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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2003
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period
from ______________to
Commission File Number 1-13762
RECKSON OPERATING PARTNERSHIP, L. P.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3233647
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 BROADHOLLOW ROAD, 11747
MELVILLE, NY (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (631) 694-6900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of Reckson Associates Realty Corp.
relating to its Annual Shareholder's Meeting to be held June 4, 2004 are
incorporated by reference into Part III.
As of March 12, 2004, 3,463,545 common units of limited partnership
interest were held by non-affiliates of the Registrant. There is no established
trading market for such units.
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TABLE OF CONTENTS
ITEM NO. PAGE
PART I
1. Business.................................................................................. 3
2. Properties................................................................................ 19
3. Legal Proceedings......................................................................... 30
4. Submission of Matters to a Vote of Security Holders....................................... 30
PART II
5. Market for Registrant's Common Equity and Related Security Matters........................ 31
6. Selected Financial Data................................................................... 32
7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 34
7(a). Quantitative and Qualitative Disclosures about Market Risk ............................... 66
8. Financial Statements and Supplementary Data............................................... 67
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 67
PART III
10. Directors and Executive Officers of the Registrant........................................ 68
11. Executive Compensation.................................................................... 68
12. Security Ownership of Certain Beneficial Owners and Management............................ 68
13. Certain Relationships and Related Transactions............................................ 68
14. Controls and Procedures................................................................... 68
15. Financial Statements and Schedules, Exhibits and Reports on Form 8-K...................... 69
PART IV
16. Principal Accountant Fees and Services.................................................... 69
2
PART I
ITEM 1. BUSINESS
GENERAL
Reckson Operating Partnership, L. P. (the "Operating Partnership")
commenced operations on June 2, 1995. Reckson Associates Realty Corp. (the
"Company"), which serves as the sole general partner of the Operating
Partnership, is a fully integrated, self administered and self managed real
estate investment trust ("REIT"). The Operating Partnership and the Company,
collectively, the "Company" were formed for the purpose of continuing the
commercial real estate business of Reckson Associates, its affiliated
partnerships and other entities ("Reckson").
For more than 40 years, Reckson has been engaged in the business of owning,
developing, acquiring, constructing, managing and leasing office and industrial
properties in the New York City tri-state area (the "Tri-State Area"). Based on
industry surveys, management believes that the Company is one of the largest
owners and operators of Class A central business district ("CBD") and suburban
office properties in the Tri-State Area. The Company operates as a fully
integrated, self-administered and self-managed real estate investment trust
("REIT"). As of December 31, 2003 the Company owned 89 properties (inclusive of
10 joint venture properties) in the Tri-State Area markets, encompassing
approximately 14.7 million rentable square feet, all of which are managed by the
Company. The properties include 16 Class A CBD office properties encompassing
approximately 5.3 million rentable square feet. The CBD office properties
consist of five properties located in New York City, nine properties located in
Stamford, CT and two properties located in White Plains, NY. Together the CBD
office properties comprised 42% of the Company's net operating income (property
operating revenues less property operating expenses) for the three months ended
December 31, 2003. These properties also include 61 Class A suburban office
properties encompassing approximately 8.4 million rentable square feet, of which
42 of these properties, or 75% as measured by square footage, are located within
the Company's ten office parks. Reckson has historically emphasized the
development and acquisition of its suburban office properties in large-scale
suburban office parks. The Company believes that owning properties in planned
office parks provides certain strategic advantages, including the following: (i)
certain tenants prefer being located in a park with other high quality companies
to enhance their corporate image, (ii) parks afford tenants certain aesthetic
amenities such as a common landscaping plan, standardization of signage and
common dining and recreational facilities, (iii) tenants may expand (or
contract) their business within a park, enabling them to centralize business
functions and (iv) a park provides tenants with access to other tenants and may
facilitate business relationships between tenants. Additionally, the properties
include 11 industrial / R&D properties encompassing approximately 1.0 million
rentable square feet and one retail property comprising approximately 9,000
rentable square feet. The Company also owns a 355,000 square foot office
property located in Orlando, Florida.
In November 2003, the Company sold all but three of the properties
included in its Long Island industrial building portfolio to members of the
Rechler family for approximately $315.5 million. (See "Recent Developments" for
further discussion on this sale.)
3
Through its ownership of properties in the key CBD and suburban office
markets in the Tri-State Area, the Company believes it has a unique competitive
advantage as the trend toward the regional decentralization of the workplace
increases. Due to the events of September 11, 2001, as well as technological
advances, which further enable decentralization, companies are strategically
re-evaluating the benefits and feasibility of regional decentralization and
reassessing their long-term space needs. The Company believes this
multi-location regional decentralization will continue to take place, increasing
as companies begin to have better visibility as to the future of the economy,
further validating our regional strategy of maintaining a significant market
share in the key CBD and suburban office markets in the Tri-State Area.
The Company also owns approximately 313 acres of land in 12 separate
parcels of which the Company can develop approximately 3.0 million square feet
of office space. The Company is currently evaluating alternative land uses for
certain of the land holdings to realize the highest economic value. These
alternatives may include rezoning certain land parcels from commercial to
residential for potential disposition. As of December 31, 2003, the Company had
invested approximately $116.8 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 Company has capitalized
approximately $10.0 million for the year ended December 31, 2003 related to real
estate taxes, interest and other carrying costs related to these development
projects. In October 2003, the Company entered into contracts to sell two land
parcels aggregating approximately 128 acres of its land holdings located in New
Jersey. The contracts provided for aggregate sales prices ranging from $23
million to $43 million. These sales are contingent upon obtaining zoning for
residential use of the land and other customary approvals. The proceeds
ultimately received from such sales will be based upon the number of residential
units permitted by the rezoning. The aggregate cost basis of these land parcels
was approximately $11.8 million at December 31, 2003. The closing is scheduled
to occur upon the rezoning which is anticipated to occur within 9 to 33 months.
During February 2004, a 3.9 acre land parcel located on Long Island was
condemned by the Town of Oyster Bay (see "Recent Developments" for further
discussion).
The Company has historically opportunistically purchased underdeveloped
land, vacant buildings or buildings that were under managed or under performing.
The Company applies its real estate expertise to develop, redevelop, renovate
and reposition their assets with the goal of creating value in these real estate
assets. Since the IPO the Company has developed, redeveloped, renovated or
repositioned 17 properties encompassing approximately 2.6 million square feet of
office and industrial / R&D space.
The Company holds a $17.0 million note receivable which bears interest at
12% per annum and is secured by a minority partnership interest in Omni
Partners, L. P., owner of the Omni, a 579,000 square foot Class A office
property located in Uniondale, N.Y., effectively increasing its economic
interest in the property owning partnership (the "Omni Note"). The Company
currently owns a 60% majority partnership interest in Omni Partners, L.P. and on
March 14, 2007 may exercise an option to acquire the remaining 40% interest for
a price based on 90% of the fair market value of the property. The Company holds
a $15 million participating interest in a $30 million junior mezzanine note loan
which is secured by a pledge of an indirect ownership interest of an entity
which owns the ground leasehold estate under a 1.1 million square foot office
complex located on Long Island, New York (the "Mezz Note"). The Mezz Note
matures in September 2005, currently bears interest at 13.43%, and the borrower
has the right to extend for three additional one-year periods. The Company also
holds three other notes receivable aggregating $21.5 million which bear interest
at rates ranging from 10.5% to 12% per annum and are secured in part by a
minority partner's preferred unit interest in the Operating Partnership, an
interest in real property and a
4
personal guarantee (the "Other Notes" and collectively with the Omni Note, and
the Mezz Note, the "Note Receivable Investments").
As of December 31, 2003, management has made subjective assessments as to
the underlying security value on the Company's Note Receivable Investments.
These assessments indicated an excess of market value over carrying value
related to the Company's Note Receivable Investments. Based on these assessments
the Company's management believes there is no impairment to the carrying value
related to the Company's Note Receivable Investments. The Company also owns a
355,000 square foot office building in Orlando, Florida. This non-core real
estate holding was acquired in May 1999 in connection with the Company's initial
New York City portfolio acquisition. This property is cross-collateralized under
a $101.0 million mortgage note payable along with one of the Company's New York
City buildings. The Company has the right to repay this note in November 2004,
prior to its maturity date.
5
The Company 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. Jon Halpern, a director of HQ Global Workplaces, is a partner in
JAH Realties, L.P. As of December 31, 2003, the 520JV had total assets of $19.8
million, a mortgage note payable of $12.0 million and other liabilities of
$185,000. The Company's allocable share of the 520JV mortgage note payable is
approximately $7.9 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005. The operating agreement of the 520JV
requires joint decisions from all members on all significant operating and
capital decisions including sale of the property, refinancing of the property's
mortgage debt, development and approval of leasing strategy and leasing of
rentable space. As a result of the decision-making participation relative to the
operations of the property, the Company accounts for the 520JV under the equity
method of accounting.
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. Currently the Company owns, through Metropolitan, five Class A office
properties aggregating approximately 3.5 million square feet.
During September 2000, the Company formed a joint venture (the "Tri-State
JV") with Teachers Insurance and Annuity Association ("TIAA") and contributed
nine Class A suburban office properties aggregating approximately 1.5 million
square feet to the Tri-State JV for a 51% majority ownership interest. TIAA
contributed approximately $136 million for a 49% interest in the Tri-State JV,
which was then distributed to the Company. In August 2003, the Company acquired
TIAA's 49% interest in the property located at 275 Broadhollow Road, Melville,
NY for approximately $12.4 million. As a result, the Tri-State JV owns eight
Class A suburban office properties aggregating approximately 1.4 million square
feet. The Company is responsible for managing the day-to-day operations and
business affairs of the Tri-State JV and has substantial rights in making
decisions affecting the properties such as leasing, marketing and financing. The
minority member has certain rights primarily intended to protect its investment.
For purposes of its financial statements the Company consolidates the Tri-State
JV.
On December 21, 2001, the Company formed a joint venture with the New York
State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby NYSTRS
acquired a 49% indirect interest in the property located at 919 Third Avenue,
New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Company. The Company is responsible for
managing the day-to-day operations and business affairs of the 919JV and has
substantial rights in making decisions affecting the property such as developing
a budget, leasing and marketing. The minority member has certain rights
primarily intended to protect its investment. For purposes of its financial
statements the Company consolidates the 919JV.
As of December 31, 2001, the Company has invested approximately $59.8
million in REIT-qualified joint ventures with Reckson Strategic Venture
Partners, LLC ("RSVP"), a real estate venture capital fund created in 1997 as a
research and development vehicle for the Company to invest in alternative real
estate sectors outside the Company's core office and industrial focus (see
"Recent Developments-Other Investing Activities" for further discussion).
All of the Company's interests in its properties, land held for
development, the Note Receivable Investments and joint ventures are held
directly or indirectly by, and all of its operations are conducted through, the
Operating Partnership. Reckson Associates Realty Corp. controls the Operating
Partnership as the sole general partner and, as of December 31, 2003, owned
approximately 94.2% of the Operating Partnership's outstanding common units of
limited partnership interest ("OP Units").
6
The Company seeks to maintain cash reserves for normal repairs,
replacements, improvements, working capital and other contingencies. The Company
has established an unsecured credit facility (the "Credit Facility") with a
maximum borrowing amount of $500 million scheduled to mature on December 30,
2005. The Credit Facility requires the Company to comply with a number of
financial and other covenants on an ongoing basis.
The Company maintains access to unsecured debt markets through its
investment grade ratings on its senior unsecured debt. The Company's ratings as
of December 31, 2003 from the major rating organizations are as follows:
Rating Organization Rating Outlook
-------------------------------------------------------------
Standard & Poor's BBB- Stable
Fitch BBB- Stable
Moody's Ba1 Stable
These security ratings are not a recommendation to buy, sell or hold the
Company's securities and they are subject to revision or withdrawal at any time
by the rating organization. Ratings assigned by every rating organization have
their own meaning within the organization's overall classification system. Each
rating should be evaluated independently of any other rating.
There are numerous commercial properties that compete with the Company in
attracting tenants and numerous companies that compete in selecting land for
development and properties for acquisition.
The Company's principal executive offices are located at 225 Broadhollow
Road, Melville, New York 11747 and its telephone number at that location is
(631) 694-6900. At December 31, 2003, the Company had approximately 270
employees.
The Operating Partnership makes certain filings with the Securities and
Exchange Commission, including its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and all amendments to those reports,
available free of charge through its website, www.reckson.com, as soon as
reasonably practicable after they are filed with the Securities and Exchange
Commission. The Company's SEC filings, annual report to shareholders, press
releases and recent presentations are also available free of charge on the
website.
7
RECENT DEVELOPMENTS
Acquisitions, Dispositions and Investing Activities
In November 2003, the Company disposed of all but three of its 95
property, 5.9 million square foot, Long Island industrial building portfolio to
members of the Rechler family (the "Disposition") for approximately $315.5
million, comprised of $225.1 million in cash and debt assumption and 3,932,111
OP Units valued at approximately $90.4 million. Approximately $204 million of
cash sales proceeds from the Disposition were used to repay borrowings under the
Credit Facility. Two of the remaining three properties, which are subject to
transfer pursuant to Section 1031 of the Internal Revenue Code of 1986, as
amended (the "Code"), are anticipated to close during 2004. There can be no
assurances that the Company will meet the requirements of Section 1031 by
identifying and acquiring qualified replacement properties in the required time
frame, in which case the Company would incur the tax liability on the capital
gain realized of approximately $1.5 million. The disposition of the other
property, which is subject to certain environmental issues, is conditioned upon
the approval of the buyer's lender, which has not been obtained. As a result,
the Company may not dispose of this property as a part of the Disposition.
Management believes that if the Company were to continue to hold this property
the cost to address the environmental issues would not have a material adverse
effect on the Company, but there can be no assurance in this regard. These three
remaining properties aggregate approximately $7.1 million of the $315.5 million
sales price. In addition, four of the five remaining options granted to the
Company at the time of the Company's IPO to purchase interests in properties
owned by Rechler family members (including three properties in which the Rechler
family members hold non-controlling interests and one industrial property) were
terminated along with management contracts relating to three of such properties.
In connection with the closing, the employment of Donald Rechler, Roger
Rechler, Gregg Rechler and Mitchell Rechler as officers of the Company
terminated and Roger Rechler, Gregg Rechler and Mitchell Rechler resigned as
members of the Board of Directors. In connection with the Disposition and the
terminations of employment, the Company incurred the following restructuring
charges: (i) approximately $7.5 million related to outstanding stock loans under
the Company's historical long term incentive program ("LTIP") were transferred
to the entity that acquired the Long Island industrial building portfolio and
approximately $642,000 of loans related to life insurance contracts were
extinguished, (ii) approximately $2.9 was million paid to the departing Rechler
family members in exchange for 127,689 of rights to receive shares of Class A
common stock that were granted in 2002 and their rights that were granted in
2003 were forfeited in their entirety and (iii) with respect to two of the
departing Rechler family members participating in the Company's March 2003 LTIP,
each received 8,681 shares of the Company's Class A common stock related to the
service component of their core award which was valued at $293,000 in the
aggregate. In addition, if the Company was to attain its annual performance
measure under the March 2003 LTIP in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they remained in continuous employment
with the Company. The remainder of their core awards was forfeited, as was the
entire amount of the special outperformance component of the March 2003 LTIP.
The Company also incurred additional restructure charges of approximately $1.2
million related primarily to the release and severance of approximately 25
employees. Total restructure charges of approximately $12.5 million were
mitigated by a $972,000 fee from departing Rechler family members, related to
the termination of the Company's option to acquire certain property which was
either owned by certain Rechler family members or in which the Rechler family
members own a non-controlling minority interest.
8
A number of shareholder derivative actions have been commenced purportedly
on behalf of the Company against the Board of Directors relating to the
Disposition. The complaints allege, among other things, that the process by
which the directors agreed to the transaction was not sufficiently independent
of the Rechler family and did not involve a "market check" or third party
auction process and, as a result, was not for adequate consideration. The
plaintiffs seek similar relief, including a declaration that the directors
violated their fiduciary duties and damages. The Company's management believes
that the complaints are without merit.
In January 2004, the Company sold a 104,000 square foot office property
located on Long Island for approximately $18.5 million. Net proceeds from the
sale were used to repay borrowings under the Credit Facility.
In January 2004, the Company acquired 1185 Avenue of the Americas, a
42-story, 1.1 million square foot Class A office tower, located between 46th and
47th Streets in New York City for $321 million. In connection with this
acquisition, the Company assumed a $202 million mortgage and $48 million of
mezzanine debt. The balance of the purchase price was paid through an advance
under the Credit Facility. The floating rate mortgage and mezzanine debt both
mature in August 2004 and presently have a weighted average interest rate of
4.95%. The property is also encumbered by a ground lease, which has a remaining
term of approximately 40 years with rent scheduled to be re-set at the end of
2005 and then remain constant for the balance of the term.
During February 2004, a 3.9 acre land parcel located on Long Island was
condemned by the Town of Oyster Bay. As consideration for the condemnation the
Company anticipates to initially receive approximately $1.8 million. The
Company's cost basis in this land parcel at December 31, 2003 was approximately
$1.4 million. The Company is currently contesting this valuation and seeking
payment of additional consideration from the Town of Oyster Bay but there can be
no assurances that the Company will be successful in obtaining any such
additional consideration.
In February 2004, the Company signed a contract to sell a 175,000 square
foot office building located on Long Island for approximately $30 million of
which the Company owns a 51% interest. Net proceeds from the sale are
anticipated to be used to repay outstanding borrowings under the Credit
Facility.
9
Other Investing Activities
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 invested primarily in real estate and real estate operating
companies outside the Company's core office 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 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 December 31, 2003 approximately $109.1 million was funded under 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 December 31, 2003,
interest accrued (net of reserves) under the FrontLine Facility and the RSVP
Facility was approximately $19.6 million.
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 Company has discontinued the accrual of interest income with respect to the
FrontLine Loans. The Company has also reserved against its share of GAAP equity
in earnings from the RSVP controlled joint ventures funded through the RSVP
Commitment until such income is realized through cash distributions.
10
At December 31, 2001, the Company, pursuant to Section 166 of the Code,
charged off for tax purposes $70 million of the aforementioned reserve directly
related to the FrontLine Facility, including accrued interest. On February 14,
2002, the Company charged off for tax purposes an additional $38 million of the
reserve directly related to the FrontLine Facility, including accrued interest,
and $47 million of the reserve directly related to the RSVP Facility, including
accrued interest.
FrontLine is in default under the FrontLine Loans from the Operating
Partnership and on June 12, 2002, filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code.
In September 2003, RSVP completed the restructuring of its capital
structure and management arrangements. In connection with the restructuring,
RSVP redeemed the interest of the preferred equity holders of RSVP for an
aggregate of approximately $137 million in cash including proceeds from the
disposition of all of the privatization and medical offices assets and the
transfer to the preferred equity holders of the assets that comprised RSVP's
parking investment valued at approximately $28.5 million. RSVP also restructured
its management arrangements whereby a management company formed by its former
managing directors has been retained to manage RSVP pursuant to a management
agreement and the employment contracts of the managing directors with RSVP have
been terminated. The management agreement provides for an annual base management
fee and disposition fees equal to 2% of the net proceeds received by RSVP on
asset sales. (The base management fee and disposition fees are subject to a
maximum over the term of the agreement of $7.5 million.) In addition, the
managing directors retained a one-third residual interest in RSVP's assets,
which is subordinated to the distribution of an aggregate amount of $75 million
to RSVP and/or the Company in respect of its joint ventures with RSVP. The
management agreement has a three-year term, subject to early termination in the
event of the disposition of all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of asset sales by RSVP.
As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments is approximately $65 million, which was reassessed with no
change by management as of December 31, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
Scott H. Rechler, who serves as President, Chief Executive Officer and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP.
11
The following table sets forth the Company's original invested capital (at
cost and 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 Amounts advanced
joint ventures 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
=================== =================== ====================
In September 2003, RSVP completed the restructuring of its capital
structure. In connection with the restructuring, RSVP redeemed the interest of
the preferred equity holders of RSVP for an aggregate of $137 million in cash
(including proceeds from the disposition of all of the Privatization and Medical
Offices assets) and the transfer to the preferred equity holders of the assets
that comprised RSVP's parking investments valued at approximately $28.5 million.
12
Leasing Activity
During the year ended December 31, 2003, the Company executed 222 leases
encompassing approximately 2.3 million square feet. The following table
summarizes the leasing activity by location and property type:
Average effective
Number of leases Leased square feet rent (1)
---------------- ------------------ --------
CBD office properties
- ---------------------
Connecticut 17 69,704 $28.20
New York City 22 305,455 $43.77
Westchester 4 12,683 $23.56
--------------- --------------
Subtotal / Weighted average 43 387,842 $40.31
--------------- --------------
Suburban office properties
- --------------------------
Long Island 65 573,591 $25.22
New Jersey 30 457,315 $21.66
Westchester 46 276,867 $20.46
--------------- --------------
Subtotal / Weighted average 141 1,307,773 $22.97
--------------- --------------
Industrial properties
- ---------------------
Long Island 36 553,230 $ 7.28
New Jersey 2 15,675 $10.57
--------------- --------------
Subtotal / Weighted average 38 568,905 $ 7.37
--------------- --------------
Total 222 2,264,520 $22.02
=============== ==============
(1) Base rent adjusted on a straight-line basis for free rent periods, tenant
improvements and leasing commissions
Financing Activities
The Company currently has a three year $500 million unsecured revolving
credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association as syndication
agent and Citicorp North America, Inc. and Wachovia Bank, National Association
as co-documentation agents. The Credit Facility matures in December 2005,
contains options for a one-year extension subject to a fee of 25 basis points
and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. In addition, borrowings under the
Credit Facility are currently priced off LIBOR plus 90 basis points and the
Credit Facility carries a facility fee of 20 basis points per annum. In the
event of a change in the Operating Partnership's senior unsecured credit rating
the interest rates and facility fee are subject to change. At December 31, 2003,
the outstanding borrowings under the Credit Facility aggregated $169 million and
carried a weighted average interest rate of 2.86% per annum.
13
The following table sets forth the Company's Applicable Margin, pursuant
to the Credit Facility, which indicates the additional respective percentages
per annum applied to LIBOR based-borrowings determined based on the Operating
Partnership's senior unsecured credit rating:
Applicable
Senior unsecured credit rating Margin
---------------------------------------- -------------
A- / A3 .600%
BBB+ / Baa1 .625%
BBB / Baa2 .700%
BBB- / Baa3 .900%
Below BBB- / Baa3 or unrated 1.20%
The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At December 31, 2003, the Company had availability under the Credit
Facility to borrow approximately an additional $331 million subject to
compliance with certain financial covenants.
On January 22, 2004, the Operating Partnership issued $150 million of
seven-year 5.15% (5.196% effective rate) senior unsecured notes. Prior to the
issuance of these notes the Company entered into several anticipatory interest
rate hedge instruments to protect itself against potentially rising interest
rates. At the time the notes were issued the Company incurred a net cost of
approximately $980,000 to settle these instruments. Such costs will be amortized
over the term of the notes. Net proceeds of approximately $148 million received
from this issuance were used to repay outstanding borrowings under the Credit
Facility.
Stock, Unit Issuances and Other Equity Offerings
On August 7, 2003, the Operating Partnership issued 465,845 Class C OP
Units valued at $24.00 per unit in connection with its acquisition of a Class A
office property located in Stamford, Connecticut.
On October 24, 2003, the Company gave notice to its Class B common
stockholders that it would exercise its option to exchange 100% of its Class B
common stock outstanding (9,915,313 shares) on November 25, 2003 for an equal
number of shares of its Class A common stock. In connection with the Company's
exchange of its Class B common stock, the Operating Partnership exchanged its
Class B common units held by the Company for an equal number of Class A common
units. Such exchange occurred on November 25, 2003.
On November 10, 2003, as partial consideration for the Company's sale of
its Long Island industrial building portfolio to the departing Rechler family
members the Company redeemed and retired approximately 3.9 million OP Units
valued at approximately $90.4 million, or $23.00 per share. In addition, during
the year ended December 31, 2003, certain limited partners exchanged
approximately 258,000 OP Units for an equal number of shares of the Company's
Class A common stock.
14
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. Transactions
conducted on the New York Stock Exchange will be effected in accordance with the
safe harbor provisions of the Securities Exchange Act of 1934 and may be
terminated by the Company at any time. During the year ended December 31, 2003,
under this buy-back program, the Company purchased 252,000 shares of Class A
common stock for an aggregate purchase price of approximately $4.5 million or
$18.01 per share.
During 2003, employees of the Company exercised 58,809 of their stock
options resulting in proceeds to the Company of approximately $1.0 million.
In January 2004, the Company exercised its option to redeem two million
shares, or 100% of its outstanding 8.85% Series B Convertible Cumulative
Preferred Stock for approximately 1,958,000 shares of its Class A common stock.
The Operating Partnership issues additional units to the Company, and
thereby increases the Company's general partnership interest in the Operating
Partnership, with terms similar to the terms of any securities (i.e.: common
stock or preferred stock) issued by the Company (including any securities issued
by the Company upon the exercise of stock options). Any consideration received
by the Company in respect of the issuance of its securities is contributed to
the Operating Partnership.
On March 15, 2004, the Company issued 5.5 million shares of its Class A
common stock at $27.18 per share, net of underwriting discount, for proceeds
aggregating approximately $149.5 million. In addition, the underwriter was
granted a 30-day over-allotment option to purchase up to an additional 825,000
shares. Net proceeds were used to repay $100 million of the Operating
Partnership's 7.4% senior unsecured notes at their maturity on March 15, 2004,
repay borrowings under the Credit Facility and for general corporate purposes.
Other
In March of 2004, the Company received notification from the Internal
Revenue Service indicating that they have selected the 2001 tax return of the
Operating Partnership for examination. The examination process has not yet
commenced.
15
BUSINESS STRATEGIES AND GROWTH OPPORTUNITIES
The Company's primary business objectives are to maximize current return
to its stockholders and the Operating Partnership's partners through increases
in distributable cash flow per share / OP Unit and to increase stakeholders'
long-term total return through the appreciation in value of its common stock and
OP Units. The Company's core business strategy is based on a long-term outlook
considering real estate as a cyclical business. The Company seeks to accomplish
long-term stability and success by developing and maintaining an infrastructure
and franchise that is modeled for success over the long-term. This approach
allows the Company to recognize different points in the market cycle and adjust
our strategy accordingly. Although the Company has recently experienced
increased leasing activity, the Company remains cautious about the market
environment. With this cautious bias we choose to maintain our conservative
strategy of focusing on retaining high occupancies, controlling operating
expenses, maintaining a high level of investment discipline and preserving
financial flexibility. The Company plans to achieve these objectives by
continuing Reckson's business strategies and capitalizing on the internal and
external growth opportunities as described below.
Business Strategies. Management believes that throughout its 40-year
operating history, Reckson has created value in its properties through a variety
of market cycles by implementing the operating strategies described below. These
operating strategies include: (i) a multidisciplinary leasing approach that
involves architectural design and construction personnel as well as leasing
professionals, (ii) innovative marketing programs that strategically position
the Company's properties and distinguish its portfolio from the competition,
increase brand equity and gain market-share. These cost-effective, high-yield
programs include electronic web-casting, targeted outdoor and print media
campaigns and sales promotion that enhances broker relationships and influences
tenant retention, (iii) a comprehensive tenant service program and property
amenities designed to maximize tenant satisfaction and retention, (iv) cost
control management and systems that take advantage of economies of scale that
arise from the Company's market position and efficiencies attributable to the
state-of-the-art energy control systems at many of the office properties, (v) a
fully integrated infrastructure of proprietary and property management
accounting systems which encompasses technologically advanced systems and tools
that provide meaningful information, on a real time basis, throughout the entire
organization and (vi) an acquisition, disposition and development strategy that
is continuously adjusted in light of anticipated changes in market conditions
and that seeks to capitalize on management's multidisciplinary expertise and
market knowledge to modify, upgrade and reposition a property in its marketplace
in order to maximize value.
The Company also currently intends to adhere to a policy of maintaining a
stabilized debt ratio over time (defined as the total debt of the Company as a
percentage of the sum of the Company's total debt and the market value of its
equity) of not more than 50%. This debt ratio is intended to provide the Company
with financial flexibility to select the optimal source of capital (whether debt
or equity) with which to finance external growth. There can be no assurances
that the Company will not adjust this policy in the future. As of December 31,
2003, the Company's debt ratio was approximately 41.2%. This calculation is net
of minority partners' proportionate share of joint venture debt and includes the
Company's share of unconsolidated joint venture debt.
16
Growth Opportunities. The Company intends to achieve its primary business
objectives by applying its corporate strategies to the internal and external
growth opportunities described below.
Internal Growth. To the extent New York City, the Long Island,
Westchester, New Jersey and Southern Connecticut office markets stabilize and
begin to recover with limited new supply, management believes the Company is
well positioned to benefit from rental revenue growth through: (i) contractual
annual compounding of 3-4% Base Rent increases (defined as fixed gross rental
amounts that exclude payments on account of real estate taxes, operating expense
escalations and base electrical charges) on approximately 90% of existing leases
from its Long Island properties, (ii) periodic contractual increases in Base
Rent on existing leases from its Westchester properties, the New Jersey
properties, the New York City properties and the Southern Connecticut properties
and (iii) the potential for increases to Base Rents as leases expire and space
is re-leased at the higher rents that exist in the current market environment.
Through its ownership of properties in the key CBD and suburban office
markets in the Tri-State Area, the Company believes it has a unique competitive
advantage as the trend toward the regional decentralization of the workplace
increases. Due to the events of September 11, 2001 as well as technological
advances, which further enable decentralization, companies are strategically
re-evaluating the benefits and feasibility of regional decentralization and
reassessing their long-term space needs. The Company believes this
multi-location regional decentralization will continue to take place, increasing
as companies begin to have better visibility as to the future of the economy,
further validating our regional strategy of maintaining a significant market
share in the key CBD and suburban office markets in the Tri-State Area.
External Growth. The Company seeks to acquire multi-tenant Class A office
buildings in New York City and the surrounding Tri-State Area CBD and core
suburban markets located in the Tri-State Area. Management believes that the
Tri-State Area presents future opportunities to acquire or invest in properties
at attractive yields. The Company believes that its (i) capital structure, in
particular its Credit Facility providing for a maximum borrowing amount of up to
$500 million and access to unsecured debt markets, (ii) ability to acquire a
property for OP Units and thereby defer the seller's income tax on gain, (iii)
operating economies of scale, (iv) relationships with financial institutions and
private real estate owners, (v) fully integrated operations in its five existing
divisions and (vi) its substantial position and franchise in the submarkets in
which it owns properties will enhance the Company's ability to identify and
capitalize on acquisition opportunities. The Company also intends to selectively
develop new Class A CBD and suburban office properties and to continue to
redevelop existing properties as these opportunities arise. The Company will
concentrate its development activities on Class A CBD and suburban office
properties within the Tri-State Area. The Company's expansion into the New York
City office market has provided it with future opportunities to acquire
interests in properties at attractive yields. The Company also believes that its
New York City division provides additional leasing and operational capabilities
and enhances its overall franchise value by being the only real estate operating
company in the Tri-State Area with significant presence in both Manhattan and
key Tri-State Area sub-markets.
In addition, when valuations for commercial real estate properties are
high, the Company will seek to sell certain properties or interests therein to
realize value and profit created. The Company will then seek opportunities to
reinvest the capital realized from these dispositions back into value-added
assets in the Company's core Tri-State Area markets, as well as pursue its stock
repurchase program when deemed appropriate.
17
ENVIRONMENTAL MATTERS
Under various Federal, state and local laws, ordinances and regulations,
an owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. These laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost of
any required remediation and the owner's liability therefore as to any property
is generally not limited under such enactments and could exceed the value of the
property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate such substances, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at a disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition, or in the event of
renovation or demolition. Such laws impose liability for release of ACMs into
the air and third parties may seek recovery from owners or operators of real
properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, potentially liable for removal or remediation
costs, as well as certain other related costs, including governmental fines and
injuries to persons and property.
All of the Company's office and industrial / R&D properties have been
subjected to a Phase I or similar environmental audit after April 1, 1994 (which
involved general inspections without soil sampling, ground water analysis or
radon testing and, for the Company's properties constructed in 1978 or earlier,
survey inspections to ascertain the existence of ACMs were conducted) completed
by independent environmental consultant companies (except for 35 Pinelawn Road
which was originally developed by Reckson and subjected to a Phase 1 in April
1992). These environmental audits have not revealed any environmental liability
that would have a material adverse effect on the Company's business.
Soil, sediment and groundwater contamination, consisting of volatile
organic compounds ("VOCs") and metals, has been identified at the property at 32
Windsor Place, Central Islip, New York. The contamination is associated with
industrial activities conducted by a tenant at the property over a number of
years. The contamination, which was identified through an environmental
investigation conducted on behalf of the Company, has been reported to the New
York State Department of Environmental Conservation. The Company has notified
the tenant of the findings and has demanded that the tenant take appropriate
actions to fully investigate and remediate the contamination. Under applicable
environmental laws, both the tenant and the Company are liable for the cost of
investigation and remediation. The Company does not believe that the cost of
investigation and remediation will be material and the Company has recourse
against the tenant. However, there can be no assurance that the Company will not
incur liability that would have a material adverse effect on the Company's
business.
18
ITEM 2. PROPERTIES
GENERAL
As of December 31, 2003 the Company owned 89 properties (including 10
joint venture properties) in the Tri-State Area CBD and suburban markets,
encompassing approximately 14.7 million rentable square feet, all of which are
managed by the Company. The properties include 16 Class A CBD office properties
encompassing approximately 5.3 million rentable square feet. The CBD office
properties consist of five properties located in New York City, nine properties
located in Stamford, CT and two properties located in White Plains, NY. The CBD
office properties comprised 42% of the Company's net operating income (property
operating revenues less property operating expenses) for the three months ended
December 31, 2003. The properties also include 61 Class A suburban office
properties encompassing approximately 8.4 million rentable square feet, of which
42 of these properties, or 75% as measured by square footage, are located within
the Company's ten office parks. Reckson has historically emphasized the
development and acquisition of properties that are part of large-scale suburban
office parks. The Company believes that owning properties in planned office and
industrial parks provides certain strategic advantages, including the following:
(i) certain tenants prefer being located in a park with other high quality
companies to enhance their corporate image, (ii) parks afford tenants certain
aesthetic amenities such as a common landscaping plan, standardization of
signage and common dining and recreational facilities, (iii) tenants may expand
(or contract) their business within a park, enabling them to centralize business
functions and (iv) a park provides tenants with access to other tenants and may
facilitate business relationships between tenants. The properties also include
11 industrial / R&D properties encompassing approximately 1.0 million rentable
square feet and one retail property comprising approximately 9,000 rentable
square feet. The Company also owns a 355,000 square foot office property located
in Orlando, Florida.
Set forth below is a summary of certain information relating to the
Company's properties, categorized by office and industrial / R&D properties, as
of December 31, 2003.
OFFICE PROPERTIES
General
As of December 31, 2003, the Company owned or had an interest in 16
Class A CBD office properties encompassing approximately 5.3 million square feet
and 61 Class A suburban office properties encompassing approximately 8.4 million
square feet. As of December 31, 2003, the office properties were approximately
91.5% leased (percent leased excludes properties under development) to
approximately 900 tenants.
The office properties are Class A office buildings and are
well-located, well-maintained and professionally managed. In addition, these
properties are modern with high finishes and achieve among the highest rent,
occupancy and tenant retention rates within their sub-markets. The 16 Class A
CBD office properties consist of five properties located in New York City, nine
properties located in Stamford, CT and two properties located in White Plains,
NY. Forty-two of the 61 suburban office properties are located within the
Company's ten office parks. The buildings in these office parks offer a full
array of amenities including health clubs, racquetball courts, sun decks,
restaurants, computer controlled HVAC access systems and conference centers.
Management believes that the location, quality of construction and amenities as
well as the Company's reputation for providing a high level of tenant service
have enabled the Company to attract and retain a national tenant base. The
office tenants include national companies representing all major industry groups
including consumer products, financial services, pharmaceuticals, health care,
telecommunication and technology and insurance and service companies, such as
"Big Four" accounting firms and major law firms.
19
The office properties are leased to both national and local tenants.
Leases on the office properties are typically written for terms ranging from
five to ten years and require: (i) payment of a fixed gross rental amount that
excludes payments on account of real estate tax, operating expense escalations
and base electrical charges ("Base Rent"), (ii) payment of a base electrical
charge, (iii) payment of real estate tax escalations over a base year, (iv)
payment of compounded annual increases to Base Rent and/or payment of operating
expense escalations over a base year, (v) payment of overtime HVAC and electric,
and (vi) payment of electric escalations over a base year. In virtually all
leases, the landlord is responsible for structural repairs. Renewal provisions
typically provide for renewal rates at market rates or a percentage thereof,
provided that such rates are not less than the most recent renewal rates.
The following table sets forth certain information as of December 31, 2003
for each of the office properties.
