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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) 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 ___.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 126.2 OF THE EXCHANGE ACT).
YES _X_ NO __
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RECKSON OPERATING PARTNERSHIP, L.P.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 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 September 30, 2002 (unaudited) and
December 31, 2001..................................................................... 2
Consolidated Statements of Income for the three and nine months ended
September 30, 2002 and 2001 (unaudited)............................................... 3
Consolidated Statements of Cash Flows for the nine months ended
September 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............................................................................ 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 29
Item 4. Controls and Procedures............................................................... 30
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings..................................................................... 34
Item 2. Changes in Securities and Use of Proceeds............................................. 34
Item 3. Defaults Upon Senior Securities....................................................... 34
Item 4. Submission of Matters to a Vote of Securities Holders................................. 34
Item 5. Other Information..................................................................... 34
Item 6. Exhibits and Reports on Form 8-K...................................................... 34
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SIGNATURES........................................................................................... 35
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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)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
ASSETS (UNAUDITED)
----------------- -----------------
Commercial real estate properties, at cost
Land ................................................................ $ 417,351 $ 408,837
Buildings and improvements .......................................... 2,400,577 2,328,374
Developments in progress:
Land ................................................................ 91,396 69,365
Development costs ................................................... 26,371 74,303
Furniture, fixtures and equipment ........................................ 7,811 7,725
----------- -----------
2,943,506 2,888,604
Less accumulated depreciation ....................................... (428,150) (361,960)
----------- -----------
2,515,356 2,526,644
Investments in real estate joint ventures ................................ 5,680 5,744
Investment in mortgage notes and notes receivable ........................ 55,695 56,234
Cash and cash equivalents ................................................ 32,285 121,773
Tenant receivables ....................................................... 9,321 9,633
Investments in service companies and affiliate loans and joint ventures .. 88,066 84,142
Deferred rents receivable ................................................ 100,755 81,089
Prepaid expenses and other assets ........................................ 30,506 45,303
Contract and land deposits and pre-acquisition costs ..................... 121 3,782
Deferred lease and loan costs ............................................ 68,295 64,438
----------- -----------
TOTAL ASSETS ........................................................ $ 2,906,080 $ 2,998,782
=========== ===========
LIABILITIES
Mortgage notes payable ................................................... $ 743,148 $ 751,077
Unsecured credit facility ................................................ 224,000 271,600
Senior unsecured notes ................................................... 499,272 449,463
Accrued expenses and other liabilities ................................... 76,683 84,651
Distributions payable .................................................... 32,234 32,988
----------- -----------
TOTAL LIABILITIES ................................................... 1,575,337 1,589,779
----------- -----------
Minority partners' interests in consolidated partnerships ................ 242,720 242,698
----------- -----------
Commitments and contingencies ............................................ -- --
PARTNERS' CAPITAL
Preferred Capital, 11,211,662 and 11,222,965 units issued and outstanding,
respectively ............................................................. 290,270 301,573
General Partners' Capital:
Class A common units, 49,152,033 and 49,982,377 units issued and
outstanding, respectively ................................................ 508,705 551,417
Class B common units, 9,915,313 and 10,283,513 units issued and
outstanding, respectively ................................................ 214,760 231,428
Limited Partners' Capital:
Class A common units, 7,276,224 and 7,487,218 units issued and
outstanding, respectively ................................................ 74,288 81,887
----------- -----------
TOTAL PARTNERS' CAPITAL ............................................... 1,088,023 1,166,305
----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL ............................. $ 2,906,080 $ 2,998,782
=========== ===========
(see accompanying notes to financial statements)
2
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT UNIT DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Base rents ................................................ $ 111,175 $ 110,594 $ 326,424 $ 327,697
Tenant escalations and reimbursements ..................... 15,272 15,273 44,656 45,198
Equity in earnings of real estate joint ventures and
service companies ....................................... 104 505 598 1,704
Interest income on mortgage notes and notes receivable .... 1,589 1,584 4,710 4,651
Gain on sales of real estate .............................. -- 972 537 972
Investment and other income ............................... 642 3,244 1,456 13,448
------------ ------------ ------------ ------------
TOTAL REVENUES ....................................... 128,782 132,172 378,381 393,670
------------ ------------ ------------ ------------
EXPENSES:
Property operating expenses ............................... 46,135 43,844 129,461 125,047
Marketing, general and administrative ..................... 6,827 6,653 19,687 20,392
Interest .................................................. 22,648 23,505 65,757 70,691
Depreciation and amortization ............................. 29,147 26,318 82,913 76,601
------------ ------------ ------------ ------------
TOTAL EXPENSES ....................................... 104,757 100,320 297,818 292,731
------------ ------------ ------------ ------------
Income from continuing operations before distributions to
preferred unit holders, minority interests, valuation
reserves on investments in affiliate loans and joint
ventures, discontinued operations and extraordinary
loss .................................................... 24,025 31,852 80,563 100,939
Minority partners' interests in consolidated partnerships . (4,446) (3,065) (14,379) (12,885)
Valuation reserves on investments in affiliate loans and
joint ventures .......................................... -- (163,000) -- (163,000)
------------ ------------ ------------ ------------
Income (loss) before discontinued operations, extraordinary
loss and distributions to preferred unitholders ......... 19,579 (134,213) 66,184 (74,946)
Discontinued operations
Income from discontinued operations .................. 503 208 889 793
Gain on sales of real estate ......................... 4,896 -- 4,896 --
------------ ------------ ------------ ------------
Income (loss) before extraordinary loss and distributions
to preferred unit holders ............................... 24,978 (134,005) 71,969 (74,153)
Extraordinary loss on extinguishment of debts ............. -- (2,898) -- (2,898)
------------ ------------ ------------ ------------
Net income (loss) ......................................... 24,978 (136,903) 71,969 (77,051)
Preferred unit distributions .............................. (5,760) (5,996) (17,475) (18,009)
------------ ------------ ------------ ------------
Net income (loss) allocable to common unit holders ........ $ 19,218 $ (142,899) $ 54,494 $ (95,060)
============ ============ ============ ============
Net Income (loss) allocable to:
Class A common units ................................. $ 15,149 $ (112,159) $ 42,895 $ (74,859)
Class B common units ................................. 4,069 (30,740) 11,599 (20,201)
------------ ------------ ------------ ------------
Total ..................................................... $ 19,218 $ (142,899) $ 54,494 $ (95,060)
============ ============ ============ ============
Net income (loss) per weighted average common units:
Class A common unit before extraordinary loss ........ $ .27 $ (1.92) $ .75 $ (1.32)
Extraordinary loss per Class A common unit ........... -- (.04) -- (.04)
------------ ------------ ------------ ------------
Class A common unit .................................. $ .27 $ (1.96) $ .75 $ (1.36)
============ ============ ============ ============
Class B common unit before extraordinary loss ........ $ .41 $ (2.93) $ 1.14 $ (1.90)
Extraordinary loss per Class B common unit ........... -- (.06) -- (.06)
------------ ------------ ------------ ------------
Class B common unit .................................. $ .41 $ (2.99) $ 1.14 $ (1.96)
============ ============ ============ ============
Weighted average common units outstanding:
Class A common units ................................. 56,802,000 57,368,000 57,530,000 55,192,000
Class B common units ................................. 10,010,000 10,284,000 10,191,000 10,284,000
(see accompanying notes to financial statements)
3
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................................... $ 71,969 $ (77,051)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ........................................... 82,913 77,221
Extraordinary loss on extinguishment of debts ........................... -- 2,898
