). Statement
No. 123 requires the use of option valuation models which determine the fair
value of the option on the date of the grant. All future employee stock option
grants will be expensed over the options' vesting periods based on the fair
value at the date of the grant in accordance with Statement No. 123. To
determine the fair value of the stock options granted, the Company uses a
Black-Scholes option pricing model. Prior to the adoption of Statement No. 123,
the Company had applied Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans and reported pro forma
disclosures in its Form 10-K filings by estimating the fair value of options
issued and the related expense in accordance with Statement No. 123.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure" ("Statement No. 148"). Statement No.
148 amends Statement No. 123 to provide alternative methods of transition for an
entity that voluntarily adopts the fair value recognition method of recording
stock option expense. Statement No. 148 also amends the disclosure provisions of
Statement 123 and APB Opinion No. 28, "Interim Financial Reporting" to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock options on reported net
income and earnings per share in annual and interim financial statements.
6
The following table sets forth the Company's pro forma information for its
common stockholders for the three and nine month periods ended September 30,
2004 and 2003. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period (in
thousands except earnings per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income as reported ................................... $ 8,840 $ 7,613 $ 37,849 $ 19,977
Add: Stock option expense included in net income ........ 1 1 4 4
Less: Stock option expense determined under fair value
recognition method for all awards .................. (94) (64) (290) (208)
---------- ---------- ---------- ----------
Pro forma net income ..................................... $ 8,747 $ 7,550 $ 37,563 $ 19,773
========== ========== ========== ==========
Net income per share as reported:
Basic ................................................. $ .13 $ .16 $ .57 $ .42
========== ========== ========== ==========
Diluted ............................................... $ .13 $ .16 $ .57 $ .41
========== ========== ========== ==========
Pro forma net income per share:
Basic ................................................. $ .12 $ .16 $ .57 $ .41
========== ========== ========== ==========
Diluted ............................................... $ .12 $ .16 $ .56 $ .41
========== ========== ========== ==========
The fair value of options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Risk free interest rate .................................. 3.00% 3.00% 3.00% 3.00%
Dividend yield ........................................... 6.96% 7.38% 6.96% 7.38%
Volatility factor of the expected market price of the
Company's common stock ................................ .199 .193 .199 .193
Weighted average expected option life (in years) ......... 5.0 5.0 5.0 5.0
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 Company 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 Company.
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 Company adopted FIN 46R during the
period ended March 31, 2004. The Company has determined that its consolidated
and unconsolidated subsidiaries do not represent VIEs pursuant to such
interpretation. The Company 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 Company'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
Company's financial position or results of operations.
7
3. MORTGAGE NOTES PAYABLE
As of September 30, 2004, the Company had approximately $712.3 million of
mortgage notes payable, which mature at various times between 2005 and 2027. The
notes are secured by 19 properties with an aggregate carrying value of
approximately $1.5 billion which are pledged as collateral against the mortgage
notes payable. Approximately $43.2 million of the $712.3 million is recourse to
the Company and 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 Company under certain limited
circumstances including environmental issues and breaches of material
representations.
The following table sets forth the Company's mortgage notes payable as of
September 30, 2004, by scheduled maturity date (dollars in thousands):
Principal Interest Maturity Amortization
Property Outstanding Rate Date Term (Years)
- ---------------------------------------------- --------------- ----------- --------------- ---------------
395 North Service Road, Melville, NY $ 18,995 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 18,584 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 73,228 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 43,175 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 16,600 8.50% April, 2007 15
333 Earle Ovington Blvd, Mitchel Field, NY (b) 52,071 7.72% August, 2007 25
810 Seventh Avenue, NY, NY (e) 80,079 7.73% August, 2009 25
100 Wall Street, NY, NY (e) 34,701 7.73% August, 2009 25
6900 Jericho Turnpike, Syosset, NY 7,132 8.07% July, 2010 25
6800 Jericho Turnpike, Syosset, NY 13,514 8.07% July, 2010 25
580 White Plains Road, Tarrytown, NY 12,308 7.86% September, 2010 25
919 Third Ave, NY, NY (c) 242,240 6.87% August, 2011 30
One Orlando Center, Orlando, FL (d) 37,275 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 62,435 6.82% November, 2027 28
---------------
Total/Weighted Average $ 712,337 7.24%
===============
- ----------
(a) Encompasses six Class A office properties.
(b) The Company has a 60% general partnership interest in this property and
its proportionate share of the aggregate principal amount is approximately
$31.2 million.
(c) The Company has a 51% membership interest in this property and its
proportionate share of the aggregate principal amount is approximately
$123.5 million.
(d) The mortgage debt on these properties, which was cross-collateralized at
September 30, 2004, was repaid without penalty on November 1, 2004.
(e) The debt on these properties is cross-collateralized.
In addition, the Company has a 60% interest in an unconsolidated joint venture
property. The Company's share of the mortgage debt at September 30, 2004 is
approximately $7.4 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005 at which time the Company's share of
the mortgage debt will be approximately $6.9 million.
On August 9, 2004, the Company made an advance under its Credit Facility
(defined below) 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 November 1, 2004, the Company exercised its right to prepay the outstanding
mortgage debt of approximately $99.6 million, without penalty, on the properties
located at One Orlando Center in Orlando, Florida and 120 West 45th Street in
New York City. The Company made an advance under its Credit Facility to fund
such repayment.
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 Company entered into several anticipatory interest rate hedge
instruments to protect itself against potentially rising interest rates. At the
time the notes were issued the Company 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.
8
On March 15, 2004, the Company repaid $100 million of the Operating
Partnership's 7.4% senior unsecured notes at maturity. These notes were repaid
with funds received from the Company's March 2004 common equity offering (see
Note 7).
On August 13, 2004, the Operating Partnership issued $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%. Prior to
the issuance of these notes the Company entered into several anticipatory
interest rate hedge instruments to protect itself against potentially rising
interest rates. At the time the notes were issued, these instruments were
settled and the Company received a net benefit of approximately $1.9 million.
Such benefit will be amortized over the term of the notes to effectively reduce
interest expense. The Operating Partnership used 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 (see Note 3).
As of September 30, 2004, the Operating Partnership had outstanding
approximately $697.9 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
August 13, 2004 150,000 5.875% 10 years August 15, 2014
----------
$ 700,000
==========
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
$2.5 million. Such discounts are being amortized over the term of the Senior
Unsecured Notes to which they relate.
5. UNSECURED CREDIT FACILITY
On July 1, 2004, the Company had an outstanding $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, 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, an increase to the
maximum revolving credit amount to $750 million. In August 2004, the Company
amended and extended the Credit Facility to mature in August 2007 with
substantially similar terms and conditions as existed prior to the amendment and
extension. As of September 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 September 30, 2004, the outstanding borrowings under the
Credit Facility aggregated $90 million and carried a weighted average interest
rate of 2.64%.
The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At September 30, 2004, the Company 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 Company. As a
result, the Company maintains certain outstanding balances on its Credit
Facility.
In accordance with the provisions of FASB Statement No. 144 and Emerging Issues
Task Force ("EITF") 87-24, the Company allocated approximately $2.8 million and
$7.8 million of its unsecured corporate interest expense to discontinued
operations for the three and nine month periods ended September 30, 2003. EITF
87-24 states that "interest on debt that is required to be repaid as a result of
the disposal transaction should be allocated to discontinued operations".
Pursuant to the terms of our Credit Facility, the Company was required to repay
the Credit Facility to the extent of the net proceeds, as defined, received from
the sales of unencumbered properties. As such, the Company has allocated to
discontinued operations the interest expense incurred on the portion of its
Credit Facility, which was required to be repaid. In August 2004, the Company
amended and extended its Credit Facility, whereby such repayment requirement was
eliminated.
9
6. COMMERCIAL REAL ESTATE INVESTMENTS
As of September 30, 2004, the Company owned and operated 78 office properties
(inclusive of eight office properties owned through joint ventures) comprising
approximately 14.8 million square feet and 8 industrial / R&D properties
comprising approximately 863,000 square feet located in the Tri-State Area.
As of September 30, 2004, the Company also owned approximately 313 acres of land
in 12 separate parcels of which the Company can, based on current estimates,
develop approximately 3.0 million square feet of office space. The Company 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 September 30, 2004, the Company had invested approximately
$126.4 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 nine month periods
ended September 30, 2004, the Company has capitalized approximately $2.7 million
and $7.8 million, respectively, related to real estate taxes, interest and other
carrying costs related to these development projects. In October 2003, the
Company 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 September 30, 2004 was
approximately $5.9 million. The closing is scheduled to occur upon the rezoning,
which is anticipated to occur within 12 to 24 months. 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 Company anticipates it will initially receive approximately
$1.8 million. The Company's cost basis in this land parcel was approximately
$1.4 million. The Company 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 Company will be successful in obtaining any such
additional consideration. In July 2004, the Company commenced the ground-up
development of a 277,000 square foot Class A office building with a total
anticipated investment of approximately $60 million. There can be no assurances
that the actual cost of this development will not exceed the anticipated amount.
This development is located within the Company's existing 404,000 square foot
executive office park in Melville, New York.
During February 2003, the Company, 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 Company has recognized
a book gain, before taxes, on this land sale and build-to-suit transaction of
approximately $23.8 million, of which $0 and $5.0 million and, $3.3 million and
$13.4 million has been recognized during the three and nine month periods ended
September 30, 2004 and 2003, respectively, and is included in investment and
other income on the accompanying consolidated statements of income.
In November 2003, the Company 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 Company sold a 104,000 square foot office property, 120
Mineola Boulevard, 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 Company recorded a net gain of approximately $5.2 million, net
of limited partners' minority interest. 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 Company 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 Company 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 matured in August
2004 at which time the Company satisfied the outstanding debt through an advance
under its Credit Facility along with the cash-on-hand. The property is
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 Company 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 Company 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 $5.8 million for the
three and nine month periods ended September 30, 2004. In addition, amortization
expense on the value of lease origination costs was approximately $700,000 and
$2.0 million for the three and nine month periods ended September 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 Company sold a 175,000 square foot office building, 400
Garden City Plaza, located on Long Island for approximately $30 million, of
which the Company owned a 51% interest, and a wholly owned 9,000 square foot
retail property for approximately $2.8 million. In addition, the Company
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. As described below, the Company
has since identified and acquired an interest in a qualified replacement
property for purposes of this exchange. The disposition of the other industrial
property, which is subject to certain environmental issues, was conditioned upon
the approval of the buyer's lender, which was not obtained. As a result, the
Company 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 Company, but there can be no assurance in this
regard.
In July 2004, the Company acquired a 141,000 square foot Class A office
property, 3 Giralda Farms, located in Madison, NJ for approximately $22.7
million. The Company made this acquisition through available cash-on-hand.
During September 2004, the Company, through Reckson Construction Group, Inc.,
acquired the remaining 49% interest in the property located at 90 Merrick
Avenue, East Meadow, NY, from the Company's joint venture partner, Teachers
Insurance and Annuity Association, for approximately $14.9 million. This
acquisition was financed, in part, from the remaining sales proceeds being held
by the previously referenced qualified intermediary as the property was an
identified, qualified replacement property. The balance of this acquisition was
financed with cash-on-hand. As a result of this acquisition, the Company
successfully completed the Section 1031 Exchange and thereby deferred the taxes
related to the gain recognized on the sale proceeds received from the sale of
the two remaining industrial properties from the Disposition.
During September 2004, the Company acquired a 215,000 square foot Class A office
property, 44 Whippany Road, located in Morristown, New Jersey for approximately
$30 million. The Company made this acquisition, in part, through funds received
from the Company's September 2004 common equity offering, cash-on-hand and the
issuance of approximately 34,000 OP Units which were priced at $28.70 per OP
Unit.
During September 2004, the Company sold a 92,000 square foot industrial
property, 500 Saw Mill River Road, located in Westchester County for
approximately $7.3 million. In connection with this sale the Company recorded a
net gain of approximately $2.2 million, net of limited partners' minority
interest. In accordance with FASB Statement No. 144, such gain has been
reflected in discontinued operations on the accompanying consolidated statements
of income.