OWNERSHIP
INTEREST
(GROUND
LEASE LAND
PERCENTAGE EXPIRATION YEAR AREA
OWNERSHIP DATE) (1) CONSTRUCTED (ACRES)
------------ -------------- ------------- ---------
CBD Office Properties:
Landmark Square
One Landmark Sq., Stamford, CT ......... 100% Fee 1973 N/A
Two Landmark Sq., Stamford, CT ......... 100% Fee 1976 N/A
Three Landmark Sq., Stamford, CT ....... 100% Fee 1978 N/A
Four Landmark Sq., Stamford, CT ........ 100% Fee 1977 N/A
Five Landmark Sq., Stamford, CT ........ 100% Fee 1976 N/A
Six Landmark Sq., Stamford, CT ......... 100% Fee 1984 N/A
----
Total- Landmark Square ................. 7.2
Other Stamford Properties
1055 Washington Blvd., Stamford, CT 100% Fee 1987 1.5
680 Washington Blvd., Stamford, CT ..... 51% Fee 1989 1.3
750 Washington Blvd., Stamford, CT ..... 51% Fee 1989 2.4
----
Total-Stamford Towers .................. 5.2
Stand-alone Westchester
360 Hamilton Ave., White Plains, NY 100% Fee 1977 1.5
140 Grand St., White Plains, NY ........ 100% Fee 1991 2.2
----
Total-Stand-alone Westchester .......... 3.7
New York City Office Properties
120 W. 45th St., New York, NY .......... 100% Fee 1989 0.4
100 Wall St., New York, NY ............. 100% Fee 1969 0.5
810 Seventh Ave., New York, NY ......... 100% Fee(5) 1970 0.6
919 Third Ave., New York, NY ........... 100% Fee(6) 1971 1.5
1350 Ave. of the Americas, New
York, NY .............................. 100% Fee 1966 0.6
----
Total-New York City Office
Properties ............................ 3.6
Total CBD Office Properties ............ 19.7
Suburban Office Properties:
Huntington Melville Corporate
Center
395 North Service Rd, Melville, NY ..... 100% Lease (2081) 1988 7.5
200 Broadhollow Rd,, Melville, NY ...... 100% Fee 1981 4.6
48 South Service Rd, Melville, NY ...... 100% Fee 1986 7.3
35 Pinelawn Rd, Melville, NY ........... 100% Fee 1980 6.0
275 Broadhollow Rd, Melville, NY ....... 100% Fee 1970 5.8
58 South Service Rd, Melville, NY ...... 100% Fee 2000 16.5
1305 Old Walt Whitman Rd, Melville,
NY .................................... 51% Fee 1998(3) 18.1
----
Total- Huntington Meville Corporate
Center ................................ 65.8
North Shore Atrium
6800 Jericho Turnpike, Syosset, NY ..... 100% Fee 1977 13.0
6900 Jericho Turnpike, Syosset, NY ..... 100% Fee 1982 5.0
----
Total-North Shore Atrium ............... 18.0
Nassau West Corporate Center
50 Charles Lindbergh Blvd., Mitchel
Field, NY ............................. 100% Lease (2082) 1984 9.1
60 Charles Lindbergh Blvd., Mitchel
Field, NY ............................. 100% Lease (2082) 1989 7.8
51 Charles Lindbergh Blvd. , Mitchel
Field, NY ............................. 100% Lease (2084) 1989 6.6
55 Charles Lindbergh Blvd. , Mitchel
Field, NY ............................. 100% Lease (2082) 1982 10.0
333 Earl Ovington Blvd., Mitchel
Field, NY ............................. 60% Lease (2088) 1991 30.6
90 Merrick Ave., Mitchel Field, NY ..... 51% Lease (2084) 1985 13.2
----
Total-Nassau West Corporate Center 77.3
20
ANNUAL
BASE
RENT NUMBER
NUMBER RENTABLE ANNUAL PER OF
OF SQUARE PERCENT BASE LEASED TENANT
FLOORS FEET LEASED RENT (2) SQ. FT. LEASES
-------- ------------ --------- --------------- ----------- -------
CBD Office Properties:
Landmark Square
One Landmark Sq., Stamford, CT ......... 22 280,661 83.7% $ 5,825,595 $ 20.76 51
Two Landmark Sq., Stamford, CT ......... 3 36,889 91.7% $ 810,020 $ 21.96 8
Three Landmark Sq., Stamford, CT ....... 6 128,887 94.3% $ 3,234,142 $ 25.09 14
Four Landmark Sq., Stamford, CT ........ 5 99,446 62.9% $ 1,111,599 $ 11.18 10
Five Landmark Sq., Stamford, CT ........ 3 58,000 100.0% $ 314,384 $ 5.42 3
Six Landmark Sq., Stamford, CT ......... 10 170,080 98.4% $ 4,215,211 $ 24.78 7
------- ----- ------------ ------- --
Total- Landmark Square ................. 773,963 87.6% $ 15,510,951 $ 20.04 93
Other Stamford Properties
1055 Washington Blvd., Stamford, CT 10 178,855 76.6% $ 3,679,745 $ 20.57 16
680 Washington Blvd., Stamford, CT ..... 11 132,759 100.0% $ 4,085,458 $ 30.77 6
750 Washington Blvd., Stamford, CT ..... 11 185,671 98.2% $ 4,758,575 $ 25.63 9
------- ----- ------------ ------- --
Total-Stamford Towers .................. 497,285 90.9% $ 12,523,778 $ 25.18 31
Stand-alone Westchester
360 Hamilton Ave., White Plains, NY 12 381,257 87.9% $ 8,613,036 $ 22.59 13
140 Grand St., White Plains, NY ........ 9 124,229 88.7% $ 2,652,606 $ 21.35 8
------- ----- ------------ ------- --
Total-Stand-alone Westchester .......... 505,486 88.1% $ 11,265,642 $ 22.29 21
New York City Office Properties
120 W. 45th St., New York, NY .......... 40 441,140 97.8% $ 18,206,283 $ 41.27 31
100 Wall St., New York, NY ............. 29 461,134 82.5% $ 13,231,149 $ 28.69 23
810 Seventh Ave., New York, NY ......... 42 690,977 88.1% $ 23,391,614 $ 33.85 27
919 Third Ave., New York, NY ........... 47 1,363,158 99.6% $ 58,287,632 $ 42.76 15
1350 Ave. of the Americas, New
York, NY .............................. 35 543,842 95.3% $ 17,340,309 $ 31.88 67
--------- ----- ------------ ------- --
Total-New York City Office
Properties ............................ 3,500,251 94.2% $130,456,987 $ 37.27 163
Total CBD Office Properties ............ 5,276,985 92.3% $169,757,358 $ 32.17 308
Suburban Office Properties:
Huntington Melville Corporate
Center
395 North Service Rd, Melville, NY ..... 4 187,374 100.0% $ 5,274,218 $ 28.15 5
200 Broadhollow Rd,, Melville, NY ...... 4 68,053 95.8% $ 1,526,750 $ 22.43 12
48 South Service Rd, Melville, NY ...... 4 127,274 99.5% $ 2,660,558 $ 20.90 10
35 Pinelawn Rd, Melville, NY ........... 2 108,136 100.0% $ 2,162,477 $ 20.00 34
275 Broadhollow Rd, Melville, NY ....... 4 126,770 100.0% $ 3,088,583 $ 24.36 1
58 South Service Rd, Melville, NY ...... 4 279,886 88.8% $ 7,435,773 $ 26.57 9
1305 Old Walt Whitman Rd, Melville,
NY .................................... 3 164,166 100.0% $ 4,364,216 $ 26.58 5
--------- ----- ------------ ------- ---
Total- Huntington Meville Corporate
Center ................................ 1,061,659 96.7% $ 26,512,575 $ 24.97 76
North Shore Atrium
6800 Jericho Turnpike, Syosset, NY ..... 2 204,331 94.2% $ 3,847,063 $ 18.83 42
6900 Jericho Turnpike, Syosset, NY ..... 4 94,945 100.0% $ 2,042,699 $ 21.51 14
--------- ----- ------------ ------- ---
Total-North Shore Atrium ............... 299,276 96.1% $ 5,889,762 $ 19.68 56
Nassau West Corporate Center
50 Charles Lindbergh Blvd., Mitchel
Field, NY ............................. 6 215,000 88.3% $ 4,431,914 $ 20.61 19
60 Charles Lindbergh Blvd., Mitchel
Field, NY ............................. 2 195,570 29.6% $ 1,401,701 $ 7.17 3
51 Charles Lindbergh Blvd. , Mitchel
Field, NY ............................. 1 108,000 100.0% $ 2,634,349 $ 24.39 1
55 Charles Lindbergh Blvd. , Mitchel
Field, NY ............................. 2 214,581 100.0% $ 2,837,056 $ 13.22 2
333 Earl Ovington Blvd., Mitchel
Field, NY ............................. 10 583,337 93.2% $ 15,141,208 $ 25.96 24
90 Merrick Ave., Mitchel Field, NY ..... 9 234,996 94.1% $ 6,009,539 $ 25.57 21
--------- ----- ------------ ------- ---
Total-Nassau West Corporate Center 1,551,484 86.0% $ 32,455,767 $ 20.92 70
21
OWNERSHIP
INTEREST
(GROUND
LEASE LAND
PERCENTAGE EXPIRATION YEAR AREA
OWNERSHIP DATE) (1) CONSTRUCTED (ACRES)
------------ -------------- ------------- ---------
Tarrytown Corporate Center
505 White Plains Rd., Tarrytown, NY .... 100% Fee 1974 1.4
520 White Plains Rd., Tarrytown, NY .... 60% Fee(4) 1981 6.8
555 White Plains Rd., Tarrytown, NY .... 100% Fee 1972 4.2
560 White Plains Rd., Tarrytown, NY .... 100% Fee 1980 4.0
580 White Plains Rd., Tarrytown, NY .... 100% Fee 1977 6.1
660 White Plains Rd., Tarrytown, NY .... 100% Fee 1983 10.9
----
Total-Tarrytown Corporate Center ....... 33.4
Reckson Executive Park
1 International Dr., Ryebrook, NY ...... 100% Fee 1983 N/A
2 International Dr., Ryebrook, NY ...... 100% Fee 1983 N/A
3 International Dr., Ryebrook, NY ...... 100% Fee 1983 N/A
4 International Dr., Ryebrook, NY ...... 100% Fee 1986 N/A
5 International Dr., Ryebrook, NY ...... 100% Fee 1986 N/A
6 International Dr., Ryebrook, NY ...... 100% Fee 1986 N/A
----
Total-Reckson Executive Park ........... 44.4
Summit at Valhalla
100 Summit Dr., Valhalla, NY ........... 100% Fee 1988 11.3
200 Summit Dr., Valhalla, NY ........... 100% Fee 1990 18.0
500 Summit Dr., Valhalla, NY ........... 100% Fee 1986 29.1
----
Total-Summit at Valhalla ............... 58.4
Mt. Pleasant Corporate Center
115/117 Stevens Ave., Mt. Pleasant,
NY .................................... 100% Fee 1984 5.0
----
Total-Mt Pleasant Corporate Center ..... 5.0
Stand-alone Long Island Properties
400 Garden City Plaza, Garden City,
NY .................................... 51% Fee 1989 5.7
88 Duryea Rd., Melville, NY ............ 100% Fee 1986 1.5
310 East Shore Rd., Great Neck, NY 100% Fee 1981 1.5
333 East Shore Rd., Great Neck, NY 100% Lease (2030) 1976 1.5
520 Broadhollow Rd., Melville, NY ...... 100% Fee 1978 7.0
1660 Walt Whitman Rd., Melville,
NY .................................... 100% Fee 1980 6.5
150 Motor Parkway, Hauppauge, NY 100% Fee 1984 11.3
120 Mineola Blvd., Mineola, NY ......... 100% Fee 1989 0.7
300 Motor Parkway, Hauppauge, NY 100% Fee 1979 4.2
48 Harbor Pk Dr., Port Washington,
NY .................................... 100% Fee 1976 2.7
50 Marcus Dr., Melville, NY ............ 100% Fee 2000 12.9
----
Total-Stand-alone Long Island .......... 55.5
Stand-alone Westchester
120 White Plains Rd., Tarrytown, NY 51% Fee 1984 9.7
80 Grasslands, Elmsford, NY ............ 100% Fee 1989 4.9
----
Total-Stand-alone Westchester .......... 14.6
Executive Hill Office Park
100 Executive Dr., Rt. 280 Corridor,
NJ .................................... 100% Fee 1978 10.1
200 Executive Dr., Rt. 208 Corridor,
NJ .................................... 100% Fee 1980 8.2
300 Executive Dr., Rt. 280 Corridor,
NJ .................................... 100% Fee 1984 8.7
10 Rooney Circle, Rt. 280 Corridor,
NJ .................................... 100% Fee 1971 5.2
----
Total-Executive Hill Office Park ....... 32.2
University Square Princeton
100 Campus Dr., Princeton/Rt. 1
Corridor, NJ .......................... 100% Fee 1987 N/A
104 Campus Dr., Princeton/Rt. 1
Corridor, NJ .......................... 100% Fee 1987 N/A
115 Campus Dr., Princeton/Rt. 1
Corridor, NJ .......................... 100% Fee 1987 N/A
----
Total-University Square ................ 11.0
Short Hills Office Complex
101 John F. Kennedy Parkway, Short
Hills, NJ ............................. 100% Fee 1981 9.0
103 John F. Kennedy Parkway, Short
Hills, NJ (3) ......................... 100% Fee 1981 6.0
51 John F. Kennedy Parkway, Short
Hills, NJ ............................. 51% Fee 1988 11.0
----
Total- Short Hills Office .............. 26.0
22
ANNUAL
BASE
RENT NUMBER
NUMBER RENTABLE ANNUAL PER OF
OF SQUARE PERCENT BASE LEASED TENANT
FLOORS FEET LEASED RENT (2) SQ. FT. LEASES
-------- ---------- --------- ------------- ----------- -------
Tarrytown Corporate Center
505 White Plains Rd., Tarrytown, NY .... 2 26,319 91.1% $ 320,423 $ 12.17 20
520 White Plains Rd., Tarrytown, NY .... 6 155,162 98.3% $ 3,274,395 $ 21.10 3
555 White Plains Rd., Tarrytown, NY .... 5 121,886 89.0% $ 2,195,871 $ 18.02 7
560 White Plains Rd., Tarrytown, NY .... 6 124,117 93.8% $ 2,501,815 $ 20.16 19
580 White Plains Rd., Tarrytown, NY .... 6 169,447 65.1% $ 2,455,550 $ 14.49 12
660 White Plains Rd., Tarrytown, NY .... 6 253,226 91.7% $ 5,416,509 $ 21.39 35
------- ----- ----------- ------- --
Total-Tarrytown Corporate Center ....... 850,157 87.5% $16,164,563 $ 19.01 96
Reckson Executive Park
1 International Dr., Ryebrook, NY ...... 3 90,000 100.0% $ 1,155,000 $ 12.83 1
2 International Dr., Ryebrook, NY ...... 3 90,000 100.0% $ 1,155,000 $ 12.83 1
3 International Dr., Ryebrook, NY ...... 3 91,193 67.1% $ 1,080,224 $ 11.85 4
4 International Dr., Ryebrook, NY ...... 3 87,833 92.9% $ 1,862,929 $ 21.21 7
5 International Dr., Ryebrook, NY ...... 3 90,000 51.1% $ 0 $ 0.00 1
6 International Dr., Ryebrook, NY ...... 3 94,753 84.0% $ 1,893,621 $ 19.98 9
------- ----- ----------- ------- --
Total-Reckson Executive Park ........... 543,779 82.5% $ 7,146,774 $ 13.14 23
Summit at Valhalla
100 Summit Dr., Valhalla, NY ........... 4 248,174 87.3% $ 5,527,232 $ 22.27 7
200 Summit Dr., Valhalla, NY ........... 4 233,391 99.4% $ 5,926,008 $ 25.39 9
500 Summit Dr., Valhalla, NY ........... 4 208,660 100.0% $ 5,529,490 $ 26.50 1
------- ----- ----------- ------- --
Total-Summit at Valhalla ............... 690,225 95.2% $16,982,730 $ 24.60 17
Mt. Pleasant Corporate Center
115/117 Stevens Ave., Mt. Pleasant,
NY .................................... 3 166,191 97.3% $ 3,383,522 $ 20.36 19
------- ----- ----------- ------- --
Total-Mt Pleasant Corporate Center ..... 166,191 97.3% $ 3,383,522 $ 20.36 19
Stand-alone Long Island Properties
400 Garden City Plaza, Garden City,
NY .................................... 5 174,408 99.1% $ 3,880,083 $ 22.25 20
88 Duryea Rd., Melville, NY ............ 2 23,878 100.0% $ 558,371 $ 23.38 4
310 East Shore Rd., Great Neck, NY 4 50,108 98.1% $ 1,216,437 $ 24.28 18
333 East Shore Rd., Great Neck, NY 2 17,650 81.4% $ 348,566 $ 19.75 8
520 Broadhollow Rd., Melville, NY ...... 1 85,784 100.0% $ 1,879,121 $ 21.91 3
1660 Walt Whitman Rd., Melville,
NY .................................... 1 76,851 79.5% $ 1,376,469 $ 17.91 6
150 Motor Parkway, Hauppauge, NY 4 185,475 96.4% $ 4,084,416 $ 22.02 23
120 Mineola Blvd., Mineola, NY ......... 6 101,572 78.4% $ 1,936,735 $ 19.07 6
300 Motor Parkway, Hauppauge, NY 1 54,154 89.0% $ 790,543 $ 14.60 6
48 Harbor Pk Dr., Port Washington,
NY .................................... 1 35,000 100.0% $ 827,502 $ 23.64 1
50 Marcus Dr., Melville, NY ............ 2 163,762 100.0% $ 3,938,677 $ 24.05 1
------- ----- ----------- ------- --
Total-Stand-alone Long Island .......... 968,642 94.2% $20,836,920 $ 21.51 96
Stand-alone Westchester
120 White Plains Rd., Tarrytown, NY 6 206,754 96.0% $ 5,200,561 $ 25.15 12
80 Grasslands, Elmsford, NY ............ 3 87,114 100.0% $ 1,900,643 $ 21.82 5
------- ----- ----------- ------- --
Total-Stand-alone Westchester .......... 293,868 97.2% $ 7,101,204 $ 24.16 17
Executive Hill Office Park
100 Executive Dr., Rt. 280 Corridor,
NJ .................................... 3 93,349 84.6% $ 1,689,771 $ 18.10 9
200 Executive Dr., Rt. 208 Corridor,
NJ .................................... 4 105,628 98.2% $ 2,271,924 $ 21.51 9
300 Executive Dr., Rt. 280 Corridor,
NJ .................................... 4 124,664 93.9% $ 2,657,216 $ 21.32 10
10 Rooney Circle, Rt. 280 Corridor,
NJ .................................... 3 70,716 78.9% $ 1,374,846 $ 19.44 2
------- ----- ----------- ------- --
Total-Executive Hill Office Park ....... 394,357 90.2% $ 7,993,757 $ 20.27 30
University Square Princeton
100 Campus Dr., Princeton/Rt. 1
Corridor, NJ .......................... 1 27,888 100.0% $ 648,433 $ 23.25 3
104 Campus Dr., Princeton/Rt. 1
Corridor, NJ .......................... 1 70,239 100.0% $ 1,663,171 $ 23.68 2
115 Campus Dr., Princeton/Rt. 1
Corridor, NJ .......................... 1 33,600 100.0% $ 834,759 $ 24.84 1
------- ----- ----------- ------- --
Total-University Square ................ 131,727 100.0% $ 3,146,363 $ 23.89 6
Short Hills Office Complex
101 John F. Kennedy Parkway, Short
Hills, NJ ............................. 6 189,524 44.0% $ 922,826 $ 4.87 2
103 John F. Kennedy Parkway, Short
Hills, NJ (3) ......................... 4 123,000 100.0% $ 4,182,000 $ 34.00 1
51 John F. Kennedy Parkway, Short
Hills, NJ ............................. 5 250,713 100.0% $ 8,993,253 $ 35.87 19
------- ----- ----------- ------- --
Total- Short Hills Office .............. 563,237 81.2% $14,098,079 $ 25.03 22
23
OWNERSHIP
INTEREST
(GROUND
LEASE LAND
PERCENTAGE EXPIRATION YEAR AREA
OWNERSHIP DATE) (1) CONSTRUCTED (ACRES)
------------ ------------ ------------- ---------
Stand-alone New Jersey Properties
99 Cherry Hill Road, Parsippany, NJ 100% Fee 1982 8.8
119 Cherry Hill Rd, Parsippany, NJ .. 100% Fee 1982 9.3
One Eagle Rock, Hanover, NJ ......... 100% Fee 1986 10.4
3 University Plaza, Hackensack, NJ .. 100% Fee 1985 10.6
1255 Broad St., Clifton, NJ ......... 100% Fee 1968 11.1
492 River Rd., Nutley, NJ ........... 100% Fee 1952 17.3
-----
Total- Stand-alone NJ Properties .... 67.5
Total Suburban Office Properties .... 509.1
Total-Office Properties ............. 528.8
ANNUAL
BASE
RENT NUMBER
NUMBER RENTABLE ANNUAL PER OF
OF SQUARE PERCENT BASE LEASED TENANT
FLOORS FEET LEASED RENT (2) SQ. FT. LEASES
-------- ------------ --------- --------------- ----------- -------
Stand-alone New Jersey Properties
99 Cherry Hill Road, Parsippany, NJ 3 93,396 85.6% $ 1,498,822 $ 16.05 12
119 Cherry Hill Rd, Parsippany, NJ .. 3 95,179 68.8% $ 1,315,148 $ 13.82 12
One Eagle Rock, Hanover, NJ ......... 3 144,587 97.3% $ 2,692,295 $ 18.62 6
3 University Plaza, Hackensack, NJ .. 6 219,590 100.0% $ 5,075,500 $ 23.11 19
1255 Broad St., Clifton, NJ ......... 2 193,574 100.0% $ 4,328,639 $ 22.36 2
492 River Rd., Nutley, NJ ........... 13 130,009 100.0% $ 2,177,651 $ 16.75 1
------- ----- ------------ ------- --
Total- Stand-alone NJ Properties .... 876,335 94.6% $ 17,088,055 $ 19.50 52
Total Suburban Office Properties .... 8,390,937 91.0% $178,800,071 $ 21.31 580
Total-Office Properties ............. 13,667,922 91.5% $348,557,429 $ 25.50 888
- ------------------
(1) Ground lease expirations assume exercise of renewal options by the lessee.
(2) Represents Base Rent, net of electric reimbursement, of signed leases at
December 31, 2003 adjusted for scheduled contractual increases during the
12 months ending December 31, 2004. Total Base Rent for these purposes
reflects the effect of any lease expirations that occur during the
12-month period ending December 31, 2004. Amounts included in rental
revenue for financial reporting purposes have been determined on a
straight-line basis rather than on the basis of contractual rent as set
forth in the foregoing table.
(3) Year renovated.
(4) The actual fee interest in is held by the County of Westchester Industrial
Development Agency. The fee interest in 520 White Plains Road may be
acquired if the outstanding principal under certain loan agreements and
annual basic installments are prepaid in full.
(5) There is a ground lease in place on a small portion of the land which
expires in 2066.
(6) There is a ground lease in place on a small portion of the land which
expires in 2066.
24
INDUSTRIAL / R&D PROPERTIES
As of December 31, 2003, the Company owned 11 industrial / R&D properties
that encompass approximately 1.0 million rentable square feet. As of December
31, 2003, the industrial / R&D properties were approximately 75.5% leased to 22
tenants. Three of these properties aggregating approximately 143,000 square feet
are currently under contract for sale. The Company anticipates the sale of these
properties to occur during 2004.
The following table sets forth certain information as of December 31, 2003
for each of the industrial / R&D Properties:
OWNERSHIP
INTEREST
(GROUND
LEASE LAND CLEARANCE
PERCENTAGE EXPIRATION YEAR AREA HEIGHT
OWNERSHIP DATE) CONSTRUCTED (ACRES) (FEET)(1)
------------ ------------ ------------- --------- -----------
LONG ISLAND INDUSTRIAL
Islip & Hauppauge Long Island
32 Windsor Pl., Islip, NY ................. 100.0% Fee 1971 2.5 18
300 Kennedy Drive, Haupauge, NY ........... 100.0% Fee 1969 4.1 12
350 Kennedy Drive, Haupauge, NY ........... 100.0% Fee 1970 4.5 26
-----
Islip Long Island Total ................... 11.1
NEW JERSEY INDUSTRIAL
Western Morris and South Plainfield .......
100 Forge Way, Rockaway, NJ ............... 100.0% Fee 1986 3.5 24
200 Forge Way, Rockaway, NJ ............... 100.0% Fee 1989 12.7 28
300 Forge Way, Rockaway, NJ ............... 100.0% Fee 1989 4.2 24
400 Forge Way, Rockaway, NJ ............... 100.0% Fee 1989 12.8 28
40 Cragwood Rd., South Plainfield, NJ. 100.0% Fee 1965 13.5 16
-----
W. Morris S. Plainfield Total ............. 46.7
WESTCHESTER INDUSTRIAL
Elmsford Westchester
100 Grasslands Rd., Elmsford, NY .......... 100.0% Fee 1964 3.6 16
500 Saw Mill Rd., Elmsford, NY ............ 100.0% Fee 1968 7.3 22
-----
Elmsford Westchester Total ................ 10.9
CONNECTICUT INDUSTRIAL
Shelton Connecticut
710 Bridgeport, Shelton, CT ............... 100.0% Fee 1971-1979 36.1 22
-----
Shelton Connecticut Total ................. 36.1
TOTAL INDUSTRIAL .......................... 104.8
ANNUAL
RESEARCH RENT NUMBER
AND RENTABLE ANNUAL PER OF
DEVELOPMENT SQUARE PERCENT BASE LEASED TENANT
FINISH FEET LEASED RENT (2) SQ. FT. LEASES
------------- ------------ ----------- ------------- --------- -------
LONG ISLAND INDUSTRIAL
Islip & Hauppauge Long Island
32 Windsor Pl., Islip, NY ................. 10% 43,000 100.0% $ 162,123 $ 3.77 1
300 Kennedy Drive, Haupauge, NY ........... 100% 50,000 100.0% $ 357,146 $ 7.14 1
350 Kennedy Drive, Haupauge, NY ........... 50% 50,489 100.0% $ 344,830 $ 6.83 1
------ ----- ---------- ------- -
Islip Long Island Total ................... 143,489 100.0% $ 864,099 $ 6.02 3
NEW JERSEY INDUSTRIAL
Western Morris and South Plainfield .......
100 Forge Way, Rockaway, NJ ............... 46% 20,150 92.3% $ 161,864 $ 8.03 4
200 Forge Way, Rockaway, NJ ............... 53% 72,118 100.0% $ 634,638 $ 8.80 2
300 Forge Way, Rockaway, NJ ............... 63% 24,200 50.4% $ 52,104 $ 2.15 1
400 Forge Way, Rockaway, NJ ............... 20% 73,000 100.0% $ 547,768 $ 7.50 3
40 Cragwood Rd., South Plainfield, NJ. 30% 130,793 70.3% $1,299,367 $ 9.93 4
------- ----- ---------- ------- -
W. Morris S. Plainfield Total ............. 320,261 83.7% $2,695,741 $ 8.42 14
WESTCHESTER INDUSTRIAL
Elmsford Westchester
100 Grasslands Rd., Elmsford, NY .......... 100% 47,690 100.0% $ 897,500 $ 18.82 3
500 Saw Mill Rd., Elmsford, NY ............ 20% 92,000 100.0% $1,002,800 $ 10.90 1
------- ----- ---------- ------- --
Elmsford Westchester Total ................ 139,690 100.0% $1,900,300 $ 13.60 4
CONNECTICUT INDUSTRIAL
Shelton Connecticut
710 Bridgeport, Shelton, CT ............... 29% 452,414 54.3% $2,032,502 $ 4.49 1
------- ----- ---------- ------- --
Shelton Connecticut Total ................. 452,414 54.3% $2,032,502 $ 4.49 1
TOTAL INDUSTRIAL .......................... 1,055,854 75.5% $7,492,642 $ 7.10 22
- ------------------
(1) Calculated as the difference from the lowest beam to floor.
(2) Represents Base Rent, net of electric reimbursement, of signed leases at
December 31, 2003 adjusted for scheduled contractual increases during the
12 months ending December 31, 2004. Total Base Rent for these purposes
reflects the effect of any lease expirations that occur during the 12
month period ending December 31, 2004. Amounts included in rental revenue
for financial reporting purposes have been determined on a straight-line
basis rather than on the basis of contractual rent as set forth in the
foregoing table.
RETAIL PROPERTY
As of December 31, 2003, the Company owned one freestanding retail
property encompassing approximately 9,000 square feet located in Great Neck, New
York. This property is 100% leased.
DEVELOPMENTS IN PROGRESS
As of December 31, 2003, the Company had invested approximately $66.4
million in developments in progress. In addition, the Company has invested
approximately $37.1 million relating to 12 remaining parcels of land on which it
can develop approximately 3.0 million square feet of office space. 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.
During February 2003, the Company, through Reckson Construction Group,
Inc., entered into a contract with an affiliate of First Data Corp. to sell a
19.3-acre parcel of land located in Melville, New York and was retained by the
purchaser to develop a build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47 million. This transaction closed on
March 11, 2003 and development of the aforementioned office building has
commenced and is near completion. Net proceeds from the land sale of
approximately $18.3 million were used to establish an escrow account with a
qualified intermediary for a future exchange of real property pursuant to
Section 1031 of the Code (a "Section 1031" exchange). A Section 1031 Exchange
allows for the deferral of taxes related to the gain attributable to the sale of
property if qualified replacement property is identified within 45 days, and
such qualified property is then acquired within 180 days from the initial sale.
The Company identified and acquired certain qualified replacement properties to
complete the 1031 exchange. Two of the qualified replacement properties were
subsequently contracted for sale as part of the Company's Long Island industrial
building portfolio sale. There can be no assurances that the Company will
identify or acquire additional qualified replacement properties in which case
the Company would incur the tax liability on the capital gain realized of
approximately $1.5 million.
25
THE OPTION PROPERTIES
In connection with the IPO, the Company was granted ten-year options to
acquire ten properties (the "Option Properties") which were either owned by
certain Rechler family members who were also executive officers of the Company,
or in which the Rechler family members own a non-controlling minority interest
at a price based upon an agreed upon formula. In years prior to 2001, one of
these properties was sold by the Rechler family members to a third party and
four of these properties were acquired by the Company for an aggregate purchase
price of approximately $35 million, which included the issuance of approximately
475,000 OP Units valued at approximately $8.8 million.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, NY (the Company's current headquarters) for five years and to
release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
26
HISTORICAL NON-INCREMENTAL REVENUE-GENERATING CAPITAL EXPENDITURES, TENANT
IMPROVEMENT COSTS AND LEASING COMMISSIONS
The following table sets forth annual and per square foot non-incremental
revenue-generating capital expenditures in which the Operating Partnership paid
or accrued, during the respective periods, to retain revenues attributable to
existing leased space for the years ended 1999 through 2003 for the Operating
Partnership's office and industrial / R&D properties.
NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES(1)
1999 2000
--------------- ---------------
Suburban Office Properties .........
Total ............................. $ 2,298,899 $ 3,289,116
Per Square Foot ................... $ 0.23 $ 0.33
NYC Office Properties ..............
Total ............................. N/A $ 946,718
Per Square Foot ................... N/A $ 0.38
Industrial Properties ..............
Total ............................. $ 1,048,688 $ 813,431
Per Square Foot ................... $ 0.11 $ 0.11
Total Portfolio ...................
Total ............................. $ 3,347,587 $ 5,049,265
----------- -----------
Per Square Foot ................... $ 0.17 $ 0.25
AVERAGE
2001 2002 1999-2002 20003(2)
--------------- --------------- --------------- ---------------
Suburban Office Properties .........
Total ............................. $ 4,606,069 $ 5,283,674 $ 3,869,440 $ 6,791,336
Per Square Foot ................... $ 0.45 $ 0.53 $ 0.39 $ 0.67
NYC Office Properties ..............
Total ............................. $ 1,584,501 $ 1,939,111 $ 1,490,110 $ 1,922,209
Per Square Foot ................... $ 0.45 $ 0.56 0.46 $ 0.55
Industrial Properties ..............
Total ............................. $ 711,666 $ 1,881,627 $ 1,113,853 $ 1,218,401
Per Square Foot ................... $ 0.11 $ 0.28 $ 0.15 $ 0.23
Total Portfolio ...................
Total ............................. $ 6,902,236 $ 9,104,413 $ 9,931,946
----------- ----------- -----------
Per Square Foot ................... $ 0.34 $ 0.45 $ 0.52
Notes:
- -----
(1) Represents capital expenditures at 100% of cost for all consolidated
properties excluding One Orlando Center, in Orlando, FL.
(2) Excludes non-incremental capital expenditures of $435,140 incurred during
the fourth quarter 2003 for the industrial properties which were sold
during the period.
