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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
COMMISSION FILE NUMBER: 1-13762
RECKSON OPERATING PARTNERSHIP, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 11-3233647
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
225 Broadhollow Road, Melville, NY 11747
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(Address of principal executive office) (zip code)
(631) 694-6900
(Registrant's telephone number including area code)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) YES_X_ NO__, AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES_X_ NO__.
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RECKSON OPERATING PARTNERSHIP, L.P.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 2002
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 June 30, 2002 (unaudited) and
December 31, 2001............................................................................ 2
Consolidated Statements of Income for the three and six months ended
June 30, 2002 and 2001 (unaudited)........................................................... 3
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 (unaudited)........................................................... 4
Notes to the Consolidated Financial Statements (unaudited)................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 26
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PART II. OTHER INFORMATION
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Item 1. Legal Proceeding............................................................................. 32
Item 2. Changes in Securities and Use of Proceeds.................................................... 32
Item 3. Defaults Upon Senior Securities.............................................................. 32
Item 4. Submission of Matters to a Vote of Securities Holders........................................ 32
Item 5. Other Information............................................................................ 32
Item 6. Exhibits and Reports on Form 8-K............................................................. 33
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SIGNATURES 33
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1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT UNIT AMOUNTS)
JUNE 30, 2002 DECEMBER 31, 2001
(UNAUDITED)
----------------------- ----------------------
ASSETS
Commercial real estate properties, at cost
Land.................................................................. $ 418,748 $ 408,837
Buildings and improvements............................................ 2,405,072 2,328,374
Developments in progress:
Land.................................................................. 90,229 69,365
Development costs..................................................... 24,919 74,303
Furniture, fixtures and equipment.......................................... 7,791 7,725
---------------------- ----------------------
2,946,759 2,888,604
Less accumulated depreciation......................................... (408,349) (361,960)
---------------------- ----------------------
2,538,410 2,526,644
Investments in real estate joint ventures.................................. 5,697 5,744
Investment in mortgage notes and notes receivable.......................... 55,368 56,234
Cash and cash equivalents.................................................. 39,281 121,773
Tenant receivables......................................................... 11,511 9,633
Investments in service companies and affiliate loans and joint ventures.... 86,787 84,142
Deferred rents receivable.................................................. 94,264 81,089
Prepaid expenses and other assets.......................................... 24,554 45,303
Contract and land deposits and pre-acquisition costs....................... 101 3,782
Deferred lease and loan costs ............................................. 64,811 64,438
---------------------- ----------------------
TOTAL ASSETS.......................................................... $ 2,920,784 $ 2,998,782
====================== ======================
LIABILITIES
Mortgage notes payable..................................................... $ 745,983 $ 751,077
Unsecured credit facility.................................................. 176,000 271,600
Senior unsecured notes..................................................... 499,239 449,463
Accrued expenses and other liabilities..................................... 75,215 84,651
Distributions payable...................................................... 33,199 32,988
---------------------- ----------------------
TOTAL LIABILITIES..................................................... 1,529,636 1,589,779
Minority partners' interests in consolidated partnerships.................. 243,286 242,698
---------------------- ----------------------
Commitments and contingencies.............................................. -- --
PARTNERS' CAPITAL
Preferred Capital, 11,211,662 and 11,222,965 units outstanding,
respectively.......................................................... 290,270 301,573
General Partners' Capital:
Class A common units, 50,988,233 and 49,982,377 units
outstanding, respectively............................................. 553,800 551,417
Class B common units, 10,283,513 units outstanding....................... 225,619 231,428
Limited Partners' Capital:
Class A common units, 7,276,224 and 7,487,218 units outstanding,
respectively.......................................................... 78,173 81,887
---------------------- ----------------------
TOTAL PARTNERS' CAPITAL................................................. 1,147,862 1,166,305
---------------------- ----------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............................... $ 2,920,784 $ 2,998,782
====================== ======================
(see accompanying notes to financial statements)
2
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED AND IN THOUSANDS, EXCEPT PER UNIT DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
------------------ ----------------- -------------- ---------------
REVENUES:
Base rents.................................................. $ 109,528 $ 111,184 $ 216,697 $ 218,678
Tenant escalations and reimbursements....................... 14,099 14,165 29,435 30,110
Equity in earnings of real estate joint ventures and
service companies...................................... 159 801 494 1,199
Interest income on mortgage notes and notes receivable...... 1,565 1,559 3,121 3,067
Gain on sales of real estate................................ -- -- 537 --
Investment and other income................................. 282 4,674 815 10,204
------------------ ----------------- -------------- ---------------
TOTAL REVENUES......................................... 125,633 132,383 251,099 263,258
------------------ ----------------- -------------- ---------------
EXPENSES:
Property operating expenses................................. 41,739 40,874 83,951 81,868
Marketing, general and administrative....................... 6,758 7,353 12,947 13,837
Interest.................................................... 22,119 23,557 43,110 47,188
Depreciation and amortization............................... 28,031 27,172 54,167 50,693
------------------ ----------------- -------------- ---------------
TOTAL EXPENSES......................................... 98,647 98,956 194,175 193,586
------------------ ----------------- -------------- ---------------
Income before distributions to preferred unit holders
and minority interests................................. 26,986 33,427 56,924 69,672
Minority partners' interests in consolidated partnerships... (4,813) (4,065) (9,933) (9,820)
------------------ ----------------- -------------- ---------------
Net income.................................................. 22,173 29,362 46,991 59,852
Preferred unit distributions................................ (5,767) (5,928) (11,715) (12,013)
------------------ ----------------- -------------- ---------------
Net income available to common unit holders................. $ 16,406 $ 23,434 $ 35,276 $ 47,839
================== ================= ============== ===============
Net Income available to:
Class A common units................................... $ 12,928 $ 18,535 $ 27,746 $ 37,300
Class B common units................................... 3,478 4,899 7,530 10,539
------------------ ----------------- -------------- ---------------
Total....................................................... $ 16,406 $ 23,434 $ 35,276 $ 47,839
================== ================= ============== ===============
Net income per weighted average common units:
Class A common unit...................................... $ .22 $ .34 $ .48 $ .69
================== ================= ============== ===============
Class B common unit...................................... $ .34 $ .48 $ .73 $ 1.02
================== ================= ============== ===============
Weighted average common units outstanding:
Class A common units................................... 58,275 54,985 57,900 54,086
Class B common units................................... 10,284 10,284 10,284 10,284
(see accompanying notes to financial statements)
3
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
SIX MONTHS ENDED
JUNE 30,
------------------------------------------
2002 2001
------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 46,991 $ 59,852
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.............................................. 54,167 50,693
Gain on sales of real estate............................................... (537) --
Minority partners' interests in consolidated partnerships.................. 9,933 9,820
Equity in earnings of real estate joint ventures and service companies..... (494) (1,199)
Changes in operating assets and liabilities:
Prepaid expenses and other assets.......................................... 20,914 (1,482)
Tenant receivables......................................................... (1,878) 1,682
Deferred rents receivable.................................................. (13,175) (22,150)
Real estate tax escrows.................................................... 288 (1,266)
Accrued expenses and other liabilities..................................... (9,490) (1,931)
------------------- ---------------------
Net cash provided by operating activities.................................. 106,719 94,019
------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in contract deposits and pre-acquisition costs.................... -- (1,343)
Proceeds from mortgage note receivable repayments.......................... 8 2,945
Additions to commercial real estate properties............................. (20,810) (87,982)
Additions to developments in progress...................................... (31,809) (5,252)
Payment of leasing costs................................................... (6,169) (5,998)
Additions to furniture, fixtures and equipment............................. (64) (244)
Proceeds from sales of real estate and marketable securities............... 2,128 --
Investments in affiliate joint ventures.................................... -- (24,966)
------------------- ---------------------
Net cash used in investing activities..................................... (56,716) (122,840)
------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on secured borrowings................................... (5,094) (73,801)
Payment of loan costs...................................................... (990) (789)
Increase in investments in affiliate loans and service companies........... (2,651) (5,042)
Proceeds from issuance of senior unsecured notes........................... 49,432 --
Proceeds from secured borrowings........................................... -- 75,000
Proceeds from of unsecured credit facility................................. 45,000 118,000
Repayment of unsecured credit facility..................................... (140,600) --
Distributions to minority partners in consolidated partnerships............ (9,559) (10,727)
Contributions.............................................................. 6,014 1,331
Distributions ............................................................. (74,047) (65,510)
------------------- ---------------------
Net cash (used in) provided by financing activities........................... (132,495) 38,462
------------------- ---------------------
Net (decrease) increase in cash and cash equivalents.......................... (82,492) 9,641
Cash and cash equivalents at beginning of period.............................. 121,773 16,624
------------------- ---------------------
Cash and cash equivalents at end of period.................................... $ 39,281 $ 26,265
=================== =====================
(see accompanying notes to financial statements)
4
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
Reckson Operating Partnership, L. P. (the "Operating Partnership")
commenced operations on June 2, 1995. The sole general partner in the Operating
Partnership, Reckson Associates Realty Corp. (the "Company") is a
self-administered and self-managed real estate investment trust ("REIT").
The Operating Partnership is engaged in the ownership, management,
operation, leasing and development of commercial real estate properties,
principally office and industrial buildings and also owns certain undeveloped
land (collectively, the "Properties") located in the New York tri-state area
(the "Tri-State Area").
During June 1995, the Company contributed approximately $162 million in
cash to the Operating Partnership in exchange for an approximate 73% general
partnership interest. All Properties acquired by the Company are held by or
through the Operating Partnership. In addition, in connection with the formation
of the Operating Partnership, the Operating Partnership executed various option
and purchase agreements whereby it issued common units of limited partnership
interest in the Operating Partnership ("Units") to the continuing investors and
assumed certain indebtedness in exchange for interests in certain property
partnerships, fee simple and leasehold interests in properties and development
land, certain other business assets and 100% of the non-voting preferred stock
of the management and construction companies. At June 30, 2002, the Company's
ownership percentage in the Operating Partnership was approximately 89.4%.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries at June 30,
2002 and December 31, 2001 and the results of their operations for the three and
six months ended June 30, 2002 and 2001, respectively, and, their cash flows for
the six months ended June 30, 2002 and 2001, respectively. The Operating
Partnership's investments in majority owned and/or controlled real estate joint
ventures are reflected in the accompanying financial statements on a
consolidated basis with a reduction for minority partners' interest. The
operating results of the service businesses currently conducted by Reckson
Management Group, Inc., RANY Management Group, Inc. Reckson Construction Group
New York, Inc. and Reckson Construction Group, Inc., in which the Operating
Partnership owns a 97% non-controlling interest, are reflected in the
accompanying financial statements on the equity method of accounting. The
Operating Partnership also invests in real estate joint ventures where it may
own less than a controlling interest. Such investments are also reflected in the
accompanying financial statements on the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.
The minority partners' interests in consolidated partnerships at June 30,
2002 represent a 49% non-affiliated interest in RT Tri-State LLC, owner of an
eight property suburban office portfolio, a 40% non-affiliated interest in Omni
Partners, L.P., owner of a 575,000 square foot suburban office property and
beginning December 21, 2001, a 49% non-affiliated interest in Metropolitan 919
Third Avenue, LLC, owner of the property located at 919 Third Avenue, New York,
NY.
5
The accompanying interim unaudited financial statements have been prepared
by the Operating Partnership's management pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC"). 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
make the information presented not misleading. The unaudited financial
statements as of June 30, 2002 and for the three and six month periods ended
June 30, 2002 and 2001 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, 2002. These financial statements
should be read in conjunction with the Operating Partnership's audited financial
statements and notes thereto included in the Operating Partnership's Form 10-K
for the year ended December 31, 2001.
In October 2001, the Financial Accounting Standards Board issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Statement No. 144 provides accounting guidance for financial accounting and
reporting for the impairment or disposal of long-lived assets. Statement No. 144
supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. It also supersedes the accounting
and reporting provisions of Accounting Principles Board Opinion No. 30,
Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions related to the disposal of a segment of a business. The
Operating Partnership adopted Statement No. 144 on January 1, 2002. The adoption
of this statement did not have a material effect on the results of operations or
the financial position of the Operating Partnership.
Effective January 1, 2002 the Company has elected to follow FASB Statement No.
123, "Accounting for Stock Based Compensation". 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. The Company expects minimal
financial impact in the current year from the adoption of Statement No. 123. To
determine the fair value of the stock options granted, the Company intends to
use a Black-Scholes option pricing model. Historically, 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. Accordingly, no compensation cost
had been recognized for its stock option plans in the past.