On October 1, 2004, the Company acquired a 260,500 square foot Class A office
property, 300 Broadhollow Road, located in Melville, Long Island, for
approximately $41.0 million. The Company made this acquisition, in part, through
an advance under the Credit Facility and cash-on-hand.
The Company 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 Company 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 Company 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"). At September 30, 2004, the Mezz Note had an outstanding balance of
approximately $27.6 million and a weighted average interest rate of 12.86% per
annum. Such interest rate is based on a minimum spread over LIBOR of 1.63% per
annum. The Mezz Note matures in September 2005 and the borrower has rights to
extend its term for three additional one-year periods and, under certain
circumstances, prepay amounts outstanding.
The Company also held three other notes receivable which aggregated $21.5
million which carried 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. As of September 30, 2004, the Operating Partnership had received
approximately $13.1 million from the preferred unit holder to be applied against
amounts owned under the Other Notes, including accrued interest. Subsequent to
September 30, 2004 the Company received an additional $2.8 million. As a result,
the remaining Other Notes 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 September 30, 2004, management has
made subjective assessments as to the underlying security value on the Company's
Note Receivable Investments. These assessments indicate an excess of market
value over the carrying value related to the Company's Note Receivable
11
Investments. Based on these assessments the Company's management believes there
is no impairment to the carrying value related to the Company's Note Receivable
Investments.
The Company 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 Company's initial New York City portfolio acquisition. This property was
cross-collateralized under a $99.7 million mortgage note payable along with one
of the Company's New York City buildings. On November 1, 2004, the Company
exercised its right to prepay this note in its entirety, without penalty.
The Company also owns a 60% interest in a 172,000 square foot office building
located at 520 White Plains Road in White Plains, New York (the "520JV"), which
is managed by its wholly owned subsidiary. As of September 30, 2004, the 520JV
had total assets of $20.7 million, a mortgage note payable of $11.5 million and
other liabilities of $726,000. The Company's allocable share of the 520JV
mortgage note payable is approximately $7.4 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 approvals from members on certain
decisions including sale of the property, refinancing of the property's mortgage
debt, and material renovations to the property. The Company has evaluated the
impact of FIN 46R on its accounting for the 520JV and has concluded that the
520JV is not a VIE. The Company accounts for the 520JV under the equity method
of accounting. In accordance with the equity method of accounting the Company's
proportionate share of the 520JV income (loss) was approximately $112,000 and
$520,000 and $134,000 and $(30,000) for the three and nine month periods ended
September 30, 2004 and 2003, respectively.
During September 2000, the Company 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 Company. In August 2003, the Company acquired TIAA's 49%
interest in the property located at 275 Broadhollow Road, Melville, NY, for
approximately $12.4 million. 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. In addition, during September 2004, the Company acquired TIAA's
49% interest in the property located at 90 Merrick Avenue, East Meadow, NY for
approximately $14.9 million. As a result of these transactions, the Tri-State JV
owns six Class A suburban office properties aggregating approximately 943,000
square feet. The Company 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 Company consolidates the Tri-State
JV.
On December 21, 2001, the Company 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 Company. The Company 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 Company
consolidates the 919JV.
7. STOCKHOLDERS' EQUITY
A Class A OP Unit and a share of common stock have similar economic
characteristics as they effectively share equally in the net income or loss and
distributions of the Operating Partnership. As of September 30, 2004, the
Operating Partnership had issued and outstanding 3,118,556 Class A OP Units and
465,845 Class C OP Units. The Class A OP Units currently receive a quarterly
distribution of $.4246 per unit. 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.
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 on a
one-for-one basis.
On September 16, 2004, the Board of Directors of the Company declared a
quarterly cash dividend on the Company's common stock of $.4246 per share which
was paid on October 20, 2004 to its stockholders of record as of October 7,
2004. The dividend is based on an annualized dividend rate of $1.6984 per share.
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 its 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
12
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.
During the nine month period ended September 30, 2004, approximately 2.5 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 $57.8 million.
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 for
general corporate purposes including the redemption of the Series A preferred
stock, discussed below.
On September 14, 2004, the Company completed an equity offering of five million
shares of its common stock raising approximately $137.5 million, net of an
underwriting discount, or $27.39 per share. Net proceeds received from this
transaction were used to redeem the Company's Series A preferred stock (defined
below) and for general corporate purposes.
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 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 nine months ended
September 30, 2004.
The Company had issued and outstanding 8,834,500 shares of 7.625% Series A
Convertible Cumulative Preferred Stock (the "Series A preferred stock"). The
Series A preferred stock was 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, was 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 on the open market and retired 140,600 shares of the Series A
preferred stock for approximately $3.4 million or $24.45 per share. During July
2004, the Company completed an exchange with a holder of 1,350,000 shares of the
Series A preferred stock for 1,304,602 shares of common stock. In addition,
during August 2004, the Company announced the redemption of 2,000,000 shares of
its then outstanding shares of Series A preferred stock at a redemption price of
$25.7625 per share plus accumulated and unpaid dividends. On September 20, 2004,
the Company redeemed 1,841,905 of such shares for approximately $47.9 million,
including accumulated and unpaid dividends. The remaining 158,095 shares of
Series A preferred stock were exchanged into common stock of the Company at the
election of the Series A preferred shareholders. During September 2004, the
Company announced the redemption of all of its then outstanding shares of Series
A preferred stock aggregating 5,343,900 shares at a redemption price of $25.7625
per share plus accumulated and unpaid dividends. On October 15, 2004, the
Company redeemed 4,965,062 shares of Series A preferred stock for approximately
$129.9 million, including accumulated and unpaid dividends. The remaining
378,838 shares of Series A preferred stock were exchanged into common stock of
the Company, at the election of the Series A preferred shareholders. As a result
of the 100% retirement of the Series A preferred stock annual preferred
dividends will decrease by approximately $16.8 million. In accordance with the
EITF Topic D-42 the Company incurred an accounting charge during the third
quarter of 2004 of approximately $6.7 million in connection with the July 2004
exchange and September 2004 redemption of the Series A preferred stock. In
addition, the Company will incur a charge of approximately $9.1 million during
the fourth quarter of 2004 in connection with the October 2004 redemption.
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. As a result of this redemption, annual preferred dividends
decreased by approximately $4.4 million.
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 an annualized distribution of $55.60 per unit (the
"Preferred Units"). The Preferred Units 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 exercised his rights to
exchange them into OP Units. The Operating Partnership converted the Preferred
Units, including accrued and unpaid dividends, into approximately 531,000 OP
Units, which were
13
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 exchange and
conversion, the preferred unit holder delivered notice to the Operating
Partnership of his intent to repay $15.5 million of the amounts owed from the
preferred unit holder under the Other Notes (see Note 6). As of September 30,
2004, there remain 1,200 Preferred Units outstanding with a stated distribution
rate of 7.0%, which is subject to reduction based upon terms of their initial
issuance. The terms of the Preferred Units provide for this reduction in
distribution rate in order to address the effect of certain mortgages with above
market interest rates which were assumed by the Operating Partnership in
connection with properties contributed to the Operating Partnership in 1998. Due
to this reduction, the Preferred Units are currently not entitled to receive a
distribution.
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 Company 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 September 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 $290,000 and
$846,000 of compensation expense were recorded for the three and nine month
periods ended September 30, 2004, respectively, related to these LTIP grants.
Such amount has been included in marketing, general and administrative expenses
on the accompanying consolidated statements of income.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $4.7 million at September 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 September 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 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 September 30, 2004, there remains, reserved for
future issuance, 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
nine month periods ended September 30, 2004 the Company recorded approximately
$101,000 and $302,000, 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
September 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 Company recorded approximately $699,000 and $2.1 million
of compensation expense for the three and nine month periods ended September 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.
The Board of Directors has approved an amendment to the LTIP to revise the peer
group used to measure relative performance. The amendment eliminated the mixed
office and industrial companies and added certain other "pure office" companies
in order to limit the peer group to office sector companies. The Board has also
approved the revision of the performance measurement dates for future vesting
under the core component of the LTIP from the anniversary of the date of grant
to December 31st of each year. This was done in order to have the performance
measurement coincide with the performance period that the Company believes many
investors use to judge the performance of the Company.
14
Basic net income per share on the Company's common stock was calculated using
the weighted average number of shares outstanding of 70,236,721 and 48,009,138
for the three months ended September 30, 2004 and 2003, respectively, and
66,178,835 and 48,069,657 for the nine months ended September 30, 2004 and 2003,
respectively.
Basic net income per share on the Company's Class B common stock was calculated
using the weighted average number of Class B shares outstanding of 9,915,313 for
the three and nine month periods ended September 30, 2003.
The following table sets forth the Company's reconciliation of numerators and
denominators of the basic and diluted net income per weighted average common
share and the computation of basic and diluted net income per weighted average
share for the Company's common stock (in thousands except for earnings per share
data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Numerator:
Income before discontinued operations, dividends to preferred
shareholders and (income) allocated to Class B shareholders .......... $ 16,666 $ 10,801 $ 44,712 $ 31,277
Discontinued operations (net of share applicable to limited partners,
minority interests and Class B shareholders) ......................... 2,328 3,440 11,722 8,314
Dividends to preferred shareholders ..................................... (3,437) (5,316) (11,868) (15,950)
Redemption charges on Series A preferred stock .......................... (6,717) -- (6,717) --
(Income) allocated to Class B common shareholders ....................... -- (1,312) -- (3,664)
-------- -------- -------- --------
Numerator for basic and diluted earnings per common share .................. $ 8,840 $ 7,613 $ 37,849 $ 19,977
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share - weighted average
common shares ........................................................ 70,237 48,009 66,179 48,070
Effect of dilutive securities:
Common stock equivalents ............................................. 273 170 354 135
-------- -------- -------- --------
Denominator for diluted earnings per common share - adjusted
weighted average shares and assumed conversions ......................... 70,510 48,179 66,533 48,205
======== ======== ======== ========
Basic earnings per weighted average common share:
Income from continuing operations ....................................... $ .10 $ .09 $ .39 $ .25
Discontinued operations ................................................. .03 .07 .18 .17
-------- -------- -------- --------
Net income per common share ............................................. $ .13 $ .16 $ .57 $ .42
======== ======== ======== ========
Diluted earnings per weighted average common share:
Income from continuing operations ....................................... $ .10 $ .09 $ .39 $ .24
Discontinued operations ................................................. .03 .07 .18 .17
-------- -------- -------- --------
Diluted net income per common share ..................................... $ .13 $ .16 $ .57 $ .41
======== ======== ======== ========
In calculating diluted net income per weighted average common share the Company
considers all potentially dilutive securities with respect to its common stock.
For the three and nine month periods ended September 30, 2003 and 2004
potentially dilutive securities considered, to the extent outstanding, were
stock option grants, OP Units, Class B common stock, Series A preferred stock
and Series B preferred stock. OP Units have a distribution rate equivalent to a
share of common stock and are convertible into common stock on a one for one
basis. As such, OP Units are not dilutive with respect to the common stock.
Shares of Class B common stock received a higher per share dividend as compared
to the common stock and were convertible into common stock on a one for one
basis. As such, shares of Class B common stock were not dilutive with respect to
the common stock. In addition, there were no shares of Class B common stock
outstanding after November 25, 2003 and no shares of Series B preferred stock
outstanding after January 15, 2004.