Valuation reserves on investments in affiliate loans and joint ventures . -- 163,000
Gain on sales of real estate ............................................ (5,433) (972)
Minority partners' interests in consolidated partnerships ............... 14,379 12,885
Equity in earnings of real estate joint ventures and service companies .. (598) (1,704)
Changes in operating assets and liabilities:
Prepaid expenses and other assets ....................................... 14,205 13,166
Tenant receivables ...................................................... 312 1,446
Deferred rents receivable ............................................... (19,666) (28,843)
Real estate tax escrows ................................................. (2,774) (2,037)
Accrued expenses and other liabilities .................................. (6,698) (20,895)
--------- ---------
Net cash provided by operating activities ............................ 148,609 139,114
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in contract deposits and pre-acquisition costs ................. (37,304) (2,897)
Proceeds from mortgage note receivable repayments ....................... 12 2,949
Additions to commercial real estate properties .......................... (31,029) (121,703)
Additions to developments in progress ................................... -- (3,606)
Payment of leasing costs ................................................ (12,789) (6,264)
Additions to furniture, fixtures and equipment .......................... (71) (324)
Proceeds from sales of real estate and marketable securities ............ 22,385 109,250
Investments in affiliate joint ventures ................................. -- (25,056)
--------- ---------
Net cash used in investing activities ................................ (58,796) (47,651)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on secured borrowings ................................ (7,930) (291,445)
Payment of loan costs ................................................... (1,538) (5,944)
Increase in investments in affiliate loans and service companies ........ (2,978) (13,878)
Proceeds from issuance of senior unsecured notes ........................ 49,432 --
Proceeds from secured borrowings ........................................ -- 325,000
Proceeds from of unsecured credit facility .............................. 115,000 128,000
Repayment of unsecured credit facility .................................. (162,600) (98,000)
Distributions to minority partners in consolidated partnerships ......... (14,572) (13,390)
Purchases of general partner common units ............................... (49,227) --
Contributions ........................................................... 6,310 1,790
Distributions ........................................................... (111,198) (102,545)
--------- ---------
Net cash used in financing activities ................................ (179,301) (70,412)
--------- ---------
Net (decrease) increase in cash and cash equivalents ....................... (89,488) 21,051
Cash and cash equivalents at beginning of period ........................... 121,773 16,624
--------- ---------
Cash and cash equivalents at end of period ................................. $ 32,285 $ 37,675
========= =========
(see accompanying notes to financial statements)
4
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2002, the
Company's ownership percentage in the Operating Partnership was approximately
89.7%.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries at
September 30, 2002 and December 31, 2001 and the results of their operations for
the three and nine months ended September 30, 2002 and 2001, respectively, and,
their cash flows for the nine months ended September 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 Reckson Management Group, Inc.,
RANY Management Group, Inc., Reckson Construction Group New York, Inc. and
Reckson Construction Group, Inc. (the "Service Companies"), in which the
Operating Partnership owns a 97% non-controlling interest, are reflected in the
accompanying financial statements on the equity method of accounting. On October
1, 2002, the Operating Partnership acquired the remaining 3% interests in the
Service Companies for an aggregate purchase price of approximately $122,000. As
a result, commencing on October 1, 2002, the Operating Partnership will
consolidate the operations of the Service Companies. 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 September 30,
2002 represent a 49% non-affiliated interest in RT Tri-State LLC, owner of an
nine 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.
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 September 30,
2002 and for the three and nine month periods ended September 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.
5
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Statement No. 144 provides accounting guidance for financial accounting
and reporting for the impairment or disposal of long-lived assets. Statement No.
144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. It also supersedes the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions related to the disposal of a segment of a business. The
Operating Partnership adopted Statement No. 144 on January 1, 2002. The adoption
of this statement did not have a material effect on the results of operations or
the financial position of the Operating Partnership. The adoption of Statement
No, 144 does not have an impact on net income (loss). Statement No. 144 only
impacts the presentation of the results of operations and gain (loss) on sales
of real estate for those properties sold during the period within the
consolidated statements of operations (see Note 6).
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 period amounts have been reclassified to conform to the current
period presentation.
3. MORTGAGE NOTES PAYABLE
As of September 30, 2002, the Operating Partnership had approximately $743.1
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 7.26%.
The following table sets forth the Operating Partnership's mortgage notes
payable as of September 30, 2002, by scheduled maturity date (dollars in
thousands):
Principal Interest Maturity Amortization
Property Outstanding Rate Date Term (Years)
- ----------------------------------------------- -------------- ----------- --------------- --------------
80 Orville Dr, Islip, NY 2,616 10.10% February, 2004 Interest only
395 North Service Road, Melville, NY 19,811 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 19,476 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 74,824 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 45,342 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 19,429 8.50% April, 2007 15
333 Earle Ovington Blvd, Mitchel Field, NY (b) 54,104 7.72% August, 2007 25
810 Seventh Avenue, NY, NY 83,223 7.73% August, 2009 25
100 Wall Street, NY, NY 36,063 7.73% August, 2009 25
6900 Jericho Turnpike, Syosset, NY 7,376 8.07% July, 2010 25
6800 Jericho Turnpike, Syosset, NY 13,976 8.07% July, 2010 25
580 White Plains Road, Tarrytown, NY 12,735 7.86% September, 2010 25
919 Third Ave, NY, NY (c) 247,464 6.867% August, 2011 30
110 Bi-County Blvd., Farmingdale, NY 3,690 9.125% November, 2012 20
One Orlando Center, Orlando, FL (d) 38,512 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 64,507 6.82% November, 2027 28
--------------
Total/Weighted Average $ 743,148 7.26%
==============
- ------------------------
(a) Encompasses six Class A office properties
(b) The Operating Partnership has a 60% general partnership interest
in this property and its proportionate share of the aggregate
principal amount is approximately $32.5 million
(c) The Operating Partnership has a 51% membership interest in this
property and its proportionate share of the aggregate principal amount
is approximately $126.2 million
(d) Subject to interest rate adjustment on November 1, 2004
In addition, the Operating Partnership has a 60% interest in an unconsolidated
joint venture property. The Operating Partnership's pro rata share of the
mortgage debt at September 30, 2002 is approximately $7.6 million.
6
4. SENIOR UNSECURED NOTES
As of September 30, 2002, the Operating Partnership had outstanding
approximately $499.3 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 semi-annually 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 6.00% (6.125%
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.
5. UNSECURED CREDIT FACILITY
As of September 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 outstanding borrowings under
the Credit Facility was $224 million at September 30, 2002. 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 September 30, 2002, the Operating Partnership had
availability under the Credit Facility to borrow approximately an additional
$351 million, subject to compliance with certain financial covenants.
6. COMMERCIAL REAL ESTATE INVESTMENTS
As of September 30, 2002, the Operating Partnership owned and operated 75 office
properties (inclusive of eleven office properties owned through joint ventures)
comprising approximately 13.6 million square feet, 101 industrial properties
comprising approximately 6.7 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 338 acres of land in 14
separate parcels of which the Operating Partnership can develop approximately
3.2 million square feet of office space and approximately 470,000 square feet of
industrial space. The Operating Partnership is currently evaluating alternative
land uses for certain of the land holdings to realize the highest economic
value. These alternatives may include rezoning certain land parcels from
commercial to residential for potential disposition. As of September 30, 2002,
the Operating Partnership had invested approximately $117 million in these
development projects. Management has made subjective assessments as to the value
and recoverability of these investments based on current and proposed
development plans market comparable land values and alternative use values. The
Operating Partnership has capitalized approximately $8.1 million for the nine
months ended September 30, 2002 related to real estate taxes, interest and other
carrying costs related to these development projects.