In April 2002, the FASB issued Statement No. 145, which rescinded Statement
No. 4, "Reporting Gains and Losses from Extinguishment of Debt". Statement No.
145 is effective for fiscal years beginning after May 15, 2002. The Operating
Partnership will adopt Statement No. 145 on January 1, 2003.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. MORTGAGE NOTES PAYABLE
As of June 30, 2002, the Operating Partnership had approximately $746.0
million of fixed rate mortgage notes which mature at various times between 2004
and 2027. The notes are secured by 21 properties with a net carrying value of
approximately $1.5 billion and have a weighted average interest rate of
approximately 7.3%.
4. SENIOR UNSECURED NOTES
As of June 30, 2002, the Operating Partnership had outstanding
approximately $499.2 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
--------------------- -------------------- ------------------ ------------------ -----------------------
March 26, 1999 $ 100,000 7.40% 5 years March 15, 2004
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
Interest on the Senior Unsecured Notes is payable semiannually with
principal and unpaid interest due on the scheduled maturity dates. In addition,
the Senior Unsecured Notes issued on March 26, 1999 and June 17, 2002 were
issued at aggregate discounts of $738,000 and 267,500, respectively. Such
discounts are being amortized over the term of the Senior Unsecured Notes to
which they relate.
On June 17, 2002, the Operating Partnership issued $50 million of 6% (6.13%
effective rate) senior unsecured notes. Net proceeds of approximately $49.4
million received from this issuance were used to repay outstanding borrowings
under the Operating Partnership's unsecured credit facility.
6
5. UNSECURED CREDIT FACILITY
As of June 30, 2002, the Operating Partnership had a three year $575
million unsecured revolving credit facility (the "Credit Facility") from The
JPMorgan Chase Bank as administrative agent, UBS Warburg LLC as syndication
agent and Deutsche Bank as documentation agent. The Credit Facility matures in
September 2003 and borrowings under the Credit Facility are currently priced off
LIBOR plus 105 basis points.
The Operating Partnership utilizes the Credit Facility primarily to finance
real estate investments, fund its real estate development activities and for
working capital purposes. At June 30, 2002, the Operating Partnership had
availability under the Credit Facility to borrow approximately an additional
$400 million, subject to compliance with certain financial covenants.
6. COMMERCIAL REAL ESTATE INVESTMENTS
As of June 30, 2002, the Operating Partnership owned and operated 77 office
properties (inclusive of eleven office properties owned through joint ventures)
comprising approximately 13.8 million square feet, 102 industrial properties
comprising approximately 6.8 million square feet and two retail properties
comprising approximately 20,000 square feet located in the Tri-State Area.
The Operating Partnership also owns approximately 254 acres of land in 12
separate parcels of which the Operating Partnership can develop approximately
two million square feet of office space and approximately 450,000 square feet of
industrial space. On April 1, 2002, the Operating Partnership paid approximately
$23.8 million to acquire an additional 52.7 acres of land located in Valhalla,
NY on which the Operating Partnership can develop approximately 875,000 square
feet of office space. The Operating Partnership currently owns and operates
three buildings encompassing approximately 700,000 square feet in the same
office park in which this land is located. The Operating Partnership financed
this acquisition in part from the sales proceeds of an office property being
held by a qualified intermediary for the purposes of an exchange of real
property pursuant to Section 1031 of the Internal Revenue Code of 1986 (the
"Code") and from an advance under the Credit Facility. In addition, the
Operating Partnership owns a 32 acre land parcel in Rye Brook, NY which is under
contract for sale for approximately $22.3 million. The sale of this land is
subject to certain rezoning and other municipal approvals. At this time it is
undetermined whether these approvals or rezoning will be obtained and the sale
closed. The Operating Partnership currently owns and operates six buildings
encompassing approximately 542,000 square feet in the same office park in which
this land is located. As of June 30, 2002, the Operating Partnership had
invested approximately $115 million in these developments in progress.
Management has made subjective assessments as to the value and recoverability of
these investments based on current and proposed development plans. The Operating
Partnership has capitalized approximately $5.4 million for the six months ended
June 30, 2002 related to real estate taxes, interest and other carrying costs
related to these developments in progress.
The Operating Partnership also owns a 357,000 square foot office building
in Orlando, Florida. Additionally, the Operating Partnership holds a $17.0
million interest in a note receivable secured by a partnership interest in Omni
Partners, L.P., owner of the Omni, a 575,000 square foot Class A office property
located in Uniondale, NY and three other notes receivable aggregating $36.5
million which bear interest at rates ranging from 10.5% to 12% per annum and are
secured by a minority partner's preferred unit interest in the Operating
Partnership and certain real property. As of June 30, 2002, management has made
subjective assessments as to the underlying security value on the Operating
Partnership's note receivable investments. These assessments indicated an excess
of market value over carrying value related to the Operating Partnership's note
receivable investments.
The Operating Partnership also owns a 60% non-controlling interest in a
172,000 square foot office building located at 520 White Plains Road in White
Plains, New York (the "520JV"). As of June 30, 2002, the 520JV had total assets
of $21.5 million, a mortgage note payable of $12.8 million and other liabilities
of $.9 million. The Operating Partnership's allocable share of the 520JV
mortgage note payable is approximately $7.7 million. In addition, the 520JV had
total revenues of $1,615,000 and total expenses of $1,637,000 for the six months
ended June 30, 2002. The Operating Partnership accounts for the 520JV under the
equity method of accounting. The 520JV contributed approximately $29,000 and
$216,000 to the Operating Partnership's equity in earnings of real estate joint
ventures for the six months ended June 30, 2002 and 2001, respectively.
7
On December 21, 2001, the Operating Partnership formed a joint venture
with the New York State Teachers' Retirement System ("NYSTRS") whereby NYSTRS
acquired a 49% indirect interest in the property located at 919 Third Avenue,
New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Operating Partnership. On January 4,
2002, net proceeds from this sale were used primarily to repay borrowings under
the Credit Facility and for working capital purposes.
On August 7, 2002, the Operating Partnership sold an industrial property on
Long Island aggregating approximately 32,000 square feet for approximately $1.8
million. This property was sold to the sole tenant of the property through an
option contained in the tenant's lease. On August 8, 2002, the Operating
Partnership sold two Class A office properties located in Westchester County, NY
aggregating approximately 157,000 square feet for approximately $18.5 million.
Net proceeds from the sale of August 8th were used to repay borrowings under the
Credit Facility.
7. PARTNERS' CAPITAL
On March 28, 2002, approximately 11,303 Series E preferred units of the
limited partnership interest, with a liquidation preference value of
approximately $11.3 million, were exchanged for 451,934 Units at a price of
$25.01 per Unit. In addition, during the three months ended June 30, 2002, the
Company increased its general partner interest in the Operating Partnership by
acquiring 666,466 outstanding Units from certain limited partners in exchange
for an equal number of shares of its Class A common stock.
As of June 30, 2002, the Operating Partnership had issued and outstanding
10,283,513 Class B common units, all of which are held by the Company and which
were entitled to receive an annual distribution of $2.5968 per unit. The
distribution on the Class B units is subject to adjustment annually based on a
formula which measures increases or decreases in the Company's Funds From
Operations, as defined, over a base year. On July 31, 2002, the annual
distribution on the Class B common unit was decreased to $2.5884 per unit.
The Class B common units are exchangeable at any time, at the option of the
holder, into an equal number of Class A common units subject to customary
antidilution adjustments. The Operating Partnership, at its option, may redeem
any or all of the Class B common units in exchange for an equal number of Class
A common units at any time following November 23, 2003.
During May 2002, the Operating Partnership declared the following
distributions:
RECORD PAYMENT THREE MONTHS ANNUALIZED
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
-------- ------------ ---- ---- ----- ------------
Class A common unit $.4246 July 5, 2002 July 17, 2002 June 30, 2002 $1.6984
Class B common unit $.6471 July 15, 2002 July 31, 2002 July 31, 2002 $2.5884
Series A preferred unit $.476563 July 15, 2002 July 31, 2002 July 31, 2002 $1.9063
Series E preferred unit $.553125 July 15, 2002 July 31, 2002 July 31, 2002 $2.2125
The Board of Directors of the Company has authorized the purchase of up to
an additional five million shares of the Company's Class B common stock and/or
its Class A common stock. Subsequent to June 30, 2002, the Operating Partnership
purchased 368,200 Class B common units at an average price of $22.90 per Class B
unit and 1,856,200 Class A common units at an average price of $21.98 per Class
A unit for an aggregate purchase price for both the Class A and Class B units of
approximately $49.2 million. Previously, in conjunction with the Company's
common stock buy-back program, the Operating Partnership purchased and retired
1,410,804 Class B common units at an average price of $21.48 per unit and 61,704
Class A common units at an average price of $23.03 per unit for an aggregate
purchase price of approximately $31.7 million. In addition, the Board of
Directors of the Company has formed a pricing committee to consider purchases of
up to $75 million of the Company's outstanding preferred securities.
On May 22, 2002, approximately $1.4 million of loans made to certain executive
officers to purchase the Company's common stock matured. The loans were secured
by 61,668 shares of the Company's Class A common stock. The loans were satisfied
by the executive officers with the 61,668 shares of Class A common stock. The
market value of these shares on May 22, 2002 was sufficient to fully satisfy
these loans and as such there was no financial impact to the Company. The
Company has subsequently retired these shares.
Net income per common partnership unit is determined by allocating net
income after preferred distributions and minority partners' interest in
consolidated partnerships income to the general and limited partners' based on
their weighted average distribution per common partnership units outstanding
during the respective periods presented.
Holders of preferred units of limited and general partnership interest are
entitled to distributions based on the stated rates of return (subject to
adjustment) for those units.
8
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2002 2001
------------ -------------
Cash paid during the period for interest......................... $ 45,817 $ 52,766
============ =============
Interest capitalized during the period .......................... $ 4,406 $ 5,137
============ =============
9. SEGMENT DISCLOSURE
The Operating Partnership's portfolio consists of Class A office properties
located within the New York City metropolitan area and Class A suburban office
and industrial properties located and operated within the Tri-State Area (the
"Core Portfolio"). In addition the Operating Partnership's portfolio includes
one office property located in Orlando, Florida. The Operating Partnership has
managing directors who report directly to the Co-Presidents and Chief Financial
Officer of the Company who have been identified as the Chief Operating Decision
Makers due to their final authority over resource allocation decisions and
performance assessment.
The Operating Partnership does not consider (i) interest incurred on its
Credit Facility and Senior Unsecured Notes and (ii) the operating performance of
the office property located in Orlando, Florida as part of its Core Portfolio's
property operating performance for purposes of its component disclosure set
forth below.