The following table sets forth annual and per square foot non-incremental
revenue-generating tenant improvement costs and leasing commissions in which the
Operating Partnership committed to perform, during the respective periods, to
retain revenues attributable to existing leased space for the years 1999 through
2003 for the Operating Partnership's office and industrial / R&D properties:
NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING COMMISSIONS
1999 2000 2001
--------------- --------------- ---------------
LONG ISLAND OFFICE PROPERTIES
Tenant Improvements .............. $ 1,009,357 $ 2,853,706 $ 2,722,457
Per Square Foot Improved ......... $ 4.73 $ 6.99 $ 8.47
Leasing Commissions .............. $ 551,762 $ 2,208,604 $ 1,444,412
Per Square Foot Leased ........... $ 2.59 $ 4.96 $ 4.49
----------- ----------- -----------
Total Per Square Foot ............ $ 7.32 $ 11.95 $ 12.96
=========== =========== ===========
WESTCHESTER OFFICE PROPERTIES
Tenant Improvements .............. $ 1,316,611 $ 1,860,027 $ 2,584,728
Per Square Foot Improved ......... $ 5.62 $ 5.72 $ 5.91
Leasing Commissions .............. $ 457,730 $ 412,226 $ 1,263,012
Per Square Foot Leased ........... $ 1.96 $ 3.00 $ 2.89
=========== =========== ===========
Total Per Square Foot ............ $ 7.58 $ 8.72 $ 8.80
=========== =========== ===========
CONNECTICUT OFFICE PROPERTIES
Tenant Improvements .............. $ 179,043 $ 385,531 $ 213,909
Per Square Foot Improved ......... $ 4.88 $ 4.19 $ 1.46
Leasing Commissions .............. $ 110,252 $ 453,435 $ 209,322
Per Square Foot Leased ........... $ 3.00 $ 4.92 $ 1.43
----------- ----------- -----------
Total Per Square Foot ............ $ 7.88 $ 9.11 $ 2.89
=========== =========== ===========
NEW JERSEY OFFICE PROPERTIES
Tenant Improvements .............. $ 454,054 $ 1,580,323 $ 1,146,385
Per Square Foot Improved ......... $ 2.29 $ 6.71 $ 2.92
Leasing Commissions .............. $ 787,065 $ 1,031,950 $ 1,602,962
Per Square Foot Leased ........... $ 3.96 $ 4.44 $ 4.08
----------- ----------- -----------
Total Per Square Foot ............ $ 6.25 $ 11.15 $ 7.00
=========== =========== ===========
NEW YORK CITY OFFICE PROPERTIES
Tenant Improvements .............. N/A $ 65,267 $ 788,930
Per Square Foot Improved ......... N/A $ 1.79 $ 15.69
Leasing Commissions .............. N/A $ 418,185 $ 1,098,829
Per Square Foot Leased ........... N/A $ 11.50 $ 21.86
----------- ----------- -----------
Total Per Square Foot ............ N/A $ 13.29 $ 37.55
=========== =========== ===========
INDUSTRIAL PROPERTIES
Tenant Improvements .............. $ 375,646 $ 650,216 $ 1,366,488
Per Square Foot Improved ......... $ 0.25 $ 0.95 $ 1.65
Leasing Commissions .............. $ 835,108 $ 436,506 $ 354,572
Per Square Foot Leased ........... $ 0.56 $ 0.64 $ 0.43
----------- ----------- -----------
Total Per Square Foot ............ $ 0.81 $ 1.59 $ 2.08
=========== =========== ===========
TOTAL PORTFOLIO
Tenant Improvements .............. $ 3,334,711 $ 7,395,070 $ 8,822,897
Per Square Foot Improved ......... $ 1.53 $ 4.15 $ 4.05
Leasing Commissions .............. $ 2,741,917 $ 4,960,906 $ 5,973,109
Per Square Foot Leased ........... $ 1.26 $ 3.05 $ 2.75
----------- ----------- -----------
Total Per Square Foot ............ $ 2.79 $ 7.20 $ 6.80
=========== =========== ===========
AVERAGE
2002 1999-2002 2003 (3) NEW RENEWAL
-------------------- --------------- -------------------- --------------- -------------
LONG ISLAND OFFICE PROPERTIES
Tenant Improvements .............. $ 1,917,466 $ 2,125,747 $ 3,774,722 $ 2,850,868 $ 923,854
Per Square Foot Improved ......... $ 7.81 $ 7.00 $ 7.05 $ 10.58 $ 3.47
Leasing Commissions .............. $ 1,026,970 $ 1,307,937 $ 2,623,245 $ 2,110,056 $ 513,190
Per Square Foot Leased ........... $ 4.18 $ 4.06 $ 4.90 $ 7.83 $ 1.93
------------- ----------- ------------- ----------- ----------
Total Per Square Foot ............ $ 11.99 $ 11.06 $ 11.95 $ 18.41 $ 5.40
============= =========== ============= =========== ==========
WESTCHESTER OFFICE PROPERTIES
Tenant Improvements .............. $6,391,589 (2) $ 3,038,239 $ 3,732,370 $ 3,250,244 $ 482,126
Per Square Foot Improved ......... $ 15.05 $ 8.08 $ 15.98 $ 22.24 $ 5.51
Leasing Commissions .............. $ 1,975,850 $ 1,027,204 $ 917,487 $ 810,491 $ 106,997
Per Square Foot Leased ........... $ 4.65 $ 3.13 $ 3.93 $ 5.55 $ 1.23
============= =========== ============= =========== ==========
Total Per Square Foot ............ $ 19.70 $ 11.21 $ 19.91 $ 27.79 $ 6.74
============= =========== ============= =========== ==========
CONNECTICUT OFFICE PROPERTIES
Tenant Improvements .............. $ 491,435 $ 317,480 $ 588,087 $ 529,328 $ 58,759
Per Square Foot Improved ......... $ 3.81 $ 3.58 $ 8.44 $ 14.56 $ 1.76
Leasing Commissions .............. $ 307,023 $ 270,008 $ 511,360 $ 306,212 $ 205,148
Per Square Foot Leased ........... $ 2.38 $ 2.93 $ 7.34 $ 8.42 $ 6.15
------------- ----------- ------------- ----------- ----------
Total Per Square Foot ............ $ 6.19 $ 6.51 $ 15.78 $ 22.98 $ 7.91
============= =========== ============= =========== ==========
NEW JERSEY OFFICE PROPERTIES
Tenant Improvements .............. $ 2,842,521 $ 1,505,821 $ 4,327,295 $ 3,614,058 $ 713,237
Per Square Foot Improved ......... $ 10.76 $ 5.67 $ 11.57 $ 24.65 $ 3.14
Leasing Commissions .............. $ 1,037,012 $ 1,114,747 $ 1,892,635 $ 1,142,697 $ 749,938
Per Square Foot Leased ........... $ 3.92 $ 4.10 $ 5.06 $ 7.80 $ 3.30
------------- ----------- ------------- ----------- ----------
Total Per Square Foot ............ $ 14.68 $ 9.77 $ 16.63 $ 32.45 $ 6.44
============= =========== ============= =========== ==========
NEW YORK CITY OFFICE PROPERTIES
Tenant Improvements .............. $ 4,350,106 $ 1,734,768 $5,810,017 (4) $ 5,526,757 $ 283,260
Per Square Foot Improved ......... $ 18.39 $ 11.96 $ 32.84 $ 44.52 $ 5.37
Leasing Commissions .............. $ 2,019,837 $ 1,178,950 $2,950,330 (4) $ 2,659,682 $ 290,648
Per Square Foot Leased ........... $ 8.54 $ 13.97 $ 16.68 $ 21.43 $ 5.51
------------- ----------- ------------- ----------- ----------
Total Per Square Foot ............ $ 26.93 $ 25.93 $ 49.52 $ 65.95 $ 10.88
============= =========== ============= =========== ==========
INDUSTRIAL PROPERTIES
Tenant Improvements .............. $ 1,850,812 $ 1,060,791 $ 1,249,200 $ 998,972 $ 250,228
Per Square Foot Improved ......... $ 1.97 $ 1.20 $ 2.42 $ 3.25 $ 1.19
Leasing Commissions .............. $ 890,688 $ 629,218 $ 574,256 $ 500,654 $ 73,602
Per Square Foot Leased ........... $ 0.95 $ 0.64 $ 1.11 $ 1.63 $ 0.35
------------- ----------- ------------- ----------- ----------
Total Per Square Foot ............ $ 2.92 $ 1.84 $ 3.53 $ 4.88 $ 1.54
============= =========== ============= =========== ==========
TOTAL PORTFOLIO
Tenant Improvements .............. $17,843,929 $ 9,782,846 $19,481,691 $16,770,227 $2,711,464
Per Square Foot Improved ......... $ 7.96 $ 4.75 $ 10.22 $ 16.28 $ 3.09
Leasing Commissions .............. $ 7,257,380 $ 5,528,064 $ 9,469,313 $ 7,529,792 $1,939,523
Per Square Foot Leased ........... $ 3.24 $ 2.66 $ 4.97 $ 7.31 $ 2.21
------------- ----------- ------------- ----------- ----------
Total Per Square Foot ............ $ 11.20 $ 7.41 $ 15.19 $ 23.59 $ 5.30
============= =========== ============= =========== ==========
Notes:
- ------
(1) Representstenant improvements and leasing commissions at 100% of cost for
all consolidated properties excluding One Orlando Center, in Orlando, FL.
27
As noted, incremental revenue-generating tenant improvement costs and
leasing commissions are excluded from the tables set forth above. The historical
capital expenditures, tenant improvement costs and leasing commissions set forth
above are not necessarily indicative of future non-incremental
revenue-generating capital expenditures or non-incremental revenue-generating
tenant improvement costs and leasing commissions that may be incurred to retain
revenues on leased space.
The following table sets forth the Operating Partnership's components of
its paid or accrued non-incremental and incremental revenue-generating capital
expenditures, tenant improvements and leasing costs for the year ended December
31, 2003 as reported on its Statements of Cash Flows - Investment Activities
contained in its consolidated financial statements (in thousands):
Capital expenditures:
Non-incremental............................ $ 9,931
Incremental................................ 2,834
Tenant Improvements:
Non-incremental............................ 24,370
Incremental................................ 6,206
-------
Additions to commercial real estate properties $43,341
-------
Leasing costs:
Non-incremental............................ $12,766
Incremental................................ 3,320
-------
Payment of deferred leasing costs............... $16,086
-------
Acquisition and development costs............... $64,891
-------
The following table sets forth the Operating Partnership's top 25 tenants
based on base rental revenue as of December 31, 2003.
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 3.7% 6.2%
Verizon Communications Inc. ......... Office 210,426 1.8% 1.5%
* Schulte Roth & Zabel ............... Office 287,177 1.6% 2.7%
* Fuji Photo Film USA ................ Office 186,484 1.4% 1.3%
Dun & Bradstreet Corp. .............. Office 123,000 1.3% 1.1%
United Distillers ................... Office 137,918 1.3% 1.1%
* WorldCom/MCI ....................... Office 245,030 1.3% 1.2%
Arrow Electronics, Inc. ............. Office 163,762 1.3% 1.1%
T.D. Waterhouse ..................... Office 103,381 1.1% 0.9%
* Banque Nationale De Paris .......... Office 145,834 1.0% 1.7%
North Fork Bank ..................... Office 126,770 1.0% 0.8%
D.E. Shaw ........................... Office 70,104 1.0% 0.8%
* Kramer Levin Nessen Kamin .......... Office 158,144 1.0% 1.6%
Heller Ehrman White ................. Office 64,526 1.0% 0.8%
Vytra Healthcare .................... Office 105,613 0.9% 0.8%
Practicing Law Institute ............ Office 77,500 0.9% 0.8%
* Prudential ......................... Office 116,910 0.9% 0.9%
P.R. Newswire Associates ............ Office 67,000 0.9% 0.7%
* Draft Worldwide Inc. ............... Office 124,008 0.8% 1.4%
Hoffmann-La Roche Inc. .............. Office 120,736 0.8% 0.7%
Laboratory Corp. of America ......... Office 108,000 0.8% 0.7%
* State Farm ......................... Office 164,013 0.8% 1.2%
* HQ Global .......................... Office 126,487 0.8% 0.8%
EMI Entertainment World ............. Office 65,844 0.8% 0.7%
Lockheed Martin Corp. ............... Office 123,554 0.8% 0.7%
- ----------------
(1) Ranked by pro rata share of annualized base rental revenue adjusted for
pro rata share of joint venture interests.
* Part or all of space occupied by tenant is in a 51% or more owned joint
venture building.
The following table sets forth the Operating Partnership's lease
expiration table, as of January 1, 2004 for its total portfolio of properties,
its office properties and its industrial / R&D portfolio:
TOTAL PORTFOLIO
NUMBER OF SQUARE % OF TOTAL CUMULATIVE
YEAR OF LEASES FEET PORTFOLIO % OF TOTAL
EXPIRATION EXPIRING EXPIRING SQ FT PORTFOLIO SQ FT
- ------------------------------------- ----------- ------------ ------------ ----------------
2004 ................................ 155 996,801 6.8% 6.8%
2005 ................................ 196 1,667,233 11.4% 18.3%
2006 ................................ 184 1,686,741 11.6% 29.8%
2007 ................................ 104 1,123,286 7.7% 37.5%
2008 ................................ 115 983,926 6.7% 44.3%
2009 ................................ 78 1,092,960 7.5% 51.8%
2010 and thereafter ................. 236 5,542,515 38.1% 89.7%
--- --------- ---- ----
Total/Weighted Average .............. 1,068 13,093,462 89.7%
===== ========== ====
Total Portfolio Square Feet ......... 14,589,628
OFFICE PORTFOLIO
NUMBER OF SQUARE % OF TOTAL CUMULATIVE
YEAR OF LEASES FEET OFFICE % OF TOTAL
EXPIRATION EXPIRING EXPIRING SQ FT PORTFOLIO SQ FT
- -------------------------------------------- ----------- ------------ ------------ ----------------
2004 ....................................... 151 952,981 7.0% 7.0%
2005 ....................................... 194 1,571,083 11.5% 18.5%
2006 ....................................... 180 1,589,775 11.6% 30.1%
2007 ....................................... 100 1,053,794 7.7% 37.8%
2008 ....................................... 112 941,113 6.9% 44.7%
2009 ....................................... 77 1,047,979 7.7% 52.4%
2010 and thereafter ........................ 232 5,274,095 38.6% 91.0%
--- --------- ---- ----
Total/Weighted Average ..................... 1,046 12,430,820 91.0%
===== ========== ====
Total Office Portfolio Square Feet ......... 13,667,922
INDUSTRIAL/R&D PORTFOLIO
NUMBER OF SQUARE % OF TOTAL CUMULATIVE
YEAR OF LEASES FEET INDUSTRIAL/R&D % OF TOTAL
EXPIRATION EXPIRING EXPIRING SQ FT PORTFOLIO SQ FT
- ------------------------------------------ ----------- ---------- ---------------- ----------------
2004 ..................................... 4 43,820 4.8% 4.8%
2005 ..................................... 2 96,150 10.4% 15.2%
2006 ..................................... 4 96,966 10.5% 25.7%
2007 ..................................... 4 69,492 7.5% 33.2%
2008 ..................................... 3 42,813 4.6% 37.9%
2009 ..................................... 1 44,981 4.9% 42.8%
2010 and thereafter ...................... 4 268,420 29.1% 71.9%
- ------- ---- ----
Total/Weighted Average ................... 22 662,642 71.9%
== ======= ====
Total Industrial/R&D Portfolio Square Feet 921,706
28
MORTGAGE INDEBTEDNESS
The following table sets forth certain information regarding the mortgage
debt of the Company, as of December 31, 2003.
Principal Amortization
Property Amount Interest Rate Maturity Date Schedule
Outstanding
- -------------------------------------------------- ----------- ------------- ------------- ------------
(in thousands)
395 North Service Road, Melville, NY.............. $ 19,301 6.45% October 26, 2005 (2)
200 Summit Lake Drive, Valhalla, NY............... 18,937 9.25% January 1, 2006 25 year
1350 Avenue of the Americas, NY, NY............... 73,779 6.52% June 1, 2006 30 year
Landmark Square, Stamford, CT (4)................. 44,029 8.02% October 7, 2006 25 year
100 Summit Lake Drive, Valhalla, NY............... 17,718 8.50% April 1, 2007 15 year
333 Earl Ovington Blvd., Mitchell Field, NY (1)... 52,869 7.72% August 14, 2007 25 year
810 7th Avenue, NY, NY (6)........................ 81,314 7.73% August 1, 2009 25 year
100 Wall Street, NY, NY (6)....................... 35,236 7.73% August 1, 2009 25 year
6800 Jericho Turnpike, Syosset, NY................ 7,229 8.07% July 1, 2010 25 year
6900 Jericho Turnpike, Syosset, NY................ 13,696 8.07% July 1, 2010 25 year
580 White Plains Road, Tarrytown, NY.............. 12,476 7.86% September 1, 2010 25 year
919 3rd Avenue, NY, NY (5)........................ 244,047 6.867% August 1, 2011 30 year
120 West 45th Street, NY, NY (7).................. 63,245 6.82% (3) November 1, 2027 28 year
One Orlando Center, Orlando, FL (7)............... 37,759 6.82% (3) November 1, 2027 28 year
--------
Total / Weighted average.................... $721,635 7.24%
========
- -----
(1) The Company has a 60% general partnership interest in this property and
its proportionate share of the aggregate principal amount of the mortgage
debt is approximately $31.7 million.
(2) Principal payments of $34,000 per month.
(3) Subject to interest rate adjustment on November 1, 2004 to the greater of
8.82% per annum or the yield of non-callable U.S. Treasury obligations
with a term of fifteen years plus 2% per annum. The Company has the
ability to prepay the loan at that time.
(4) Encompasses six Class A office properties.
(5) The Company has a 51% membership interest in this property and its
proportionate share of the aggregate principal amount of the mortgage debt
is approximately $124.5 million.
(6,7) These properties are cross-collateralized
In addition, the Company has a 60% interest in an unconsolidated joint
venture property. The Company's pro-rata share of the mortgage debt at December
31, 2003 is approximately $7.9 million. This mortgage note payable bears
interest at 8.85% per annum and matures on September 1, 2005 at which time the
Company's share of the mortgage debt will be approximately $6.9 million.
29
ITEM 3. LEGAL PROCEEDINGS
A number of shareholder derivative actions have been commenced purportedly
on behalf of the Company against the Board of Directors in the Supreme Court of
the State of New York, County of Nassau (Lowinger v. Rechler et al., Index No.
01 4162/03 (9/16/03)), the Supreme Court of the State of New York, County of
Suffolk (Steiner v. Rechler et al., Index No. 03 32545 (10/2/03) and Lighter v.
Rechler et al., Index No. 03 23593 (10/3/03)), the United States District Court,
Eastern District of New York (Tucker v. Rechler et al., Case No. cv 03 4917
(9/26/03), Clinton Charter Township Police and Fire Retirement System v. Rechler
et al., Case No. cv 03 5008 (10/1/03) and Teachers' Retirement System of
Louisiana v. Rechler et al., Case No. cv 03 5178 (10/14/03) which have been
consolidated into a single action on 10/3/03) and the Circuit Court for
Baltimore County (Sekuk Global Enterprises Profit Sharing Plan v. Rechler et
al., Civil No. 24-C-03007496 (10/16/03), Hoffman v. Rechler et al.,
24-C-03-007876 (10/27/03) and Chirko v. Rechler et al., 24-C-03-008010
(10/30/03) which have been consolidated into a single action on 1/20/04),
relating to the sale of the Long Island Industrial Building Portfolio to certain
members of the Rechler family. The complaints allege, among other things, that
the process by which the directors agreed to the transaction was not
sufficiently independent of the Rechler family and did not involve a "market
check" or third party auction process and as a result was not for adequate
consideration. The Plaintiffs seek similar relief, including a declaration that
the directors violated their fiduciary duties, equitable relief and damages. The
Company believes that complaints are without merit.
Except as provided above, the Company is not presently subject to any
material litigation nor, to the Company's knowledge, is any litigation
threatened against the Company, other than routine actions for negligence or
other claims and administrative proceedings arising in the ordinary course of
business, some of which are expected to be covered by liability insurance and
all of which collectively are not expected to have a material adverse effect on
the liquidity, results of operations or business or financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 2003.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
There is no established trading market for the Registrant's common
equity. As of March 12, 2004, there were approximately 70 holders of the
Registrant's common equity.
COMMON UNITS
The following table sets forth, for the periods indicated, the
distributions declared by the Operating Partnership for each respective quarter
ended.
Class A Class B Class C
Distribution Distribution (2) Distribution
------------ ---------------- ------------
March 31, 2002......... $.4246 $.6492 --
June 30, 2002.......... $.4246 $.6485 (1) --
September 30, 2002..... $.4246 $.6471 --
December 31, 2002...... $.4246 $.6471 --
March 31, 2003......... $.4246 $.6471 --
June 30, 2003.......... $.4246 $.6471 --
September 30, 2003..... $.4246 $.6471 --
December 31, 2003...... $.4246 $.6471 $.28 (3)
(1) Commencing with the distribution for the three-month period ended July 31,
2002; the Board of Directors of the Company decreased the quarterly
distribution to $.6471 per share, which is equivalent to an annual
distribution of $2.5884 per share.
(2) On November 25, 2003, the Company elected to exchange all of its Class B
common stock for an equal number of shares of its Class A common stock. As
a result, the Class B common stock ceased trading. In connection with the
Company's exchange of its Class B common stock, the Operating Partnership
exchanged its Class B common units held by the Company for an equal number
of Class A common units.
(3) Based on a current annual distribution rate of approximately $1.87 per
unit. These OP Units were issued on August 7, 2003.
31
ITEM 6. SELECTED FINANCIAL DATA (in thousands except per share data and
property count)
The following table sets forth our selected financial data and should be
read in conjunction with our Financial Statements and notes thereto included in
Item 8, "Financial Statements and Supplementary Data" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-K.
In connection with this Annual Report on Form 10-K, we are restating our
historical audited consolidated financial statements as a result of Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). During 2003, we classified the
Company's Long Island industrial building portfolio and a office property
located on Long Island as held for sale and, in compliance with SFAS 144, have
reported revenues and expenses from these properties as discontinued operations
for each period presented in our Annual Report on Form 10-K. This
reclassification has no effect on our reported net income or funds from
operations.
We are also providing updated summary selected financial information,
which is included below reflecting the prior period reclassification as
discontinued operations of the properties classified as held for sale during
2003.
Reckson Operating Partnership, L. P.
For the year ended December 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
----------- --------- --------- --------- ------------
OPERATING DATA:
Total revenues ....................................... $ 470,282 $ 458,069 $ 467,805 $ 442,362 $ 351,643
Total expenses ....................................... 416,463 377,998 355,068 333,153 263,934
Income before distributions to preferred unit holders,
minority interests, equity in earnings of real
estate joint ventures and service companies,
gain on sales of real estate, valuation reserves
and discontinued operations .................... 53,819 80,071 112,737 109,209 87,709
Minority interests ................................... 17,972 18,730 15,975 9,120 6,802
Valuation reserves on investments in
affiliate loans and joint ventures and other
investments ..................................... -- -- 166,101 -- --
Preferred distributions .............................. 22,360 23,123 23,977 28,012 27,001
Equity in earnings of real estate joint ventures
and service companies ........................... 30 1,113 2,087 4,383 2,148
Gain on sales of real estate ......................... -- 537 20,173 18,669 10,052
Discontinued operations .............................. 142,847 21,347 11,113 4,524 5,128
Net income (loss) allocable to common unit holders ... $ 156,364 $ 61,215 $ (59,943) $ 99,653 $ 71,234
PER UNIT DATA: (1)
Net income (loss) per weighted average common unit:
Basic net income (loss) .......................... $ .18 $ .54 $ (1.29) $ 1.15 $ .95
Gain on sales of real estate ..................... -- .01 .28 .28 .17
Discontinued operations .......................... 2.29 .30 .16 .07 .09
----------- --------- --------- --------- -----------
Class A common unit .............................. $ 2.47 $ .85 $ (.85) $ 1.50 $ 1.21
=========== ========= ========= ========= ===========
Basic net income (loss) .......................... $ .39 $ .83 $ (1.88) $ 1.76 $ 1.53
Gain on sales of real estate ..................... -- .01 .42 .43 .27
Discontinued operations .......................... 1.55 .44 .23 .11 .14
----------- --------- --------- --------- -----------
Class B common unit .............................. $ 1.94 $ 1.28 $ (1.23) $ 2.30 $ 1.94
=========== ========= ========= ========= ===========
Basic net income (loss) ......................... $ .09 $ -- $ -- $ -- $ --
Gain on sales of real estate .................... -- -- -- -- --
Discontinued operations ......................... 5.65 -- -- -- --
----------- --------- --------- --------- -----------
Class C common unit ............................. $ 5.74 $ -- $ -- $ -- $ --
=========== ========= ========= ========= ===========
Weighted average common units outstanding:
Class A common units ............................. 55,786 57,059 55,773 50,766 47,975
Class B common units ............................. 8,910 10,122 10,284 10,284 6,744
Class C common units ............................. 188 -- -- -- --
Cash distributions declared per unit:
Class A common unit .............................. $ 1.70 $ 1.70 $ 1.66 $ 1.53 $ 1.45
Class B common unit .............................. $ 2.12 $ 2.59 $ 2.55 $ 2.35 $ 1.54
Class C common unit .............................. $ .28 $ -- $ -- $ -- $ --
32
ITEM 6. SELECTED FINANCIAL DATA (in thousands except per share
data and property count) (continued)
Reckson Operating Partnership, L. P.
For the year ended December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------------
BALANCE SHEET DATA (PERIOD END):
Commercial real estate properties, before
accumulated depreciation................... $ 2,796,789 $2,707,878 $2,643,045 $2,537,193 $2,017,170
Cash and cash equivalents (5)................... 23,069 30,576 121,975 17,843 21,368
Total assets.................................... 2,750,680 2,912,052 2,998,782 2,999,794 2,734,577
Mortgage notes payable.......................... 721,635 733,761 744,613 722,312 452,338
Unsecured credit facility (5)................... 169,000 267,000 271,600 216,600 297,600
Unsecured term loan............................. --- --- --- --- 75,000
Senior unsecured notes.......................... 499,445 499,305 449,463 449,385 449,313
Market value of equity (2)...................... 1,792,895 1,681,372 1,915,587 2,016,390 1,726,845
Total market capitalization including debt
(2 and 3).................................. 3,050,142 3,052,818 3,251,599 3,397,204 2,993,756
OTHER DATA:
Funds from operations (4)....................... $ 134,889 $ 158,422 $ 180,743 $ 168,340 $ 131,815
Total square feet (at end of period)............ 14,733 20,284 20,611 21,291 21,385
Number of properties (at end of period)......... 89 178 182 188 189
(1) Based on the weighted average common units outstanding for the period then
ended.
(2) Based on the market value of the Operating Partnership's common units, the
stated value of the Operating Partnership's preferred units and the number
of units outstanding at the end of the period.
(3) Debt amount is net of minority partners' proportionate share of joint
venture debt plus the Operating Partnership's share of unconsolidated
joint venture debt.
(4) Management believes that funds from operations ("FFO") is an appropriate
measure of performance of an equity REIT. Although FFO is a non-GAAP
measure, the Company believes it provides useful information to its
shareholders, potential investors and management. The Company computes FFO
in accordance with standards established by the National Association of
Real Estate Investment Trusts ("NAREIT") as net income or loss, excluding
gains or losses from sales of depreciable properties plus real estate
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated
from operating activities in accordance with GAAP and is not indicative of
cash available to fund cash needs. FFO should not be considered as an
alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
FFO for the year ended December 31, 2003 includes a gain from the sale of
land and build-to-suit transaction in the amount of $18.8 million. For the
years ended December 31, 2002 and 2001, pursuant to the Company's adoption
of FASB Statement No. 145, which addresses reporting for gains and losses
from extinguishment of debt, the Company has reduced previously reported
FFO by approximately $2.6 million and $2.9 million, respectively, related
to the write-off of certain deferred loan costs incurred in connection
with the Company's refinancing of its debt. These costs were previously
recorded as an extraordinary loss and therefore excluded from the
Company's calculation of FFO. In addition, FFO for the year ended December
31, 2001 excludes $163 million of valuation reserves on investments in
affiliate loans and joint ventures. Since all companies and analysts do
not calculate FFO in a similar fashion, the Company's calculation of FFO
may not be comparable to similarly titled measures as reported by other
companies. A reconciliation of FFO to net income allocable to common
shareholders, the GAAP measure the Company believes to be the most
directly comparable, is contained in Item 7 of this Form 10-K.
(5) On January 4, 2002, approximately $85 million of the cash proceeds
received from the sale of a 49% interest in the property located at 919
Third Avenue, New York, NY, was used to pay down the Operating
Partnership's unsecured credit facility.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the historical
financial statements of Reckson Operating Partnership, L.P. (the "Operating
Partnership") and related notes thereto.
The Operating Partnership considers certain statements set forth herein to
be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, with respect to the Operating Partnership's
expectations for future periods. Certain forward-looking statements, including,
without limitation, statements relating to the timing and success of
acquisitions and the completion of development or redevelopment of properties,
the financing of the Operating Partnership's operations, the ability to lease
vacant space and the ability to renew or relet space under expiring leases,
involve risks and uncertainties. Many of the forward-looking statements can be
identified by the use of words such as "believes", "may", "expects",
"anticipates", "intends" or similar expressions. Although the Operating
Partnership believes that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, the actual results may differ
materially from those set forth in the forward-looking statements and the
Operating Partnership can give no assurance that its expectation will be
achieved. Among those risks, trends and uncertainties are: the general economic
climate, including the conditions affecting industries in which our principal
tenants compete; changes in the supply of and demand for office in the New York
Tri-State area; changes in interest rate levels; changes in the Operating
Partnership's senior unsecured credit ratings; changes in the Operating
Partnership's cost and access to capital; downturns in rental rate levels in our
markets and our ability to lease or re-lease space in a timely manner at current
or anticipated rental rate levels; the availability of financing to us or our
tenants; financial condition of our tenants; changes in operating costs,
including utility, security, real estate tax and insurance costs; repayment of
debt owed to the Operating Partnership by third parties (including FrontLine
Capital Group); risks associated with joint ventures; liability for uninsured
losses or environmental matters; and other risks associated with the development
and acquisition of properties, including risks that development may not be
completed on schedule, that the tenants will not take occupancy or pay rent, or
that development or operating costs may be greater than anticipated.
Consequently, such forward-looking statements should be regarded solely as
reflections of the Operating Partnership's current operating and development
plans and estimates. These plans and estimates are subject to revisions from
time to time as additional information becomes available, and actual results may
differ from those indicated in the referenced statements.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Operating Partnership include
accounts of the Operating Partnership, the Company and all majority-owned and
controlled 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.
34
Revenue Recognition and Accounts Receivable
Minimum rental revenue is recognized on a straight-line basis, which
averages minimum rents over the terms of the leases. The excess of rents
recognized over amounts contractually due are included in deferred rents
receivable on the Operating Partnership's balance sheets. The leases also
typically provide for tenant reimbursements of common area maintenance and other
operating expenses and real estate taxes. Ancillary and other property related
income is recognized in the period earned.
The Operating Partnership makes estimates of the collectibility of its
accounts receivables related to base rents, tenant escalations and
reimbursements and other revenue or income. The Operating Partnership
specifically analyzes tenant receivables and analyzes historical bad debts,
customer credit worthiness, current economic trends and changes in customer
payment terms when evaluating the adequacy of its allowance for doubtful
accounts. In addition, when tenants are in bankruptcy the Operating Partnership
makes estimates of the expected recovery of pre-petition administrative and
damage claims. In some cases, the ultimate resolution of those claims can exceed
a year. These estimates have a direct impact on the Operating Partnership's net
income, because a higher bad debt reserve results in less net income.
The Operating Partnership incurred approximately $4.7 million and $6.3
million of bad debt expense for the years ended December 31, 2003 and 2002,
respectively, 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.
Reckson Construction Group, Inc., Reckson Construction and Development
LLC, the successor to Reckson Construction Group, Inc., and Reckson Construction
Group New York, Inc. use the percentage-of-completion method for recording
amounts earned on their contracts. This method records amounts earned as revenue
in the proportion that actual costs incurred to date bear to the estimate of
total costs at contract completion.
Gain on sales of real estate are recorded when title is conveyed to the
buyer, subject to the buyer's financial commitment being sufficient to provide
economic substance to the sale and the Operating Partnership having no
substantial continuing involvement with the buyer.
The Operating Partnership follows the guidance provided for under the
Financing Accounting Standards Board ("FASB") Statement No. 66 "Accounting for
Sales of Real Estate" ("Statement No. 66"), which provides guidance on sales
contracts that are accompanied by agreements which require the seller to develop
the property in the future. Under Statement No. 66 profit is recognized and
allocated to the sale of the land and the later development or construction work
on the basis of estimated costs of each activity; the same rate of profit is
attributed to each activity. As a result, profits are recognized and reflected
over the improvement period on the basis of costs incurred (including land) as a
percentage of total costs estimated to be incurred. The Operating Partnership
uses the percentage of completion method, as future costs of development and
profit are reliably estimated.
35
Real Estate
Land, buildings and improvements, furniture, fixtures and equipment are
recorded at cost. Tenant improvements, which are included in buildings and
improvements, are also stated at cost. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are incurred. Renovations and / or
replacements, which improve or extend the life of the asset, are capitalized and
depreciated over their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of ten to thirty years for buildings and improvements and
five to ten years for furniture, fixtures and equipment. Tenant improvements are
amortized on a straight-line basis over the term of the related leases.
The Operating Partnership is required to make subjective assessments as to
the useful lives of its properties for purposes of determining the amount of
depreciation to reflect on an annual basis with respect to those properties.
These assessments have a direct impact on the Operating Partnership's net
income. Should the Operating Partnership lengthen the expected useful life of a
particular asset, it would be depreciated over more years, and result in less
depreciation expense and higher annual net income.
Assessment by the Operating Partnership of certain other lease related
costs must be made when the Operating Partnership has a reason to believe that
the tenant will not be able to execute under the term of the lease as originally
expected.
On July 1, 2001 and January 1, 2002, the Operating Partnership adopted
FASB Statement No.141 "Business Combinations" and FASB Statement No. 142,
"Goodwill and Other Intangibles", respectively. As part of the acquisition of
real estate assets, the fair value of the real estate acquired is allocated to
the acquired tangible assets, consisting of land, building and building
improvements, and identified intangible assets and liabilities, consisting of
the value of above-market and below-market leases, other value of in-place
leases, and value of tenant relationships, based in each case on their fair
values. The Operating Partnership assesses fair value based on estimated cash
flow projections that utilize appropriate discount and capitalization rates and
available market information. Estimates of future cash flows are based on a
number of factors including the historical operating results, known trends, and
market / economic conditions that may affect the property. If the Operating
Partnership incorrectly estimates the values at acquisition or the undiscounted
cash flows, initial allocation of purchase price and future impairment charges
may be different.
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators
that the value of the real estate properties may be impaired. A property's value
is impaired only if management's estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by the property are
less than the carrying value of the property. Such cash flows consider factors
such as expected future operating income, trends and prospects, as well as the
effects of demand, competition and other factors. To the extent impairment has
occurred, the loss will be measured as the excess of the carrying amount of the
property over the fair value of the property.
36
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 taking an impairment results in an immediate
negative adjustment to net income. In determining impairment, if any, the
Operating Partnership has adopted FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long Lived Assets".
Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which explains how to identify variable
interest entities ("VIE") and how to assess whether to consolidate such
entities. The initial determination of whether an entity qualifies as a VIE
shall be made as of the date at which a primary beneficiary becomes involved
with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for
VIEs formed after January 31, 2003. In December 2003 the FASB issued FIN 46R,
deferring the effective date until the period ending March 31, 2004 for
interests held by public companies in variable interest entities created before
February 1, 2003, which were non-special purpose entities. Management has not
yet determined whether any of its consolidated or unconsolidated subsidiaries
represent VIEs pursuant to such interpretation. Such determination could result
in a change in the Operating Partnership's consolidation policy related to such
entities.
37
OVERVIEW AND BACKGROUND
Reckson Operating Partnership, L. P. (the "Operating Partnership")
commenced operations on June 2, 1995. Reckson Associates Realty Corp. (the
"Company"), which serves as the sole general partner of the Operating
Partnership, is a fully integrated, self administered and self managed real
estate investment trust ("REIT"). The Operating Partnership and the Company,
collectively, the "Company" were formed for the purpose of continuing the
commercial real estate business of Reckson Associates, its affiliated
partnerships and other entities ("Reckson").
Reckson Associates, the predecessor to the Company, was engaged in the
ownership, management, operation, leasing and development of commercial real
estate properties, principally office and industrial / R&D buildings, and also
owned certain undeveloped land located primarily on Long Island, New York. In
June 1995, the Company completed an initial public offering (the "IPO"),
succeeded to the Reckson Group's real estate business and commenced operations.
The Operating Partnership is engaged in the ownership, operation,
acquisition, leasing, financing, management and development of primarily office
and to a lesser extent industrial / R&D properties and also owns land for future
development. The Operating Partnership's growth strategy is focused on the
commercial real estate markets in and around the New York City tri-state area
(the "Tri-State Area"). The Company owns all of its interests in its real
properties, directly or indirectly, through the Operating Partnership.
In connection with the IPO, the Company was granted ten year options to
acquire ten properties (the "Option Properties") which were either owned by
certain Rechler family members who were also executive officers of the Company,
or in which the Rechler family members owned a non-controlling minority interest
at a price based upon an agreed upon formula. In years prior to 2001, one Option
Property was sold by the Rechler family members to a third party and four of the
Option Properties were acquired by the Company for an aggregate purchase price
of approximately $35 million, which included the issuance of approximately
475,000 common units of limited partnership interest in the Operating
Partnership ("OP Units") valued at approximately $8.8 million.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated, along with management contracts relating to three of such
properties. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, NY (the Company's current headquarters) for five years and to
release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
38
The Operating Partnership conducts its management, leasing and
construction related services through the Company's 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 and Development LLC, the successor
to Reckson Construction Group, Inc., and Reckson Construction Group New York,
Inc. (the "Service Companies") in which, as of September 30, 2002 the Operating
Partnership 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, which became possible as a result of changes to the Code that permit
REITs to own 100% of taxable REIT subsidiaries, the independent directors of the
Company approved the purchase by the Operating Partnership of the remaining 3%
interests 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 of the
acquisition of the remaining interests in the Service Companies, the Operating
Partnership commenced consolidating the operations of the Service Companies.
During the year ended December 31, 2003, Reckson Construction Group, Inc. billed
approximately $775,000 of market rate services and Reckson Management Group,
Inc. billed approximately $279,000 of market rate management fees to the
Remaining Option Properties. In addition, for the year ended December 31, 2003,
Reckson Construction Group, Inc. performed market rate services, aggregating
approximately $207,000, for a property in which certain former executive
officers of the Company maintain an equity interest.
Reckson Management Group, Inc. leases approximately 28,000 square feet of
office and storage space at a Remaining Option Property located at 225 Broad
Hollow Road, Melville, New York for its corporate offices at an annual base rent
of approximately $785,000. Reckson Management Group, Inc. had also entered into
a short-term license agreement at the property for 6,000 square feet of
temporary space, which expired in January 2004. Reckson Management Group, Inc.
also leases 10,722 square feet of warehouse space used for equipment, materials
and inventory storage at a property owned by certain members of the Rechler
family at an annual base rent of approximately $75,000.
A company affiliated with an independent director of the Company leases
15,566 square feet in a property owned by the Company at an annual base rent of
approximately $447,000. Reckson Strategic Venture Partners, LLC ("RSVP") leased
5,144 square feet in one of the Company's joint venture properties at an annual
base rent of approximately $176,000. On June 15, 2003, this lease was mutually
terminated and RSVP vacated the premises.
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. Currently the Company owns, through Metropolitan, five Class A office
properties aggregating approximately 3.5 million square feet.
39
During September 2000, the Company formed a joint venture (the "Tri-State
JV") with Teachers Insurance and Annuity Association ("TIAA") and contributed
nine Class A suburban office properties aggregating approximately 1.5 million
square feet to the Tri-State JV for a 51% majority ownership interest. TIAA
contributed approximately $136 million for a 49% interest in the Tri-State JV,
which was then distributed to the Company. In August 2003, the Company acquired
TIAA's 49% interest in the property located at 275 Broadhollow Road, Melville,
NY, for approximately $12.4 million. As a result, the Tri-State JV owns eight
Class A suburban office properties aggregating approximately 1.4 million square
feet. The Company is responsible for managing the day-to-day operations and
business affairs of the Tri-State JV and has substantial rights in making
decisions affecting the properties such as leasing, marketing and financing. The
minority member has certain rights primarily intended to protect its investment.
For purposes of its financial statements the Company consolidates the Tri-State
JV.
On December 21, 2001, the Company formed a joint venture with the New York
State Teachers' Retirement Systems ("NYSTRS") (the "919JV") whereby NYSTRS
acquired a 49% indirect interest in the property located at 919 Third Avenue,
New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Company. The Company is responsible for
managing the day-to-day operations and business affairs of the 919JV and has
substantial rights in making decisions affecting the property such as developing
a budget, leasing and marketing. The minority member has certain rights
primarily intended to protect its investment. For purposes of its financial
statements the Company consolidates the 919JV.