15
The following table sets forth the Company's reconciliation of numerators and
denominators of the basic and diluted net income per weighted average common
share and the computation of basic and diluted net income per weighted average
share for the Company's Class B common stock (in thousands except for earnings
per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------ ------------------
Numerator:
Income before discontinued operations, dividends to preferred
shareholders and (income) allocated to common shareholders ........ $ 10,801 $ 31,277
Discontinued operations (net of share applicable to limited
partners and common shareholders) ................................. 1,084 2,615
Dividends to preferred shareholders .................................. (5,316) (15,950)
(Income) allocated to common shareholders ............................ (4,173) (11,662)
---------- ----------
Numerator for basic earnings per Class B common share ................... 2,396 6,280
Add back:
Income allocated to common shareholders .............................. 7,613 19,977
Limited partner's minority interest in the operating partnership ..... 1,202 3,072
---------- ----------
Numerator for diluted earnings per Class B common share ................. $ 11,211 $ 29,329
========== ==========
Denominator:
Denominator for basic earnings per share-weighted average
Class B common shares ............................................. 9,915 9,915
Effect of dilutive securities:
Weighted average common shares outstanding ........................ 48,009 48,070
Weighted average OP Units outstanding ............................. 7,554 7,370
Common stock equivalents .......................................... 170 135
---------- ----------
Denominator for diluted earnings per Class B common share -
adjusted weighted average shares and assumed conversions .......... 65,648 65,490
========== ==========
Basic earnings per weighted average common share:
Income from continuing operations .................................... $ .13 $ .37
Discontinued operations .............................................. .11 .26
---------- ----------
Net income per Class B common share .................................. $ .24 $ .63
========== ==========
Diluted earnings per weighted average common share:
Income from continuing operations .................................... $ .15 $ .41
Discontinued operations .............................................. .02 .04
---------- ----------
Diluted net income per Class B common share .......................... $ .17 $ .45
========== ==========
The Company's computation for purposes of calculating the diluted weighted
average Class B common shares outstanding is based on the assumption that the
Class B common stock is converted to the Company's common stock.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2004 2003
---------- ----------
Cash paid during the period for interest .......................... $ 83,781 $ 79,193
========== ==========
Interest capitalized during the period ............................ $ 6,008 $ 5,804
========== ==========
16
9. SEGMENT DISCLOSURE
The Company owns all of the interests in its real estate properties directly or
indirectly through the Operating Partnership. The Company'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 Company'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 Company 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 Company'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 Company's discontinued
operations in accordance with FASB Statement No. 144.
The following table sets forth the components of the Company's revenues and
expenses and other related disclosures (in thousands):
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
----------------------------------------- ------------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
----------- ----------- ------------ ----------- ----------- ------------
PROPERTY OPERATING REVENUES:
Base rents, tenant
escalations and reimbursements ......... $ 130,719 $ 58 $ 130,777 $ 107,931 $ 1,538 $ 109,469
----------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Property operating expenses ............... 53,975 669 54,644 45,388 834 46,222
Marketing, general and administrative ..... 4,220 3,461 7,681 3,819 4,344 8,163
Depreciation and amortization ............. 28,513 1,071 29,584 24,037 1,026 25,063
----------- ----------- ----------- ----------- ----------- -----------
Total Operating Expenses .................. 86,708 5,201 91,909 73,244 6,204 79,448
----------- ----------- ----------- ----------- ----------- -----------
Operating Income .......................... 44,011 (5,143) 38,868 34,687 (4,666) 30,021
----------- ----------- ----------- ----------- ----------- -----------
NON-OPERATING INCOME AND EXPENSES
Interest, investment and other income ..... 5,578 1,743 7,321 670 5,714 6,384
Interest:
Expense incurred ....................... (13,857) (10,263) (24,120) (12,285) (7,598) (19,883)
Amortization of deferred
financing costs ..................... (271) (734) (1,005) (262) (545) (807)
----------- ----------- ----------- ----------- ----------- -----------
Total Non-Operating Income and Expenses ... (8,550) (9,254) (17,804) (11,877) (2,429) (14,306)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before minority interests,
preferred dividends and distributions,
equity in earnings of real estate
joint ventures and discontinued
operations ............................. $ 35,461 $ (14,397) $ 21,064 $ 22,810 $ (7,095) $ 15,715
=========== =========== =========== =========== =========== ===========
17
NINE MONTHS ENDED
---------------------------------------------------------------------------------------
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
----------------------------------------- ------------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
----------- ----------- ------------ ----------- ----------- ------------
PROPERTY OPERATING REVENUES:
Base rents, tenant
escalations and reimbursements ......... $ 383,201 $ 3,969 $ 387,170 $ 321,151 $ 5,145 $ 326,296
----------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Property operating expenses ............... 154,457 2,278 156,735 129,305 2,736 132,041
Marketing, general and administrative ..... 12,499 9,623 22,122 11,827 12,700 24,527
Depreciation and amortization ............. 83,327 3,169 86,496 76,037 3,084 79,121
----------- ----------- ----------- ----------- ----------- -----------
Total Operating Expenses .................. 250,283 15,070 265,353 217,169 18,520 235,689
----------- ----------- ----------- ----------- ----------- -----------
Operating Income .......................... 132,918 (11,101) 121,817 103,982 (13,375) 90,607
----------- ----------- ----------- ----------- ----------- -----------
NON-OPERATING INCOME AND EXPENSES
Interest, investment and other income ..... 7,565 8,742 16,307 2,468 16,063 18,531
Interest:
Expense incurred ....................... (45,334) (29,054) (74,388) (36,857) (23,268) (60,125)
Amortization of deferred
financing costs ..................... (858) (1,973) (2,831) (896) (1,617) (2,513)
----------- ----------- ----------- ----------- ----------- -----------
Total Non-Operating Income and Expenses ... (38,627) (22,285) (60,912) (35,285) (8,822) (44,107)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before minority
interests, preferred dividends
and distributions, equity (loss)
in earnings of real estate
joint ventures and discontinued
operations ............................. $ 94,291 $ (33,386) $ 60,905 $ 68,697 $ (22,197) $ 46,500
----------- ----------- ----------- ----------- ----------- -----------
Total Assets .............................. $ 2,898,666 $ 209,298 $ 3,107,964 $ 2,426,455 $ 515,619 $ 2,942,074
=========== =========== =========== =========== =========== ===========
10. NON-CASH INVESTING AND FINANCING ACTIVITIES
During January 2004, in connection with the Company's acquisition of 1185 Avenue
of the Americas, New York, NY, the Company assumed a $202 million mortgage note
payable and $48 million of mezzanine debt.
During January 2004, the Company exercised its option to redeem two million
shares of its outstanding Series B preferred stock for approximately 1,958,000
shares of its common stock.
During April 2004, the Company exchanged approximately 3,081 of the Preferred
Units, with an aggregate stated value of approximately $3.1 million with such
amount applied to amounts owed from the preferred unit holder under the Other
Notes.
During July 2004, the Company exchanged approximately 15,381 of the Preferred
Units, with an aggregate stated value of approximately $15.4 million into
approximately 531,000 OP Units. Subsequent to this exchange the OP Units were
exchanged for an equal number of shares of the Company's common stock.
During July 2004, the Company exchanged 1,350,000 shares of its Series A
preferred stock, with a par value of approximately $33.8 million, for 1,304,602
shares of its common stock with a fair market value, on the date of the exchange
of approximately $36.1 million. In addition, as a result of this exchange, the
Company incurred a non-cash accounting charge of approximately $3.4 million.
On September 20, 2004, the Company redeemed approximately 1.8 million shares of
its Series A preferred stock resulting in an accounting charge of approximately
$3.4 million of which approximately $2.0 million was non-cash.
During September 2004, 181,510 shares of the Company's Series A preferred stock
was exchanged by the Series A preferred shareholders into 159,134 shares of the
Company's common stock which was valued at approximately $4.5 million or $28.47
per common share.
During September 2004, in connection with the Company's acquisition of a 215,000
square foot Class A office property, the Operating Partnership issued
approximately 34,000 OP Units for a total non-cash investment of approximately
$1 million.
18
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 exchange for the right to terminate its existing
lease at 225 Broadhollow Road eighteen months early, the Company amended the
terms of its option to acquire such property by providing certain Rechler family
members with customary tax protection in the event the Company were to acquire
the property and then dispose of it within five years. This amendment was
negotiated and approved by the Independent Directors of the Company.
In addition, in April 2004, the Company completed the sale to the Rechler family
of 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 nine month periods ended September 30, 2004 and
2003, Reckson Construction Group, Inc. or its successor, Reckson Construction &
Development, LLC billed approximately $170,000 and $848,000 and $86,000 and
$317,000, respectively, of market rate services and Reckson Management Group,
Inc. billed approximately $68,000 and $206,000 and $67,000 and $207,000,
respectively, of market rate management fees to the Remaining Option Properties.
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 $287,000 was paid by RCD during the six month period
ended September 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 Company at an annual base rent of
approximately $445,000. This lease has recently been extended for an additional
sixteen month period at market terms. Such extension was approved by the
disinterested members of the Company's Board of Directors.
During 1997, the Company 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
Company'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 Company 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 Company increased the RSVP Commitment to $110 million and
as of September 30, 2004 approximately $109.1 million had been funded through
the RSVP Commitment, of which $59.8 million represents investments by the
Company in RSVP-controlled (REIT-qualified) joint ventures and $49.3 million
represents loans made to FrontLine under the RSVP Facility. As of September 30,
2004, interest accrued (net of reserves) under the FrontLine Facility and the
RSVP Facility was approximately $19.6 million.
19
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 Company has discontinued the accrual of interest
income with respect to the FrontLine Loans. The Company 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 Company 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 August 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 completed an initial public offering ("IPO") of its common
stock. RSVP and the joint venture between RSVP and a subsidiary of the Operating
Partnership sold its entire ownership position in ACC in connection with the IPO
transaction. The Company through its ownership position in the joint venture and
outstanding advances made under the RSVP facility anticipates realizing
approximately $30 million in the aggregate from the sale. To date, the Company
has received approximately $10.6 million of such proceeds. The remaining amount
is expected to be received subsequent to the United States Bankruptcy Court's
approval of a Plan of re-organization of FrontLine. There can be no assurances
as to the final outcome of such Plan of re-organization.
As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments, is approximately $55.2 million which was reassessed with
no change by management as of September 30, 2004. Such amount has been reflected
in investments in affiliate loans and joint ventures on the Company'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 serves as a member of the Board of
Directors of ACC.
20
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 Associates Realty Corp. (the "Company") and
related notes thereto.
The Company 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 Company'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 Company'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 Company
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 Company 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 Company's credit ratings; changes in the
Company'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 Company 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
Company'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 Company include accounts of the
Company 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 Company'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 Company'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
Company'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 Company makes estimates of the collectibility of its tenant accounts
receivables related to base rents, tenant escalations and reimbursements and
other revenue or income. The Company 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 Company 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 Company's net income because a higher bad debt reserve results in
less net income.
The Company incurred approximately $1.3 million and $3.1 million, and $373,000
and $3.7 million of bad debt expense during the three and nine month periods
ended September 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.
21
The Company records interest income on investments in mortgage notes and notes
receivable on an accrual basis of accounting. The Company 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 Company 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 & 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.
The Company follows the guidance provided for under the Financial 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 Company uses the percentage of completion
method, as the future costs of development and profit are reliably estimated.
Gains 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 Company having no substantial continuing
involvement with the buyer.
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 Company 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 Company's net income. Should the Company 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 Company of certain other lease related costs must be made when
the Company 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 Company 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 Company allocates a portion of the purchase price to tangible assets
including the fair value of the building and building improvements on an
as-if-vacant basis and to land determined either by real estate tax assessments,
independent appraisals or other relevant data. Additionally, the Company
assesses fair value of identified intangible assets and liabilities 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 Company incorrectly estimates the values at
acquisition or the undiscounted cash flows, initial allocation of purchase price
and future impairment charges may be different.
22
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.