The following table sets forth the components of the Operating
Partnership's revenues and expenses and other related disclosures for the three
and six months ended June 30, 2002 and 2001 (in thousands):
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, 2002 JUNE 30, 2001
-------------------------------------------------------- ----------------------------------------
CONSOLIDATED CONSOLIDATED
CORE PORTFOLIO OTHER TOTALS CORE PORTFOLIO OTHER TOTALS
---------------- ----------- -------------- ---------------- ---------- ------------
REVENUES:
Base rents, tenant
escalations and
reimbursements........ $ 121,517 $ 2,110 $ 123,627 $ 123,030 $ 2,319 $ 125,349
Equity in earnings of
real estate joint
ventures and service
companies........... -- 159 159 -- 801 801
Other income 141 1,706 1,847 1,929 4,304 6,233
------------- ----------- ------------- ------------- ------------ ------------
Total Revenues........ 121,658 3,975 125,633 124,959 7,424 132,383
------------- ----------- ------------- ------------- ------------ ------------
EXPENSES:
Property operating
Expenses.............. 40,190 1,549 41,739 40,080 794 40,874
Marketing, general
and administrative.... 4,671 2,087 6,758 5,446 1,907 7,353
Interest................ 12,990 9,129 22,119 12,149 11,408 23,557
Depreciation and
amortization.......... 25,831 2,200 28,031 25,096 2,076 27,172
------------- ----------- ------------- ------------- ------------ -----------
Total Expenses...... 83,682 14,965 98,647 82,771 16,185 98,956
------------- ----------- ------------- ------------- ------------ ------------
Income (loss) before
distributions to
preferred unitholders
and minority interests. $ 37,976 $ (10,990) $ 26,986 $ 42,188 $ (8,761) $ 33,427
============= =========== ============== ============= ============ ============
Total Assets............. $ 2,693,174 $ 227,610 $ 2,920,784 $ 2,691,989 $ 423,705 $ 3,115,694
============= =========== ============== ============= ============ ============
9
SIX MONTHS ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, 2002 JUNE 30, 2001
--------------------------------------------------- ---------------------------------------------
CONSOLIDATED CONSOLIDATED
CORE PORTFOLIO OTHER TOTALS CORE PORTFOLIO OTHER TOTALS
----------------- ----------- ------------------ ---------------- ------------ -------------
REVENUES:
Base rents, tenant
escalations and
reimbursements........ $ 241,715 $ 4,417 $ 246,132 $ 243,752 $ 5,036 $ 248,788
Equity in earnings of
real estate joint
ventures and service
companies........... -- 494 494 -- 1,199 1,199
Other income 1,093 3,380 4,473 2,478 10,793 13,271
------------- ----------- ------------- ------------- ------------ -----------
Total Revenues........ 242,808 8,291 251,099 246,230 17,028 263,258
------------- ----------- ------------- ------------- ------------ -----------
EXPENSES:
Property operating
Expenses.............. 81,610 2,341 83,951 80,434 1,434 81,868
Marketing, general
and administrative.... 9,275 3,672 12,947 10,070 3,767 13,837
Interest................ 25,954 17,156 43,110 25,055 22,133 47,188
Depreciation and
amortization.......... 50,428 3,739 54,167 46,631 4,062 50,693
------------- ----------- ------------- ------------- ------------ -----------
Total Expenses...... 167,267 26,908 194,175 162,190 31,396 193,586
------------- ----------- ------------- ------------- ------------ -----------
Income (loss) before
distributions to
preferred unitholders
and minority interests.. $ 75,541 $ (18,617) $ 56,924 $ 84,040 $ (14,368) $ 69,672
============= =========== ============== ============ ============= ===========
10
10. RELATED PARTY TRANSACTIONS
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. These services are currently provided by Reckson Management Group,
Inc., RANY Management Group, Inc., Reckson Construction Group New York, Inc.,
and Reckson Construction Group, Inc. (collectively, the "Service Companies").
The Operating Partnership owns a 97% non-controlling interest in the Service
Companies. An entity which is substantially owned by certain Rechler family
members who are also executive officers of the Company owns a 3% controlling
interest in the Service Companies. During the six months ended June 30, 2002,
Reckson Construction Group, Inc. billed approximately $77,000 of market rate
services and Reckson Management Group, Inc. billed approximately $156,000 of
market rate management fees to certain properties in which certain Rechler
family members who are also executive officers maintain an equity interest.
These properties consist of five properties in which these officers had acquired
their interests prior to the initial public offering, but were not contributed
to the Company as part of the initial public offering (the "Option Properties").
At the initial public offering the Operating Partnership was granted ten year
options to acquire these interests at a price based upon an agreed upon formula.
In addition, for the six months ended June 30, 2002, Reckson Construction Group,
Inc. performed market rate services, aggregating approximately $200,000 for a
property in which certain executive officers maintain an equity interest.
The Company leases 43,713 square feet of office and storage space at an Option
Property for its corporate offices located in Melville, New York at an annual
base rent of approximately $1.1 million. The Company also leases 10,722 square
feet of warehouse space used for equipment, materials and inventory storage at
an Option Property located in Deer Park, New York at an annual base rent of
approximately $72,000.
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 $416,000. In addition, Reckson Strategic Venture Partners, LLC
("RSVP") leases 5,144 square feet in one of the Company's joint venture
properties at an annual base rent of approximately $170,000.
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc., ("FrontLine") and RSVP. RSVP is a real estate venture
capital fund which invests primarily in real estate and real estate operating
companies outside the Operating Partnership's core office and industrial 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 June 30, 2002,
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 June 30, 2002, interest accrued (net of
reserves) under the FrontLine Facility and the RSVP Facility was approximately
$19.6 million. RSVP retained the services of two managing directors to manage
RSVP's day to day operations. Prior to the spin off of Frontline, the Company
guaranteed certain salary provisions of their employment agreements with RSVP
Holdings, LLC, RSVP's common member. The term of these employment agreements is
seven years commencing March 5, 1998 provided however, the term may be earlier
terminated after five years upon certain circumstances. The salary for each
managing director is $1 million in the first five years and $1.6 million in
years six and seven.
At June 30, 2001, the Company assessed the recoverability of the FrontLine Loans
and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
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
11
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The Operating Partnership has discontinued the accrual of interest income with
respect to the FrontLine Loans. The Operating Partnership has also reserved
against its share of GAAP equity in earnings from the RSVP controlled joint
ventures funded through the RSVP Commitment until such income is realized
through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code charged
off $70 million of the aforementioned reserve directly related to the FrontLine
Facility, including accrued interest. On February 14, 2002, the Company charged
off 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.
As a result of the foregoing, the net carrying value of the Operating
Partnership's investments in the FrontLine Loans and joint venture investments
with RSVP, inclusive of the Operating Partnership's share of previously accrued
GAAP equity in earnings on those investments, is approximately $65 million which
was reassessed with no change by management as of June 30, 2002. Such amount has
been reflected in investments in service companies and affiliate loans and joint
ventures on the Operating Partnership's consolidated balance sheet. The common
and preferred members of RSVP are currently in dispute over certain provisions
of the RSVP operating agreement. The members are currently negotiating to
restructure the RSVP operating agreement to settle the dispute. There can be no
assurances that the members will successfully negotiate a settlement.
Both the FrontLine Facility and the RSVP Facility have terms of five years, are
unsecured and advances thereunder are recourse obligations of FrontLine.
Notwithstanding the valuation reserve, under the terms of the credit facilities,
interest accrued on the FrontLine Loans at a rate equal to the greater of (a)
the prime rate plus two percent and (b) 12% per annum, with the rate on amounts
that were outstanding for more than one year increasing annually at a rate of
four percent of the prior year's rate. In March 2001, the credit facilities were
amended to provide that (i) interest is payable only at maturity and (ii) the
Company may transfer all or any portion of its rights or obligations under the
credit facilities to its affiliates. The Company requested these changes as a
result of changes in REIT tax laws. As a result of FrontLine's default under the
FrontLine Loans, interest on borrowings thereunder accrue at default rates
ranging between 13% and 14.5% per annum.
In November 1999, the Company received 176,186 shares of the common stock of
FrontLine as fees in connection with the FrontLine Loans. As a result of certain
tax rule provisions included in the REIT Modernization Act, it was determined
that the Company could no longer maintain any equity position in FrontLine. As
part of a compensation program, the Company distributed these shares to certain
non-executive employees, subject to recourse loans. The loans were scheduled to
be forgiven over time based on continued employment with the Company. Based on
the current value of FrontLine's common stock, the Operating Partnership has
established a valuation reserve charge relating to the outstanding balance of
these loans in the amount of $2.4 million.
12
11. COMMITMENTS AND CONTINGENCIES
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible
officing solutions in the world and which is controlled by FrontLine, currently
operates nine (formerly eleven) executive office centers in the Operating
Partnership's properties, three of which are held through joint ventures. The
leases under which these office centers operate expire between 2008 and 2011,
encompass approximately 225,000 square feet and have current contractual annual
base rents of approximately $6.7 million. On March 13, 2002, as a result of
experiencing financial difficulties, HQ voluntarily filed a petition for relief
under Chapter 11 of the U.S. Bankruptcy Code. As of June 30, 2002, HQ's leases
with the Operating Partnership were in default. Further, effective March 13,
2002, the Bankruptcy Court granted HQ's petition to reject two of its leases
with the Operating Partnership. The two rejected leases aggregated approximately
23,900 square feet and provided for contractual base rents of approximately
$548,000 for the 2002 calendar year. Commencing April 1, 2002 and pursuant to
the bankruptcy filing, HQ has been paying current rental charges under its
leases with the Operating Partnership, other than under the two rejected leases.
The Operating Partnership is in negotiation to restructure three of the leases
and leave the terms of the remaining six leases unchanged. All negotiations with
HQ are conducted by a committee designated by the Company's Board and chaired by
an independent director. There can be no assurance as to whether any deal will
be consummated with HQ or if HQ will affirm or reject any or all of its
remaining leases with the Operating Partnership. As a result of the foregoing,
the Operating Partnership has reserved approximately $500,000 (net of minority
partners' interests and including the Operating Partnership's share of
unconsolidated joint venture interest), or 74%, of the amounts due from HQ as of
June 30, 2002.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leases as of June 30, 2002 approximately 547,000 square feet in fifteen of
the Operating Partnership's properties located throughout the Tri-State Area
voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy
Code on July 21, 2002. The total annualized base rental revenue from these
leases amounts to approximately $12.3 million, or 2.8% of the Operating
Partnership's total 2002 annualized rental revenue, making it the Operating
Partnership's second largest tenant based on base rental revenue earned on a
consolidated basis. All of WorldCom's leases are current on base rental charges
through July 31, 2002 and the Operating Partnership currently holds
approximately $300,000 in security deposits relating to these leases. There can
be no assurance as to whether WorldCom will affirm or reject any or all of its
leases with the Operating Partnership. As a result of the foregoing, the
Operating Partnership has increased its reserve against the deferred rent
receivable on its balance sheet at June 30, 2002 in an amount equal to $1.1
million representing approximately 51% of the outstanding deferred rent
receivable attributable to WorldCom.
MetroMedia Fiber Network Services, Inc. ("MetroMedia"), which leases
approximately 112,000 square feet in one property from the Operating
Partnership, voluntarily filed a petition for relief under Chapter 11 of the
U.S. Bankruptcy Code in May 2002. MetroMedia's lease with the Operating
Partnership provided for contractual base rent of approximately $25 per square
foot amounting to $2.8 million per calendar year and expired in May 2010. In
July 2002, the Bankruptcy Court granted MetroMedia's petition to restructure and
reduce space under its existing lease. As a result, the lease was amended to
reduce MetroMedia's space by 80,357 square feet to 31,718 square feet. Annual
base rent on the 31,718 square feet MetroMedia will continue to lease is $25 per
square foot amounting to approximately $793,000 per annum. Further, pursuant to
the Bankruptcy Court order MetroMedia is required to pay to the Operating
Partnership a surrender fee of approximately $1.8 million. As a result of the
foregoing, at June 30, 2002, the Operating Partnership has written off
approximately $388,000 of deferred rent receivable relating to this lease and
recognized the aforementioned surrender fee.
Arthur Andersen, LLP ("AA") leases approximately 38,000 square feet in one of
the Operating Partnership's New York City buildings. AA's lease with the
Operating Partnership provides for base rent of approximately $2 million on an
annualized basis and expires in April 2004. AA is current on all rental charges
through July 31, 2002. AA has experienced significant financial difficulties
with its business and there is uncertainty as to whether it will remain in its
space for the duration of its lease term. As of June 30, 2002, the Operating
Partnership has reserved 100% of the deferred rent receivable related to this
lease which is approximately $140,000.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of Reckson Operating Partnership, L. P. (the "Operating
Partnership") and related notes.
The Operating Partnership considers certain statements set forth herein to
be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, with respect to the Operating Partnership's
expectations for future periods. Certain forward-looking statements, including,
without limitation, statements relating to the timing and success of
acquisitions and the completion of development or redevelopment of properties,
the financing of the Operating Partnership's operations, the ability to lease
vacant space and the ability to renew or relet space under expiring leases,
involve risks and uncertainties. Although the Operating Partnership believes
that the expectations reflected in such forward-looking statements are based on
reasonable assumptions, the actual results may differ materially from those set
forth in the forward-looking statements and the Operating Partnership can give
no assurance that its expectation will be achieved. Among those risks, trends
and uncertainties are: the general economic climate, including the conditions
affecting industries in which our principal tenants compete; changes in the
supply of and demand for office and industrial properties in the New York
tri-state area; changes in interest rate levels; downturns in rental rate levels
in our markets and our ability to lease or release space in a timely manner at
current or anticipated rental rate levels; the availability of financing to us
or our tenants; credit of our tenants, changes in operating costs, including
utility, security and insurance costs; repayment of debt owed to the Operating
Partnership by third parties (including FrontLine Capital Group); risks
associated with joint ventures; and other risks associated with the development
and acquisition of properties, including risks that development may not be
completed on schedule, that the tenants will not take occupancy or pay rent, or
that development or operating costs may be greater than anticipated.