40
In November 2003, the Company disposed of all but three of its 95
property, 5.9 million square foot, Long Island industrial building portfolio to
members of the Rechler family (the "Disposition") for approximately $315.5
million, comprised of $225.1 million in cash and debt assumption and 3,932,111
OP Units valued at approximately $90.4 million. Approximately $204 million of
cash sales proceeds from the Disposition were used to repay borrowings under the
Company's Credit Facility. Two of the remaining three properties, which are
subject to transfer pursuant to Section 1031 of the Code are anticipated to
close during 2004. There can be no assurances that the Company will meet the
requirements of Section 1031 by identifying and acquiring qualified replacement
properties in the required time frame, in which case the Company would incur the
tax liability on the capital gain realized of approximately $1.5 million. The
disposition of the other property, is subject to certain environmental issues,
is conditioned upon the approval of the buyer's lender, which has not been
obtained. As a result, the Company may not dispose of this property as a part of
the Disposition. Management believes that if the Company were to continue to
hold this property the cost to address the environmental issues would not have a
material adverse effect on the Company, but there can be no assurance in this
regard. These three remaining properties aggregate approximately $7.1 million of
the $315.5 million sales price.
In connection with the closing, the employment of Donald Rechler, Roger
Rechler, Gregg Rechler and Mitchell Rechler as officers of the Company
terminated and Roger Rechler, Gregg Rechler and Mitchell Rechler resigned as
members of the Board of Directors. In connection with the Disposition and the
terminations of employment, the Company incurred the following restructuring
charges: (i) approximately $7.5 million related to outstanding stock loans under
the Company's historical long term incentive program ("LTIP") were transferred
to the entity that acquired the Long Island industrial building portfolio and
approximately $642,000 of loans related to life insurance contracts were
extinguished, (ii) approximately $2.9 was million paid to the departing Rechler
family members in exchange for 127,689 of rights to receive shares of Class A
common stock that were granted in 2002 and their rights that were granted in
2003 were forfeited in their entirety and (iii) with respect to two of the
departing Rechler family members participating in the Company's March 2003 LTIP,
each received 8,681 shares of the Company's Class A common stock related to the
service component of their core award which was valued at $293,000 in the
aggregate. In addition, if the Company was to attain its annual performance
measure under the March 2003 LTIP in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they remained in continuous employment
with the Company. The remainder of their core awards was forfeited, as was the
entire amount of the special outperformance component of the March 2003 LTIP.
The Company also incurred additional restructure charges of approximately $1.2
million related primarily to the release and severance of approximately 25
employees. Total restructure charges of approximately $12.5 million were
mitigated by a $972,000 fee from departing Rechler family members, related to
the termination of the Company's option to acquire certain property which was
either owned by certain Rechler family members or in which the Rechler family
members own a non-controlling minority interest.
41
As of December 31, 2003 the Company owned 89 properties (inclusive of 10
joint venture properties) in the Tri-State Area Central Business District
("CBD") and suburban markets, encompassing approximately 14.7 million rentable
square feet, all of which are managed by the Company. The properties include 16
Class A CBD office properties encompassing approximately 5.3 million rentable
square feet. The CBD office properties consist of five properties located in New
York City, nine properties located in Stamford, CT and two properties located in
White Plains, NY. The CBD office properties comprised 42% of the Company's net
operating income (property operating revenues less property operating expenses)
for the three months ended December 31, 2003. These properties also include 61
Class A suburban office properties encompassing approximately 8.4 million
rentable square feet, of which 42 of these properties, or 75% as measured by
square footage, are located within the Company's ten office parks. Reckson has
historically emphasized the development and acquisition of properties that are
part of large-scale suburban office parks. The Company believes that owning
properties in planned office parks provides certain strategic advantages,
including the following: (i) certain tenants prefer being located in a park with
other high quality companies to enhance their corporate image, (ii) parks afford
tenants certain aesthetic amenities such as a common landscaping plan,
standardization of signage and common dining and recreational facilities, (iii)
tenants may expand (or contract) their business within a park, enabling them to
centralize business functions and (iv) a park provides tenants with access to
other tenants and may facilitate business relationships between tenants.
Additionally, the properties include 11 industrial / R&D properties encompassing
approximately 1.0 million rentable square feet and one retail property
comprising approximately 9,000 rentable square feet. The Company also owns a
355,000 square foot office property located in Orlando, Florida.
As of December 31, 2003, the Company also owned approximately 313 acres of
land in 12 separate parcels of which the Company can develop approximately 3.0
million square feet of office space. The Company is currently evaluating
alternative land uses for certain of the land holdings to realize the highest
economic value. These alternatives may include rezoning certain land parcels
from commercial to residential for potential disposition. As of December 31,
2003, the Company had invested approximately $116.8 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 Company has
capitalized approximately $10.0 million for the year ended December 31, 2003,
related to real estate taxes, interest and other carrying costs related to these
development projects. In October 2003, the Company entered into contracts to
sell two land parcels aggregating approximately 128 acres of its land holdings
located in New Jersey. The contracts provided for aggregate sales prices ranging
from $23 million to $43 million. These sales are contingent upon obtaining
zoning for residential use of the land and other customary approvals. The
proceeds ultimately received from such sales will be based upon the number of
residential units permitted by the rezoning. The aggregate cost basis of these
land parcels at December 31, 2003 was approximately $11.8 million. The closing
is scheduled to occur upon the rezoning, which is anticipated to occur within 9
to 33 months. In addition, during February 2004, a 3.9 acre land parcel located
on Long Island was condemned by the Town of Oyster Bay. As consideration for the
condemnation the Company anticipates to initially receive approximately $1.8
million. The Company's cost basis in this land parcel at December 31, 2003 was
approximately $1.4 million. The Company is currently contesting this valuation
and seeking payment of additional consideration from the Town of Oyster Bay but
there can be no assurances that the Company will be successful in obtaining any
such additional consideration.
42
The Company holds a $17.0 million interest in a note receivable, which
bears interest at 12% per annum and is secured by a minority partnership
interest in Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class
A office property located in Uniondale, New York (the "Omni Note"). The Company
currently owns a 60% majority partnership interest in Omni Partnership, L.P. and
on March 14, 2007 may exercise an option to acquire the remaining 40% interest
for a price based on 90% of the fair market value of the property. The Company
holds a $15 million participating interest in a $30 million junior mezzanine
note loan which is secured by a pledge of an indirect ownership interest of an
entity which owns the ground leasehold estate under a 1.1 million square foot
office complex located on Long Island, New York (the "Mezz Note"). The Mezz Note
matures in September 2005; currently bears interest at 13.43%, and the borrower
has the right to extend for three additional one-year periods. The Company also
holds three other notes receivable aggregating $21.5 million bearing interest at
rates ranging from 10.5% to 12% per annum. These notes are secured in part by a
minority partner's preferred unit interest in the Operating Partnership, an
interest in real property and a personal guarantee (the "Other Notes" and
collectively with the Omni Note, and the Mezz Note, the "Note Receivable
Investments").
Management has made subjective assessments as to the underlying security
value on the Company's Note Receivable Investments. These assessments indicated
an excess of market value over carrying value related to the Company's Note
Receivable Investments. Based on these assessments, the Company's management
believes there is no impairment to the carrying value related to the Company's
Note Receivable Investments. The Company also owns a 355,000 square foot office
building in Orlando, Florida. This non-core real estate holding was acquired in
May 1999 in connection with the Company's initial New York City portfolio
acquisition. This property is cross-collateralized under a $101.0 million
mortgage note along with one of the Company's New York City buildings. The
Company has the right to pre-pay this note in November 2004, prior to its
maturity date.
The Company 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. Jon Halpern, a director of HQ Global Workplaces, is a partner in
JAH Realties, L.P. As of December 31, 2003, the 520JV had total assets of $19.8
million, a mortgage note payable of $12.0 million and other liabilities of
$185,000. The Company's allocable share of the 520JV mortgage note payable is
approximately $7.9 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005. During the second quarter of 2003,
HQ Global Workplaces, a tenant of the 520JV surrendered approximately one-third
of its premises. As a result, the 520JV incurred a write-off of $633,000
relating to its deferred rents receivable. The operating agreement of the 520JV
requires joint decisions from all members on all significant operating and
capital decisions including sale of the property, refinancing of the property's
mortgage debt, development and approval of leasing strategy and leasing of
rentable space. As a result of the decision-making participation relative to the
operations of the property, the Company accounts for the 520JV under the equity
method of accounting. In accordance with the equity method of accounting the
Company's proportionate share of the 520JV income was approximately $30,000,
$648,000 and $478,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
43
Through its ownership of properties in the key CBD and suburban office
markets in the Tri-State Area, the Company believes it has a unique competitive
advantage as the trend toward the regional decentralization of the workplace
increases. Due to the events of September 11, 2001, as well as technological
advances, which further enable decentralization, companies are strategically
re-evaluating the benefits and feasibility of regional decentralization and
reassessing their long-term space needs. The Company believes this
multi-location regional decentralization will continue to take place, increasing
as companies begin to have better visibility as to the future of the economy,
further validating our regional strategy of maintaining a significant market
share in the key CBD and suburban office markets in the Tri-State Area.
The Company's core business strategy is based on a long-term outlook
considering real estate as a cyclical business. The Company seeks to accomplish
long-term stability and success by developing and maintaining an infrastructure
and franchise that is modeled for success over the long-term. This approach
allows the Company to recognize different points in the market cycle and adjust
our strategy accordingly. Currently, the Company remains cautious about the
market environment. With this cautious bias we choose to maintain our
conservative operating strategy of focusing on retaining high occupancies,
controlling operating expenses, maintaining a high level of investment
discipline and preserving financial flexibility.
The market capitalization of the Company at December 31, 2003 was
approximately $3.1 billion. The Company's market capitalization is based on the
sum of (i) the market value of the Company's Class A common stock and OP Units
(assuming conversion) of $24.30 per share / unit (based on the closing price of
the Company's Class A common stock on December 31, 2003), (ii) the liquidation
preference value of the Company's preferred stock of $25.00 per share, (iii) the
liquidation preference value of the Operating Partnership's preferred units of
$1,000 per unit and (iv) 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 December 31, 2003. As a result, the
Company's total debt to total market capitalization ratio at December 31, 2003
equaled approximately 41.2%.
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 invested primarily in real estate and real estate operating
companies outside the Company's core office 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 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 December 31, 2003 approximately $109.1 million was funded under 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 December 31, 2003,
interest accrued (net of reserves) under the FrontLine Facility and the RSVP
Facility was approximately $19.6 million.
44
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 Company has discontinued the accrual of interest income with respect to the
FrontLine Loans. The Company has also reserved against its share of GAAP equity
in earnings from the RSVP controlled joint ventures funded through the RSVP
Commitment until such income is realized through cash distributions.
At December 31, 2001, the Company, pursuant to Section 166 of the Code,
charged off for tax purposes $70 million of the aforementioned reserve directly
related to the FrontLine Facility, including accrued interest. On February 14,
2002, the Company charged off for tax purposes an additional $38 million of the
reserve directly related to the FrontLine Facility, including accrued interest,
and $47 million of the reserve directly related to the RSVP Facility, including
accrued interest.
FrontLine is in default under the FrontLine Loans from the Operating
Partnership and on June 12, 2002, filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code.
45
In September 2003, RSVP completed the restructuring of its capital
structure and management arrangements. In connection with the restructuring,
RSVP redeemed the interest of the preferred equity holders of RSVP for an
aggregate of approximately $137 million in cash and the transfer to the
preferred equity holders of the assets that comprised RSVP's parking investment
valued at approximately $28.5 million. RSVP also restructured its management
arrangements whereby a management company formed by its former managing
directors has been retained to manage RSVP pursuant to a management agreement
and the employment contracts of the managing directors with RSVP have been
terminated. The management agreement provides for an annual base management fee
and disposition fees equal to 2% of the net proceeds received by RSVP on asset
sales. (The base management fee and disposition fees are subject to a maximum
over the term of the agreement of $7.5 million.) In addition, the managing
directors retained a one-third residual interest in RSVP's assets, which is
subordinated to the distribution of an aggregate amount of $75 million to RSVP
and/or the Company in respect of its joint ventures with RSVP. The management
agreement has a three-year term, subject to early termination in the event of
the disposition of all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of asset sales by RSVP.
As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments, is approximately $65 million, which was reassessed with no
change by management as of December 31, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
Scott H. Rechler, who serves as President, Chief Executive Officer and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP.
46
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of
flexible officing solutions in the world and which was formerly controlled by
FrontLine, previously operated eleven executive office centers comprising
approximately 205,000 square feet at the Company's properties, including two
operated at the Company's joint venture properties. 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 and subsequently
rejected three of its leases with the Company and surrendered approximately an
additional 20,500 square feet from two other leases. The Company has since
re-leased 100% of the rejected space. In September 2003, the Bankruptcy Court
approved the assumption and amendment by HQ of its remaining eight leases with
the Company. The assumed leases expire between 2007 and 2011, encompass
approximately 150,000 square feet and provide for current annual base rents
totaling approximately $3.5 million. A committee designated by the Board and
chaired by an independent director conducted all negotiations with HQ.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications
company, which leased approximately 527,000 square feet in thirteen of the
Company'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 Bankruptcy Court granted WorldCom's petition to reject four of its
leases with the Company. The four rejected leases aggregated approximately
282,000 square feet and were to provide for contractual base rents of
approximately $7.2 million for the 2003 calendar year. The Company has agreed to
restructure five of the remaining leases. Pursuant to WorldCom's Plan of
Reorganization, which has been confirmed by the Bankruptcy Court, WorldCom must
assume or reject the remaining leases prior to the effective date of the Plan.
The effective date of the Plan is estimated to occur during the first quarter of
2004. All of WorldCom's leases are current on base rental charges through March
31, 2004, other than under the four rejected leases, and the Company currently
holds approximately $195,000 in security deposits relating to the non-rejected
leases. There can be no assurance as to whether WorldCom will affirm or reject
any or all of its remaining leases with the Company.
As of December 31, 2003, WorldCom occupied approximately 245,000 square
feet of office space with aggregate annual base rental revenues of approximately
$4.1 million, or 1.1% of the Company's total 2003 annualized rental revenue
based on base rental revenue earned on a consolidated basis.
47
RESULTS OF OPERATIONS
The following table is a comparison of the results of operations for
the year ended December 31, 2003 to the year ended December 31, 2002:
Year ended December 31,
-----------------------------------------------
Change
-------------------
2003 2002 Dollars Percent
-----------------------------------------------
PROPERTY OPERATING REVENUES:
Base rents $ 385,225 $395,308 $(10,083) (2.6)%
Tenant escalations and
reimbursements 60,556 55,441 5,115 9.2%
----------------------- --------
TOTAL PROPERTY OPERATING REVENUES $ 445,781 $450,749 $ (4,968) (1.1)%
======================= ========
PROPERTY OPERATING EXPENSES:
Operating expenses $ 108,152 $ 97,253 $ 10,899 11.2%
Real estate taxes 72,259 65,778 6,481 9.9%
----------------------- --------
TOTAL PROPERTY OPERATING EXPENSES $ 180,411 $163,031 $ 17,380 10.7%
======================= ========
OTHER INCOME $ 24,501 $ 7,320 $ 17,181 234.7%
======================= ========
OTHER EXPENSES:
Interest expense $ 82,487 $ 83,309 $ (822) (1.0)%
Marketing, general and
administrative 32,746 29,214 3,532 12.1%
----------------------- --------
TOTAL OTHER EXPENSES $ 115,233 $112,523 $ 2,710 2.4%
======================= ========
The Operating Partnership's property operating revenues, which include
base, rents and tenant escalations and reimbursements ("Property Operating
Revenues") decreased by $ 5.0 million from 2002 to 2003. The Operating
Partnership's base rent reflects the positive impact of the straight-line rent
adjustment of $16.7 million in 2003 as compared to $26.8 million in 2002, a
decrease of $10.1 million. The 2003 and 2002 straight-line adjustment includes
$6.9 million and $10.9 million respectively, generated from the property located
at 919 Third Avenue, New York, NY, which is primarily attributable to rental
abatement periods for the three largest tenants. In addition, Property Operating
Revenues increased by $6.1 million attributable to lease up of newly developed
and redeveloped assets and $7.5 million in built in rent increases for existing
tenants in our same store properties. These increases were offset by $4.3
million of revenue attributable to properties that were sold during the year,
including 92 properties in the Long Island industrial building portfolio. $2.9
million in reduced termination fees and $6.4 million of revenue lost due to
weighted average occupancy decrease in our same store properties.
The 2003 increase in property operating expenses, real estate taxes and
ground rents ("Property Expenses") is primarily due to a $9.2 million increase
in operating expenses and a $6.7 million increase in real estate taxes related
to the Operating Partnership's "same store" properties. Development properties
going into service increased property expenses by an additional $1.5 million.
Included in the $9.2 million increase in operating expenses is $1.7 million and
$.5 million of increased insurance and security costs, respectively. Increases
in insurance and security costs result primarily from implications of the events
that occurred on September 11, 2001. The security cost increases relate
primarily to our New York City properties. Also included in the $9.2 million
increase are operating expenses of the Operating Partnership's same store
properties, which represent a $4.2 million, increase in repairs and maintenance
and a $2.8 million increase in utility costs. Increases in utility costs
primarily relates to rate increases per energy unit. Increases in real estate
taxes is attributable to the significant increases levied by certain
municipalities, particularly in New York City and Nassau County, New York which
have experienced severe fiscal budget issues.
48
Other income increased by $17.2 million. This increase is primarily
attributable to the gain recognized on the First Data land sale and
build-to-suit construction contract.
Gross operating margins (defined as Property Operating Revenues less
Property Expenses, taken as a percentage of Property Operating Revenues) for
2003 and 2002 were 59.5% and 63.8%, respectively. The decrease from 2002 to 2003
in gross operating margin percentages resulted primarily from portfolio wide
increases in real estate taxes, utilities and property and liability insurance
costs as well as decreases to revenues primarily as a result of decreased
portfolio occupancy.
The following table is a comparison of the results of operations for the
year ended December 31,2002 to the year ended December 31,2001:
Year ended December 31,
--------------------------------------------------
Change
--------------------
2002 2001 Dollars Percent
--------------------------------------------------
PROPERTY OPERATING REVENUES:
Base rents $395,308 $392,824 $ 2,484 0.6%
Tenant escalations and
reimbursements 55,441 54,739 702 1.3%
---------------------- --------
TOTAL PROPERTY OPERATING REVENUES $450,749 $447,563 $ 3,186 0.7%
====================== ========
PROPERTY OPERATING EXPENSES:
Operating expenses $ 97,253 $ 94,411 $ 2,842 3.0%
Real estate taxes 65,778 61,566 4,212 6.8%
---------------------- --------
TOTAL PROPERTY OPERATING EXPENSES $163,031 $155,977 $ 7,054 4.5%
====================== ========
OTHER INCOME $ 7,320 $ 20,242 $(12,922) (63.8)%
====================== ========
OTHER EXPENSES:
Interest expense $ 83,309 $ 82,624 $ 685 0.8%
Marketing, general and
administrative 29,214 24,289 4,925 20.3%
---------------------- --------
TOTAL OTHER EXPENSES $112,523 $106,913 $ 5,610 5.2%
====================== ========
The Operating Partnership's Property Operating Revenues increased by $3.2
million from 2001 to 2002. The Operating Partnership's base rent reflects the
positive impact of the straight-line rent adjustment of $26.8 million in 2002 as
compared to $41.6 million in 2001, a decrease of $14.8 million. The 2002 and
2001 straight-line adjustment includes $10.9 million and $26.9 million
respectively, generated from the property located at 919 Third Avenue, New York,
NY, which is primarily attributable to rental abatement periods for the three
largest tenants. The net increase in base rents is attributable to fixed
increases to base rent in certain of the Operating Partnership's leases.
The 2002 increase in Property Expenses consists of a $2.8 million
increase in operating expenses and a $4.2 million increase in real estate taxes.
Included in the $2.8 million increase in operating expenses is $1.4 million and
$ .7 million of increased insurance and security costs, respectively. These
increases result primarily from implications of the events that occurred on
September 11, 2001. The security cost increases relate primarily to the
Operating Partnership's New York City properties.
Other income decreased by $12.9 million. This decrease is primarily due
to a decrease of $11.6 million related to interest earned on advances made under
the FrontLine Loans.
49
Gross operating margins for 2002 and 2001 were 63.8% and 65.1%,
respectively. The decrease from 2001 to 2002 in gross operating margin
percentages resulted primarily from portfolio wide increases in real estate
taxes, utilities and property and liability insurance costs.
Marketing, general and administrative expenses were $32.7 million in
2003, $29.2 million in 2002 and $24.3 million in 2001. The increase in
marketing, general and administrative expenses is primarily due to the increased
costs of maintaining offices and infrastructure in each of the Operating
Partnership's five divisional markets, increased directors and officers
insurance costs and other costs associated with complying with the provisions of
Sarbanes Oxley legislation including additional directors of the Company and
independent accounting and legal fees. The Operating Partnership's business
strategy has been to expand further into the Tri-State Area CBD and suburban
office markets, to create a superior franchise value by applying its standards
for high quality office space and premier tenant service to its five operating
divisions. Over the past three years the Operating Partnership has supported
this effort by increasing its marketing programs and strengthening its resources
and operating systems. The cost of these efforts is reflected in marketing,
general and administrative expenses. Marketing, general and administrative
expenses as a percentage of total revenues from continuing operations were 7.0%
in 2003, 6.4% in 2002 and 6.0% in 2001. The competitive market environment has
resulted in decreased portfolio occupancies and market rental rates and has
negatively impacted the Operating Partnership's revenues. As a result,
marketing, general and administrative expenses as a percentage of total revenues
has increased.
Interest expense was $82.5 million in 2003, $83.3 million in 2002 and
$82.6 million in 2001. The decrease of approximately $822,000 from 2003 to 2002
was primarily a result of the Operating Partnership's adoption of FASB Statement
No. 145, "Reporting Gains and Losses from Extinguishment of Debt" which caused
the reclassification of approximately $2.6 million of previously reported
extraordinary losses to interest expense. The 2002 extraordinary loss was the
result of the Operating Partnership's refinancing its unsecured credit facility
in December 2002 and writing off the related unamortized deferred loan costs.
This decrease was mitigated by an increase in interest expense of approximately
$1.5 million on the Operating Partnership's $50 million, 6% senior unsecured
notes issued in June 2002. The increase of approximately $670,000 from 2001 to
2002 is attributable to (i) increased interest expense of $1.7 million on the
Operating Partnership's senior unsecured notes resulting from the issuance of
$50 million of five-year notes in June 2002, which was used to repay lower
internal cost borrowings under the Operating Partnership's floating rate credit
facility, (ii) a net increase in mortgage interest expense of approximately
$520,000 which was primarily attributable to the $50 million principal increase
on the debt of 919 Third Avenue in July 2001, and the satisfaction of three
mortgage notes payable aggregating approximately $24.3 million during 2001,
(iii) approximately a $2.0 million decrease in capitalized interest attributable
to a decrease in the level of development projects and (iv) a decrease of $5.4
million of interest expense allocated to discontinued operations in connection
with the Operating Partnership's adoption of FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" on January 1, 2002. These
resulting increases, aggregating approximately $9.6 million, were mitigated
primarily by a decrease of approximately $8.7 million on the Operating
Partnership's unsecured credit facility resulting from an overall decrease in
interest rates.
50
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio, the settlement of the employment contracts
of the departing Rechler family members, and the cost of certain other
organizational changes, the Company incurred net restructuring charges of
approximately $11.6 million during the three months ended December 31, 2003.
Included in depreciation and amortization expense are amortized financing
costs of $3.3 million in 2003, $4.5 million in 2002 and $4.5 million in 2001.
For the year ended December 31, 2001, the Operating Partnership's
consolidated statement of operations includes valuation reserve charges of
$166.1 million primarily consisting of $163 million related to the Operating
Partnership's investments in the FrontLine Loans and joint ventures with RSVP
(See "Overview and Background" for a further discussion of this valuation
reserve charge).
51
LIQUIDITY AND CAPITAL RESOURCES
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and non-incremental capital expenditures,
excluding incremental capital expenditures of the Operating Partnership. The
Operating Partnership expects to meet its short-term liquidity requirements
generally through its net cash provided by operating activities along with its
unsecured credit facility described below. The credit facility contains several
financial covenants with which the Operating Partnership must be in compliance
in order to borrow funds thereunder. During 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
that result from the re-tenanting of scheduled expirations or early terminations
of leases. The Operating Partnership is currently experiencing high tenanting
costs including tenant improvement costs, leasing commissions and free rent in
all of its markets. For the year ended December 31, 2003, the Operating
Partnership paid $50.3 million for tenanting costs including tenant improvement
costs and leasing commissions. This compares to $49.7 million paid for the year
ended December 31, 2002. As a result of these and / or other operating factors,
the Company's cash flow from operating activities was not sufficient to pay 100%
of the dividends paid on its common stock or the Operating Partnership's OP
Units during 2003. To meet the short-term funding requirements relating to these
leasing costs, the Company has used proceeds of property sales or borrowings
under its credit facility. Based on the Operating Partnership's anticipated
leasing for 2004 it may incur similar shortfalls. The Operating Partnership
currently intends to fund any shortfalls with proceeds from non-income producing
asset sales or borrowings under its credit facility. The Company periodically
reviews its dividend policy to determine the appropriateness of the Company's
dividend rate and OP Unit distribution rate relative to the Company's cash
flows. The Company adjusts its dividend rate and the OP Unit distribution rate
based on forecasted increases and decreases in its cash flow as well as required
distributions of taxable income to maintain REIT status. There can be no
assurance that the Company will maintain the current quarterly distribution
level on its common stock or the Operating Partnership's OP Units. The Company
expects to meet certain of its financing requirements through long-term secured
and unsecured borrowings and the issuance of debt and equity securities of the
Company. There can be no assurance that there will be adequate demand for the
Company's equity at the time or at the price in which the Company desires to
raise capital through the sale of additional equity. Similarly, there can be no
assurance that the Operating Partnership will be able to access the unsecured
debt markets at the time when the Operating Partnership desires to sell its
unsecured notes. In addition, when valuations for commercial real estate
properties are high, the Operating Partnership will seek to sell certain land
inventory to realize value and profit created. The Operating Partnership will
then seek opportunities to reinvest the capital realized from these dispositions
back into value-added assets in the Operating Partnership's core Tri-State Area
markets. The Operating Partnership will refinance existing mortgage
indebtedness, senior unsecured notes or indebtedness under its credit facility
at maturity or retire such debt through the issuance of additional debt
securities or additional equity securities. The Operating Partnership
anticipates that the current balance of cash and cash equivalents and cash flows
from operating activities, together with cash available from borrowings, equity
offerings and proceeds from sales of land and non-income producing assets, will
be adequate to meet the capital and liquidity requirements of the Operating
Partnership in both the short and long-term. The Operating Partnership's senior
unsecured debt is currently rated "BBB-" by Fitch, "BBB-" by Standard & Poors
and "Ba1" by Moody's. The rating agencies review the ratings assigned to an
issuer such as the Operating Partnership on an ongoing basis. Negative changes
in the Operating Partnership's senior unsecured ratings would result in
increases in the Operating Partnership's borrowing costs, including borrowings
under the Operating Partnership's unsecured credit facility.
52
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 are at the higher end of the range of historical cycles and in
some instances our asking rents in our markets have trended lower and landlords
are being required to grant greater concessions such as free rent and tenant
improvements. Our markets have also been experiencing higher real estate taxes
and utility rates. Additionally, the Operating Partnership carries comprehensive
liability, fire, extended coverage and rental loss insurance on all of its
properties. Six of the Operating Partnership's properties, including 1185 Avenue
of the Americas, which was purchased in January 2004, are located in New York
City. As a result of the events of September 11, 2001, insurance companies are
limiting coverage for acts of terrorism in "all risk" policies. In November
2002, the Terrorism Risk Insurance Act of 2002 was signed into law, which, among
other things, requires insurance companies to offer coverage for losses
resulting from defined "acts of terrorism" through 2004. The Operating
Partnership's current insurance coverage provides for full replacement cost of
its properties, (other than its two largest properties), including for acts of
terrorism up to $500 million on a per occurrence basis. The two largest
properties are covered for up to $200 million on such policies and are covered
under separate policies, which include coverage for acts of terrorism, up to the
estimated replacement cost for these properties.
The impact of the terrorist attacks of September 11, 2001, in New York
City may adversely affect the value of the Operating Partnership's New York City
properties and its ability to generate cash flow. There may be a decrease in
demand for office space in metropolitan areas that are considered at risk for
future terrorist attacks, and this decrease may reduce the Operating
Partnership's revenues from property rentals.
In order to qualify as a REIT for federal income tax purposes, the
Company is required to make distributions to its stockholders of at least 90% of
REIT taxable income. The Company expects to use its cash flow from operating
activities for distributions to stockholders and for payment of recurring,
non-incremental revenue-generating expenditures. The Company intends to invest
amounts accumulated for distribution in short-term investments.
Summary of Cash Flows
Net cash provided by operating activities totaled $161.2 million in
2003, $196.1 million in 2002, and $188.8 million in 2001. The decrease in 2003
is attributable to a more competitive operating environment in which the
Operating Partnership made a limited number of commercial property acquisitions
as well as a decrease in market rental rates and lower occupancies in the
Operating Partnership's portfolio. The 2002 increase is primarily attributable
to the growth in cash flow provided by increased occupancy levels of the
Operating Partnership's development properties and as a result of fixed
increases in certain of the Operating Partnership's leases.
53
Net cash provided by investing activities totaled $ 109.5 million in
2003. Net cash used in investing activities totaled $85.1 million in 2002 and
$87.5 million in 2001. Cash provided by investing activities in 2003 is
primarily attributable to proceeds from the sale of the Long Island industrial
building portfolio, which was offset by the purchase of assets and investments
in developments and commercial real estate properties. Cash flows used in
investing activities during 2002 related primarily to the Operating
Partnership's ongoing development of its properties, the acquisition of
approximately 52.7 acres of development land located in Valhalla, NY and costs
associated with creating tenant space including the payment of leasing costs.
Cash used in investing activities during 2001 related primarily to investments
in real estate properties including development costs. Included in these
investing activities for the 2001 period is the Operating Partnership's
investment of approximately $18.7 million in RSVP-controlled (REIT qualified)
joint ventures. Cash used in investing activities for the 2001 period was offset
by proceeds from the redemption of the Operating Partnership's preferred equity
investments in Keystone Property Trust as well as from sales of real estate,
securities and mortgage note receivable repayments.
Net cash used in financing activities totaled $ 278.2 million in 2003
and $202.2 million in 2002. Net cash provided by financing activities totaled
$3.8 million in 2001. Cash used in financing activities for 2003 primarily
resulted from secured debt amortization payments and the repayment of
outstanding borrowings on the Operating Partnership's unsecured credit facility
from proceeds from the sale of the Long Island industrial building portfolio.
Cash used in financing activities during 2002 related primarily to the Company's
stock buy-back program and repurchases of its Series A preferred stock
aggregating approximately $75 million. These uses of cash were offset by the
Operating Partnership issuing $50 million of five-year senior unsecured notes.
Cash provided by financing activities during 2001 related primarily to proceeds
from secured debt financings, minority partner contributions and advances under
the Operating Partnership's unsecured credit facility. Cash provided by
financing activities for 2001 was offset by advances made under the FrontLine
Loans of approximately $7.2 million. In each of the three years ended December
31, cash was used in financing activities by principal payments on secured
borrowings and the unsecured credit facility as well as loan issuance costs and
distributions.
54
Investing Activities
During February 2003, the Company, through Reckson Construction Group,
Inc., entered into a contract with an affiliate of First Data Corp. to sell a
19.3-acre parcel of land located in Melville, New York and was retained by the
purchaser to develop a build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47 million. This transaction closed on
March 11, 2003 and development of the aforementioned office building has
commenced and is near completion. Net proceeds from the land sale of
approximately $18.3 million were used to establish an escrow account with a
qualified intermediary for a future exchange of real property pursuant to
Section 1031 of the Code (a "Section 1031 Exchange"). A Section 1031 Exchange
allows for the deferral of taxes related to the gain attributable to the sale of
property if qualified replacement property is identified within 45 days and such
qualified replacement property is then acquired within 180 days from the initial
sale. As described below, the Company identified and acquired certain qualified
replacement properties. In accordance with Statement No. 66, the Company has
estimated its book gain on this land sale and build-to-suit transaction to be
approximately $22.4 million, of which $18.8 million has been recognized during
the year ended December 31, 2003 and is included in investment and other income
on the Company's statement of operations. Approximately $3.6 million is
estimated to be earned in 2004 as the development is completed.
On May 22, 2003, the Company, through Reckson Construction Group, Inc.,
acquired two industrial redevelopment properties in Hauppauge, Long Island
encompassing approximately 100,000 square feet for total consideration of
approximately $6.5 million. On August 27, 2003, the Company, through Reckson
Construction Group, Inc., acquired the remaining 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, from the Company's joint venture
partner, TIAA, for approximately $12.4 million. These acquisitions were financed
from the sales proceeds being held by the aforementioned qualified intermediary
and the properties acquired were qualified replacement properties. As a result
of these acquisitions, the Company successfully completed the exchange of real
property pursuant to Section 1031 and thereby deferred the taxes related to the
gain recognized on the proceeds received from the land sale to First Data Corp.
Two of the qualified replacement properties were subsequently contracted for
sale as part of the Company's Long Island industrial building portfolio sale.
There can be no assurances that the Company will identify or acquire additional
qualified replacement properties in which case the Company would incur the tax
liability on the capital gain realized of approximately $1.5 million.
On August 7, 2003, the Company acquired a ten story, 181,800 square foot
Class A office property located in Stamford, Connecticut. This acquisition was
financed, in part, through an advance under the Company's unsecured credit
facility of $21.6 million and the issuance of 465,845 Class C OP Units valued at
$24.00 per unit. In accordance with FASB Statement No. 141 "Business
Combinations", the Company allocated and recorded a net deferred intangible
lease asset of approximately $1.5 million, representing the net value of
acquired above and below market leases, assumed lease origination costs and
other value of in-place leases. The net value of the above and below market
leases is amortized over the remaining terms of the respective leases to rental
income and such amortization amounted to approximately $331,000 during the 2003
period of ownership. In addition, amortization expense on the value of lease
origination costs was approximately $114,000 during the 2003 period of
ownership. At acquisition, there were 16 in-place leases aggregating
approximately 136,000 square feet with a weighted average remaining lease term
of approximately 21 months.
55
On September 5, 2003, the Company acquired the Mezz Note which is
comprised of three tranches based upon priority: a $14 million A tranche, a $14
million B tranche and a $2 million C tranche. The Company acquired a 25%
interest in the A tranche, a 75% interest in the B tranche and a 50% interest in
the C tranche. Interest is payable on the tranches at 9.5%, 12.5% and 12.5%,
respectively, over the greater of one month LIBOR or 1.63%. As a result, the
minimum weighted average interest rate accruing to the Company is 13.43% per
annum. In addition, as part of the Company's participation it received a 1%
origination fee amounting to $150,000. Such fee is being recognized over a
three-year period.
On November 24 2003, the Company sold a 181,000 square foot office
property located on Long Island for approximately $24.4 million. Net proceeds
from the sale were used to pay outstanding borrowings under the Company's
unsecured credit facility.
In January 2004, the Company sold a 104,000 square foot office property
located on Long Island for approximately $18.5 million. Net proceeds from the
sale were used to repay borrowings under the Company's unsecured credit
facility.
In January 2004, the Company acquired 1185 Avenue of the Americas, a
42-story, 1.1 million square foot Class A office tower, located between 46th and
47th Streets in New York City for $321 million. In connection with this
acquisition, the Company assumed a $202 million mortgage and $48 million of
mezzanine debt. The balance of the purchase price was paid through an advance
under the Company's unsecured Credit Facility. The floating rate mortgage and
mezzanine debt both mature in August 2004 and presently have a weighted average
interest rate of 4.95%. The property is also encumbered by a ground lease, which
has a remaining term of approximately 40 years with rent scheduled to be re-set
at the end of 2005 and then remain constant for the balance of the term.
During February 2004, a 3.9 acre land parcel located on Long Island was
condemned by the Town of Oyster Bay. As consideration for the condemnation the
Company anticipates to initially receive approximately $1.8 million. The
Company's cost basis in this land parcel at December 31, 2003 was approximately
$1.4 million. The Company is currently contesting this valuation and seeking
payment of additional consideration from the Town of Oyster Bay but there can be
no assurances that the Company will be successful in obtaining any such
additional consideration.
In February 2004, the Company signed a contract to sell a 175,000 square
foot office building located on Long Island for approximately $30 million of
which the Company owns a 51% interest. Net proceeds from the sale are
anticipated to be used to pay outstanding borrowings under the Company's
unsecured credit facility.
56
The following table sets forth the Company's original invested capital (at
cost and 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 Amounts
joint ventures 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
======= ======= ========
In September 2003, RSVP completed the restructuring of its capital
structure. In connection with the restructuring, RSVP redeemed the interest of
the preferred equity holders of RSVP for an aggregate of $137 million in cash
(including proceeds from the disposition of all of the Privatization and Medical
Offices assets) and the transfer to the preferred equity holders of the assets
that comprised RSVP's parking investments valued at approximately $28.5 million.