7
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 September 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 357,000 square foot office building in
Orlando, Florida. This non-core real estate holding was acquired in May 1999 in
connection with the Operating Partnership's initial New York City portfolio
acquisition. This property is cross collateralized under a $103 million mortgage
note along with one of the Operating Partnership's New York City buildings.
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV"), which it manages. The remaining 40% interest is owned by
JAH Realties L.P. John Halpern, the CEO and a director of HQ Global Workplaces,
is a partner in JAH Realties, L.P. As of September 30, 2002, the 520JV had total
assets of $21.3 million, a mortgage note payable of $12.7 million and other
liabilities of $1.0 million. The Operating Partnership's allocable share of the
520JV mortgage note payable is approximately $7.6 million. In addition, the
520JV had total revenues of $2.6 million and total expenses of $2.5 million for
the nine months ended September 30, 2002. The Operating Partnership accounts for
the 520JV under the equity method of accounting. The 520JV contributed
approximately $133,000 and $316,000 to the Operating Partnership's equity in
earnings of real estate joint ventures for the nine months ended September 30,
2002 and 2001, respectively.
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 transition 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 these sales were used to repay borrowings under the Credit
Facility and for general operating purposes. The Operating Partnership recorded
an aggregate net gain of approximately $4.9 million as a result of these sales.
In addition, in accordance with FASB Statement No. 144, the operating results of
these properties and the resulting gain on sales of real estate have been
reflected as discontinued operations for all periods presented on the
accompanying statements of operations.
7. PARTNERS' CAPITAL
On September 30, 2002, the Operating Partnership had issued and outstanding
9,915,313 Class B common units, all of which are held by the Company. 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. The Class B common units currently
receive an annual distribution of $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.
8
During August 2002, the Operating Partnership declared the following
distributions:
RECORD PAYMENT THREE MONTHS ANNUALIZED
SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION
-------- ------------ ---- ---- ----- ------------
Class A common unit $.4246 October 7, 2002 October 18, 2002 September 30, 2002 $1.6984
Class B common unit $.6471 October 15, 2002 October 31, 2002 October 31, 2002 $2.5884
Series A preferred unit $.476563 October 15, 2002 October 31, 2002 October 31, 2002 $1.9063
Series E preferred unit $.553125 October 15, 2002 October 31, 2002 October 31, 2002 $2.2125
The Board of Directors of the Company has authorized the purchase of up to five
million shares of the Company's Class A common stock and/or its Class B common
stock. During the three months ended September 30, 2002, under this buy-back
program, 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 common units of approximately $49.2 million. In
addition, subsequent to September 30, 2002, the Operating Partnership purchased
842,200 Class A common units at $20.77 per unit. As a result of these purchases,
annual common unit distributions will decrease by approximately $5.5 million.
Previously, in conjunction with the Company's prior 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.
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 September 30, 2002, the Company had 9,192,000 shares of its Class
A preferred stock outstanding and on October 14, 2002, purchased and retired
357,500 shares at $22.29 per share for approximately $8.0 million. As a result,
the Operating Partnership purchased and retired an equal number of preferred
units of general partnership interest from the Company and reduced annual
preferred distributions by approximately $682,000.
Net income (loss) per common partnership unit is determined by allocating net
income (loss) 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. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2002 2001
------- -------
Cash paid during the period for interest...... $79,456 $87,932
======= =======
Interest capitalized during the period ....... $ 6,354 $ 7,764
======= =======
9
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, (ii) the operating performance of the
office property located in Orlando, Florida and (iii) the operating performance
of those properties reflected as discontinued operations on the Operating
Partnership's consolidated statements of operations 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 nine
months ended September 30, 2002 and 2001 (in thousands):
Three months ended
------------------------------------------------------------------------------------------------------
September 30, 2002 September 30, 2001
-------------------------------------------------- ---------------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
---------- ---------- ------------ ----------- ---------- ------------
REVENUES:
Base rents, tenant
escalations and
reimbursements ......... $ 124,289 $ 2,158 $ 126,447 $ 123,689 $ 2,178 $ 125,867
Equity in earnings of real
estate joint ventures
and service companies .. -- 104 104 -- 505 505
Other income (loss) ...... 331 1,900 2,231 6,714 (914) 5,800
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues ......... 124,620 4,162 128,782 130,403 1,769 132,172
---------- ---------- ---------- ---------- ---------- ----------
EXPENSES:
Property operating
expenses ............... 45,011 1,124 46,135 42,933 911 43,844
Marketing, general
and administrative ..... 4,807 2,020 6,827 5,533 1,120 6,653
Interest ................. 13,003 9,645 22,648 13,033 10,472 23,505
Depreciation and
amortization ........... 26,730 2,417 29,147 24,183 2,135 26,318
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses ......... 89,551 15,206 104,757 85,682 14,638 100,320
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before distributions to
preferred unitholders,
minority interests,
valuation reserves,
discontinued operations
and extraordinary loss . $ 35,069 $ (11,044) $ 24,025 $ 44,721 $ (12,869) $ 31,852
========== ========== ========== ========== ========== ==========
Total Assets ............. $2,679,679 $ 226,401 $2,906,080 $2,631,077 $ 234,124 $2,865,201
========== ========== ========== ========== ========== ==========
10
Nine months ended
------------------------------------------------------------------------------------------------------
September 30, 2002 September 30, 2001
-------------------------------------------------- ---------------------------------------------
Core CONSOLIDATED Core CONSOLIDATED
Portfolio Other TOTALS Portfolio Other TOTALS
---------- ---------- ------------ ----------- ---------- ------------
REVENUES:
Base rents, tenant
escalations and
reimbursements ........... $ 364,505 $ 6,575 $ 371,080 $ 365,681 $ 7,214 $ 372,895
Equity in earnings of
real estate joint ventures
and service companies .... -- 598 598 -- 1,704 1,704
Other income ............... 1,383 5,320 6,703 9,192 9,879 19,071
---------- ---------- ---------- ---------- ---------- ----------
Total Revenues ........... 365,888 12,493 378,381 374,873 18,797 393,670
---------- ---------- ---------- ---------- ---------- ----------
EXPENSES:
Property operating
expenses ................. 125,996 3,465 129,461 122,702 2,345 125,047
Marketing, general
and administrative ....... 13,994 5,693 19,687 15,505 4,887 20,392
Interest ................... 38,956 26,801 65,757 38,086 32,605 70,691
Depreciation and
amortization ............. 76,757 6,156 82,913 70,404 6,197 76,601
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses ........... 255,703 42,115 297,818 246,697 46,034 292,731
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before distributions to
preferred unitholders,
minority interests,
valuation reserves,
discontinued operations
and extraordinary loss ... $ 110,185 $ (29,622) $ 80,563 $ 128,176 $ (27,237) $ 100,939
========== ========== ========== ========== ========== ==========
11
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 Internal Revenue Code of 1986, as amended (the "Code"). These services are
currently provided by the Service Companies in which, as of September 30, 2002,
the Operating Partnership owns a 97% non-controlling interest. An entity which
is substantially owned by certain Rechler family members who are also executive
officers of the Company own a 3% controlling interest in the Service Companies.
In order to minimize the potential for corporate conflicts of interests, the
Independent Directors of the Company approved the purchase by the Operating
Partnership of the remaining 3% interest in the Service Companies. On October 1,
2002, the Operating Partnership acquired such 3% interests in the Service
Companies for an aggregate purchase price of approximately $122,000. Such amount
was less than the total amount of capital contributed by the Rechler family
members. As a result, commencing on October 1, 2002, the Operating Partnership
will consolidate the operations of the Service Companies. During the nine months
ended September 30, 2002, Reckson Construction Group, Inc. billed approximately
$134,000 of market rate services and Reckson Management Group, Inc. billed
approximately $232,000 of market rate management fees to certain properties in
which certain Rechler family members who are also executive officers of the
Company 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. Such options provide the Company the right to
acquire fee interest in two of the Option Properties and the Rechler's minority
interests in the remaining properties. The Independent Directors are currently
reviewing whether the Company should exercise one or more of these options. In
addition, for the nine months ended September 30, 2002, Reckson Construction
Group, Inc. performed market rate services, aggregating approximately $299,000
for a property in which certain executive officers maintain an equity interest.