Consequently, such forward-looking statements should be regarded solely as
reflections of the Operating Partnership's current operating and development
plans and estimates. These plans and estimates are subject to revisions from
time to time as additional information becomes available, and actual results may
differ from those indicated in the referenced statements.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Operating Partnership include
accounts of the Operating Partnership and all majority-owned subsidiaries. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("GAAP") requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the Operating Partnership's consolidated financial statements and related
notes. In preparing these financial statements, management has utilized
information available including its past history, industry standards and the
current economic environment among other factors in forming its estimates and
judgments of certain amounts included in the consolidated financial statements,
giving due consideration to materiality. It is possible that the ultimate
outcome as anticipated by management in formulating its estimates inherent in
these financial statements may not materialize. However, application of the
critical accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of the Operating Partnership's results
of operations to those of companies in similar businesses.
Revenue Recognition and Accounts Receivable
Rental revenue is recognized on a straight line basis, which averages
minimum rents over the terms of the leases. The excess of rents recognized over
amounts contractually due are included in deferred rents receivable on the
Operating Partnership's balance sheets. The leases also typically provide for
tenant reimbursements of common area maintenance and other operating expenses
and real estate taxes. Ancillary and other property related income is recognized
in the period earned.
The Operating Partnership makes estimates of the collectibility of its
tenant receivables related to base rents, tenant escalations and
reimbursements and other revenue or income. The Operating Partnership
specifically analyzes tenant receivables and analyzes historical bad debts,
customer credit worthiness, current economic trends, changes in customer payment
terms, publicly available information and, to the extent available, guidance
provided by the tenant when evaluating the adequacy of its
14
allowance for doubtful accounts. In addition, when tenants are in bankruptcy the
Operating Partnership makes estimates of the expected recovery of pre-petition
administrative and damage claims. In some cases, the ultimate resolution of
those claims can exceed a year. These estimates have a direct impact on the
Operating Partnership's net income, because a higher bad debt reserve results in
less net income.
During the six months ended June 30, 2002, the Operating Partnership
incurred approximately $3.5 million of bad debt expense related to tenant
receivables and deferred rents receivable which accordingly reduced total
revenues and reported net income during the period.
The Operating Partnership records interest income on investments in
mortgage notes and notes receivable on an accrual basis of accounting. The
Operating Partnership does not accrue interest on impaired loans where, in the
judgment of management, collection of interest according to the contractual
terms is considered doubtful. Among the factors the Operating Partnership
considers in making an evaluation of the collectibility of interest are: (i) the
status of the loan, (ii) the value of the underlying collateral, (iii) the
financial condition of the borrower and (iv) anticipated future events.
Gain on sales of real estate are recorded when title is conveyed to the
buyer, subject to the buyer's financial commitment being sufficient to provide
economic substance to the sale.
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 maintenance and repairs
are charged to operations as incurred. Renovations and/or replacements, which
improve or extend the life of the asset are capitalized and depreciated over
their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of ten to thirty years for buildings and improvements and
five to ten years for furniture, fixtures and equipment. Tenant improvements are
amortized on a straight-line basis over the term of the related leases.
The Operating Partnership is required to make subjective assessments as to
the useful lives of its properties for purposes of determining the amount of
depreciation to reflect on an annual basis with respect to those properties.
These assessments have a direct impact on the Operating Partnership's net
income. Should the Operating Partnership lengthen the expected useful life of a
particular asset, it would be depreciated over more years, and result in less
depreciation expense and higher annual net income.
Assessment by the Operating Partnership of certain other lease related
costs must be made when the Operating Partnership has a reason to believe that
the tenant will not be able to execute under the term of the lease as originally
expected.
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 Operating Partnership is required to make subjective assessments as to
whether there are impairments in the value of its real estate properties and
other investments. These assessments have a direct impact on the Operating
Partnership's net income, because recognizing an impairment results in an
immediate negative adjustment to net income. In determining impairment, if any,
the Operating Partnership has adopted Financial Accounting Standards Board
Statement No. 144, "Accounting for the Impairment or Disposal of Long Lived
Assets".
15
OVERVIEW AND BACKGROUND
The Operating Partnership, which commenced operations on June 2, 1995, is
engaged in the ownership, management, operation, leasing and development of
commercial real estate properties, principally office and industrial buildings,
and also owns certain undeveloped land located in the New York tri-state area
(the "Tri-State Area"). Reckson Associates Realty Corp. (the "Company"), is a
self-administered and self-managed real estate investment trust ("REIT"), and
serves as the sole general partner in the Operating Partnership.
As of June 30, 2002, the Operating Partnership owned and operated 77 office
properties (inclusive of eleven office properties which are owned through joint
ventures) comprising approximately 13.8 million square feet, 102 industrial
properties comprising approximately 6.8 million square feet and two retail
properties comprising approximately 20,000 square feet located in the Tri-State
Area.
The Operating Partnership also owns approximately 254 acres of land in 12
separate parcels of which the Operating Partnership can develop approximately
two million square feet of office space and approximately 450,000 square feet of
industrial space. On April 1, 2002, the Operating Partnership paid approximately
$23.8 million to acquire an additional 52.7 acres of land located in Valhalla,
NY on which the Operating Partnership can develop approximately 875,000 square
feet of office space. The Operating Partnership currently owns and operates
three buildings encompassing approximately 700,000 square feet in the same
office park in which this land is located. The Operating Partnership financed
this acquisition in part from the sales proceeds of an office property being
held by a qualified intermediary for the purposes of an exchange of real
property pursuant to Section 1031 of the Internal Revenue Code of 1986 and from
an advance under the Operating Partnership's unsecured credit facility. In
addition, the Operating Partnership owns a 32 acre land parcel in Rye Brook, NY
which is under contract for sale for approximately $22.3 million. The sale of
this land is subject to certain rezoning and other municipal approvals. At this
time it is undetermined whether these approvals or rezoning will be obtained and
the sale closed. The Operating Partnership currently owns and operates six
buildings encompassing approximately 542,000 square feet in the same office park
in which this land is located. As of June 30, 2002, the Operating Partnership
had invested approximately $115 million in these developments in progress.
Management has made subjective assessments as to the value and recoverability of
these investments based on current and proposed development plans. The Operating
Partnership has capitalized approximately $5.4 million for the six months ended
June 30, 2002 related to real estate taxes, interest and other carrying costs
related to these developments in progress.
The Operating Partnership also owns a 357,000 square foot office building
located in Orlando, Florida. Additionally, the Operating Partnership holds a
$17.0 million interest in a note receivable secured by a partnership interest in
Omni Partners, L. P., owner of the Omni, a 575,000 square foot Class A Office
Property located in Uniondale, NY and three other notes aggregating $36.5
million which bear interest at rates ranging from 10.5% to 12% per annum and are
secured by a minority partner's preferred unit interest in the Operating
Partnership and certain real property. As of June 30, 2002, management has made
subjective assessments as to the underlying security value on the Operating
Partnership's note receivable investments. These assessments indicated an excess
of market value over carrying value related to the Operating Partnership's note
receivable investments.
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. These services are currently provided by Reckson Management Group,
Inc., RANY Management Group, Inc., Reckson Construction Group New York, Inc.,
and Reckson Construction Group, Inc. (collectively, the "Service Companies").
The Operating Partnership owns a 97% non-controlling interest in the Service
Companies. An entity which is substantially owned by certain Rechler family
members who are also executive officers of the Company owns a 3% controlling
interest in the Service Companies. During the six months ended June 30, 2002,
Reckson Construction Group, Inc. billed approximately $77,000 of market rate
services and Reckson Management Group, Inc. billed approximately $156,000 of
market rate management fees to certain properties in which certain Rechler
family members who are also executive officers maintain an equity interest.
These properties consist of five properties in which these officers had acquired
their interests prior to the initial public offering, but were not contributed
to the Company as part of the initial public offering (the "Option Properties").
At the initial public offering the Operating Partnership was granted ten year
options to acquire these interests at a price based upon an agreed upon formula.
In addition, for the six months ended June 30, 2002, Reckson Construction Group,
Inc. performed market rate services, aggregating approximately $200,000 for a
property in which certain executive officers maintain an equity interest.
16
The Company leases 43,713 square feet of office and storage space at an
Option Property for its corporate offices located in Melville, New York at an
annual base rent of approximately $1.1 million. The Company also leases 10,722
square feet of warehouse space used for equipment, materials and inventory
storage at an Option Property located in Deer Park, New York at an annual base
rent of approximately $72,000.
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 $416,000. In addition, Reckson Strategic Venture Partners, LLC
("RSVP") leases 5,144 square feet in one of the Company's joint venture
properties at an annual base rent of approximately $170,000.
During July 1998, the Operating Partnership formed Metropolitan Partners,
LLC ("Metropolitan") for the purpose of acquiring Class A office properties in
New York City. Currently the Operating Partnership owns, through Metropolitan,
five Class A office properties aggregating approximately 3.5 million square
feet.
During September 2000, the Operating Partnership formed a joint venture
(the "Tri-State JV") with Teachers Insurance and Annuity Association ("TIAA")
and contributed eight Class A suburban office properties aggregating
approximately 1.5 million square feet to the Tri-State JV for a 51% majority
ownership interest. TIAA contributed approximately $136 million for a 49%
interest in the Tri-State JV which was then distributed to the Operating
Partnership. For purposes of its financial statements the Operating Partnership
consolidates this joint venture.
On December 21, 2001, the Operating Partnership formed a joint venture with
the New York State Teachers' Retirement Systems ("NYSTRS") whereby NYSTRS
acquired a 49% indirect interest in the property located at 919 Third Avenue,
New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Operating Partnership. For purposes of
its financial statements, the Operating Partnership consolidates this joint
venture.
The total market capitalization of the Operating Partnership at June 30,
2002 was approximately $3.3billion. The Operating Partnership's total market
capitalization is calculated based on the sum of (i) the value of the Operating
Partnership's Class A common units and Class B common units (which, for this
purpose, is assumed to be the same per unit as the market value of a share of
the Company's Class A common stock and Class B common stock), (ii) the
liquidation preference values of the Operating Partnership's preferred units and
(iii) the approximately $1.3 billion (including its share of joint venture debt
and net of minority partners' interests share of joint venture debt) of debt
outstanding at June 30, 2002. As a result, the Operating Partnership's total
debt to total market capitalization ratio at June 30, 2002 equaled approximately
39.0%.
During 1997, the Company formed FrontLine Capital Group, formerly Reckson
Service Industries, Inc., ("FrontLine") and RSVP. RSVP is a real estate venture
capital fund which invests primarily in real estate and real estate operating
companies outside the Operating Partnership's core office and industrial 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 June 30, 2002,
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 June 30, 2002, interest accrued (net of
reserves) under the FrontLine Facility and the RSVP Facility was approximately
$19.6 million. RSVP retained the services of two managing directors to manage
RSVP's day to day operations. Prior to the spin off of Frontline, the Company
guaranteed certain salary provisions of their employment agreements with RSVP
Holdings, LLC, RSVP's common member. The term of these employment agreements is
seven years commencing
17
March 5, 1998 provided however, the term may be earlier terminated after five
years upon certain circumstances. The salary for each managing director is $1
million in the first five years and $1.6 million in years six and seven.
At June 30, 2001, the Company assessed the recoverability of the FrontLine
Loans and reserved approximately $3.5 million of the interest accrued during the
three-month period then ended. In addition, the Company formed a committee of
its Board of Directors, comprised solely of independent directors, to consider
any actions to be taken by the Company in connection with the FrontLine Loans
and its investments in joint ventures with RSVP. During the third quarter of
2001, the Company noted a significant deterioration in FrontLine's operations
and financial condition and, based on its assessment of value and recoverability
and considering the findings and recommendations of the committee and its
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The Operating Partnership has discontinued the accrual of interest income with
respect to the FrontLine Loans. The Operating Partnership has also reserved
against its share of GAAP equity in earnings from the RSVP controlled joint
ventures funded through the RSVP Commitment until such income is realized
through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code
charged off $70 million of the aforementioned reserve directly related to the
FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off 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.
As a result of the foregoing, the net carrying value of the Operating
Partnership's investments in the FrontLine Loans and joint venture investments
with RSVP, inclusive of the Operating Partnership's share of previously accrued
GAAP equity in earnings on those investments, is approximately $65 million which
was reassessed with no change by management as of June 30, 2002. Such amount has
been reflected in investments in service companies and affiliate loans and joint
ventures on the Operating Partnership's consolidated balance sheet. The common
and preferred members of RSVP are currently in dispute over certain provisions
of the RSVP operating agreement. The members are currently negotiating to
restructure the RSVP operating agreement to settle the dispute. There can be no
assurances that the members will successfully negotiate a settlement.