57
Financing Activities
During 2003, the Operating Partnership paid cash distributions on its
Class A common units of approximately $1.70 per unit, approximately $2.59 per
unit on its Class B common units and approximately $.28 per unit on its Class C
common units which were issued on August 7, 2003.
On November 10, 2003, as partial consideration for the Company's sale of
its Long Island industrial building portfolio to the departing Rechler family
members, the Company redeemed and retired, approximately 3.9 million OP Units
valued at approximately $90.4 million or $23.00 per share. In addition, during
the year ended December 31, 2003, certain limited partners exchanged
approximately 258,000 OP Units for an equal number of shares of the Company's
Class A common stock.
During the year ended December 31, 2002, certain limited partners
exchanged approximately 11,303 preferred units of limited partnership interest
in the Operating Partnership, with a liquidation preference value of
approximately $11.3 million, for 451,934 OP Units at an average price of $24.66
per OP Unit. In addition, certain limited partners exchanged 666,468 OP Units
for an equal number of shares of the Company's Class A common stock.
On August 7, 2003, in conjunction with the Operating Partnership's
acquisition of a Class A office property located in Stamford, Connecticut, it
issued 465,845 Class C OP Units to the sellers of the property. The Class C OP
Units are substantially identical to the Class A OP Units except that the Class
C OP Units will receive an initial annual distribution of $1.87 per unit, which
amount will increase or decrease pro-rata based upon changes in the dividend
paid on the Company's Class A common stock.
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. During the year ended
December 31, 2003, as a result of this buy-back program, the Operating
Partnership purchased 252,000 Class A common units at an average price of $18.01
per unit for an aggregate purchase price of approximately $4.5 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. During October 2002, the Company purchased and retired 357,500
shares of its Series A preferred stock 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 currently has a three year $500 million
unsecured revolving credit facility (the "Credit Facility") from JPMorgan Chase
Bank, as administrative agent, Wells Fargo Bank, National Association as
syndication agent and Citicorp North America, Inc. and Wachovia Bank, National
Association as co-documentation agents. The Credit Facility matures in December
2005, contains options for a one-year extension subject to a fee of 25 basis
points and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. At December 31, 2003, borrowings under
the Credit Facility were priced off LIBOR plus 120 basis points and the Credit
Facility carried a facility fee of 30 basis points per annum. On January 28,
2004, the Operating Partnership received an investment grade rating on its
senior unsecured debt from Fitch Ratings of BBB-. This rating along with the
Operating Partnership's existing investment grade rating of BBB- from Standard &
Poors, resulted in the pricing on outstanding borrowings to decrease to LIBOR
plus 90 basis points and the facility fee to decrease to 20 basis points per
annum. In the event of a change in the Operating Partnership's senior unsecured
credit rating the interest rates and facility fee are subject to change. At
December 31,
58
2003, the outstanding borrowings under the Credit Facility aggregated $169
million and carried a weighted average interest rate of 2.86% per annum.
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 December 31, 2003, the Operating Partnership
had availability under the Credit Facility to borrow approximately an additional
$331 million subject to compliance with certain financial covenants.
In January 2004, the Operating Partnership exercised its option to redeem
two million shares, or 100% of its outstanding Series B preferred stock for
approximately 1,958,000 shares of its Class A common stock.
On January 22, 2004, the Operating Partnership issued $150 million of
seven-year 5.15% (5.196% effective rate) senior unsecured notes. Prior to the
issuance of these notes the Company entered into several anticipatory interest
rate hedge instruments to protect itself against potentially rising interest
rates. At the time the notes were issued the Company incurred a net cost of
approximately $980,000 to settle these instruments. Such costs will be amortized
over the term of the notes. Net proceeds of approximately $148 million received
from this issuance were used to repay outstanding borrowings under the Credit
Facility.
On March 15, 2004, the Company issued 5.5 million shares of its Class A
common stock at $27.18 per share, net of underwriting discount, for proceeds
aggregating approximately $149.5 million. In addition, the underwriter was
granted a 30-day over-allotment option to purchase up to an additional 825,000
shares. Net proceeds were used to repay $100 million of the Operating
Partnership's 7.4% senior unsecured notes at their maturity on March 15, 2004,
repay borrowings under the Credit Facility and for general corporate purposes.
The Operating Partnership issues additional units to the Company, and
thereby increases the Company's general partnership interest in the Operating
Partnership, with terms similar to the terms of any securities (i.e.: common
stock or preferred stock) issued by the Company (including any securities issued
by the Company upon the exercise of stock options). Any consideration received
by the Company in respect of the issuance of its securities is contributed to
the Operating Partnership. In addition, the Operating Partnership or a
subsidiary, funds the compensation of personnel, including any amounts payable
under the Company's LTIP.
59
Capitalization
The Operating Partnership's indebtedness at December 31, 2003 totaled
approximately $1.3 billion (including its share of joint venture debt and net of
minority partners' interests share of joint venture debt) and was comprised of
$169.0 million outstanding under the Credit Facility, approximately $499.4
million of senior unsecured notes and approximately $588.8 million of mortgage
indebtedness with a weighted average interest rate of approximately 7.32% and a
weighted average maturity of approximately 8.1 years. Based on the Operating
Partnership's total market capitalization of approximately $3.1 billion at
December 31, 2003 (calculated based on the sum of (i) the market value of the
Company's Class A common stock and OP Units, assuming conversion, (ii) the
liquidation preference value of the Company's preferred stock, (iii) the
liquidation preference value of the Operating Partnership's preferred units and
(iv) the $1.3 billion of debt), the Operating Partnership's debt represented
approximately 41.2% of its total market capitalization.
On October 16, 2000, the Company's Board of Directors announced that it
adopted a Shareholder Rights Plan designed to protect its shareholders from
various abusive takeover tactics, including attempts to acquire control of the
Company at an inadequate price, depriving its shareholders of the full value of
their investment. The Operating Partnership has adopted a similar rights plan
(the "Rights Plan") which would be triggered in the event the Company's
Shareholder Rights Plan is triggered. A description of the Rights Plan is
included in the Notes to Financial Statements of the Operating Partnership.
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 December 31, 2003 (in
thousands):
MATURITY DATE
-------------------------------------------------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
-------- -------- -------- -------- ------- ---------- ----------
Mortgage notes payable (1) $ 12,853 $ 13,887 $ 13,478 $ 10,969 $ 9,989 $105,178 $ 166,354
Mortgage notes payable (2)(3) -- 18,553 129,920 60,539 -- 346,269 555,281
Senior unsecured notes 100,000 -- -- 200,000 -- 200,000 500,000
Unsecured credit facility -- 169,000 -- -- -- -- 169,000
Land lease obligations 2,993 2,995 2,961 2,888 2,888 47,309 62,034
Air rights lease
obligations (4) 333 333 333 333 333 3,680 5,345
Operating leases 785 813 842 870 370 -- 3,680
-------- -------- -------- -------- ------- -------- ----------
$116,964 $205,581 $147,534 $275,599 $13,580 $702,436 $1,461,694
======== ======== ======== ======== ======= ======== ==========
(1) Scheduled principal amortization payments.
(2) Principal payments due at maturity.
(3) In addition, the Operating Partnership has a 60% interest in an
unconsolidated joint venture property. The Operating Partnership's pro
rata share of the mortgage debt at December 31, 2003 is approximately $7.9
million. This mortgage note payable bears interest at 8.85% per annum and
matures on September 1, 2005 at which time the Operating Partnership's
share of the mortgage debt will be approximately $6.9 million.
(4) Excludes approximately $453,000 in aggregate payments due under a Long
Island office property which was sold in January 2004
Certain of the mortgage notes payable are guaranteed by certain limited
partners in the Operating Partnership and / or the Company. In addition,
consistent with customary practices in non-recourse lending, certain
non-recourse mortgages may be recourse to the Operating Partnership under
certain limited circumstances including environmental issues and breaches of
material representations.
At December 31, 2003, the Operating Partnership had approximately $1.0
million in outstanding undrawn standby letters of credit issued under the Credit
Facility. In addition, approximately $44 million, or 6.1%, of the Operating
Partnership's mortgage debt is recourse to the Company.
60
Other Matters
Seven of the Operating Partnership's office properties which were acquired
by the issuance of OP Units are subject to agreements limiting the Operating
Partnership's ability to transfer them prior to agreed upon dates without the
consent of the limited partner who transferred the respective property to the
Operating Partnership. In the event the Operating Partnership transfers any of
these properties prior to the expiration of these limitations, the Operating
Partnership may be required to make a payment relating to taxes incurred by the
limited partner. These limitations expire between 2007 and 2013.
Two 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.
In connection with the Disposition, the employment of Donald Rechler,
Roger Rechler, Gregg Rechler and Mitchell Rechler as officers of the Company
terminated and Roger Rechler, Gregg Rechler and Mitchell Rechler resigned as
members of the Board of Directors. In connection with the Disposition and the
terminations of employment, the Company incurred the following restructuring
charges: (i) approximately $7.5 million related to outstanding stock loans under
the Company's historical long term incentive program ("LTIP") were transferred
to the entity that acquired the Long Island industrial building portfolio and
approximately $642,000 of loans related to life insurance contracts were
extinguished, (ii) approximately $2.9 million paid to the departing Rechler
family members in exchange for 127,689 of rights to receive shares of Class A
common stock that were granted in 2002 and their rights that were granted in
2003 were forfeited in their entirety and (iii) with respect to two of the
departing Rechler family members participating in the Company's March 2003 LTIP,
each received 8,681 shares of the Company's Class A common stock related to the
service component of their core award which was valued at $293,000 in the
aggregate. In addition, if the Company was to attain its annual performance
measure under the March 2003 LTIP in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they remained in continuous employment
with the Company. The remainder of their core awards was forfeited, as was the
entire amount of the special outperformance component of the March 2003 LTIP.
The Company also incurred additional restructure charges of approximately $1.2
million related primarily to the release and severance of approximately 25
employees. Total restructure charges of approximately $12.5 million were
mitigated by a $972,000 fee from the departing Rechler family members related to
the termination of the Company's option to acquire certain property which was
either owned by certain Rechler family members or in which the Rechler family
members own a non-controlling interest .
A number of shareholder derivative actions have been commenced purportedly
on behalf of the Company against its Board of Directors relating to the
Disposition. The complaints allege, among other things, that the process by
which the directors agreed to the transaction was not sufficiently independent
of the Rechler family and did not involve a "market check" or third party
auction process and, as a result, was not for adequate consideration. The
plaintiffs seek similar relief, including a declaration that the directors
violated their fiduciary duties and damages. The Company's management believes
that the complaints are without merit.
61
In July 2002, as a result of certain provisions of the Sarbanes Oxley
legislation, the Company discontinued the use of stock loans in its LTIP. In
connection with LTIP grants made prior to the enactment of the Sarbanes Oxley
legislation the Company made stock loans to certain executive and senior
officers to purchase 1,372,393 shares of its Class A common stock at market
prices ranging from $18.44 per share to $27.13 per share. The stock loans were
set to bear interest at the mid-term Applicable Federal Rate and were secured by
the shares purchased. Such stock loans (including accrued interest) were
scheduled to vest and be ratably forgiven each year on the anniversary of the
grant date based upon vesting periods ranging from four to ten years based on
continued service and in part on attaining certain annual performance measures.
These stock loans had an initial aggregate weighted average vesting period of
approximately nine years. As of December 31, 2003, and giving effect to the
settlement of the employment contracts of certain executive officers, there
remains 264,144 shares of common stock subject to the original stock loans which
are anticipated to vest between 2004 and 2011. Approximately $3.1 million and
$4.5 million of compensation expense was recorded for the years ended December
31, 2003 and 2002, respectively, related to these LTIP. Such amounts have been
included in marketing, general and administrative expenses on the accompanying
consolidated statements of operations.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $5.6 million and $17.0 million at December 31, 2003 and
December 31, 2002, respectively, and have been included as a reduction of
additional paid in capital on the accompanying consolidated balance sheets.
Other outstanding loans to executive and senior officers at December 31, 2003
and December 31, 2002 amounted to approximately $2.9 million and $2.0 million,
respectively, primarily related to tax payment advances on stock compensation
awards and life insurance contracts made to certain executive and non-executive
officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively and collectively, the "Rights"). Each Right represents the right to
receive, upon vesting, one share of Class A common stock if shares are then
available for grant under one of the Company's stock option plans or, if shares
are not so available, an amount of cash equivalent to the value of such stock on
the vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 190,524 shares of the Company's Class A common stock and the
2003 Rights aggregate 60,760 shares of Class A common stock. As of December 31,
2003, and giving effect to the settlement of the employment contracts of certain
executive officers, there remains 47,126 shares of Class A common stock related
to the 2002 Rights and 26,040 shares of Class A common stock related to the 2003
rights. During the year ended December 31, 2003, the Company recorded
approximately $855,000 of compensation expense related to the Rights. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of operations.
62
In March 2003, the Company established a new LTIP for its executive and
senior officers. The four-year plan has a core award, which provides for annual
stock based compensation based upon continued service and in part based on
attaining certain annual performance measures. The plan also has a special
outperformance award, which provides for compensation to be earned at the end of
a four-year period if the Company attains certain four-year cumulative
performance measures. Amounts earned under the special outperformance award may
be paid in cash or stock at the discretion of the Compensation Committee of the
Board. Performance measures are based on total shareholder returns on a relative
and absolute basis. On March 13, 2003, the Company made available 1,384,102
shares of its Class A common stock under its existing stock option plans in
connection with the core award of this LTIP for twelve of its executive and
senior officers. During May 2003, two of the Company's executive officers waived
these awards under this LTIP in their entirety, which aggregated 277,778 shares
or 20% of the core awards granted. In addition, the special outperformance
awards of the LTIP were amended to increase the per share base price above which
the four year cumulative return is measured from $18.00 to $22.40. As of
December 31, 2003 and giving effect to the settlement of the employment
contracts of certain executive officers, there remains 879,858 shares of Class A
common stock reserved for future issuance under the core award of this LTIP.
With respect to the core award of this LTIP, the Company recorded approximately
$2.6 million of compensation expense for the year ended December 31, 2003. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of operations. Further, no provision
will be made for the special outperformance award of this LTIP until such time
as achieving the requisite performance measures is determined to be probable.
63
OFF BALANCE SHEET ARRANGEMENTS
The Operating Partnership has no off balance sheet arrangements except for
its 60% non-controlling interest in the 520 JV and its joint venture interest in
RSVP (for a more detailed description of these arrangements see "Overview and
Background" of this Item 7).
INFLATION
The office leases generally provide for fixed base rent increases or
indexed escalations. In addition, the office leases provide for separate
escalations of real estate taxes, operating expenses and electric costs over a
base amount. The industrial / R&D leases generally provide for fixed base rent
increases, direct pass through of certain operating expenses and separate real
estate tax escalations over a base amount. The Operating Partnership believes
that inflationary increases in expenses will be mitigated 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 and has billed them to its tenants
consistent with the terms of the underlying leases. 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.
64
FUNDS FROM OPERATIONS
Management believes that funds from operations ("FFO") is an appropriate
measure of performance of an equity REIT. Although FFO is a non-GAAP measure,
the Operating Partnership believes it provides useful information to its
shareholders, potential investors and management. The Operating Partnership
computes FFO in accordance with the standards established by the National
Association of Real Estate Investment Trusts ("NAREIT") as net income or loss,
excluding gains or losses from sales of depreciable properties plus real estate
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated from
operating activities in accordance with GAAP and is not indicative of cash
available to fund cash needs. FFO should not be considered as an alternative to
net income as an indicator of the Operating Partnership's operating performance
or as an alternative to cash flow as a measure of liquidity. (See Selected
Financial Data). FFO for the year ended December 31, 2003 includes a gain from
the sale of land and build-to-suit transaction in the amount of $18.8 million.
For the years ended December 31, 2002 and 2001, pursuant to the Operating
Partnership's adoption of FASB Statement No. 145, which addresses reporting for
gains and losses from extinguishment of debt, the Operating Partnership has
reduced previously reported FFO by approximately $2.6 million and $2.9 million,
respectively, related to the write-off of certain deferred loan costs incurred
in connection with the Operating Partnership's refinancing of its debt. These
costs were previously recorded as an extraordinary loss and therefore excluded
from the Operating Partnership's calculation of FFO. In addition, FFO for the
year ended December 31, 2001 excludes $163 million of valuation reserves on
investments in affiliate loans and joint ventures.
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 for
the years ended December 31 (in thousands):
2003 2002 2001
-------- -------- --------
Net income (loss) allocable to common unitholders........... $156,364 $ 61,215 $(59,943)
Adjustments for basic Funds From Operations
Add:
Real estate depreciation and amortization............... 113,940 108,906 100,967
Minority partners' interests in consolidated 17,972 18,730 15,975
partnerships.......................................
Valuation reserves on investments in affiliate loans
and joint ventures................................ -- -- 163,000
Less:
Gain on sales of real estate............................ 126,789 5,433 20,173
Amounts distributable to minority partners in
consolidated partnerships.......................... 26,598 24,996 19,083
-------- -------- --------
Basic Funds From Operations................................. 134,889 158,422 180,743
Add:
Dividends and distributions on dilutive shares
and units.......................................... 1,093 23,123 26,601
-------- -------- --------
Diluted Funds From Operations............................... $135,982 $181,545 $207,344
======== ======== ========
Weighted Average Shares/OP Units outstanding (1)............ 64,884 67,180 66,057
======== ======== ========
Diluted Weighted Average Shares/OP Units outstanding (1).... 65,715 78,133 79,027
======== ======== ========
(1) Assumes conversion of limited partnership units of the Operating
Partnership.
65
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk facing the Operating Partnership is interest rate
risk on its long-term debt, mortgage notes and notes receivable. The Operating
Partnership will, when advantageous, hedge its interest rate risk using
financial instruments. The Operating Partnership is not subject to foreign
currency risk.
The Operating Partnership manages its exposure to interest rate risk on
its variable rate indebtedness by borrowing on a short-term basis under its
Credit Facility until such time as it is able to retire the short-term variable
rate debt with either a long-term fixed rate debt offering, long term mortgage
debt, equity offerings or through sales or partial sales of assets.
The Operating Partnership will recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges will be adjusted to fair
value through income. If a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged asset, liability or firm commitment
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. As of December 31,
2003, the Operating Partnership had certain derivatives outstanding related to
the Operating Partnership's January 2004 issuance of senior unsecured notes. At
December 31, 2003 the fair value of these instruments reasonably approximated
their carrying value.
The fair market value ("FMV") of the Operating Partnership's long term
debt, mortgage notes and notes receivable is estimated based on discounting
future cash flows at interest rates that management believes reflect the risks
associated with long term debt, mortgage notes and notes receivable of similar
risk and duration.
The following table sets forth the Operating Partnership's long-term debt
obligations by scheduled principal cash flow payments and maturity date,
weighted average interest rates and estimated FMV at December 31, 2003 (dollars
in thousands):
For the Year Ended December 31
-------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) F M V
------------------------------------------------------------------------------------------------
Long term debt:
Fixed rate.......... $ 112,853 $ 32,440 $143,398 $271,508 $9,989 $651,447 $1,221,635 $1,306,303
Weighted average
interest rate..... 7.41% 6.90% 7.37% 7.14% 7.23% 7.32% 7.28%
Variable rate....... $ -- $169,000 $ -- $ -- $ -- $ -- $ 169,000 $ 169,000
Weighted average
interest rate..... --% 2.86% --% --% --% --% 2.86%
(1) Includes aggregate unamortized issuance discounts of approximately
$555,000 on the senior unsecured notes issued during March 1999 and June
2002, which are due at maturity.
In addition, the Operating Partnership has assessed the market risk for
its variable rate debt, which is based upon LIBOR, and believes that a one
percent increase in the LIBOR rate would have an approximate $1.7 million
annual increase in interest expense based on $169 million of variable rate
debt outstanding at December 31, 2003.
66
The following table sets forth the Operating Partnership's mortgage notes
and notes receivable by scheduled maturity date, weighted average interest rates
and estimated FMV at December 31, 2003 (dollars in thousands):
For the Year Ended December 31
----------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total (1) F M V
-----------------------------------------------------------------------------------------------
Mortgage notes
and notes receivable:
Fixed rate............ $21,500 $ -- $ -- $16,990 $ -- $ -- $38,490 $39,368
Weighted average
interest rate...... 10.85% --% --% 12.0% --% --% 11.36%
Variable rate.......... $ -- $15,000 $ -- $ -- $ -- $ -- $15,000 $15,000
Weighted average
interest rate....... --% 13.43% --% --% --% --% 13.43%
(1) Excludes interest receivables aggregating approximately $1.5 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in a separate section of this Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is reported within the time periods specified in the SEC's
rules and forms. In this regard, the Operating Partnership has formed a
Disclosure Committee currently comprised of all of the Company's executive
officers as well as certain other employees with knowledge of information that
may be considered in the SEC reporting process. The Committee has responsibility
for the development and assessment of the financial and non-financial
information to be included in the reports filed by the Operating Partnership
with the SEC and assists the Company's Chief Executive Officer and Chief
Financial Officer in connection with their certifications contained in the
Operating Partnership's SEC reports. The Committee meets regularly and reports
to the Company's Audit Committee, with the participation of the Company's
management, on a quarterly or more frequent basis. Our principal executive and
financial officers have evaluated, with the participation of the Company's
management, our disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K. Based upon the evaluation, our
principal executive and financial officers concluded that such disclosure
controls and procedures are effective.
There were no changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
67
PART III
ITEMS 10, 11, 12, 13 AND 14
The Company is the sole managing general partner of the Operating
Partnership. All of the Company's business is conducted through the Operating
Partnership. As a result, the information required by items 10, 11, 12, 13 and
14 is identical to the information contained in Items 10, 11, 12, 13 and 14 of
the Company's Form 10-K, which incorporates by reference information appearing
in the Company's Proxy Statement furnished to shareholders in connection with
the Company's 2004 Annual Meeting. Such information is incorporated by reference
in this Form 10-K.
68
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1 and 2) Financial Statement Schedules
The following consolidated financial information is included as a separate
section of this annual report on Form 10-K:
PAGE
----
RECKSON OPERATING PARTNERSHIP, L.P.
Report of Independent Auditors................................................................ 75
Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002..................... 76
Consolidated Statements of Operations for the years ended December 31, 2003, 2002,
and 2001.................................................................................. 78
Consolidated Statements of Partners' Capital for the years ended December 31,
2003, 2002, and 2001...................................................................... 79
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002,
and 2001.................................................................................. 80
Notes to Consolidated Financial Statements.................................................... 81
Schedule III - Real Estate and Accumulated Depreciation....................................... 117
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
(3) Exhibits
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
- ------ --------- -----------
3.1 a Amended and Restated Agreement of Limited Partnership of
the Registrant
3.2 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
A Preferred Units of Limited Partnership Interest
3.3 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
B Preferred Units of Limited Partnership Interest
3.4 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
C Preferred Units of Limited Partnership Interest
3.5 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
D Preferred Units of Limited Partnership Interest
3.6 g Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
B Common Units of Limited Partnership Interest
3.7 g Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
E Preferred Partnership Units of Limited Partnership
3.8 j Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
F Junior Participating Preferred Partnership Units
Issuable Under the Rights Plan
3.9 s Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing the
Series C Common Units of Limited Partnership Interest
4.1 f Form of 7.40% Notes due 2004 of the Registrant
4.2 f Form of 7.75% Notes due 2009 of the Registrant
4.3 f Indenture, dated March 26, 1999, among the Registrant,
Reckson Associates Realty Corp. (the "Company"), and The
Bank of New York, as trustee
4.4 j Rights Agreement, dated as of October 13, 2000, between
the Registrant and American Stock Transfer and Trust
Company
4.5 n Form of 6.00% Notes due 2007 of the Registrant
4.6 d Note Purchase Agreement for the Senior Unsecured Notes
4.7 v Form of 5.15% Notes due 2011 of the Registrant
10.1 d Third Amended and Restated Agreement of Limited
Partnership of Omni Partners, L.P.
10.2 h Amendment and Restatement of Employment and
Non-Competition Agreement, dated as of August 15, 2000
between the Company and Scott Rechler
10.3 h Amendment and Restatement of Employment and
Non-Competition Agreement, dated as of August 15, 2000
between the Company and Michael Maturo
10.4 h Amendment and Restatement of Employment and
Non-Competition Agreement, dated as of August 15, 2000
between the Company and Jason Barnett
10.5 w Employment and Noncompetition Agreement, dated as of
July 16, 2001, between the Company and F.D. Rich
10.6 w Employment and Noncompetition Agreement, dated as of
November 20, 2002, among the Company, Metropolitan
Partners LLC and Philip Waterman III
10.7 a Purchase Option Agreement relating to 225 Broadhallow
Road
10.8 s Amended and Restated 1995 Stock Option Plan
69
10.9 c 1996 Employee Stock Option Plan
10.10 b Ground Leases for certain of the properties
10.11 s Amended and Restated 1997 Stock Option Plan
10.12 d 1998 Stock Option Plan
10.13 h Amended and Restated Severance Agreement, dated August
15, 2000 between the Company and Scott Rechler
10.14 h Amended and Restated Severance Agreement, dated August
15, 2000 between the Company and Michael Maturo
10.15 h Amended and Restated Severance Agreement, dated August
15, 2000 between the Company and Jason Barnett
10.16 g Amended and Restated Credit Agreement dated as of
August 4, 1999 between Reckson Service Industries, Inc.,
as borrower and the Registrant, as Lender relating to
Reckson Strategic Venture Partners, LLC ("RSVP Credit
Agreement")
10.17 g Amended and Restated Credit Agreement dated as of August
4, 1999 between Reckson Service Industries, Inc., as
borrower and the Registrant, as Lender relating to the
operations of Reckson Service Industries, Inc. ("RSI
Credit Agreement")
10.18 g Letter Agreement, dated November 30, 1999, amending the
RSVP Credit Agreement and the RSI Credit Agreement
10.19 k Second Amendment to the Amended and Restated Credit
Agreement, dated March 30, 2001, between the Registrant
and FrontLine Capital Group
10.20 l Loan Agreement, dated as of June 1, 2001, between 1350
LLC, as Borrower, and Secore Financial Corporation, as
Lender
10.21 l Loan Agreement, dated as of July 18, 2001, between
Metropolitan 919 3rd Avenue, LLC, as Borrower, and Secore
Financial Corporation, as Lender
10.22 h Operating Agreement dated as of September 28, 2000
between Reckson Tri-State Member LLC (together with its
permitted successors and assigns) and TIAA Tri-State LLC
10.23 i Agreement of Spreader, Consolidation and Modification of
Mortgage Security Agreement among Metropolitan 810 7th
Ave., LLC, 100 Wall Company LLC and Monumental Life
Insurance Company
10.24 i Consolidated, Amended and Restated Secured Promissory
Note relating to Metropolitan 810 7th Ave., LLC and 100
Wall Company LLC
10.25 m Amended and Restated Operating Agreement of 919 JV LLC
10.26 s Amended and Restated 2002 Stock Option Plan
10.27 p Indemnification Agreement, dated as of May 23, 2002,
between the Company and Donald J. Rechler*
10.28 o Second Amended and Restated Credit Agreement, dated as
of December 30, 2002, among the Registrant, the
institutions from time to time party thereto as Lenders
and JPMorgan Chase Bank, as Administrative Agent
10.29 o Form of Guarantee Agreement to the Second Amended and
Restated Credit Agreement, between and among the
Registrant, the institutions from time to time party
thereto as Lenders and JPMorgan Chase Bank, as
Administrative Agent
10.30 o Form of Promissory Note to the Second Amended and
Restated Credit Agreement, between and among the
Registrant, the institutions from time to time party
thereto as Lenders and JPMorgan Chase Bank, as
Administrative Agent
10.31 o First Amendment to Second Amended and Restated Credit
Agreement, dated as of January 24, 2003, among the
Registrant, JPMorgan Chase Bank, as Administrative Agent
for the institutions from time to time party thereto as
Lenders and Key Bank, N.A., as New Lender
70
10.32 r Amended and Restated Long-Term Incentive Award
Agreement, dated as of March 13, 2003, between the
Company and Scott H. Rechler**
10.33 q Award Agreement, dated November 14, 2002, between the
Company and Scott H. Rechler***
10.34 q Award Agreement, dated March 13, 2003, between the
Company and Scott H. Rechler****
10.35 t Redemption Agreement, dated as of September 10, 2003, by
and among the Registrant, Reckson FS Limited Partnership
and Rechler Equity Partners I LLC, as transferee
10.36 t Property Sale Agreement, dated as of September 10, 2003,
by and among the Registrant, Reckson FS Limited
Partnership, RCG Kennedy Drive LLC and Rechler Equity
Partners II LLC
10.37 t Transition Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Donald
Rechler
10.38 t Transition Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Roger
Rechler
10.39 t Transition Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Mitchell
Rechler
10.40 t Transition Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Gregg
Rechler
10.41 t Amendment Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Scott
Rechler
10.42 u Purchase and Sale Agreement, dated as of November 10,
2003, between Reckson 1185 Avenue of the Americas LLC and
1185 Sixth LLC
12.1 Statement of Ratios of Earnings to Fixed Charges
14.1 w Reckson Associates Realty Corp. Code of Ethics and
Business Conduct
21.1 Statement of Subsidiaries
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included in Part IV of the Form 10-K)
31.1 Certification of Scott H. Rechler, Chief Executive
Officer and President of the Company, the sole general
partner of the Registrant, pursuant to Rule 13a-14(a) or
Rule 15(d)-14(a)
31.2 Certification of Michael Maturo, Executive Vice
President, Treasurer and Chief Financial Officer of the
Company, the sole general partner of the Registrant,
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
32.1 Certification of Scott H. Rechler, Chief Executive
Officer and President of the Company, the sole general
partner of the Registrant, pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code
32.2 Certification of Michael Maturo, Executive Vice
President, Treasurer and Chief Financial Officer of the
Company, the sole general partner of the Registrant,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code
(a) Previously filed as an exhibit to Registration Statement Form S-11 (No.
333-1280) and incorporated herein by reference.
(b) Previously filed as an exhibit to Registration Statement Form S-11 (No.
33-84324) and incorporated herein by reference.
(c) Previously filed as an exhibit to the Company's Form 8-K report filed
with the SEC on November 25, 1996 and incorporated herein by reference.
(d) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 26, 1998 and incorporated herein by reference.
71
(e) Previously filed as an exhibit to the Company's Form 8-K report filed
with the SEC on March 1, 1999 and incorporated herein by reference.
(f) Previously filed as an exhibit to the Registrant's Form 8-K filed with
SEC on March 26, 1999 and incorporated herein by reference.
(g) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 17, 2000 and incorporated herein by reference.
(h) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on October 17, 2000 and incorporated herein by reference.
(i) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 21, 2001 and incorporated herein by reference.
(j) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 22, 2001 and incorporated herein by reference.
(k) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on May 14, 2001 and incorporated herein by reference.
(l) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on August 14, 2001 and incorporated herein by reference.
(m) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on January 8, 2002 and incorporated herein by reference.
(n) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on June 18, 2002 and incorporated herein by reference.
(o) Previously filed as an exhibit to the Registrant's Current Report on
8-K filed with the SEC on January 27, 2003 and incorporated herein by
reference.
(p) Previously filed with the Registrant's Form 10-Q filed with the SEC on
November 14, 2002 and incorporated herein by reference.
(q) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 31, 2003 and incorporated herein by reference.
(r) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on May 15, 2003 and incorporated herein by reference.
(s) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on August 14, 2003 and incorporated herein by reference.
(t) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on September 18, 2003 and incorporated herein by reference.
(u) Previously filed as an exhibit to the Registrant's Form 8-K filed on
November 21, 2003 and incorporated herein by reference.
(v) Previously filed as an exhibit to the Registrant's Form 8-K filed on
January 21, 2004 and incorporated herein by reference.
(w) Previously filed as an exhibit to the Company's Form 10-K filed on
March 9, 2004 and incorporated herein by reference.
* Each of Scott H. Rechler, Michael Maturo, Jason M. Barnett, John V.N.
Klein, Lewis S. Ranieri and Conrad D. Stephenson has entered into an
Indemnification Agreement with the Company, dated as of May 23, 2002.
Each of Ronald H. Menaker and Peter Quick has entered into an
Indemnification Agreement with the Company dated as of May 1, 2002.
Each of Douglas Crocker and Stanley Steinberg has entered into an
Indemnification Agreement with the Company dated as of February 5,
2004. Elizabeth McCaul has entered into an Indemnification Agreement
with the Company dated as of February 25, 2004. These Agreements are
identical in all material respects to the Indemnification Agreement for
Donald J. Rechler incorporated by reference herein.
** Each of Michael Maturo and Jason M. Barnett has entered into an
Amended and Restated Long-Term Incentive Award Agreement with the
Company, dated as of March 13, 2003. These Agreements are identical in
all material respects to the Amended and Restated Long-Term Incentive
Award Agreement for Scott H. Rechler incorporated by reference herein.
*** Michael Maturo has been awarded certain rights to shares of Class A
Common Stock of the Company, pursuant to Award Agreements dated
November 14, 2002. This Agreement is identical in all material respects
to the Agreement for Scott H. Rechler incorporated by reference herein,
except that Michael Maturo received rights to 27,588 shares.
**** Each of Michael Maturo and Jason M. Barnett has been awarded certain
rights to shares of Class A Common Stock of the Company, pursuant to
Award Agreements dated March 13, 2003. These Agreements are identical
in all material respects to the Agreement for Scott H. Rechler
incorporated by reference herein.
72
(B) REPORTS ON FORM 8-K:
Reports on Form 8-K
On October 1, 2003, the Registrant submitted a report on Form 8-K under
Item 5 thereof in order to describe (i) the restructuring of the
capital structure and management of RSVP and (ii) the shareholder
litigation concerning the Registrant's proposed sale of its industrial
building portfolio.
On October 22, 2003, the Registrant submitted a report on Form 8-K
under Items 2 and 7 thereof in connection with the Registrant's
disposition of its industrial building portfolio.
On November 5, 2003, the Registrant submitted a report on Form 8-K
under Items 7 and 12 thereof in order to file a press release
announcing its consolidated financial results for the quarter ended
September 30, 2003.
On November 21, 2003, the Registrant submitted a report on Form 8-K
under Items 2, 5 and 7 thereof in connection with (i) disposition of
the Registrant's industrial building portfolio and (ii) the acquisition
of 1185 Avenue of the Americas.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 8, 2004.
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp.
By: /s/ Scott H. Rechler
-------------------------------
Scott H. Rechler,
Chief Executive Officer, President and Director
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Reckson Associates Realty Corp., the corporate general partner of
the Registrant hereby severally constitute and appoint Scott H. Rechler and
Michael Maturo, and each of them singly, our true and lawful attorneys-in-fact
with full power to them, and each of them singly, to sign for us and in our
names in the capacities indicated below, the Form 10-K filed herewith and any
and all amendments to said Form 10-K, and generally to do all such things in our
names and in our capacities as officers and directors to enable Reckson
Associates Realty Corp. to comply with the provisions of the Securities Exchange
Act of 1934, and all requirements of the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 8, 2004.
Signature Title
--------- -----
/s/ Donald J. Rechler Chairman of the Board
- ---------------------------
Donald J. Rechler
/s/ Scott H. Rechler Chief Executive Officer, President and Director
- ---------------------------
Scott H. Rechler
/s/ Michael Maturo Executive Vice President, Treasurer and Chief
- --------------------------- Financial Officer (Principal Financial Officer
Michael Maturo and Principal Accounting Officer)
/s/ Ronald Menaker Director
- ---------------------------
Ronald Menaker
/s/ Peter Quick Director
- ---------------------------
Peter Quick
/s/ John V.N. Klein Director
- ---------------------------
John V.N. Klein
/s/ Lewis S. Ranieri Director
- ---------------------------
Lewis S. Ranieri
/s/ Conrad D. Stephenson Director
- ---------------------------
Conrad D. Stephenson
/s/ Douglas Crocker III Director
- ---------------------------
Douglas Crocker III
/s/ Stanley Steinberg Director
- ---------------------------
Stanley Steinberg
/s/ Elizabeth McCaul Director
- ---------------------------
Elizabeth McCaul
74
REPORT OF INDEPENDENT AUDITORS
To the Partners
Reckson Operating Partnership, L.P.
We have audited the accompanying consolidated balance sheets of Reckson
Operating Partnership, L.P. as of December 31, 2003 and 2002, and the related
consolidated statements of operations, partners' capital, and cash flows for
each of the three years in the period ended December 31, 2003. We have also
audited the financial statement schedule listed in the index at item 15(a).