The Operating Partnership leases 43,713 square feet of office and storage space
at an Option Property for its management offices located in Melville, New York
at an annual base rent of approximately $1.1 million. The Operating Partnership
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 Operating Partnership at an annual base
rent of approximately $431,500. In addition, Reckson Strategic Venture Partners,
LLC ("RSVP") leases 5,144 square feet in one of the Operating Partnership's
joint venture properties at an annual base rent of approximately $176,000.
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 September 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 September 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.
12
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 for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
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 September 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.
Scott H. Rechler, who serves as Co-Chief Executive Officer and a director of the
Company, serves as CEO and Chairman of the Board of Directors of FrontLine. As
of December 31, 2001, the Company's directors and officers owned approximately
15.9% of FrontLine's outstanding common stock.
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.
13
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 202,000 square feet and have current contractual annual
base rents of approximately $6.1 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 $550,000 (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
September 30, 2002. Scott H. Rechler serves as the non-Executive Chairman of the
Board and Jon Halpern is the Chief Executive Officer and a director of HQ.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leases as of September 30, 2002 approximately 527,000 square feet in
thirteen 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 $12.0 million, or 2.9% 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 November 30, 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 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 leased
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, 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") leased approximately 38,000 square feet in one of
the Operating Partnership's New York City buildings. AA's lease with the
Operating Partnership provided for base rent of approximately $2 million on an
annualized basis and expired in April 2004. AA has experienced significant
financial difficulties with its business and as a result has entered into a
lease termination agreement with the Operating Partnership effective November
30, 2002. In October 2002, AA paid the Operating Partnership for all base rental
and other charges through November 30, 2002 and a lease termination fee of
approximately $144,000. As of September 30, 2002, the Operating Partnership has
reserved 100% of the deferred rent receivable related to this lease which is
approximately $130,000.
14
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 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.
15
During the nine months ended September 30, 2002, the Operating Partnership
incurred approximately $4.6 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".
16
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 September 30, 2002, the Operating Partnership owned and operated 75 office
properties (inclusive of eleven office properties owned through joint ventures)
comprising approximately 13.6 million square feet, 101 industrial properties
comprising approximately 6.7 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 338 acres of land in 14
separate parcels of which the Operating Partnership can develop approximately
3.2 million square feet of office space and approximately 470,000 square feet of
industrial space. The Operating Partnership is currently evaluating alternative
land uses for certain of the land holdings to realize the highest economic
value. These alternatives may include rezoning certain land parcels from
commercial to residential for potential disposition. As of September 30, 2002,
the Operating Partnership had invested approximately $117 million in these
development projects. Management has made subjective assessments as to the value
and recoverability of these investments based on current and proposed
development plans, market comparable land values and alternative use values. The
Operating Partnership has capitalized approximately $8.1 million for the nine
months ended September 30, 2002 related to real estate taxes, interest and other
carrying costs related to these development projects.
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 September 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 357,000 square foot office building in
Orlando, Florida. This non-core real estate holding was acquired in May 1999 in
connection with the Operating Partnership's initial New York City portfolio
acquisition. This property is cross collateralized under a $103 million mortgage
note along with one of Operating Partnership's New York City buildings.
The Operating Partnership also owns a 60% non-controlling interest in a 172,000
square foot office building located at 520 White Plains Road in White Plains,
New York (the "520JV") which it manages. The remaining 40% interest is owned by
JAH Realties L.P. John Halpern, the CEO and director of HQ Global Workplaces, is
a partner in JAH Realties, L.P. As of September 30, 2002, the 520JV had total
assets of $21.3 million, a mortgage note payable of $12.7 million and other
liabilities of $1.0 million. The Operating Partnership's allocable share of the
520JV mortgage note payable is approximately $7.6 million. In addition, the
520JV had total revenues of $2.6 million and total expenses of $2.5 million for
the nine months ended September 30, 2002. The Operating Partnership accounts for
the 520JV under the equity method of accounting. The 520JV contributed
approximately $133,000 and $316,000 to the Operating Partnership's equity in
earnings of real estate joint ventures for the nine months ended September 30,
2002 and 2001, respectively.
17
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 Internal Revenue Code of 1986, as amended (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") in which the Operating Partnership,
as of September 30, 2002 owned a 97% non-controlling interest. An entity which
is substantially owned by certain Rechler family members who are also executive
officers of the Company owned a 3% controlling interest in the Service
Companies. In order to minimize the potential for corporate conflicts of
interests, the Independent Directors of the Company approved the purchase by the
Operating Partnership of the remaining 3% interest in the Service Companies. On
October 1, 2002, the Operating Partnership acquired such 3% interests in the
Service Companies for an aggregate purchase price of approximately $122,000.
Such amount was less than the total amount of capital contributed by the Rechler
family members. As a result, commencing on October 1, 2002, the Operating
Partnership will consolidate the operations of the Service Companies. During the
nine months ended September 30, 2002, Reckson Construction Group, Inc. billed
approximately $134,000 of market rate services and Reckson Management Group,
Inc. billed approximately $232,000 of market rate management fees to certain
properties in which certain Rechler family members who are also executive
officers of the Company 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. Such options provide the
Company the right to acquire fee interest in two of the Option Properties and
the Rechler's minority interests in the remaining properties. The Independent
Directors are currently reviewing whether the Company should exercise one or
more of these options. In addition, for the nine months ended September 30,
2002, Reckson Construction Group, Inc. performed market rate services,
aggregating approximately $299,000 for a property in which certain executive
officers maintain an equity interest.
The Operating Partnership leases 43,713 square feet of office and storage space
at an Option Property for its management offices located in Melville, New York
at an annual base rent of approximately $1.1 million. The Operating Partnership
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 Operating Partnership at an annual base
rent of approximately $431,500. In addition, Reckson Strategic Venture Partners,
LLC ("RSVP") leases 5,144 square feet in one of the Operating Partnership's
joint venture properties at an annual base rent of approximately $176,000.
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 nine Class A suburban office properties aggregating approximately
1.5 million square feet to the Tri-State JV for a 51% majority ownership
interest. TIAA contributed approximately $136 million for a 49% interest in the
Tri-State JV which was then distributed to the Operating Partnership. 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 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 transaction were used primarily to repay borrowings under the Credit
Facility and for working capital purposes. For purposes of its financial
statements the Operating Partnership consolidates this joint venture.
The total market capitalization of the Operating Partnership at September 30,
2002 was approximately $3.2 billion. 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 September 30, 2002. As a result, the Operating Partnership's
total debt to total market capitalization ratio at September 30, 2002 equaled
approximately 42.2%.
18
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 September 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 September 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
financial advisor, the Company recorded a $163 million valuation reserve charge,
inclusive of anticipated costs, in its consolidated statements of operations
relating to its investments in the FrontLine Loans and joint ventures with RSVP.
The Operating Partnership has discontinued the accrual of interest income with
respect to the FrontLine Loans. The Operating Partnership has also reserved
against its share of GAAP equity in earnings from the RSVP controlled joint
ventures funded through the RSVP Commitment until such income is realized
through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code charged
off for tax purposes $70 million of the aforementioned reserve directly related
to the FrontLine Facility, including accrued interest. On February 14, 2002, the
Company charged off for tax purposes an additional $38 million of the reserve
directly related to the FrontLine Facility, including accrued interest and $47
million of the reserve directly related to the RSVP Facility, including accrued
interest.