Both the FrontLine Facility and the RSVP Facility have terms of five years,
are unsecured and advances thereunder are recourse obligations of FrontLine.
Notwithstanding the valuation reserve, under the terms of the credit facilities,
interest accrued on the FrontLine Loans at a rate equal to the greater of (a)
the prime rate plus two percent and (b) 12% per annum, with the rate on amounts
that were outstanding for more than one year increasing annually at a rate of
four percent of the prior year's rate. In March 2001, the credit facilities were
amended to provide that (i) interest is payable only at maturity and (ii) the
Company may transfer all or any portion of its rights or obligations under the
credit facilities to its affiliates. The Company requested these changes as a
result of changes in REIT tax laws. As a result of FrontLine's default under the
FrontLine Loans, interest on borrowings thereunder accrue at default rates
ranging between 13% and 14.5% per annum.
In November 1999, the Company received 176,186 shares of the common stock
of FrontLine as fees in connection with the FrontLine Loans. As a result of
certain tax rule provisions included in the REIT Modernization Act, it was
determined that the Company could no longer maintain any equity position in
FrontLine. As part of a compensation program, the Company distributed these
shares to certain non-executive employees, subject to recourse loans. The loans
were scheduled to be forgiven over time based on continued employment with the
Company. Based on the current value of FrontLine's common stock, the Operating
Partnership has established a valuation reserve charge relating to the
outstanding balance of these loans in the amount of $2.4 million.
18
RESULTS OF OPERATIONS
Three months ended June 30, 2002 as compared to the three months ended June 30,
2001.
The Operating Partnership's total revenues decreased by $6.8 million or 5.1% for
the three months ended June 30, 2002 as compared to the 2001 period. Property
operating revenues, which include base rents and tenant escalations and
reimbursements ("Property Operating Revenues") decreased by $1.7 million or 1.4%
for the three months ended June 30, 2002 as compared to the 2001 period. The
change in Property Operating Revenues is attributable to increases in rental
rates in our "same store" properties amounting to $9.1 million. In addition,
Property Operating Revenues increased by $0.8 million attributable to lease up
of newly developed and redeveloped properties. These increases in Property
Operating Revenues were offset by $4.4 million of operating revenue attributable
to six properties that were sold in 2001. The Operating Partnership's Property
Operating Revenues was further effected by the impact of the straightline rent
adjustment of $4.4 million for the three months ended June 30, 2002 as compared
to $10.9 million for the 2001 period. Straightline rent for the three months
ended June 30, 2002 was decreased by $1.8 million for bad debt reserves. This
decrease of $6.5 million is primarily attributable to the property located at
919 Third Avenue for the free rent period, which was effective through February
28, 2002, contained in the lease of the largest tenant in the building. Other
revenues (excluding Property Operating Revenues) decreased by $5.0 million or
71.5% for the three months ended June 30, 2002 as compared to the 2001 period.
This decrease is primarily attributable to $4.6 million of interest income
accrued on the FrontLine Loans during the 2001 period with no such comparable
interest earned for the 2002 period.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $0.9 million or 2.1% for the three months ended June 30,
2002 as compared to the 2001 period. This increase includes a $1.5 million
increase in property operating expenses and a $1.1 million increase in real
estate taxes related to our "same-store" properties. Included in the $1.5
million of property operations expense increase is $500,000 and $350,000
attributable to increases in security and insurance costs respectively. These
increases result primarily from implications of September 11th and security cost
increases primarily relate to our New York City properties. These increases in
Property Expenses were offset by $1.7 million of expenses attributable to six
properties that were sold in 2001.
Gross Operating Margins (defined as Property Operating Revenues less Property
Expenses, taken as a percentage of Property Operating Revenues) for the three
months ended June 30, 2002 and 2001 were 66.2% and 67.4%, respectively. The
decrease in Gross Operating Margins is primarily attributable to decreases in
average occupancy of the portfolio and also as a result of an increase in
reserves on deferred rents receivable which reduced property operating revenues
for the three months ended June 30, 2002.
Marketing, general and administrative expenses decreased by approximately
$595,000 or 8.1% for the three months ended June 30, 2002 as compared to the
2001 period. The decrease in marketing, general and administrative expenses is
primarily due to staff reduction, cost containment and reduction in legal and
professional fees incurred during the 2001 period in connection with certain
cancelled acquisition transactions. Marketing, general and administrative
expenses, as a percentage of total revenues, were 5.4% for the three months
ended June 30, 2002 as compared to 5.6% for the 2001 period. The Operating
Partnership capitalized approximately $1.3 million of marketing, general and
administrative expenses for the three months ended June 30, 2002 as compared to
$1.2 million for the 2001 period. These costs relate to leasing, construction
and development activities, which are performed by the Operating Partnership.
Interest expense decreased by approximately $1.4 million for the three months
ended June 30, 2002 as compared to the 2001 period. The decrease was primarily
attributable to a decrease in interest expense on the Operating Partnership's
variable rate debt due to lower interest rates and a lower average balance
outstanding on the Operating Partnership's unsecured credit facility. The
weighted average balance outstanding was $218.1 million for the three months
ended June 30, 2002 as compared to $323.2 million for the three months ended
June 30, 2001.
19
Six months ended June 30, 2002 as compared to the six months ended June 30,
2001.
The Operating Partnership's total revenues decreased by $12.2 million or 4.6%
for the six months ended June 30, 2002 as compared to the 2001 period. Property
Operating Revenues decreased by $2.6 million or 1.1% for the six months ended
June 30, 2002 as compared to the 2001 period. The change in Property Operating
Revenues is attributable to increases in rental rates in our "same store"
properties amounting to $13.9 million. In addition, Property Operating Revenues
increased by $3.0 million attributable to lease up of newly developed and
redeveloped properties. These increases in Property Operating Revenues were
offset by $9.3 million of revenue attributable to six properties that were sold
in 2001. The Operating Partnership's property operating revenues was further
effected by the impact of the straightline rent adjustment of $13.0 million for
the six months ended June 30, 2002 as compared to $22.0 million for the 2001
period. This decrease of $9.0 million is primarily attributable to the property
located at 919 Third Avenue for the free rent period, which was effective
through February 28, 2002, contained in the lease of the largest tenant in the
building. Straightline rent for the six months ended June 30, 2002 was decreased
by $2.5 million for bad debt reserves. Other revenues (excluding Property
Operating Revenues) decreased by $9.5 million or 65.7% for the six months ended
June 30, 2002 as compared to the 2001 period. This decrease is primarily
attributable to $6.1 million of interest income accrued on the FrontLine Loans
during the 2001 period with no such comparable interest accrual for the 2002
period.
Property Expenses increased by $2.1 million or 2.5% for the six months ended
June 30, 2002 as compared to the 2001 period. This increase is primarily due to
a $2.0 million increase in property operating expenses and a $2.2 million
increase in real estate taxes related to our "same store" properties. Included
in the $2.0 million increase in property operating expenses is $850,000 and
$470,000 attributable to increases in security and insurance costs,
respectively. The increases result primarily from implications of September 11th
and security cost increases primarily relate to our New York City properties. In
addition, Property Expenses increased by $0.8 million attributable to the lease
up of newly developed and redeveloped properties. These increases in Property
Expenses were offset by $3.3 million of expenses attributable to six properties
that were sold in 2001.
Gross Operating Margins for the six months ended June 30, 2002 and 2001 were
65.9% and 67.1%, respectively. The decrease in Gross Operating Margins is
primarily attributable to decreases in average occupancy of the portfolio and
also as a result of an increase in reserves on deferred rents receivable.
Marketing, general and administrative expenses decreased by approximately
$890,000 or 6.4% for the six months ended June 30, 2002 as compared to the 2001
period. The decrease in marketing, general and administrative expenses is
primarily due to staff reduction, cost containment and reduction in legal and
professional fess incurred during the 2001 period in connection with certain
cancelled acquisition transactions. Marketing, general and administrative
expenses, as a percentage of total revenues, were 5.2% for the six months ended
June 30, 2002 as compared to 5.3% for the 2001 period. The Operating Partnership
capitalized approximately $2.6 million of marketing, general and administrative
expenses for the six months ended June 30, 2002 as compared to $2.4 million for
the 2001 period. These costs relate to leasing, construction and development
activities, which are performed by the Operating Partnership.
Interest expense decreased by approximately $4.1 million for the six months
ended June 30, 2002 as compared to the 2001 period. The decrease was primarily
attributable to a decrease in interest expense on the Operating Partnership's
variable rate debt due to lower interest rates and a lower average balance
outstanding on the Operating Partnership's unsecured credit facility. The
weighted average balance outstanding was $211.8 million for the six months ended
June 30, 2002 as compared to $289.0 million for the six months ended June 30,
2001.
Liquidity and Capital Resources
As of June 30, 2002, the Operating Partnership had a three year $575 million
unsecured revolving credit facility (the "Credit Facility") from The JPMorgan
Chase Bank, as administrative agent, UBS Warburg LLC as syndication agent and
Deutsche Bank as documentation agent. The Credit Facility matures in September
2003 and borrowings under the Credit Facility are currently priced off LIBOR
plus 105 basis points.
The Operating Partnership utilizes the Credit Facility primarily to finance
real estate investments, fund its real estate development activities and for
working capital purposes. At June 30, 2002, the Operating Partnership had
availability under the Credit Facility to borrow approximately an additional
$400 million, subject to compliance with certain financial covenants.
20
On March 28, 2002, approximately 11,303 Series E preferred units of the
limited partnership interest, with a liquidation preference value of
approximately $11.3 million, were exchanged for 451,934 limited partnership
units at a price of $25.01 per unit. In addition, during the three months ended
June 30, 2002, the Company increased its general partner interest in the
Operating Partnership by acquiring 666,466 outstanding Units from certain
limited partners in exchange for an equal number of shares of its Class A common
stock.
On June 17, 2002, the Operating Partnership issued $50 million of 6% (6.13%
effective rate) senior unsecured notes due June 15, 2007. Net proceeds of
approximately $49.4 million were used to repay outstanding borrowings under the
Credit Facility.
On August 7, 2002, the Operating Partnership sold an industrial property
on Long Island aggregating approximately 32,000 square feet for approximately
$1.8 million. This property was sold to the sole tenant of the property through
an option contained in the tenant's lease. On August 8, 2002, the Operating
Partnership sold two Class A office properties located in Westchester County, NY
aggregating approximately 157,000 square feet for approximately $18.5 million.
Net proceeds from the August 8th sale were used to repay borrowings under the
Credit Facility.
The following table sets forth the Operating Partnership's invested capital
(before valuation reserves) in RSVP controlled (REIT-qualified) joint ventures
and amounts which were advanced under the RSVP Commitment to FrontLine, for its
investment in RSVP controlled investments (in thousands):
RSVP controlled
joint ventures Amounts advanced Total
--------------- ---------------- ---------------
Privatization $ 21,480 $ 3,520 $ 25,000
Student Housing 18,086 3,935 22,021
Medical Offices 20,185 -- 20,185
Parking -- 9,091 9,091
Resorts -- 8,057 8,057
Net leased retail -- 3,180 3,180
Other assets and overhead -- 21,598 21,598
-------------- -------------- ---------------
$ 59,751 $ 49,381 $ 109,132
============== ============== ===============
Included in these investments is approximately $17.5 million of cash that has
been contributed to the respective RSVP controlled joint ventures or advanced
under the RSVP Commitment to FrontLine and is being held, along with cash from
the preferred investors.
As of June 30, 2002 the Operating Partnership had issued and outstanding
10,283,513 Class B common units, all of which are held by the Company and which
were entitled to receive an annual distribution of $2.5968 per unit. The
distribution on the Class B units is subject to adjustment annually based on a
formula which measures increases or decreases in the Company's Funds From
Operations ("FFO"), as defined, over a base year. On July 31, 2002, the annual
distribution on the Class B common units was decreased to $2.5884 per unit.
The Class B common units are exchangeable at any time, at the option of the
holder, into an equal number of Class A common units subject to customary
antidilution adjustments. The Operating Partnership, at its option, may redeem
any or all of the Class B common units in exchange for an equal number of Class
A common units at any time following November 23, 2003.