These financial statements and financial statement schedule are the
responsibility of the Operating Partnership's management. Our responsibility is
to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reckson
Operating Partnership, L.P. at December 31, 2003 and 2002, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 17, 2004,
except for Note 15,
as to which the date
is March 15, 2004
75
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
----------------------------------------
2003 2002
------------------- ------------------
ASSETS
Commercial real estate properties, at cost (Notes 2, 3, 5, and 6)
Land...................................................................... $ 386,501 $ 386,747
Buildings and improvements................................................ 2,251,455 2,199,896
Developments in progress:
Land...................................................................... 90,706 92,924
Development costs......................................................... 68,127 28,311
Furniture, fixtures and equipment............................................ 11,338 12,203
------------------- ------------------
2,808,127 2,720,081
Less accumulated depreciation........................................ (469,642) (382,022)
------------------- ------------------
2,338,485 2,338,059
Properties and related assets held for sale, net of accumulated depreciation
(Note 6).................................................................. 6,920 196,954
Investments in real estate joint ventures.................................... 5,904 6,116
Investment in mortgage notes and notes receivable (Note 6)................... 54,986 54,547
Cash and cash equivalents (Note 9)........................................... 23,069 30,576
Tenant receivables........................................................... 12,034 12,529
Investments in service companies and affiliate loans and joint ventures
(Note 8).................................................................. 75,544 78,104
Deferred rents receivable.................................................... 113,601 97,145
Prepaid expenses and other assets............................................ 35,074 32,577
Contract and land deposits and pre-acquisition costs......................... 20,203 240
Deferred leasing and loan costs, less accumulated amortization of
$56,108 and $41,502, respectively......................................... 64,860 65,205
------------------- ------------------
Total Assets.............................................................. $ 2,750,680 $ 2,912,052
=================== ==================
LIABILITIES
Mortgage notes payable (Note 2).............................................. $ 721,635 $ 733,761
Mortgage notes payable and other liabilities associated with properties held
for sale.................................................................. 333 10,722
Unsecured credit facility (Note 3)........................................... 169,000 267,000
Senior unsecured notes (Note 4).............................................. 499,445 499,305
Accrued expenses and other liabilities....................................... 90,527 85,849
Distributions payable........................................................ 28,290 31,575
------------------- ------------------
Total Liabilities......................................................... 1,509,230 1,628,212
------------------- ------------------
Minority interests in consolidated partnerships.............................. 233,070 242,934
------------------- ------------------
Commitments and contingencies (Notes 9, 10, and 13).......................... -- --
PARTNERS' CAPITAL (Note 7)
Preferred Capital, 10,854,162 units outstanding.............................. 281,690 281,690
General Partners Capital:
Class A common units, 58,275,367 and 48,246,083 units outstanding,
respectively........................................................... 682,172 478,121
Class B common units, 0 and 9,915,313 units outstanding, respectively..... -- 209,675
Limited Partners Capital:
Class A common units, 3,084,713 and 7,276,224 units issued and
outstanding, respectively.............................................. 38,613 71,420
Class C common units, 465,845 and 0 units issued and outstanding,
respectively........................................................... 5,905 --
------------------- ------------------
Total Partners Capital.................................................... 1,008,380 1,040,906
------------------- ------------------
Total Liabilities and Partners Capital................................. $ 2,750,680 $ 2,912,052
=================== ==================
(see accompanying notes to financial statements)
76
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
For the year ended December 31,
----------------------------------------------------------
2003 2002 2001
------------------ ------------------- ----------------
REVENUES (Note 10):
Property operating revenues:
Base rents..................................... $ 385,225 $ 395,308 $ 392,824
Tenant escalations and reimbursements.......... 60,556 55,441 54,739
------------------ ------------------- ----------------
Total property operating revenues................... 445,781 450,749 447,563
Interest income on mortgage notes and notes
receivable (including $3,865, $4,287and
$4,196, respectively from related parties)....... 6,568 6,279 6,238
Investment and other income (including $0, $85
and $5,164, respectively from related parties)... 17,933 1,041 14,004
------------------ ------------------- ----------------
Total revenues.................................. 470,282 458,069 467,805
------------------ ------------------- ----------------
EXPENSES:
Property operating expenses......................... 180,411 163,031 155,977
Marketing, general and administrative............... 32,746 29,214 24,289
Interest............................................ 82,487 83,309 82,624
Restructure charges - net (Note 7).................. 11,580 -- --
Depreciation and amortization....................... 109,239 102,444 92,178
------------------ ------------------- ----------------
Total expenses............................... 416,463 377,998 355,068
------------------ ------------------- ----------------
Income before distributions to preferred unit
holders, minority interests, equity in earnings
of real estate joint ventures and service
companies, gain on sales of real estate,
valuation reserves and discontinued operations... 53,819 80,071 112,737
Minority partners' interest in consolidated
partnerships .................................... (17,972) (18,730) (15,975)
Equity in earnings of service companies and real
estate joint ventures (including $0, $465 and
$1,450, respectively from related parties)....... 30 1,113 2,087
Gain on sales of real estate (Note 6)............... -- 537 20,173
Valuation reserves on investments in affiliate
loans and joint ventures and other investments
(Note 8)......................................... -- -- (166,101)
------------------ ------------------- ----------------
Income (loss) before discontinued operations and
distributions to preferred unitholders........... 35,877 62,991 (47,079)
Discontinued operations:
Income from discontinued operations........... 16,058 16,452 11,113
Gain on sales of real estate.................. 126,789 4,895 ---
------------------ ------------------- ----------------
Net income (loss)................................... 178,724 84,338 (35,966)
Preferred unit distributions........................ (22,360) (23,123) (23,977)
----------------- ------------------ --------------
Net income (loss) allocable to common unitholders... $ 156,364 $ 61,215 $ (59,943)
================= ================== ==============
Net income (loss) allocable to:
Class A common units............................. $ 137,996 $ 48,286 $ (47,283)
Class B common units............................. 17,288 12,929 (12,660)
Class C common units......................... 1,080 -- --
----------------- ------------------ --------------
Total............................................... $ 156,364 $ 61,215 $ (59,943)
================= ================== ==============
77
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS - (continued)
(IN THOUSANDS, EXCEPT UNIT DATA)
Net income (loss) per weighted average units:
Class A common................................... $ .18 $ .54 $ (1.29)
Gain on sales of real estate..................... -- .01 .28
Discontinued operations.......................... 2.29 .30 .16
----------------- ------------------ -------------------
Net income (loss) per Class A common............. $ 2.47 $ 85 $ (.85)
================= ================== ===================
Class B common................................... $ .39 $ .83 $ (1.88)
Gain on sales of real estate..................... -- .01 .42
Discontinued operations.......................... 1.55 .44 .23
----------------- ------------------ -------------------
Net income (loss) per Class B common............. $ 1.94 $ 1.28 $ (1.23)
================= ================== ===================
Class C common..................................... $ .09 $ -- $ --
Gain on sales of real estate....................... -- -- --
Discontinued operations............................ 5.65 -- --
----------------- ------------------ -------------------
Net income (loss) per Class C common............... $ 5.74 $ -- $ --
================= ================== ===================
Weighted average common units outstanding:
Class A common................................... 55,786,000 57,059,000 55,773,000
Class B common................................... 8,910,000 10,122,000 10,284,000
Class C common................................... 188,000 -- --
(see accompanying notes to financial statements)
78
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
General Partners' Capital Limited Partners' Capital
-------------------------------------------- --------------------------------
Preferred Class B Class A Class A Common Class C Total
Capital Common units Common units units Common units Partners'Capital
-------------- ------------- ------------- -------------- ------------- ----------------
Balance January 1, 2001............... $ 313,126 $ 270,118 $ 575,570 $ 97,353 $ -- $ 1,256,167
Net loss.............................. -- (12,660) (41,253) (6,030) -- (59,943)
Contributions......................... -- -- 82,821 18,745 -- 101,566
Distributions......................... -- (26,030) (81,142) (12,604) -- (119,776)
Retirement / redemption of units
(Note 7)........................... (11,553) -- 15,421 (15,577) -- (11,709)
-------------- ------------- ------------- -------------- ------------- ---------------
Balance December 31, 2001............. 301,573 231,428 551,417 81,887 -- 1,166,305
Net income............................ -- 12,929 41,604 6,682 -- 61,215
Contributions......................... -- -- 26,227 2,473 -- 28,700
Distributions......................... -- (26,250) (84,365) (12,449) -- (123,064)
Retirement / redemption of units
(Note 7)........................... (19,883) (8,432) (56,762) (7,173) -- (92,250)
-------------- ------------- ------------- -------------- ------------- ---------------
Balance December 31, 2002............. 281,690 209,675 478,121 71,420 -- 1,040,906
Net income............................ -- 17,288 124,966 13,030 1,080 156,364
Contributions......................... -- -- 17,602 -- -- 17,602
Issuance of OP Units.................. -- -- 203,833 6,008 5,172 215,013
Distributions......................... -- (23,130) (83,367) (11,656) (347) (118,500)
Retirement / redemption of units
(Note 7)........................... -- (203,833) (58,983) (40,189) -- (303,005)
-------------- ------------- ------------- -------------- ------------- ---------------
Balance December 31, 2003............. $ 281,690 $ -- $ 682,172 $ 38,613 $ 5,905 $ 1,008,380
============== ============= ============= ============== ============= ===============
(see accompanying notes to financial statements)
79
RECKSON OPERATING PARTNERSHIP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended December 31,
-------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS).......................................................... $ 178,724 84,338 (35,966)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization (including discontinued operations).... 116,633 112,341 102,931
Write off of deferred loan costs..................................... -- 2,602 2,898
Minority partners' interests in consolidated partnerships............ 17,972 18,730 15,975
Gain on sales of real estate, securities and mortgage repayment...... (126,789) (4,804) (20,173)
Valuation reserves on investments in affiliate loans and joint
ventures and other investments....................................... -- -- 166,101
Equity in earnings of real estate joint ventures and service
companies......................................................... (30) (1,113) (2,087)
Changes in operating assets and liabilities:
Deferred rents receivable............................................ (6,444) (26,277) (38,186)
Prepaid expenses and other assets.................................... (5,225) 4,354 (4,869)
Tenant and affiliate receivables..................................... 1,919 (4,417) 1,878
Accrued expenses and other liabilities............................... (15,582) 10,346 342
---------------- ---------------- ----------------
Net cash provided by operating activities.................................. 161,178 196,100 188,844
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Purchases of commercial real estate properties....................... (40,500) -- --
Increase in contract and land deposits and pre-acquisition costs..... (20,000) -- (3,267)
Increase in mortgage notes receivable................................ (15,000) -- --
Additions to developments in progress................................ (24,391) (41,896) (8,260)
Additions to commercial real estate properties....................... (43,341) (48,052) (152,074)
Payment of deferred leasing costs.................................... (16,086) (16,414) (10,513)
Distributions from investments in real estate joint ventures......... 243 276 82
Acquisition of controlling interests in service companies............ -- (122) --
Additions to furniture, fixtures and equipment....................... (196) (2,414) (635)
Investments in affiliate joint ventures.............................. -- -- (25,056)
Proceeds from redemption of preferred securities..................... -- 1,528 35,700
Proceeds from sales of real estate, securities and mortgage note
receivable repayments............................................. 268,757 22,022 76,503
---------------- ---------------- ----------------
Net cash provided by (used in) investing activities....................... 109,486 (85,072) (87,520)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured borrowings..................................... -- -- 325,000
Principal payments on secured borrowings............................. (12,300) (11,065) (302,894)
Proceeds from issuance of senior unsecured notes, net of issuance
costs............................................................. -- 49,432 --
Payment of loan and equity issuance costs............................ (156) (1,568) (6,252)
Investments in affiliate loans and service companies................. -- -- (14,227)
Proceeds from unsecured credit facility.............................. 132,000 158,000 153,000
Principal payments on unsecured credit facility...................... (230,000) (162,600) (98,000)
Contributions ....................................................... 1,028 6,310 2,813
Contributions by minority partners in consolidated partnerships...... -- 1,343 101,832
Distributions to minority partners in consolidated partnerships...... (22,189) (20,051) (16,458)
Distributions........................................................ (142,016) (147,334) (139,568)
Retirement of OP Units............................................... (4,538) (74,692) (1,421)
---------------- ---------------- ----------------
Net cash (used in) provided by financing activities........................ (278,171) (202,225) 3,825
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents....................... (7,507) (91,197) 105,149
Cash and cash equivalents at beginning of period........................... 30,576 121,773 16,624
---------------- ---------------- ----------------
Cash and cash equivalents at end of period................................. $ 23,069 $ 30,576 $ 121,773
================ ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, including interest
capitalized....................................................... $ 97,644 $ 98,083 $ 105,087
================ ================ ================
(see accompanying notes to financial statements)
80
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Reckson Operating Partnership, L. P. (the "Operating Partnership")
commenced operations on June 2, 1995. Reckson Associates Realty Corp. (the
"Company"), which serves as the sole general partner of the Operating
Partnership, is a fully integrated, self administered and self managed real
estate investment trust ("REIT"). The Operating Partnership and the Company,
collectively, the "Company" were formed for the purpose of continuing the
commercial real estate business of Reckson Associates, its affiliated
partnerships and other entities.
The Operating Partnership is engaged in the ownership, management,
operation, leasing and development of commercial real estate properties,
principally office and to a lesser extent industrial buildings and also owns
land for future development (collectively, the "Properties") located in the New
York City tri-state area (the "Tri-State Area").
ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
The Company was incorporated in Maryland in September 1994. In June 1995,
the Company completed an Initial Public Offering (the "IPO") and commenced
operations.
The Company became the sole general partner of the Operating Partnership
by contributing substantially all of the net proceeds of the IPO, in exchange
for an approximate 73% interest in the Operating Partnership. All Properties
acquired by the Company are held by or through the Operating Partnership. In
conjunction with the IPO, the Operating Partnership executed various option and
purchase agreements whereby it issued common units of limited partnership
interest in the Operating Partnership ("OP Units") to certain continuing
investors and assumed certain indebtedness in exchange for (i) interests in
certain property partnerships, (ii) fee simple and leasehold interests in
properties and development land, (iii) certain other business assets and (iv)
100% of the non-voting preferred stock of the management and construction
companies. The Company's ownership percentage in the Operating Partnership was
approximately 94.2% and 89.5% at December 31, 2003 and 2002, respectively.
81
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the
consolidated financial position of the Operating Partnership at December 31,
2003 and 2002 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003. The
Operating Partnership's investments in majority owned and controlled real estate
joint ventures are reflected in the accompanying financial statements on a
consolidated basis with a reduction for the minority partners' interest. The
Operating Partnership also invests in real estate joint ventures where it may
own less than a controlling interest. Such investments are reflected in the
accompanying financial statements on the equity method of accounting. The
operating results of 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
owned a 97% non-controlling interest are reflected in the accompanying financial
statements on the equity method of accounting through September 30, 2002. 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, the Operating Partnership commenced consolidating the
operations of the Service Companies. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
82
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Minority partners' interests in consolidated partnerships represent a 49%
non-affiliated interest in RT Tri-State LLC, owner of an eight property suburban
office portfolio, a 40% non-affiliated interest in Omni Partners, L.P., owner of
a 579,000 square foot suburban office property and a 49% non-affiliated interest
in Metropolitan 919 Third Avenue, LLC, owner of the property located at 919
Third Avenue, New York, NY.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Real Estate
Land, buildings and improvements, furniture, fixtures and equipment are
recorded at cost. Tenant improvements, which are included in buildings and
improvements, are also stated at cost. Expenditures for ordinary maintenance and
repairs are expensed to operations as they are 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,
which are included in buildings and improvements, are amortized on a
straight-line basis over the term of the related leases. Depreciation expense,
net of discontinued operations, for each of the three years ended December 31,
2003 amounted to approximately $65.6 million, $67.0 million and $63.7 million,
respectively.
The Company is required to make subjective assessments as to the useful
lives of its properties for purposes of determining the amount of depreciation
to reflect on an annual basis with respect to those properties. These
assessments have a direct impact on the Company's net income. Should the Company
lengthen the expected useful life of a particular asset, it would be depreciated
over more years and result in less depreciation expense and higher annual net
income.
Assessment by the Company of certain other lease related costs must be
made when the Company has a reason to believe that the tenant will not be able
to execute under the term of the lease as originally expected.
83
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.
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"). Statement No. 144 provides accounting
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets. Statement No. 144 supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. It also supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
related to the disposal of a segment of a business. The Company adopted
Statement No. 144 on January 1, 2002. The adoption of this statement did not
have a material effect on the results of operations or the financial position of
the Company. The adoption of Statement No. 144 does not have an impact on net
income (loss) allocable to common shareholders. Statement No. 144 only impacts
the presentation of the results of operations and gain on sales of depreciable
real estate assets for those properties sold during the period within the
consolidated statements of operations. In accordance with the provisions of
Statement No. 144, the Company allocated approximately $7.6 million, $7.3
million and $12.7 million of its unsecured corporate interest expense to
discontinued operations for the three annual periods ended December 31, 2003,
respectively. Such allocation was based upon the Company's weighted average
interest rate incurred under its unsecured credit facility which was applied to
the portion of the proceeds received from its asset sales as if such asset sales
occurred at the beginning of each reported period.
On July 1, 2001 and January 1, 2002, the Company adopted FASB Statement
No.141 "Business Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangibles", respectively. As part of the acquisition of real estate assets,
the fair value of the real estate acquired is allocated to the acquired tangible
assets, consisting of land, building and building improvements, and identified
intangible assets and liabilities, consisting of the value of above-market and
below-market leases, other value of in-place leases, and value of tenant
relationships, based in each case on their fair values. The Company assesses
fair value based on estimated cash flow projections that utilize appropriate
discount and capitalization rates and available market information. Estimates of
future cash flows are based on a number of factors including the historical
operating results, known trends, and market / economic conditions that may
affect the property. If the Company incorrectly estimates the values at
acquisition or the undiscounted cash flows, initial allocation of purchase price
and future impairment charges may be different.
84
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Tenant's lease security deposits aggregating approximately $4.9 million
and $5.6 million at December 31, 2003 and 2002, respectively, have been included
in cash and cash equivalents on the accompanying balance sheets.
Deferred Costs
Tenant leasing commissions and related costs incurred in connection with
leasing tenant space are capitalized and amortized over the life of the related
lease. In addition, loan costs incurred in obtaining financing are capitalized
and amortized over the term of the related loan.
Costs incurred in connection with equity offerings are charged to
stockholders' equity when incurred.
Income Taxes
No provision has been made for income taxes in the accompanying
consolidated financial statements since such taxes, if any, are the
responsibility of the individual partners.
85
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Revenue Recognition & Accounts Receivable
Minimum rental revenue is recognized on a straight-line basis over the
term of a lease. The excess of rents recognized over amounts contractually due
are included in deferred rents receivable on the accompanying balance sheets.
Contractually due but unpaid rents are included in tenant receivables on the
accompanying balance sheets. Certain lease agreements provide for reimbursement
of real estate taxes, insurance, common area maintenance costs and indexed
rental increases, which are recorded on an accrual basis.
The Company makes estimates of the collectibility of its accounts
receivables related to base rents, tenant escalations and reimbursements and
other revenue or income. The Company specifically analyzes tenant receivables
and analyzes historical bad debts, customer credit worthiness, current economic
trends and changes in customer payment terms when evaluating the adequacy of its
allowance for doubtful accounts. In addition, when tenants are in bankruptcy the
Company makes estimates of the expected recovery of pre-petition administrative
and damage claims. In some cases, the ultimate resolution of those claims can
exceed a year. These estimates have a direct impact on the Company's net income,
because a higher bad debt reserve results in less net income.
The Company incurred approximately $4.7 million and $6.3 million of bad
debt expense for the years ended December 31, 2003 and 2002, respectively,
related to tenant receivables and deferred rents receivable which accordingly
reduced total revenues and reported net income during the period.
86
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company records interest income on investments in mortgage notes and
notes receivable on an accrual basis of accounting. The Company does not accrue
interest on impaired loans where, in the judgment of management, collection of
interest according to the contractual terms is considered doubtful. Among the
factors the Company considers in making an evaluation of the collectibility of
interest are: (i) the status of the loan, (ii) the value of the underlying
collateral, (iii) the financial condition of the borrower and (iv) anticipated
future events.
Gain on sales of real estate are recorded when title is conveyed to the
buyer, subject to the buyer's financial commitment being sufficient to provide
economic substance to the sale and the Company having no substantial continuing
involvement with the buyer.
Net Income (Loss) Per Common Partnership Unit
Net income (loss) per Class A common partnership unit, Class B Common
partnership unit and Class C 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.
Distributions to Preferred Unit Holders
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.
Derivative Instruments
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which became effective January 1, 2001, requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must 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 accumulated other comprehensive income ("OCI") 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.
Extinguishment of Debt
In April 2002, the FASB issued Statement No. 145, ("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 Company adopted Statement No. 145 on January
1, 2003. As a result of the adoption of Statement No. 145, previously reported
extraordinary losses resulting from the write-off of certain deferred loan costs
related to debt refinancings reported in 2002 and 2001 have been reclassed to
interest expense on the accompanying consolidated statements of operations. Such
amounts,
87
totaled approximately $2.6 million and $2.9 million, respectively. The
adoption of Statement No. 145 does not have an impact on net income (loss).
Statement No. 145 only impacts the presentation of the results of operations
within the consolidated statements of operations.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 significantly changes
the current practice in the accounting for, and disclosure of, guarantees.
Guarantees and indemnification agreements meeting the characteristics described
in FIN 45 are required to be initially recorded as a liability at fair value.
FIN 45 also requires a guarantor to make significant new disclosures for
virtually all guarantees even if the likelihood of the guarantor having to make
payment under the guarantee is remote. The disclosure requirements within FIN 45
are effective for financial statements for annual or interim periods ending
after December 15, 2002. The initial recognition and initial measurement
provisions are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have a material
effect on the results of operations or the financial position of the Company.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which explains how to identify variable
interest entities ("VIE") and how to assess whether to consolidate such
entities. The initial determination of whether an entity qualifies as a VIE
shall be made as of the date at which a primary beneficiary becomes involved
with the entity and reconsidered as of the date of a triggering event, as
defined. The provisions of this interpretation are immediately effective for
VIEs formed after January 31, 2003. In December 2003 the FASB issued FIN 46R,
deferring the effective date until the period ending March 31, 2004 for
interests held by public companies in variable interest entities created before
February 1, 2003, which were non-special purpose entities. Management has not
yet determined whether any of its consolidated or unconsolidated subsidiaries
represent VIEs pursuant to such interpretation. Such determination could result
in a change in the Company's consolidation policy related to such entities.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("Statement No. 150"). Statement No. 150 is effective for financial instruments
entered into or modified after May 15, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of adoption.
The adoption of Statement No. 150 did not have a material effect the Company's
financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
88
2. MORTGAGE NOTES PAYABLE
At December 31, 2003, there were 14 fixed rate mortgage notes payable with
an aggregate outstanding principal amount of approximately $721.6 million. These
mortgage notes are secured by properties with an aggregate carrying value at
December 31, 2003 of approximately $1.5 billion and which are pledged as
collateral against the mortgage notes payable. In addition, approximately $44.0
million of the $721.6 million is recourse to the Company. The mortgage notes
bear interest at rates ranging from 6.45% to 9.25%, and mature between 2005 and
2027. The weighted average interest rates on the outstanding mortgage notes
payable at December 31, 2003, 2002 and 2001 were approximately 7.2%, 7.3% and
7.3%, respectively. Certain of the mortgage notes payable are guaranteed by
certain limited partners in the Operating Partnership and / or the Company.
The following table sets forth the Company's mortgage notes payable at
December 31, 2003, by scheduled maturity date (dollars in thousands):
Principal Interest Maturity Amortization
Property Outstanding Rate Date Term (Years)
- ----------------------------------------------- -------------- ----------- --------------- --------------
395 North Service Road, Melville, NY $ 19,301 6.45% October, 2005 $34 per month
200 Summit Lake Drive, Valhalla, NY 18,937 9.25% January, 2006 25
1350 Avenue of the Americas, NY, NY 73,779 6.52% June, 2006 30
Landmark Square, Stamford, CT (a) 44,029 8.02% October, 2006 25
100 Summit Lake Drive, Valhalla, NY 17,718 8.50% April, 2007 15
333 Earle Ovington Blvd., Mitchel Field, NY (b) 52,869 7.72% August, 2007 25
810 Seventh Avenue, NY, NY (e) 81,314 7.73% August, 2009 25
100 Wall Street, NY, NY (e) 35,236 7.73% August, 2009 25
6800 Jericho Turnpike, Syosset, NY 7,229 8.07% July 1, 2010 25
6900 Jericho Turnpike, Syosset, NY 13,696 8.07% July 1, 3010 25
580 White Plains Road, Tarrytown, NY 12,476 7.86% September, 2010 25
919 Third Avenue, NY, NY (c) 244,047 6.867% August, 2011 30
One Orlando Center, Orlando, FL (d) 37,759 6.82% November, 2027 28
120 West 45th Street, NY, NY (d) 63,245 6.82% November, 2027 28
--------------
Total / Weighted average $ 721,635 7.24%
==============
- ------------------------
(a) Encompasses six Class A office properties.
(b) The Company has a 60% general partnership interest in this property
and its proportionate share of the aggregate principal amount is
approximately $31.7 million.
(c) The Company has a 51% membership interest in this property and its
proportionate share of the aggregate principal amount is approximately
$124.5 million.
(d) Subject to interest rate adjustment on November 1, 2004 to the
greater of 8.82% per annum or the yield on non-callable U.S. Treasury
obligations with a term of fifteen years plus 2% per annum. The Company
has the ability to prepay the loan at that time. In addition, these
properties are cross-collateralized.
(e) These properties are cross-collateralized.
In addition, the Company has a 60% interest in an unconsolidated joint
venture property. The Company's pro rata share of the mortgage debt at December
31, 2003 is approximately $7.9 million. This mortgage note payable bears
interest at 8.85% per annum and matures on September 1, 2005 at which time the
Company's share of the mortgage debt will be approximately $6.9 million.
89
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Scheduled principal repayments to be made during the next five years and
thereafter, for mortgage notes payable outstanding at December 31, 2003, are as
follows (in thousands):
Scheduled principal Due at maturity Total
------------------- --------------- -----
2004................ $ 12,853 $ -- $ 12,853
2005................ 13,887 18,553 32,440
2006................ 13,478 129,920 143,398
2007................ 10,969 60,539 71,508
2008................ 9,989 -- 9,989
Thereafter.......... 105,178 346,269 451,447
-------------------- ----------------- -------------
$ 166,354 $ 555,281 $ 721,635
==================== ================= =============
3. UNSECURED CREDIT FACILITY
The Company currently has a three year $500 million unsecured revolving
credit facility (the "Credit Facility") from JPMorgan Chase Bank, as
administrative agent, Wells Fargo Bank, National Association as syndication
agent and Citicorp North America, Inc. and Wachovia Bank, National Association
as co-documentation agents. The Credit Facility matures in December 2005,
contains options for a one-year extension subject to a fee of 25 basis points
and, upon receiving additional lender commitments, increasing the maximum
revolving credit amount to $750 million. At December 31, 2003, borrowings under
the Credit Facility were priced off LIBOR plus 120 basis points and the Credit
Facility carried a facility fee of 30 basis points per annum. On January 28,
2004, the Company received an investment grade rating on its senior unsecured
debt from Fitch ratings of BBB-. This rating along with the Company's existing
investment grade rating of BBB- from Standard & Poors, resulted in the pricing
on outstanding borrowings to decrease to LIBOR plus 90 basis points and the
facility fee to decrease to 20 basis points per annum. In the event of a change
in the Operating Partnership's senior unsecured credit rating the interest rates
and facility fee are subject to change. At December 31, 2003, the outstanding
borrowings under the Credit Facility aggregated $169 million and carried a
weighted average interest rate of 2.86% per annum.
The Company utilizes the Credit Facility primarily to finance real estate
investments, fund its real estate development activities and for working capital
purposes. At December 31, 2003, the Company had availability under the Credit
Facility to borrow approximately an additional $331 million subject to
compliance with certain financial covenants.
The Company capitalized interest incurred on borrowings to fund certain
development projects in the amount of $8.0 million, $8.3 million and $10.2
million for the years ended December 31, 2003, 2002 and 2001, respectively.
90
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
4. SENIOR UNSECURED NOTES
As of December 31, 2003, the Operating Partnership had outstanding
approximately $499.4 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 COUPON
ISSUANCE AMOUNT RATE TERM MATURITY
- ------------------------------ ---------------- ------------------- --------------- --------------------
March 26, 1999 $100,000 7.40% 5 years March 15, 2004
June 17, 2002 $ 50,000 6.00% 5 years June 15, 2007
August 27, 1997 $150,000 7.20% 10 years August 28, 2007
March 26, 1999 $200,000 7.75% 10 years March 15, 2009
Interest on the senior unsecured notes is payable semiannually with
principal and unpaid interest due on the scheduled maturity dates. In addition,
the Senior Unsecured Notes issued on March 26, 1999 and June 17, 2002 was 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 January 22, 2004, the Operating Partnership issued $150 million of
seven-year 5.15% (5.196% effective rate) senior unsecured notes. Prior to the
issuance of these notes the Company entered into several anticipatory interest
rate hedge instruments to protect itself against potentially rising interest
rates. At the time the notes were issued the Company incurred a net cost of
approximately $980,000 to settle these instruments. Such costs will be amortized
over the term of the notes. Net proceeds of approximately $148 million received
from this issuance were used to repay outstanding borrowings under the Credit
Facility.
91
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. LAND LEASES, AIR RIGHTS AND OPERATING LEASES
The Company leases, pursuant to noncancellable operating leases, the land
on which eleven of its buildings were constructed. The leases, certain of which
contain renewal options at the direction of the Company, expire between 2006 and
2090. The leases either contain provisions for scheduled increases in the
minimum rent at specified intervals or for adjustments to rent based upon the
fair market value of the underlying land or other indexes at specified
intervals. Minimum ground rent is recognized on a straight-line basis over the
terms of the leases. The excess of amounts recognized over amounts contractually
due was approximately $3.2 million and $3.3 million at December 31, 2003 and
2002, respectively. These amounts are included in accrued expenses and other
liabilities on the accompanying balance sheets.
In addition, the Company, through the acquisition of certain properties,
is subject to an air rights lease agreement. This lease agreement has a term
expiring 2048, including renewal options.
Reckson Management Group, Inc. is subject to operating leases for certain
of its management offices and warehouse storage space. These operating leases
expire 2009.
Future minimum lease commitments relating to the land leases, air rights
lease agreements and operating leases during the next five years and thereafter
are as follows (in thousands):
Year ended December 31, Land Leases Air Rights (1) Operating Leases
---------------------------------------- -------------------- ----------------- -------------------
2004.................................... $ 2,993 $ 333 $ 785
2005.................................... 2,995 333 813
2006.................................... 2,961 333 842
2007.................................... 2,888 333 870
2008.................................... 2,888 333 370
Thereafter.............................. 47,309 3,680 --
-------------------- ----------------- -------------------
$ 62,034 $ 5,345 $ 3,680
==================== ================= ===================
(1) Excludes approximately $453,000 in aggregate payments due under a Long
Island office property which was sold in January 2004.
In addition, aggregate expense contractually due under the Company's land
leases, air rights and operating leases for each of the three years ended
December 31, 2003 amounted to $3.4 million, $3.5 million and $4.9 million.
92
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COMMERCIAL REAL ESTATE INVESTMENTS
As of December 31, 2003, the Company owned and operated 77 office
properties (inclusive of 10 office properties owned through joint ventures)
comprising approximately 13.7 million square feet, 11 industrial properties
comprising approximately 1.0 million square feet and one retail property
comprising approximately 9,000 square feet located in the Tri-State Area.
The Company also owns approximately 313 acres of land in 12 separate
parcels of which the Company can develop approximately 3.0 million square feet
of office space. The Company is currently evaluating alternative land uses for
certain of the land holdings to realize the highest economic value. These
alternatives may include rezoning certain land parcels from commercial to
residential for potential disposition. As of December 31, 2003, the Company had
invested approximately $116.8 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 Company has capitalized
approximately $10.0 million for the year ended December 31, 2003 related to real
estate taxes, interest and other carrying costs related to these development
projects. In October 2003, the Company entered into contracts to sell two land
parcels aggregating approximately 128 acres of its land holdings located in New
Jersey. The contracts provided for aggregate sales prices ranging from $23
million to $43 million. These sales are contingent upon obtaining zoning for
residential use of the land and other customary approvals. The proceeds
ultimately received from such sales will be based upon the number of residential
units permitted by the rezoning. The aggregate cost basis of these assets at
December 31, 2003 was approximately $11.8 million. The closing is scheduled to
occur upon the rezoning, which is anticipated to occur within 9 to 33 months.
During February 2004, a 3.9 acre land parcel located on Long Island was
condemned by the Town of Oyster Bay. As consideration from the condemnation the
Company anticipates to initially receive approximately $1.8 million. The
Company's cost basis in this land parcel at December 31, 2003 was approximately
$1.4 million. The Company is currently contesting this valuation and seeking
payment of additional consideration from the Town of Oyster Bay but there can be
no assurances that the Company will be successful in obtaining any such
additional consideration.
The Company holds a $17.0 million note receivable, which bears
interest at 12% per annum and is secured by a minority partnership interest in
Omni Partners, L.P., owner of the Omni, a 579,000 square foot Class A office
property located in Uniondale, New York (the "Omni Note"). The Company currently
owns a 60% majority partnership interest in Omni Partners, L.P. and on March 14,
2007 may exercise an option to acquire the remaining 40% interest for a price
based on 90% of the fair market value of the property. The Company holds a $15
million participating interest in a $30 million junior mezzanine note loan which
is secured by a pledge of an indirect ownership interest of an entity which owns
the ground leasehold estate under a 1.1 million square foot office complex
located on Long Island, New York (the "Mezz Note"). The Mezz Note matures in
September 2005, currently bears interest at 13.43%, and the borrower has the
right to extend for three additional one-year periods. The Company also holds
three other notes receivable aggregating $21.5 million which bear interest at
rates ranging from 10.5% to 12% per annum. These notes are secured in part by a
minority partner's preferred unit interest in the Operating Partnership, an
interest in real property and a personal guarantee (the "Other Notes" and
collectively with the Omni Note, the Mezz Note, the "Note Receivable
Investments").
As of December 31, 2003, management has made subjective assessments as to
the underlying security value on the Company's Note Receivable Investments.
These assessments indicate an excess of market value over the carrying value
related to the Company's Note Receivable Investments. Based on these assessments
the Company's management believes there is no impairment to the carrying value
related to the Company's Note Receivable Investments. The Company also owns a
355,000 square foot office building in Orlando, Florida. This non-core real
estate holding was acquired in May 1999 in connection with the Company's initial
New York City portfolio acquisition. This property is cross-collateralized under
a $101.0 million mortgage note payable along with one of the Company's New York
City buildings. The Company has the right to prepay this note in November 2004,
prior to its maturity.
93
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COMMERCIAL REAL ESTATE INVESTMENTS (CONTINUED)
The Company 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. Jon Halpern, a director of HQ Global Workplaces, is a partner in
JAH Realties, L.P. As of December 31, 2003, the 520JV had total assets of $19.8
million, a mortgage note payable of $12.0 million and other liabilities of
$185,000. The Company's allocable share of the 520JV mortgage note payable is
approximately $7.9 million. This mortgage note payable bears interest at 8.85%
per annum and matures on September 1, 2005. During the second quarter of 2003,
HQ Global Workplaces, a tenant of the 520JV surrendered approximately one-third
of its premises. As a result, the 520JV incurred a write-off of $633,000
relating to its deferred rents receivable. The operating agreement of the 520JV
requires joint decisions from all members on all significant operating and
capital decisions including sale of the property, refinancing of the property's
mortgage debt, development and approval of leasing strategy and leasing of
rentable space. As a result of the decision-making participation relative to the
operations of the property, the Company accounts for the 520JV under the equity
method of accounting. In accordance with the equity method of accounting the
Company's proportionate share of the 520JV income was approximately $30,000,
$648,000 and $478,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
During September 2000, the Company formed a joint venture (the "Tri-State
JV") with Teachers Insurance and Annuity Association ("TIAA") and contributed
nine Class A suburban office properties aggregating approximately 1.5 million
square feet to the Tri-State JV for a 51% majority ownership interest. TIAA
contributed approximately $136 million for a 49% interest in the Tri-State JV,
which was then distributed to the Company. In August 2003, the Company acquired
TIAA's 49% interest in the property located at 275 Broadhollow Road, Melville,
NY for approximately $12.4 million. As a result, the Tri-State JV owns eight
Class A suburban office properties aggregating approximately 1.4 million square
feet. The Company is responsible for managing the day-to-day operations and
business affairs of the Tri-State JV and has substantial rights in making
decisions affecting the properties such as leasing, marketing and financing. The
minority member has certain rights primarily intended to protect its investment.
For purposes of its financial statements the Company consolidates the Tri-State
JV.
On December 21, 2001, the Company formed a joint venture with the New York
State Teachers' Retirement System ("NYSTRS") (the "919JV") whereby NYSTRS
acquired a 49% indirect interest in the property located at 919 Third Avenue,
New York, NY for $220.5 million which included $122.1 million of its
proportionate share of secured mortgage debt and approximately $98.4 million of
cash which was then distributed to the Company. The Company is responsible for
managing the day-to-day operations and business affairs of the 919JV and has
substantial rights in making decisions affecting the property such as developing
a budget, leasing and marketing. The minority member has certain rights
primarily intended to protect its investment. For purposes of its financial
statements the Company consolidates the 919JV.