FrontLine is in default under the FrontLine Loans from the Operating Partnership
and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code.
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 September 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.
19
Scott H. Rechler, who serves as Co-Chief Executive Officer and a director of the
Company, serves as CEO and Chairman of the Board of Directors of FrontLine. As
of December 31, 2001, the Company's directors and officers owned approximately
15.9% of FrontLine's outstanding common stock.
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.
20
RESULTS OF OPERATIONS
Three months ended September 30, 2002 as compared to the three months ended
September 30, 2001.
The Operating Partnership's total revenues decreased by $3.4 million or 2.6% for
the three months ended September 30, 2002 as compared to the 2001 period.
Property operating revenues from continuing operations, which include base rents
and tenant escalations and reimbursements ("Property Operating Revenues")
increased by approximately $.6 million for the three months ended September 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 $.5 million. In addition, Property Operating Revenues increased by
$2. 9 million attributable to lease up of newly developed and redeveloped
properties. These increases in Property Operating Revenues were offset by $1.9
million of Property Operating Revenues attributable to six properties that were
sold in 2001 and a decrease of $.9 million in lease termination fees. Other
revenues from continuing operations (excluding Property Operating Revenues)
decreased by $4.0 million or 63% for the three months ended September 30, 2002
as compared to the 2001 period. This decrease is primarily attributable to
decreases in dividends received on marketable securities, real estate tax
refunds and gain on sales of real estate.
Property operating expenses, real estate taxes and ground rents ("Property
Expenses") increased by $2.3 million or 5.2% for the three months ended
September 30, 2002 as compared to the 2001 period. This increase includes a $2.0
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 $2.0
million of property operating expense increase is $500,000 and $1.1 million
attributable to increases in security and insurance costs, respectively. These
increases result primarily from implications of the events which occurred on
September 11, 2001 and security cost increases primarily relate to our New York
City properties. These increases in Property Expenses were offset by
approximately $800,000 of Property 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 September 30, 2002 and 2001 were 63.5% and 65.2%, respectively. The
decrease in Gross Operating Margins is primarily attributable to decreases in
average occupancy of the portfolio and also as a result of increased Property
Expenses specifically relating to security, insurance costs and real estate
taxes.
Marketing, general and administrative expenses increased by approximately
$174,000 or 2.6% for the three months ended September 30, 2002 as compared to
the 2001 period. The increase in marketing, general and administrative expenses
is primarily due to legal and professional fees incurred during the 2002 period
in connection with certain cancelled acquisition transactions, increased
directors and officers insurance costs and costs associated with the expensing
of the fair value of stock options. Marketing, general and administrative
expenses, as a percentage of total revenues were 5.3% for the three months ended
September 30, 2002 as compared to 5.0% for the 2001 period. The Operating
Partnership capitalized approximately $1.1 million of marketing, general and
administrative expenses for the three months ended September 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 Company.
Interest expense decreased by approximately $857,000 for the three months ended
September 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 $216.0 million for the three months
ended September 30, 2002 as compared to $296.3 million for the three months
ended September 30, 2001. This decrease was offset by $750,000 of interest
expense on the senior unsecured notes issued in June 2002.
Income (loss) before extraordinary loss and distributions to preferred unit
holders increased by approximately $159.0 million for the three months ended
September 30, 2002 as compared to the 2001 period. This increase is primarily
attributable to the $163 million valuation reserve (see Overview and Background)
on investments in affiliate loans and joint ventures recorded in the 2001 period
with no such comparable reserve recorded in the 2002 period. In addition,
included in the net increase, is a $5.1 million increase in discontinued
operations relating to the sale of three properties during the 2002 period.
21
Nine months ended September 30, 2002 as compared to the nine months ended
September 30, 2001.
The Operating Partnership's total revenues decreased by $15.3 million or 3.9%
for the nine months ended September 30, 2002 as compared to the 2001 period.
Property Operating Revenues decreased by $1.8 million for the nine months ended
September 30, 2002 as compared to the 2001 period. The change in Property
Operating Revenues is attributable to net increases in rental rates and lease
termination fees in our "same store" properties amounting to $.8 million. In
addition, Property Operating Revenues increased by $8.2 million attributable to
lease up of newly developed and redeveloped properties. These increases in
Property Operating Revenues were offset by $10.8 million of revenue attributable
to six properties that were sold in 2001. Other revenues (excluding Property
Operating Revenues) decreased by $13.5 million or 64.9% for the nine months
ended September 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 and $2.6 million of dividends from marketable securities during
the 2001 period with no such comparable income for the 2002 period. To a lesser
extent this decrease is attributable to a decrease in real estate tax refunds,
operating interest income and gain on sales of real estate.
Property Expenses increased by $4.4 million or 3.5% for the nine months ended
September 30, 2002 as compared to the 2001 period. This increase is primarily
due to a $3.9 million increase in property operating expenses and a $3.0 million
increase in real estate taxes related to our "same store" properties. Included
in the $3.9 million increase in property operating expenses is $1.4 million and
$1.6 million attributable to increases in security and insurance costs,
respectively. The increases result primarily from implications of the events
which occurred on September 11, 2001 and security cost increases primarily
relate to our New York City properties. In addition, Property Expenses increased
by $1.6 million attributable to the lease up of newly developed and redeveloped
properties. These increases in Property Expenses were offset by $4.1 million of
expenses attributable to six properties that were sold in 2001.
Gross Operating Margins for the nine months ended September 30, 2002 and 2001
were 65.1% and 66.5%, respectively. The decrease in Gross Operating Margins is
primarily attributable to decreases in average occupancy of the portfolio and
also as a result of increased Property Expenses specifically relating to
security, insurance costs and real estate taxes.
Marketing, general and administrative expenses decreased by approximately
$705,000 or 3.5% for the nine months ended September 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 nine month periods
ended September 30, 2002 and September 30, 2001. The Operating Partnership
capitalized approximately $3.6 million of marketing, general and administrative
expenses for the nine month periods ended September 30, 2002 and September 30,
2001. These costs relate to leasing, construction and development activities,
which are performed by the Company.
Interest expense decreased by approximately $4.9 million for the nine months
ended September 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 $213.2 million for the nine months
ended September 30, 2002 as compared to $291.5 million for the nine months ended
September 30, 2001. This decrease was offset by approximately $875,000 of
interest expense on the senior unsecured notes issued in June 2002.
Income (loss) before extraordinary loss and distributions to preferred unit
holders increased by approximately $146.1 million for the nine months ended
September 30, 2002 as compared to the 2001 period. This increase is primarily
attributable to the $163 million valuation reserve (see Overview and Background)
on investments in affiliate loans and joint ventures recorded in the 2001 period
with no such comparable reserve recorded in the 2002 period. In addition,
included in the net increase, is a $5.0 million increase in discontinued
operations relating to the sale of three properties during the 2002 period.
22
Liquidity and Capital Resources
As of September 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 outstanding borrowings under
the Credit Facility was $224 million at September 30, 2002. 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 September 30, 2002, the Operating Partnership had
availability under the Credit Facility to borrow approximately an additional
$351 million, subject to compliance with certain financial covenants.
On June 17, 2002 the Operating Partnership issued $50 million of 6.00% (6.125%
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.
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 these sales were used to repay borrowings under the Credit
Facility and for general operating purposes. The Operating Partnership recorded
an aggregate gain of approximately $4.9 million as a result of these sales. Such
gain has been included in discontinued operations for all periods presented on
the Operating Partnership's consolidated statements of operations.