The Company 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 Company's net income because
recognizing an impairment results in an immediate negative adjustment to net
income. In determining impairment, if any, the Company 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, and Emerging Issues Task
Force("EITF") 87-24, the Company allocated approximately $2.8 million and $7.8
million of its unsecured corporate interest expense to discontinued operations
for the three and nine months ended September 30, 2003. EITF 87-24 states that
"interest on debt that is required to be repaid as a result of the disposal
transaction should be allocated to discontinued operations". Pursuant to the
terms of our Credit Facility, the Company was required to repay the Credit
Facility to the extent of the net proceeds, as defined, received from the sales
of unencumbered properties. As such, the Company has allocated to discontinued
operations the interest expense incurred on the portion of its Credit Facility,
which was required to be repaid. In August 2004, the Company amended and
extended its Credit Facility, whereby such repayment requirement was eliminated.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
OVERVIEW AND BACKGROUND
The Company is a self-administered and self-managed real estate investment trust
("REIT") specializing in the ownership, operation, acquisition, leasing,
financing, management and development of office and to a lesser extent
industrial / R&D properties and also owns land for future development. The
Company's growth strategy is focused on the commercial real estate markets in
and around the New York City tri-state area (the "Tri-State Area"). The Company
owns all of its interest in its real properties, directly or indirectly, through
Reckson Operating Partnership, L.P. (the "Operating Partnership").
As of September 30, 2004, the Company owned and operated 78 office properties
(inclusive of eight office properties owned through joint ventures) comprising
approximately 14.8 million square feet and 8 industrial / R&D properties
comprising approximately 863,000 square feet located in the Tri-State Area.
As of September 30, 2004, the Company also owned approximately 313 acres of land
in 12 separate parcels of which the Company can develop approximately 3.0
million square feet of office space. The Company 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 September
30, 2004, the Company had invested approximately $126.4 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 nine month periods ended September 30, 2004, the
Company has capitalized approximately $2.7 million and $7.8 million,
respectively, related to real estate taxes, interest and other carrying costs
related to these development projects. In October 2003, the Company 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 September 30, 2004 was approximately $5.9 million.
The closing is scheduled to occur upon the rezoning, which is anticipated to
occur within 12 to 24 months. 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
Company anticipates it will initially receive approximately $1.8 million. The
Company's cost basis in this land parcel was approximately $1.4 million. The
Company 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 Company will be successful in obtaining any such additional consideration.
In July 2004, the Company commenced the ground-up development of a 277,000
square foot Class A office building with a total anticipated investment of
approximately $60 million. There can be no assurances that the actual cost of
this development will not exceed the anticipated amount. This development is
located within the Company's existing 404,000 square foot executive office park
in Melville, New York.
23
During February 2003, the Company, 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 Company has recognized
a book gain, before taxes, on this land sale and build-to-suit transaction of
approximately $23.8 million, of which $0 and $5.0 million and $3.3 million and
$13.4 million has been recognized during the three and nine month periods ended
September 30, 2004 and 2003, respectively, and is included in investment and
other income on the Company's consolidated statements of income.
In November 2003, the Company 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 Company'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. Also, in exchange for the right to terminate its existing lease
at 225 Broadhollow Road eighteen months early, the Company amended the terms of
its option to acquire such property by providing certain Rechler family members
with customary tax protection in the event the Company were to acquire the
property and then dispose of it within five years. This amendment was negotiated
and approved by the Independent Directors of the Company.
In January 2004, the Company sold a 104,000 square foot office property, 120
Mineola Boulevard, located on Long Island for approximately $18.5 million. Net
proceeds from the sale were used to repay borrowings under the Company's
unsecured credit facility. As a result, the Company recorded a net gain of
approximately $5.2 million, net of limited partners' minority interest. In
accordance with FASB Statement No. 144, such gain has been reflected in
discontinued operations on the Company's consolidated statements of income.
In January 2004, the Company 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 Company 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 matured in August
2004 at which time the Company satisfied the outstanding debt through an advance
under its unsecured credit facility along with cash on hand. The property is
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 Company 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 Company 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 $5.8 million for the
three and nine month periods ended September 30, 2004. In addition, amortization
expense on the value of lease origination costs was approximately $700,000 and
$2.0 million for the three and nine month periods ended September 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.
In April 2004, the Company sold a 175,000 square foot office building, 400
Garden City Plaza, located on Long Island for approximately $30 million, of
which the Company owned a 51% interest, and a wholly owned 9,000 square foot
retail property for approximately $2.8 million. In addition, the Company
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. As described below, the Company
has since identified and acquired an interest in a qualified replacement
property for purposes of this exchange. The disposition of the other industrial
property, which is subject to certain environmental issues, was conditioned upon
the approval of the buyer's lender, which was not obtained. As a result, the
Company 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 Company, but there can be no assurance in this
regard.
24
In July 2004, the Company acquired a 141,000 square foot Class A office
property, 3 Giralda Farms, located in Madison, NJ for approximately $22.7
million. The Company made this acquisition through available cash-on-hand. The
building is 100% occupied by a tenant which intends to fully vacate the premises
by June 2005. On September 30, 2004, the Company signed a lease with an
international pharmaceutical company to lease 100% of the building for 12 years,
commencing on July 1, 2005, with options to renew for two additional 5 year
periods.
During September 2004, the Company, through Reckson Construction Group, Inc.,
acquired the remaining 49% interest in the property located at 90 Merrick
Avenue, East Meadow, NY, from the Company's joint venture partner, Teachers
Insurance and Annuity Association, for approximately $14.9 million. This
acquisition was financed, in part, from the remaining sales proceeds being held
by the previously referenced qualified intermediary as the property was an
identified, qualified replacement property. The balance of this acquisition was
financed with cash-on-hand. As a result of this acquisition, the Company
successfully completed the Section 1031 Exchange and thereby deferred the taxes
related to the gain recognized on the sale proceeds received from the sale of
the two remaining industrial properties from the Disposition.
During September 2004, the Company acquired a 215,000 square foot Class A office
property, 44 Whippany Road, located in Morristown, New Jersey for approximately
$30 million. The Company made this acquisition, in part, through funds received
from the Company's September 2004 common equity offering, cash-on-hand and the
issuance of approximately 34,000 OP Units which were priced at $28.70 per OP
Unit.
During September 2004, the Company sold a 92,000 square foot industrial
property, 500 Saw Mill River Road, located in Westchester County for
approximately $7.3 million. In connection with this sale the Company recorded a
net gain of approximately $2.2 million, net of limited partners' minority
interest. In accordance with FASB Statement No. 144, such gain has been
reflected in discontinued operations on the Company's consolidated statements of
income.
On October 1, 2004, the Company acquired a 260,500 square foot Class A office
property, 300 Broadhollow Road, located in Melville, Long Island, for
approximately $41.0 million. The Company made this acquisition, in part, through
an advance under the Credit Facility and cash-on-hand.
The Company 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 Company 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 Company 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"). At September 30, 2004, the Mezz Note had an outstanding balance of
approximately $27.6 million and a weighted average interest rate of 12.86% per
annum. Such interest rate is based on a minimum spread over LIBOR of 1.63% per
annum. The Mezz Note matures in September 2005 and the borrower has rights to
extend its term for three additional one-year periods and, under certain
circumstances, prepay amounts outstanding.
The Company held three other notes receivable which aggregated $21.5 million
which carried 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. As of September 30, 2004, the Operating Partnership had received
approximately $13.1 million from the preferred unit holder to be applied against
amounts owed under the Other Notes, including accrued interest. Subsequent to
September 30, 2004 the Company received an additional $2.8 million. As a result,
the remaining Other Notes 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 September 30, 2004, management has
made subjective assessments as to the underlying security value on the Company's
Note Receivable Investments. These assessments indicate an excess of market
value over the carrying value related to the Company's Note Receivable
Investments. Based on these assessments the Company's management believes there
is no impairment to the carrying value related to the Company's Note Receivable
Investments.
The Company 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 Company's initial New York City portfolio acquisition. This property was
cross-collateralized under a $99.7 million mortgage note payable along with one
of the Company's New York City buildings. On November 1, 2004, the Company
exercised its right to prepay this note in its entirety, without penalty.
25
The Company also owns a 60% interest in a 172,000 square foot office building
located at 520 White Plains Road in White Plains, New York (the "520JV"), which
is managed by its wholly owned subsidiary. As of September 30, 2004, the 520JV
had total assets of $20.7 million, a mortgage note payable of $11.5 million and
other liabilities of $726,000. The Company's allocable share of the 520JV
mortgage note payable is approximately $7.4 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 approvals from members on certain
decisions including sale of the property, refinancing of the property's mortgage
debt, and material renovations to the property. The Company has evaluated the
impact of FIN 46R on its accounting for the 520JV and has concluded that the
520JV is not a VIE. The Company accounts for the 520JV under the equity method
of accounting. In accordance with the equity method of accounting the Company's
proportionate share of the 520JV income (loss) was approximately $112,000 and
$520,000 and $134,000 and $(30,000) for the three and nine month periods ended
September 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 nine months ended September 30, 2004 and 2003,
Reckson Construction Group, Inc. or its successor, Reckson Construction &
Development, LLC billed approximately $170,000 and $848,000 and $86,000 and
$317,000, respectively, of market rate services and Reckson Management Group,
Inc. billed approximately $68,000 and $206,000 and $67,000 and $207,000,
respectively, of market rate management fees to the Remaining Option Properties.
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 $287,000 was paid by RCD during the six month period ended
September 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 Company at an annual base rent of
approximately $445,000. This lease has recently been extended for an additional
sixteen-month period at market terms. Such extension was approved by the
disinterested members of the Company's Board of Directors.
During July 1998, the Company 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 Company 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 Company. In August 2003, the Company acquired TIAA's 49%
interest in the property located at 275 Broadhollow Road, Melville, NY, for
approximately $12.4 million. 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. In addition, during September 2004, the Company acquired TIAA's
49% interest in the property located at 90 Merrick Avenue, East Meadow, NY for
approximately $14.9 million. As a result of these transactions, the Tri-State JV
owns six Class A suburban office properties aggregating approximately 943,000
square feet. The Company 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 Company consolidates the Tri-State
JV.
On December 21, 2001, the Company 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 Company. The Company 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 Company
consolidates the 919JV.
26
The total market capitalization of the Company at September 30, 2004 was
approximately $3.8 billion. The Company's total market capitalization is based
on the sum of (i) the market value of the Company's common stock and OP Units
(assuming conversion) of $28.75 per share/unit (based on the closing price of
the Company's common stock on September 30, 2004), (ii) the liquidation
preference value of the Company's Series A preferred stock of $25 per share,
(iii) the liquidation preference value of the Operating Partnership's preferred
units of $1,000 per unit and (iv) the approximately $1.4 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 September 30, 2004. As a result, the Company's total debt to
total market capitalization ratio at September 30, 2004 equaled approximately
36.2%.
During 1997, the Company 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
Company'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 Company 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 Company increased the RSVP Commitment to $110 million and
as of September 30, 2004, approximately $109.1 million had been funded through
the RSVP Commitment, of which $59.8 million represents investments by the
Company in RSVP-controlled (REIT-qualified) joint ventures and $49.3 million
represents loans made to FrontLine under the RSVP Facility. As of September 30,
2004, interest accrued (net of reserves) under the FrontLine Facility and the
RSVP Facility was approximately $19.6 million.
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 Company has discontinued the accrual of interest
income with respect to the FrontLine Loans. The Company 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 Company 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.
27
In August 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 completed an initial public offering ("IPO") of its common
stock. RSVP and the joint venture between RSVP and a subsidiary of the Operating
Partnership sold its entire ownership position in ACC in connection with the IPO
transaction. The Company through its ownership position in the joint venture and
outstanding advances made under the RSVP facility anticipates realizing
approximately $30 million in the aggregate from the sale. To date, the Company
has received approximately $10.6 million of such proceeds. The remaining amount
is expected to be received subsequent the United States Bankruptcy Court's
approval of a Plan of re-organization of FrontLine. There can be no assurances
as to the final outcome of such Plan of re-organization.
As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments, is approximately $55.2 million, which was reassessed with
no change by management as of September 30, 2004. Such amount has been reflected
in investments in affiliate loans and joint ventures on the Company'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 serves as a member of the Board of
Directors of ACC.