During February 2003, the Company, through Reckson Construction Group,
Inc., entered into a contract with an affiliate of First Data Corp. to sell a
19.3-acre parcel of land located in Melville, New York and was retained by the
purchaser to develop a build-to-suit 195,000 square foot office building for
aggregate consideration of approximately $47 million. This transaction closed on
March 11, 2003 and development of the aforementioned office building has
commenced and is near completion. Net proceeds from the land sale of
approximately $18.3 million were used to establish an escrow account with a
qualified intermediary for a future exchange of real property pursuant to
Section 1031 of the Code (a "Section 1031 Exchange"). A Section 1031 Exchange
allows for the deferral of taxes related to the gain attributable to the sale of
property if qualified replacement property is identified within 45 days and such
qualified replacement property is then acquired within 180 days from the initial
sale. As described below, the Company identified and acquired certain qualified
replacement properties. In accordance with Statement No. 66, the Company has
estimated its book gain on this land sale and build-to-suit transaction to be
approximately $22.4 million, of which $18.8 million has been recognized during
the year ended December 31, 2003 and is included in investment and other income
on the Company's statement of operations. Approximately $3.6 million is
estimated to be earned in 2004 as the development is completed.
94
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. COMMERCIAL REAL ESTATE INVESTMENTS (CONTINUED)
On May 22, 2003, the Company, through Reckson Construction Group, Inc.,
acquired two industrial redevelopment properties in Hauppauge, Long Island
encompassing approximately 100,000 square feet for total consideration of
approximately $6.5 million. On August 27, 2003, the Company, through Reckson
Construction Group, Inc., acquired the remaining 49% interest in the property
located at 275 Broadhollow Road, Melville, NY, from the Company's joint venture
partner, TIAA, for approximately $12.4 million. These acquisitions were financed
from the sales proceeds being held by the aforementioned qualified intermediary
and the properties acquired were qualified replacement properties. As a result
of these acquisitions, the Company successfully completed the exchange of real
property pursuant to Section 1031 and thereby deferred the taxes related to the
gain recognized on the sale proceeds received from the land sale to First Data
Corp. Two of the qualified replacement properties were subsequently contracted
for sale as part of the Company's Long Island industrial building portfolio
sale. There can be no assurances that the Company will identify or acquire
additional qualified replacement properties in which case the Company would
incur the tax liability on the capital gain realized of approximately $1.5
million.
On August 7, 2003, the Company acquired a ten story, 181,800 square foot
Class A office property located in Stamford, Connecticut. This acquisition was
financed, in part, through an advance under the Company's unsecured credit
facility of $21.6 million and the issuance of 465,845 Class C OP Units valued at
$24.00 per unit. In accordance with FASB Statement No. 141 "Business
Combinations", the Company allocated and recorded a net deferred intangible
lease asset of approximately $1.5 million, representing the net value of
acquired above and below market leases, assumed lease origination costs and
other value of in-place leases. The net value of the above and below market
leases is amortized over the remaining terms of the respective leases to rental
income and such amortization amounted to approximately $331,000 during the 2003
period of ownership. In addition, amortization expense on the value of lease
origination costs was approximately $114,000 during the 2003 period of
ownership. At acquisition, there were 16 in-place leases aggregating
approximately 136,000 square feet with a weighted average remaining lease term
of approximately 21 months.
On September 5, 2003, the Company acquired the Mezz Note which is
comprised of three tranches based upon priority: a $14 million A tranche, a $14
million B tranche and a $2 million C tranche. The Company acquired a 25%
interest in the A tranche, a 75% interest in the B tranche and a 50% interest in
the C tranche. Interest is payable on the tranches at 9.5%, 12.5% and 12.5%,
respectively, over the greater of one month LIBOR or 1.63%. As a result, the
minimum weighted average interest rate accruing to the Company is 13.43% per
annum. In addition, as part of the Company's participation it received a 1%
origination fee amounting to $150,000. Such fee is being recognized over a
three-year period.
95
In November 2003, the Company disposed of all but three of its 95
property, 5.9 million square foot, Long Island industrial building portfolio to
members of the Rechler family (the "Disposition") for approximately $315.5
million, comprised of $225.1 million in cash and debt assumption and 3,932,111
OP Units valued at approximately $90.4 million. Approximately $204 million of
cash sales proceeds from the Disposition were used to repay borrowings under the
Company's Credit Facility. Two of the remaining three properties, which are
subject to transfer pursuant to Section 1031 of the Code, are anticipated to
close during 2004. There can be no assurances that the Company will meet the
requirements of Section 1031 by identifying and acquiring qualified replacement
properties in the required time frame, in which case the Company would incur the
tax liability on the capital gain realized of approximately $1.5 million. The
disposition of the other property, which is subject to certain environmental
issues, is conditioned upon the approval of the buyer's lender, which has not
been obtained. As a result, the Company may not dispose of this property as a
part of the Disposition. Management believes that if the Company were to
continue to hold this property the cost to address the environmental issues
would not have a material adverse effect on the Company, but there can be no
assurance in this regard. The three remaining properties aggregate approximately
$7.1 million of the $315.5 million sales price. In addition, four of the five
remaining options granted to the Company at the time of the Company's IPO to
purchase interests in properties owned by Rechler family members (including
three properties in which the Rechler family members hold non-controlling
interests and one industrial property) were terminated along with management
contracts relating to three of such properties (See Note 8).
On November 24 2003, the Company sold a 181,000 square foot office
property located on Long Island for approximately $24.4 million. Net proceeds
from the sale were used to pay outstanding borrowings under the Credit Facility.
In January 2004, the Company sold a 104,000 square foot office property
located on Long Island for approximately $18.5 million. Net proceeds from the
sale were used to repay borrowings under the Company's unsecured Credit
Facility.
In January 2004, the Company acquired 1185 Avenue of the Americas, a
42-story, 1.1 million square foot Class A office tower, located between 46th and
47th Streets in New York City for $321 million. In connection with this
acquisition, the Company assumed a $202 million mortgage and $48 million of
mezzanine debt. The balance of the purchase price was paid through an advance
under the Credit Facility. The floating rate mortgage and mezzanine debt both
mature in August 2004 and presently have a weighted average interest rate of
4.95%. The property is also encumbered by a ground lease which has a remaining
term of approximately 40 years with rent scheduled to be re-set at the end of
2005 and then remain constant for the balance of the term.
In February 2004, the Company signed a contract to sell a 175,000 square
foot office building located on Long Island for approximately $30 million of
which the Company owns a 51% interest. Net proceeds from the sale are
anticipated to be used to pay outstanding borrowings under the Credit Facility.
96
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. PARTNERS' CAPITAL
The following table sets forth the Operating Partnership's annual
distribution rates and distributions paid on each class of its common and
preferred units for each of the years ended December 31:
2003 2002 2001
-------------- ---------------- -----------------
Class A common unit:
Distribution rate....................... $ 1.698 $ 1.698 $ 1.621
============== ================ =================
Distributions paid (in thousands)....... $ 93,641 $ 97,552 $ 90,030
============== ================ =================
Class B common unit:
Distribution rate....................... $ 2.588 $ 2.593 $ 2.498
============== ================ =================
Distributions paid (in thousands)....... $ 25,665 $ 26,423 $ 25,692
============== ================ =================
Class C common unit:
Distribution rate.....................(1) $ .28 $ -- $ --
============== ================ =================
Distributions paid (in thousands)........ $ 130 $ -- $ --
============== ================ =================
Series A preferred unit:
Distribution rate........................ $ 1.906 $ 1.906 $ 1.906
============== ================ =================
Distributions paid (in thousands)........ $ 16,842 $ 17,524 $ 17,524
============== ================ =================
Series B preferred unit:
Distribution rate........................ $ 2.213 $ 2.213 $ 2.171
============== ================ =================
Distributions paid (in thousands)....... $ 4,425 $ 4,425 $ 4,300
============== ================ =================
- --------------------------
(1) Based on a current annual distribution rate of approximately $1.87
per unit. These OP Units were issued on August 7, 2003.
On January 1, 2003, the Company had issued and outstanding 9,915,313 shares
of Class B Exchangeable Common Stock, par value $.01 per share (the "Class B
common stock"). The shares of Class B common stock were exchangeable at any
time, at the option of the holder, into an equal number of shares of Class A
common stock, subject to customary antidilution adjustments. The Company, at its
option, could have redeemed any or all of the Class B common stock in exchange
for an equal number of shares of the Company's Class A common stock at any time
following November 23, 2003.
97
On October 24, 2003, the Company gave notice to its Class B common
stockholders that it would exercise its option to exchange all of its Class B
common stock outstanding on November 25, 2003 for an equal number of shares of
Class A common stock. The Board of Directors declared a final cash dividend on
the Company's Class B common stock to holders of record on November 25, 2003 in
the amount of $.1758 per share, which was paid on January 12, 2004. The payment
covered the period from November 1, 2003 through November 25, 2003 and was based
on the previous quarterly Class B common stock dividend rate of $.6471 per
share. In order to align the regular quarterly dividend payment schedule of the
former holders of Class B common stock with the schedule of the holders of Class
A common stock for periods subsequent to the exchange date for the Class B
common stock, the Board of Directors also declared a cash dividend with regard
to the Class A common stock to holders of record on October 14, 2003 in the
amount of $.2585 per share, which was paid on January 12, 2004. This payment
covered the period from October 1, 2003 through November 25, 2003 and was based
on the current quarterly Class A common stock dividend rate of $.4246 per share.
As a result, the Company has declared dividends through November 25, 2003 to all
holders of Class A common stock and Class B common stock. The Board of Directors
also declared the Class A common stock cash dividend for the portion of the
fourth quarter subsequent to November 25, 2003. The holders of record of Class A
common stock on January 2, 2004, giving effect to the exchange transaction,
received a Class A common stock dividend in the amount of $.1661 per share, on
January 12, 2004. This payment covered the period from November 26, 2003 through
December 31, 2003 and was based on the current quarterly Class A common stock
dividend rate of $.4246 per share.
The Board of Directors of the Company authorized the purchase of up to
five million shares of the Company's Class A common stock. Transactions
conducted on the New York Stock Exchange will be effected in accordance with the
safe harbor provisions of the Securities Exchange Act of 1934 and may be
terminated by the Company at any time. During the year ended December 31, 2003,
under this buy-back program, the Company purchased 252,000 shares of Class A
common stock at an average price of $18.01 per Class A share for an aggregate
purchase price of approximately $4.5 million.
98
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 October 14, 2002, the Company purchased and retired 357,500
shares of its Series A preferred stock at $22.29 per share for approximately
$8.0 million. As a result of this purchase, annual preferred dividends decreased
by approximately $682,000.
As of December 31, 2003, the Company had issued and outstanding two
million shares of 8.85% Series B Convertible Cumulative Preferred Stock (the
"Series B preferred stock"). The Series B preferred stock was redeemable by the
Company as follows: (i) on or after March 2, 2002 to and including June 2, 2003,
at an amount which provides an annual rate of return in respect to such share of
15%, (ii) on or after June 3, 2003 to and including June 2, 2004, $25.50 per
share and (iii) on or after June 3, 2004 and thereafter, $25.00 per share. The
Series B preferred stock, at the option of the holder, was convertible at any
time into the Company's Class A common stock at a price of $26.05 per share. In
January 2004, the Company exercised its option to redeem the two million shares
of outstanding Series B preferred stock for approximately 1,958,000 shares of
its Class A common stock. As a result of this redemption, based on current
common dividend rates, net dividends will decrease by approximately $1.1
million.
On August 7, 2003, in conjunction with the Company's acquisition of a
Class A office property located in Stamford, Connecticut it issued 465,845 Class
C OP Units to the sellers of the property. The Class C OP Units are
substantially identical to the Class A OP Units except that the Class C OP Units
will receive an initial annual distribution of $1.87 per unit, which amount will
increase or decrease pro-rata based upon changes in the dividend paid on the
Company's Class A common stock.
On November 10, 2003, as partial consideration for the Company's sale of
its Long Island industrial building portfolio to the departing Rechler family
members, the Company redeemed and retired approximately 3.9 million OP Units
valued at approximately $90.4 million or $23.00 per share. In addition, during
the year ended December 31, 2003, certain limited partners exchanged
approximately 258,000 OP Units for an equal number of shares of the Company's
Class A common stock.
During the year ended December 31, 2002, certain limited partners
exchanged approximately 11,303 preferred units of limited partnership interest
in the Operating Partnership, with a liquidation preference value of
approximately $11.3 million, for 451,934 OP Units at an average price of $24.66
per OP Unit. In addition, certain limited partners exchanged 666,468 OP Units
for an equal number of shares of the Company's Class A common stock.
The Operating Partnership issues additional units to the Company, and
thereby increases the Company's general partnership interest in the Operating
Partnership, with terms similar to the terms of any securities (i.e.: common
stock or preferred stock) issued by the Company (including any securities issued
by the Company upon the exercise of stock options). Any consideration received
by the Company in respect of the issuance of its securities is contributed to
the Operating Partnership. In addition, the Operating Partnership or a
subsidiary, funds the compensation of personnel, including any amounts payable
under the Company's LTIP.
99
On October 16, 2000, the Company's Board of Directors announced that it
adopted a Shareholder Rights Plan designed to protect its shareholders from
various abusive takeover tactics, including attempts to acquire control of the
Company at an inadequate price, depriving its shareholders of the full value of
their investment. The Operating Partnership has adopted a similar rights plan
(the "Rights Plan") which would be triggered in the event the Company's
Shareholders Rights Plan is triggered. The Rights Plan was not adopted in
response to any known effort to acquire control of the Operating Partnership or
the Company.
During July 1998, the Company formed Metropolitan Partners, LLC
("Metropolitan") for the purpose of acquiring Class A office properties in New
York City. In May 2001, a minority partner that owned an $85 million preferred
equity investment in Metropolitan converted its preferred equity investment into
3,453,881 shares of the Company's Class A common stock based on a conversion
price of $24.61 per share. As a result of the minority partner's conversion of
their preferred equity investment, the Company owns 100% of Metropolitan.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio and the settlement of the employment
contracts of the departing Rechler family members, the Company incurred the
following restructuring charges: (i) approximately $7.5 million related to
outstanding stock loans under the Company's historical LTIP program were
transferred to the purchaser and approximately $642,000 of loans related to life
insurance contracts were extinguished, (ii) approximately $2.9 million paid to
the departing Rechler family members in exchange for 127,689, or 100%, of their
2002 Rights and their 2003 Rights were forfeited in their entirety and (iii)
with respect to two of the departing Rechler family members participating in the
Company's March 2003 LTIP, each received 8,681 shares of the Company's Class A
common stock related to the service component of their core award which was
valued at $293,000 in the aggregate. In addition, if the Company attains its
annual performance measure in March 2004, these individuals will also be
entitled to each receive 26,041 shares of Class A common stock representing the
balance of the annual core award as if they had remained in continuous
employment with the Company. The remainder of their core awards, aggregating
208,334 shares of Class A common stock, was forfeited. The Company also incurred
additional restructure charges of approximately $1.2 million related primarily
to the release and severance of approximately 25 employees. Total restructure
charges of approximately $12.5 million were mitigated by a $972,000 fee from the
departing Rechler family members related to the termination of the Company's
option to acquire certain property which was either owned by certain Rechler
family members or in which the Rechler family members own a non-controlling
interest (see Note 8).
100
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The Company had historically structured long term incentive programs
("LTIP") using restricted stock and stock loans. In July 2002, as a result of
certain provisions of the Sarbanes Oxley legislation, the Company discontinued
the use of stock loans in its LTIP. In connection with LTIP grants made prior to
the enactment of the Sarbanes Oxley legislation the Company made stock loans to
certain executive and senior officers to purchase 1,372,393 shares of its Class
A common stock at market prices ranging from $18.44 per share to $27.13 per
share. The stock loans were set to bear interest at the mid-term Applicable
Federal Rate and were secured by the shares purchased. Such stock loans
(including accrued interest) were scheduled to vest and be ratably forgiven each
year on the anniversary of the grant date based upon vesting periods ranging
from four to ten years based on continued service and in part on attaining
certain annual performance measures. These stock loans had an initial aggregate
weighted average vesting period of approximately nine years. As of December 31,
2003, and giving effect to the settlement of the employment contracts of certain
executive officers, there remains 264,144 shares of common stock subject to the
original stock loans which are anticipated to vest between 2004 and 2011.
Approximately $3.1 million and $4.5 million of compensation expense was recorded
for the years ended December 31, 2003 and 2002, respectively, related to these
LTIP. Such amounts have been included in marketing, general and administrative
expenses on the accompanying consolidated statements of operations.
The outstanding stock loan balances due from executive and senior officers
aggregated approximately $5.6 million and $17.0 million at December 31, 2003 and
December 31, 2002, respectively, and have been included as a reduction of
additional paid in capital on the accompanying consolidated balance sheets.
Other outstanding loans to executive and senior officers at December 31, 2003
and December 31, 2002 amounted to approximately $2.9 million and $2.0 million,
respectively, primarily related to tax payment advances on stock compensation
awards and life insurance contracts made to certain executive and non-executive
officers.
In November 2002 and March 2003 an award of rights was granted to certain
executive officers of the Company (the "2002 Rights" and "2003 Rights",
respectively, and collectively, the "Rights"). Each Right represents the right
to receive, upon vesting, one share of Class A common stock if shares are then
available for grant under one of the Company's stock option plans or, if shares
are not so available, an amount of cash equivalent to the value of such stock on
the vesting date. The 2002 Rights will vest in four equal annual installments
beginning on November 14, 2003 (and shall be fully vested on November 14, 2006).
The 2003 Rights will be earned as of March 13, 2005 and will vest in three equal
annual installments beginning on March 13, 2005 (and shall be fully vested on
March 13, 2007). Dividends on the shares will be held by the Company until such
shares become vested, and will be distributed thereafter to the applicable
officer. The 2002 Rights also entitle the holder thereof to cash payments in
respect of taxes payable by the holder resulting from the Rights. The 2002
Rights aggregate 190,524 shares of the Company's Class A common stock and the
2003 Rights aggregate 60,760 shares of Class A common stock. As of December 31,
2003, and giving effect to the settlement of the employment contracts of certain
executive officers, there remains 47,126 shares of Class A common stock related
to the 2002 Rights and 26,040 shares of Class A common stock related to the 2003
rights. During the year ended December 31, 2003, the Company recorded
approximately $855,000 of compensation expense related to the Rights. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of operations.
101
In March 2003, the Company established a new LTIP for its executive and
senior officers. The four-year plan has a core award, which provides for annual
stock based compensation based upon continued service and in part based on
attaining certain annual performance measures. The plan also has a special
outperformance award, which provides for compensation to be earned at the end of
a four-year period if the Company attains certain four-year cumulative
performance measures. Amounts earned under the special outperformance award may
be paid in cash or stock at the discretion of the Compensation Committee of the
Board. Performance measures are based on total shareholder returns on a relative
and absolute basis. On March 13, 2003, the Company made available 1,384,102
shares of its Class A common stock under its existing stock option plans in
connection with the core award of this LTIP for twelve of its executive and
senior officers. During May 2003, two of the Company's executive officers waived
these awards under this LTIP in their entirety, which aggregated 277,778 shares
or 20% of the core awards granted. In addition, the special outperformance
awards of the LTIP were amended to increase the per share base price above which
the four year cumulative return is measured from $18.00 to $22.40. As of
December 31, 2003 and giving effect to the settlement of the employment
contracts of certain executive officers, there remains 879,858 shares of Class A
common stock reserved for future issuance under the core award of this LTIP.
With respect to the core award of this LTIP, the Company recorded approximately
$2.6 million of compensation expense for the year ended December 31, 2003. Such
amount has been included in marketing, general and administrative expenses on
the accompanying consolidated statements of operations. Further, no provision
will be made for the special outperformance award of this LTIP until such time
as achieving the requisite performance measures is determined to be probable.
102
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. RELATED PARTY TRANSACTIONS
In connection with the IPO, the Company was granted ten year options to
acquire ten properties (the "Option Properties") which were either owned by
certain Rechler family members who were also executive officers of the Company,
or in which the Rechler family members owned a non-controlling minority interest
at a price based upon an agreed upon formula. In years prior to 2001, one Option
Property was sold by the Rechler family members to a third party and four of the
Option Properties were acquired by the Company for an aggregate purchase price
of approximately $35 million, which included the issuance of approximately
475,000 OP Units valued at approximately $8.8 million.
On November 10, 2003, in connection with the Company's sale of its Long
Island industrial building portfolio, four of the five remaining options (the
"Remaining Option Properties") granted to the Company at the time of the IPO to
purchase interests in properties owned by Rechler family members were
terminated. In return the Company received an aggregate payment from the Rechler
family members of $972,000. Rechler family members have also agreed to extend
the term of the remaining option on the property located at 225 Broadhollow
Road, Melville, NY (the Company's current headquarters) for five years and to
release the Company from approximately 15,500 square feet under its lease at
this property. In connection with the restructuring of the remaining option the
Rechler family members paid the Company $1 million in return for the Company's
agreement not to exercise the option during the next three years. As part of the
agreement, the exercise price of the option payable by the Company was increased
by $1 million.
As part of the Company's REIT structure it is provided management, leasing
and construction related services through taxable REIT subsidiaries as defined
by the Code. These services are currently provided by the Service Companies in
which, as of September 30, 2002, the Operating Partnership 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, which became possible as a
result of changes to the Code that permit REITs to own 100% of taxable REIT
subsidiaries, the independent directors of the Company approved the purchase by
the Operating Partnership of the remaining 3% interests 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. During the year ended December 31,
2003, Reckson Construction Group, Inc. billed approximately $775,000 of market
rate services and Reckson Management Group, Inc. billed approximately $279,000
of market rate management fees to the Remaining Option Properties. In addition,
for the year ended December 31, 2003, Reckson Construction Group, Inc. performed
market rate services, aggregating approximately $207,000, for a property in
which certain former executive officers of the Company maintain an equity
interest.
103
Reckson Management Group, Inc. leases approximately 28,000 square feet of
office and storage space at a Remaining Option Property located at 225 Broad
Hollow Road, Melville, New York for its corporate offices at an annual base rent
of approximately $ 785,000. The Company had also entered into a short-term
license agreement at the property for 6,000 square feet of temporary space,
which expired in January 2004. Reckson Management Group, Inc. also leases 10,722
square feet of warehouse space used for equipment, materials and inventory
storage at a property owned by certain members of the Rechler family at an
annual base rent of approximately $75,000.
A company affiliated with an independent director of the Company leases
15,566 square feet in a property owned by the Company at an annual base rent of
approximately $447,000. Reckson Strategic Venture Partners, LLC ("RSVP") leased
5,144 square feet in one of the Company's joint venture properties at an annual
base rent of approximately $176,000. On June 15, 2003, this lease was mutually
terminated and RSVP vacated the premises.
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 invested primarily in real estate and real estate operating
companies outside the Company's core office 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 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 December 31, 2003 approximately $109.1 million was funded under 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 December 31, 2003,
interest accrued (net of reserves) under the FrontLine Facility and the RSVP
Facility was approximately $19.6 million.
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 Company has discontinued the accrual of interest income with respect to the
FrontLine Loans. The Company has also reserved against its share of GAAP equity
in earnings from the RSVP controlled joint ventures funded through the RSVP
Commitment until such income is realized through cash distributions.
104
At December 31, 2001, the Company, pursuant to Section 166 of the Code,
charged off for tax purposes $70 million of the aforementioned reserve directly
related to the FrontLine Facility, including accrued interest. On February 14,
2002, the Company charged off for tax purposes an additional $38 million of the
reserve directly related to the FrontLine Facility, including accrued interest,
and $47 million of the reserve directly related to the RSVP Facility, including
accrued interest.
FrontLine is in default under the FrontLine Loans from the Operating
Partnership and on June 12, 2002, filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code.
In September 2003, RSVP completed the restructuring of its capital
structure and management arrangements. In connection with the restructuring,
RSVP redeemed the interest of the preferred equity holders of RSVP for an
aggregate of approximately $137 million in cash including proceeds from the
disposition of all of the privatization and medical offices assets and the
transfer to the preferred equity holders of the assets that comprised RSVP's
parking investment valued at approximately $28.5 million. RSVP also restructured
its management arrangements whereby a management company formed by its former
managing directors has been retained to manage RSVP pursuant to a management
agreement and the employment contracts of the managing directors with RSVP have
been terminated. The management agreement provides for an annual base management
fee and disposition fees equal to 2% of the net proceeds received by RSVP on
asset sales. (The base management fee and disposition fees are subject to a
maximum over the term of the agreement of $7.5 million.) In addition, the
managing directors retained a one-third residual interest in RSVP's assets,
which is subordinated to the distribution of an aggregate amount of $75 million
to RSVP and/or the Company in respect of its joint ventures with RSVP. The
management agreement has a three-year term, subject to early termination in the
event of the disposition of all of the assets of RSVP.
In connection with the restructuring, RSVP and certain of its affiliates
obtained a $60 million secured loan. In connection with this loan, the Operating
Partnership agreed to indemnify the lender in respect of any environmental
liabilities incurred with regard to RSVP's remaining assets in which the
Operating Partnership has a joint venture interest (primarily certain student
housing assets held by RSVP) and guaranteed the obligation of an affiliate of
RSVP to the lender in an amount up to $6 million plus collection costs for any
losses incurred by the lender as a result of certain acts of malfeasance on the
part of RSVP and/or its affiliates. The loan is scheduled to mature in 2006 and
is expected to be repaid from proceeds of asset sales by RSVP.
As a result of the foregoing, the net carrying value of the Company's
investments in the FrontLine Loans and joint venture investments with RSVP,
inclusive of the Company's share of previously accrued GAAP equity in earnings
on those investments is approximately $65 million, which was reassessed with no
change by management as of December 31, 2003. Such amount has been reflected in
investments in service companies and affiliate loans and joint ventures on the
Company's consolidated balance sheet.
Scott H. Rechler, who serves as President, Chief Executive Officer and a
director of the Company, serves as CEO and Chairman of the Board of Directors of
FrontLine and is its sole board member. Scott H. Rechler also serves as a member
of the management committee of RSVP.
105
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with FASB Statement No. 107, "Disclosures About Fair Value
of Financial Instruments", management has made the following disclosures of
estimated fair value at December 31, 2003 as required by FASB Statement No. 107.
Cash equivalents, accounts receivable, accounts payable and accrued
expenses and variable rate debts are carried at amounts which reasonably
approximate their fair values.
The fair value of the Company's long-term debt, mortgage notes and notes
receivable is estimated based on discounting future cash flows at interest rates
that management believes reflects the risks associated with long-term debt,
mortgage notes and notes receivable of similar risk and duration. At December
31, 2003, the estimated aggregate fair value of the Company's notes and mortgage
notes receivable exceeded their carrying value by approximately $878,000 and the
aggregate fair value of the Company's long term debt exceeded its carrying value
by approximately $84.7 million.
Considerable judgment is necessary to interpret market data and develop
estimated fair value. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
10. RENTAL INCOME
The Company's properties are being leased to tenants under operating
leases. The minimum rental amount due under certain leases is generally either
subject to scheduled fixed increases or indexed escalations. In addition, the
leases generally also require that the tenants reimburse the Company for
increases in certain operating costs and real estate taxes above base year
costs.
Expected future minimum rents to be received over the next five years and
thereafter from leases in effect at December 31, 2003 are as follows (in
thousands):
2004................................... $ 365,498
2005................................... 333,839
2006................................... 299,722
2007................................... 268,567
2008................................... 240,758
Thereafter............................. 1,269,856
-------------------
$ 2,778,240
===================
106
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. SEGMENT DISCLOSURE
The Company owns all of the interests in its real estate properties
directly or indirectly through the Operating Partnership. The Company's
portfolio consists of Class A office properties located within the New York City
metropolitan area and Class A suburban office and industrial / R&D properties
located and operated within the Tri-State Area (the "Core Portfolio"). The
Company's portfolio also includes one office property located in Orlando,
Florida. The Company has formed an Operating Committee that reports directly to
the President and Chief Financial Officer who have been identified as the Chief
Operating Decision Makers due to their final authority over resource allocation,
decisions and performance assessment.
The Company does not consider (i) interest incurred on its Credit Facility
and Senior Unsecured Notes, (ii) the operating performance of the office
property located in Orlando, Florida, (iii) the operating performance of those
properties reflected as discontinued operations on the Company's consolidated
statements of operations, (iv) the operating results of the Service Companies
and (v) restructure charges as part of its Core Portfolio's property operating
performance for purposes of its component disclosure set forth below.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. In addition,
amounts reflected have been adjusted to give effect to the Company's
discontinued operations in accordance with Statement No. 144.
107
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following tables set forth the components of the Company's revenues
and expenses and other related disclosures, as required by FASB Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information", for
the years ended December 31 (in thousands):
2003
--------------------------------------------------------------
Core Portfolio Other CONSOLIDATED TOTALS
-------------------- ------------------ --------------------
REVENUES:
Base rents, tenant escalations and reimbursements... $ 438,684 $ 7,097 $ 445,781
Other income........................................ 3,165 21,336 24,501
-------------------- ------------------ --------------------
Total Revenues.................................. 441,849 28,433 470,282
-------------------- ------------------ --------------------
EXPENSES:
Property expenses................................... 176,748 3,663 180,411
Marketing, general and administrative............... 16,078 16,668 32,746
Interest............................................ 51,098 31,389 82,487
Restructure charges - net........................... -- 11,580 11,580
Depreciation and amortization....................... 102,867 6,372 109,239
-------------------- ------------------ --------------------
Total Expenses.................................. 346,791 69,672 416,463
-------------------- ------------------ --------------------
Income (loss) before minority interests, preferred
dividends and distributions, equity in
earnings of real estate joint ventures and
service companies, gain on sales of real estate
and discontinued operations..................... $ 95,058 $ (41,239) $ 53,819
==================== ================== ====================
Total assets........................................ $ 2,494,769 $ 255,911 $ 2,750,680
==================== ================== ====================
2002
--------------------------------------------------------------
Core Portfolio Other CONSOLIDATED TOTALS
-------------------- ------------------ --------------------
REVENUES:
Base rents, tenant escalations and reimbursements .. $ 442,485 $ 8,264 $ 450,749
Other income........................................ 380 6,940 7,320
-------------------- ------------------ --------------------
Total Revenues.................................. 442,865 15,204 458,069
-------------------- ------------------ --------------------
EXPENSES:
Property expenses................................... 158,713 4,318 163,031
Marketing, general and administrative............... 16,322 12,892 29,214
Interest............................................ 44,028 39,281 83,309
Depreciation and amortization....................... 94,167 8,277 102,444
-------------------- ------------------ --------------------
Total Expenses.................................. 313,230 64,768 377,998
-------------------- ------------------ --------------------
Income (loss) before minority interests, preferred
dividends and distributions, equity in
earnings of real estate joint ventures and
service companies, gain on sales of real
estate and discontinued operations.............. $ 129,635 $ (49,564) $ 80,071
==================== ================== ====================
Total assets........................................ $ 2,488,863 $ 423,189 $ 2,912,052
==================== ================== ====================
108
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
2001
--------------------------------------------------------------
Core Portfolio Other CONSOLIDATED TOTALS
-------------------- ------------------ --------------------
REVENUES:
Base rents, tenant escalations and reimbursements... $ 438,307 $ 9,256 $ 447,563
Other income........................................ 4,133 16,109 20,242
-------------------- ------------------ --------------------
Total Revenues.................................. 442,440 25,365 467,805
-------------------- ------------------ --------------------
EXPENSES:
Property expenses................................... 153,043 2,934 155,977
Marketing, general and administrative............... 18,155 6,134 24,289
Interest............................................ 38,047 44,577 82,624
Depreciation and amortization....................... 84,550 7,628 92,178
-------------------- ------------------ --------------------
Total Expenses.................................. 293,795 61,273 355,068
-------------------- ------------------ --------------------
Income (loss) before minority interests, preferred
dividends and distributions, valuation reserves,
equity in earnings of real estate joint ventures
and service companies, gain on sales of real
estate and discontinued operations.............. $ 148,645 $ (35,908) $ 112,737
==================== ================== ====================
Total assets........................................ $ 2,569,774 $ 429,008 $ 2,998,782
==================== ================== ====================
109
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and financing
activities are as follows:
On August 7, 2003, the Company issued 465,845 Class C OP Units valued at
$24.00 per unit in connection with its acquisition of a Class A office property
located in Stamford, Connecticut.
On October 24, 2003, the Company gave notice to its Class B common
stockholders that it would exercise its option to exchange 100% of its Class B
common stock outstanding (9,915,313 shares) on November 25, 2003 for an equal
number of shares of its Class A common stock. Such exchange occurred on November
25, 2003.
On November 10, 2003, as partial consideration for the Company's sale of
its Long Island industrial building portfolio to the departing Rechler family
members, the Company redeemed and retired, approximately 3.9 million OP Units
valued at approximately $90.4 million or $23.00 per share. In addition, as
further consideration, the Company assigned approximately $6.0 million of
mortgage indebtedness to the purchaser.
During the year ended December 31, 2003, certain limited partners
exchanged approximately 258,000 OP Units for an equal number of shares of the
Company's Class A common stock.
During the year ended December 31, 2002, certain limited partners
exchanged approximately 11,303 preferred units of limited partnership interest
in the Operating Partnership, with a liquidation preference value of
approximately $11.3 million, for 451,934 OP Units at an average price of $24.66
per OP Unit. In addition, certain limited partners exchanged 666,468 OP Units
for an equal number of shares of the Company's Class A common stock.
110
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into amended and restated employment and
noncompetition agreements with three executive officers. The agreements are for
five years and expire on August 15, 2005. The Company has also entered into
employment agreements with two additional officers prior to their appointment as
executive officers. These agreements expire in July of 2004 and December of
2006, respectively.
The Company had outstanding undrawn letters of credit against its Credit
Facility of approximately $1.0 million at December 31, 2003 and 2002.
The Company, through its Service Companies, sponsors a defined
contribution savings plan pursuant to Section 401(k) of the Code. Under such
plan, there are no prior service costs. Employees are generally eligible to
participate in the plan after three months of service. Employer contributions
are based on a discretionary amount determined by the Company's management. As
of December 31, 2003, the Company has not made any contributions to the plan.
Commencing with the calendar year beginning January 1, 2004, the Company has
elected to match 50% to eligible participants deferral contribution up to 3% of
their annual compensation, as defined, up to an aggregate of $1,000 per employee
per year.
A number of shareholder derivative actions have been commenced purportedly
on behalf of the Company against the Board of Directors relating to the
Disposition. The complaints allege, among other things, that the process by
which the directors agreed to the transaction was not sufficiently independent
of the Rechler family and did not involve a "market check" or third party
auction process and, as a result, was not for adequate consideration. The
plaintiffs seek similar relief, including a declaration that the directors
violated their fiduciary duties and damages. The Company's management believes
that the complaints are without merit.
111
HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of
flexible officing solutions in the world and which was formerly controlled by
FrontLine, previously operated eleven executive office centers comprising
approximately 205,000 square feet at the Company's properties, including two
operated at the Company's joint venture properties. 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 and subsequently
rejected three of its leases with the Company and surrendered approximately an
additional 20,500 square feet from two other leases. The Company has since
re-leased 100% of the rejected space. In September 2003, the Bankruptcy Court
approved the assumption and amendment by HQ of its remaining eight leases with
the Company. The assumed leases expire between 2007 and 2011, encompass
approximately 150,000 square feet and provide for current annual base rents
totaling approximately $3.5 million. A committee designated by the Board and
chaired by an independent director conducted all negotiations with HQ.
WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications
company, which leased approximately 527,000 square feet in thirteen of the
Company'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 Bankruptcy Court granted WorldCom's petition to reject four of its
leases with the Company. The four rejected leases aggregated approximately
282,000 square feet and were to provide for contractual base rents of
approximately $7.2 million for the 2003 calendar year. The Company has agreed to
restructure five of the remaining leases. Pursuant to WorldCom's Plan of
Reorganization, which has been confirmed by the Bankruptcy Court, WorldCom must
assume or reject the remaining leases prior to the effective date of the Plan.
The effective date of the Plan is estimated to occur during the first quarter of
2004. All of WorldCom's leases are current on base rental charges through March
31, 2004, other than under the four rejected leases, and the Company currently
holds approximately $195,000 in security deposits relating to the non-rejected
leases. There can be no assurance as to whether WorldCom will affirm or reject
any or all of its remaining leases with the Company.
As of December 31, 2003, WorldCom occupied approximately 245,000 square
feet of office space with aggregate annual base rental revenues of approximately
$4.1 million, or 1.1% of the Company's total 2003 annualized rental revenue
based on base rental revenue earned on a consolidated basis.