The Operating Partnership continues to seek opportunities to acquire real estate
assets in its markets. The Operating Partnership has historically sought to
acquire properties where it could use its real estate expertise to create
additional value subsequent to acquisition. As a result of increased market
values for the Operating Partnership's commercial real estate assets the
Operating Partnership has sold certain non-core assets or interests in assets
where significant value has been created. During 2000, 2001 and 2002, the
Operating Partnership has sold assets or interests in assets with aggregate
sales prices of approximately $499.8 million. The Operating Partnership has used
the proceeds from these sales primarily to pay down borrowings under the Credit
Facility, repurchase units of general partnership interest as a result of the
Company's common stock buy-back program and for general operating purposes.
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 $16.5 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.
On September 30, 2002, the Operating Partnership had issued and outstanding
9,915,313 Class B common units, all of which are held by the Company. 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. The Class B common units currently
receive an annual distribution of $2.5884 per unit.
23
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 five
million shares of the Company's Class A common stock and/or its Class B common
stock. During the three months ended September 30, 2002, under this buy-back
program, 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 common units of approximately $49.2 million. In
addition, subsequent to September 30, 2002, the Operating Partnership purchased
842,200 Class A common units at $20.77 per unit. As a result of these purchases,
annual common unit distributions will decrease by approximately $5.5 million.
Previously, in conjunction with the Company's prior 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.
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 September 30, 2002, the Company had 9,192,000 shares of its Class
A preferred stock outstanding and on October 14, 2002, purchased and retired
357,500 shares at $22.29 per share for approximately $8.0 million. As a result,
the Operating Partnership purchased and retired an equal number of preferred
units of general partnership interest from the Company and reduced annual
preferred distributions by approximately $682,000.
The Operating Partnership's indebtedness at September 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 $224 million outstanding under the Credit Facility, approximately $499.3
million of senior unsecured notes and approximately $607.9 million of mortgage
indebtedness. Based on the Operating Partnership's total market capitalization
of approximately $3.2 billion at September 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 42.2% 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 202,000 square feet and have current contractual annual
base rents of approximately $6.1 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. The Operating Partnership has since
released the rejected spaces for approximately $519,000 per year in contractual
base rents. 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 $550,000 (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 September 30,
2002. Scott H. Rechler serves as the non-Executive Chairman of the Board and Jon
Halpern is the Chief Executive Officer and a director of HQ.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company,
which leases as of September 30, 2002 approximately 527,000 square feet in
thirteen 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 $12.0 million, or 2.9% 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 November 30, 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 in an amount equal to $1.1 million representing
approximately 51% of the outstanding deferred rent receivable attributable to
WorldCom.
24
MetroMedia Fiber Network Services, Inc. ("MetroMedia"), which leased
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, the Operating Partnership has written off approximately $388,000 of
deferred rent receivable relating to this lease and recognized the
aforementioned surrender fee. The Operating Partnership has re-leased
approximately 49,000 square feet of the 80,357 square feet MetroMedia terminated
to Skadden, Arps, Slate, Meagher & Flom, LLP, a New York City based law firm.
Arthur Andersen, LLP ("AA") leased approximately 38,000 square feet in one of
the Operating Partnership's New York City buildings. AA's lease with the
Operating Partnership provided for base rent of approximately $2 million on an
annualized basis and expired in April 2004. AA has experienced significant
financial difficulties with its business and as a result has entered into a
lease termination agreement with the Operating Partnership effective November
30, 2002. In October 2002, AA paid the Operating Partnership for all base rental
and other charges through November 30, 2002 and a lease termination fee of
approximately $144,000. As of September 30, 2002, the Operating Partnership has
reserved 100% of the deferred rent receivable related to this lease which is
approximately $130,000.
25
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 September 30, 2002 (in
thousands):
MATURITY DATE
---------------------------------------------------------------------------
2002 2003 2004 2005 2006 THEREAFTER TOTAL
---------- ---------- ---------- ---------- ---------- ----------- -----------
Mortgage notes payable (1) $ 3,132 $ 12,300 $ 13,169 $ 14,167 $ 13,785 $ 128,698 $ 185,251
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 -- 224,000 -- -- -- -- 224,000
Land lease obligations 652 2,687 2,811 2,814 2,795 49,921 61,680
Air rights lease obligations 91 369 379 379 379 4,659 6,256
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 3,875 $ 239,356 $ 118,975 $ 35,913 $ 146,879 $ 990,086 $1,535,084
========== ========== ========== ========== ========== ========== ==========
(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 September 30, 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.
26
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. During certain quarterly periods, the Operating
Partnership may incur significant leasing costs as a result of increased market
demands from tenants and high levels of leasing transactions. As a result,
during these periods the Operating Partnership's cash flow from operating
activities may not be sufficient to pay 100% of the quarterly distributions due
on its common units. To meet the short term funding requirements relating to
these leasing costs, the Operating Partnership may use proceeds of property
sales or borrowings under its Credit Facility. 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. A number of the Operating
Partnership's properties are subject to certain environmental investigations or
remediation including asbestos related abatement, soil sampling and ground water
monitoring. Environmental conditions are included in the Operating Partnership's
original acquisition underwriting of properties. Management does not anticipate
any of the known environmental conditions to have a material impact on the
Operating Partnership's results of operations or financial condition. There are
no assurances that management's estimates are correct and actual results may
differ materially. 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.
27
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. As a result of the impact of the events
of September 11, 2001, the Operating Partnership has realized increased
insurance costs, particularly relating to property and terrorism insurance, and
security costs. The Operating Partnership has included these costs as part of
its escalatable expenses. The Operating Partnership has billed these escalatable
expense items to its tenants consistent with the terms of the underlying leases
and believes they are collectible. To the extent the Operating Partnership's
properties contain vacant space, the Operating Partnership will bear such
inflationary increases in expenses.
The Credit Facility 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 real estate depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. FFO does not represent cash generated from operating activities in
accordance with 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income (loss) available to common
unit holders ............................... $ 19,218 $(142,899) $ 54,494 $ (95,060)
Adjustments for Funds From Operations:
Add:
Real estate depreciation and amortization ... 28,208 26,340 80,570 76,055
Minority partners' interests in consolidated
partnerships................................ 4,446 3,065 14,379 12,885
Valuation reserves on investments in
affiliate loans and joint ventures.......... -- 163,000 -- 163,000
Extraordinary loss .......................... -- 2,898 -- 2,898
Less:
Gain on sales of real estate ................ 4,896 972 5,433 972
Amounts distributable to minority partners in
consolidated partnerships .................. 6,050 4,206 18,943 15,010
--------- --------- --------- ---------
Funds From Operations ........................ $ 40,926 $ 47,226 $ 125,067 $ 143,796
========= ========= ========= =========
Weighted average units outstanding ........... 66,812 67,651 67,721 65,476
========= ========= ========= =========
28
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 September 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 September 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........ $ 3,132 $ 12,300 $ 115,785 $ 32,720 $ 143,705 $ 935,506 $1,243,148 $1,263,046
Weighted average
interest rate.... 7.47% 7.51% 7.47% 6.92% 7.38% 7.27% 7.29%
Variable rate..... $ -- $ 224,000 $ -- $ -- $ -- $ -- $ 224,000 $ 224,000
Weighted average
interest rate.... -- 2.85% -- -- -- -- 2.85%
(1) Includes aggregate unamortized issuance discounts of approximately
$728 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
$2.2 million annual increase in interest expense based on $224.0 million of
variable rate debt outstanding at September 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 September 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. ....... $ 1,153 $ -- $ 36,500 $ -- $ -- $ 16,990 $ 54,643 $ 55,829
Weighted average
interest rate..... 9.0% -- 10.23% -- -- 11.95% 10.74%
(1) Excludes interest receivables aggregating approximately $1.0
million.