RESULTS OF OPERATIONS
The following table is a comparison of the results of operations for the three
month period ended September 30, 2004 to the three month period ended September
30, 2003 (dollars in thousands):
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
CHANGE
------------------
2004 2003 DOLLARS PERCENT
-------- -------- -------- -------
PROPERTY OPERATING REVENUES:
Base rents ................................. $111,260 $ 93,225 $ 18,035 19.3%
Tenant escalations and reimbursements ...... 19,517 16,244 3,273 20.1%
-------- -------- --------
TOTAL PROPERTY OPERATING REVENUES .......... $130,777 $109,469 $ 21,308 19.5%
======== ======== ========
PROPERTY OPERATING EXPENSES:
Operating expenses ......................... $ 32,779 $ 27,517 $ 5,262 19.1%
Real estate taxes .......................... 21,865 18,705 3,160 16.9%
-------- -------- --------
TOTAL PROPERTY OPERATING EXPENSES .......... $ 54,644 $ 46,222 $ 8,422 18.2%
======== ======== ========
INVESTMENT AND OTHER INCOME ................... $ 7,321 $ 6,384 $ 937 14.7%
======== ======== ========
OTHER EXPENSES:
Interest expense incurred .................. $ 24,120 $ 19,883 $ 4,237 21.3%
Amortization of deferred financing costs ... 1,005 807 198 24.5%
Marketing, general and administrative ...... 7,681 8,163 (482) (5.9)%
-------- -------- --------
TOTAL OTHER EXPENSES ....................... $ 32,806 $ 28,853 $ 3,953 13.7%
======== ======== ========
The Company's property operating revenues, which include base-rents and tenant
escalations and reimbursements ("Property Operating Revenues") increased by
$21.3 million for the three months ended September 30, 2004 as compared to the
2003 period. Property Operating Revenues increased $14.7 million attributable to
lease up of redeveloped properties and from the acquisitions of 3 Giralda Farms
in July 2004, 1185 Avenue of the Americas in January 2004 and 1055 Washington
Boulevard 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 a $2.0 million increase in termination fees. Property
Operating Revenues also increased by approximately $1.8 million due to a
weighted average occupancy increase in our "same store" properties. Tenant
escalations and reimbursements increased $2.1 million attributable to increased
operating expense and real estate tax costs being passed through to tenants.
These increases in Property Operating Revenues were offset by approximately
$600,000 in same space rental rate decreases and an increase in reserves against
certain tenant receivables.
28
The Company's property operating expenses, real estate taxes and ground rents
("Property Expenses") increased by approximately $8.4 million for the three
months ended September 30, 2004 as compared to the 2003 period. The increase is
primarily attributable the Company's acquisitions of 3 Giralda Farms, 1185
Avenue of the Americas and 1055 Washington Boulevard amounting to approximately
$7.7 million. The remaining increase in property operating expenses is
attributable to $700,000 in real estate taxes and operating expenses from the
Company'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 increased by $937,000 or 14.7%. This increase is
primarily attributable to the increase in successful real estate tax certiorari
proceedings in the third quarter of 2004 in the amount of approximately $1.3
million, income tax refunds through a Service Company of approximately $1.0
million and approximately $2.8 million received as consideration for the
assignment of certain mortgage indebtedness. These increases were off-set by
gain recognized in the third quarter of 2003 relating to a land sale and
build-to-suit transaction of approximately $4.2 million with no corresponding
gain in 2004.
Interest expense incurred increased by $4.2 million or 21.3%. This increase is
attributable to the net increase in the Operating Partnership's senior unsecured
notes of $200 million, which resulted in approximately $1.3 million of
additional interest expense. Interest expense incurred also increased by
approximately $1.4 million from 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 September 30, 2003 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 $383,000 incurred under the Company's "same store"
mortgage portfolio and a decrease in interest expense of approximately $920,000
incurred under the Company's unsecured credit facility as a result of a decrease
in the weighted average balance outstanding. The weighted average balance
outstanding under the Company's unsecured credit facility was $90 million for
the three months ended September 30, 2004 as compared to $352.2 million for the
three months ended September 30, 2003.
Marketing, general and administrative expenses decreased by $482,000 or 5.9%.
This overall net decrease is attributable to the efficiencies the Company
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 Company. These overall cost savings
were impacted by additional professional fees incurred during the three month
period ended September 30, 2004 relating to the Company's initiative to comply
with the provisions of the Sarbanes-Oxley Act of 2002 in the amount of
approximately $200,000 with no such costs applicable to the comparative period
of 2003.
Discontinued operations, net of limited partners' and minority interests,
decreased by approximately $2.2 million. This net decrease is attributable to
the gain on sales related to those properties sold during the current period of
approximately $2.2 million, which was off-set by the decrease of income from
discontinued operations for those properties sold between October 1, 2003 and
June 30, 2004.
The following table is a comparison of the results of operations for the nine
month period ended September 30, 2004 to the nine month period ended September
30, 2003 (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------
CHANGE
------------------
2004 2003 DOLLARS PERCENT
--------- --------- -------- -------
PROPERTY OPERATING REVENUES:
Base rents .................................. $ 332,060 $ 282,110 $ 49,950 17.7%
Tenant escalations and reimbursements ...... 55,110 44,186 10,924 24.7%
--------- --------- --------
TOTAL PROPERTY OPERATING REVENUES ........... $ 387,170 $ 326,296 $ 60,874 18.7%
========= ========= ========
PROPERTY OPERATING EXPENSES:
Operating expenses .......................... $ 94,185 $ 79,307 $ 14,878 18.8%
Real estate taxes ........................... 62,550 52,734 9,816 18.6%
--------- --------- --------
TOTAL PROPERTY OPERATING EXPENSES ........... $ 156,735 $ 132,041 $ 24,694 18.7%
========= ========= ========
INVESTMENT AND OTHER INCOME .................... $ 16,307 $ 18,531 $ (2,224) (12.0)%
========= ========= ========
OTHER EXPENSES:
Interest expense ............................ $ 74,388 $ 60,125 $ 14,263 23.7%
Amortization of deferred financing costs ... 2,831 2,513 318 12.7%
Marketing, general and administrative ...... 22,122 24,527 (2,405) (9.8)%
--------- --------- --------
TOTAL OTHER EXPENSES ........................ $ 99,341 $ 87,165 $ 12,176 14.0%
========= ========= ========
29
The Company's Property Operating Revenues increased by $60.9 million for the
nine months ended September 30, 2004 as compared to the 2003 period. Property
Operating Revenues increased $39.3 million attributable to lease up of
redeveloped properties and from the acquisitions of 3 Giralda Farms in July
2004, 1185 Avenue of the Americas in January 2004 and 1055 Washington Boulevard
in August 2003. In addition, Property Operating Revenues increased by $4.1
million from built-in rent increases for existing tenants in our "same store"
properties and by a $7.1 million increase in termination fees. Property
Operating Revenues also increased by approximately $4.4 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 $6.5 million attributable to increased operating expense and real
estate tax costs being passed through to tenants. These increases were offset by
approximately $500,000 in same space rental rate decreases.
The Company's Property Expenses increased by approximately $24.7 million for the
nine months ended September 30, 2004 as compared to the 2003 period. The
increase is primarily attributable to the Company's acquisitions of 3 Giralda
Farms, 1185 Avenue of the Americas and 1055 Washington Boulevard amounting to
approximately $21.5 million. The remaining increase in Property Expenses is
attributable to approximately $3.2 million in real estate taxes and operating
expenses from the Company'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 $2.2 million or 12.0 % from the nine
month period ended September 30, 2003 as compared to the same period of 2004.
The decrease is primarily attributable to a decrease in the gain recognized on
the Company's land sale and build-to-suit transaction of approximately $8.3
million. These decreases were off-set by increases in successful real estate tax
certiorari proceedings during 2004 of approximately $1.9 million, income tax
refunds through a Service Company of approximately $1.0 million, approximately
$2.8 million received as consideration for the assignment of certain mortgage
indebtedness, and approximately $360,000 in interest income due to net increases
in the Company's weighted average balances on its investments in mortgage notes
and notes receivable.
Interest expense incurred increased by $14.3 million or 23.7% from the nine
month period ended September 30, 2003 as compared to the same period of 2004.
The increase is attributable to the net increase of $200 million in the
Operating Partnership's senior unsecured notes which resulted in approximately
$2.6 million of additional interest expense and approximately $8.0 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 nine month period
ended September 30, 2003, the Company allocated approximately $7.8 million of
its interest expense to discontinued operations 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 $634,000 incurred under the Company's "same
store" mortgage portfolio, increases in capitalized interest expense of
approximately $201,000 attributable to an increase in development projects and a
decrease in interest expense of approximately $3.3 million incurred under the
Company's unsecured credit facility as a result of a decrease in the weighted
average balance outstanding. The weighted average balance outstanding under the
Company's unsecured credit facility was $99.9 million for the nine months ended
September 30, 2004 as compared to $319.7 million for the nine months ended
September 30, 2003.
Marketing, general and administrative expenses decreased by $2.4 million or 9.8%
from the nine month period ended September 30, 2003 as compared to the same
period of 2004. This overall net decrease is primarily attributable to the
efficiencies the Company 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 Company. In
addition, the Company had an overall decrease in contributions and sponsorships
of approximately $250,000 from the nine month period ended 2003 as compared to
the 2004 period. These overall cost savings were impacted by additional
professional fees incurred during the nine month period ended September 30, 2004
relating to the Company's initiative to comply with the provisions of section
404 of the Sarbanes-Oxley Act of 2002 in the amount of approximately $200,000
with no such costs applicable to the comparative period of 2003.
Discontinued operations, net of limited partners' and minority interests,
increased by approximately $792,000. This net increase is attributable to the
gain on sales of real estate for those properties sold during the current period
of approximately $11.1 million, which was off-set by the decrease of income from
discontinued operations for those properties sold between October 1, 2003 and
December 31, 2003.
30
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 Company. The Company 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 Company must be in compliance in order to borrow funds thereunder.
During recent quarterly periods, the Company 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 space vacated as a result of early terminations of leases. The Company is
also expending costs on tenants that are renewing or extending their leases
earlier than scheduled. The Company is currently experiencing high tenanting
costs including tenant improvement costs, leasing commissions and free rent in
all of its markets. For the three and nine month periods ended September 30,
2004, the Company paid $12.8 million and $34.4 million, respectively, for
tenanting costs including tenant improvement costs and leasing commissions. As a
result of these and / or other operating factors, the Company's cash flow from
operating activities was not sufficient to pay 100% of the dividends paid on its
common stock. To meet the short-term funding requirements relating to these
leasing costs, the Company has used proceeds of property sales or borrowings
under its credit facility. Based on the Company's forecasted leasing, it
anticipates that it will continue to incur similar shortfalls. The Company
currently intends to fund any shortfalls with proceeds from non-income producing
asset sales or borrowings under its credit facility. The Company periodically
reviews its dividend policy to determine the appropriateness of the Company's
dividend rate relative to the Company's cash flows. The Company adjusts its
dividend 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 taxable income to maintain REIT status. There can be no
assurance that the Company will maintain the current quarterly distribution
level on its common stock.
The Company 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 Company. During the nine months ended September 30, 2004, the
Company issued $287.5 million of common stock and the Operating Partnership
issued $300 million of senior unsecured debt securities. There can be no
assurance that there will be adequate demand for the Company's equity at the
time or at the price in which the Company 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 Company desires to sell its unsecured notes. In addition, when
valuations for commercial real estate properties are high, the Company will seek
to sell certain land inventory to realize value and profit created. The Company
will then seek opportunities to reinvest the capital realized from these
dispositions back into value-added assets in the Company's core Tri-State Area
markets. However, there can be no assurances that the Company will be able to
identify such opportunities that meet the Company's underwriting criteria. The
Company 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
Company 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 Company in both the short and long-term. The Company's
senior unsecured debt is currently rated "BBB-" by Fitch, "BBB-" by Standard &
Poors and "Ba1" by Moody's. The rating agencies review the ratings assigned to
an issuer such as the Company on an ongoing basis. Negative changes in the
Company's ratings would result in increases in the Company's borrowing costs,
including borrowings under the Company'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 Company 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 Company.