The Board of Directors of the Company has authorized the purchase of up to
an additional five million shares of the Company's Class B common stock and/or
its Class A common stock. Subsequent to June 30, 2002, the Operating Partnership
purchased 368,200 Class B common units at an average price of $22.90 per Class B
unit and 1,856,200 Class A common units at an average price of $21.98 per Class
A unit for an aggregate purchase price for both the Class A and Class B units of
approximately $49.2 million. Previously, in conjunction with the Company's
common stock buy-back program, the Operating Partnership purchased and retired
1,410,804 Class B common units at an average price of $21.48 per unit and 61,704
Class A common units at an average price of $23.03 per unit for an aggregate
purchase price of approximately $31.7 million. In addition, the Board of
Directors of the Company has formed a pricing committee to consider purchases up
to $75 million of the Company's outstanding preferred securities.
On May 22, 2002, approximately $1.4 million of loans made to certain executive
officers to purchase the Company's common stock matured. The loans were secured
by 61,668 shares of the Company's Class A common stock. The loans were satisfied
by the executive officers with the 61,668 shares of Class A common stock. The
market value of these shares on May 22, 2002 was sufficient to fully satisfy
these loans and as such there was no financial impact to the Company. The
Company has subsequently retired these shares.
21
The Operating Partnership also owns a 60% non-controlling interest in a
172,000 square foot office building located at 520 White Plains Road in White
Plains, New York (the "520JV"). As of June 30, 2002, the 520JV had total assets
of $21.5 million, a mortgage note payable of $12.8 million and other liabilities
of $.9 million. The Operating Partnership's allocable share of the 520JV
mortgage note payable is approximately $7.7 million. In addition the 520JV had
total revenues of $1,615,000 and total expenses of $1,637,000 for the six months
ended June 30, 2002. The Operating Partnership accounts for the 520JV under the
equity method of accounting, The 520JV contributed approximately $29,000 and
$216,000 to the Operating Partnership's equity in earnings of real estate joint
ventures for the six months ended June 30, 2002 and 2001, respectively.
Effective January 1, 2002 the Company has elected to follow FASB Statement No.
123, "Accounting for Stock Based Compensation". 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. The Company expects minimal
financial impact in the current year from the adoption of Statement No. 123. To
determine the fair value of the stock options granted, the Company intends to
use a Black-Scholes option pricing model. Historically, 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. Accordingly, no compensation cost
had been recognized for its stock option plans in the past.
The Operating Partnership's indebtedness at June 30, 2002 totaled
approximately $1.3 billion (including its share of joint venture debt and net of
the minority partners' interests share of joint venture debt) and was comprised
of $176.0 million outstanding under the Credit Facility, approximately $499.2
million of senior unsecured notes and approximately $610.4 million of mortgage
indebtedness. Based on the Operating Partnership's total market capitalization
of approximately $3.3 billion at June 30, 2002 (calculated based on the sum of
(i) the value of the Operating Partnership's Class A common units and Class B
common units (which, for this purpose, is assumed to be the same per unit as the
market value of a share of the Company's Class A common stock and Class B common
stock), (ii) the liquidation preference value of the Operating Partnership's
preferred units and (iii) the $1.3 billion of debt), the Operating Partnership's
debt represented approximately 39.0% of its total market capitalization
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible
officing solutions in the world and which is controlled by FrontLine, currently
operates nine (formerly eleven) executive office centers in the Operating
Partnership's properties, three of which are held through joint ventures. The
leases under which these office centers operate expire between 2008 and 2011,
encompass approximately 225,000 square feet and have current contractual annual
base rents of approximately $6.7 million. On March 13, 2002, as a result of
experiencing financial difficulties, HQ voluntarily filed a petition for relief
under Chapter 11 of the U.S. Bankruptcy Code. As of June 30, 2002, HQ's leases
with the Operating Partnership were in default. Further, effective March 13,
2002, the Bankruptcy Court granted HQ's petition to reject two of its leases
with the Operating Partnership. The two rejected leases aggregated approximately
23,900 square feet and provided for contractual base rents of approximately
$548,000 for the 2002 calendar year. Commencing April 1, 2002 and pursuant to
the bankruptcy filing, HQ has been paying current rental charges under its
leases with the Operating Partnership, other than under the two rejected leases.
The Operating Partnership is in negotiation to restructure three of the leases
and leave the terms of the remaining six leases unchanged. All negotiations with
HQ are conducted by a committee designated by the Company's Board and chaired by
an independent director. There can be no assurance as to whether any deal will
be consummated with HQ or if HQ will affirm or reject any or all of its
remaining leases with the Operating Partnership. As a result of the foregoing,
the Operating Partnership has reserved approximately $500,000 (net of minority
partners' interests and including the Operating Partnership's share of
unconsolidated joint venture interest), or 74%, of the amounts due from HQ as of
June 30, 2002.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company
which leases as of June 30, 2002 approximately 547,000 square feet in fifteen of
the Operating Partnership's properties located throughout the Tri-State Area
voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy
Code on July 21, 2002. The total annualized base rental revenue from these
leases amounts to approximately $12.3 million, or 2.8% of the Operating
Partnership's total 2002 annualized rental revenue, making it the Operating
Partnership's second largest tenant based on base rental revenue earned on a
consolidated basis. All of WorldCom's leases are current on base rental charges
through July 31, 2002 and the Operating Partnership currently holds
approximately $300,000 in security deposits relating to these leases. There can
be no assurance as to whether WorldCom will affirm or reject any or all of its
leases with the Operating Partnership. As a result of the foregoing, the
Operating Partnership has increased its reserve against the deferred rent
receivable on its balance sheet at June 30, 2002 in an amount equal to $1.1
million representing approximately 51% of the outstanding deferred rent
receivable attributable to WorldCom.
22
MetroMedia Fiber Network Services, Inc. ("MetroMedia"), which leases
approximately 112,000 square feet in one property from the Operating
Partnership, voluntarily filed a petition for relief under Chapter 11 of the
U.S. Bankruptcy Code in May 2002. MetroMedia's lease with the Operating
Partnership provided for contractual base rent of approximately $25 per square
foot amounting to $2.8 million per calendar year and expired in May 2010. In
July 2002, the Bankruptcy Court granted MetroMedia's petition to restructure and
reduce space under its existing lease. As a result, the lease was amended to
reduce MetroMedia's space by 80,357 square feet to 31,718 square feet. Annual
base rent on the 31,718 square feet MetroMedia will continue to lease is $25 per
square foot amounting to approximately $793,000 per annum. Further, pursuant to
the Bankruptcy Court order MetroMedia is required to pay to the Operating
Partnership a surrender fee of approximately $1.8 million. As a result of the
foregoing, at June 30, 2002, the Operating Partnership has written off
approximately $388,000 of deferred rent receivable relating to this lease and
recognized the aforementioned surrender fee.
Arthur Andersen, LLP ("AA") leases approximately 38,000 square feet in one of
the Operating Partnership's New York City buildings. AA's lease with the
Operating Partnership provides for base rent of approximately $2 million on an
annualized basis and expires in April 2004. AA is current on all rental charges
through July 31, 2002. AA has experienced significant financial difficulties
with its business and there is uncertainty as to whether it will remain in its
space for the duration of its lease term. As of June 30, 2002, the Operating
Partnership has reserved 100% of the deferred rent receivable related to this
lease which is approximately $140,000.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table sets forth the Operating Partnership's significant debt
obligations by scheduled principal cash flow payments and maturity date and its
commercial commitments by scheduled maturity at June 30, 2002 (in thousands):
MATURITY DATE
------------------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL
--------- ---------- ---------- ---------- ---------- ----------- -----------
Mortgage notes payable (1) $ 5,965 $ 12,300 $ 13,169 $14,167 $ 13,785 $128,700 $ 188,086
Mortgage notes payable (2) -- -- 2,616 18,553 129,920 406,808 557,897
Senior unsecured notes -- -- 100,000 -- -- 400,000 500,000
Unsecured credit facility -- 176,000 -- -- -- -- 176,000
Land lease obligations 1,331 2,687 2,811 2,814 2,795 49,921 62,359
Air rights lease obligations 187 369 379 379 379 4,659 6,352
--------- ---------- ---------- ---------- ---------- ----------- ------------
$ 7,483 $191,356 $118,975 $35,913 $146,879 $990,088 $1,490,694
========= ========== ========== ========== ========== =========== ============
(1) Scheduled principal amortization payments
(2) Principal payments due at maturity
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.
In addition, at March 31, 2002, the Operating Partnership had approximately
$1.0 million in outstanding undrawn standby letters of credit issued under the
Credit Facility which expire in 2003.
Thirteen of the Operating Partnership's office properties and two of the
Operating Partnership's industrial properties which were acquired by the
issuance of Units are subject to agreements limiting the Operating Partnership's
ability to transfer them prior to agreed upon dates without the consent of the
limited partner who transferred the respective property to the Operating
Partnership. In the event the Operating Partnership transfers any of these
properties prior to the expiration of these limitations, the Operating
Partnership may be required to make a payment relating to taxes incurred by the
limited partner. The limitations on nine of the properties expire prior to June
30, 2003. The limitations on the remaining properties expire between 2007 and
2013.
Eleven of the Operating Partnership's office properties are held in joint
ventures which contain certain limitations on transfer. These limitations
include requiring the consent of the joint venture partner to transfer a
property prior to various specified dates ranging from 2003 to 2005, rights of
first offer, and buy/sell provisions.
23
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures of the Operating Partnership. The Operating
Partnership expects to meet its short-term liquidity requirements generally
through its net cash provided by operating activities along with the Credit
Facility previously discussed. The Credit Facility contains several financial
covenants with which the Operating Partnership must be in compliance in order to
borrow funds thereunder. The Operating Partnership expects to meet certain of
its financing requirements through long-term secured and unsecured borrowings
and the issuance of debt and equity securities of the Operating Partnership. In
addition, the Operating Partnership believes that it will, from time to time,
generate funds from the disposition of certain of its real estate properties or
interests therein. The Operating Partnership will refinance existing mortgage
indebtedness or indebtedness under the Credit Facility at maturity or retire
such debt through the issuance of additional debt securities or additional
equity securities. There can be no assurance that there will be adequate demand
for the Operating Partnership's equity securities at the time or at the price in
which the Operating Partnership desires to raise capital through the sale of its
equity securities. The Operating Partnership anticipates that the current
balance of cash and cash equivalents and cash flows from operating activities,
together with cash available from borrowings and equity offerings, will be
adequate to meet the capital and liquidity requirements of the Operating
Partnership in both the short and long-term.
The Operating Partnership is subject to federal, state and local laws and
regulations relating to the protection of the environment, which may require a
current or previous owner or operator of real estate to investigate and clean up
hazardous or toxic substances or petroleum product releases at a property. An
owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in the property. These laws often
impose such liability without regard to whether the owner knew of, or caused,
the presence of the contaminants. Clean-up costs and the owner's liability
generally are not limited under the enactments and could exceed the value of the
property and/or the aggregate assets of the owner. The presence of, or the
failure to properly remediate, the substances may adversely affect the owner's
ability to sell or rent the property or to borrow using the property as
collateral.
As a result of current economic conditions, certain tenants have either not
renewed their leases upon expiration or have paid the Operating Partnership to
terminate their leases. In addition, a number of U.S. companies have filed for
protection under federal bankruptcy laws. Certain of these companies are tenants
of the Operating Partnership. The Operating Partnership is subject to the risk
that other companies that are tenants of the Operating Partnership may file for
bankruptcy protection. This may have an adverse impact on the financial results
and condition of the Operating Partnership. In addition, vacancy rates in our
markets have been trending higher and in some instances our asking rents in our
markets have been trending lower and landlords are being required to grant
greater concessions such as free rent and tenant improvements. Additionally, the
Operating Partnership carries comprehensive liability, fire, extended coverage
and rental loss insurance on all of its properties. Five of the Operating
Partnership's properties are located in New York City. As a result of the events
of September 11, 2001, insurance companies are limiting and/or excluding
coverage for acts of terrorism in all risk policies. The Operating Partnership's
current insurance coverage provides for full replacement cost of its properties,
except that the coverage for acts of terrorism on its properties covers losses
in an amount up to $100 million per occurrence (except for one property which
has an additional aggregate $150 million of coverage). As a result, the
Operating Partnership may suffer losses from acts of terrorism that are not
covered by insurance. In addition, the mortgage loans which are secured by
certain of the Operating Partnership's properties contain customary covenants,
including covenants that require the Operating Partnership to maintain property
insurance in an amount equal to replacement cost of the properties. There can be
no assurance that the lenders under these mortgage loans will not take the
position that exclusions from the Operating Partnership's coverage for losses
due to terrorist acts is a breach of a covenant which, if uncured, could allow
the lenders to declare an event of default and accelerate repayment of the
mortgage loans. Other outstanding debt instruments contain standard cross
default provisions that would be triggered in the event of an acceleration of
the mortgage loans. This matter could adversely affect the Operating
Partnership's financial results, its ability to finance and/or refinance its
properties or to buy or sell properties.