29
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures and internal controls designed to
ensure that information required to be disclosed in our filings under the
Securities Exchange Act of 1934 is reported within the time periods specified in
the Securities and Exchange Commission's rules and forms. Our principal
executive and financial officers have evaluated our disclosure controls and
procedures within 90 days prior to the filing of this Quarterly Report on Form
10-Q and have determined that such disclosure controls and procedures are
effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
30
The following table sets forth the Operating Partnership's schedule of its top
25 tenants based on base rental revenue as of September 30, 2002:
- ---------------------------------------------------------------------------------------------------------------
PERCENT OF PRO-RATA PERCENT OF CONSOLIDATED
TOTAL SHARE OF ANNUALIZED ANNUALIZED BASE
TENANT NAME (1) TENANT TYPE SQUARE FEET BASE RENTAL REVENUE RENTAL REVENUE
- ---------------------------------------------------------------------------------------------------------------
* DEBEVOISE & PLIMPTON Office 465,420 3.3% 5.6%
* WORLDCOM/MCI Office 527,214 3.2% 2.9%
* AMERICAN EXPRESS Office 240,142 2.0% 1.8%
BELL ATLANTIC Office 210,426 1.5% 1.3%
* SCHULTE ROTH & ZABEL Office 238,052 1.4% 2.3%
* HQ GLOBAL Office/Industrial 201,900 1.2% 1.5%
UNITED DISTILLERS Office 137,918 1.1% 1.0%
WATERHOUSE SECURITIES Office 127,143 1.1% 0.9%
* BANQUE NATIONALE DE PARIS Office 145,834 0.9% 1.5%
* KRAMER LEVIN NESSEN KAMIN Office 158,144 0.9% 1.4%
VYTRA HEALTHCARE Office 105,613 0.8% 0.7%
D.E.SHAW Office 89,526 0.7% 0.6%
P.R.NEWSWIRE ASSOCIATES Office 67,000 0.7% 0.6%
HOFFMANN-LA ROCHE INC. Office 120,736 0.7% 0.6%
EMI ENTERTAINMENT WORLD Office 65,844 0.7% 0.6%
* STATE FARM Office/Industrial 162,651 0.7% 1.0%
HELLER EHRMAN WHITE Office 51,167 0.7% 0.6%
LABORATORY CORP OF AMERICA Office 108,000 0.7% 0.6%
ESTEE LAUDER Industrial 374,578 0.7% 0.6%
* DRAFT WORLDWIDE INC. Office 124,008 0.7% 1.1%
PRACTICING LAW INSTITUTE Office 62,000 0.7% 0.6%
LOCKHEED MARTIN CORP. Office 123,554 0.7% 0.6%
RADIANZ U.S. NO.2 Office 130,009 0.6% 0.5%
TOWERS PERRIN FOSTER Office 88,233 0.6% 0.5%
* MERRILL LYNCH Office 102,973 0.6% 0.7%
- ----------------------------------------------------------------------------------------------------------------
(1) Ranked by pro-rata share of annualized based rental revenue
* Part or all of space occupied by tenant is in a 51% or more owned joint
venture building.
31
- --------------------------------------------------------------------------------------------------------------------
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 nine months ended September 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 $3,629,532
Per Square Foot 0.23 0.23 0.33 0.45 0.31 $0.36
NYC Office Properties
Total N/A N/A $946,718 $1,584,501 $1,265,610 $1,406,967
Per Square Foot N/A N/A 0.38 0.45 0.42 $0.40
Industrial Properties
Total $1,205,266 $1,048,688 $813,431 $711,666 $944,763 $1,379,875
Per Square Foot 0.12 0.11 0.11 0.11 0.11 $0.21
- --------------------------------------------------------------------------------------------------------------------
NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING COMMISSIONS (3)
- --------------------------------------------------------------------------------------------------------------------
1998 1999 2000 2001
--------------- ------------- -------------- --------------
Long Island Office Properties
Tenant Improvements $1,140,251 $1,009,357 $2,853,706 $2,722,457
Per Square Foot Improved 3.98 4.73 6.99 8.47
Leasing Commissions $418,191 $551,762 $2,208,604 $1,444,412
Per Square Foot Leased 1.46 2.59 4.96 4.49
--------------- ------------- -------------- --------------
Total Per Square Foot $5.44 $7.32 $11.95 $12.96
=============== ============= ============== ==============
Westchester Office Properties
Tenant Improvements $711,160 $1,316,611 $1,860,027 $2,584,728
Per Square Foot Improved 4.45 5.62 5.72 5.91
Leasing Commissions $286,150 $457,730 $412,226 $1,263,012
Per Square Foot Leased 1.79 1.96 3.00 2.89
--------------- ------------- -------------- --------------
Total Per Square Foot $6.24 $7.58 $8.72 $8.80
=============== ============= ============== ==============
Connecticut Office Properties
Tenant Improvements $202,880 $179,043 $385,531 $213,909
Per Square Foot Improved 5.92 4.88 4.19 1.46
Leasing Commissions $151,063 $110,252 $453,435 $209,322
Per Square Foot Leased 4.41 3.00 4.92 1.43
--------------- ------------- -------------- --------------
Total Per Square Foot $10.33 $7.88 $9.11 $2.89
=============== ============= ============== ==============
New Jersey Office Properties
Tenant Improvements $654,877 $454,054 $1,580,323 $1,146,385
Per Square Foot Improved 3.78 2.29 6.71 2.92
Leasing Commissions $396,127 $787,065 $1,031,950 $1,602,962
Per Square Foot Leased 2.08 3.96 4.44 4.08
--------------- ------------- -------------- --------------
Total Per Square Foot $5.86 $6.25 $11.15 $7.00
=============== ============= ============== ==============
New York City Office Properties
Tenant Improvements N/A N/A $65,267 $788,930
Per Square Foot Improved N/A N/A 1.79 15.69
Leasing Commissions N/A N/A $418,185 $1,098,829
Per Square Foot Leased N/A N/A 11.50 21.86
--------------- ------------- -------------- --------------
Total Per Square Foot N/A N/A $13.29 $37.55
=============== ============= ============== ==============
Industrial Properties
Tenant Improvements $283,842 $375,646 $650,216 $1,366,488
Per Square Foot Improved 0.76 0.25 0.95 1.65
Leasing Commissions $200,154 $835,108 $436,506 $354,572
Per Square Foot Leased 0.44 0.56 0.64 0.43
--------------- ------------- -------------- --------------
Total Per Square Foot $1.20 $0.81 $1.59 $2.08
=============== ============= ============== ==============
Average YTD
1998-2001 2002 New Renewal
-------------- -------------- ------------- ---------------
Long Island Office Properties
Tenant Improvements $1,931,443 $1,240,929 $675,704 $565,225
Per Square Foot Improved 6.04 6.37 9.70 4.52
Leasing Commissions $1,155,742 $773,699 $317,398 $456,301
Per Square Foot Leased 3.38 3.97 4.55 3.65
-------------- -------------- -------------- ---------------
Total Per Square Foot $9.42 10.33 $14.25 $8.16
============== ============== ============== ===============
Westchester Office Properties
Tenant Improvements $1,618,132 $5,973,514 (2) $3,907,006 $2,066,508
Per Square Foot Improved 5.43 15.63 18.46 12.12
Leasing Commissions $604,780 $1,777,227 $1,434,359 $342,868
Per Square Foot Leased 2.41 4.91 6.36 2.51
-------------- -------------- -------------- ---------------
Total Per Square Foot $7.84 $20.54 $24.83 $14.63
============== ============== ============== ===============
Connecticut Office Properties
Tenant Improvements $245,341 $397,308 $395,588 $1,720
Per Square Foot Improved 4.11 7.92 8.52 0.46
Leasing Commissions $231,018 $122,612 $122,612 $0
Per Square Foot Leased 3.44 2.45 2.64 --
-------------- -------------- -------------- ---------------
Total Per Square Foot $7.55 $10.37 $11.16 0.46
============== ============== ============== ===============
New Jersey Office Properties
Tenant Improvements $958,910 $1,306,938 $998,613 $308,325
Per Square Foot Improved 3.93 9.39 17.47 3.76
Leasing Commissions $954,526 $359,276 $131,731 $227,545
Per Square Foot Leased 3.64 2.52 2.18 2.77
-------------- -------------- -------------- ---------------
Total Per Square Foot $7.57 $11.91 $19.65 $6.53
============== ============== ============== ===============
New York City Office Properties
Tenant Improvements $427,099 $3,868,236 $3,104,358 $763,878
Per Square Foot Improved 8.74 21.14 21.77 18.91
Leasing Commissions $758,507 $1,665,978 $1,218,308 $447,670
Per Square Foot Leased 16.68 9.10 8.54 11.08
-------------- -------------- -------------- ---------------
Total Per Square Foot $25.42 $30.24 $30.32 $29.99
============== ============== ============== ===============
Industrial Properties
Tenant Improvements $669,048 $872,114 $694,363 $177,751
Per Square Foot Improved 0.90 1.43 3.31 --
Leasing Commissions $456,585 $366,653 $320,996 $45,657
Per Square Foot Leased 0.52 0.60 1.52 0.11
-------------- -------------- -------------- ---------------
Total Per Square Foot $1.42 $2.02 $4.84 $0.11
============== ============== ============== ===============
- -------------------------------------------------------------------------------
NOTES:
(1) Excludes non-incremental capital expenditures, tenant improvements and
leasing commissions for One Orlando Center in Orlando, Florida.