The Company is subject to the risk that other companies that are tenants of the
Company may file for bankruptcy protection. This may have an adverse impact on
the financial results and condition of the Company. 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. The Company believes that these trends are
beginning to adjust, and that the above average tenant costs relating to leasing
are decreasing. This trend is supported by increased occupancy and reduced
vacancy rates in all of our markets, by the general economic recovery in the
market resulting in job growth and the limited new supply of office space.
The Company carries comprehensive liability, fire, extended coverage and rental
loss insurance on all of its properties. Six of the Company'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 2005. The
Company'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 Company'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 Company's revenues from property
rentals.
31
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. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of recurring,
non-incremental revenue-generating expenditures. The Company intends to invest
amounts accumulated for distribution in short-term liquid investments.
On July 1, 2004, the Company had an outstanding $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, 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, an increase to the
maximum revolving credit amount to $750 million. In August 2004, the Company
amended and extended the Credit Facility to mature in August 2007 with
substantially similar terms and conditions as existed prior to the amendment and
extension. As of September 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 September 30, 2004, the outstanding borrowings under the
Credit Facility aggregated $90 million and carried a weighted average interest
rate of 2.64%.
The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At September 30, 2004, the Company 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 Company. As a
result, the Company maintains certain outstanding balances on its Credit
Facility.
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 Company entered into several anticipatory
interest rate hedge instruments to protect itself against potentially rising
interest rates. At the time the notes were issued the Company 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 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 March 15, 2004, the Company repaid $100 million of the Operating
Partnership's 7.4% senior unsecured notes at maturity. These notes were repaid
with funds received from the Company's March 2004 common equity offering.
On August 9, 2004, the Company 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 November 1, 2004, the Company exercised its right to prepay the outstanding
mortgage debt of approximately $99.6 million, without penalty, on the properties
located at One Orlando Center in Orlando, Florida and 120 West 45th Street in
New York City. The Company made an advance under its Credit Facility to fund
such repayment.
On August 13, 2004, the Operating Partnership issued $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%. Prior to
the issuance of these notes the Company entered into several anticipatory
interest rate hedge instruments to protect itself against potentially rising
interest rates. At the time the notes were issued, these instruments were
settled and the Company received a net benefit of approximately $1.9 million.
Such benefit will be amortized over the term of the notes to effectively reduce
interest expense. The Operating Partnership used 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 continues to seek opportunities to acquire real estate assets in its
markets. The Company 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 Company's commercial
real estate assets, the Company has sold certain non-core assets or interests in
assets where significant value has been created. During 2003, the Company sold
assets or interests in assets with aggregate sales prices of approximately
$350.6 million. In addition, during the nine months ended September 30, 2004,
the Company has sold assets or interests in assets with aggregate sales prices
of approximately $51.4 million, net of minority partner's joint venture
interest. The Company 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.
32
A Class A OP Unit and a share of common stock have similar economic
characteristics as they effectively share equally in the net income or loss and
distributions of the Operating Partnership. As of September 30, 2004, the
Operating Partnership had issued and outstanding 3,118,556 Class A OP Units and
465,845 Class C OP Units. The Class A OP Units currently receive a quarterly
distribution of $.4246 per unit. 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.
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 on a
one-for-one basis.
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 its 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.
During the nine month period ended September 30, 2004, approximately 2.5 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 $57.8 million.
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 for
general corporate purposes including the redemption of the Series A preferred
stock, discussed below.
On September 14, 2004, the Company completed an equity offering of five million
shares of its common stock raising approximately $137.5 million, net of an
underwriting discount, or $27.39 per share. Net proceeds received from this
transaction were used to redeem the Company's Series A preferred stock (defined
below) and for general corporate purposes.
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 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 nine months ended
September 30, 2004.
The Company had issued and outstanding 8,834,500 shares of 7.625% Series A
Convertible Cumulative Preferred Stock (the "Series A preferred stock"). The
Series A preferred stock was 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, was 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 on the open market and retired 140,600 shares of the Series A
preferred stock for approximately $3.4 million or $24.45 per share. During July
2004, the Company completed an exchange with a holder of 1,350,000 shares of the
Series A preferred stock for 1,304,602 shares of common stock. In addition,
during August 2004, the Company announced the redemption of 2,000,000 shares of
its then outstanding shares of Series A preferred stock at a redemption price of
$25.7625 per share plus accumulated and unpaid dividends. On September 20, 2004,
the Company redeemed 1,841,905 of such shares for approximately $47.9 million,
including accumulated and unpaid dividends. The remaining 158,095 shares of
Series A preferred stock were exchanged into common stock of the Company at the
election of the Series A preferred shareholders. During September 2004, the
Company announced the redemption of all of its then outstanding shares of Series
A preferred stock aggregating 5,343,900 shares at a redemption price of $25.7625
per share plus accumulated and unpaid dividends. On October 15, 2004, the
Company redeemed 4,965,062 shares of Series A preferred stock for approximately
$129.9 million, including accumulated and unpaid dividends. The remaining
378,838 shares of Series A preferred stock were exchanged into common stock of
the Company, at the election of the Series A preferred shareholders. As a result
of the 100% retirement of the Series A preferred stock annual preferred
dividends will decrease by approximately $16.8 million. In accordance with the
EITF Topic D-42 the Company incurred an accounting charge during the third
quarter of 2004 of approximately $6.7 million in connection with the July 2004
exchange and September 2004 redemption of the Series A preferred stock. In
addition, the Company will incur a charge of approximately $9.1 million during
the fourth quarter of 2004 in connection with the October 2004 redemption.
33
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. As a result of this redemption annual preferred dividends
decreased by approximately $4.4 million.
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 an annualized distribution of $55.60 per unit (the
"Preferred Units"). The Preferred Units 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 exercised his rights to
exchange 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 exchange and conversion, the preferred unit holder delivered notice to
the Operating Partnership of his intent to repay $15.5 million of the amounts
owed from the preferred unit holder under the Other Notes. As of September 30,
2004, there remain 1,200 Preferred Units outstanding with a stated distribution
rate of 7.0%, which is subject to reduction based upon terms of their initial
issuance. The terms of the Preferred Units provide for this reduction in
distribution rate in order to address the effect of certain mortgages with above
market interest rates, which were assumed by the Operating Partnership in
connection with properties contributed to the Operating Partnership in 1998. Due
to this reduction, the Preferred Units are currently not entitled to receive a
distribution.
Effective January 1, 2002 the Company has elected to follow FASB Statement No.
123, "Accounting for Stock Based Compensation" ("Statement No. 123"). Statement
No.123 requires the use of option valuation models, which determine the fair
value of the option on the date of the grant. All future employee stock option
grants will be expensed over the options' vesting periods based on the fair
value at the date of the grant in accordance with Statement No. 123. To
determine the fair value of the stock options granted, the Company uses a
Black-Scholes option pricing model. Prior to the adoption of Statement No. 123,
the Company had applied Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans and reported pro forma
disclosures in its Form 10-K filings by estimating the fair value of options
issued and the related expense in accordance with Statement No. 123. During each
of the nine month periods ended September 30, 2004 and 2003, the Company
recorded approximately $4,000 of expense related to the fair value of stock
options issued. Such amounts have been included in marketing, general and
administrative expenses in the Company's consolidated statements of income.
The Company's indebtedness at September 30, 2004 totaled approximately $1.4
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 $697.9 million of senior unsecured notes and approximately $580.3
million of mortgage indebtedness. Based on the Company's total market
capitalization of approximately $3.8 billion at September 30, 2004 (calculated
based on the sum of (i) the market value of the Company's common stock and OP
Units, assuming conversion, (ii) the liquidation preference value of the
Company's preferred stock, (iii) the liquidation preference value of the
Operating Partnership's preferred units and (iv) the $1.4 billion of debt), the
Company's debt represented approximately 36.2% of its total market
capitalization.
34
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Company's significant consolidated debt
obligations, by scheduled principal cash flow payments and maturity date, and
its commercial commitments by scheduled maturity at September 30, 2004 (in
thousands):
MATURITY DATE
--------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ---------- ----------
Mortgage notes payable (1) $ 3,555 $ 13,887 $ 13,478 $ 10,969 $ 9,989 $ 105,178 $ 157,056
Mortgage notes payable (2) (3) -- 18,553 129,920 60,539 -- 346,269 555,281
Senior unsecured notes -- -- -- 200,000 -- 500,000 700,000
Unsecured credit facility -- -- -- 90,000 -- -- 90,000
Land lease obligations (4) 943 3,776 3,828 3,753 3,753 78,672 94,725
Operating leases 317 1,282 1,198 844 359 -- 4,000
Air rights lease obligations 83 333 333 333 333 3,680 5,095
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 4,898 $ 37,831 $ 148,757 $ 366,438 $ 14,434 $1,033,799 $1,606,157
========== ========== ========== ========== ========== ========== ==========
(1) Scheduled principal amortization payments.
(2) Principal payments due at maturity.
(3) In addition, the Company has a 60% interest in an unconsolidated joint
venture property. The Company's share of the mortgage debt at September
30, 2004 is approximately $7.4 million. This mortgage note bears interest
at 8.85% per annum and matures on September 1, 2005 at which time the
Company's share of the mortgage debt will be approximately $6.9 million.
(4) The Company 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 Company, 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 Company under certain limited circumstances including
environmental issues and breaches of material representations.
On September 30, 2004, the Company had approximately $1.5 billion of debt
outstanding consisting of approximately $712.3 million of fixed rate mortgage
notes payable, approximately $697.9 million of fixed rate senior unsecured notes
payable and $90 million of variable rate debt under its Credit Facility. The
$1.5 billion of debt had a weighted average interest rate of approximately 6.65%
per annum and a weighted average term of approximately 6.2 years. During the
three and nine month periods ended September 30, 2004 and 2003, the Company
incurred interest costs, including capitalized interest, of $27.1 million and
$83.2 million and $25.6 million and $76.7 million, respectively. The Company's
rental revenues are its principal source of funds along with its net cash
provided by operating activities to meet these and future interest obligations.
On November 1, 2004, the Company exercised its right to prepay the outstanding
mortgage debt of approximately $99.6 million, which was due in 2027, without
penalty, on the properties located at One Orlando Center in Orlando, Florida and
120 West 45th Street in New York City.
At September 30, 2004, the Company had approximately $940,000 in outstanding
undrawn standby letters of credit issued under the Credit Facility. In addition,
approximately $43.2 million, or 6.1%, of the Company's consolidated mortgage
debt is recourse to the Company.
CORPORATE GOVERNANCE
Eight of the Company's office properties which were acquired by the issuance of
OP Units are subject to agreements limiting the Company's ability to transfer
them prior to agreed upon dates without the consent of the limited partner who
transferred the respective property to the Company. In the event the Company
transfers any of these properties prior to the expiration of these limitations,
the Company may be required to make a payment relating to taxes incurred by the
limited partner. These limitations expire between 2007 and 2014.
Three of the Company'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.
35
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.
OTHER MATTERS
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 Company 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 September 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 $290,000 and
$846,000 of compensation expense were recorded for the three and nine month
periods ended September 30, 2004, respectively, related to these LTIP grants.
Such amount has been included in marketing, general and administrative expenses
on the Company's consolidated statements of income.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $4.7 million at September 30, 2004, and have been
included as a reduction of additional paid in capital on the Company's
consolidated balance sheets. Other outstanding loans to executive and senior
officers at September 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 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 September 30, 2004, there remains, reserved for
future issuance, 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
nine month periods ended September 30, 2004 the Company recorded approximately
$101,000 and $302,000, respectively, of compensation expense related to the
Rights. Such amount has been included in marketing, general and administrative
expenses on the Company'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
September 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 Company recorded approximately $699,000 and $2.1 million
of compensation expense for the three and nine month periods ended September 30,
2004, respectively. Such amount has been included in marketing, general and
administrative expenses on the Company'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.