In order to qualify as a REIT for federal income tax purposes, the Company is
required to make distributions to its stockholders of at least 90% of REIT
taxable income. As a result, it is anticipated that the Operating Partnership
will make distributions in amounts sufficient to meet this requirement. The
Operating Partnership expects to use its cash flow from operating activities for
distributions to unit holders and for payment of recurring, non-incremental
revenue-generating expenditures. The Operating Partnership intends to invest
amounts accumulated for distribution in short-term investments.
24
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 leases also generally provide for fixed base rent
increases, direct pass through of certain operating expenses and separate real
estate tax escalations over a base amount. The Operating Partnership believes
that inflationary increases in expenses will be offset by contractual rent
increases and expense escalations described above. To the extent the
Operating Partnership's properties contain vacant space, the Operating
Partnership will bear such inflationary increases in expenses.
The Credit Facility bears interest at a variable rate, which will be
influenced by changes in short-term interest rates, and is sensitive to
inflation.
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") is an appropriate
measure of performance of an operating partnership whose general partner is an
equity REIT. FFO is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") as net income or loss, excluding gains or losses
from debt restructurings and sales of properties, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. FFO does not represent cash generated from operating activities in
accordance with accounting principles generally accepted in the United States
and is not indicative of cash available to fund cash needs. FFO should not be
considered as an alternative to net income as an indicator of the Operating
Partnership's operating performance or as an alternative to cash flow as a
measure of liquidity.
Since all companies and analysts do not calculate FFO in a similar fashion,
the Operating Partnership's calculation of FFO presented herein may not be
comparable to similarly titled measures as reported by other companies.
The following table presents the Operating Partnership's FFO calculation
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Net income available to common
unit holders............................. $ 16,406 $ 23,434 $ 35,276 $ 47,839
Adjustment for Funds From Operations:
Add:
Real estate depreciation and
amortization.......................... 27,041 26,727 52,362 49,715
Minority partners' interests in
consolidated partnerships............. 4,813 4,065 9,933 9,820
Less:
Gain on sales of real estate............. -- -- 537 --
Amounts distributable to minority
partners in consolidated
partnerships...................... 6,329 5,104 12,893 10,805
---------------- ---------------- ------------------ ----------------
Funds From Operations....................... $ 41,931 $ 49,122 $ 84,141 $ 96,569
================ ================ ================== ================
Weighted average units outstanding.......... 68,559 65,268 68,184 64,369
================ ================ ================== ================
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing the Operating Partnership is interest rate
risk on its long-term debt, mortgage notes and notes receivable. The Operating
Partnership will, when advantageous, hedge its interest rate risk using
financial instruments. The Operating Partnership is not subject to foreign
currency risk.
The Operating Partnership manages its exposure to interest rate risk on its
variable rate indebtedness by borrowing on a short-term basis under its Credit
Facility until such time as it is able to retire the short-term variable rate
debt with either a long-term fixed rate debt offering, long term mortgage debt,
general partner contributions or through sales or partial sales of assets.
The Operating Partnership will recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges will be adjusted to fair
value through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability or firm commitment
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. As of June 30, 2002,
the Operating Partnership had no derivatives outstanding.
The fair market value ("FMV") of the Operating Partnership's long term
debt, mortgage notes and notes receivable is estimated based on discounting
future cash flows at interest rates that management believes reflects the risks
associated with long term debt, mortgage notes and notes receivable of similar
risk and duration.
The following table sets forth the Operating Partnership's long term debt
obligations by scheduled principal cash flow payments and maturity date,
weighted average interest rates and estimated FMV at June 30, 2002 (dollars in
thousands):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL(1) FMV
-------------------------------------------------------------------------------------------------------
Long term debt:
Fixed rate........... $ 5,965 $ 12,300 $ 115,785 $ 32,720 $ 143,705 $ 935,508 $ 1,245,983 $ 1,265,746
Weighted average
Interest rate..... 7.49% 7.51% 7.47% 6.92% 7.38% 7.27% 7.30%
Variable rate........ $ -- $ 176,000 $ -- $ -- $ -- $ -- $ 176,000 $ 176,000
Weighted average
interest rate..... -- 2.97% -- -- -- -- 2.97%
(1) Includes aggregate unamortized issuance discounts of approximately
$761 on the senior unsecured notes issued during March 1999 and June 2002,
which are due at maturity.
In addition, a one percent increase in the LIBOR rate would have an
approximate $1.8 million annual increase in interest expense based on $176.0
million of variable rate debt outstanding at June 30, 2002.
The following table sets forth the Operating Partnership's mortgage notes
and note receivables by scheduled maturity date, weighted average interest rates
and estimated FMV at June 30, 2002 (dollars in thousands):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL (1) FMV
-----------------------------------------------------------------------------------------------------
Mortgage notes
and notes receivable:
Fixed rate........... $ 1,157 $ -- $ 36,500 $ -- $ -- $ 16,990 $ 54,647 $ 55,867
Weighted average
interest rate...... 9.0% -- 10.23% -- -- 11.92% 10.73%
(1) Excludes interest receivables aggregating approximately $721.
26
NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES, TENANT IMPROVEMENT
COSTS AND LEASING COMMISSIONS
The following table summarizes the expenditures incurred for capital
expenditures for the entire portfolio and tenant improvements and leasing
commissions for space leased at the Operating Partnership's office and
industrial properties for the years 1998 through 2001 and the six months ended
June 30, 2002.
NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES
Average
1998 1999 2000 2001 1998-2001 2002
-------------- -------------- ------------- ------------- -------------- -------------
Suburban Office Properties
Total $2,004,976 $2,298,899 $3,289,116 $4,606,069 $3,049,765 $2,325,404
Per Square Foot 0.23 0.23 0.33 0.45 0.31 $0.23
NYC Office Properties
Total N/A N/A $946,718 $1,584,501 $1,265,610 $828,596
Per Square Foot N/A N/A 0.38 0.45 0.42 $0.24
Industrial Properties
Total $1,205,266 $1,048,688 $813,431 $711,666 $944,763 $437,208
Per Square Foot 0.12 0.11 0.11 0.11 0.11 $0.07
NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING
COMMISSIONS
AVERAGE
1998 1999 2000 2001 1998-2001
-------------- ------------ ------------ ----------- -----------
Long Island Office Properties
Tenant Improvements $1,140,251 $1,009,357 $2,853,706 $2,722,457 $1,931,443
Per Square Foot Improved 3.98 4.73 6.99 8.47 6.04
Leasing Commissions $418,191 $551,762 $2,208,604 $1,444,412 $1,155,742
Per Square Foot Leased 1.46 2.59 4.96 4.49 3.38
-------------- ------------ ------------ ----------- -----------
Total Per Square Foot $5.44 $7.32 $11.95 $12.96 $9.42
============== ============ ============ =========== ===========
Westchester Office Properties
Tenant Improvements $711,160 $1,316,611 $1,860,027 $2,584,728 $1,618,132
Per Square Foot Improved 4.45 5.62 5.72 5.91 5.43
Leasing Commissions $286,150 $457,730 $412,226 $1,263,012 $604,780
Per Square Foot Leased 1.79 1.96 3.00 2.89 2.41
-------------- ------------ ------------ ----------- -----------
Total Per Square Foot $6.24 $7.58 $8.72 $8.80 $7.84
============== ============ ============ =========== ===========
Connecticut Office Properties
Tenant Improvements $202,880 $179,043 $385,531 $213,909 $245,341
Per Square Foot Improved 5.92 4.88 4.19 1.46 4.11
Leasing Commissions $151,063 $110,252 $453,435 $209,322 $231,018
Per Square Foot Leased 4.41 3.00 4.92 1.43 3.44
-------------- ------------ ------------ ----------- -----------
Total Per Square Foot $10.33 $7.88 $9.11 $2.89 $7.55
============== ============ ============ =========== ===========
New Jersey Office Properties
Tenant Improvements $654,877 $454,054 $1,580,323 $1,146,385 $958,910
Per Square Foot Improved 3.78 2.29 6.71 2.92 3.93
Leasing Commissions $396,127 $787,065 $1,031,950 $1,602,962 $954,526
Per Square Foot Leased 2.08 3.96 4.44 4.08 3.64
-------------- ------------ ------------ ----------- -----------
Total Per Square Foot $5.86 $6.25 $11.15 $7.00 $7.57
============== ============ ============ =========== ===========
New York City Office Properties
Tenant Improvements N/A N/A $65,267 $788,930 $427,099
Per Square Foot Improved N/A N/A 1.79 15.69 8.74
Leasing Commissions N/A N/A $418,185 $1,098,829 $758,507
Per Square Foot Leased N/A N/A 11.50 21.86 16.68
-------------- ------------ ------------ ----------- -----------
Total Per Square Foot N/A N/A $13.29 $37.55 $25.42
============== ============ ============ =========== ===========
Industrial Properties
Tenant Improvements $283,842 $375,646 $650,216 $1,366,488 $669,048
Per Square Foot Improved 0.76 0.25 0.95 1.65 0.90
Leasing Commissions $200,154 $835,108 $436,506 $354,572 $456,585
Per Square Foot Leased 0.44 0.56 0.64 0.43 0.52
-------------- ------------ ------------ ----------- -----------
Total Per Square Foot $1.20 $0.81 $1.59 $2.08 $1.42
============== ============ ============ =========== ===========
2002 NEW RENEWAL
-------------- -------------- -----------
Long Island Office Properties
Tenant Improvements $817,925 $470,774 $347,151
Per Square Foot Improved 5.33 10.51 3.20
Leasing Commissions $661,559 $253,957 $407,602
Per Square Foot Leased 4.31 5.67 3.75
-------------- -------------- -----------
Total Per Square Foot 9.63 $16.18 $6.95
============== ============== ===========
Westchester Office Properties
Tenant Improvements $1,200,380 $967,886 $232,494
Per Square Foot Improved 7.59 11.53 3.13
Leasing Commissions $513,884 $357,295 $156,589
Per Square Foot Leased 3.25 4.26 2.11
-------------- -------------- -----------
Total Per Square Foot $10.84 $15.79 $5.24
============== ============== ===========
Connecticut Office Properties
Tenant Improvements $385,999 $384,279 $1,720
Per Square Foot Improved 8.86 9.34 0.71
Leasing Commissions $101,574 $101,574 $0
Per Square Foot Leased 2.33 2.47 --
-------------- -------------- -----------
Total Per Square Foot $11.19 $11.81 0.71
============== ============== ===========
New Jersey Office Properties
Tenant Improvements $624,731 $336,076 $288,655
Per Square Foot Improved 10.22 19.80 6.54
Leasing Commissions $330,520 $127,681 $202,839
Per Square Foot Leased 5.13 6.30 4.60
-------------- -------------- -----------
Total Per Square Foot $15.35 $26.10 $11.14
============== ============== ===========
New York City Office Properties
Tenant Improvements $2,074,924 $1,348,436 $726,488
Per Square Foot Improved 20.23 20.47 19.82
Leasing Commissions $816,045 $389,781 $426,264
Per Square Foot Leased 7.96 5.92 11.63
-------------- -------------- -----------
Total Per Square Foot $28.19 26.39 $31.44