(2) Excludes tenant improvements and leasing commissions related to a 163,880
square foot leasing transaction with Fuji Photo Film U.S.A. Leasing
commissions on this transaction amounted to $5.33 per square foot and
tenant improvement allowance amounted to $40.88 per square foot.
(3) All amounts represent tenant improvements and leasing costs committed on
leases signed during the period.
- -------------------------------------------------------------------------------
32
- ----------------------------------------------------------------------------------------------------------------------------
LEASE EXPIRATION SCHEDULE
As of September 30, 2002
TOTAL PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- ----------------------------------------------------------------------------------------------------------------------------
2002 40 222,550 1.1% 1.1%
2003 159 1,742,219 8.6% 9.7%
2004 201 1,820,933 9.0% 18.6%
2005 244 2,445,977 12.0% 30.6%
2006 221 2,592,815 12.8% 43.4%
2007 126 1,535,558 7.6% 50.9%
2008 and thereafter 327 8,787,070 43.3% 94.2%
- ----------------------------------------------------------------------------------------------------------------------------
Total/Weighted Average 1,318 19,147,122 94.2% --
- ----------------------------------------------------------------------------------------------------------------------------
Total Portfolio Square Feet 20,334,559
OFFICE PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- ----------------------------------------------------------------------------------------------------------------------------
2002 36 197,457 1.5% 1.5%
2003 136 1,154,426 8.5% 9.9%
2004 157 1,159,480 8.5% 18.4%
2005 210 1,764,124 13.0% 31.4%
2006 170 1,622,691 11.9% 43.3%
2007 98 1,197,898 8.8% 51.1%
2008 and thereafter 260 5,844,193 42.9% 95.1%
- ----------------------------------------------------------------------------------------------------------------------------
Total/Weighted Average 1,067 12,940,269 95.1% --
- ----------------------------------------------------------------------------------------------------------------------------
Total Portfolio Square Feet 13,614,217
INDUSTRIAL/R&D PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
Number of Square % of Total Cumulative
Year of Leases Feet Portfolio % of Total
Expiration Expiring Expiring Sq Ft Portfolio Sq Ft
- ----------------------------------------------------------------------------------------------------------------------------
2002 4 25,093 0.4% 0.4%
2003 23 587,793 8.7% 9.1%
2004 44 661,452 9.8% 19.0%
2005 34 681,853 10.1% 29.0%
2006 51 970,124 14.4% 43.5%
2007 28 337,660 5.0% 48.6%
2008 and thereafter 67 2,942,877 43.8% 92.4%
- ----------------------------------------------------------------------------------------------------------------------------
Total/Weighted Average 251 6,206,853 92.4% --
- ----------------------------------------------------------------------------------------------------------------------------
Total Portfolio Square Feet 6,720,342
33
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.
Item 2. Changes in Securities and use of proceeds - None
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.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1 Each member of Reckson Associates Realty Corp.'s Board
of Directors and each Executive Officer of Reckson
Associates Realty Corp. has entered into an
Indemnification Agreement with Reckson Associates Realty
Corp. These Indemnification Agreements are identical in
all material respects. The schedule below sets forth the
terms of each Indemnification Agreement not filed which
differ from the copy of the example Indemnification
Agreement (between Reckson Associates Realty Corp. and
Donald J. Rechler, dated as of May 23, 2002), which is
filed as Exhibit 10.1 hereto:
Name Dated As Of
---- -----------
Scott H. Rechler May 23, 2002
Mitchell D. Rechler May 23, 2002
Gregg M. Rechler May 23, 2002
Michael Maturo May 23, 2002
Roger M. Rechler May 23, 2002
Jason Barnett May 23, 2002
Herve A. Kevenides May 23, 2002
John V. N. Klein May 23, 2002
Ronald H. Menaker May 1, 2002
Peter Quick May 1, 2002
Lewis S. Ranieri May 23, 2002
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 States 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 States Code
99.3 Certification of Michael Maturo, Executive Vice
President, Treasurer and 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 States Code
34
PART II - OTHER INFORMATION (CONTINUED)
b) During the three months ended September 30, 2002 the Registrant
filed the following reports on Form 8K:
On August 8, 2002, the Registrant submitted a report on Form 8-K
under Item 9 thereof in order to submit its second quarter
presentation in satisfaction of the requirements of Regulation FD.
On August 8, 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 June 30, 2002 in satisfaction
of the requirements of Regulation FD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RECKSON OPERATING PARTNERSHIP, L. P.
BY: RECKSON ASSOCIATES REALTY CORP., its sole general partner
By: /s/ Scott H. Rechler By: /s/ Michael Maturo
- -------------------------- ------------------------------------------------
Scott H. Rechler, Michael Maturo, Executive Vice President,
Co-Chief Executive Officer Treasurer and Chief Financial Officer
By: /s/ Donald Rechler
- --------------------------
Donald Rechler, Co-Chief
Executive Officer
DATE: November 12, 2002
35
CERTIFICATION
I, Donald J. Rechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson Operating
Partnership, L.P.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Donald J. Rechler
--------------------------------
Donald J. Rechler
Co-Chief Executive Officer,
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
36
CERTIFICATION
I, Scott H. Rechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson Operating
Partnership, L.P.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Scott H. Rechler
-------------------------
Scott H. Rechler
Co-Chief Executive Officer,
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
37
CERTIFICATION
I, Michael Maturo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reckson Operating
Partnership, L.P.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Michael Maturo
-----------------------------------
Michael Maturo
Executive Vice President, Treasurer
and Chief Financial Officer,
Reckson Associates Realty Corp.,
the sole general partner of
the Registrant
38