36
The Board of Directors has approved an amendment to the LTIP to revise the peer
group used to measure relative performance. The amendment eliminated the mixed
office and industrial companies and added certain other "pure office" companies
in order to limit the peer group to office sector companies. The Board has also
approved the revision of the performance measurement dates for future vesting
under the core component of the LTIP from the anniversary of the date of grant
to December 31st of each year. This was done in order to have the performance
measurement coincide with the performance period that the Company believes many
investors use to judge the performance of the Company.
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 Company 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 Company's properties have been subjected to a Phase I or similar
environmental audit (which involved general inspections without soil sampling,
ground water analysis or radon testing) completed by independent environmental
consultant companies. These environmental audits have not revealed any
environmental liability that would have a material adverse effect on the
Company'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 Company, has been reported to the New York State
Department of Environmental Conservation. The Company 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 Company are liable for the cost of investigation
and remediation. The Company does not believe that the cost of investigation and
remediation will be material and the Company has recourse against the tenant.
However, there can be no assurance that the Company will not incur liability
that would have a material adverse effect on the Company's business.
In March 2004, the Company 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.
37
FUNDS FROM OPERATIONS
Funds from Operations ("FFO") is defined by the National Association of Real
Estate Investment Trusts ("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. The Company presents FFO because it considers it an important
supplemental measure of the Company's operating performance and believes it is
frequently used by securities analysts, investors and other interested parties
in the evaluation of REITs, many of which present FFO when reporting their
results. FFO is intended to exclude GAAP historical cost depreciation and
amortization of real estate and related assets, which assumes that the value of
real estate diminishes ratably over time. Historically, however, real estate
values have risen or fallen with market conditions. As a result, FFO provides a
performance measure that, when compared year over year, reflects the impact to
operations from trends in occupancy rates, rental rates, operating costs,
development activities, interest costs and other matters without the inclusion
of depreciation and amortization, providing perspective that may not necessarily
be apparent from net income.
The Company computes FFO in accordance with the standards established by NAREIT.
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
Company'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 Company's calculation of FFO presented herein may not be comparable
to similarly titled measures as reported by other companies.
The following table presents the Company's FFO calculation (unaudited and in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income allocable to common shareholders ........................................... $ 8,840 $ 10,009 $ 37,849 $ 26,257
Adjustments for basic funds from operations:
Add:
Limited partners' minority interest in the operating partnership ................ 453 1,202 2,090 3,072
Real estate depreciation and amortization ....................................... 26,758 24,407 78,100 78,249
Minority partners' interests in consolidated partnerships ....................... 7,117 7,437 23,931 23,074
Less:
Gain on sales of real estate..................................................... 2,381 -- 11,322 --
Amounts distributable to minority partners in consolidated partnerships ......... 6,070 6,339 20,985 19,914
-------- -------- -------- --------
Basic Funds From Operations ("FFO") ................................................... 34,717 36,716 109,663 110,738
Add:
Dividends and distributions on dilutive shares and units ........................ 41 4,485 541 13,452
-------- -------- -------- --------
Diluted FFO ..................................................................... $ 34,758 $ 41,201 $110,204 $124,190
======== ======== ======== ========
Weighted average common shares outstanding ......................................... 70,237 57,924 66,179 57,985
Weighted average units of limited partnership interest outstanding ................. 3,552 7,554 3,551 7,370
-------- -------- -------- --------
Basic weighted average common shares and units outstanding ......................... 73,789 65,478 69,730 65,355
Adjustments for dilutive FFO weighted average shares and units outstanding:
Add:
Weighted average common stock equivalents .................................... 274 170 354 136
Weighted average shares of Series A Preferred Stock .......................... -- 7,747 -- 7,747
Weighted average shares of preferred limited partnership interest ............ 127 661 455 661
-------- -------- -------- --------
Dilutive FFO weighted average shares and units outstanding ......................... 74,190 74,056 70,539 73,899
======== ======== ======== ========
38
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 Company 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 Company has realized increased insurance costs, particularly relating to
property and terrorism insurance, and security costs. The Company has included
these costs as part of its escalatable expenses. The Company 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 Company's
properties contain vacant space, the Company will bear such inflationary
increases in expenses.
The Credit Facility 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk on its long
term debt, mortgage notes and notes receivable. The Company will, when
advantageous, hedge its interest rate risk using financial derivative
instruments. The Company is not subject to foreign currency risk.
The Company 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, equity offerings or through sales or
partial sales of assets.
The Company 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 Company entered into
two anticipatory interest rate hedge instruments which were scheduled to
coincide with an August 2004 debt maturity, totaling $100 million, to protect
itself against potentially rising interest rates. On August 13, 2004, the
Operating Partnership issued $150 million of senior unsecured notes due August
15, 2014 and simultaneously settled certain interest rate hedge instruments
resulting in a net benefit to the Company of approximately $1.9 million. Such
benefit will be amortized against interest expense over the term of the notes to
effectively reduce interest expense.
The fair market value ("FMV") of the Company'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 Company's long-term debt obligations by
scheduled principal cash flow payments and maturity date, weighted average
interest rates and estimated FMV at September 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 ............. $ 3,555 $ 32,440 $ 143,398 $ 271,508 $ 9,989 $ 951,447 $ 1,412,337 $1,486,609
Weighted average
interest rate ........ 7.45% 6.90% 7.37% 7.14% 7.23% 7.45% 7.37%
Variable rate .......... $ -- $ -- $ -- $ 90,000 $ -- $ -- $ 90,000 $ 90,000
Weighted average
interest rate ....... -- -- -- 2.64% -- -- 2.64%
(1) Includes aggregate unamortized issuance discounts of approximately $2.1
million 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 2007.
39
The following table sets forth the Company's mortgage notes and note receivables
by scheduled maturity date, weighted average interest rates and estimated FMV at
September 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 ................. $ 1,250 $ 2,500 $ -- $16,990 $ -- $ 2,500 $23,240 $24,159
Weighted average
interest rate ........... 10.50% 12.00% -- 12.00% -- 10.50% 11.76%
Variable rate .............. $ -- $27,592 $ -- $ -- $ -- $ -- $27,592 $27,592
Weighted average
interest rate ........... -- 12.86% -- -- -- -- 12.86%
(1) Excludes interest receivables and unamortized acquisition costs
aggregating approximately $2.7 million dollars.
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 Company has formed a Disclosure Committee
currently comprised of all of the Company's executive officers as well as
certain other members of senior management 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 Company with the SEC and
supports the Company's Chief Executive Officer and Chief Financial Officer in
connection with their certifications contained in the Company's SEC reports. The
Committee meets regularly and reports to the Audit Committee on a quarterly or
more frequent basis. Our Chief Executive Officer and Chief Financial Officer
have evaluated, with the participation of the Company's senior 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, our 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.
40
SELECTED PORTFOLIO INFORMATION
The following table sets forth the Company's schedule of its top 25 tenants
based on base rental revenue as of September 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 17.3 465,420 3.2% 5.5%
King & Spalding 7.5 180,391 2.2% 2.0%
Verizon Communications Inc. 2.4 263,569 1.9% 1.7%
*American Express 9.0 129,818 1.8% 1.6%
*Schulte Roth & Zabel 16.2 279,746 1.7% 2.8%
*Fuji Photo Film USA 7.9 194,984 1.3% 1.2%
United Distillers 0.5 137,918 1.3% 1.1%
*WorldCom/MCI 2.3 244,730 1.2% 1.1%
*Bank of America/Fleet Bank 6.1 162,050 1.2% 1.1%
Dun & Bradstreet Corp. 8.0 123,000 1.2% 1.0%
Arrow Electronics Inc. 9.3 163,762 1.1% 1.0%
Amerada Hess Corporation 8.3 127,300 1.1% 0.9%
Atlantic Mutual Insurance
Co., Inc. (4) 0.5 158,157 1.0% 0.9%
T.D. Waterhouse 2.9 103,381 1.0% 0.8%
Westdeutsche Landesbank 11.6 53,000 1.0% 0.8%
D.E. Shaw 11.3 79,515 0.9% 0.8%
Practicing Law Institute 9.4 77,500 0.9% 0.8%
*Banque Nationale De Paris 11.8 145,834 0.9% 1.5%
North Fork Bank 14.3 126,770 0.9% 0.7%
*Kramer Levin Nessen Kamin 0.6 158,144 0.8% 1.4%
Heller Ehrman White 0.7 64,526 0.8% 0.7%
Vytra Healthcare 3.2 105,613 0.8% 0.7%
*State Farm 4.1 189,310 0.8% 1.1%
P.R. Newswire Associates 3.6 67,000 0.8% 0.7%
Laboratory Corp. Of America 2.7 108,000 0.7% 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 Company 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 nine
month period ended September 30, 2004 for the Company's consolidated office and
industrial / R&D properties other than One Orlando Centre 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 $ 4,491,046
Per Square Foot $ 0.33 $ 0.45 $ 0.53 $ 0.67 $ 0.49 $ 0.44
NYC Office Properties
Total $ 946,718 $ 1,584,501 $ 1,939,111 $ 1,922,209 $ 1,598,135 $ 1,797,457
Per Square Foot $ 0.38 $ 0.45 $ 0.56 $ 0.55 $ 0.48 $ 0.40
Industrial Properties
Total $ 813,431 $ 711,666 $ 1,881,627 $ 1,218,401(1) $ 1,156,281 $ 81,389
Per Square Foot $ 0.11 $ 0.11 $ 0.28 $ 0.23 $ 0.18 $ 0.09
------------ ------------ ------------ ------------ ------------ ------------
TOTAL PORTFOLIO
Total $ 5,049,265 $ 6,902,236 $ 9,104,412 $ 9,931,946 $ 7,746,965 $ 6,369,892
Per Square Foot $ 0.25 $ 0.34 $ 0.45 $ 0.52 $ 0.39 $ 0.41
(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.