112
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. QUARTERLY FINANCIAL DATA (Unaudited)
The following summary represents the Company's results of operations for
each fiscal quarter during 2003 and 2002 (in thousands, except share amounts):
2003
-------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
Total revenues as previously reported................ $ 130,760 $ 127,412 $ 118,105 $ 118,679
Revenues from discontinued operations.............(a) (12,440) (12,234) -- --
------------- ------------- ------------- ------------
Total revenues....................................(b) $ 118,320 $ 115,178 $ 118,105 $ 118,679
============= ============= ============= ============
Income before distributions to preferred unit
holders, minority interests, equity in earnings
of real estate joint ventures and service
companies gain on sales of real estate,
discontinued operations and extraordinary loss... $ 16,795 $ 15,101 $ 16,149 $ 5,774
Preferred unit distributions......................... (5,590) (5,591) (5,589) (5,590)
Minority partners' interest in consolidated
partnerships.................................... (4,690) (4,335) (4,379) (4,568)
Equity in earnings of real estate joint ventures and
service companies............................... 106 (270) 134 60
Discontinued operations.............................. 3,038 3,554 4,893 131,362
------------- ------------- ------------- ------------
Net income allocable to common unit holders.......... $ 9,659 $ 8,459 $ 11,208 $ 127,038
============= ============= ============= ============
Net income allocable to:
Class A common units........................... $ 7,591 $ 6,643 $ 8,764 $ 114,998
Class B common units........................... 2,068 1,816 2,396 11,008
Class C common units........................... -- -- 48 1,032
------------- ------------- ------------- ------------
Total................................................ $ 9,659 $ 8,459 $ 11,208 $ 127,038
============= ============= ============= ============
Net income per weighted average common unit:
Class A common.................................. $ .14 $ .12 $ .16 $ 2.01
Class B common.................................. $ .21 .18 $ .24 $ 1.86
Class C common.................................. $ -- $ -- $ .17 $ 2.21
Weighted average common units outstanding:
Class A common.................................. 55,477,000 55,277,000 55,285,000 57,093,000
Class B common.................................. 9,915,000 9,915,000 9,915,000 5,928,000
Class C common.................................. -- -- 278,000 466,000
- --------------------------------------------------
(a) excludes revenues from discontinued operations which were previously
excluded from total revenues as previously reported
(b) amounts have been adjusted to give effect to the Company's discontinued
operations in accordance with Statement No. 144.
113
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
14. QUARTERLY FINANCIAL DATA (Unaudited) (continued)
2002
------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------- ------------------ ------------------- ----------------
Total revenues as previously reported............... $ 125,467 $ 125,635 $ 128,782 $ 128,842
Revenues from discontinued operations............(a) (12,361) (12,920) (11,815) (12,426)
Gain on sales of real estate and equity in earnings
of real estate joint ventures and service
companies........................................ (872) (159) (104) --
---------------- ------------------ ------------------- ----------------
Total revenues...................................(b) $ 112,234 $ 112,556 $ 116,863 $ 116,416
================ ================== =================== ================
Income before distributions to preferred unit
holders, minority interests, equity in earnings
of real estate joint ventures and service
companies gain on sales of real estate and
discontinued operations.......................... $ 24,210 $ 21,403 $ 18,999 $ 15,459
Preferred unit distributions........................ (5,948) (5,767) (5,760) (5,648)
Minority partners' interest in consolidated
partnerships..................................... (5,120) (4,813) (4,446) (4,351)
Equity in earnings of real estate joint ventures
and service companies............................ 335 159 104 515
Gain on sales of real estate........................ 537 -- -- --
Discontinued operations............................. 3,902 4,486 9,178 3,781
---------------- ----------------- ------------------ ---------------
Net income allocable to common unit holders......... $ 17,916 $ 15,468 $ 18,075 $ 9,756
================= ================= ================== ===============
Net income allocable to:
Class A common units (c)....................... $ 14,093 $ 12,211 $ 14,275 $ 7,707
Class B common units (c)....................... 3,823 3,257 3,800 2,049
---------------- ----------------- ------------------ ---------------
Total............................................... $ 17,916 $ 15,468 $ 18,075 $ 9,756
================= ================= ================== ===============
Net income per weighted average common unit:
Class A common (c)............................. $ .25 $ .21 $ .25 $ .14
Class B common (c)............................. $ .37 $ .32 $ .38 $ .21
Weighted average common units outstanding:
Class A common................................ 57,520,000 58,275,000 56,802,000 55,660,000
Class B common................................ 10,284,000 10,284,000 10,101,000 9,915,000
- ----------------------------
(a) excludes revenues from discontinued operations, which were previously
excluded from total revenues as previously reported.
(b) amounts have been adjusted to give effect to the Company's discontinued
operations in accordance with Statement No. 144.
(c) The net income allocable to common unit holders for the first, second and
third quarters as previously reported has been adjusted to record the
amortization of stock loans to certain executive and senior officers of
the Company and other costs incurred by the Company on behalf of the
Operating Partnership. These amounts aggregated approximately $.95 million,
$.94 million and $1.1 million, respectively. Such amounts also adjusted
net income per weighted average common unit as follows:
FIRST QUARTER SECOND QUARTER THIRD QUARTER
---------------- ----------------- ----------------
Class A common............................. $ (.01) $ (.01) $ (.02)
Class B common............................. $ (.02) $ (.02) $ (.03)
114
15. SUBSEQUENT EVENT
On March 15, 2004, the Company issued 5.5 million shares of its Class A
common stock at $27.18 per share, net of underwriting discount, for proceeds
aggregating approximately $149.5 million. In addition, the underwriter was
granted a 30-day over-allotment option to purchase up to an additional 825,000
shares. Net proceeds were used to repay $100 million of the Operating
Partnership's 7.4% senior unsecured notes at their maturity on March 15, 2004,
repay borrowings under the Credit Facility and for general corporate purposes.
115
COLUMN A COLUMN D COLUMN E
- ---------------------------------------------------------- ---------------------------- ----------------------------------
COST CAPITALIZED,
SUBSEQUENT TO GROSS AMOUNT AT WHICH
ACQUISITION CARRIED AT CLOSE OF PERIOD
---------------------------- ----------------------------------
BUILDINGS AND BUILDINGS AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ---------------------------------------------------------- ------------ --------------- -------- --------------- ---------
1170 Northern Blvd., N. Great Neck, New York ............. -- 347 30 446 476
50 Charles Lindbergh Blvd., Mitchel Field, New York . -- 6,351 -- 18,440 18,440
200 Broadhollow Road Melville, New York .................. -- 3,583 338 6,937 7,275
48 South Service Road Melville, New York ................. -- 5,848 1,652 16,093 17,745
395 North Service Road Melville, New York ................ -- 7,480 -- 23,031 23,031
6800 Jericho Turnpike Syosset, New York .................. -- 10,456 582 17,022 17,604
6900 Jericho Turnpike Syosset, New York .................. -- 4,243 385 8,471 8,856
300 Motor Parkway Hauppauge, New York .................... -- 1,838 276 2,974 3,250
88 Duryea Road Melville, New York ........................ -- 846 200 2,411 2,611
333 Earl Ovington Blvd., (Omni) Mitchel Field, New
York .................................................... -- 23,436 -- 90,657 90,657
40 Cragwood Road South Plainfield, New Jersey ............ -- 6,483 725 13,614 14,339
333 East Shore Road Great Neck, New York ................. -- 606 -- 1,170 1,170
310 East Shore Road Great Neck, New York ................. -- 2,607 485 4,616 5,101
35 Pinelawn Road Melville, New York ...................... -- 3,219 999 10,292 11,291
520 Broadhollow Road Melville, New York .................. (1) 2,888 456 8,460 8,916
1660 Walt Whitman Road Melville, New York ................ -- 1,393 370 6,465 6,835
48 Harbor Park Drive Port Washington, New York ........... -- 570 1,304 2,817 4,121
60 Charles Lindbergh Mitchel Field, New York ............. -- 2,107 -- 22,907 22,907
505 White Plains Road Tarrytown, New York ................ -- 417 210 1,749 1,959
555 White Plains Road Tarrytown, New York ................ 51 4,775 763 8,908 9,671
560 White Plains Road Tarrytown, New York ................ (1) 5,213 1,520 13,969 15,489
580 White Plains Road Tarrytown, New York ................ -- 3,714 2,414 18,309 20,723
660 White Plains Road Tarrytown, New York ................ 45 6,565 3,974 29,205 33,179
Landmark Square Stamford, Connecticut .................... 832 33,174 12,435 97,640 110,075
One Eagle Rock, East Hanover, New Jersey ................. -- 5,159 803 12,722 13,525
710 Bridgeport Avenue Shelton, Connecticut ............... 7 1,054 5,412 22,674 28,086
10 Rooney Circle West Orange, New Jersey ................. 1 1,168 1,303 5,783 7,086
Executive Hill Office Park West Orange, New Jersey . 4 4,227 7,633 35,515 43,148
3 University Plaza Hackensack, New Jersey ................ -- 3,186 7,894 15,032 22,926
150 Motor Parkway Hauppauge, New York .................... -- 4,278 1,114 24,708 25,822
Reckson Executive Park Ryebrook, New York ................ -- 6,759 18,343 61,787 80,130
University Square Princeton, New Jersey .................. (1) 1,827 3,287 10,715 14,002
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- ---------------------------------------------------------- -------------- -------------- ---------- --------------
LIFE ON WHICH
ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------------------------------------- -------------- -------------- ---------- --------------
1170 Northern Blvd., N. Great Neck, New York ............. 176 1947 1962 10-30 Years
50 Charles Lindbergh Blvd., Mitchel Field, New York . 12,247 1984 1984 10-30 Years
200 Broadhollow Road Melville, New York .................. 5,041 1981 1981 10-30 Years
48 South Service Road Melville, New York ................. 9,647 1986 1986 10-30 Years
395 North Service Road Melville, New York ................ 13,979 1988 1988 10-30 Years
6800 Jericho Turnpike Syosset, New York .................. 11,837 1977 1978 10-30 Years
6900 Jericho Turnpike Syosset, New York .................. 5,506 1982 1982 10-30 Years
300 Motor Parkway Hauppauge, New York .................... 1,882 1979 1979 10-30 Years
88 Duryea Road Melville, New York ........................ 1,572 1980 1980 10-30 Years
333 Earl Ovington Blvd., (Omni) Mitchel Field, New
York .................................................... 34,347 1990 1995 10-30 Years
40 Cragwood Road South Plainfield, New Jersey ............ 9,005 1970 1983 10-30 Years
333 East Shore Road Great Neck, New York ................. 768 1976 1976 10-30 Years
310 East Shore Road Great Neck, New York ................. 2,559 1981 1981 10-30 Years
35 Pinelawn Road Melville, New York ...................... 3,263 1980 1995 10-30 Years
520 Broadhollow Road Melville, New York .................. 3,090 1978 1995 10-30 Years
1660 Walt Whitman Road Melville, New York ................ 1,701 1980 1995 10-30 Years
48 Harbor Park Drive Port Washington, New York ........... 657 1976 1996 10-30 Years
60 Charles Lindbergh Mitchel Field, New York ............. 6,386 1989 1996 10-30 Years
505 White Plains Road Tarrytown, New York ................ 569 1974 1996 10-30 Years
555 White Plains Road Tarrytown, New York ................ 3,932 1972 1996 10-30 Years
560 White Plains Road Tarrytown, New York ................ 4,385 1980 1996 10-30 Years
580 White Plains Road Tarrytown, New York ................ 6,052 1997 1996 10-30 Years
660 White Plains Road Tarrytown, New York ................ 9,148 1983 1996 10-30 Years
Landmark Square Stamford, Connecticut .................... 23,208 1973-1984 1996 10-30 Years
One Eagle Rock, East Hanover, New Jersey ................. 3,804 1986 1997 10-30 Years
710 Bridgeport Avenue Shelton, Connecticut ............... 5,245 1971-1979 1997 10-30 Years
10 Rooney Circle West Orange, New Jersey ................. 1,330 1971 1997 10-30 Years
Executive Hill Office Park West Orange, New Jersey . 7,783 1978-1984 1997 10-30 Years
3 University Plaza Hackensack, New Jersey ................ 3,832 1985 1997 10-30 Years
150 Motor Parkway Hauppauge, New York .................... 6,001 1984 1997 10-30 Years
Reckson Executive Park Ryebrook, New York ................ 12,570 1983-1986 1997 10-30 Years
University Square Princeton, New Jersey .................. 2,246 1987 1997 10-30 Years
Continued
116
RECKSON OPERATING PARTNERSHIP, L.P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C
- ------------------------------------------------------- ------------- -------------------------------
INITIAL COST
-------------------------------
BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS
- ------------------------------------------------------- ------------- --------------- ---------------
80 Grasslands Elmsford, New York ...................... -- 1,208 6,728
100 Forge Way Rockaway, New Jersey .................... -- 315 902
200 Forge Way Rockaway, New Jersey .................... -- 1,128 3,228
300 Forge Way Rockaway, New Jersey .................... -- 376 1,075
400 Forge Way Rockaway, New Jersey .................... -- 1,142 3,267
51 -- 55 Charles Lindbergh Blvd. Mitchel Field, New
York ................................................. -- (A) 27,975
100 Summit Drive Valhalla, New York ................... 17,718 3,007 41,351
115/117 Stevens Avenue Valhalla, New York ............. -- 1,094 22,490
200 Summit Lake Drive Valhalla, New York .............. 18,937 4,343 37,305
140 Grand Street White Plains, New York ............... -- 1,932 18,744
500 Summit Lake Drive Valhalla, New York .............. -- 7,052 37,309
99 Cherry Hill Road Parsippany, New Jersey ............ -- 2,360 7,508
119 Cherry Hill Road Parsippany, New Jersey ........... -- 2,512 7,622
500 Saw Mill River Road Elmsford, New York ............ -- 1,542 3,796
120 W.45th Street New York, New York .................. 63,245 28,757 162,809
1255 Broad Street Clifton, New Jersey ................. -- 1,329 15,869
810 7th Avenue New York, New York ..................... 81,315 26,984 (A) 152,767
120 Mineola Blvd. Mineola, New York ................... -- 1,869 10,603
100 Wall Street New York, New York .................... 35,237 11,749 66,517
One Orlando Orlando, Florida .......................... 37,758 9,386 51,136
1350 Avenue of the Americas New York, New York . 73,779 19,222 109,168
919 3rd. Avenue New York, New York .................... 244,047 101,644 (A) 205,736
360 Hamilton Avenue White Plains, New York ............ -- 2,838 34,606
492 River Road Nutley, New Jersey ..................... -- 2,615 5,102
275 Broadhollow Road Melville, New York ............... -- 3,850 12,958
400 Garden City Plaza Garden City, New York ........... -- 9,081 17,004
90 Merrick Avenue East Meadow, New York ............... -- (A) 23,804
120 White Plains Road Tarrytown, New York ............. -- 3,852 24,861
100 White Plains Road Tarrytown, New York ............. -- 79 472
51 JFK Parkway Short Hills, New Jersey ................ -- 10,053 62,504
680 Washington Blvd Stamford, Connecticut ............. -- 4,561 23,698
750 Washington Blvd Stamford, Connecticut ............. -- 7,527 31,940
117
COLUMN A COLUMN D COLUMN E
- ------------------------------------------------------- ------------------------------ ------------------------------------
COST CAPITALIZED,
SUBSEQUENT TO GROSS AMOUNT AT WHICH
ACQUISITION CARRIED AT CLOSE OF PERIOD
------------------------------ ------------------------------------
BUILDINGS AND BUILDINGS AND
DESCRIPTION LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ------------------------------------------------------- -------------- --------------- ---------- --------------- ---------
80 Grasslands Elmsford, New York ...................... -- 616 1,208 7,344 8,552
100 Forge Way Rockaway, New Jersey .................... -- 120 315 1,022 1,337
200 Forge Way Rockaway, New Jersey .................... -- 546 1,128 3,774 4,902
300 Forge Way Rockaway, New Jersey .................... -- 281 376 1,356 1,732
400 Forge Way Rockaway, New Jersey .................... -- 250 1,142 3,517 4,659
51 -- 55 Charles Lindbergh Blvd. Mitchel Field, New
York ................................................. -- 4,315 -- 32,290 32,290
100 Summit Drive Valhalla, New York ................... -- 5,322 3,007 46,673 49,680
115/117 Stevens Avenue Valhalla, New York ............. -- 2,003 1,094 24,493 25,587
200 Summit Lake Drive Valhalla, New York .............. -- 11,111 4,343 48,416 52,759
140 Grand Street White Plains, New York ............... (1) 370 1,931 19,114 21,045
500 Summit Lake Drive Valhalla, New York .............. -- 7,837 7,052 45,146 52,198
99 Cherry Hill Road Parsippany, New Jersey ............ 5 1,784 2,365 9,292 11,657
119 Cherry Hill Road Parsippany, New Jersey ........... 6 1,646 2,518 9,268 11,786
500 Saw Mill River Road Elmsford, New York ............ -- 205 1,542 4,001 5,543
120 W.45th Street New York, New York .................. 7,680 (B) 6,233 36,437 169,042 205,479
1255 Broad Street Clifton, New Jersey ................. -- 4,930 1,329 20,799 22,128
810 7th Avenue New York, New York ..................... 117 15,698 27,101 168,465 195,566
120 Mineola Blvd. Mineola, New York ................... 5 1,054 1,874 11,657 13,531
100 Wall Street New York, New York .................... 93 13,195 11,842 79,712 91,554
One Orlando Orlando, Florida .......................... 32 7,067 9,418 58,203 67,621
1350 Avenue of the Americas New York, New York . -- 19,170 19,222 128,338 147,560
919 3rd. Avenue New York, New York .................... 12,795 87,254 114,439 292,990 407,429
360 Hamilton Avenue White Plains, New York ............ -- 23,100 2,838 57,706 60,544
492 River Road Nutley, New Jersey ..................... 1 4,354 2,616 9,456 12,072
275 Broadhollow Road Melville, New York ............... 972 8,345 4,822 21,303 26,125
400 Garden City Plaza Garden City, New York ........... -- 804 9,081 17,808 26,889
90 Merrick Avenue East Meadow, New York ............... -- 1,231 -- 25,035 25,035
120 White Plains Road Tarrytown, New York ............. -- 902 3,852 25,763 29,615
100 White Plains Road Tarrytown, New York ............. -- 79 79 551 630
51 JFK Parkway Short Hills, New Jersey ................ 1 1,065 10,054 63,569 73,623
680 Washington Blvd Stamford, Connecticut ............. -- 275 4,561 23,973 28,534
750 Washington Blvd Stamford, Connecticut ............. -- 193 7,527 32,133 39,660
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- ------------------------------------------------------- -------------- -------------- ---------- --------------
LIFE ON WHICH
ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ------------------------------------------------------- -------------- -------------- ---------- --------------
80 Grasslands Elmsford, New York ...................... 1,653 1989/1964 1997 10-30 Years
100 Forge Way Rockaway, New Jersey .................... 231 1986 1998 10-30 Years
200 Forge Way Rockaway, New Jersey .................... 803 1989 1998 10-30 Years
300 Forge Way Rockaway, New Jersey .................... 404 1989 1998 10-30 Years
400 Forge Way Rockaway, New Jersey .................... 697 1989 1998 10-30 Years
51 -- 55 Charles Lindbergh Blvd. Mitchel Field, New
York ................................................. 8,248 1981 1998 10-30 Years
100 Summit Drive Valhalla, New York ................... 10,096 1988 1998 10-30 Years
115/117 Stevens Avenue Valhalla, New York ............. 4,870 1984 1998 10-30 Years
200 Summit Lake Drive Valhalla, New York .............. 9,014 1990 1998 10-30 Years
140 Grand Street White Plains, New York ............... 3,632 1991 1998 10-30 Years
500 Summit Lake Drive Valhalla, New York .............. 8,946 1986 1998 10-30 Years
99 Cherry Hill Road Parsippany, New Jersey ............ 1,783 1982 1998 10-30 Years
119 Cherry Hill Road Parsippany, New Jersey ........... 1,819 1982 1998 10-30 Years
500 Saw Mill River Road Elmsford, New York ............ 806 1968 1998 10-30 Years
120 W.45th Street New York, New York .................. 25,953 1998 1999 10-30 Years
1255 Broad Street Clifton, New Jersey ................. 3,883 1999 1999 10-30 Years
810 7th Avenue New York, New York ..................... 25,946 1970 1999 10-30 Years
120 Mineola Blvd. Mineola, New York ................... 1,940 1977 1999 10-30 Years
100 Wall Street New York, New York .................... 12,582 1969 1999 10-30 Years
One Orlando Orlando, Florida .......................... 8,778 1987 1999 10-30 Years
1350 Avenue of the Americas New York, New York . 17,174 1966 2000 10-30 Years
919 3rd. Avenue New York, New York .................... 27,572 1970 2000 10-30 Years
360 Hamilton Avenue White Plains, New York ............ 8,930 2000 2000 10-30 Years
492 River Road Nutley, New Jersey ..................... 1,427 2000 2000 10-30 Years
275 Broadhollow Road Melville, New York ............... 2,286 1970 1997 10-30 Years
400 Garden City Plaza Garden City, New York ........... 2,875 1989 1997 10-30 Years
90 Merrick Avenue East Meadow, New York ............... 4,591 1985 1997 10-30 Years
120 White Plains Road Tarrytown, New York ............. 3,995 1984 1997 10-30 Years
100 White Plains Road Tarrytown, New York ............. 58 1984 1997 10-30 Years
51 JFK Parkway Short Hills, New Jersey ................ 9,886 1988 1998 10-30 Years
680 Washington Blvd Stamford, Connecticut ............. 3,753 1989 1998 10-30 Years
750 Washington Blvd Stamford, Connecticut ............. 4,842 1989 1998 10-30 Years
Continued
118
RECKSON OPERATING PARTNERSHIP, L.P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D
- ---------------------------------------------------- ------------- --------------------------- ------------------------
COST CAPITALIZED,
SUBSEQUENT TO
INITIAL COST ACQUISITION
--------------------------- ------------------------
BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------------------------------- ------------- ----------- --------------- -------- ---------------
1305 Walt Whitman Road Melville, New York .......... -- 3,934 24,040 -- 433
50 Marcus Drive Melville, New York ................. -- 930 13,600 65 6,568
100 Grasslands Road Elmsford, New York ............. -- 289 3,382 -- 982
58 South Service Road Melville, New York ........... -- 1,061 6,886 46,113
103 JFK Parkway Short Hills, New Jersey ............ -- 3,098 18,011 219 11,192
1055 Washington Blvd Stamford, Connecticut ......... -- -- 31,637 -- 37
Land held for development .......................... -- 90,706 -- -- --
Developments in progress ........................... -- -- 68,127 -- --
Other property ..................................... -- -- -- -- 17,711
-- ------ ------ ----- ------
Total .............................................. $721,635 $447,395 $1,839,373 29,813 $480,208
======== ======== ========== ====== ========
COLUMN A COLUMN E COLUMN F COLUMN G
- ---------------------------------------------------- ----------------------------------------- -------------- --------------
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
-----------------------------------------
BUILDINGS AND ACCUMULATED DATE OF
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION
- ---------------------------------------------------- ----------- --------------- ------------- -------------- --------------
1305 Walt Whitman Road Melville, New York .......... 3,934 24,473 28,407 4,117 1999
50 Marcus Drive Melville, New York ................. 995 20,168 21,163 1,963 2001
100 Grasslands Road Elmsford, New York ............. 289 4,364 4,653 600 2001
58 South Service Road Melville, New York ........... 7,947 46,113 54,060 3,447 2001
103 JFK Parkway Short Hills, New Jersey ............ 3,317 29,203 32,520 4,094 2002
1055 Washington Blvd Stamford, Connecticut ......... -- 31,674 31,674 440 1987
Land held for development .......................... 90,706 -- 90,706 -- N/A
Developments in progress ........................... -- 68,127 68,127 --
Other property ..................................... -- 17,711 17,711 12,242
------ ------ ------ ------
Total .............................................. $477,208 $2,319,581 $2,796,789 $460,144
======== ========== ========== ========
COLUMN A COLUMN H COLUMN I
- ---------------------------------------------------- ----------- --------------
LIFE ON WHICH
DATE DEPRECIATION
DESCRIPTION ACQUIRED IS COMPUTED
- ---------------------------------------------------- ----------- --------------
1305 Walt Whitman Road Melville, New York .......... 1999 10-30 Years
50 Marcus Drive Melville, New York ................. 1998 10-30 Years
100 Grasslands Road Elmsford, New York ............. 1997 10-30 Years
58 South Service Road Melville, New York ........... 1998 10-30 Years
103 JFK Parkway Short Hills, New Jersey ............ 1997 10-30 Years
1055 Washington Blvd Stamford, Connecticut ......... 2003 10-30 Years
Land held for development .......................... Various N/A
Developments in progress ...........................
Other property .....................................
Total ..............................................
- ----------
A These land parcels, or a portion of the land parcels, on which the building
and improvements were constructed are subject to a ground lease.
B Includes costs incurred to acquire the lessor's rights to an air rights lease
agreement.
The aggregate cost of Federal Income Tax purposes was approximately $ 2,067
million at December 31, 2003.
119
RECKSON OPERATING PARTNERSHIP, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
The changes in real estate for each of the periods in the three years
ended December 31, 2003 are as follows:
2003 2002 2001
-------------- -------------- --------------
Real estate balance at beginning of period ................ $ 2,707,878 $ 2,643,045 $ 2,537,193
Improvements / revaluations ............................... 71,770 83,085 189,072
Disposal, including write-off of fully depreciated building
improvements ............................................. (14,496) (18,252) (83,220)
Acquisitions .............................................. 31,637 -- --
----------- ----------- -----------
Balance at end of period .................................. $ 2,796,789 $ 2,707,878 $ 2,643,045
=========== =========== ===========
The changes in accumulated depreciation, exclusive of amounts relating to
discontinued operations, equipment, autos, furniture and fixtures, for each of
the periods in the three years ended December 31, 2003 are as follows:
2003 2002 2001
------------ ------------ -----------
Balance at beginning of period ............................ $ 374,420 $ 294,901 $ 231,040
Depreciation for period ................................... 87,369 83,542 74,380
Disposal, including write-off of fully depreciated building
improvements ............................................. (1,645) (4,023) (10,519)
--------- --------- ---------
Balance at end of period .................................. $ 460,144 $ 374,420 $ 294,901
========= ========= =========
120
(3) Exhibits
EXHIBIT FILING
NUMBER REFERENCE DESCRIPTION
------ --------- -----------
3.1 a Amended and Restated Agreement of Limited Partnership of
the Registrant
3.2 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
A Preferred Units of Limited Partnership Interest
3.3 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
B Preferred Units of Limited Partnership Interest
3.4 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
C Preferred Units of Limited Partnership Interest
3.5 e Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
D Preferred Units of Limited Partnership Interest
3.6 g Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
B Common Units of Limited Partnership Interest
3.7 g Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
E Preferred Partnership Units of Limited Partnership
3.8 j Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing Series
F Junior Participating Preferred Partnership Units
Issuable Under the Rights Plan
3.9 s Supplement to the Amended and Restated Agreement of
Limited Partnership of the Registrant Establishing the
Series C Common Units of Limited Partnership Interest
4.1 f Form of 7.40% Notes due 2004 of the Registrant
4.2 f Form of 7.75% Notes due 2009 of the Registrant
4.3 f Indenture, dated March 26, 1999, among the Registrant,
Reckson Associates Realty Corp. (the "Company"), and The
Bank of New York, as trustee
4.4 j Rights Agreement, dated as of October 13, 2000, between
the Registrant and American Stock Transfer and Trust
Company
4.5 n Form of 6.00% Notes due 2007 of the Registrant
4.6 d Note Purchase Agreement for the Senior Unsecured Notes
4.7 v Form of 5.15% Notes due 2011 of the Registrant
10.1 d Third Amended and Restated Agreement of Limited
Partnership of Omni Partners, L.P.
10.2 h Amendment and Restatement of Employment and
Non-Competition Agreement, dated as of August 15, 2000
between the Company and Scott Rechler
10.3 h Amendment and Restatement of Employment and
Non-Competition Agreement, dated as of August 15, 2000
between the Company and Michael Maturo
10.4 h Amendment and Restatement of Employment and
Non-Competition Agreement, dated as of August 15, 2000
between the Company and Jason Barnett
10.5 w Employment and Noncompetition Agreement, dated as of
July 16, 2001, between the Company and F.D. Rich
10.6 w Employment and Noncompetition Agreement, dated as of
November 20, 2002, among the Company, Metropolitan
Partners LLC and Philip Waterman III
10.7 a Purchase Option Agreement relating to 225 Broadhallow
Road
10.8 s Amended and Restated 1995 Stock Option Plan
121
10.9 c 1996 Employee Stock Option Plan
10.10 b Ground Leases for certain of the properties
10.11 s Amended and Restated 1997 Stock Option Plan
10.12 d 1998 Stock Option Plan
10.13 h Amended and Restated Severance Agreement, dated August
15, 2000 between the Company and Scott Rechler
10.14 h Amended and Restated Severance Agreement, dated August
15, 2000 between the Company and Michael Maturo
10.15 h Amended and Restated Severance Agreement, dated August
15, 2000 between the Company and Jason Barnett
10.16 g Amended and Restated Credit Agreement dated as of
August 4, 1999 between Reckson Service Industries, Inc.,
as borrower and the Registrant, as Lender relating to
Reckson Strategic Venture Partners, LLC ("RSVP Credit
Agreement")
10.17 g Amended and Restated Credit Agreement dated as of August
4, 1999 between Reckson Service Industries, Inc., as
borrower and the Registrant, as Lender relating to the
operations of Reckson Service Industries, Inc. ("RSI
Credit Agreement")
10.18 g Letter Agreement, dated November 30, 1999, amending the
RSVP Credit Agreement and the RSI Credit Agreement
10.19 k Second Amendment to the Amended and Restated Credit
Agreement, dated March 30, 2001, between the Registrant
and FrontLine Capital Group
10.20 l Loan Agreement, dated as of June 1, 2001, between 1350
LLC, as Borrower, and Secore Financial Corporation, as
Lender
10.21 l Loan Agreement, dated as of July 18, 2001, between
Metropolitan 919 3rd Avenue, LLC, as Borrower, and Secore
Financial Corporation, as Lender
10.22 h Operating Agreement dated as of September 28, 2000
between Reckson Tri-State Member LLC (together with its
permitted successors and assigns) and TIAA Tri-State LLC
10.23 i Agreement of Spreader, Consolidation and Modification of
Mortgage Security Agreement among Metropolitan 810 7th
Ave., LLC, 100 Wall Company LLC and Monumental Life
Insurance Company
10.24 i Consolidated, Amended and Restated Secured Promissory
Note relating to Metropolitan 810 7th Ave., LLC and 100
Wall Company LLC
10.25 m Amended and Restated Operating Agreement of 919 JV LLC
10.26 s Amended and Restated 2002 Stock Option Plan
10.27 p Indemnification Agreement, dated as of May 23, 2002,
between the Company and Donald J. Rechler*
10.28 o Second Amended and Restated Credit Agreement, dated as
of December 30, 2002, among the Registrant, the
institutions from time to time party thereto as Lenders
and JPMorgan Chase Bank, as Administrative Agent
10.29 o Form of Guarantee Agreement to the Second Amended and
Restated Credit Agreement, between and among the
Registrant, the institutions from time to time party
thereto as Lenders and JPMorgan Chase Bank, as
Administrative Agent
10.30 o Form of Promissory Note to the Second Amended and
Restated Credit Agreement, between and among the
Registrant, the institutions from time to time party
thereto as Lenders and JPMorgan Chase Bank, as
Administrative Agent
10.31 o First Amendment to Second Amended and Restated Credit
Agreement, dated as of January 24, 2003, among the
Registrant, JPMorgan Chase Bank, as Administrative Agent
for the institutions from time to time party thereto as
Lenders and Key Bank, N.A., as New Lender
122
10.32 r Amended and Restated Long-Term Incentive Award
Agreement, dated as of March 13, 2003, between the
Company and Scott H. Rechler**
10.33 q Award Agreement, dated November 14, 2002, between the
Company and Scott H. Rechler***
10.34 q Award Agreement, dated March 13, 2003, between the
Company and Scott H. Rechler****
10.35 t Redemption Agreement, dated as of September 10, 2003, by
and among the Registrant, Reckson FS Limited Partnership
and Rechler Equity Partners I LLC, as transferee
10.36 t Property Sale Agreement, dated as of September 10, 2003,
by and among the Registrant, Reckson FS Limited
Partnership, RCG Kennedy Drive LLC and Rechler Equity
Partners II LLC
10.37 t Transition Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Donald
Rechler
10.38 t Transition Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Roger
Rechler
10.39 t Transition Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Mitchell
Rechler
10.40 t Transition Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Gregg
Rechler
10.41 t Amendment Agreement, dated as of September 10, 2003, by
and between the Company, the Registrant and Scott
Rechler
10.42 u Purchase and Sale Agreement, dated as of November 10,
2003, between Reckson 1185 Avenue of the Americas LLC and
1185 Sixth LLC
12.1 Statement of Ratios of Earnings to Fixed Charges
14.1 w Reckson Associates Realty Corp. Code of Ethics and
Business Conduct
21.1 Statement of Subsidiaries
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included in Part IV of the Form 10-K)
31.1 Certification of Scott H. Rechler, Chief Executive
Officer and President of the Company, the sole general
partner of the Registrant, pursuant to Rule 13a-14(a) or
Rule 15(d)-14(a)
31.2 Certification of Michael Maturo, Executive Vice
President, Treasurer and Chief Financial Officer of the
Company, the sole general partner of the Registrant,
pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
32.1 Certification of Scott H. Rechler, Chief Executive
Officer and President of the Company, the sole general
partner of the Registrant, pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code
32.2 Certification of Michael Maturo, Executive Vice
President, Treasurer and Chief Financial Officer of the
Company, the sole general partner of the Registrant,
pursuant to Section 1350 of Chapter 63 of Title 18 of the
United States Code
(a) Previously filed as an exhibit to Registration Statement Form S-11 (No.
333-1280) and incorporated herein by reference.
(b) Previously filed as an exhibit to Registration Statement Form S-11 (No.
33-84324) and incorporated herein by reference.
(c) Previously filed as an exhibit to the Company's Form 8-K report filed
with the SEC on November 25, 1996 and incorporated herein by reference.
(d) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 26, 1998 and incorporated herein by reference.
123
(e) Previously filed as an exhibit to the Company's Form 8-K report filed
with the SEC on March 1, 1999 and incorporated herein by reference.
(f) Previously filed as an exhibit to the Registrant's Form 8-K filed with
SEC on March 26, 1999 and incorporated herein by reference.
(g) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 17, 2000 and incorporated herein by reference.
(h) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on October 17, 2000 and incorporated herein by reference.
(i) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 21, 2001 and incorporated herein by reference.
(j) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 22, 2001 and incorporated herein by reference.
(k) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on May 14, 2001 and incorporated herein by reference.
(l) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on August 14, 2001 and incorporated herein by reference.
(m) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on January 8, 2002 and incorporated herein by reference.
(n) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on June 18, 2002 and incorporated herein by reference.
(o) Previously filed as an exhibit to the Registrant's Current Report on
8-K filed with the SEC on January 27, 2003 and incorporated herein by
reference.
(p) Previously filed with the Registrant's Form 10-Q filed with the SEC on
November 14, 2002 and incorporated herein by reference.
(q) Previously filed as an exhibit to the Registrant's Form 10-K filed with
the SEC on March 31, 2003 and incorporated herein by reference.
(r) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on May 15, 2003 and incorporated herein by reference.
(s) Previously filed as an exhibit to the Registrant's Form 10-Q filed with
the SEC on August 14, 2003 and incorporated herein by reference.
(t) Previously filed as an exhibit to the Registrant's Form 8-K filed with
the SEC on September 18, 2003 and incorporated herein by reference.
(u) Previously filed as an exhibit to the Registrant's Form 8-K filed on
November 21, 2003 and incorporated herein by reference.
(v) Previously filed as an exhibit to the Registrant's Form 8-K filed on
January 21, 2004 and incorporated herein by reference.
(w) Previously filed as an exhibit to the Company's Form 10-K filed on
March 9, 2004 and incorporated herein by reference.
* Each of Scott H. Rechler, Michael Maturo, Jason M. Barnett, John V.N.
Klein, Lewis S. Ranieri and Conrad D. Stephenson has entered into an
Indemnification Agreement with the Company, dated as of May 23, 2002.
Each of Ronald H. Menaker and Peter Quick has entered into an
Indemnification Agreement with the Company dated as of May 1, 2002.
Each of Douglas Crocker and Stanley Steinberg has entered into an
Indemnification Agreement with the Company dated as of February 5,
2004. Elizabeth McCaul has entered into an Indemnification Agreement
with the Company dated as of February 25, 2004. These Agreements are
identical in all material respects to the Indemnification Agreement for
Donald J. Rechler incorporated by reference herein.
** Each of Michael Maturo and Jason M. Barnett has entered into an
Amended and Restated Long-Term Incentive Award Agreement with the
Company, dated as of March 13, 2003. These Agreements are identical in
all material respects to the Amended and Restated Long-Term Incentive
Award Agreement for Scott H. Rechler incorporated by reference herein.
*** Michael Maturo has been awarded certain rights to shares of Class A
Common Stock of the Company, pursuant to Award Agreements dated
November 14, 2002. This Agreement is identical in all material respects
to the Agreement for Scott H. Rechler incorporated by reference herein,
except that Michael Maturo received rights to 27,588 shares.
**** Each of Michael Maturo and Jason M. Barnett has been awarded certain
rights to shares of Class A Common Stock of the Company, pursuant to
Award Agreements dated March 13, 2003. These Agreements are identical
in all material respects to the Agreement for Scott H. Rechler
incorporated by reference herein.
124