============== ============== ===========
Industrial Properties
Tenant Improvements $743,640 $672,728 $70,912
Per Square Foot Improved 1.56 3.71 --
Leasing Commissions $330,391 $289,591 $40,800
Per Square Foot Leased 0.69 1.60 0.14
-------------- -------------- -----------
Total Per Square Foot $2.25 5.32 $0.14
============== ============== ===========
27
LEASE EXPIRATION SCHEDULE
The following table sets forth scheduled lease expirations for executed leases
as of June 30, 2002:
LONG ISLAND OFFICE (EXCLUDING OMNI)
Number of Square % of Total Cumulative Expiring Expiring
Year of Leases Feet Leased % of Total GAAP Cash
Expiration Expiring Expiring Sq Ft Leased Sq Ft Rent (1) Rent (2)
---------- -------- -------- ----- ------------ -------- --------
2002 17 66,399 2.1% 2.1% $23.83 $26.06
2003 50 319,071 10.0% 12.1% $24.48 $26.72
2004 49 301,455 9.5% 21.6% $21.75 $24.38
2005 71 396,191 12.5% 34.0% $24.95 $27.66
2006 44 169,206 5.3% 39.4% $25.18 $28.45
2007 36 423,707 13.3% 52.7% $24.60 $30.25
2008 and thereafter 81 1,505,191 47.3% 100.0% -- --
-- ----------- -----
Total/Weighted Average 348 3,181,220 100.0% -- -- --
OMNI
Number of Square % of Total Cumulative Expiring Expiring
Year of Leases Feet Leased % of Total GAAP Cash
Expiration Expiring Expiring Sq Ft Leased Sq Ft Rent (1) Rent (2)
---------- -------- -------- ----- ------------ -------- --------
2002 2 34,975 6.3% 6.3% $28.02 $33.80
2003 3 49,793 9.0% 15.4% $29.54 $35.16
2004 5 113,793 20.6% 36.0% $27.29 $34.79
2005 4 43,780 7.9% 43.9% $28.24 $35.42
2006 0 -- 0.0% 43.9% -- --
2007 2 59,722 10.8% 54.7% $26.78 $34.41
2008 and thereafter 12 250,112 45.3% 100.0% -- --
-- ---------------- -----
Total/Weighted Average 28 552,175 100.0% -- -- --
WESTCHESTER OFFICE
Number of Square % of Total Cumulative Expiring Expiring
Year of Leases Feet Leased % of Total GAAP Cash
Expiration Expiring Expiring Sq Ft Leased Sq Ft Rent (1) Rent (2)
---------- -------- -------- ----- ------------ -------- --------
2002 24 172,220 5.7% 5.7% $21.16 $22.28
2003 46 242,271 8.0% 13.7% $22.17 $23.82
2004 38 177,296 5.9% 19.6% $21.50 $22.52
2005 51 465,316 15.4% 35.0% $22.62 $23.91
2006 40 720,326 23.8% 58.8% $22.69 $24.55
2007 33 425,732 14.1% 72.9% $25.36 $27.15
2008 and thereafter 35 819,145 27.1% 100.0% -- --
-- ---------------- -----
Total/Weighted Average 267 3,022,306 100.0% -- -- --
28
LEASE EXPIRATION SCHEDULE
STAMFORD OFFICE
Number of Square % of Total Cumulative Expiring Expiring
Year of Leases Feet Leased % of Total GAAP Cash
Expiration Expiring Expiring Sq Ft Leased Sq Ft Rent (1) Rent (2)
- ---------- -------- -------- ----- ------------ -------- --------
2002 13 32,118 3.0% 3.0% $24.53 $25.96
2003 20 145,085 13.6% 16.6% $30.97 $31.81
2004 28 236,570 22.2% 38.9% $22.02 $23.08
2005 24 123,864 11.6% 50.5% $26.41 $28.18
2006 24 291,313 27.4% 77.9% $24.22 $25.11
2007 10 94,890 8.9% 86.8% $32.04 $34.41
2008 and thereafter 9 140,729 13.2% 100.0% -- --
Total/Weighted Average 128 1,064,569 100.0% -- -- --
NEW JERSEY OFFICE
Number of Square % of Total Cumulative Expiring Expiring
Year of Leases Feet Leased % of Total GAAP Cash
Expiration Expiring Expiring Sq Ft Leased Sq Ft Rent (1) Rent (2)
- ---------- -------- -------- ----- ------------ -------- --------
2002 8 81,618 4.4% 4.4% $21.13 $21.64
2003 20 319,328 17.2% 21.5% $27.16 $28.22
2004 28 206,608 11.1% 32.6% $23.08 $23.91
2005 27 272,784 14.7% 47.3% $23.83 $24.84
2006 16 181,060 9.7% 57.0% $24.48 $26.12
2007 5 57,237 3.1% 60.1% $21.25 $23.18
2008 and thereafter 20 743,082 39.9% 100.0% -- --
Total/Weighted Average 124 1,861,717 100.0% -- -- --
NEW YORK CITY OFFICE
Number of Square % of Total Cumulative Expiring Expiring
Year of Leases Feet Leased % of Total GAAP Cash
Expiration Expiring Expiring Sq Ft Leased Sq Ft Rent (1) Rent (2)
- ---------- -------- -------- ----- ------------ -------- --------
2002 10 122,367 3.6% 3.6% $43.61 $40.26
2003 7 114,987 3.4% 6.9% $32.10 $33.65
2004 20 223,677 6.5% 13.5% $36.54 $39.89
2005 34 451,470 13.2% 26.7% $36.30 $38.34
2006 54 346,402 10.1% 36.8% $30.29 $31.95
2007 12 126,083 3.7% 40.5% $34.66 $37.35
2008 and thereafter 88 2,034,773 59.5% 100.0% -- --
Total/Weighted Average 225 3,419,759 100.0% -- -- --
29
LEASE EXPIRATION SCHEDULE
INDUSTRIAL
Number of Square % of Total Cumulative Expiring Expiring
Year of Leases Feet Leased % of Total GAAP Cash
Expiration Expiring Expiring Sq Ft Leased Sq Ft Rent (1) Rent (2)
---------- -------- -------- ----- ------------ -------- --------
2002 8 91,878 1.8% 1.8% $7.15 $7.95
2003 19 499,273 9.8% 11.6% $5.67 $6.86
2004 35 562,235 11.0% 22.6% $6.55 $7.60
2005 26 476,541 9.4% 32.0% $5.85 $7.30
2006 39 865,820 17.0% 49.0% $6.65 $7.91
2007 22 229,316 4.5% 53.5% $7.70 $9.16
2008 and thereafter 50 2,371,109 46.5% 100.0% -- --
-- --------------- -----
Total / Weighted Average 199 5,096,172 100.0% -- -- --
RESEARCH & Development
Number of Square % of Total Cumulative Expiring Expiring
Year of Leases Feet Leased % of Total GAAP Cash
Expiration Expiring Expiring Sq Ft Leased Sq Ft Rent (1) Rent (2)
---------- -------- -------- ----- ------------ -------- --------
2002 1 4,620 0.4% 0.4% $12.85 $12.85
2003 4 91,938 8.2% 8.6% $10.59 $10.97
2004 9 99,218 8.9% 17.5% $13.86 $15.07
2005 11 457,440 40.9% 58.3% $9.95 $11.45
2006 7 83,061 7.4% 65.8% $17.49 $20.08
2007 4 85,444 7.6% 73.4% $12.60 $13.95
2008 and thereafter 15 298,015 26.6% 100.0% -- --
-- ---------------- -----
Total / Weighted Average 51 1,119,736 100.0% -- -- --
30
The following table sets forth the Operating Partnership's schedule of its top
25 tenants based on base rental revenue as of June 30, 2002:
Percent of Consolidated
Total Annualized Base
Tenant Name (1) Tenant Type Square Feet Rental Revenue
- -----------------------------------------------------------------------------------------------------------------
* Debevoise & Plimpton Office 465,420 5.5%
* WorldCom/MCI Office 547,018 2.8%
* American Express Office 238,261 1.7%
Bell Atlantic Office 208,661 1.3%
* Shulte Roth & Zabel Office 230,621 2.2%
* HQ Global Office/Industrial 201,900 1.5%
United Distillers Office 137,918 0.9%
Waterhouse Securities Office 127,143 0.9%
* Prudential Office 219,416 0.9%
* Banque Nationale De Paris Office 144,334 1.5%
D.E. Shaw Office 89,526 0.7%
Vytra Healthcare Office 105,612 0.7%
Metromedia Fiber Network Svcs. Office 112,075 0.7%
* Kramer Levin Nessen Kamin, Office 140,892 1.3%
Hoffman-La Roche Inc. Office 120,736 0.6%
Heller Ehrman White Office 54,815 0.6%
Lab Corp Office 108,000 0.6%
* Novartis Office 150,747 0.9%
* Draft Worldwide, Inc. Office 124,008 1.1%
Practicing Law Institute Office 62,000 0.6%
Lockheed Martin Corporation Office 123,554 0.5%
* State Farm Office/Industrial 162,650 1.0%
Estee Lauder Industrial 370,000 0.5%
* JP Morgan Chase Bank Office 69,527 0.6%
Radianz U.S. No. 2 Inc. Office 130,009 0.5%
- -----------------------------------------------------------------------------------------------------------------
(1) Ranked by pro rata share of annualized base rental revenue
(2) Based on annualized base rental revenue adjusted for pro rata share of
joint venture interests.
* Part or all of space occupied by tenant is in a 51% or more owned joint
venture building.
- --------------------------------------------------------------------------------
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Operating Partnership is not presently subject to any material
litigation nor, to the Operating Partnership's knowledge, is any
litigation threatened against the Operating Partnership, other than
routine actions for negligence or other claims and administrative
proceedings arising in the ordinary course of business, some of which
are expected to be covered by liability insurance and all of which
collectively are not expected to have a material adverse effect on the
liquidity, results of operations or business or financial condition of
the Operating Partnership.
On or about October 3, 2001, Burgess Services, LLC ("Burgess Services"),
Dominion Venture Group, LLC ("Dominion Venture Group") and certain
affiliated parties commenced an action in Oklahoma State Court against
Reckson Strategic Venture Partners, LLC ("RSVP"), the Company, and
RAP-Dominion LLC ("RAP-Dominion"), a joint venture through which the
Operating Partnership invested with RSVP in a venture with certain of
the plaintiffs. On April 10, 2002, the litigation was settled without
liability on the part of the Company, the Operating Partnership or the
defendant. In connection with the settlement, the joint venture will be
terminated.
Item 2. Changes in Securities and use of proceeds
During the three months ended June 30, 2002, the Registrant issued
666,466 common units of general partnership interest for an equal
number of common units of limited partnership interest. These
transactions were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information
The Company as general partner of the Operating Partnership has received
approval of the Audit Committee of the Board permitting Ernst & Young, LLP, the
Company's auditors to perform the following non-audit related services: (i) the
preparation and review of tax filings; (ii) analysis related to compliance with
law including, but not limited to the REIT qualification; (iii) review of
Company disclosure related issues; and (iv) analysis relating to alternative
structures of potential joint ventures, acquisitions and financings.
32
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 2002 Stock Option Plan of the Company
99.1 Certification of Donald Rechler, Co-CEO of Reckson
Associates Realty Corp., the sole general partner
of Reckson Operating Partnership, L.P., pursuant to
Section 1350 of Chapter 63 of title 18 of the United
State Code
99.2 Certification of Scott H. Rechler, Co-CEO of Reckson
Associates Realty Corp., the sole general partner of
Reckson Operating Partnership, L.P., pursuant to
Section 1350 of Chapter 63 of title 18 of the United
State Code
99.3 Certification of Michael Maturo, CFO of Reckson
Associates Realty Corp., the sole general partner of
Reckson Operating Partnership, L.P., pursuant to
Section 1350 of Chapter 63 of title 18 of the United
State Code
b) During the three months ended June 30, 2002 the Registrant filed
the following reports on Form 8K:
On May 2, 2002, the Registrant submitted a report on Form 8-K under
Item 9 thereof in order to submit its first quarter presentation in
satisfaction of the requirements of Regulation FD.
On May 2, 2002, the Registrant submitted a report on Form 8-K under
Item 9 thereof in order to submit supplemental operating and
financial data for the quarter ended March 31, 2002 in satisfaction
of the requirements of Regulation FD.
On May 23, 2002, the Registrant submitted a report on Form 8-K
under Item 9 thereof in order to submit the Company's annual
shareholders' meeting presentation in satisfaction of the
requirements of Regulation FD.
On June 18, 2002, the Registrant submitted a report on Form 8-K
under Item 5 thereof relating to the public offering by the
Operating Partnership of $50,000,000 aggregate principal amount of
its 6.00% senior unsecured notes due 2007.
On June 28, 2002, the Registrant submitted a report on Form 8-K
under Item 9 thereof in order to submit a press release concerning
certain data on the Registrant's leases with WorldCom/MCI in
satisfaction of the requirements of Regulation FD.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECKSON OPERATING PARTNERSHIP, L.P.
BY: RECKSON ASSOCIATES REALTY CORP., its sole general partner
By: /s/ Scott H. Rechler By: /s/ Michael Maturo
- ----------------------------------------------------------- ------------------------------------------------------
Scott H. Rechler, Co-Chief Executive Officer Michael Maturo, Executive Vice President, Treasurer
and Chief Financial Officer
By: /s/ Donald Rechler
- -----------------------------------------------------------
Donald Rechler, Co-Chief Executive Officer
DATE: August 12, 2002
33