41
The following table sets forth annual and per square foot non-incremental
revenue-generating tenant improvement costs and leasing commissions which the
Company committed to perform, during the respective periods, to retain revenues
attributable to existing leased space for the years 2000 through 2003 and for
the nine month period ended September 30, 2004 for the Company's consolidated
office and industrial / R&D properties other than One Orlando Centre in Orlando,
FL:
2000 2001 2002 2003
---------- ---------- ----------- -----------
Long Island Office Properties
Tenant Improvements $2,853,706 $2,722,457 $ 1,917,466 $ 3,774,722
Per Square Foot Improved $ 6.99 $ 8.47 $ 7.81 $ 7.05
Leasing Commissions $2,208,604 $1,444,412 $ 1,026,970 $ 2,623,245
Per Square Foot Leased $ 4.96 $ 4.49 $ 4.18 $ 4.90
---------- ---------- ----------- -----------
Total Per Square Foot $ 11.95 $ 12.96 $ 11.99 $ 11.95
========== ========== =========== ===========
Westchester Office Properties
Tenant Improvements $1,860,027 $2,584,728 $ 6,391,589(2) $ 3,732,370
Per Square Foot Improved $ 5.72 $ 5.91 $ 15.05 $ 15.98
Leasing Commissions $ 412,226 $1,263,012 $ 1,975,850(2) $ 917,487
Per Square Foot Leased $ 3.00 $ 2.89 $ 4.65 $ 3.93
---------- ---------- ----------- -----------
Total Per Square Foot $ 8.72 $ 8.80 $ 19.70 $ 19.91
========== ========== =========== ===========
Connecticut Office Properties
Tenant Improvements $ 385,531 $ 213,909 $ 491,435 $ 588,087
Per Square Foot Improved $ 4.19 $ 1.46 $ 3.81 $ 8.44
Leasing Commissions $ 453,435 $ 209,322 $ 307,023 $ 511,360
Per Square Foot Leased $ 4.92 $ 1.43 $ 2.38 $ 7.34
---------- ---------- ----------- -----------
Total Per Square Foot $ 9.11 $ 2.89 $ 6.19 $ 15.78
========== ========== =========== ===========
New Jersey Office Properties
Tenant Improvements $1,580,323 $1,146,385 $ 2,842,521 $ 4,327,295
Per Square Foot Improved $ 6.71 $ 2.92 $ 10.76 $ 11.57
Leasing Commissions $1,031,950 $1,602,962 $ 1,037,012 $ 1,892,635
Per Square Foot Leased $ 4.44 $ 4.08 $ 3.92 $ 5.06
---------- ---------- ----------- -----------
Total Per Square Foot $ 11.15 $ 7.00 $ 14.68 $ 16.63
========== ========== =========== ===========
New York City Office Properties
Tenant Improvements $ 65,267 $ 788,930 $ 4,350,106 $ 5,810,017(3)
Per Square Foot Improved $ 1.79 $ 15.69 $ 18.39 $ 32.84
Leasing Commissions $ 418,185 $1,098,829 $ 2,019,837 $ 2,950,330(3)
Per Square Foot Leased $ 11.50 $ 21.86 $ 8.54 $ 16.68
---------- ---------- ----------- -----------
Total Per Square Foot $ 13.29 $ 37.55 $ 26.93 $ 49.52
========== ========== =========== ===========
Industrial Properties
Tenant Improvements $ 650,216 $1,366,488 $ 1,850,812 $ 1,249,200
Per Square Foot Improved $ 0.95 $ 1.65 $ 1.97 $ 2.42
Leasing Commissions $ 436,506 $ 354,572 $ 890,688 $ 574,256
Per Square Foot Leased $ 0.64 $ 0.43 $ 0.95 $ 1.11
---------- ---------- ----------- -----------
Total Per Square Foot $ 1.59 $ 2.08 $ 2.92 $ 3.53
========== ========== =========== ===========
TOTAL PORTFOLIO
Tenant Improvements $7,395,070 $8,822,897 $17,843,929 $19,481,691
Per Square Foot Improved $ 4.15 $ 4.05 $ 7.96 $ 10.22
Leasing Commissions $4,960,906 $5,973,109 $ 7,257,380 $ 9,469,313
Per Square Foot Leased $ 3.05 $ 2.75 $ 3.24 $ 4.97
---------- ---------- ----------- -----------
Total Per Square Foot $ 7.20 $ 6.80 $ 11.20 $ 15.19
========== ========== =========== ===========
Average YTD
2000-2003 2004 (1) New Renewal
----------- ----------- ----------- ----------
Long Island Office Properties
Tenant Improvements $ 2,817,088 $ 3,912,154 $ 2,012,053 $1,900,101
Per Square Foot Improved $ 7.58 $ 8.22 $ 14.37 $ 5.66
Leasing Commissions $ 1,825,808 $ 1,822,373 $ 756,282 $1,066,091
Per Square Foot Leased $ 4.63 $ 3.83 $ 5.40 $ 3.18
----------- ----------- ----------- ----------
Total Per Square Foot $ 12.21 $ 12.05 $ 19.77 $ 8.84
=========== =========== =========== ==========
Westchester Office Properties
Tenant Improvements $ 3,642,178 $ 5,516,541 $ 4,593,189 $ 923,352
Per Square Foot Improved $ 10.66 $ 13.46 $ 21.15 $ 4.79
Leasing Commissions $ 1,142,144 $ 2,099,540 $ 1,667,746 $ 431,794
Per Square Foot Leased $ 3.62 $ 5.12 $ 7.68 $ 2.25
----------- ----------- ----------- ----------
Total Per Square Foot $ 14.28 $ 18.58 $ 28.83 $ 7.04
=========== =========== =========== ==========
Connecticut Office Properties
Tenant Improvements $ 419,740 $ 2,910,018 $ 1,326,598 $1,583,420
Per Square Foot Improved $ 4.47 $ 12.44 $ 26.53 $ 8.61
Leasing Commissions $ 370,285 $ 1,448,056 $ 380,444 $1,067,612
Per Square Foot Leased $ 4.02 $ 6.19 $ 7.61 $ 5.80
----------- ----------- ----------- ----------
Total Per Square Foot $ 8.49 $ 18.63 $ 34.14 $ 14.41
=========== =========== =========== ==========
New Jersey Office Properties
Tenant Improvements $ 2,474,131 $ 1,194,305 $ 1,141,315 $ 52,990
Per Square Foot Improved $ 7.99 $ 7.36 $ 16.83 $ 0.56
Leasing Commissions $ 1,391,140 $ 692,593 $ 460,177 $ 232,416
Per Square Foot Leased $ 4.38 $ 4.27 $ 6.79 $ 2.46
----------- ----------- ----------- ----------
Total Per Square Foot $ 12.37 $ 11.63 $ 23.62 $ 3.02
=========== =========== =========== ==========
New York City Office Properties
Tenant Improvements $ 2,753,580 $ 6,098,113(3)(4) $ 4,041,654 $2,056,459(3)(4)
Per Square Foot Improved $ 17.18 $ 21.88 $ 29.19 $ 14.66
Leasing Commissions $ 1,621,795 $ 1,915,195(3)(4) $ 970,691 $ 944,504(3)(4)
Per Square Foot Leased $ 14.64 $ 6.87 $ 7.01 $ 6.73
----------- ----------- ----------- ----------
Total Per Square Foot $ 31.82 $ 28.75 $ 36.20 $ 21.39
=========== =========== =========== ==========
Industrial Properties
Tenant Improvements $ 1,279,179 $ 205,104 $ 157,661 $ 47,443
Per Square Foot Improved $ 1.75 $ 2.11 $ 1.73 $ 7.46
Leasing Commissions $ 564,005 $ 225,539 $ 225,539 $ 0
Per Square Foot Leased $ 0.78 $ 2.32 $ 2.48 $ 0.00
----------- ----------- ----------- ----------
Total Per Square Foot $ 2.53 $ 4.43 $ 4.21 $ 7.46
=========== =========== =========== ==========
TOTAL PORTFOLIO
Tenant Improvements $13,385,896 $19,836,235 $13,272,470 $6,563,765
Per Square Foot Improved $ 6.66 $ 11.96 $ 18.84 $ 6.88
Leasing Commissions $ 6,915,177 $ 8,203,296 $ 4,460,879 $3,742,417
Per Square Foot Leased $ 3.54 $ 4.95 $ 6.33 $ 3.93
----------- ----------- ----------- ----------
Total Per Square Foot $ 10.20 $ 16.91 $ 25.17 $ 10.81
=========== =========== =========== ==========
(1) Excludes $3.2 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 2004. Sandler O'Neil leasing costs are
reflected in 2Q04 numbers.
(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.
- --------------------------------------------------------------------------------
42
The following table sets forth the Company's lease expiration table, as adjusted
for pre-leased space, at October 1, 2004 for its Total Portfolio of properties,
its Office Portfolio and its Industrial / R&D Portfolio:
TOTAL PORTFOLIO
- --------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- --------------------------------------------------------------------------------
2004 64 318,657 2.0% 2.0%
2005 170 1,308,031 8.4% 10.4%
2006 193 1,713,654 10.9% 21.3%
2007 117 1,288,378 8.2% 29.6%
2008 117 1,056,558 6.7% 36.3%
2009 111 1,195,610 7.6% 43.9%
2010 and thereafter 343 7,684,935 49.1% 93.0%
- --------------------------------------------------------------------------------
Total/Weighted Average 1,115 14,565,823 93.0%
- --------------------------------------------------------------------------------
Total Portfolio Square Feet 15,657,275
- --------------------------------------------------------------------------------
OFFICE PORTFOLIO
- --------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Office % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- --------------------------------------------------------------------------------
2004 61 287,037 1.9% 1.9%
2005 168 1,260,881 8.5% 10.5%
2006 189 1,616,688 10.9% 21.4%
2007 113 1,218,886 8.2% 29.6%
2008 114 1,013,715 6.9% 36.5%
2009 110 1,150,629 7.8% 44.3%
2010 and thereafter 338 7,339,071 49.6% 93.9%
- --------------------------------------------------------------------------------
Total/Weighted Average 1,093 13,886,907 93.9%
- --------------------------------------------------------------------------------
Total Office Portfolio Square Feet 14,793,880
- --------------------------------------------------------------------------------
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 3.7% 3.7%
2005 2 47,150 5.5% 9.1%
2006 4 96,966 11.2% 20.4%
2007 4 69,492 8.0% 28.4%
2008 3 42,843 5.0% 33.4%
2009 1 44,981 5.2% 38.6%
2010 and thereafter 5 345,864 40.1% 78.6%
- --------------------------------------------------------------------------------
Total/Weighted Average 22 678,916 78.6%
- --------------------------------------------------------------------------------
Total Industrial/R&D Portfolio
Square Feet 863,395
- --------------------------------------------------------------------------------
43
The following table sets forth the Company'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):
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2004 2003
-------- -------
Capital expenditures:
Non-incremental ................................. $ 6,370 $ 7,523
Incremental ..................................... 2,690 1,674
Tenant improvements:
Non-incremental ................................. 15,405 23,410
Incremental ..................................... 3,549 3,473
-------- -------
Additions to commercial real estate properties ....... $ 28,014 $36,080
======== =======
Leasing costs:
Non-incremental ................................. $ 12,007 $ 9,952
Incremental ..................................... 1,944 3,233
-------- -------
Payment of deferred leasing costs .................... $ 13,951 $13,185
======== =======
Acquisition and development costs .................... $159,348 $55,604
======== =======
44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A number of shareholder derivative actions have been commenced purportedly on
behalf of the Company 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 Company 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 Company'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 Company believes
that the complaint is without merit.
Except as provided above, the Company is not presently subject to any material
litigation nor, to the Company's knowledge, is any litigation threatened against
the Company, 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
Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------------
(C) TOTAL NUMBER OF (D) MAXIMUM NUMBER
(A) TOTAL NUMBER SHARES (OR UNITS) (OR APPROXIMATE DOLLAR VALUE)
OF SHARES (B) AVERAGE PRICE PURCHASED AS PART OF OF SHARES (OR UNITS) THAT MAY
(OR UNITS) PAID PER SHARE PUBLICLY ANNOUNCED YET BE PURCHASED UNDER THE
PERIOD PURCHASED (OR UNIT) PLANS OR PROGRAMS PLANS OR PROGRAMS
- ------------------------------------------------------------------------------------------------------------------------------------
July 1 - 31 1,350,000 $27.74 --- ---
Series A preferred stock (1)
- ------------------------------------------------------------------------------------------------------------------------------------
August 1 - 31 --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
September 1 - 30 1,841,905 $25.7625 1,841,905 (2) 0 (2)
Series A preferred stock (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,191,905 $26.60 1,841,905 0 (3)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) On July 27, 2004, the Company exchanged 1,350,000 shares of its Series A
preferred stock, with a par value of approximately $33.8 million, for
1,304,602 shares of its common stock with a fair market value on the date
of the exchange of approximately $36.1 million in a privately negotiated
transaction.
(2) On August 18, 2004, the Company announced the redemption of 2,000,000
shares of its Series A preferred stock. On September 20, 2004, the Company
redeemed 1,841,905 shares of its Series A preferred stock at a price of
$25.7625 per share, pursuant to the terms of such security, for an
aggregate purchase price of approximately $47.6 million. The remaining
158,095 shares of Series A preferred stock were exchanged into common stock
of the Company at the election of the Series A shareholders.
(3) On September 14, 2004, the Company announced the redemption of its
remaining shares of Series A preferred stock. On October 15, 2004, the
Company redeemed its remaining 4,965,062 shares of Series A preferred stock
at a price of $25.7625 per share, pursuant to the terms of such security,
for an aggregate purchase price of approximately $127.9 million.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
45
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
Exhibits
31.1 Certification of Scott H. Rechler, Chief Executive Officer and
President 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 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 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 the Registrant,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code.
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 ASSOCIATES REALTY CORP.
By: /s/ Scott H. Rechler By: /s/ Michael Maturo
------------------------------- -------------------------------
Scott H. Rechler, Chief Executive Michael Maturo,
Officer and President Executive Vice President,
Treasurer and Chief Financial Officer
DATE: November 2, 2004
46